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June 27, 2012

Theory of Constraints (Part 3)

TOC does not concern itself with optimization of a particular portion of the company. It concerns itself with the improvement of the entire system.

*Let me restate here that all these ideas are from the Theory of Constraints of E. M. Goldratt and his books, Goal, Goal II and Critical Chain gives the concepts told here in the form of stories.*

To understand TOC fully, one has to fully understand the goal TOC has envisioned for any business and the underlying measurements by which it measures the success of a business.  TOC does not concern itself with optimization of a particular portion of the company. It concerns itself with the improvement of the entire system.

Coming to the goal of a company, a company's main goal is not creating a quality product or being the best employer or higher productivity or higher market share or higher operating margins or innovations or many of the lines that we hear often from many managers. Rather the goal of any commercial organization is 'To make more money now as well as in the future'.

So what about the other goals which are mentioned? Think about it. All the other goals such as being a good employer or higher productivity are just steps to make money, either now or in the future. The problem comes when people focus on the steps rather than on the ultimate goal.

My personal take on it is that, it is very similar to the goal of a person of making money => the actual motive or goal is to be happy now and in the future but by confusing it with making money, many people lose quite a lot in their lives without realizing it.

Coming back to topic, to achieve the goal of making more money now and in the future, we need to know how to measure ourselves. Ideally such measurements should be such that it can be applied to both the CEO of the organization as well as the driver of the CEO. This will ensure that every decision taken with these measurements will make sure that the company goes closer to the stated goal.

These 3 measurements are: THROUGHPUT, INVENTORY/INVESTMENT and OPERATING EXPENSE

  • THROUGHPUT:  This is the rate at which the system generates money through sales.
  • INVENTORY: This is all the money that the system has invested in purchasing things which it intends to sell.
  • OPERATIONAL EXPENSE: This is all the money the system spends in order to turn inventory into throughput 

 

throughput.pngLet us understand these terms more closely as these TOC terms are a bit different from the popular definitions. When we analyze the "Throughput" of a single process we have to analyze the sales that arise from the cases or widgets that the single process is responsible for. Not the amount of items / service which has gone through the process but what has actually been sold. This will give us the answer as to why many (Not all) six sigma projects do not yield the desired effect. These projects concentrate on speeding up the particular process (thus causing increased inventory down the line) and not increasing the sales in the system as a whole. On analyzing "Inventory / Investment", it is everything that can be sold by the company later for money. This can include even the land and building on which the company is running. "Operating expenses" is anything which is spent to turn the inventory into throughput (Which includes depreciation of machines). Each and every measurement here can be measured in money. The money coming into the system, money locked in the system and money made out from the system.

The beauty of TOC lies in its simplicity. These 3 measurements once measured give us the rest of general measurements which are regularly stated. For example:

  • Profit = Throughput - Operating Expense
  • Return on Investment (ROI) = (Throughput - Operating Expense)/Inventory = Profit / Inventory
  • TA (Throughput Accounting) Productivity = Throughput / Operating Expense
  • Investment turns (IT) = Throughput / Investment

Hence in order for a company to keep improving, it has to concentrate on increasing Throughput while reducing both Inventory and Operating Expense. Any change in one measurement which leads to an adverse impact to the other measurements will only cause more problems.

When one thinks in these terms there will be a paradigm shift in thinking on how to resolve problems at an organization level. One can no longer think on improving only their "silos", rather they have to think how their actions affect the whole system and thus behave accordingly.

June 21, 2012

Center of Excellence - the R&D in BPO (Part 2)

Even though we cannot clearly state which company should have R&D and which COE, there are substantial differences between Research & Development units and Centres of Excellence, which motivate different naming.

In my previous blog I introduced the idea of copying the approach used in the production environment - the Research and Development - to the BPO as an extended service environment.

Following the definition of an Organization for Economic Co-operation and Development, R&D means "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications."  This part of definition is applicable for both COE and R&D and is core to recognizing the department within the whole organization. The Hackett Group says that Centre of Excellence is the unit, which "enables the organization to consolidate expertise and employ standard approaches in dealing with such things as project management, pricing, cost analysis and value-based decision models" .

As you can see the objective of the effort taken by R&D and COE slightly differs, just like it differs between manufacturers and service providers but in both cases it focuses on increasing the level of knowledge used to develop a new product or service to fulfil customers' demands.

The research is done here in order to acquire knowledge of the observable facts or a defined pragmatic objective. However R&D covers also such activities as experimental research or experimental development where a physical object is being created in order to try out its properties or features and collect feedback. In case of services it is often impossible to conduct experiments on the living process, especially those recognized as core or critical for the client's business. Moreover the research often focuses deeply on culture and society, diving deeply into the legal and regulatory requirements (such as finance law, labour law, international accounting associations' rules etc).

Line of demarcation

I would really prefer to be able to draw a clear line distinguishing companies with R&D units from companies with COEs. As mentioned above, the easiest way would be to divide manufacturing companies (pharmaceutics, electronics, or beverages such as Nestle) with their own (or outsourced) Research & Development units, and service providers (consulting ones, like KPMG or outsourcing like Infosys BPO) where Centers of Excellence are more visible. Such a division however gets blurred in the case of companies which offer much more than mere physical products. A good example is the General Electric Company, which established the Controls & Power Electronics Center of Excellence. In this case COE focuses clearly on the technological development and innovation for their production devices. Thus it is closer to the R&D's rather than to COE's definition. A completely different approach is presented by BMW AG where COE is devoted to the customer satisfaction and branding with a program dedicated to car dealers and salesmen. It this case however we meet just the improvement and incentive program to enhance sales for fastidious customers of the luxurious goods.

Perhaps we could also consider the division that is not based on the company category but on the place where the COE unit is situated within the organization. According to the Hackett "COE can either be complementary to or part of a Global Business Services organization" , thus as the contradiction R&D should be a standalone unit providing services to other units.

Even though we cannot clearly state which company should have R&D and which COE, there are substantial differences between Research & Development units and Centres of Excellence, which motivate different naming. Given all that, we can still say that R&D is a centre where excellence is delivered. And still we can say that the Centre of Excellence is dealing with research and development. Thus we can assume that COE evolved from R&D, but still R&D strives for excellence. And the importance and values generated by these units are unquestionable.

June 20, 2012

Center of Excellence - the R&D in BPO (Part 1)

To be able to outdistance other market players, service providers have to reach to an idea used in production environments - the Research and Development units.

In today's world the physical product market value is being reduced by increasing value of services. This sector expands thanks to a growing demand for small services (valet service, restaurants) as well as corporate services, such as consulting, security or outsourcing. The growing demand for services meets with proper (or maybe even bigger) supply, which stimulates an increasing competency in the way the services are being provided. To be able to outdistance other market players, service providers have to focus on quality, procedures, as well as on a continuous, permanent development and improvement. Such situation results in the need to reach to the idea used in production environments - the Research and Development units.

Portfolio development

The Research and Development unit is often perceived as an elitist, exclusive unit to work in. It is due to the fact that people working there are one of the most creative, inventive and ingenious in the company. The future of the whole company often relies on the outcome of their work.

The main purpose of R&D units is either to create new products or to improve existing products. Many times the aim is to anticipate the customers' needs (both verbalized as well as anticipated) and to outdistance the competitors. These teams are often recognized as a motivational power for the whole organization's growth and expansion. The ideas, results of researches, new technologies and innovations give the company a competitive advantage and a major differentiator to the rivalry, which is necessary to stay in a market and achieve goals. The goal is not only related to a high level of sales, a number of new entries or wide product portfolio - it is also PR related. The ambition is to build brand awareness and position an entity as a modern, innovative company that creates the future, makes dreams come true, and is able to materialize visions that used to exist only in science fiction stories.

Parities and disparities

Should R&D focus on services as well? Service oriented enterprises should maintain a high level of sales, new entries or develop a wide product portfolio. Even though a service is not a physical product the research and development over the services they provide also has an impact on PR and branding. There is no production but still there are units focusing on the development of services offered as well as on improving their value and quality. They are Centres of Excellence (COE). 

Of course there are several differences in the ways of working and main objectives of R&Ds and COEs, but they arise mainly from the differences between the profiles (the product is defined as a physical, manufactured object, and the service - as virtual, intangible product), and the way they are being generated. Let us focus on those differences to prove that COEs are also elite, exclusive units to work in, and that COEs also give a huge value to the company.

In case of a manufacturing company, one of the most important assets are tools, machines and production lines, which produce items with a high, repeatable quality. On the contrary, the most valuable assets in the services area are staff members, their knowledge, experience and skills. Moreover, the services provided are very homogenous in nature, and thus the repetitiveness of their work is one of the main concerns.

R&D departments focus primarily on creating new products - on development and improvement, leaving the quality or improvement of the production processes to the quality or technical departments, whereas Centres of Excellence focus their attention primarily on the process improvement, and also on people development. Of course, we can assume that the service is a product, and as such, develop it using the techniques used in R&D. However in case of the service delivery it is very difficult to clearly separate the product from the process - thus there is a need to cover at the same time both streamlining and improvements.

June 14, 2012

Supply Risks - Aim, Focus, Shoot

So how are we approaching supply risks? 

There are different approaches to establish risk management framework for supply chain.  One can argue that the traditional enterprise wide risk management frameworks, which start with identification of risks can be adapted to Supply.  Having seen both sides of the coin, as a Risk Manager and a Sourcing & Procurement Professional, I would tend to argue for a simple yet effective approach - embed your supply risk management as part of your Category management framework and Sourcing Process.

 

And here's why:

At the core of supply chain risks, particularly on the procurement side, are the resources and services that we procure or manage.  Whether we are talking of risks of direct materials, indirect materials or services, - and these would be across functions, categories and geographies and business - each would have a spend - that's what we aim to manage through our sourcing frameworks.  Why not use the same approach to start grouping the risks of the your spend? 

So when you group categories, based on the global/functional/geographical spread, also consider the risks that each could bring it, and as we drill down to spend analysis, supply market analysis, industry analysis, commodity analysis, sourcing plans and approach, consider the risk of SSC - supply, supplier and compliance at each level. 

Practical approach, but can be very effective. 

But the challenge each faces is to have a mechanism to record, track and trigger risks as they occur. And have the mindset to think risk! Your views pls...

June 13, 2012

FP&A outsourcing - will it ever fulfill its promise?

The potential of FP&A outsourcing has not yet been realized and it is important to analyze why customers have not adopted the outsourcing of FP&A in a meaningful way.

Over the last few years FP&A (Financial Planning & Analysis) has been touted as the next big thing in F&A (Finance & Accounting) outsourcing by almost everyone. BPO vendors also latched on to it as it perfectly aligned with their objectives of moving-up-the-value-chain, increasing revenue productivity, providing business insights etc. However, the potential of FP&A outsourcing has not yet been realized and it is important to analyze why customers have not adopted the outsourcing of FP&A in a meaningful way.

However, before we try to find out why potential of FP&A outsourcing is not getting realized it is important to understand why everyone thought (probably still thinking) that FP&A will be next big thing in F&A outsourcing. Following are the widely accepted challenges faced by CFOs of large enterprise:

  • Increased complexity: with business going global and the technology landscape becoming complex it has become difficult to get a single source of truth from diverse systems, structures, processes etc.
  • Increased focus on cost: increased business dynamics and competition have forced companies to look at SG&A through a microscope.
  • Data overload: companies are swamped in data but struggling to derive meaningful information and insight from data. On an average FPA teams spend around 50-60% of their time collecting and collating data
  • Lack of analytical maturity: majority of global 2000 enterprises have invested in business intelligence platforms but use it- at best - as a reporting system, that too in a limited way
  • Parochial view: most organizations are sucked deep into their own mess and are not able to analyze beyond boundaries

The current challenges faced by CFOs make a perfect recipe for outsourcing and it is no surprise that a majority of analysts have concluded that large enterprise will have to outsource FP&A functions in a big way. However, FP&A outsourcing is more of an exception than a rule. I believe FP&A outsourcing did not take off because of the following reasons:

  • Concerns around data security / privacy: FP&A analysts deal with highly confidential data and deal with senior management of the company. No business case in cost terms will substitute the concerns around data security and privacy.
  • Proximity to CFO office: in a survey done in US it was found that chances of a doctor smoking is directly proportional to distance of her specialization from heart. Similarly, in my view the chances of a function getting outsourced are directly proportional to its remoteness from CFO office. FP&A function is closest to CFO so last to be considered for outsourcing.
  • Planning the work: it is difficult to smooth out peak and troughs in FP&A work. Typical FP&A analysts spend around 12-14 hours in the last 5 days and first 10 days of a month but are relatively free the rest of the time. It is very difficult to structure a similar work pattern in an outsourced environment.
  • High attrition is no-go:  the BPO industry is plagued with very high attrition. However, BPO vendors are able to mitigate it with proper cross training, SOP etc. for transactional processes. It is not acceptable in FP&A work as it requires significantly higher touch time with the client and an individual has to spend anything between 12-18 months to understand the business nuances.
  • Operating model: BPO companies have a model suited for voluminous work and have struggled to come up with a tailor-made model for FP&A.
  • BI Platforms are sold as self-service platforms: Last but not the least, most of the BI such as Hyperion, Business Objects etc. are sold as service self-service platforms and clients believe that they will not need any further assistance from anyone to manage their reporting and analysis.

The challenges facing large enterprises are not going to go away in the near-future. Unless BPO vendors come up innovative operating models i.e. onsite / near shore location centric operating model, leverage technology to provide differentiated value and combine it with reporting and analytics service to address CFOs concerns and dilemma, I don't think the scenario will change in the near future.

June 11, 2012

Theory of Constraints (Part 2)

As discussed in my previous blog post, a single point in the entire workflow can choke the flow of work. This point otherwise known as the constraint is to be taken as the most important part of the whole process. In hindi this may be known as "Nuss" or the nerve centre of the entire process.

On reading my previous post you may be think that it is the responsibility of a person (Constraint) to improve or that the person is the reason that the whole process is bogged down. Now it is true that a person can be the constraint but it is also true that the constraint can also be a machine or a policy.

From my understanding of TOC, policies constitute 90% of all the constraints. If there is a suggestion for improvement on the constraint, it might be noticed that the answer will be, "This is not how we work here" or "This is not what the client wants" or "If anything goes wrong, I will not be able to answer to my bosses" or "This situation is different" or "The solution is not realistic". If any of these or any similar answers come up, you can be rest assured that a policy is restricting the efficiency of the process. These policies may be written or unwritten (such as a process not done before and hence not to be tried - seems silly when verbalized but very often the reason in our heads).

Next point is, once we think that increasing the capacity of the constraint will solve all the problems, that is wrong again. It is not that the capacity will not be increased. The capacity will increase but other problems will arise. The main issue is of inventory and how it moves ahead in the system. Inventory can be the number of cases (in case of services) or widgets (in case of manufacturing).

Two phenomena known as statistical fluctuations and dependent events cause quite a lot of headache even in a balanced system (where every process is having equal capacity).

To explain what statistical fluctuations are, let us consider an example of estimating the number of bulbs required in a month to replace any bulbs in office. Some people may try to calculate the total number of lights in office and then try to estimate how many % of bulbs gets spoilt on average in a month. Now what if, a voltage fluctuation fries out half the bulbs in the office? What if a 64.45% (A random %) of the total number of bulbs had already been changed in the last 2 months and hence the change of a bulb getting spoilt gets reduced? Or what if 84.76% (Again a random % to illustrate this example) of all the bulbs were last replaced 5 years ago and have a life of around 5 years?

As shown in the above case, to start calculating every variable for every minor item would lead to a high amount of data requirement and even this would only lead to an intelligent "Guesstimate" (Guess + Estimate). This difference in the number of bulbs getting burnt out in any given month is an example of "Statistical Fluctuation". i.e. the average number of bulbs getting burnt out for the last ten years may be easily calculated but to get an accurate answer on the actual number of bulbs getting burnt out in any month is essentially impossible.

Dependent events are those events which can take place only based on the events which take place before it. The effect of these two phenomena leads to huge inventories and loss of control of the process.  Let us take the example of a line of 6 people rolling a dice. Based on the number thrown, a batch of matchsticks move from the first person to the last person.

One would assume that the matchsticks that get passed on at the end of the line would be on an average of 3.5 i.e. [(1+2+3+4+5+6)/6] Hence at the end of 10 rounds, the number of matchsticks should be around 35. But this is not so. Let us check the below scenario of the first round.

When the first person throws the number 4, 4 matchsticks are passed on to the second person. When the second person throws a 6, only 4 matchsticks are passed on to the next person as there are no more matchsticks with the second person. When the third person throws a 2, only 2 matchsticks are passed on with 2 remaining with the third person as "Inventory". By the time the last (sixth) person throws the dice, he will have only 1 or 2 matchsticks to pass on to the end.

After a few rounds of doing this (With truly random numbers of 1 to 6 rolled by each person), it is seen that two things happen:

  1. Inventory increases all over the system and
  2. The output comes in the form of waves (There is no uniformity in output)

Allocating buffer at every point also does not help much as the situation again changes back to chaos without any control on the system.

To prevent such issues, the constraint is very critical. We need to pinpoint the constraint and use it to control the entire system. How we do such a process shall be explained in future blog posts.

June 6, 2012

Greed is good - Particularly for Procurement

As a Sourcing and Procurement professional, I can put my hand on my heart and say that I've been driven by greed to get highest value on my spending and I'm not ashamed to accept that. What about you?

In the famous 1987 Hollywood movie "Wall Street", Gordan Gekko, played by Michael Douglas said "Greed, for lack of better word, is good". Douglas went ahead won an Oscar for that role.

Now I don't know how much of that 'greed' was responsible for the Oscar but some people say that the financial downfall of west was definitely caused by too much Greed. "Stop the Greed" signs are all over the streets and internet. But I have a disconnect with this whole idea of categorizing a normal human nature as a bad thing. Greed can actually make employees and organizations achieve amazing heights.  It depends on how employees act and what ethical/non-ethical choices they make when they get greedy.

Over last few decades the procurement function has shifted from a back office clerical department to a strategic one, creating value for shareholders. There are new tools and techniques available to understand the spend pattern and leverage the power of internet through e-sourcing, e-procurement and value networks. The Supply markets have changed from Local to Regional and Regional to Global. There is continuous pressure on CPOs to do more with fewer resources. In this changing scenario, 'Greed' or 'a nonstop appetite for tangible results' is actually a desirable attribute for procurement function.

Take Reverse Auction for example; it is a classic case where buyer's greed for price reduction, seller's greed for getting more business and a technology platform, all three come together and create value for their respective organizations. But some critics feel that Reverse Auction is not good because it creates lack of trust and damages buyer - supplier relationship. This is often mixed with biased assumptions and misleading claims due to half/no knowledge about right e-Sourcing process. I believe these notions are similar to branding 'wall street's greed' a cause for 'Global financial distress'; and we all know that's not the truth.

As a Sourcing and Procurement professional, I can put my hand on my heart and say that I've been driven by greed to get highest value on my spending and I'm not ashamed to accept that. What about you?

June 4, 2012

Are your sourcing goals futuristic too?

So how did your sourcing function perform this year? 

Our performance indicators are usually measured by targets, that are linked to measurable corporate and functional goals.  For sourcing, typically goals fall into 3 categories - savings, supply and supplier performance.  Definitely these goals aid the annual corporate results year on year.  But do they also cater to the future evolution of the Sourcing function?

Performance systems should also ensure that in the long term the Sourcing function is viewed as vibrant, flexible, evolved and innovative. 

Today's goals need to cater to this.  And harnessing experience as the goal can help take Sourcing to the next level.

The experience that each individual has during the course of sourcing projects is invaluable.  When the group is small, and cohesive, the personal touch can be relied on, but if we want to manage scale, we need a formal process that taps and tracks the knowledge created during sourcing.  We can include contribution of sourcing knowledge to development and evolution of frameworks, benchmarks, category experience, market analysis, supply risks and so forth, as a performance indicator for Sourcing Managers.

The scope of the performance systems should include the number of contributions, quality of contribution, impact of the contribution on the future evolution. That is one way of ensuring that Sourcing Professionals not only serve the current needs but contribute to the future...

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