Simplifying the Vendor Selection Process

Managing the vendor and product selection process at your company isn't as hard as you think, writes CIO Update guest columnist John Lakey of Acquity Group. Contemporary companies rely on outsourcing for success in today's competitive marketplace, and selecting a vendor is now as important a process as developing new products. Products and services are selected for cost, requirements, overall quality, stability of the supplier, time-to-market and traditional partnerships. The purchase approval process often involves more than one criteria and one opinion and requires the establishment of a broad-based team to manage the process. Creation of a repeatable evaluation process is critical and development of a process that works for your company is not as hard as many think. It's worth the time and effort and can be broken down into a four step approach that will allow selection of the right vendor for the job. The key to a successful cost-based evaluation is that the product or service in question is an undifferentiated offering (e.g., long distance phone service). When evaluating offerings that can be differentiated, it becomes much more difficult to find a company that offers a solution that is clearly superior along all dimensions your organization would like to consider. In these situations, cost is joined by other evaluation areas such as: functionality, ease-of-use, company history and financials and value-added services. A Four-Step Plan Sophisticated product and service evaluations can be accomplished in four steps: Evaluating Business Needs Request & Assess Offers Vendor Interviews & Proof-of-Concepts Negotiation Step 1 - Evaluating Business Needs: This is where you ask the tough questions that drive the execution steps in the successive steps in the process: What need you are looking to satisfy? Which evaluation categories you will use? What are your business, technical and usability requirements? How you will roll your evaluation into a scorecard? The evaluation team should be made up of representatives from all of the key stakeholder groups. This allows for clear reporting back to stakeholders as the process proceeds and for balanced discussions. Establish a base set of scorecard categories and a base scorecard that is the default for any evaluation. A good starting set is: business requirements, technical requirements, TCO, usability and vendor health. By turning this starting point into a reusable template, you will give the cross-functional evaluation team more faith in the process. You can then discuss deviations from the process upfront for a given evaluation which increases the sense of transparency and is critical to generate the buy-in necessary to successfully move from evaluation and selection to implementation. Step 2 - Request & Assess Offers: Once you understand the requirements that your evaluation team will be working with and how you will score the vendors you are evaluating, the next step is to gather the information necessary to fill in the scorecard and to create a shortlist of vendors for interviews and, where appropriate, proof-of-concept activities. Assuming you have options, consider whether you need to send out a request for information (RFI). Do you have a solid understanding of the market? Are you dealing with a limited number of potential vendors? Are you ready to get proposals? If the answer to these questions is "yes" then you may be able to send out a request for proposal (RFP) directly to each of the potential vendors. Often, vendors are more responsive to requests that have quantifiable requirements and dollar goals than to general requests for information. After you get the information you need, fill in as much of the scorecard as possible. Your goal is to see if any vendor fails to meet your "must have" requirements. Evaluate which vendors withdrew from consideration and why. Finally, work with the evaluation team to document who made the short-list and why. Document everything so that the evaluation team has clear logic to support the short-list decision. Step 3 - Vendor Interviews & Proof-of-Concepts: Once the evaluation team has a short-list, it should move quickly to invite vendors in to engage in a set interview schedule. All vendors will need the agenda in advance and each member of the evaluation team should try to be present for each meeting. If the evaluation involves a process or technology, consider a proof-of-concept as a piece of the vendor interview process. There should always be a section of the evaluation scorecard that includes vendor interviews. These dog and pony shows are important because they will demonstrate the personality of the vendor and their level of commitment to your account. Step 4 - Negotiation: After the vendor interviews end and all of the evaluation team's questions are answered, the team should pick the finalists for negotiation. Use the scorecard to make the determination. It is generally easier to complete the scorecard with preliminary pricing allowing you to narrow the field to the clear scorecard leaders and then to revisit the scorecard as the negotiating process continues with the few remaining vendors. Some companies like to work with the entire short-list and to get final pricing up front which is okay, but it can take longer than narrowing the list before the evaluation team hands the recommended finalists over to purchasing. Finalized pricing will give the evaluation team the last element of the scorecard. To generate the buy-in necessary for implementation, it is important for the evaluation team to present the final scorecard to the broader stakeholder group and answer any questions about the recommended vendor that may come up. By properly evaluating which products and services organizations can save time and money. Implementing a flexible and repeatable model for evaluations will give all stakeholder groups comfort that the evaluation was fair and complete, which will give the resulting projects the legitimacy they need to succeed.

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JUST-IN-TIME (JIT) PRODUCTION

Just-in-time (JIT) is defined in the APICS dictionary as "a philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity".  It also has been described as an approach with the objective of producing the right part in the right place at the right time (in other words, "just in time").  Waste results from any activity that adds cost without adding value, such as the unnecessary moving of materials, the accumulation of excess inventory, or the use of faulty production methods that create products requiring subsequent rework.  JIT (also known as lean production or stockless production) should improve profits and return on investment by reducing inventory levels (increasing the inventory turnover rate), reducing variability, improving product quality, reducing production and delivery lead times, and reducing other costs (such as those associated with machine setup and equipment breakdown).  In a JIT system, underutilized (excess) capacity is used instead of buffer inventories to hedge against problems that may arise. JIT applies primarily to repetitive manufacturing processes in which the same products and components are produced over and over again.  The general idea is to establish flow processes (even when the facility uses a jobbing or batch process layout) by linking work centers so that there is an even, balanced flow of materials throughout the entire production process, similar to that found in an assembly line.  To accomplish this, an attempt is made to reach the goals of driving all inventory buffers toward zero and achieving the ideal lot size of one unit. The basic elements of JIT were developed by Toyota in the 1950's, and became known as the Toyota Production System (TPS)..  JIT was well-established in many Japanese factories by the early 1970's.  JIT began to be adopted in the U.S. in the 1980's (General Electric was an early adopter), and the JIT/lean concepts are now widely accepted and used. Some Key Elements of JIT 1. Stabilize and level the MPS with uniform plant loading (heijunka in Japanese): create a uniform load on all work centers through constant daily production (establish freeze windows to prevent changes in the production plan for some period of time) and mixed model assembly (produce roughly the same mix of products each day, using a repeating sequence if several products are produced on the same line).  Meet demand fluctuations through end‑item inventory rather than through fluctuations in production level.  Use of a stable production schedule also permits the use of backflushing to manage inventory: an end item's bill of materials is periodically exploded to calculate the usage quantities of the various components that were used to make the item, eliminating the need to collect detailed usage information on the shop floor. 2. Reduce or eliminate setup times: aim for single digit setup times (less than 10 minutes) or "one‑touch" setup ‑‑ this can be done through better planning, process redesign, and product redesign.  A good example of the potential for improved setup times can be found in auto racing, where a NASCAR pit crew can change all four tires and put gas in the tank in under 20 seconds.  (How long would it take you to change just one tire on your car?)  The pit crew's efficiency is the result of a team effort using specialized equipment and a coordinated, well-rehearsed process. 3. Reduce lot sizes (manufacturing and purchase): reducing setup times allows economical production of smaller lots; close cooperation with suppliers is necessary to achieve reductions in order lot sizes for purchased items, since this will require more frequent deliveries. 4. Reduce lead times (production and delivery): production lead times can be reduced by moving work stations closer together, applying group technology and cellular manufacturing concepts, reducing queue length (reducing the number of jobs waiting to be processed at a given machine), and improving the coordination and cooperation between successive processes; delivery lead times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory. 5. Preventive maintenance: use machine and worker idle time to maintain equipment and prevent breakdowns. 6. Flexible work force: workers should be trained to operate several machines, to perform maintenance tasks, and to perform quality inspections.  In general, JIT requires teams of competent, empowered employees who have more responsibility for their own work.  The Toyota Production System concept of "respect for people" contributes to a good relationship between workers and management. 7. Require supplier quality assurance and implement a zero defects quality program: errors leading to defective items must be eliminated, since there are no buffers of excess parts.  A quality at the source (jidoka) program must be implemented to give workers the personal responsibility for the quality of the work they do, and the authority to stop production when something goes wrong.  Techniques such as "JIT lights" (to indicate line slowdowns or stoppages) and "tally boards" (to record and analyze causes of production stoppages and slowdowns to facilitate correcting them later) may be used. 8. Small‑lot (single unit) conveyance: use a control system such as a kanban (card) system (or other signaling system) to convey parts between work stations in small quantities (ideally, one unit at a time).  In its largest sense, JIT is not the same thing as a kanban system, and a kanban system is not required to implement JIT (some companies have instituted a JIT program along with a MRP system), although JIT is required to implement a kanban system and the two concepts are frequently equated with one another. Kanban Production Control System A kanban or "pull" production control system uses simple, visual signals to control the movement of materials between work centers as well as the production of new materials to replenish those sent downstream to the next work center.  Originally, the name kanban (translated as "signboard" or "visible record") referred to a Japanese shop sign that communicated the type of product sold at the shop through the visual image on the sign (for example, using circles of various colors to indicate a shop that sells paint).  As implemented in the Toyota Production System, a kanban is a card that is attached to a storage and transport container.  It identifies the part number and container capacity, along with other information, and is used to provide an easily understood, visual signal that a specific activity is required. In Toyota 's dual-card kanban system, there are two main types of kanban: 1. Production Kanban: signals the need to produce more parts 2. Withdrawal Kanban (also called a "move" or a "conveyance" kanban): signals the need to withdraw parts from one work center and deliver them to the next work center. In some pull systems, other signaling approaches are used in place of kanban cards.  For example, an empty container alone (with appropriate identification on the container) could serve as a signal for replenishment.  Similarly, a labeled, pallet-sized square painted on the shop floor, if uncovered and visible, could indicate the need to go get another pallet of materials from its point of production and move it on top of the empty square at its point of use. A kanban system is referred to as a pull‑system, because the kanban is used to pull parts to the next production stage only when they are needed.  In contrast, an MRP system (or any schedule‑based system) is a push system, in which a detailed production schedule for each part is used to push parts to the next production stage when scheduled.  Thus, in a pull system, material movement occurs only when the work station needing more material asks for it to be sent, while in a push system the station producing the material initiates its movement to the receiving station, assuming that it is needed because it was scheduled for production.  The weakness of a push system (MRP) is that customer demand must be forecast and production lead times must be estimated.  Bad guesses (forecasts or estimates) result in excess inventory and the longer the lead time, the more room for error.  The weakness of a pull system (kanban) is that following the JIT production philosophy is essential, especially concerning the elements of short setup times and small lot sizes, because each station in the process must be able to respond quickly to requests for more materials. Dual-card Kanban Rules: No parts are made unless there is a production kanban to authorize production.  If no production kanban are in the "in box" at a work center, the process remains idle, and workers perform other assigned activities.  This rule enforces the "pull" nature of the process control. There is exactly one kanban per container. Containers for each specific part are standardized, and they are always filled with the same (ideally, small) quantity.  (Think of an egg carton, always filled with exactly one dozen eggs.) Decisions regarding the number of kanban (and containers) at each stage of the process are carefully considered, because this number sets an upper bound on the work-in-process inventory at that stage. For example, if 10 containers holding 12 units each are used to move materials between two work centers, the maximum inventory possible is 120 units, occurring only when all 10 containers are full.  At this point, all kanban will be attached to full containers, so no additional units will be produced (because there are no unattached production kanban to authorize production).  This feature of a dual-card kanban system enables systematic productivity improvement to take place.  By deliberately removing one or more kanban (and containers) from the system, a manager will also reduce the maximum level of work-in-process (buffer) inventory.  This reduction can be done until a shortage of materials occurs.  This shortage is an indication of problems (accidents, machine breakdowns, production delays, defective products) that were previously hidden by excessive inventory.  Once the problem is observed and a solution is identified, corrective action is taken so that the system can function at the lower level of buffer inventory.  This simple, systematic method of inventory reduction is a key benefit of a dual card kanban system.

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SOURCING

Saving money is always at the forefront of every business decision but when it comes to purchasing and sourcing, there are a number ways to cut costs that are often neglected or which do not use to their full advantage. Companies who fail to see these possibilities could be standing in the way of significant savings that would dramatically improve their bottom line. Many of the ways that are available to cut costs vary depending on the business. For example, manufacturing companies may want to first start finding savings by talking to the suppliers of their raw materials. Since these represent a larger portion of their purchases, these areas often offer the greatest potential cost savings benefits. When buyers sit down with vendors, they can often negotiate an arrangement that will be more cost-effective. Other companies may find their great potential savings opportunities revolve around their MRO purchases. In order to identify potential savings opportunities in this area, companies need to take a straight look at their current operations to determine areas that need improvement. Rejected parts or excessive downtime are two of the most common problems for many companies and both of these areas can significantly add to the cost of operations. To solve the problem, companies should call in their suppliers, provide them with the necessary information, and ask them to come up with suggestions. These suggestions will usually come in the form of valued-added services from the suppliers. These extra services can sometimes then become the backbone of the supplier selection process. Many companies make the mistake of choosing vendors strictly on the basis of the quoted price; however, the lowest stated cost does not always spell the best deal for the business. Instead of focusing strictly on price, buyers need to evaluate suppliers additionally on their willingness to provide these value-added services. Another way for companies to save money over the long term is by tracking the performance of their suppliers. Once relationships with select vendors have been formed, the company needs to begin assessing their overall job performance because poor performance translates into additional costs for the buyer. Some analysts suggest evaluating vendor performance in terms of Total Cost of Ownership (TCO). Essentially, this means that the company looks at one event that the supplier is responsible for and uses that as an indicator of their overall performance. For example, if a vendor is scheduled to provide a delivery of raw materials in two weeks but misses the target date by a full week, then that delay would need to be figured into the costs of doing business with that vendor. Most companies do not currently use the TCO model for judging vendor performance and instead base their decisions solely on quoted costs. These companies generally find out in the long run that a low price does not always equal adequate performance. While all of these cost saving measures may sound good on paper, many companies may find suppliers reluctant to cooperate. One reason suppliers are often hesitant to get involved in these value-added ideas is that to achieve their objectives they require cooperation from within the company itself. If a vendor is asked to make a process within the plant more efficient but workers within the plant are interfering with their ability to make that happen, then this reflects badly on the vendor who doesn't live up to his or her end of the bargain. Companies need to reassure suppliers that they will have total cooperation from all levels of management and staff to accomplish their tasks. The individuals in charge of purchasing should also maintain an open line of communication with the suppliers throughout the process so that they can be alerted immediately if conflicts do arise. Companies often overlook the value-added services that many vendors offer simply because their savings are harder to quantify. By using the TCO model and getting suppliers more actively involved in the creative process, however, companies can see definite improvements in their bottom line.

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PROCUREMENT - VALUE ADDED SERVICES

Every company is looking to lower costs and increase profitability. Each year, company management devises new initiatives to cut costs and boost productivity. However, one area that is often overlooked by company management is the purchasing department. The purchasing department is usually in charge of purchasing direct goods (fall into the cost of goods sold) and indirect goods (other areas like office supplies, computers, etc). The efficiency and effectiveness of a purchasing department is often difficult to quantify. However, it is worthwhile for companies to examine purchasing departments since cost savings in the purchasing department translate directly to the bottom line. New purchasing software equipped with advanced RFQ, automated bid submission, and automated negotiation have made it possible to realize significant cost savings from the purchasing department. While eprocurement can offer companies a lot of tangible benefits, it takes specific knowledge of software and the purchasing process to maximize these benefits for the company. This article will describe some areas where specific knowledge of the purchasing process can lead to cost savings and efficiency gains when this knowledge is used in conjunction with software. Spend Analysis: A knowledgeable partner will help you obtain detailed supply management goals and objectives and provide detailed vies of current and projected spend. Once current spend has been analyzed, a knowledgeable partner can help develop actionable strategies to support goals. Technology can then be used to develop capabilities to manage and analyze spend going forward. Market Analysis: If a company is going to purchase a particular type goods in the open market, the buyer / partner will need to understand the market dynamics. This means having a knowledge of the average prices, key suppliers, drivers of value. This will also determine which procurement methodology will be used to purchase the goods. For example, if there is only one or two suppliers of a particular item in the world, an auction event will not work. Supplier Sourcing: One of the biggest problems that buyers face in setting up automated procurement events is supplier participation.. For large procurement events, the addition of an additional supplier will enable the buyer to obtain a much better price. This calls for expertise in supplier sourcing and requires the ability to locate new, qualified suppliers. RFQ creation: The way that an RFQ is worded can often have a strong impact on how a procurement event unfolds. Each RFQ should contain enough information for a supplier to make a bid. Depending on the type of item, this will include delivery terms, payment terms, and specifications. An experienced RFQ creator will know what suppliers are looking for and will understand the key drivers of price. Supplier Invitation: The decision of which suppliers to invite has a profound impact on the way a procurement event progresses. Generally, the more suppliers participate, the better that the event will work. Event Structuring: To maximize the value of powerful, feature rich purchasing software, knowledge of how to structure the procurement event will be necessary. This includes knowing what information to show suppliers during the event, the type of logic to use for the event (sealed bid, dutch, percent over cost, vickrey, etc).

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AUCTION LOGIC OVERVIEW

Today, auctions have come a long way since the days when businesses generally used them only for reclaiming their investments in machinery, in automobiles, and in the other tools of their trade. Now auctions have come into the computer age and have changed the way businesses think about procurement and selling goods and services. Many people new to the world of auctions - both on- and off-line - may not realize that there are a wide variety of auction logics being used to set the rules for numerous auction events. In this case, the term logic refers to a sequence of instructions which is part of the software and which sets the pricing rules for an auction event. Software developers have attempted to create logic systems that imitate the same types of auctions that are conducted in the brick and mortar world. For example, there are several major types of auction logics: first price, second price, English, and Dutch. First price auctions are fairly traditional auctions. A good or service is offered up for bidding. Participants place bids in an effort to compete with the other bidders but while also trying to keep the price low so that they can get a good deal on the items. When the auction is over, the highest bidder wins and pays his bid. One thing that does make this type of auction different than English and Dutch auctions is that all the bids are sealed so that no one knows how much the other participants have bid. Second price auctions, also known as Vickrey auctions, are somewhat different. In these auctions, participants place their bids as with first price auctions. At the end of the simple quantity second price auction auction, however, the winner does not pay his bid but pays the highest losing bid. For example, Bidder A wins the auction by bidding $400. He beats out Bidder B who placed a bid of $350. Bidder A then has to pay $350 and not $400 to the seller. Like, first price auctions, however, all bids are sealed and are not viewable by the participants. Another type of auction logic is the English auction. With English auctions, the prices are not sealed because these types of auctions were traditionally run by auctioneers in public. With online auctions, the seller gets to act as auctioneer while the software itself tracks the bids. In this type of auction, a low price is announced to start the auction. Bidders then raise that price in increments until no more bids are offered. At that time, the highest bidder is considered the winner. Finally, there are Dutch auctions. Like with English auctions, bids are known by all participants because these auctions were traditionally handled by auctioneers as well. In these auctions, the auctioneer called out a very high price for the item. He then lowered the price in specific increments until someone accepts the price. Some confusion has been caused over the definition of the Dutch auction because a third-party online auction site has labeled other, non-Dutch auctions as being Dutch. All of these types of auction logics each have their own benefits and their strategic uses. Sealed auctions, such as first and second price auctions, generally are more useful at driving prices higher for a smaller number of participants than more open auctions. The reason is that when people cannot use other bidders' prices as a guide, they tend to bid higher than they normally would. Participants in English auctions are usually the most bidder-friendly because it gives them an advantage. They can see the other bids and can use them to help determine how much to bid themselves. Dutch auctions are trickier because to be effective a bidder must have some idea of how low the bidding will go before it is accepted. For example, if the bidding starts at $1000, then goes to $900, then to $800, the anxious bidder may go ahead and accept that price even though it could have went all the way to $500 without being accepted. All auction logics can be used by businesses to increase revenue and/or to decrease costs. Businesses simply need to pick the right logic for their needs. And to understand these logics to determine which logic is right for their auction event.   INTERNET AUCTIONS   Today, most people recognize that the Internet has changed the way businesses and individuals handle shopping transactions. After all, millions of people go online to buy everything from computer software to office supplies to heavy equipment. Nowhere has that change been most obvious than in the popularity of Internet auctions. Internet auctions work similarly to traditional auctions. A seller places an item up for bid and interested buyers offer to purchase it for steadily increasing amounts of money. The differences, however, are in how this simple process is executed and in the array of benefits it provides for both involved parties. In order to understand some of these reasons why Internet auctions are so popular, one must also realize that there are two types of Internet auctions. One type is a direct-sales auction; the other is a vendor-operated auction. Direct-sales auctions usually involve individuals who want to buy or sell items and often go through third-party sites in order to accomplish this goal. Vendor-operated auctions, on the other hand, usually involve businesses as the sellers and, sometimes, as the buyers. Some vendor-operated auctions go through third-party sites also, but many others use software to create their own online auctions. Both types of auctions share many of the same benefits. For example, online auctions simply attract a greater audience than traditional, in-person auctions. People from all around the globe can participate in the bidding easily when these auctions are held on the Internet, so the chances of getting a bigger selection of bidders is increased. Likewise, buyers are more likely to find the items they want thanks to online auctions. Just as there are millions of bidders, there are also millions of sellers with a wide-range of items up for auction. Another benefit is that the prices are determined by competition among the bidders, so sellers can usually earn a better price for their goods than if they choose a fixed-price marketplace. While this may seem like a disadvantage for buyers, it isn't always. In many cases, buyers have been able to walk away with a nice deal on the item they really wanted thanks to strategic bidding. They are unlikely to get such a bargain in a fixed-price marketplace, even if the seller is willing to engage in price negotiations. Another benefit of both types of auctions is that they save both buyers and sellers time. For the buyer, he or she doesn't have to devote hours, weeks, or longer trying to track down an item. Instead, they can sit at their desk, search for the item, and make an offer within minutes. Sellers don't have to worry about setting up displays in brick and mortar stores or in trying to lure in customers. They simply create a product description, post it using the auction software, and wait for the bidders to show up. Also, since the entire auction process is automated, the auction can be going on while the seller deals with other business. Although the benefits are similar, there is at least two main differences. One difference is the amount of information required to sign up as a bidder. Direct-sales auctions, particularly those that go through third-party sites, require a minimum amount of information. They don't request any of your payment information since that information is only exchanged between the seller and the buyer. With vendor-operated auctions, however, users generally have to provide all payment and shipping information when they sign-up as a bidder, since the entire transaction from beginning to end will be handled solely by the vendor. The second difference is in the security of the auction. Direct-sales auctions have a reputation for being risky propositions. Sellers lie about the goods for sale or never send them to the buyer while buyers fail to ever make payment. Thankfully, vendor-operated auctions are less likely to have these types of problems. In fact, many vendors even offer guarantees and warranties on the items they auction online.

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E-PROCUREMENT

Definition of E-Procurement E-Procurement is more than just a system for making purchases online. A properly implemented system can connect companies and their business processes directly with suppliers while managing all interactions between them. This includes management of correspondence, bids, questions and answers, previous pricing, and multiple emails sent to multiple participants. A good e-procurement system helps a firm organize its interactions with its most crucial suppliers. It provides those who use it with a set of built-in monitoring tools to help control costs and assure maximum supplier performance. It provides an organized way to keep an open line of communication with potential suppliers during a business process. The system allows managers to confirm pricing, and leverage previous agreements to assure each new price quote is more competitive than the last. Benefits of Adopting an E-Procurement System E-Procurement helps with the decision-making process by keeping relevant information neatly organized and time-stamped. Most are template-driven which makes all transactions standardized and trackable. Keeping track of all bids means leveraging your knowledge to obtain better pricing. Companies can focus on their most lucrative trading partners and contracts. Well-managed e-procurement helps reduce inventory levels. Knowing product numbers, bid prices and contact points can help businesses close a deal while other suppliers are struggling to gather their relevant data. E-Procurement systems that allow multiple access levels and permissions help managers organize administrative users by roles, groups, or tasks. Procurement managers do not need to be as highly trained or paid because such systems are standardized and easy to learn. Typical Adoption Strategies Some firms have discovered that many of their transactions still take place on paper, and they have run into problems ranging from content management to supplier participation in their systems. Most companies who desire to make the switch fall into two camps. The first are the slow step-by-step adopters. They implement one piece of their system at a time and slowly bring trading partners on board. The others follow the total replacement model. They build a totally parallel system, test it, then switch over to it when it works. There is usually some pain involved and some mistakes are discovered, but by and large these are absorbed and the business continues. Pitfalls to Avoid Don't bite off more than you can chew. The parallel system approach should only be used if you have the time and resources to do this. If not, stick to the incremental approach. Don't expect an immediate return on investment. A short-tem gain may be noticeable, but it may be eaten up by the cost of staff training and equipment purchases. A year or two down the road, a larger ROI should be evident.

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Deming Cycle

Deming Cycle   W. Edwards Deming in the 1950's proposed that business processes should be analyzed and measured to identify sources of variations that cause products to deviate from customer requirements. He recommended that business processes be placed in a continuous feedback loop so that managers can identify and change the parts of the process that need improvements.. As a teacher, Deming created a (rather oversimplified) diagram to illustrate this continuous process, commonly known as the PDCA cycle for Plan, Do, Check, Act*: PLAN: Design or revise business process components to improve results DO: Implement the plan and measure its performance CHECK: Assess the measurements and report the results to decision makers ACT: Decide on changes needed to improve the process Deming's PDCA cycle can be illustrated as follows: Deming's focus was on industrial production processes, and the level of improvements he sought were on the level of production. In the modern post-industrial company, these kinds of improvements are still needed but the real performance drivers often occur on the level of business strategy. Strategic deployment is another process, but it has relatively longer-term variations because large companies cannot change as rapidly as small business units. Still, strategic initiatives can and should be placed in a feedback loop, complete with measurements and planning linked in a PDCA cycle. To illustrate the relationship of business unit processes to strategic processes, we may construct two nested PDCA cycles: This 'wheel within a wheel' describes the relationship between strategic management and business unit management in a large company. There are actually several separate business units, of course, each with its own set of metrics, goals, targets and initiatives. But this figure illustrates the idea that the business activities constitute the DO part of the overall strategic effort. * Note: The PDCA cycle was in fact originally developed by Walter A, Shewhart, a Bell Laboratories scientist who was Deming's friend and mentor, and the developer of Statistical Process Control (SPC) in the late 1920s.  So sometimes this is referred to as the "Shewhart Cycle".  There are also several recent variations on this concept.   PDCA - The Deming Cycle This cycle of "Plan - Do - Check - Act" is also known as the Control Circle, or PDCA. Kaoru Ishikawa has expanded Deming's four steps into six: Determine goals and targets. Determine methods of reaching goals. Engage in education and training. Implement work. Check the effects of implementation. Take appropriate action.   Benefits of the PDSA cycle: - Daily routine management-for the individual and/or the team - Problem-solving process - Project management - Continuous development - Vendor development - Human resources development - New product development - Process trials

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GE restructures into four business segments

CEO Immelt under pressure from investors to make changes HARTFORD, Conn. - General Electric Co., which owns businesses ranging from light bulbs to NBC television, on Friday said it will restructure into four businesses from six, a move that Chief Executive Officer Jeff Immelt says will focus the company on growth. Immelt has been under pressure to shake up GE since it shocked investors with disappointing first-quarter earnings. GE's share price has since dropped nearly 22 percent. Friday's move follows GE's recent plan to consider spinning off its iconic lighting and appliance businesses, a brand familiar to Americans for generations.   The new structure includes GE Technology Infrastructure, led by Vice Chairman John Rice, which includes Healthcare, Aviation, Transportation and Enterprise Solutions. GE Energy Infrastructure, headed up by John Krenicki, includes Energy, Oil & Gas and Water.   GE Capital, led by Vice Chairman Mike Neal, brings together all the financial service businesses, including Commercial Finance, GE Money, industry verticals and Corporate Treasury.   NBC Universal, headed by Jeff Zucker, will remain unchanged. (Msnbc.com is a joint venture of Microsoft and NBC Universal.) In the reorganization, GE's Commercial Finance, GE Money, GE Industrial and GE Healthcare were folded into new, expanded business segments.   Analyst Nicholas Heymann of Sterne Agee in New York said in an e-mail that GE made the right move, and that the new structure suggested GE would be focusing increasingly on infrastructure and, to a lesser extent, on commericial finance.   The expected sale of GE Money at a favorable price "should further underscore GE's narrowing focus of its businesses," Heymann said. Immelt has said GE will consider selling portions of GE Money, which provides banking and credit services.   GE, which is based in Fairfield, has been getting rid of other units that have failed to drive profitability. It announced in May it would sell or spin off its appliance business, but this month said it would spin off the entire unit that includes household appliances such as dishwashers and clothes dryers and lighting, motors and electrical distribution.   Last year, GE shed its underperforming plastics business by selling it to a Saudi Arabian company for $11.6 billion.   Analyst Matt Collins of Edward Jones in St. Louis said investors will benefit from the reorganization if it helps GE officials focus on key markets and provides more transparency. In particular, he said organizing GE's array of financial services into one unit makes it a "little easier to figure out where the financial earnings are coming from," he said. "That's overdue."   The reorganization is GE's second announcement in a week. On Tuesday, GE said it had formed a joint venture with an Abu Dhabi government investment company that will pump $4 billion of outside capital into its weakened commercial finance business. The deal with Mubadala Development Co. also will launch or broaden several other ventures with the Persian Gulf investment vehicle, which expects to become one of the top 10 institutional investors in GE.   Immelt also announced that GE's board has named Krenicki, 46, a 24-year GE veteran, as a vice chairman of GE.

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The father of Kaizen speaks!

The 73-year-old mind of Masaaki Imai runs razor sharp belying the frailty of his small frame. He talks with sincere conviction, pausing to select the right words. He has to be careful, after all, his words have been changing the way the corporate world talks, and more important, acts.     When he first threw the word 'Kaizen' at the corporate world through his book Kaizen: The Key to Japan's Competitive Success in 1986, it was swallowed hungrily by a world in the throes of transition. Translated in fourteen languages, Kaizen became a fad the world over. Toyota, the outstandingly successful Japanese carmaker, became one of his most committed followers. However, Imai, the founder of a leading international management and executive recruiting firm, and consultant to over two hundred companies, realized that the concept had neither been digested nor well implemented. He introduced an evolved form of Kaizen in 1997 in his book Gemba Kaizen: A Commonsense, Low-Cost Approach to Management, to reassert the importance of the shop floor in bringing about continual improvement in an organization. Today, the father of 'Kaizen' and 'Gemba Kaizen' is convinced that to survive in an increasingly competitive world, top management must adopt a just-in-time approach and drive change down the hierarchy without yielding to resistance. Forget forecasting, concentrate instead on crashing the time taken to execute orders. According to Imai, 90 per cent of all corporate problems can be solved using common sense and improving quality while reducing cost through the elimination of waste is the only option for survival. In an exclusive interview to The Smart Manager, Imai explained the principles underlying his just-in-time philosophy:   Kaizen is about constant continual improvement but in today's world, are small improvements enough? What if you need to make big, radical changes?   Kaizen is the means to achieve a corporate strategy, not the strategy. Every corporation needs to make a radical change, or some change at least, to survive in this very competitive, rapidly changing world. The most important challenge facing top management today, especially in a manufacturing company, is to establish a target about where they want to take the company in the next two, five and ten years. In manufacturing, there are only two systems. One is the batch or queue production system, and the other is what we call just-in-time (JIT) or the Toyota production system. One of the most urgent tasks for top management is to choose the strategy, and say that we have decided to change to the just-in-time production system to be able to survive in the new millennium. Kaizen is misunderstood by most people. They say Kaizen is small step improvement and this is the age of big jumps, but in my way of thinking, the biggest jump is making the transformation from the batch mode to JIT. Why should companies move away from the batch mode to just-in-time?   The batch production system, to which almost 99.9 per cent  of all manufacturing companies subscribe, is destined to perish. It is the most inefficient way to make products. It is prone to all kind of shortcomings: it is almost impossible to build quality in a product and it defeats the purpose of making products at low cost. It also makes it very difficult to meet customer requirements, which come in different orders, like different volumes in different time frames and so on. On the other hand, JIT production system is the opposite of the batch system. The batch system derives from the agricultural mentality. When the industrial revolution took place in the nineteenth century, managers adopted the pattern of production from agriculture: first you sow seeds, then harvest and store. The more wheat you had, the more secure you were, so everything was made in big batches. Similarly, in the batch system, you purchase material and produce in big batches and there are many processes. At every process, you accumulate the batch and at the end you accumulate the finished product in a batch, which is stored in the warehouse. Which is very efficient, offers standardization. . .   This kind of production system is based on market forecast. You say, this year we will sell half a million cars, so you plan according to that and start making half a million cars. What happens if your forecast is wrong and you manage to sell only quarter million cars? You are left with quarter million cars unsold and a chunk of cost -- labour, raw material, etc -- is in it. What are you going to do? You think it is the most efficient production system? Batch system is good when there is demand. As a company begins to acquire the capacity to produce faster and faster and more and more, eventually there will come a time when its production capacity goes above what the market can bear. Today, several Japanese electronic companies are in big difficulty. What do you think happened to these companies? These are the companies that didn't know that they should have introduced JIT. Most of the electronic companies have a production system based on assumption of the market and market forecast. The same thing happens in the computer chip industry. You end up with huge inventory of unsold products and excess capacity, then you borrow money to carry that inventory. By that time you have acquired too many people for every process. Do you think that is a very efficient way of making a product? Eventually the company will have to restructure or go bankrupt. And what is the solution? Just-in-time.. The starting point of JIT is to pull from the market. The market should always come first and production later. How long would the customer have to wait for the product?   In some cases, only a few hours. In the case of a car, maybe a few days. But it is a competitive market, why would a customer wait? There are lots of car manufacturers, there is lots of choice, I can walk into any showroom and buy a car. Why should I wait?   In batch system, the company has to anticipate that the customer will request this kind of a model. Right? And it will have to build an inventory of this kind of car, but they don't know how many orders are coming. They have to have so many cars waiting for your order to arrive, which is very inefficient. The customer may not know that she wants a product. The inventor has to estimate the market for it. It is the role of marketing to define the product and the role of production to make the product.   Well, I think it is the other way round. The role of marketing is to dig out the potential or hidden requirement that the market has. You don't follow the product out approach but first find the need of the market and then make the product. If you don't have technology, you have to develop it and if you don't have the machinery for such a product, you have to design it. Managers today are obsessed by a 'growth' mentality? Do you think growth is a smart strategy?   I can say that 99.9 per cent of all companies in the world today are obsessed by a growth mentality. These are companies that can make profits only when the market is growing. In real life, market demand always fluctuates. The only companies that will survive in to the next millennium will be the ones that have the flexibility to produce according to fluctuating demand. I read that Kaizen works most effectively in the time of crisis. Why?   During a crisis, everyone understands the urgency of the situation. The transformation of the production system is a massive physical operation, like operating on the bone structure itself, which is why it is very important that top management be committed to make such a transformation. That is the only way to survive in the new millennium because it is the most effective way of making a product. It also increases your cash flow immediately, so when companies are faced with crisis, it is the best time to introduce Kaizen. For instance, in India, there are many situations emerging, like China exporting products far below the cost price. In this age of global supply chain management, being the best in India is not enough, you have to be the best in the world. Do you have a Kaizen institute in China? What makes China so efficient?   No, we don't have an institute in China. What makes China superior is its labour cost, which is 1/50th of Japan's labour cost.   But lower labor cost does not equal efficiency. What makes China so efficient?   I wouldn't call the country very efficient. They can produce a certain product, particularly consumer-related products, at a lower cost in mass production because so far many western and Japanese companies have transferred technical know-how to them. China has acquired the basic production capacity. Earlier the same thing happened with Malaysia, Korea, Taiwan. Today it is China's turn. What happened was that Japanese, American and European people have transplanted technology, they hired local people and brought machines there and trained them to do the job. So that's how they can produce. So, would you call China a superior manufacturer?   Not superior, but they can produce at a far more competitive price. Superior has many connotations, in terms of design, efficiency, etc. I certainly wouldn't call China superior. They also have efficient processes. . .   But so far, those processes have been given to them from Japan and the western world. The price of labour is cheaper in China, but would the productivity of a Japanese worker be higher than that of a Chinese worker?   I am talking about labour cost. Of course, you have to make quality products and in order to make quality products, you must have quality conscious employees. How do you develop quality conscious employees? Most Japanese companies when they went to China had a hard time training them, the people didn't have quality consciousness. The Japanese spent a lot of time selecting the right people and training them in production procedures. So this kind of training has been provided along with some basic principles of quality assurance. These managerial practices can be transferred, but you see in China, they are paying the equivalent of one Japanese worker's wages to fifty people. Quality control has been introduced and can be exported in any country. Japan was at its peak in the 1980s but now China is far ahead, does this suggest that the Japanese model is invalid?   We need to distinguish between external circumstances (social, cultural and political infrastructure) and internal circumstances (like how business is conducted within the company). The recent negative reports about Japan relate to the external circumstances, such as governmental regulations, overprotected market in some sectors, aging society and the Big Bang needed by the monetary institutions. There is a realisation that Japan Inc may not be functioning as efficiently as it used to. This in no way means that Japanese management practices (internal management of the company) have proven to be inferior. The Japanese companies developed a very effective system of management, particularly in the manufacturing sectors, and the rest of the world has much to learn from these practices. What are your views about management practices in the Indian corporate sector?   I see that Indian managers are extremely intelligent. They are abreast with latest technologies and developments. But the problem is that they completely isolate themselves from reality. They are under the impression that real knowledge can be gained only by reading books and attending lectures. How often do they actually roll up their sleeves and get into some action? They really need to make more effort [at getting into the thick of action]. They have immense knowledge, but what they lack is wisdom that comes by doing things yourself.

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SWOT Analysis

SWOT Analysis   Strengths, Weaknesses, Opportunites and Threats (SWOT).   SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.   At the bottom of this page are FREE SWOT examples - so please read on.   In SWOT, strengths and weaknesses are internal factors. For example:A strength could be: Your specialist marketing expertise. A new, innovative product or service. Location of your business. Quality processes and procedures. Any other aspect of your business that adds value to your product or service. A weakness could be: Lack of marketing expertise. Undifferentiated products or services (i.e. in relation to your competitors) . Location of your business. Poor quality goods or services. Damaged reputation. In SWOT, opportunities and threats are external factors. For example: An opportunity could be: A developing market such as the Internet. Mergers, joint ventures or strategic alliances. Moving into new market segments that offer improved profits. A new international market. A market vacated by an ineffective competitor. A threat could be: A new competitor in your home market. Price wars with competitors. A competitor has a new, innovative product or service. Competitors have superior access to channels of distribution. Taxation is introduced on your product or service. A word of caution, SWOT analysis can be very subjective. Do not rely on SWOT too much. Two people rarely come-up with the same final version of SWOT. TOWS analysis is extremely similar. It simply looks at the negative factors first in order to turn them into positive factors. So use SWOT as guide and not a prescription. Simple rules for successful SWOT analysis. Be realistic about the strengths and weaknesses of your organization when conducting SWOT analysis. SWOT analysis should distinguish between where your organization is today, and where it could be in the future. SWOT should always be specific. Avoid grey areas. Always apply SWOT in relation to your competition i.e. better than or worse than your competition. Keep your SWOT short and simple. Avoid complexity and over analysis SWOT is subjective.   SWOT Analysis Examples   SWOT Analysis Wal-Mart   Strengths. Wal-Mart is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store. Wal-Mart has grown substantially over recent years, and has experienced global expansion (for example its purchase of the United Kingdom based retailer ASDA). The company has a core competence involving its use of information technology to support its international logistics system. For example, it can see how individual products are performing country-wide, store-by-store at a glance. IT also supports Wal-Mart's efficient procurement. A focused strategy is in place for human resource management and development. People are key to Wal-Mart's business and it invests time and money in training people, and retaining a developing them. Weaknesses. Wal-Mart is the World's largest grocery retailer and control of its empire, despite its IT advantages, could leave it weak in some areas due to the huge span of control. Since Wal-Mart sell products across many sectors (such as clothing, food, or stationary), it may not have the flexibility of some of its more focused competitors. The company is global, but has has a presence in relatively few countries Worldwide. Opportunities. To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as Europe or the Greater China Region. The stores are currently only trade in a relatively small number of countries. Therefore there are tremendous opportunities for future business in expanding consumer markets, such as China and India. New locations and store types offer Wal-Mart opportunities to exploit market development. They diversified from large super centres, to local and mall-based sites. Opportunities exist for Wal-Mart to continue with its current strategy of large, super centres. Threats. Being number one means that you are the target of competition, locally and globally. Being a global retailer means that you are exposed to political problems in the countries that you operate in. The cost of producing many consumer products tends to have fallen because of lower manufacturing costs. Manufacturing cost have fallen due to outsourcing to low-cost regions of the World. This has lead to price competition, resulting in price deflation in some ranges. Intense price competition is a threat. 'Wal-Mart Stores, Inc. is the world's largest retailer, with $256.3 billion in sales in the fiscal year ending Jan. 31, 2004. The company employs 1.6 million associates worldwide through more than 3,600 facilities in the United States and more than 1,570 units . . .more? Go to Wal-Mart Facts Disclaimer: This case study has been compiled from information freely available from public sources. It is merely intended to be used for educational purposes only.

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