The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
When I graduated from University, I joined the Management Development program with a major North American retailer. Most of my colleagues had run off to join the Public Service somewhere, and are likely luxuriating in the South Pacific six months a year as a result! But I digress...
The management development program really was an excellent one, where future managers learned the business "from the ground up". We had the opportunity to run our own business, managing everything from gross profit to payroll, inventory to customer service, promotions to write-offs. It helped me, in retrospect, to understand how parts of the retail business fit together, or at least should fit together, and how the whole can become greater than the sum of the parts.
My first big assignment was to manage the Electronics Department: TV's, stereo systems, portable radios, records and tapes (before CD's and DVD's!). My first day on the job was spent with my predecessor: a nice guy named Jim. Jim had a single focus: gross profit. GP was King, Queen, Duke, and Duchess of the business. I walked into my new office, and it was a mass of hundreds of returned clock radios and portable radios. I could not find the desk. I asked Jim what was up.
It seemed that our company had a rebate program for defective goods: when a customer returned a clock radio or similar small electronic device, we could return it to our warehouse for refurbishment. This return program came at a cost, however. We could only recoup 50% of the cost that we had originally paid. This, of course would cause quite a problem for our gross profit, especially if the volumes were high. The volumes were high, and Jim being focused on GP, avoided returning anything like the plague. Writing goods off was an even worse option. The result was an appalling accumulation of useless inventory.
It took me six months to dig our way out of the mess. Did my gross profit suffer? Absolutelty. I had to hire someone for a minimum of 12 hours per week for that six months to process the returns. In the end, our inventory was clean, and our GP began to grow nicely.
What does all this have to do with Deming's Point #2?
Dr. Deming advocated that we embrace Quality as the new religion in business, and in particular manufacturing. We cannot, he argued, afford to live with poor workmanship, delays, bad materials, uninformed workers, and executive job-hopping. (see Mary Walton's "The Deming Management Method", Chapter 6). Deming tells the story of the myopic beer producer who happily returned defective cans, without realizing that the can manufacturer was simply building the cost of the return program into the cost of goods! Does this sound familiar?
Dr. Deming points out again that American-manufactured goods dominated the marketplace in the post WW2 era. Americans could not lose. They could continually produce products of questionable quality with no complaint from consumers. They could, that is, until competition arrived from the East.
"Competition introduced a squeeze," Dr Deming said. "Management [American] offered all kinds of excuses. There was every kind of thing in this world except the awful truth that the Americans were beaten. Where they have been beaten is in the management."
Is the recent experience with the American (and Canadian) auto industry not further proof of Deming's position? Perhaps, with this solid and dramatic kick in the pants, the Big Three might finally see the light.
My experience managing the Electronics Department taught me that poor Quality carries big cost, that cannot be ignored over time. Management might try to cover up this fact, but there will be a Day of Reckoning.
Dr. Deming said, "We will have to undergo total dmolition of the American style of management..." I am confident that since he spoke those words, many Western companies have embraced Total Quality Management, Lean, JIT, or other programs focused on continuous improvement. Sadly, remnants of the old style still remain to a problematic degree.
By 1950, when he was called to work in Japan, Dr. Deming had developed a framework, or philosophy of management which were later christened "The Fourteen Points" (see my previous blog entry). There was a recognition that there had been a failure of statistical methods to drive improvement in processes, and Dr. Deming strove to inject consistent statistical methods into improvement initiatives. Upon his return to the USA, Dr. Deming modified his prescription for reform to address various problems in management that were uniquely American: the so-called tyranny of fear, of barriers, of sloganeering, and of quotas. Further to The Fourteen Points, Dr. Deming developed the "Seven Deadly Diseases" and "Obstacles"
Dr. Deming's Point One is "Create constancy of purpose for the improvement of product and service." Firms generally face two sets of problems: those of today, and those of tomorrow. American management has a tendency (some might say "obsession") with the problems of the present. Since the life span of a typical senior manager is very short (2 to 3 years in any particular assignment), it is in the individual's best interest to focus upon the issues of the day, at the expense of planning for the future, I have witnessed many an individual who has been promoted to ever-increasing levels of responsibility on account of their aptitude for fire-fighting. The skill for creating a Big Noise and Commotion is highly valued, and unfortunately many of those who try to do their best are drawn into the vortex of confusion created by the fire-fighters.
At the corporate level, the firm tends to set its sights on tomorrow's share value, meeting the financial analysts' predictions for the this month's sales target. or profitability outlook for the next Quarter. "The future is ninety days at most," said Dr. Deming, "or non-existent. There might not be any future. That is what occupies people's minds. That is not the way to stay in business. Not the way to get ahead."
The practice of "mortgaging the future" through such techniques as motivating forward-buying (a.k.a. "buyouts") is still common: firms will irrationally incent their customers through discounts to buy a few days earlier than they otherwise might such that the seller can achieve some arbitrary sales budget this month. Insanity! This is throwing money down a pit! The five year plan might have been written, but it gathers dust on the shelves of each manager, never to be consulted.
Dr. Deming commented, "It is easy to stay bound up in the tangled knots of the problems of today, becoming ever more efficient in them."
Dr. Deming concluded that creating constancy of purpose requires 1) innovation, 2)research and education, 3)continuous improvement of product and service, and 4) investment in the maintenance of equipment, furiture, an fixtures, and in new aids to production in the office and in the plant.
While each of these four elements ought to be self-evident (but rarely are) the one that interests me most is #2. Companies ought to put resources into research and education. And it is to my never-ending frustration, as has been evidenced during the latest economic downturn, that companies' budgets for employee training and education are cut mercilessly. Would good employees not want to stay with a company that is seen to be investing in the future, thereby introducing some measure of security to individuals and to the Team alike?
Constancy of purpose also implies "sticking to the plan". This is where a good Strategic Plan, which articulates the Vision, Mission and Values of the firm, comes into play. It is important to carefully create the Strategic Plan, then live it. The Plan ought to leave enough room for tactical flexibility, to deal with short-term economic and marketplace anomalies, but it ought to be strong enough, and visible enough, to endure for the medium term (3 to 5 years.). Revisit the Strategic Plan each year and tweak it as necessary, but in the end, each employee should be able to point to it and say "This is where we are going. This is who we are. This is what we represent." Without the Plan, we are like a tattered flag, flapping in the wind.
Next: "Point Two: Adopt the New Philosophy"
John Skelton is the Principal Consultant and founder of Strategic Inventory Management.