The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
For the past few weeks, the theme of this Opinion Page has been a commentary on the Fourteen Points crafted by Dr. W. Edwards Deming throughout the latter half of the 20th Century. The Points are as relevant today as they were in 1960, when Dr. Deming was instrumental in the transformation of the Japanese manufacturing landscape into its current position of dominance in the world markets. Mary Walton's book "The Deming Management Method" is an excellent synopsis of Dr. Deming's career and teachings.
His Point #5 is "Improve Constantly and Forever the System of Production and Service." Not only must quality be built into products and services at the design stage, but efforts at quality improvement must be pursued constantly. Points 3 and 4 taught us that defects caught at the inspection stage (say, just before shipping the product to the customer) do nothing to improve the process, and therefore ensure better quality going forward. In fact, catching defects at the end of the line is characterized by Dr. Deming as "fire fighting", a term with which I am sure we are all too familiar. He uses the following analogy: "You are in a hotel. You hear someone yell fire. He runs for the fire extinguisher and pulls the alarm to call for the fire department. We all get out. Extinguishing the fire does not improve the hotel. That is not improvement of quality. That is putting out fires." Catching defects at the point of outbound shipping, for example, is too late. Cost has been built in to the product or service by this stage, and frequently the cause of such defects may be very difficult to find. I am reminded of the years that I worked for a famous manufacturer of high-quality crystal stemware and decor. We would, as a matter of routine, inspect every piece of product prior to final shipment. Fair enough. We did this as a service to our customers, to make absolutely sure that each customer was receiving virtually perfect product. We did, only occasionally, find defects, such as small bubbles within the glass or tiny scratches on the surface. Further, we did experience some small level of customer returns due to defects that they found or perceived. It broke my heart every time we found a defect at either of these two stages. This product had been designed by skilled artists. It had been created from shards of leaded crystal by skilled glass blowers and cutters. It had been carefully cleaned, wrapped and packaged to withstand shipping and travel from Europe to Canada. It had been handled, counted and stored with great care while in the Canadian warehouse, which I managed. So much love, and care, and cost had been built in to that piece of crystal, only to have it rejected and destroyed at the final step. What a shame. But there are two points that I learned: one was that the pursuit of the holy grail of "zero defects" is folly. As a goal, it makes no sense. Focus on the method, as Dr. Deming advises. The second is that by focus upon the method, by building the skill set of its workers, artisans, and involving and encouraging employees from all functional areas (from purchasing to engineering to finance to logistics to sales) in the total quality culture, this company was able to build and maintain a reputation for its brand that was beyond compare. It can be done!
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Dr. Deming's Point #4 was "End the practice of awarding business on price tag alone."
In her thought-provoking editorial titled "One Single Point of Failure" (Purchasing b2b Magazine, May 2010), Deborah Aarts discusses the April 2010 eruption of volcano Eyjafjallajokull in Iceland, and the impact suffered by supply chains worldwide caused by the subsequent ash and dust clouds. This natural disaster "caused chaos in supply chains the world over. As air traffic to and from northern Europe ceased, many companies sourcing from the region scrambled to make alternate arrangements." She cites the example of Nissan, who sources pneumatic tire pressure sensors out of Ireland that are sent to plants around the world by air in a JIT environment: "When the airspace closed, planes could no longer service the Irish plant, and Nissan's quick supply of the sensors was cut off. The company was reportedly forced to temporarily suspend production at its plants in Fukuoka and Kanagawa, Japan." BMW operations in South Carolina were similarly disrupted as it could no longer obtain seat covers from South Africa. Ms. Aarts (along with risk advisor Marsh Inc. in a follow-up contribution within that same magazine) search for solutions. The key, it is argued, is to analyze the supply chain of each item and look for single points of failure: those critical items and points of contact that, if disrupted, would cause serious problems downstream. But what specific evasive action could be forward-planned? Searching for alternative suppliers is a possibility, but having an alternate local supplier sit idle in anticipation of a similar disaster could be impractical and cost-prohibitive. Carrying some protective safety stock might be a prudent plan: I discussed this option with a colleague of mine in the health care industry at a recent APICS Professional Development Meeting - in an industry that makes life-or-death decisions on a daily basis, they have concluded that a 4-week safety stock is affordable and comfortable. While I have never personally embraced an arbitrary "weeks coverage" objective (as it flies in the face of the spirit of continuous improvement) I had difficulty arguing with my colleague. Lives are at stake. I decided to take a "Total Cost" view which worked to support his conclusion. Whatever the optimal solution, it is important to identify those single points of contact that present the greatest risk. How is all this relevant to Dr. Deming's Point #4? Well, Deming argues that the practice of awarding business based on price tag alone, which was, and continues to be ubiquitous in American business and public service procurement policies, leads to a proliferation of suppliers. Moreover, if the purchasing agent plays one supplier against another, he or she may succeed in driving the rice to a point where the suppliers having difficulty staying alive! It is critically important for companies' procurement policies to put quality first. Sourcing from a multitude of suppliers will make evaluation of quality of inbound materials virtually impossible. Too much variation lot-to-lot and within lots will necessarily occur, and variation impairs quality. Jumping from vendor to vendor will further produce reliance upon specifications, the practice of which impairs pursuit of the quality initiative and continuous improvement. Deming strongly advocates building long term relationships built on trust with single suppliers. There are enormous advantages. Long term quality initiatives can be cemented. The supplier is more likely to assume the risk of innovation and the cost of modification of production processes that benefit the customer. Administrative processes and transactions between the two partners are likely to be streamlined. Engineering, supply chain, and marketing departments, among others, in both companies should work together to build quality and reduce costs. He argues that robust quality arrangements cannot be adequately arranged across a multitude of suppliers. Dr. Deming further questions the worth of contracts, especially short term (annual) ones. A supplier who enters in to a series of short term contracts cannot, typically, afford to tailor the product to the needs of the buyer. Does Dr. Deming's advocacy of single source long-term relationships conflict with the "Single Point of Failure" analysis as discussed by Ms. Aarts? I do not think so. Dr. Deming was enough of a realist to understand that catastrophes such as fires, strikes, and yes, even volcanoes happen, sometimes with devastating consequences. The outcomes are magnified in a JIT environment. Alternatives need to be planned, with intelligence. The point is that the myopic view of awarding business based on price tag alone is a quality catastrophe waiting to happen. Take the Quality and Total Cost view. "Defects beget defects. Good quality begets good quality." Late in the 20th Century, the term "GIGO", or "garbage in, garbage out" was popularized, specifically with reference to data management and ubiquitous computerization. There was no computer in the world that could ever make a "silk purse out of a sow's ear": no matter how sophisticated the technology, a computer could never transform misleading and erroneous input data into meaningful and useful information.
Dr. Deming maintained that quality comes improving the process, not from inspecting the finished goods at the end of the production process, then discarding those items that failed to meet specifications. He did not advocate the extinction of inspection altogether. He acknowledged that for some industries, high levels of downstream inspection might be necessary (banks, health care providers, certain military and aerospace operations, for example, might do this to ensure safety or reduce risk exposure). Inspection might also be necessary to gather information or to monitor engineering success during quality upgrades. But, at the finished goods stage, it might be very difficult to determine where a defect took place. It is therefore better to ensure high quality input of raw materials and processes than to wait until the end of the process to find defects. The Japanese, for example, embraced the notion that decreasing variation decreases total cost, not final inspection. Further, they found that the concept of "meeting specification" was synonymous with "high quality" was incorrect. Dr. Deming tells the story about two orchestras playing Beethoven's Fifth Symphony: the London Symphony Orchestra and his local hometown orchestra. Both play the same music, the same notes, and employ competent musicians who make no mistakes. But the London Symphony's work is beautiful, and the hometown's simply competent. "Just listen to the difference". 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" In the field of sports, overly-eager reporters and assorted talking heads tend to quickly label the latest flash-in-the-pan as "The Greatest Ever". "This guy is a phenom." "He is the Second Coming", and other superlatives are frequently used to describe an individual whose accomplishments are too often short-lived. Rare indeed are the Bobby Orrs, the Wayne Gretzkys, the Jim Browns, the Johnny Unitases, and the Mickey Mantles of this world, who truly deserve the moniker "Superstar".
I was fortunate, early in my career, to have worked with a modest superstar of operations and supply chain management. His name was David Chapman. Mr. Chapman (I could never call him David - he deserved too much respect) was a truly unsung visionary. Working with North America's largest retailer, Mr. Chapman envisioned, created, and implemented some of the most progressive SCM and Inventory Management systems known to retailing. He was ahead of Wal-Mart. The only constraint that he faced was that of available information technology. Mr. Chapman, without knowing it, shaped many of my attitudes to SCM and Inventory Management: virtually anything is possible if you expand your mind and embrace creative energy. A more famous Superstar in OM circles was William Edwards Deming. Like Mr. Chapman, he dared to buck the trends and the conventional wisdoms which infected North American business leadership in the post-WWII era, and which still torment Western economies today. If all you have ever heard of Deming is a stray comment or two at a cocktail party (something like "wasn't he that weird statistician with the red beads?"), you owe it to yourself to get to know him. I very much recommend a book written by Mary Walton in 1986 called "The Deming Management Method". It is an easy read, but very insightful. She covers many of the important points in his teachings, without getting bogged down in the minutae (a very easy thing to do when it comes to Deming). Mr. Deming lived from October 14, 1900 to December 20, 1993. He was an American statistician, professor, author, lecturer, and consultant. He worked in the post-War years with Japanese businesses to improve product quality through various methods including statistical process control and the concept of continuous improvement. Considered a hero in Japan, his genius was considerably overlooked in the USA until late is his life. One of his enduring contributions to Quality Management were his Fourteen Points. These were a set of principles which outlined the foundation of his philosophy. (There were not always 14 points - in the 1970's, there were only 10!) In my forthcoming posts, I will discuss some of the 14 points, and how they might relate to our businesses and lives today. "Export anything to a friendly country, except American management." W. Edwards Deming |
AuthorJohn Skelton is the Principal Consultant and founder of Strategic Inventory Management. Archives
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