The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
This is just a quick note to wish all of my readers and their families and friends a very Merry Christmas, and the happiest of Holiday seasons. I wish you, and your businesses, a healthy and profitable 2011!
Cheers! John
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The New York Times reported this week that NY Attorney General Andrew Cuomo sued Ernst and Young on Tuesday, accusing the accounting firm of helping its client, Lehman Brothers, to "engage in a massive accounting fraud" by misleading investors regarding the financial health of the investment bank.
It seems that Ernst and Young approved a controversial accounting maneuver known inside Lehman Bros. as "Repo 105", which involved the "surreptitious removal of tens of billions of dollars of securities [debt] from Lehman's balance sheet to create a false impression of Lehman's liquidity, thereby defauding the investing public". The NY Times reported that this tactic temporarily removed as much as $50 billion from Lehman's balance sheet to give the appearance that Lehman had reduced its debt levels. Cuomo referred to the practice as a "House of Cards business model, designed to hide billions in liabilities before Lehman collapsed." The shock waves were felt with great pain around the world. The "repo" transactions, variations of which are employed ubiquitously on Wall Street, occur when an investment bank raises cash by selling assets, then buying them back a few days later. These transactions would typically occur just before the close of the books at the end of financial quarters. Ernst and Young argue, of course, that such transactions are allowed under GAAP (Generally Accepted Accounting Principles). I am not an Accountant, and as such cannot express an opinion one way or the other. But this certainly fails to pass my ethical "sniff test": is management interfering in the normal patterns of business in an extraordinary way in an attempt to distort reality and otherwise mislead stakeholders? There is an analagous practice which occurs frequently in the Canadian retail, wholesale, and manufacturing supply chains. From the point of views of the industrial customer, this is called "forward buying." It works something like this: As a manufacturer or wholesaler approaches its fiscal period end (month, quarter, or year), management realizes that it is about to fall short of its sales targets. It creates incentives for its customers to buy product in quantities that the customer would not normally need. These incentives are frequently expressed as reduced cost prices or discounts from contracted prices, if the customer will buy quantities prescribed by the seller. The customer, let's assume that in this case it is a retailer, performs a quick analysis of the "deal" (comparing the reduced prices to the related inventory carrying costs, for example) and arrives at a decision to buy or not buy the incremental quantities. Incentives need not necessarily come in the form of reduced prices. Occasionally, they can come in the form of an "exchange of favours" by individuals in senior management, extended payment terms, and a variety of other arrangements. As a professional inventory manager, I have always argued strenuously against this technique. Not only does it open the seller/customer relationship to unethical practices, but the true costs of such transactions are frequently overlooked. From the seller's perspective, I call it "mortgaging the future" to relieve current pain. It often takes a long time for conditions to develop which lead to offering such deals, but once the firm is on the merry-go-round it is very difficult to get off. It is like a heroine addict who receives great pleasure and results from the first hit, then spends a lifetime trying to replicate that first feeling. Pretend that Wholesaler ABC has enjoyed 50 years of relatively stable growth, with sales averaging +5% growth annually. Senior management at ABC sign on to a +5% budgeted sales increase for 2010. Shipments in 2009 were 100,000 cases of widgets. ABC must therefore ship 105,000 cases in 2010 to meet their sales target. The average price of a case is $1,000, so annual sales in 2009 were about $100,000,000. Significant unexpected changes happen in the marketplace in 2010. Such changes might include the entry of new competitors, a softening of the macroeconomy, a change in consumer tastes, or government legislation. Whatever the negative issue, sales for ABC start to trend downward, at a rate of 95% of the prior year's volume. Management at ABC either ignore the slide, or dismiss it as a temporary "blip", or are completely unaware of it due to flaws in their sales analysis system. On Dec. 1, 2010, the sales trends hit management at ABC like a shovel in the face. Not only are sales down relative to last year, they will never make budget! In fact, the gap between actual and budgeted sales looks like it will be 10%! (5% vs.LY + 5% growth). After 11 months, they realize that their shipments will be about 95,000 cases, versus a target of 105,000 cases and the shortfall is therefore about 10,000 cases ($10,000,000). Management panics. It's "Let's Make a Deal" time at ABC. They approach their top two customers, Customer 123 and Customer 456. If each of these two customers buy an extra 6,250 cases, to be shipped before December 31, 2010, ABC will extend a 20% cost discount on the incremental purchase. (6,250 x 2 x $800 per case = $10,000,000 = sales shortfall). On Dec. 15, 2010, both 123 and 456 agree. The incremental purchases represent about 3 months' worth of stock at each of Customer 123 and Customer 456. Ultimately, ABC achieves their 2010 sales target. What are the costs of this deal to ABC? One might answer, correctly, that ABC has lost potential gross margin dollars of 12,500 x $200 / case = $2,500,000. Incidentally, ABC had to ship 12,500 cases, and not just the "gap" of 10,000 cases, because the selling price has been reduced to $800 per case rather than the contracted $1,000 per case. So, 12,500 x $800 is enough extra volume to make up the shortfall in dollars. But, there are other costs to ABC. Since they are shipping an extra 12,500 cases, which is about 4 weeks of normal stock, in the last two weeks of December, they are cramming 6 weeks of work into 2 weeks. This means extreme pressure on operations. - overtime might have to be paid to warehouse workers - inbound product (e.g. subcomponents or raw materials) might have to be expedited. ABC have to incur air freight and premium routing costs in order to ensure backorders are not accumulated?. - standard manufacturing or assembly maintenance procedures might be foregone, as lines are dedicated to increased production or assembly. - standard Health & Safety considerations might be overlooked in the month-end rush. Might there be a higher risk of accident, injury or burn-out? - this is Christmas Break time, and the extra work could effect employee morale. - integrity of inventory record accuracy and inventory control measures might be compromised in the rush to finish paperwork. At the end of the day, is ABC any farther ahead? In many cases, the answer to this is "no." Their Big Customers, 123 and 456, have simply "bought forward" 3 months' of supply. They now have surplus. They will simply shut down their purchasing for 3 months, until the surplus is reduced to normal levels. At the end of the First Quarter, therefore, Supplier ABC is in even worse shape than they were in December! The gap between actual sales and budgeted sales widens further. Besides, ABC has now misled their investors, by overstating their sales potential, and the financial health of their company. Unless ABC is willing to tackle the underlying causes of the 2010 sales erosion (competition, style, or legislation) ABC's financial condition will continue to worsen. Customers become perturbed as well! Customers 123 and 456 now have surplus. Their careful management of inventories for the past 11 months has now been eradicated. Their warehouses are strained to find homes for the extra inventory. They are exposed to shelf-life issues, increased risk if shrink, and increased risk already associated with forecast accuracy. I have see situations where Customers 123 and 456 end up returning the surplus stock! What a disaster for everyone! There are too many reasons not to jump on merry-go-rounds of this nature. Do the right thing: address the underlying problems and take your lumps when you have to do so. But do not matrgage the future with schemes such as these. Greg Walsh, a minor league hockey coach in the city of Peterborough, Ontario, was recently suspended for pulling his team off the ice during a November 15th, 2010 Midget Class hockey game. This violated Hockey Canada and league rules, and officials suspended Walsh for the balance of the season. For good reason, hockey league officials don't want coaches to nonchalantly withdraw their teams from competition because they don't like the colour of the referee's hair. Mr. Walsh's motive? One of his young (16 years of age) players suffered verbal abuse on the ice, as an opposing player uttered racial slurs in an effort to throw Coach Walsh's player off his game. When game officials allowed the offending miscreant back on to the ice, Walsh withdrew his team from the game.
Eventually, the offending (and offensive) player received a three game suspension. For his uncompromising support of his player, and in a valiant show of team solidarity, Coach Walsh was handed a one year suspension, "for breaking Hockey Canada rules". In the wake of the suspensions, many have argued that the one-year penalty was unfair. Many argue that the league ought to use some discretion, and forgive Walsh's violation. No young player should be compelled to play in unsafe, or abusive conditions. However, Mr. Walsh pays a steep price for his actions. I heard him interviewed on radio today, and he does not sound bitter. He would have done the same again, given similar circumstances. He has shown great class, and in the face of a flawed rule book, decided that he was willing to pay whatever price was necessary to DO THE RIGHT THING. Frequently, there is a price to be paid for having the courage to act on principle, and to exercise good ethics. This is true in sports, in society, and in business. The price of unethical behaviour can be even more dramatic. Mark Madoff, son of disgraced fraud artist Bernie Madoff, committed suicide last weekend. Some feel that he was in father Bernie's inner circle, when Dad was bilking widows of billions. Father Bernie os rotting in jail for the rest of his life, and his name will be forever linked to all that is wrong with the American financial system. His son has killed himself. A costly venture indeed. Ethical dilemmas are seldom as cut-and-dry as the examples referenced above. This will be the theme of my next few postings. Consider the following four scenarios: Scenario A: A man has worked for a major player in the financial services industry for over ten years. He has accumulated considerable expertise, is very reliable, and has become the "go to" guy within his department. He is reliable, honest, a team player, and has a great work ethic. He was recruited into the company, in part, on the promise that the company was utterly committed to the value of "promotion from within": if you are talented and make an enduring contribution, you will advance. His paycheck is satisfactory, but unspectacular. After receiving a few modest raises and level advances in his first five years, his career has stalled. The business is successful. The employee has noticed that HR has developed a habit of hiring new MBA graduates, fast-tracking their careers, and rapidly promoting the new hires to senior executive positions such as Assistant Vice President within one or two years. He, and many others like him are routinely bypassed. He has been told to "be patient, and good things will come to those who wait." Last month, he applied for a new position within the company and his credentials matched the position exactly. A new MBA was hired into the position, directly from University. Behind closed doors, the Vice President of HR has been told by expensive consultants that MBA's must be hired to ensure that the company stays in tune with new industry trends and best practices. On the other hand, if the company rescinds the "promotion from within" policy, they will lose considerable expertise when fed up employees look elsewhere. Scenario B: A large North American retailer, who has dominated the landscape for decades, is faced with fierce price competition from a new entrant into the industry. The new competitor has two distinct advantages over the older established firm: a superior logistics network which replenishes stock more quickly and efficiently, and a supplier/vendor network that is based primarily in southeast Asia. By sourcing from Asia, the new company takes advantage of labour and manufacturing costs that are one tenth of that in North America, where the established company has most of its vendors. The older retailer decides that it must aggressively develop vendor relationships in Asia to drive its costs down. Many of the vendors that it meets routinely use child labour. The vendors argue that this is culturally acceptable in Asia, and it is the only way many families can escape poverty. If the retailer turns away from such supplier opportunities, they will be unable to meet or beat the new competitor on price. Customers are flocking to the new retailer by the thousands. Scenario C: A European manufacturer who has been in business for centuries is facing intense competitive pressure. A major player in their market, who is in worse financial shape than they are, has decided to relocate manufacturing facilities in SE Asia. Labour costs are 90 percent lower than in their old traditional plants in Europe. Our company decides to follow suit. Their brand name has a strong association with the neighbourhood in which they have manufactured for several generations. Our company's marketing team assures the Executive Team that the brand image will not suffer, since the Asians can produce high quality product, and profit margins will skyrocket. Our company decides to sink tens of millions of dollars in setting up a set of factories in SE Asia, like the competition. The little European town where the company grew up is decimated, as our company has been the major employer in that area for more than 200 years. Supply of product to the key North American and European markets is damaged for months in the transition period. Inventory stability is destroyed. Consumers clue in to the fact that goods produced under our company's brand name is no longer from that little European town with a great reputation for craftsmanship. Our company's reputation as a producer of prestige product is at risk. Scenario D: A new Vice President is hired in to a retail company who is struggling to achieve former glories. The new woman's credentials are impecable. She is experienced, skillful, and possesses great drive. She works hard with her staff to build an internal analytical infrastructure to guide buyers in their appreciation of the impact that purchasing decisions have on inventory management, gross margin, ROII, and company profitability. Some buyers had to be terminated for refusing to accept the new direction. In the fullness of time, the changes start to take root, and ROII begins to recover. The new VP is rewarded with a new car, raises in salary and richer benefits. She goes on a Buying Trip in Asia. While there, she ignores the new buying infrastructure and decides to go with her "gut feel". She spends too much money on new inventory. Far too much money. This crushes the frail financial recovery that the company has recently enjoyed, and sends it on a downward spiral to bankruptcy. The VP is fired, but walks away with a $1 million severance. The employees are now out of work, and the company's assets are sold. These scenarios are loosely based on fact. How might a strong sense of ethics have helped resolve these problematic stuations? . . The following article appeared on today's news service on Sympatico. It discusses the report of Canada's Auditor General Shiela Fraser's investigation into the actions of the Public Sector Integrity Commissioner in Ottawa. The Integrity Commissioner is the person who is supposed to act as the champion of ethical behaviour on a federal level (Canada-wide). You may be excused if you are tempted, after reading this, to throw up your hands in resignation. I know that I almost did. Thank goodness for the Shiela Frasers of this world - the pit bulls who have to watch over the watch dogs.
I ask myself: - How can this person go so far off the rails? - What Vice President of HR approved her hire? - Who recommended this person for this job? - Did she falsify her credentials? - Will the Federal Government sue this person for breach of contract? And a thousand other questions. Dozens and hundreds of examples of similar incompetence at senior levels have been well-publicized lately. It takes enormous resources to root out these toxic individuals - frequently at taxpayers' expense. We need to determine the root causes. As we all know, it is cheapest to solve the problem at its source. For now, read on - and bite on a bullet while you do. ---------------------------------- The content of the article is printed below. http://news.sympatico.ctv.ca/home/ Former Integrity Watchdog failed to do job, AG finds The woman appointed to act as an advocate for public sector whistleblowers not only failed to do her job, she herself engaged in "inappropriate conduct" with her own staff, the auditor general says in a scathing report. Auditor General Sheila Fraser says Public Sector Integrity Commissioner Christiane Ouimet failed to follow up properly on more than 170 allegations of wrongdoing in the public service brought forward since her position was created in 2007. initializeArticleBodyFontSize() In fact, the report finds Ouimet's office did not find a single case of wrongdoing among the 170 complaints, and launched only three official investigations. The complaints included the case of military veteran Sean Bruyea, who has since received an apology from the federal government for the way bureaucrats handled his file. The report alleges Ouimet, the country's first federal public sector integrity commissioner, didn't implement procedures for investigating cases, and dismissed disclosures of wrongdoing without proper investigation. "In our view, a more thorough approach to these files was warranted before decisions to refuse to investigate, or to dismiss, these disclosures and complaints could be reached," the report concluded. What's more, Ouimet created a toxic atmosphere within her office, berating and swearing at staff, and even trying to smear the character of an employee who Ouimet believed had complained about her to the Auditor General. At least 18 of the 22 employees in Ouimet's office left over one year -- a fact that appears to counter Ouimet's mandate of protecting public servants from reprisals, the report suggests. "Many of these former PSIC employees told us that they left as a result of the Commissioner's conduct and the resulting work environment," the report notes. "Some of these former employees also told us that they experienced health problems as a result of their interactions with the Commissioner. Some very negative terms were used by both current and former employees to describe the work environment at PSIC." Ouimet has responded that complaints from her employees that she treated with disrespect were exaggerated. She said the employees in question were angry at being denied promotions promised by previous managers. Ouimet suddenly resigned in October, in the midst of Fraser's investigation, which was prompted by three internal complaints in 2008 and 2009. The report says while Ouimet was given a chance to respond to the final report, she hasn't. "In our view, the Commissioner's behaviour and actions do not pass the test of public scrutiny and are inappropriate and unacceptable for a public servant -- most notably for the Agent of Parliament specifically charged with the responsibility of upholding integrity in the public sector and of protecting public servants from reprisal," the report says. For the past numbers of weeks, we have been on a journey of discovery of the thoughts, observations, and solutions about challenges in the fields of Quality Management and Supply Chain Management, as articulated by Dr. W. Edwards Deming. Practical applications of his theories have been discussed, and the enduring nature of his works have been revealed. Dr. Deming was truly one of the rare and brilliant visionaries of the 20th Century. Again, I credit Mary Walton and her book titled "The Deming Management Method" as an excellent synopsis of Dr. Deming's theories.
Dr. Deming's work goes far beyond the prescription for success as he had put forward in his famous Fourteen Points. The Points should be viewed as summaries of his views. They are a roadmap for Corporate Executives in Western industries that were formulated on successful outcomes of his exhaustive work in Asia, most notably post-WWII Japan. Like so many Eastern traditions, the Points must be incorporated into the culture of the firm - embraced as a way of life rather than a turnkey solution. It is a long path for any company to follow, but the potential rewards are tremendous. Beyond the Fourteen Points, Dr. Deming authored his Seven Deadly Diseases and further Obstacles that are presented below: The Seven Deadly Diseases: 1. Lack of Constancy of Purpose Companies must think beyond the next quarterly report and dedicate themsleves to the new philosophy in the long term. 2. Emphasis on Short Term Profits Dr. Deming warned of the dominance of lawyers and financial wizards in companies' Board Rooms, who may be ready to sacrifice core competencies and values in order to increase shareholders' dividends. The catastrophe of Enron is a brilliant illustration of this disease. 3. Evaluation of Performance, Merit Rating, or Annual Review Dr. Deming redefines MBO (Management by Objective) as "Management by Fear". He argues that these mechanisms reward short term performance at the expense of long term planning and pride of workmanship. 4. Mobility of Top Management By shifting senior managers around the business at high rates of speed ("fast-tracking") companies and individuals inhibit implementation of long term change. 5. Running a Company on Visible Figures Alone By focusing exclusively on the numbers, companies are in danger of neglecting intangibles that may be associated with customer satisfaction and continuous improvement. 6. Excessive Medical Costs This was a special disease, which for some companies is its largest single expenditure. 7. Excessive costs of warranty, fueled by lawyers The USA is one of the most litigious countries in the world. Among some other Obstacles that he discussed were: - "Nelgect of long term planning" - "The supposition that automation, gadgets, and new machinery will transform industry" - "Our problems are different" - "Quality by inspection" - "Meeting specifications" - "The unmanned computer" - "Inadequate testing of prototypes" - "Anyone who comes to help us must understand all about our business" I encourage the reader to speculate on exactly what Dr. Deming meant by each of these obstacles, while relating them to examples within our own career. Then, research the Obstacles in Deming's own words. They will appear to be surprizingly self-evident and consistent with your instincts. There is no doubt that introducing cultural and structural change in the magnitude advocate by Dr. Deming must be chamioned by Senior Management - indeed, through the Board of Directors - anddriven down through all levels in the organization. Unofrtunately, winning converts in middle management and professional ranks, such as QC Managers and Inventory Controllers, will do little good, as these people do not have the power to implement uch change. Nevertheless, middle management can take lessons from Dr. Deming at more "micro" levels. The 14 Points can help to guide us with repect to implementing a spirit of continuous improvement in our departments, and to help us with issues of employee relations and understanding morale issues. Studying Dr. Deming's work had a profound impact on my own approach to employee management and developing business processes. His lessons have allowed me to realize numerous successes which endured for many years. I encourage my readers to study more about this great visionary, and use his spirit and content to maximum capability. In the capstone of his Fourteen Points, Deming urges management to form a team to advance the thirteen other points. This is a cultural change that must take place - a long and sometimes ardurous road with the promise of long-term profitability and sustainability as the prize.
Deming introduces, or at least stresses the use of what has become known alternatively as the Shewart Cycle, or the Deming Cycle (in Japan), or the PDCA Cycle. PDCA is an acronym for "Plan, Do, Check, Act.". In brief: Step One: Plan - study the process, decide what change(s) might be appropriate to improve the process. Organize a cross-functional team and gather data. Do nit proceed without a plan. Step Two: Make the change, preferably on a small scale. Step Three: Monitor and observe the effects. Step Four: Document the key learnings, repeat the tests as necessary, and look for side effects. Frankly, the PDCA Cycle has never really excited me. Perhaps this is because its elements seem self-evident. Most of us follow the cycle every day without knowing it: an example might be getting ready for work in the morning. You plan when to set your alarm to wake up, you might plan what you are going to wear, you plan your driving route to work, you leave time for a shower and a shave, you wake up with the alarm, you try on your clothes, you look in the mirror and don't like what you see, so you change your shirt and tie, you eat breakfast, you drive to work. You find out that you are arrving to work late, you amend your plan by waking up earlier, by skipping breakfast, by speeding in your car, and so forth. Not terribly exciting, but self-evident n many ways. But Dr. Deming rightfully argues that the PDCA cycle is the emodiment of continuous improvement. It encourages the firm to focus upon and reasses methods and procedures. So if you don't get it, study it, and use.it. Deming further emphasizes constancy and consistency of purpose by top management. This is a long-term commitment by management, and requires brutal self-assessment and pursuit of the Truth. Buddhists say that the path to enlightenment requires that one see reality. The Four Noble Truths of Buddhism may be paraphrased as follows: 1. recognize that suffering exists 2. discover the causes of those sufferings 3. see if it is possible to remove those causes 4. determine what should be practiced. Walking this path can be painful and requires the courage to change. Rarely, and sadly, can such change emerge and succeed solely from the bottom-up. Top management needs to be engaged and need to sponsor the change. Neither workers nor Top Management can work alone. In my next submission, I will wrap up my discussion of my views on Dr. Deming and his teachings, with a quick look at Seven Deadly Diseases, Some Obstacles, and Some Helpful Tools. My apologies to my loyal readers for not having posted on this blog for quite some time. I have been very busy working on two exciting projects: first, I am helping to set up a new small business which covers the spectrum from creative thought to manufacturing to final assembly to carrying the product to market. The second is that I am writing a book - who knows if it will ever be published.
Both projects are incredibly challenging, but both bring to bear many if not all of the skills that I have developed in the past thirty years. My knowledge of inventory and asset management, including forecasting and demand management, drew me towards the first project. Since there is very little resource to invest in technology, we are challenged to build solid fundamentals of procurement and inventory management into the business from the start. But the level of risk is very high - much higher than anything I have seen before - and as such one needs to be flexible from an operations standpoint. Forecasting is very helpful, but one never really knows the direction a new business will take. I feel a little like Gandalf leading the Fellowship of the Ring into unknown territory - we are all very skilled, but in spite of our rigorous preparation we know not what lies ahead of us. I am also very appreciative that my career has exposed me to many business families: from the shop floor to the warehouse to the marketing department to sales to merchandising to visual merchandising to technology to Finance to accounting to advertising and promotion. It has truly equipped me to be able to put all of the pieces together into a largely cohesive unit, understanding the interrelationships within the business unit. Writing the book frequently takes me back to lessons learned in Mrs. Ferguson's Grade 10 English class at Lorne Park Secondary School. She, in large measure, taught me how to write. How to construct a sentence, how to vary the rhythm of the piece, why spelling is important, and developing a decent vocabulary are all aspects that come into play when writing. Writing, unfortunately, is becoming a lost art due to advances in technology, and there are negative ramifications in business communications. With the book, the joy is in the creation, not necessarily the publication. Deming's 13th Point advises us to "Institute a Vigorous Program of Education and Retraining". This is critical both for the business entity and for the individual. This is especially true in the 21st Century environment, where technology, as indispensible as it is, changes so rapidly that it is almost impossible to keep up. Some new developments should be ignored, some need to be adopted right away to achieve competitive advantage. Five years ago, Twitter barely existed; now it is ubiquitous. In the 1980's Sears Canada was on the leading edge when we introduced an internal communication system called "PROFS" - it was an early version of something called "email". In 30 years, email has become an essential part of commerce and individual communication in both Developed and Developing worlds. In order to survive, we need to constantly improve and learn. I have, for many years, been an advocate of APICS, who has occupied a leading position in offering continuing education in Operations Management. There are many such educational services providers in a broad variety of disciplines. In SCM in Canada, many Universities and Colleges have joined independent educational service providers such as CITT and PMAC in offering post-secondary accreditations and degrees in SCM, OM, and Logistics. Take advantage of these offerings in the field that interests you most. Or, take a course in something from way out in left field. Dr. Deming has said: "How do you help people improve? What do you mean by improve? I would say that I find a general fear of education. People are afraid to take a course. It might not be the right one. My advice is take it. Find the right one later. And how do you know it is the wrong one? Study, learn, improve. Many companies spend a lot for helping their people in this and that way. In arithmetic, geography, geology. learning about gears. "You never know what could be used, what could be needed. He that thinks he has to be practical is not going to be here very long. Who knows what is practical? "Help people to improve. I mean everybody." (from Mary Walton's "The Deming Management Method") So, get out there and learn stuff. Adopt a learning culture in your life and your business. Nestle Canada, for example, was (and might still be) very good at this, building such a requirement into their annual HR Review Cycle. Build knowledge into your personal and business tool kit. Your prospects for growth will improve immeasurably. Cheers Dr. Deming's 12th Point speaks to the issues of employee empowerment, the necessity of recognizing and dealing with employee discontent, and encouraging managers to allow employees' true talents to shine through into the firm's final products.
Dr. Deming observed that while managers in American companies were willing to work long hours and go beyond the call of duty to resolve complex challenges, many shied away from confronting "people problems." It was necessary, he argued, for one of management's top priorities to be identification of the root causes of barriers to pride of workmanship, and subsequent removal of those barriers. He observed that through obsession on production volumes and meeting quotas, workers were seen to be told to produce defective parts. Fixing the machinery that was producing the defective parts was, it seemed, too inconvenient. I once worked for a leading Canadian consumer chocolate and confectionery manufacturer who allowed pride of workmanship from the front lines to shine through. The finished products were truly outstanding. When quality issues arose they were dealt with promptly, and often front-line workers were consulted to find solutions. We all took it personally when something went wrong. We were all proud of our product, happy to have our families eat our product, and pleased to mention the company name at dinner parties. It was a pleasure being employed by them. Later in my career, I toiled for a different firm. I had over 25 years of experience in supply chain management by that time, had enjoyed considerable successes, and possessed two University degrees along with a professional designation in my profession that was recognized around the world. I was hired into a senior position in order to export my SCM expertise, critical thinking skills, and project management experience to the employees. The problem was that my managers had a vested interest in protecting the status quo. They had built the inventory control processes and systems, and would do anything to protect them. Changing the processes would have meant giving up power and knowledge to an underling. I had no such vested interest and quickly identified the gaps that existed in a very average system. Evidently, they took my criticism personally. I was called on the mat in the Director's office daily (sometimes hourly). Every action that I took was apparently wrong. I was told time and again that I just did not understand the system, and that I had better learn it. He even went so fas as to start correcting my grammar and vocabulary. I recall a protracted agrument over the use of the word "supplier" versus the word "vendor." The quantity of my output was simply below quota. After six months, they truly had me wondering if I actually had learned nothing in my life and career. It had a profound effect in me on a personal level. Thankfully, I eventually gave my head a shake. I knew better. They had purposefully erected barriers to pride of workmanship, and thereby frustrated and destroyed the motvation of a person who could have been one of their best workers. People who needed the job stayed with the firm. Thise who had brains, some courage, and marketable skills simply left. Listen to your employees. Understand their concerns. Explain to them if they misunderstand. Treat them like humans instead of like instruments of production. Be willing to act in order to remove the barriers. You will find that this will help you to achieve a motivated workforce, and ultimately will help you to produce high quality output. Dr. Deming very much opposed management's habit of setting arbitrary production quotas for workers. One form of such quotas is often referred to as "piecework" - where the worker is paid by the piece that is turned out or produced.
Deming argued, of course, that pursuit of arbitrary quantity goals had nothing whatsoever to do with the quality of output. Indeed, in the pursuit of quantity, the worker would routinely sacrifice quality, taking short-cuts along the way. This would in turn lead to rework, rejects, and demoralization. He talks, for example, about the airline reservations clerk who has a quota of 25 customer calls per hour to process. What happens if her customers on a given day have some difficult problems? What happens if customers are slow in providing information? Her job then becomes taking 25 calls per day rather than satisfying the customer. Risky stuff. While it may be true that piecwork and its relatives are less common in western manufacturing processes than they were in the mid-20th century (we tend to rely more on technology to perform the mundane tasks than we did 50 years ago), the practice remains ubiquitous in SE Asia and other low labour cost jurisdictions. Further, it still permeates many North American businesses within the business processes themselves. I once worked as a Manager for a large retailer and distributor. Candidates had to pass an intelligence test (top 5% of the general population) to be considered for a position in this firm. This was because their distribution and procurement systems were exceedingly complex, and only the very intelligent, they argued, could hope to understand them. It turned out that the procurement system was based upon a broad network of Excel and Access databases and tools, which attempted to articulate the myriad rules and regulations required to run the business. The Director was one of the authors of the "system", and was its fiercest defender. One such tool was called the "buyout". A supplier would come to us with a price reduction proposal (limited time offer) or an announcement that the supplier's prices were about to rise. The buyout was an Excel-based tool which allowed us to quantify the appropriate purchase. I could go on for hours about my philosophical opposition to the concept of forward-buys, but I will leave that for another day. Suffice it to say that it violated every principle that I have come to hold dear in the field of inventory management. I underline the word management purposefully. Nevertheless, it became our task as a team of inventory analysts, to churn out as many buyout spreadsheets as possible. Believe me, the buyout opportunities flowed like water over Niagara Falls. Analysts were prohibited from challenging the credibility of the process. Considering metrics like inventory turns was a waste of time. Flowing products through the supply chain was never a consideration. The process was deemed to be infallible. Constraints such as warehouse capacity were ignored. Speed was essential. Speed trumped quality every time. All energies were directed at inputting the parameters correctly, forwarding the spreadsheet for approval, and doing these tasks quickly. What a waste if human talent. The analysts effectively became pieceworkers where the rate of output was of paramount importance, where critical thought was of little value, and where suggestions for improvement were discouraged on the strongest terms. Search not only within your production operations, but also within your business processes for examples of piecework. Are your employees producing great work? Or are they churning out numbers for their own sake? Today, I take time to remember the catastrophe that occurred on September 11, 2001 in New York, and to pray that we can collectively find a solution to the terrorist threat. My special wishes and thoughts go to my friends in the USA, and in particular to those colleagues of mine in New Jersey who suffered so dearly.
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AuthorJohn Skelton is the Principal Consultant and founder of Strategic Inventory Management. Archives
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