Niranjan Chatterjee’s Weblog

August 2, 2014

Workers’ Participation in Corporate Governance

Filed under: Corporate Management — niranjanchatterjee @ 10:47 pm

Introduction

The generally accepted principle in law is that Directors should act in the best interest of the corporation but the issue becomes a little unclear as to what exactly would be defined as the best interest of the corporation. To put it more clearly, would best interests of only the shareholders or the best interests of other stakeholders also be considered while delineating the contents of the best interest of the corporation? This thesis examines the highly debated issue of how workers’ participation in corporate governance would serve the best interests of a corporation.

In BCE Inc. v. 1976 Debenture holders and in Peoples Department Stores Inc. (Trustee of) v. Wise court was extremely ambiguous about the exact nature of what would be the best interest of the coporation and chose a somewhat middle path by harping on good coroprate citizenship. But such ambiguity creates a situation where each stakeholder feels that they have got the best but inreality none of the stakeholders get anything substantial.

The issue becomes more complicated since in a globalised world individual countries and their courts have little control or jurisdiction over companies that are spread across continents. Thus, the issue of what would constitute the best interest of a company becomes a genuine conundrum that needs serious thinking to achieve even a modicum of a solution.

Moreover, stakeholders in a corporation have diverse and often conflicting interests and how could directors serve the best interests of such a diverse group also becomes an equally serious concerns. While shareholders might wish directors take excessive risks as that would increase the possibility of earning higher rates of return, workers might be inherently averse to such risk taking as that might jeopardize their jobs if things went wrong without the prospect of any corresponding rise in wages if things moved in right direction. So, solving such diverse desires in a fair manner is surely a very difficult matter.

According to Ed Waitzer and Johnny Jaswal, courts have never maintained any specific stand on this issue and very often court judgments reflected the popular mood or notions of the time. In fact, Dickerson Committee had the opportunity of unambiguously explaining the nuances of ‘corporate responsibility and could have got it incorporated in Canada Business Corporation Act (CBCA) but they perhaps shirked the duty and preferred to leave it to the judges to explain. The Committee thus lost a golden opportunity of rectifying the imbalance that many feel is there in English laws that mainly define corporate responsibility as mainly responsibility towards increasing net worth of shareholders.

The situation does not improve by introducing the concept of good faith on the part of directors since good faith is something that is not quite specific and is open to several contextual interpretations. Such an act of good faith is obviously connected to fiduciary duty of directors where fiduciary duty is defined as self disciplined behavior on the part of actors that have access to others’ assets for some limited purpose (Flannigan 2004).

The situation becomes really complicated if workers are allowed to sit on Boards and become party to corporate decision making. It is an undeniable fact that workers are one of the most important stakeholders in any business organization and their interests will in most cases be divergent to interests of stakeholders. So, the issue at hand is whether workers should be allowed to participate in corporate decision making and if they are indeed allowed would Board decisions be in convergence and within the ambit of Canadian law and would pass the test of fairness as stated in Ebrahimi v. Westbourne Galleries Ltd.

But one thing might be said with a fair degree of certainty. Workers are more interested in long term stability of an organization and thus would be averse to taking any decision that might seem attractive in the short run but could jeopardize long term financial health of the organization they are working for. So, the possibility of decisions taken by Boards that have worker participation passing the fairness test would surely be more under normal circumstances.

The need for revision of corporate governance in Canada

There are many examples that existing laws were not enough to ensure fair treatment of stakeholders. One of the most prominent companies that failed to ensure proper corporate governance was the so-called ‘Canadian Microsoft’ which was considered one of the icons of Canadian success stories of Canadian technology. Shares of this company were traded at $120 when the company was at its peak but slumped to 5 cents when the company collapsed. Not only were shareholders left in the lurch, employees lost their jobs and even their pensions since the company lost so much money that it did not have money to pay even pensions of employees. So employees were suddenly left out in the cold without any money or safety net to protect them against this sudden catastrophe.

Irrespective of the political storm that raised the moot and far more serious question was a lacuna in Canadian corporate governance laws that allowed such a thing to happen. Top executives who made millions in salaries and perquisites when the company was going strong (or the general public was made to believe so) went scot free and none could be held liable for their lack of foresight or mismanagement of corporate funds that resulted in such widespread chaos.

The total disappearance of the guaranteed pension of $58,000 dollars per year to each employee sure generated a lot heat and dust. But, workers had only demonstrations and fiery speeches to remain contented with and nothing material evolved from all the commotion.

The main reason for the demise of the company was a determined and well planned mismanagement of funds by Directors and a diabolic cooking of books to give an impression to workers that the company was financially stable. While this criminal act was being perpetrated, executives made millions in compensation and the future of workers was ruined.

A similar situation occurred in Toronto where insider trading was the main reason for the demise of another reputed company. This insider trading continued for a decade resulting in nine million dollars benefit to the perpetrators while the corporation and all stakeholders lost money and they were left with ruined futures.

Court was very ambiguous about the extent to which Board should pay attention to the interest of employees as it was not mandatory for the Boards to do so. It was left to the management to decide on whether they would consider it or not before taking any particular decision. Actually the interest for shareholders was implicitly given more importance over interests of other stakeholders, especially workers and if workers’ interests are compromised Directors would never be held responsible for committing any illegal act and would hence be never penalized.

The issue boils down to what would be the legally defined duties of directors. If directors are found to be lacking in such well defined and legally enforceable duties, they would sure then be brought to book for their misdeeds. This again brings to the forefront the basic question as to how would the directors manage divergent interests of two most important group of stakeholders – shareholders and employees.

A common sense approach would be to allow more participative powers to the workers as that would ensure an automatic check on irresponsible and risky actions by top management but the Court did not utter a single word about it. The Court was not progressive enough to delineate a new structure of corporate governance and did not incorporate any of the European structures like work councils and supervisory boards that permit considerable participation of workers in management of a company. The Court stuck to responsibility of Directors and did not feel the need to include the voice of the workers in corporate governance. There was no progress in the power equation between labor and capital which are both equally necessary for the successful running of a company.

But considering the success of German and Japanese companies it could have more beneficial for Canadian corporations if there was a legal requirement of including employee voice in corporate decision making. At least that would have surely prevented sudden demise of corporate icons due to mismanagement and deliberate fudging of books by top management.

Board as a mediator between competing stakeholders

Margaret Blair and Lynn Stout have elevated the Board to some sort of a coordinator that is entrusted to somehow balance conflicting stakeholder interests (Blair and Stout 1999). But these authors have clearly delineated as to which shareholders would get priority if and when such balancing do takes place. They have stated that only those stakeholders that have made firm-specific investments and their continuance and support is absolutely essential for future success of the business would be considered when such balancing of diverse interests would have to be done. From this standpoint, workers are clearly one such group of shareholders that require extra care and attention and if workers are themselves members of the Board it would be that much easier for the Board to take decisions that would surely not jeopardize the interests of workers. But one thing must be made clear at this juncture.

Even if workers do become members of the Board they must be prepared to sacrifice some of their interests and adjust to a considerable extent for the long term health of the organization.

As has been already mentioned, the issue becomes complicated as immediate gains oftentimes tend to overshadow long term gains that might not be immediately tangible and the lure for immediate benefit is too strong for many people to not fall prey to it. This of course includes workers too. The lure for short term incentives often at the cost of long term stability might force workers on the Board to take unfair decisions. As the law is not that clear and prescriptive in this regard, it might be possible for the Board to get away from this misdeed.

It would be a case where stakeholders that are usually on divergent poles coming together for short term expediency and committing a team scam of sorts. It is possibly for this reason that Richard Ellsworth feels customer primacy should be the only touchstone against which all corporate decisions be judged (Ellsworth 2002).

Conflict between suppliers of capital and suppliers of labor

It is only natural that corporate governance would place more emphasis on taking care of the interests of the suppliers of capital rather than the suppliers of labor although both are vitally necessary for the continuance of a business corporation. Such a biased approach might be traced to a very deep rooted perception that labor is always cheap and easily available while capital is difficult to come by and is comparatively far more costlier than labor.

While this bias in favor of capital is commonplace among those that control business houses existing laws also protect the interests of suppliers of capital in a very big way. While the debenture holders have their capital fully secured against fixed assets of the borrowing company, shareholders have the option of airing their grievances in annual general meetings and special meetings of shareholders. But Scott is of the opinion that as shareholders offer vast amounts of capital without either any clear cut promise of a predetermined rate of return on their investments or any form of security of the capital they have lent to the corporation, they are exposed to extreme risks especially if the management is prone to mismanaging funds or take recourse to cooking up books or any other form of fraud. Hence, this class of stakeholders needs special protection and management should give first priority to enhancing the wealth of shareholders (Scott 1998).

The concept of good corporate governance also varies from country to country. In France, however, primacy of shareholder interest is ignored and a good company is considered to be one that is able to effectively reconcile stakeholder interests. Germany also feels mostly in the same manner. While managers are supposed to be market oriented they should discuss with different stakeholders their interests and take a position that would be acceptable to all. The uniqueness of this approach is twofold. Firstly, the directors must engage in some sort of discussion with stakeholders before coming to a decision and secondly they have a responsibility to ensure that no stakeholder group feels that they have been neglected or their concerns have not been addressed properly.

It would be of interest to have a brief discussion of German system of corporate governance as that system presents a unique arrangement where conflicting interests of employees and shareholders are reconciled to a very great extent.

In accordance with Codetermination Act of 1976 every organization that has more than 2000 employees is legally bound to have two tiered management system. The two tiers in that system are, supervisory board and management and executive committee (Halpern 1999).

The supervisory board cannot be involved in day-to-day management but it has certain very important powers to oversee the functioning of the management and executive committee which is involved in daily management of the organization.

The supervisory board of which half the members are from the employees of the company has the power to appoint or dismiss members of management and executive committee and also to monitor the performance of this committee. Moreover, the supervisory board is the ultimate authority to approve or dismiss any investment plan mooted by the executive committee and also determines what information should be passed on to shareholders subject to, of course, relevant provisions in the Company Law of the country.

The only concession management has in the formation of the supervisory board is that the chairperson of the board is from the management side and has two votes that could be used in case there is a tie in a voting in the board. This serves very well to create some sort of balance and equitability in management decisions in Germany where concentration of equity is extremely high compared to other developed countries of the world. Generally, the concentration of equities vests more with founding families and where such families are not that dominant, commercial banks take their place. So, some sort of veto wielding authority which consists of a sizeable number of employees also safeguards them from any reckless decision of management in quest of short term spectacular gains.

Arguments about shareholder primacy

Discussions till now have been concentrated on how to negate primacy of shareholder interest and also include voices of other stakeholders, especially that of employees, in corporate decision making. But it would be fair in the interest of a properly balanced discussion to delve a little deeper in the arguments put forward to support shareholder primacy in corporate governance and decision making process.

The first and possibly the crudest argument in favor of shareholder primacy is that according law a corporation belongs to the shareholders and therefore it is the bounden duty of management to further the interests of shareholders. This line of argument was echoed by Milton Friedman in his famous essay “The Social Responsibility of Business Is to Increase Its Profits”. But where Friedman possibly went wrong, at least legally, was that shareholders do not own the corporation; what they own is a financial asset known as stock. Legally speaking, shareholders have only limited rights as owners of corporate stocks. It might be worthwhile to mention at this juncture that shareholders do not have any right over the assets of a company; actually that right is conferred on the Board of Directors. Also, shareholders cannot decide how much dividend they would earn in particular year; Board of Directors decides on the rate of dividend.

Thus shareholders have neither any direct control nor any direct access to either a company’s assets or its earnings. It is true; however, that Directors are appointed by shareholders and any control they can exert on the management of a company is indirectly through Board of directors. But in current economic scenario shareholding is so widely dispersed such indirect control has become a myth without any tangible or practical significance.

Hence, shareholders as owners of a corporation has very little legal base and is more an economist’s notion than a lawyer’s. Some economists have even challenged the concept of shareholders being owners of a corporation from an economic perspective too. They maintain that in a corporation, even one that is closely held by one person or a family of shareholders, the concept of ownership gets significantly diluted once the firm issues debentures as debenture holders have lien on fixed assets of the corporation which even shareholders do not have (Scholes and Black 1973).

The second and oft repeated argument about shareholder supremacy maintains that all other stakeholders have some form of contractual agreement with the corporation about the return they would be entitled to during and at the end of the contracted period. But shareholders are not protected by similar contractual obligation. They are entitled to residual income after all contractual obligations have been met by the corporation. Therefore, they bear the greatest risk and thus should be protected the most and all management decisions should be made with an eye towards maximizing shareholder returns (Easterbrook and Fischel 1996).

However, from a legal perspective the assertion that shareholders are sole residual claimants do not have much strength. According to corporate law, shareholders can be considered as sole residual claimants only during bankruptcy proceedings of a corporation.

In other situations, shareholders are entitled to dividend only when the company is financially sound and is performing well and has enough reserves and surplus, and, what is most important, directors decide to declare a dividend.

Actually, shareholders would get dividend only when directors decide to give it and, frankly speaking, such decision is not that much related to the financial health of a company. It could very well be that a company is doing extremely well financially but if the directors decide that the increased revenue would be spent on employee benefits and bonuses, that extra income would be diverted towards these expenses and nothing much would show up as profit or surplus. Moreover, existence of reserves and surplus by itself does not guarantee that shareholders would most certainly get dividend. It all depends on the discretion of directors. Hence, the claim that shareholders are sole residual claimants does not have much legal or economic basis (Stout 2002).

Considering what has been discussed above it is apparent that corporate governance based on the sole objective of maximizing shareholders’ wealth is a very narrow window and would grossly undermine the efforts of a corporate entity from discharging its duties and functioning like a good corporate citizen.

Shareholder primacy might cause international convergence of corporate law

There is a dominant view that irrespective of all legal and economic logic that attempts to dilute shareholder supremacy, the overwhelming trend in corporate governance all over the world is tilted towards maximizing shareholder wealth. One of the reasons for this bias could be the failure of any other workable alternative or more likely due to the emergence of more vocal representatives of shareholders and a significant increase of importance of share markets in a market driven capitalist economy (Hansmann and Kraakman 2000).

There have been alternative models of corporate governance through nineteenth and twentieth century. These models were either manager-oriented, or, labor-oriented, or state-oriented depending on peculiarities of countries and their economies and the influence each stakeholder class had at that particular point of time.

Over time all these models lost their hour of glory and shareholder primacy has come to rule the roost. Of late stakeholder model is being touted as an alternative to shareholder primacy model but this new model is nothing but a combination and permutation of earlier manager-oriented model and labor-oriented model. So, detractors of those earlier models have come out in full force and are berating this new model with great vehemence.

 This of course does not mean that interests of other stakeholders should be sacrificed at the altar of shareholder supremacy. It only means that corporate law could and should concentrate only on ensuring shareholder supremacy is maintained and every corporate entity should strive to maximize shareholder wealth. All other stakeholders can and, possibly must, address their concern in forums that are outside the ambit of corporate law.

There are enough legal remedies available to other stakeholders and they should take recourse to such remedies instead of trying to search for remedies and protections within the ambit of corporate legal framework. Workers and employees, for example, can seek remedies in the law of labor contracting, pension law, health and safety law, and antidiscrimination law. Consumers can also seek remedies within the ambit of product safety regulation, tort law that governs product liability and law governing warranty.

But one must remember that no matter how forceful the arguments in favor of shareholder primacy are, it would not be proper to highlight only shareholder supremacy in corporate law as that would lead to irresponsible and often rash and highly risky management decisions that might ruin an otherwise flourishing company. Management would, quite obviously, be intent and over eager to maximize shareholder wealth in short term in order obtain higher bonuses and remuneration for themselves and such a short term approach and attitude will surely spell doom for not only a couple of firms but the entire economy of a country.

Conclusion

An examination of the current status of legal acceptance of workers’ participation in corporate governance reveals that primacy of shareholders’ interests is still the dominating trend though there are some exceptions as found in the form of work councils and supervisory boards as is prevalent in Germany. However, it would be wrong to assume that employees are taking it lying down as they find increased emphasis of shareholder supremacy in corporate laws across the world. Rather, employees have thought out a way of gaining advantage especially in United States of America. However, in Canada similar concerted activity is yet to materialize. Maybe Canadian labor will finally follow in their US brethrens’ steps someday.

Employees who are also shareholders have become increasingly active and organized labor is now playing a very important part in corporate governance in USA. These activists have already scored certain important victories for shareholders and labor and recently AFL-CIO have actively started to coordinate voting practices of union pension funds. If these newfound tools actually succeed, organized labor would become the single largest block of shareholders in entire United States. One would expect Canadian labor also to become aware of their role as shareholders and try to work around the problem as it were to wield more influence in corporate management.

It would, however, be grossly unfair to state that Canadian shareholders (among them there might be a fair number of employees) are totally inactive. Shareholders of magna International Corporation had, way back in 1984, implemented a so-called ‘Corporate Constitution’ which mandated an allocation of profits between management, shareholders and employees. Though it was targeted to reduce influence of labor unions, Magna also implemented ‘Employee’s Charter’ that promised job security and a share in profits and equity. The point that should not be missed is labor is indeed getting an increased importance whether directly or indirectly through the efforts of shareholder activists.

Casio Computer Company has also taken a leaf out of Magna’s book and incorporated a ‘Charter of Creativity for Casio’ where the company has pledged to consider the interests of all categories of stakeholders. The salient points in this charter are twofold. First, there is a marked shift from shareholder focus to stakeholder focus and the second; there is a serious attempt to balance interests of all categories of stakeholders. This is indeed a genuinely welcome step towards granting more importance to labor in Canadian corporate governance.

This debate and consequent divergence of opinions would never have occurred had Dickerson Committee which had raised this issue been more forthright and included an unambiguous definition of what constitutes ‘best interests of the corporation’ in Canada Business Corporations Act. It had the opportunity to do so but left it to the courts to define it instead.

So, we may conclude that workers have indeed found a way to exert their supremacy through the roundabout route of shareholder primacy in corporate law and their newfound tool of self defense would surely lend some form of protection against risky and often adventurous attempts by managers to increase shareholders’ wealth at any cost.

References

BCE Inc. v. 1976 Debentureholders. (3 S.C.R. 560 BCE, 2008).

Blair, Margaret M., and Lynn A. Stout. “A Team Production Theory of Corporate Law.” Virginia Law Review (Volume 85), 1999: 247.

Easterbrook, Frank, and Daniel R. Fischel. The Economic Structure of Corporate Law. Cambridge MA: Harvard University Press, 1996.

Ebrahimi v. Westbourne Galleries Ltd. A.C. 360 (H.L.) (1973).

Ellsworth, Richard. Leading with Purpose: The New Corporate Realities. Stanford: Stanford University Press, 2002.

Flannigan, Robert. “Fiduciary Duties of Shareholders and Directors.” J. Bus. L. 277 at 281, 2004.

Friedman, Milton. “The Social Responsibility of Business is to Increase its Profits.” New York Times Magazine, September 13, 1970: 32–33, 122–26.

Halpern, Paul. “Systemic Perspectives on Corporate Governance Systems.” Conference and Symposium on Corporate Governance and Globalization. Toronto: Rotman School of Management, University of Toronto, 1999.

Hansmann, Henry, and Reinier Kraakman. The End of History for Corporate Law. Discussion Paper Series, Cambridge MA: Harvard Law School John M. Olin Center for Law, Economics and Business, 2000.

Peoples Department Stores Inc. (Trustee of) v. Wise. (3 S.C.R. 461, 2004).

Scholes, Myron, and Fischer Black. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81, University of Chicago, 1973: 637.

Scott, K. “The Role of Corporate Governance in South Korean Economic Reform.” Bank of America Journal of Applied Corporate Finance, 1998: Winter, 8-15.

Stout, Lynn A. “Bad and Not-So-Bad Arguments for Shareholder Primacy.” Southern California Law Review, 2002: 1189-1209.

Waitzer, Ed, and Johnny Jaswal. “Peoples, BCE, and the Good Corporate “Citizen”.” Osgoode Hall Law Journal 47, 2009: 439-496.

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Strategic Human Resource Management

Filed under: Corporate Management — niranjanchatterjee @ 10:34 pm

Table of Contents

Introduction

Strategic human resource management can be explained as an attempt by human resource management practitioners to align policies and processes of human resource management with strategic aims and objectives of an organization. Thus, if we view the issue at the ground level, strategic human resource management finally boils down to a process that aims to markedly improve performance of an organization through the human resource at the disposal of the organization while improving the lot of that human resource. That is, strategic human resource management aims at improving the economic performance of an organization while improving the lot of employees of that particular organization. It intends to create a win-win scenario for both the organization and its employees by ensuring a people working in an organization provide a competitive advantage that no competing organization can easily achieve (Hendry & Pettigrew, 1990).

Basis of strategic human resource management

The entire concept or practice of strategic human resource management is based on a couple of assumptions that form the foundation of this branch of management.

The first assumption is human resource of an organization is the basic source of competitive advantage and thus should be handled strategically to remain ahead in fiercely competitive environments.

There should be a vertical alignment of business strategy and human resource strategy for success and prosperity of an organization (Allen & White, 2007).

There should be horizontal integration between individual human resource strategies so that they are all focused towards a common goal. This is of course not applicable only in case of strategic human resource management as it is true for all kinds of strategic planning. Unless individual strategies and processes are horizontally aligned and are collateral with one another it is impossible to achieve the desired objective.

Thus, strategic human resource management might be described as an approach or a process rather than a set of well documented techniques where there is a continuous review of existing HR practices in the broader context of organizational objectives which result in choosing and modifying human resource strategies and planning. However, it would be wrong to define strategic human resource management as only strategic planning; it also includes implementation of such strategic plans as well as the attitude and approach of Human Resource Managers towards line managers with regard to successful implementation of those plans.

Aims of strategic human resource management

The basic aim of strategic human resource management is to make sure that an organization has sufficient volume of skilled, dedicated and motivated employees so that it enjoys a sustained competitive advantage in the marketplace. Thus, the aim of strategic human resource management would be to develop and successfully implement policies of managing people that incorporate ever changing external and internal environment parameters and long term goals of an organization (Digman, 1990).

There are certain ethical issues involved that should be discussed while elaborating on the aims of strategic human resource management. The basic areas where there must be a fine balancing act and those involve the interests of employees and other stakeholders on the one hand and the owners and management of an organization. There is also the equally important issue of discharging social responsibilities of an organization as a conscientious corporate citizen. Other than ethics, it might also be considered as a purely commercial decision where an organization must also repay the society for the resources it draws from the society for its sustenance. Unless it is very prompt and particular in repaying the society it might soon face a situation where the society might be unwilling to provide resources that an organization so urgently needs for survival and prosperity. Corporate social responsibility should go beyond the mandatory obligations of an organization; it should extend in delivering some social benefit that is not determined only by the profit motive of the organization (McWilliams, et al., 2006). Employees of an organization also reside in the society where an organization operates. Therefore, in a sense, discharging corporate social responsibility also comes under the purview of strategic human resource management as it is a significant window through which an organization interacts with general members of the society. If society in general has a good impression of an organization, it definitely has a positive impact in the mindset of employees.  

Approaches to strategic human resource management

Soft strategic HRM

Soft strategic HRM (Storey, 1989) is an approach that places greater emphasis on human relations angle of managing people and places more emphasis on quality of employee experience and satisfaction. It thus concentrates more on continuous development and involvement of employees through smoother and hassle free two-way communication and increased security of employment. In these turbulent times when downsizing has almost become a norm for most organizations, employment security would most certainly work as a huge morale booster for employees. The situation would become even more ambient if there is noise free two-way communication through the entire managerial hierarchy. This approach also emphasizes on achieving an optimum work-life balance of employees. With such a employee oriented approach there is a very big possibility that an organization will able to develop and retain a dedicated and highly motivated workforce that would not mind to walk that extra mile for the benefit of the organization.

Hard strategic HRM

Hard strategic HRM, as the name implies insists on a more commercial approach to the entire process of managing people and insists on deriving a positive return on investment at every step. Though this approach could not be faulted as the primary objective of every organization is maximization of shareholders’ wealth, it must be remembered that human resource is inherently different from all other types of resources and should be dealt with more sensitively than the manner in which inanimate raw materials or machines are evaluated. It needs no elaboration that there should be an optimum balance between the hard and soft approaches but the unfortunate fact is in most organizations hard approach almost invariably takes precedence over soft approach. But an organization should not overlook the fact that for long term survival and prosperity, it should keep people at the center of each and every strategy (Quinn Mills, 1983).

Concepts of strategic human resource management

There are three basic concept of strategic human resource management:

  1. Resource-based approach
  2. Strategic fit
  3. Strategic flexibility

Resource-based Approach

This is the most predominant approach towards strategic human resource management. This is based on the basic premise that resources available with an organization, especially, human resource provides unique character to an organization and a unique competitive advantage. Competitive advantage arises when firms within an industry do not have homogenous control over resources, that is, resources are not uniformly spread across firms within an industry, and also when these resources do not have the ability to freely move across firms within that industry. In such situations, competitive advantage on account of ownership of resources can last for long time. Therefore, in order to create sustainable competitive advantage a firm should have ownership of unique resources and capabilities as compared to other firms in the same industry (Barney, 1991). In order to create sustainable competitive advantage, a resource should primarily be rare and secondarily neither be easily imitable nor be easily substitutable and, it is but obvious, that such resource must have high value and importance in the production process. The resource that has the highest possibility of fulfilling all these attributes would be human resource as knowledge, experience, risk taking propensity and judgmental capability of individuals are extremely difficult, if not impossible, to replicate within a short span of time. Resource based approach to strategic human resource management can provide such sustainable competitive advantage to a firm by properly nurturing employees in a company through implementation of optimally designed training and development programs and opting for a predominantly soft HRM approach. Such investment in human capital endows an organization with sustainable competitive advantage over a considerable period of time (Boxall & Purcell, 2003).

Strategic Fit

This is related to the two fold balancing of strategic human resource management in an organization. Firstly, human resources policies and programs should be vertically aligned with overall strategy of an organization and, secondly, various HRM policies should be streamlined and be unidirectional in the sense that all policies should be oriented towards strengthening overall corporate strategy without any policy generating any confusion or disruption of overall corporate strategy. That is, human resource policies should also be horizontally aligned or collateral to prevent any cross current of wasted efforts that might wrong signals to employees (Wright & McMahan, 1992).

Strategic Flexibility

It refers to the ability of a firm to respond to changes in external business environment which are beyond the control of that firm. However, such flexibility is in its turn largely determined by the environment in which a particular firm operates. In case the external environment is relatively stable, a firm would opt for developing specific set of skills for its employees and would not choose the more costly option of imparting multiple skills as it might not be necessary given the relatively stable external environment. The job descriptions in such scenarios would also tend to be more tightly and narrowly defined. However, if the external environment is unstable and dynamic, an organization would opt to impart multiple skills to its people and job descriptions will also have more latitude and flexibility. It might be argued that the concepts of strategic fit and strategic flexibility are contradictory but it must be understood that while fit is a short term concept, flexibility is a relatively longer term concept (Wright & Snell, 1998).

The best practice approach

This approach assumes that there is a list of best practices which, if implemented, would most certainly lead to a superior organization irrespective of the business environment in which a firm is operating. Thus, this approach implicitly assumes that these best practices are universally applicable to all organizations across the board.

List of best practices

One of the commonest lists of best practices runs as follows (Guest, 1999):

  • Recruitment should be done through a very well designed testing system that would identify only those potential employees that have the capability of contributing the maximum
  • Training and development should be a continuous activity in the organization
  • Jobs should be designed in such a manner that employees have full scope of putting to use their skills and enjoy considerable autonomy at workplace which is adequately tempered by having to bear full responsibility of their autonomous actions
  • There must be uncluttered two-way communication to ensure free flow of information throughout the organization
  • Distributing ownership of the organization among employees to make them fully aware of financial implications of their actions

High performance organizations as US Department of Labor might enjoy considerable advantage through implementation of these best practices (Appelbaum, et al., 2000).

Drawbacks of best practice approach

Contingency theory postulates responses of and practices adopted by an organization are almost totally dependent on the business environment in which that particular organization operates. As environment varies widely between countries, regions and cultures, it would be nearly impossible to lay down a cut and dried list of best practices that would be universally applicable to all organizations. Therefore what might work miracles in an organization might usher total chaos in another organization because of their differing working practices, corporate culture, technology, or management styles (Armstrong, 2008).

However, it is always helpful to know of some sort of best practices as that allows a firm to pick and choose from among these best practices and modify those according to prevailing situations. This list acts as sort of primary resource for an organization searching for human resource practices that could be gainfully implemented.

The best fit approach

From the name itself it is apparent that this approach prefers a version that would be best suited for an organization thereby implicitly admitting that organizations vary so widely that it would be quite impossible to find a one-size-fits-all universally applicable approach.

Life cycle model

Human resource strategy that best fits an organization depends on the stage of life cycle it is residing (Baird & Meshoulam, 1988). An organization, just like a product, passes through the following stages during its life cycle:

  • Start-up
  • Growth
  • Maturity
  • Decline

In the initial stages, human resource management is generally informal with the owner/founder performing most of human resource management activities themselves. As the organization starts growing both in size and activities, more formal structures are introduced and professional human resource managers are employed as the owner/founder finds it beyond their capacity to handle this facet in an efficient manner. This is the period when recruiting right people for right jobs and innovations in reward and remuneration structure takes place at a rapid rate. Also, introduction and implementation of innovative and often radical training and development programs are being carried out in right earnest. As the organization becomes more mature, human resource managers gradually become less and less innovative and prefer to consolidate existing practices rather than implementing newer and more innovative ideas. When an organization starts declining human resource managers have very little time in implementing schemes and programs for the benefit of employees; the department becomes more involved in unpalatable activities as restructuring and downsizing (Buller & Napier, 1993).

Competitive strategies and best fit approach

There are three basic strategies adopted by firms to attain and sustain competitive advantage (Porter, 1985):

  • Becoming a unique producer, the uniqueness attained through innovation
  • Providing high quality goods to customers that cannot be matched by competitors
  • By managing to produce at a lower cost as compared to competitors

A firm would be able to be much more effective if it manages to modify its human resource practices so that they suit the approach the firm has adopted to retain competitive advantage (Schuler & Jackson, 1987).

Drawbacks of the best fit approach

There is no doubt that best fit approach is better than best practices approach since the former incorporates the reality that organizational culture, management practices and business environments vary widely between organizations. There is, however, a very real danger of falling into the trap of blindly aligning human resource strategies with overall corporate strategies and ending up being on the wrong side of the law of the land. Moreover, such tendency to align often results in trying to search for models that would factor in all variables of change without analyzing the interconnection and cause and effect relations between those. Such attempts might lead to half baked and confusing policy decisions that harm the organization more than benefitting it (Boxall, et al., 2007).

Bundling

This concept refers to development and implementation of several human resource practices and policies that work on different planes but are coherent and complement and reinforce each other in a synergic manner. It is an established fact that employee performance is as much dependent on proper training and skill as it is on proper remuneration and incentive schemes. Thus, for effective implementation and tangible results adequate human resource practices would be necessary in both aspects (MacDuffie, 1995).

Conclusion

Strategic human resource management has developed through rigorous academic analysis and equally rigorous field research and if one is able to peel off the jargon one will be able to admire the solid common sense approach that this field of knowledge possesses. This branch of knowledge effectively tackles major issues related to employees that often erupt on account of overall business strategies and objectives. It also provides a solid academic base for developing and implementing methods of approaching employee related human issues especially in current day dynamic external and internal environments that every firm has to endure and attempt to successfully negotiate.

References

Allen, M. R. & White, P., 2007. Strategic management and HRM. In: P. Boxall, J. Purcell & P. Wright, eds. Oxford handbook of Human Resource Management. Oxford: Oxford University Press, pp. 67-89.

Appelbaum, E., Bailey, T., Berg, P. & Kalleberg, A. L., 2000. Manufacturing Advantage: Why high performance work systems pay off. 1st ed. Ithaca, NY: ILR Press.

Armstrong, M., 2008. Strategic human resource management a guide to action. 4th ed. London and Philadelphia: Kogan Page.

Baird, L. & Meshoulam, I., 1988. Managing two fits of stratgeic human resource management. Academy of Management Review, 13(1), pp. 116-128.

Barney, J. B., 1991. Firm resources and sustained competitive advantage. Journal of Management Studies, 17(1), pp. 99-120.

Boxall, P. F. & Purcell, J., 2003. Strategy and Human Resource Management. 1st ed. Basingstoke: Palgrave Macmillan.

Boxall, P. F., Purcell, J. & Wright, P., 2007. Human resource management: scope, analysis and significance. In: P. F. Boxall, J. Purcell & P. Wright, eds. Oxford Handbook of Human Resource Management. Oxford: Oxford University Press, pp. 12-21.

Buller, P. F. & Napier, N. K., 1993. Strategy and human resource management: integration in fast growth versus other mid-sized firms. British Journal of Management, 4(1), pp. 77-90.

Digman, L. A., 1990. Strategic Management: Concepts, decisions, cases. 1st ed. Georgetown, Ontario: Irwin.

Guest, D. E., 1999. Human ressource management: the workers’ verdict. Human Resource Management Journal, 9(2), pp. 5-25.

Hendry, C. & Pettigrew, A., 1990. Human resource management: an agenda for 1990s. International Journal of Human Resource Management, 1(3), pp. 17-43.

MacDuffie, J. P., 1995. Human resource bundles and manufacturing performance. Industrial Relations Review, 48(2), pp. 199-221.

McWilliams, A., Siegel, D. S. & Wright, P. M., 2006. Corporate social responsibility: strategic implications. Journal of Management Studies, 43(1), pp. 1-12.

Porter, M. E., 1985. Competitive Advantage: Creating and sustaining superior performance. 1st ed. New York: Free Press.

Quinn Mills, D., 1983. Planning with people in mind. Harvard Business Review, Issue November-December, pp. 97-105.

Schuler, R. S. & Jackson, S. E., 1987. Linking competitive strategies with human resource management practices. Academy of Management Executive, 9(3), pp. 207-219.

Storey, J., 1989. From personnel management to human resource management. In: J. Storey, ed. New perspectives on Human Resource Management. London: Routledge, pp. 12-21.

Wright, P. M. & McMahan, G. C., 1992. Theoretical perspectives for SHRM. Journal of Management, 18(2), pp. 295-320.

Wright, P. M. & Snell, S. A., 1998. Towards a unifying framework for exploring fit and flexibility in strategic human resource management. Academy of Management Review, 23(4), pp. 756-772.

August 1, 2014

THE ROLE OF LEAN MANUFACTURING AND LEAN TECHNIQUES IN THE SUCCESS OF AN ORGANIZATION

Filed under: Corporate Management — niranjanchatterjee @ 11:13 pm

ACKNOWLEDGEMENT

Requirements of this project were rather stringent as sufficient knowledge of the topic was not enough. It was also necessary to have abundance of devotion and willpower together with an ability and willingness to perform hard labour for successful completion of this project. It would be unfair on my part not to acknowledge the contribution of all those who had encouraged me all through and kept my spirits from flagging and that include my parents, friends and well wishers. These people, though not directly involved with the project, did most certainly provide the ambience that was sorely needed while undertaking such a strenuous task.

I feel extremely fortunate that I had Mr/Ms Xxxx as my project leader and cannot thank him/her more for the unstinted encouragement I had received throughout this period. If his/her suggestions that resulted in necessary and timely course corrections were not there, I doubt very much whether this project would have at all seen the light of the day, let alone being successfully completed within the deadline.

 


ABSTRACT

The word that is most significant in Lean Manufacturing process is ‘lean’ which literally means a body or a system that does not have any unnecessary or avoidable flab or float. Such flab or float exists in manufacturing systems and are manifested through unnecessary or nil value movements or costs that do not add to the final worth of the finished product but increase total cost of production. The requirement of such a stringent approach to production process arose immediately after the Second World War especially in Japan which was facing a critical situation with most of its production facilities destroyed by Allied bombing and social infrastructure in total shambles following its ignominious defeat. The captains of Japanese industry were eager to bring back the country on an even keel and the only way they could do it was to match the Allied victors in industrial output. As there was acute shortage of necessary inputs, the captains of Japanese industry thought of ways and means to make best use of whatever is available. The best way to increase productivity was to reduce wastages of all form – be it material or human resources, and this resulted in the birth of Lean Manufacturing Process. As it was pioneered by Toyota, this form of taut and lean production system was named after the company. 

Toyota Corporation realised pretty early that production process should be designed in such a manner that the level of inventory at each stage, right from the raw material inputs, to in-process stock till the finished output should be maintained at an optimum level to reduce capital locked up in inventory. Such reduction in inventory would drastically bring down working capital requirements of an organisation and would most certainly help in very big way to bolster its financial health. The most common tools used in reducing inventory levels are known as Just in Time (JIT) manufacturing, manufacture smoothing, setup reduction, and similar techniques.

It must be mentioned that the efficacy of TPS is most apparent in Job and Batch manufacturing processes as these processes have production stages that can be independently controlled with clearly identifiable stages and specific engineering requirements. Moreover, TPS can be most effectively implemented in engineering industries and might not be that easy or effective to implement in chemical industries which have a continuous process system.

This project analyses the situation of BAY STREET Company which had introduced these lean principles were implemented in a process-based manufacturing scenario. The chosen tool for implementing this production system was ‘Value Stream Mapping’ that was put to use to identify the unnecessary cushions that exist in the system.

Value Stream Mapping (VSM), as the name implies, is a procedure to identify contribution of each related activity towards the final output till it reaches the ultimate consumer. Hence, it is quite obvious that VSM starts right from arrangement of raw materials to a rigorous analysis of the distribution system in places that ensures that final consumers gets the finished output in right quantities and at the right moment when they need it.

This project attempts to break the prevailing myth that TPS is unsuitable for process based manufacturing. It has been observed that the so-called unsuitability of TPS arises more from the fact that managers are not enthusiastic about proper documentation and are hence averse to implement this programme that guarantees improvement in productivity and efficiency. Moreover, the ground reality is rarely do industries have production systems that are either pure process or pure batch based. Rather, a combination of both these systems is the order of the day. Thus, the primary goal of this project is to establish that it is not as difficult as it is made out to be to implement Lean Manufacturing techniques in such industries.

Two randomly chosen industries, HCS Bakery (a well known Indian manufacturer of bakery machines) and ALDO (a Canadian manufacturer of shoes having factories United Kingdom and several other countries of the world), have been considered to prove our point.  

The project contains a brief study of the tools used by these companies to implement Lean Manufacturing techniques and though there are many tools that are utilised by them, such as, VSM, PEST, SWOT and Gap Analysis and the like, emphasis is placed on GAP Analysis to examine how this technique has introduced perceptible improvements in the working of these two organisations.

 

 

 

Table of Contents

  1. INTRODUCTION.. 7
  2. LITERATURE REVIEW… 15
  3. METHODOLOGY.. 27
  4. DEVELOPING THE CURRENT STATE.. 30
  1. DEVELOPING FUTURE STATE.. 49
  2. DISCUSSION.. 56
  3. CONCLUSION AND RECOMMENDATIONS. 69
  4. REFERENCES. 72
  5. ANNEXURE.. 77

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

INTRODUCTION


 

Technique of Lean Management

This technique is resorted to achieve production efficiency generally in manufacturing but these days, industries in service sectors are also implementing these techniques and are reaping rich dividends by doing so. The main objective of this technique is to increase efficiency and productivity by doing away with unnecessary blockages of financial and physical resources that so often happens in the course of production of goods or offering services. This technique is the foundation stone on which a management can hope to obtain maximum output from existing resources. But one must remember that such maximisation of efficiency cannot be achieved simply through proper handling of financial and physical resources, it also requires equally efficient and application of human resources that are available at the disposal of a commercial organisation.

The origins of Lean Production System lie in Toyota Motor Corporation and thus this technique is often also referred to as Toyota Production System (TPS). The credit for being the creator of this system can surely be given to Sakichi Toyoda.

But in fairness of things it should be mentioned that Lean Management techniques were already in use in some form or the other since middle of 19th century heavy machinery equipment manufacturing unit to motivate workers, improve quality and reduce unnecessary and avoidable wastes. It is, in a nutshell, a technique of producing efficiently to generate maximum possible output for available resources (Richard 2006).

This also implies that this technique automatically ensures reduction in production cycles, at least in terms labour hours required since any effective improvement in efficiency can never take place unless labour productivity is substantially increased. It is only through this that effective cost reduction can be achieved and, as is most obvious, an efficient production system is one that is least expensive. After all, all efficiencies and improvements are worthwhile only when the result in reduction in production costs and consequent improvements in bottom-lines.

An example might make the issue clearer.

Let us assume 100 workers are engaged in manufacturing shoes and there is no division of labour in the shop floor. It implies every single worker does everything necessary to produce a pair of shoes. Let us also suppose 500 pairs can be produced per day when 100 workers are hired. Hence, these figures translate into the basic fact that average output per labour per day is 5 shoes. However, in lean management process labour efficiency is increased by employing workers in jobs that match their expertise and specialisation thereby increasing average productivity of labour from 5 shoes to 8 shoes per day through the simple technique of judicious division of labour. Thus the factory can now enjoy more output with same level of inputs. This is in brief the main advantage of Lean Manufacturing system (Stephens 2006).

General Observations

The Process of Lean Manufacturing

(a) Analysis of requirement

Implementation of Lean Manufacturing technique begins with an analysis of what is required. Once there is a clear perception about the immediate requirement can the management team go about choosing the relevant tools that can deliver the desired results in the shortest possible time and least possible disruptions in the existing work process or schedule (David 2002).

(b) Application of theories

This is a very crucial stage in implementation of Lean Management techniques. There is an old adage which says “what is sauce for goose need not be sauce for gander.” In a sense this is a very crucial issue that should never be forgotten by those that are in charge of implementation of this technique. It is but natural that techniques that would be suitable for manufacturing sectors need not always be that much relevant for service sectors too. But one thing that can be said with reasonable degree of certainty is that as the mindset of all levels of employees in service sector are almost the same, the same techniques are applicable for all levels of employees, but as the mindset of employees vary widely from one level to another in manufacturing sector, the same techniques cannot be applied with equal degree of success at all levels in a manufacturing industry. Techniques will vary widely – from soft to hard – depending upon specific requirements and urgency (David 2002).

(c) Results analysis

As implementation of lean techniques impacts all aspects of a company, the general approach to this tool is to implement it on a pilot project and observe very carefully the benefits obtained. The management then engages in a very detailed cost benefit analysis of implementation of this technique and once they come round to the conclusion that it indeed would be beneficial to implement it on a company wide basis, a feasibility testing is done to further confirm whether or not this technique is actually generating the desired results. It is a commonly accepted fact that a 10% margin of error must be accommodated in the results of the feasibility study before accepting the results and taking a final decision (David 2002).

(d) Closely observing the activities in the related areas

Once the requirements are analysed and proper lean technique has been chosen and implemented, the area where it has been implemented needs to be monitored very closely. This monitoring is necessary to ensure that human resource is accordingly put to use. Any mismatch between choosing required technique and applying requisite human resource in a balanced way would result in total disarray and complete failure of the technique that has been implemented. In fact, the results achieved might even be worse than what had been achieved when such lean techniques have not been implemented. Often the negative results from such mismatch are wrongly attributed to Lean Management techniques. But management must always remain alert and be awake to the fact that human resource must be properly aligned to achieve the best results. If there is a slip up in that area, entire good intentions of management will be washed away in a flood of failures. One of the main requirements of rational employment of human resource is that departments and sub processes in production should not be working at cross purposes and each and every activity should be directed towards achievement of overall corporate objectives (David 2002).

(e) Re-evaluation of results

Nothing is etched in stone in corporate activities. Each activity, however much it might seem as necessary, should be re-evaluated in terms of results achieved and, if necessary, suitable modifications should be done to the original plan. Application of Lean Management techniques are no exception to this golden rule of corporate management. Periodic re-evaluation of ground reality and modifications those are necessary both in terms of course correction as well as modification in quantum and direction of resource application (David 2002).

(f) Application of lean technique

Re-evaluation provides management with necessary information before implementing Lean Management techniques throughout the organisation. The ultimate technique that will be applied totally depends on the inputs received from the steps mentioned above and might not come as a surprise if the ultimate technique that is adopted hardly has any similarity with the techniques that were initially envisaged (David 2002).

Present Status of Lean Management

No one would ever deny the importance of employees in the entire process of implementation of Lean Management techniques. Hence, training of employees and making them aware of not only the requirements of new techniques but also taking them into confidence about the benefits that are surely to be derived from such implementation is absolutely imperative for the success of these techniques. Winning over unstinted employee support is one of the prerequisites if the organisation genuinely wishes to improve its competitive advantage. This is observed mostly in service sector where organisations spent considerable amount of money in training their employees in the nuances and requirements of six sigma techniques. 

Employees need to be convinced that such training programmes are mainly directed at improving their levels of efficiency which if they at some point in future decide to leave the organisation would still be with them. In fact, they can claim higher levels of compensation in their new workplaces if they imbibe the salient features that are imparted in the current training programmes. Such a hint that employees would also be personally enriched if the wholeheartedly participate in these training programmes would, in most cases, motivate them to support the efforts of the enterprise. Companies are liberally using software and other modern training tools to achieve this end (Bicheno 2003).  

The primary objective of Lean Management is to improve corporate productivity and this is achieved by focussing on all relevant sectors of a company.  While it primarily concentrates on reducing avoidable and unnecessary levels of inter process inventory, it also aims at strengthening supply chain and spends considerable efforts in managing it properly. However, it must not be overlooked that while these initiatives are fructified, employee satisfaction and improvement of working environment also automatically improves substantially. This implied benefit also helps the organisation in no small manner as it becomes fortunate to have a contented army of workers who would go out of their way to ensure that corporate targets and objective are met without any fail. This would improve their levels of efficiency and would finally result in overall reduction of costs in the entire company. Such reductions, even if some parts of those are passed on to the customers, would most certainly improve turnover and profit volumes of the company (Bicheno 2003).

Primary Objective of this report

The basic aim of this report is to underscore and dissect a few common tools of Lean Manufacturing. The project initially obtains empirical substantiation of the efficacy of these techniques and then proceeds to further investigate their impacts on operational performance of organisations.

This report also highlights the following techniques that are integral to the entire concept of Lean Manufacturing:

  • Cellular Manufacturing aims to club together similar processes that might be common to the manufacture of several finished products. These similar processes are bunched together to form a single group or ‘cell’, if it may be termed so, to ensure smooth functioning of the entire organisation. This approach not only eliminates duplication of work but also provides inherent flexibility to the organisation to modify its output in line with varying levels of demand. This reduces lead time in production and supply and imparts the much needed agility to the organisation.
  • Just-In-Time (JIT) is a system where the ‘pull’ exerted by a demand sets in motion the entire production process. The action starts from reverse, with a confirmed demand and related actions are undertaken right down to the purchase of raw materials and arranging manpower. In a sense, the final demand pulls in its wake all other related activities where no unused or unnecessary stock results as whatever is demanded is produced without anything extra at any phase.
  • Kanban is method of indicating all preceding processes that there is a demand by a subsequent process. This signalling method is possible the most important tool for practically implementing JIT system of production.
  • Total Preventive Maintenance (TPM), as the name implies, is an activity that ensures workers carry out regular preventive maintenance of equipment and tools to ensure minor glitches do not hamper smooth and uninterrupted functioning of production process. It is distinct from breakdown maintenance as it attempts to prevent machine breakdowns altogether. Such preventive maintenance is undertaken by workers that work on those machines. This serves two important purposes. Firstly, workers become more aware of how those machines work and secondly, as they are in constant touch with those machines, it is possible for them to predict any possible breakdowns much earlier. Also, by involving production personnel in maintenance activity the organisation is able to reduce manpower hired exclusively for maintenance.
  • Setup Time Reduction continuously attempts to minimize the setup time on any machine.
  • Total Quality Management (TQM) is a system of uninterrupted and continuous attempts to achieve further improvements in the entire gamut of activities of an organisation. This is essentially participative in nature and often involves suppliers and customers.
  • 5s provide suitable guidelines and benchmarks for improving work place conditions and aim at standardisation of work procedures to eliminate any ambiguity or hesitation on the part of workers to tackle a given situation.

It must be remembered that all these techniques aim to achieve one objective, that of improving production efficiency and corporate competitiveness. In technical terms, these tools attempt to draw a brighter and more rational ‘future state’ map.

A Birds Eye View of the Report

This project is an effort towards measuring the importance of Lean Management or Lean Manufacturing in organizations.

The innovation innate in Lean Management was first given a concrete tangible shape by Toyota Motor Corporation and hence it is also referred as Toyota Production System.

In modern times these techniques have been embraced by manufacturing organisations, but the pleasantly surprising fact is that service providers have also become ardent fans of these techniques. The popularity of these techniques is sure an indicator of their efficiency and effectiveness and has actually motivated me to investigate in greater detail as to how exactly such a transformation of an organisation is possible without any further capital injection but simply through alterations and modifications in existing work procedures.

Two companies have been chosen randomly, the only thing common between these two organisations is that both use Lean Management techniques. Other than that there is nothing in common between these two companies that manufacture completely different products and operate in different sectors and mostly in different markets too. The targeted consumers are also different, so is the work culture that is prevailing in these organisations.

By studying two such disparate companies the researcher attempts to confirm beyond all reasonable doubts that Lean Management techniques are effective irrespective of the companies they are applied to.

The report commences with a succinct overview of these two companies as well as techniques that are generally used to implement Lean Management system. However, main emphasis is given on GAP Analysis as it happens to be the most popular among all the tools that are associated with Lean Management techniques.  

The report ends with a definite conclusion that lean management has indeed resulted in major improvements in these companies and, in particular, their manufacturing processes.

 

 

 

 

 

 

 

 

 

 

 

LITERATURE REVIEW


Review of Relevant Literature

As Juran has observed it was not even fifty years ago that Japanese goods were condescended by rest of the industrialized world for their poor quality and the general idea people had about Japan was that of a country manufacturing elementary electrical items and sundry gadgets that carried no guarantee of uninterrupted service (Juran 1993). People preferred goods of European or US origin and none gave Japan even the slimmest chance of being able to manufacture goods that would one day give the products manufactured in Europe and United States such a stiff competition that some of the producers would almost be driven to extinction. But this metamorphosis of Japanese industry did not take place overnight by the wave of a magic wand; it took years of concentrated application and single minded focus of the captains of Japanese industry who were determined to pull the country back from the brink of economic collapse after Second World War that completely destroyed nearly half of Japanese industrial infrastructure.

Ohno notes, Japanese industrialists, especially Kiichiro Toyoda, president of Toyota Motor Company, realized pretty early that unless they could beat the Americans in quality there was absolutely no chance of a revival (Ohno 1988). This realization that quality is not one among many problems but the only problem the solution of which takes care of all other problems, gave Japanese industrialists a head start over their American and European counterparts and Toyota became the mascot of Japanese industrial revival that started the era of supremacy of Japanese automobiles.

Ford Motor Company was the leader in automobile industry during the 50s and 60s of the previous century and Eiji Toyoda, cousin of Kiichiro Toyoda, was sent to the US in the early part of 50s, to observe minutely the famous mass production system of Ford Motor Company that managed to produce phenomenally large volumes that allowed the company to enjoy economies of large scale. A part of this economy was routinely passed on to the customers who enjoyed automobiles of very good quality at unbelievably low prices. Ford Company thus was a model that every aspiring automobile manufacturer wanted to analyze and duplicate and Toyota was no exception. An example of the exceptional productive capacity of Ford Company can be understood from the fact that while Toyota could produce 2,685 automobiles in thirteen years since its inception, Ford Motor Company was producing 7,000 units daily in its Rouge plant in Detroit (Womack, Jones and Roos 2007).

The secret to such an astounding level of output was the revolutionary concept of assembly line production pioneered by Henry Ford. Eiji Toyoda was no doubt impressed by the efficiency of the system but thought it needed certain adjustments if it was to be a success in Japan where automobile markets were fundamentally different from those in US. Moreover, US automobiles had a ready market all over the world whereas Toyota could only aspire to sell in Japanese markets. It did not till then have the goodwill to command any clientele anywhere else. Thus, the economies of large scale production that Ford could enjoy were not there for Toyota to take advantage of. It still did not have that many prospective customers to cater for. So, Eiji Toyoda thought of other ways to enjoy the fruits of economies of large scale and that came not through producing large volumes of a single product but relatively much lesser volumes of quite a large number of products on the same production line. This was how the famous Toyota Production System came into existence (McCoby 1997).

Almost during the same time, Taiichi Ohno, production manager at Toyota, observed cost per unit of output drastically went down when production is taken up in small lots in place of large batches. This was no black magic as such and had definite economic reasons for such an occurrence. The most important reason was there for all to see and it related to the small volume of inventory of inputs that was necessary to manufacture a small lot. Such reduction in inventory substantially reduced working capital locked in inventory and, considering the high rates of interest that were prevalent at that time, led to a substantial reduction in total cost of production.  Moreover, with smaller volumes to handle, in-process deviations are easier to identify thus restricting unnecessary process expenses on defective units of output. The other benefit, though indirect, was an additional awareness on the part of the workers to produce defect free output as they knew that production defects if any would immediately be identified. Thus Toyota enjoyed a twin gain when it produced in small batches.

Ohno visited several times Ford’s factory at Detroit and observed the assembly line method of production from close quarters and felt it could be much leaner than what it is – there were still many areas where unnecessary wastages were taking place.

Ford’s assembly line had a foreman who ensured workers were working according to predetermined schedules and procedures and there were housekeepers who periodically came and cleaned the work area to remove any unnecessary oil and chemicals that may or may not cause slippage, fire or any other possible hazard. There was a separate group of workers entrusted with the responsibility of repair and maintenance of both machines and tools and they visited the work area according to a preset frequency to ensure that there was no stoppage in production due to sudden breakdowns. There were several quality inspectors who examined at random finished units to verify that output conformed to standards. There was a rework area where the production line ended and specially trained labourers were stationed there to rectify defective outputs. The company also had on its role a gang of workers who acted as a backup to cover up unanticipated absenteeism. According to Rother and Shook, Ohno felt such a system was full of muda, the Japanese equivalent of non-value added activities that resulted in expenditure without any corresponding benefit (Rother and Shook 2003).

He modified the assembly line setup to make it more efficient by shedding some of its fat. Ohno did away with the foreman and clubbed workers into teams where team leaders played the role of the foremen. Thus, while the team leader himself worked he also ensured that work is proceeding according to predetermined parameters. Each team also had the responsibility of keeping the work area clean thereby removing the requirement of the group of workers who perform only housekeeping jobs under Ford Company’s system of assembly line production. Ohno also entrusted this team with undertaking minor repairs of machines and tools and undertaking quality checks of outputs produced. Thus, at one stroke Ohno removed four categories of workers that populated the shop floor in assembly line production system without directly being involved in the production process. Ohno envisaged a scenario where only those that are directly adding value should be present on the shop floor. This removed unnecessary crowd on the shop floor and, as Tolliday observes, what is most important, reduced a substantial amount of production overhead (Tolliday 1998).

But the most innovative introduction of Ohno was setting aside some time for each group of workers when they would collectively discuss and suggest ways and means of further improving the current levels of production efficiency. This became known as ‘Quality Circles’ in Western industries that eagerly picked up this innovative idea as all knew that this would surely increase productivity in shop floor. This process of continuously thinking about ways to further improve the current procedures at workplace is known as kaizen in Japanese and it became one of the mainstays of Toyota’s production process and philosophy (Imai 1986).

Ohno also proved his innovative genius while dealing with rework and rectification of damaged and defective units. Under assembly system the damaged and substandard outputs were reworked at the end of the assembly line but Ohno would have none of this. He was absolutely right in insisting that defects should be rectified right at the very moment they are identified else a late rectification would be much more costly and cumbersome. To ensure that a defective piece of output does not proceed further up the production line, he envisaged introduction of some form of automatic self regulation or jidoka similar to the power loom designed by Sakichi Toyoda that automatically stopped the moment one thread broke (Becker 1998).

Ohno knew it would not be easy to manufacture machines that would be intelligent enough to spot defects in such a complicated manufacturing process as in automobile production and so he introduced another equally novel concept called andon system. It was basically a system where every worker had the right to stop the assembly the moment any one of them spotted a defect. It was in direct contrast with American methods of assembly line production where only a senior supervisor had the right to stall the assembly line. The moment the assembly line is stopped by a worker in a Toyota factory all related workers gather around to solve the problem and the assembly line is restarted only after the problem has been fully resolved. Ohno also introduced ‘five whys’ method of solving a problem that went to root of a problem to ensure that it never occurred again. Initially andon system caused numerous stoppages of work but as workers got used to it the assembly lines hardly stopped since 1990 even though every worker had the right to stall the assembly line if the need arose. Thus, quality of output increased dramatically while cost of rework and rectification fell equally drastically (Webster 2007).

Inventory levels have always remained pretty high in Ford’s assembly line system and Ohno realized it like none else that the unnecessary increase in overhead costs that occur as inventories keep piling up can prove to be a very heavy burden on the working capital of a company. Hence he devised a novel method of reducing inventory levels on the shop floor by introducing Just in time (JIT) inventory system which is described as producing only what is needed, in right volumes and just when it is required  (Toyota Production System 1995). Ohno was determined to reduce shop floor inventory of components and decided that at each stage of production the previous stage should produce only those components and in that specific quantities that would be required by the succeeding stage. There would be no unnecessary production and consequent stockpiling of WIP inventories. This undoubtedly was a very ambitious target and the most important tool to achieve such a target was the famous kanban system which Toyota often refers to as the ‘supermarket concept’. Supermarket authorities make it a point to keep all their shelves full with products in proper quantities and varieties to satisfy demands of customers as and when they visit the supermarket. Ohno tried to replicate this concept in Toyota by considering each process as both a supermarket and customer – a supermarket for succeeding processes and a customer for preceding processes. Thus, each process would manufacture only that much volume that is required by the succeeding processes at the precise moment when it is required (Fisher 1997).

An analogy with a McDonald’s outlet would make the issue clearer. A McDonald’s outlet never prepares burgers in anticipation of customer as there would always be a possibility of demand not matching with quantity produced leading to either inventory stockpiling or a stock-out situation. As a customer places an order, a pull is exerted on the production system signaling it to get started. Here the entire production process depends on the order quantity and in a way works in the reverse direction (Hamel and Prahalad 1996).

A similar situation takes place in Toyota manufacturing units where all subsequent processes send signals to the preceding processes indicating the exact quantity that needs to be manufactured and the accurate time when it needs to be supplied by those preceding processes. These signals are conveyed through cards called kanban which in Japanese means signboard. This form or ordering production in reverse is not only carried out between intra-company production departments but also with suppliers thereby bringing inter-process inventory to a minimum (Spear and Bowen 1999).

However, such a fine-tuned production process can run with clockwork precision only when each process unambiguously defines the exact permissible duration during which a particular job has got to be fully finished by that particular process. This is done by measuring Takt time that is found out by dividing total available production time per day with targeted production units per day (Olofsson 2009).

Automobiles do not come cheap and Toyota is acutely aware of that unsold stock would radically increase its working capital. But at the same time it is also aware that stock out situations would hamper its turnover. It has found a novel solution to this problem. It manufactures semi finished products or “platforms” in accordance with a predetermined schedule. These “platforms” are basic structures that do not require too much of material or labor. Depending upon confirmed orders, these “platforms” are converted into fully finished products. Thus, Toyota does not block capital in unsold stocks while is able to satisfy customers with timely delivery. This hybrid method tries to marry the leanness of “pull” system with the inherent agility and ability of “push” system to quickly satisfy consumer demand and is referred as “leagile” system because of its twin features of leanness and agility. (Goldsby, Griffis and Roath 2006).

The best example of this “leagile” production system is observed in the Scion line of cars produced by Toyota. While the basic platform is manufactured in Japan according to certain predetermined production schedules, the various models, viz., tC, xB or xD are manufactured according to specific demands either at Toyota’s Long Beach production facility or at a dealer’s production facility, if that happens to be logistically more economical. Toyota has also made a marketing coup by taking this agility in its production system even further by allowing customers to mix and match the various specifications of these three models to create unique designs and models for themselves. Thus, customers get the satisfaction of getting their u nique cars within a very short time while Toyota retains its leanness by keeping inventories at the minimum.

Toyota not only modified the famous Assembly line system of production that has been applied so successfully at Ford but also introduced some features in its very own Toyota Production System that were quantum improvements over the production process followed by western manufacturers.

One such process is known as VSM or Value Stream Mapping. In this method a unit of raw material is visually tracked right from the moment it enters the factory gates till it is converted into finished output. What is most important is value added at each stage is meticulously noted. The quantification of value addition is divided into four broad stages that begin with “Preparation” goes on to “Current State” and thereafter to “Future State” and finishes with “Planning and Implementation”. This approach allows management to identify activities that add value as well as non-value adding activities and concentrate their efforts on improving activities that add value while drastically pruning activities that do not (Locher 2008).

The other equally innovative introduction is the concept of 5S that provide a methodology to ensure that the workplace is cleaner, orderly and more organised. Though an orderly and clean workplace does not directly improve efficiency as say reduction of waste but a favourable environment most surely creates an ambience where the workforce feel more motivated to put in their best. The 5S consists of: Seiri (retaining what is necessary and discarding what is not so), Seiton (Orderliness where each item has a designated place and is located at that place only), Seiso (Cleanliness), Seiketsu (Ensure everything conforms to standards set) and Shitsuke (Constant application of the previous four Ss to ensure that levels attained are sustained).

The other innovation of Toyota was the implementation of Quality Function Deployment (QFD) that tries to incorporate the customers’ requirements while designing the products. This is indeed a watershed in production planning and marketing where till now a company produced what it felt it was best in and its marketing team tried to convince customers into accepting whatever the company has produced. But with the implementation of QFD, a company would no longer have to be bothered about a consumer demand since it has produced what exactly the consumers want. This method also guarantees a massive savings in cost as all the problems are solved at the drawing stage only (ReVelle, Moran and Cox 1998).

A survey of Toyota’s path breaking innovations in production systems would remain incomplete if a mention is not made about Total Productive Maintenance (TPM) approach to production processes. Toyota elevated the job of maintenance from a necessary nuisance that only added to downtimes to an essential activity that is as much a part of production as is the act of churning out finished jobs from machine BAYs. It also incorporated the maintenance downtime within the normal time required for production and thus reduced machine breakdowns and consequent production losses to near zero levels (Wireman 2003).

Many companies tried to duplicate Toyota’s Production System but failed to do so thus forcing many management experts to believe that Toyota’s success lay in its cultural roots that would simply not be possible for any western organisation to imbibe and implement (Kotter 2001).

These experts pointed out that Japanese companies, for example believe in life-long employment and Japanese workers value long term economic stability far more than immediate benefits, promotions and incentives. Western workers on the other hand are not that much enamoured by such long term benefits and prefer immediate benefits instead. While Japanese companies lay a lot of emphasis on loyalty, Western employers value the varied exposure and experience that an employee gathers if he switches quite a few jobs.  Japanese workers pride themselves as being team members and exult at the success of their team, but Western workers are more individualistic and are more interested in personal development and enhancement (Hofstede 1991).

These arguments seem very convincing initially but if these were to be the only reasons for the success of Toyota then other Japanese stalwarts like Honda or Nissan would also have been able to replicate this system with ease which, strangely enough, is not the case.

The basic reason for Toyota’s success lies in its inimitable system that marries strict rules, rigid procedures and meticulously delineated routes of material and information flows throughout the production process with an unmatched element of adaptability and flexibility. Every activity in Toyota is specified down to the smallest possible detail. When seats are bolted to the body of a car, the order in which the bolts would be tightened and the torque to be applied and the number of turns to given are strictly specified and any change to the given specification can be done only through a rigorous problem solving procedure that requires a detailed scientific analysis of both the current and the desired state of affairs and a thorough evaluation of the benefit that can be derived from the proposed change. Such a scientific rigour automatically removes all forms of wasteful activity. This scientific rigour is so ingrained in Toyota’s workforce that in spite of such rigidity in specifications and structure, an environment of regimentation or strict command and control that one would normally expect does not exist in Toyota’s factories (McKay and Wiers August 2004).

The other unique factor of Toyota’s Production System is that it evolved through decades of conscientious labour of workers and was not imposed by the top management and thus has become an organic part of the company culture so much so that nothing is written down and hence it becomes very difficult for an employee if he is asked to articulate the uniqueness of this fabulous production system. It thus becomes even more difficult for outsiders to grasp the conundrum of simultaneous existence of flexibility and rigidity (Ibrahim 2008).

This can be better understood if one glances at the four rules that are strictly adhered to in every production facility of Toyota and they are (Spear and Bowen 1999):

Rule 1: Each activity should be unambiguously delimeated with clear descriptions of content, sequence, timing and outcome of each single activity and, every single worker at the factory, irrespective of their seniority or experience, are supposed to meticulously follow the instructions. At a first glance it might seem to be the handiwork of a control freak but if one ponders a bit, the obvious benefit becomes apparent – there would never be any variations in quality of output as all units will be processed in exactly the same manner.

Rule 2: The communication between departments and with outside agencies must be direct and the responses must always be unambiguous in terms of “yes” or “no”.

Rule 3: All production lines in Toyota are set up in a simple well defined path without any forks or loops that might complicate the uninterrupted functioning of supply chains.

Rule 4: Toyota has a continuous programme for teaching people how to improve and ensures that improvements are initiated right down at the lowest level under the guidance of a teacher and is vetted through an elaborate and scientific evaluation process. This ensures that the spirit of innovation keeps burning brightly among the labour force in spite of such rigidity in specifications and procedures.

The story of the continuous development of Japanese industries and their rise to international eminence, especially in spheres of automobile and consumer electronics, is something every country would love to emulate but have till date found rather difficult to do so.  The reason is not very difficult to unravel. Japanese industries have developed a work culture that analyses threadbare each single activity and lays down rigid procedures that are religiously followed by every worker. But the magic lies elsewhere. In spite such strict regimentation, the desire to improve is systematically kept alive in every worker through company sponsored training and top management ensures that every improvement takes place from the bottom instead of being imposed from the top (Ferdman 1992).

Perceptible Benefits Derived from Lean Management

The benefits of Lean Management techniques are:

(1) Final output has better quality and there is lesser in process reduction: This is possible due to smaller batch sizes where workers can pay attention to the work at hand and can immediately identify deviations (David, M. 2006).

(2) Reduced Inventory: As pull system of production is followed there is no scope of extra production by any process and hence the scope of stockpiling of work-in-progress is totally eliminated (David, M. 2006).

(3) Requires less space: This is almost a corollary as lesser inventory is required at every stage (David, M. 2006).

 (5) Makes identifying future kaizens simpler: As in process inventories reduce, it becomes easier to spot and identify production problems as a defective process would not be able to properly satisfy demands of succeeding processes and all subsequent process come to a grinding halt. The defects come to light almost immediately and the management becomes aware where the next improvement initiative has to be undertaken (Henderson 2006).       

(6) Ensures a safer work environment: Lesser inventory ensures lesser clutter at workplace and more light in farthest and least accessible corners of shop floor. Moreover, as each manufacturing cell consists of only a few employees who know each other very well, there is very little possibility of unexpected movements from any of them (George 2003).

(7) Improves employee morale: There is an almost immediate feedback on the state of affairs which reduces the possibility of carrying forward of rework of defective pieces produced in the previous shift. This provides workers some sort of ownership of their output and they no longer try to hide any deviations. Instead, they come forward with all their problems and management gets a chance of solving genuine problems almost immediately. This no doubt motivates employees to give their best and employee morale reaches unprecedented heights (David M 2006).

 

 

 

 

 

 


 

 

 

 

 

 

 

METHODOLOGY

 


 

Methodology Followed in this Project

This project concentrates on two companies – HCS Bakery of India and ALDO Shoe Company of Canada. A number of research approaches will be employed to study in depth the research question of whether Lean Management and Lean Techniques indeed helps organisations in achieving higher levels of defect free output at lower cost. This question assumes greater importance given the global nature of marketplace and levels of competition that has been unleashed as a necessary by-product of globalisation.

Tools and Techniques

As already discussed before, tools and techniques to solve a specific problem or reach a predetermined target depends almost entirely on the nature and characteristics of the problem at hand or the target that is desired to be reached. Some of the tools and techniques that have been discussed in detail are:

Gap Analysis

Gap Analysis basically tries to decode the difference from the present state of affairs of a company and the future state it desires to be in. This analysis tries to identify ways and means of achieving a desired future state without any further input of financial, material or human resources.

If any arm of the company is not functioning efficiently such inefficiency is immediately exposed through this analysis. Such inefficiencies prevent the company from achieving what it could do and hence restrict the company from achieving its true potential.

Gap Analysis in effect informs the management about those areas that are performing below desired levels and hence where the management must immediately concentrate for further improvement.

Value Stream Mapping (VSM)

There is a continuous movement of information and materials between departments in every organisation. This technique is geared towards a scientific analysis of such movements. The purpose of such mapping is to identify value additions at each stage. It automatically brings to the fore those processes that do not add any appreciable or tangible value and thus can be termed as wasteful processes that only increase the total cost of production without contributing any commensurate value. Once management is aware of such wasteful processes it can take immediate action to prune those away. This will result in a leaner manufacturing process that would result in considerable cost reduction without any corresponding reduction in volume or quality of output.

Source of Data

All necessary information has been obtained from secondary sources that comprised of published journals, books and authentic websites. The researcher is aware of one of the biggest pitfalls of such type of research, and that is, inherent bias of the researcher that seems to creep in while choosing resources. A researcher, sometimes unknowingly, seems to pick up only those resources that seem to support their intention, thus resulting in a report that, though apparently unbiased, in reality reeks of personal bias and prejudice.

Utmost care has been exercised to eliminate such innate bias and the end product can be reasonably claimed to be a true and authentic study of the research question.

Limitations faced in the course of the project

There were some obstacles that were continually encountered in the course of completing the project and they are:

  • Limitation of the data: As secondary data has been relied upon, this project lacks the authenticity it could have achieved had the researcher been able to collect and collate primary data obtained through personal interviews with line managers. The researcher could also have been able to present a better picture if he had the opportunity of sending questionnaires to line managers on their personal experiences and views on Lean Management techniques.
  • Timeline: This is perhaps the ruse of every researcher that it could have been better if more time was at hand to conduct the research in a more detailed manner. The present researcher is no exception to that grouse and would have surely loved to carry on this research on more relaxed timeframe.

 

 

 

 

 

 

 

DEVELOPING THE CURRENT STATE

 

 

 

 

 

 

 

 

 

 

HCS Bakery Machines

HCS BAKERY MACHINES is a globally famous company. Founded in 1997, HCS Bakery is a well known and reputed manufacturer, supplier and exporter of various industrial bakery equipments and machines of the bakery industry. The different products manufactured by the company include electrically operated bakery ovens, flour sifters made of steel, and, machines meant for automated slicing of breads.

Its products are exported throughout the world and some of the best known names in Bakery industry as Britannia and Taaza are regular customers of this company.

The company has state of the art machines and a team of expert technicians that manufacture world class machines. An excellent network of after sales service ensures complete customer satisfaction and generates very high levels of customer loyalty.

Product portfolio of HCS

The company makes their machines from the best quality metal and ensures that the final products are of international quality. Some of their most popular products are:

  1. Spiral Mixers

These machines are equipped with latest cutting edge technology and are extremely efficient in thoroughly mixing and kneading all types of dough. There are different types of mixers to suit almost every type of requirement. They can be specially configured to radically improve their performance and also their durability. In short, the company can satisfy any type of special requirements of a customer. It might hardly be mentioned that with their proven expertise in this line, the company is able to satisfy even the most finicky of customers.

  1. Final Proofers

For the uniform proofing in the baked products in the baking industries final proofers are used. Final proofers are best suited for all varieties of ovens that are used for baking and radically improve their performance. To meet the requirements of their clients, final baking proofers are made in accordance to their drawings and specifications. Final proofers are manufactured from premium grade materials to ensure that they function at highest levels of efficiency for many years.

  1. Rotor Ovens

HCS Bakery manufactures various types of premium category rotor ovens. These ovens conform to the strict European standards and thus enjoy high degree of market acceptability in Europe. The company manufactures forced convention ovens and rotary rack ovens on a regular basis and if desired by customer, they also manufacture these ovens in stainless steel. As is the case with its other machines, the company is open to any sort of customisation that the customer may desire.

  1. Process Mixers

HCS Bakery manufactures a mind boggling variety of process mixers. These machines play a crucial role in the manufacturing process of bakery industry as they are used to properly mix the contents of a baked product. If the mixing is not done properly, the end product will have severe quality problems and will, in all probability, be summarily rejected by final consumers. Hence, bakers are very particular when they choose process mixers. The company has on offer mixers that operate at high speeds and also those that are made of stainless steel and also mixers that are of planetary type.

  1. Other Machineries used in Baking Industry

The company also manufactures dough dividers and moulders, ovens having swinging trays, elevators and sifters of flour and pizza moulding machines. It also has on offer automated bread-slicers and hoisters of bowls.

Manufacturing Process at HCS Bakery

Any lean manufacturing system can best be appreciated through a proper and thorough understanding of the manufacturing process that is in place in a company that has successfully implemented the lean system. At HCS, the following steps in manufacturing are in place:

  1. It starts with careful selection of sheets that would be used to manufacture these machines. These have to be of high quality pure stainless steel.
  2. These sheets are then cut into different shapes necessary to construct bakery machines. As the cutting has to be extremely accurate, a sharp steel cutter is used for this purpose.
  3. These pieces are then moulded into required shapes.
  4. These moulded shapes are assembled to get the shape of the desired machine. Due care is taken to reduce wastage in the form of scrap at a minimum.
  5. The Company has a tolerance limit of 5% and take utmost care to ensure that none of its products cross this threshold.

 A “Made by HCS ENTERPRISES” label is a guarantee of assured quality and stringent quality control has propelled the company to the position of market leader that it enjoys now. As it has earned this position through of hard work and commitment, it takes utmost care to weed out all deviations in its manufacturing process.

Future of HCS Bakery

HCS ENTERPRISES is an international name in the bakery industry. With its superior quality and exquisite range of products HCS Bakery has gained in reputation. The company has earned accolades in terms of brand equity, customer satisfaction, popularity and market reputation. It has an assured share of markets in Europe and United States and also has a considerable footprint in African and Middle East markets. It is perhaps needless to add that some of biggest names in Bakery industry in India as Britannia, Taaza and Ellora are also its loyal clients.

ALDO Group of Companies

The ownership of ALDO Group is in private hands. It is headquartered in Montreal. At present it operates nearly 1400 retail outlets and over 700 of these outlets are operating as exclusive stores for the company. It was established by ALDO Bensadoun, a retired French soldier in 1966.

ALDO opened its first standalone store at Montreal and ended its earlier practice of hiring spaces within fashion boutiques. Though that practice ensured steady customer footfall, it did not however, lead to a commensurate turnover. ALDO became an object of often idle curiosity of those that ventured into its shops as the customers were usually more preoccupied with buying other items that the fashion boutiques had on offer.

After successfully testing the waters in Canadian retail market, ALDO ventured into US retail sector during the end of 1993 when it opened its first US store at Boston. There was no looking back for the company thereafter. Within less than a decade the company went on to open one hundred and twenty five stores in United States. It simultaneously strengthened its already preeminent position in Canadian markets also by owning and operating more than one hundred and eighty stores in premium retail locations all over Canada.

The company has opted for market segmentation approach in marketing its products and puts on offer 8 popular and prestigious retail brands through specially designated stores that cater exclusively to the customer group that they intends to target. The number of such exclusive stores has now exceeded 300. This approach, quite obviously, ensures greater conversion of enquiries into actual sales. ALDO has spread its wings and have crossed the Atlantic to open its stores in United Kingdom and Ireland.

It realised pretty early that opening of company owned stores is a time consuming affair and has thus opted for the franchising route also to increase its presence in other markets. It has franchisees spread over in more than forty countries of the world.

The products and services the company provide are meant for everyday use. The company is always on the lookout for excellent craftsmen and is committed to remain a Total Customer Service Provider to retain and expand customer loyalty.

As a part of this effort, ALDO has also designed a series of excellent handbags and purses for ladies and exquisite purses for men, which are available in their stores as well as online through their website www.youthaids-ALDO.org.

Product range of ALDO

ALDO has acquired specialisation and is famous as a manufacturer of footwear that is highly durable and fashionable. They cater to footwear requirements of both men and women. Also it has made a name for itself as a producer and marketer of other leather accessories as purse, handbags and belts. It has expanded its production from fashionable adult footwear to children’s footwear also.

This premium brand takes care of the detailed features of its products and also ensures craftsmanship is of the highest order. Avant-garde designs and durability coupled with extremely reasonable and affordable prices makes its products irresistibly attractive.

Fashion stylists associated with ALDO regularly scour the fashion capitals of the world and keep a keen eye on the emerging trends to ensure that ALDO always remains the first company to come to the market with the latest trends and fashions. This awareness of latest trends makes it a big hit with fashion conscious ladies in all corners of the world.

Social Welfare Activities of ALDO

ALDO is an excellent corporate citizen and not only does it play an active role by directly engaging in certain welfare activities but also equally actively raises funds for activities where it can do directly get involved in the execution of projects.

The most notable social welfare activity that ALDO is engaged in is a relentless battle for two and a half decades against AIDS. It operates awareness programmes about AIDS especially among the youths who are most vulnerable to this killer disease. It also sells special badges and stickers the proceeds of which go towards educating and protecting this vulnerable group.

It also plays an active role in protection of environment and one such initiative has been conversion of cartons in which it packed its shoes into bags made of bio-degradable material.

 ALDO’s Team

ALDO has a team that is dedicated and totally committed and all departments are equally efficient, be it the personnel manufacturing shoes or sales people who convince customers to buy those or people involved in smooth functioning of the administrative department of the company. ALDO realises that being at the cutting edge of international fashion is one of its strong points and thus ensures that its fashion designers are always on the prowl in international fashion capitals to be the first company to get a whiff of the next emerging fashion that would be a rage within a very short time. In this way, ALDO is always ready with its merchandise when the market demand is at its peak. This not only ensures high turnover but also an ever growing band of happy and satisfied customers.

Training and Development department of ALDO relentlessly works towards raising the levels of efficiency of its manufacturing and marketing personnel and it takes help of latest software and other training methods to ensure people at ALDO are always raring to go and achieve what lesser companies might consider impossible and improbable.

One of the major participants in the ALDO Team is its superlative Research and Development Department that continuously tries to add more value to the product through substitution and product engineering.

Future outlook of ALDO 

The graph of ALDO is on a continuous upswing and it has never looked back since its inception. With a strong customer focus, the main aim of the company is to satisfy customers. As it operates in high fashion segment its clients are also well heeled it does not mind in providing exclusive footwear to its customers. Such exclusivity is attained through total customisation of its products to satisfy every whim and fancy of customers. It is but natural that it is made possible through continuous interaction between the company and its valued clients. Such a flexible and accommodating attitude has only made it more popular among the rich and famous of the world.

ALDO plans to expand its footprint in the small island of Cyprus in Mediterranean as well as the throbbing and buzzing markets of Far East and by the first quarter of 2011 it plans to reach the landmark of 1000 company owned stores spread over forty five countries of the world.

It is also planning to go green and help in environment protection.

Gap Analysis

There is always a difference what we have achieved and what we desire to achieve and this gap between our achievements and our dreams propel us to push ourselves further. What is true for an individual is also equally true for a company. The only difference is perhaps that in case of a company the whole process is more organised and documented so that all  relevant  members of the company are able to take part in the process of filling in that gap  between where the company is at the present moment (also known as Current State) and where it wants to see itself (also known as Future State) after a specific period (Gerhard Johannes Plenert – 2007).

The basic reason for a company is not being able to reach the desired position is a mismatch or imbalance between optimum allocation of scarce resources at its command and current status of allotment prevailing within the company or organisation. Gap Analysis allows an organisation to correctly evaluate and pinpoint the areas of this imbalance and work on ways to rectify it.

This analysis commences with fixing the targets of every department – right from procurement to final despatch. Once these targets or benchmarks are set, it becomes that much easier for the company to modify its existing activities so as to achieve those benchmarks.

Generally the benchmarks are determined through industry average and the difference between industry average and firm actual is termed as “gap” that the firm intends to bridge. The analysis of gaps and attempts to bridge constitutes the essence of Gap Analysis. Such gaps can be found out in different areas, as:

  1. Business trend as opposed to firm’s trend
  2. Organization structure of the firm as compared to common organisation structure in most firm of the industry
  3. Extent to which Information Technology tools and techniques used in the firm
  4. Business practices followed by the firm as compared with popular business practices in the industry

Relevance of Gap Analysis in an organisation

A question might reasonably be asked at this stage as to why a company will take so much trouble in undertaking such an analysis. A simple answer to that query would be this analysis satisfies the need for adjustments and modifications that are necessary for a company to achieve its professed target. Such an analysis might also become necessary to efficiently tackle a change in demand structure or some changes in market equations. Such changes in demand structure often takes place due to changes in tastes and preferences of customers and market equations might change due to entry of a new participant or exit of an established operator. For companies as ALDO that thrive on the cutting edge of international fashion that is fickle, to say the least, such an analysis is almost a daily routine if it wants to retain its position as market leader.

Often, as is the case these days, rapid technological changes render exiting technologies obsolete almost overnight and a company finds itself with grappling with new problems that come along with new technologies. It is practically a Hobson’s choice for most companies as they neither can ignore latest technology nor are they enthusiastic about embracing the new changes as it would automatically lead to a lot of alterations and modifications in its existing procedures and schedules.

However, this so called gap has to be reduced by every company if they want to stay afloat in this world of cutthroat competition.

It might be mentioned at this stage that while Gap Analysis tries to ensure that organisation remains efficient and profitable, Lean Management also has similar objectives and hence these two are perfect complements of each other.

Stages in implementation of Gap Analysis

There are three broad steps in analysing the gap between Current State and Future State and they are:

Gap in usage

The term ‘usage’ means the number of customers that opt for products that a company has on offer. It is quite obvious that every company would ideally try to ensure that each and every consumer buys only the products that they market and the gap between the number of customers that actually buy their products and the total number of customers in a market would put in clear perspective the ground that a company needs to cover. However, every company is practical enough to realise that it is not possible to sell their products to all the customers in a market. Hence, while calculating the gap in usage every company factors in certain percentage of market that would certainly be cornered by their rivals no matter how hard they try to prevent it and then sets a target that they might realistically achieve.

Total potential of the market

The calculation of possible market demand is done through market research made by the company as well as from data purchased from companies engaged in market research. While calculating total market demand, demographic structure of markets and average purchasing power of customers visiting a particular market are taken into consideration to derive a realistic figure.

Current levels of market share

This is available with the company as it knows the volumes it is able to sell and is also aware of the total potential of the market. It is thus very simple arithmetic to calculate the share of market that the company controls.

Thus, gap in usage is calculated as a difference between total potential of the market and the current level of market share controlled by the company.

For most companies this gap can be made up by increasing the scale of their operations and that requires time. Thus this gap analysis also serves as a guide for future expansion.

It must also be mentioned that usage gap does not happen only for companies that operate in competitive markets. It is also an issue of concern for monopolies as well since they should aim at literally winning over all potential customers together with those that actually come to the market and buy their product. Else, these monopolies would also reach a state of stagnation where the only hope of increasing turnover would be through an increase in total population. If the percentage remains the same, an increase in total would obviously result in an increase in the number of customers. But that is not what any progressive company would depend on. Rather, it would act proactively to bring in its fold all those that are still not interested enough in their products. 

Segment gap

It is not possible for any company to have a product for every segment of the market. Hence, it does not have any market share in those segments where it does not have a product. All progressive companies, especially those operating in fast moving consumer goods category, always try to be present in every segment to reduce the gap in usage. In fact, market segmentation to ensure better focus in every segment has been a very popular and persistent approach of these companies.

Gap in Competition

Only a monopolist can sit back and relax as it does not have face the heat of competitors breathing down its neck. But the situation is not that easy going for companies that battle it out in ferociously competitive markets. In such a pressure cooker type of situation the difference between the company and its competitors is of paramount importance for the management. This gap signifies the status of a company with respect to other companies in the market. This gap also indicates the ground that the company has to cover in order to grab the position of the market leader or the efforts the company has to put in to retain its position. Such efforts are mainly directed at marketing and are characterised by innovative advertisements or promotions. Improvements in product quality, though repeated in almost every book of management, is hardly required since in a fiercely competitive market all marketers deliver products that are comparable with other products in the market. Any deficiency in quality will automatically drive out such a producer, so simply in order to exist in the market; no company can afford any slip ups in quality.

Mapping of Value Stream

This is one of the most popular tools of Lean Management through which a company is able to put in proper perspective all the activities undertaken by it from the angle of value addition. By clearly perceiving value addition done by each activity, the company is able to identify the activities that actively contribute to the value of the final product and activities that do not do so. It would perhaps be superfluous to state that all those activities that do not add value should be mercilessly weeded out. But, any such weeding across the board might be counterproductive in some situations since in every company there are activities that do not add any perceptible or tangible value but are absolutely vital in maintaining the work culture or personality of the organisation. If such activities are also pruned out, they might adversely affect the market standing and reputation of the company as a corporate citizen.

Generally this mapping of value addition is done by diagrammatically representing the present production flow chart and information flow chart in the organisation. Just as in any other flow chart, the cycle time and floats in the production process are mentioned against each node thus giving a complete picture of how production is done in the company.

As against the present scenario, the desired scenario is also exhibited in the form of another flow chart with desired lead times and floats mentioned against each node. The desired lead times are reduced to the extent it is practically feasible without causing severe strain on the production process and after factoring in the delays that would creep in due to no fault of the production or procurement departments. Issues such as lack of power or labour unrest must surely be considered before drawing up the desired lead times. If such considerations are not accommodated, the flow chart that represents the desired Future State would only remain as an intellectual exercise without ever being translated into reality.

It must also be remembered that mapping of the value stream and drawing up a Future State flow chart is not one off activity. It needs to be continually updated and worked upon to enable the company not only to reach the heights of excellence but also remain there for long. This is necessary since competitors will always try to outsmart this company and it therefore needs to be on its toes to thwart any possible moves by competitors to usurp its preeminent position.

It should also be appreciated that any improvement in value stream cannot be achieved through the efforts of the production department alone as it depends on almost all other departments, be it procurement, logistics or marketing to make it a genuine success. Any shortcomings on the part of procurement department might result in production delays on account of non-availability of material or hindrances in smooth production flow due to poor quality raw material. Similarly, any shortcomings on the part of the marketing department may lead to stockpiling of finished goods inventory.

Analysis of Value Stream

Drawing of a flow chart might seem to be an easy matter but it is not so, especially in production processes that are complicated and involve a lot of sub processes. However, the flow chart needs to be easily intelligible to every supervisor on the shop floor so that they can manage operations in their areas accordingly. For this, drawing up a value stream chart should be left to specially trained people who would remain sensitive to the requirements of making this chart a genuine and practically beneficial tool for the company.

Identify the product or service to be Mapped

The company should start by identifying the target product or service for which mapping is necessary. It is done by first determining what would be starting and ending points of the production process where Lean Management techniques is to be implemented. Then from this map one can figure out the obstructions and worthless activities in the complete process. The company can also classify certain portions of the whole production process where it feels removal of unnecessary float is required.

The relatively straightforward and uncomplicated process of converting an order placed through internet into despatching the finished product is considered for constructing a Value Stream Map.

Visualising the map of the prevailing value stream

Using special standard codes, the Current State map is drawn which portrays the current flow of materials and information through the production process and relevant departments of the company. The flows that are to be considered for this purpose would also include the flow through supply chain as well as flows through planning and design departments.

The company makes it a point to include those workers or employees who are stake holders in the progression, or in the administration and the supporters of various part of the value stream. Not only the above stated workers but also the recruiters and managers or team leaders are also taken into the account so that the process of creating VSM does not go haywire. The VSM should be based on more of the realistic ideas rather than idealistic ones.

The common activities that need to be included in this flow chart are:

  • Acceptance and processing of an order
  • Managing Supply Chain
  • Organising and monitoring levels of inventory
  • Order scheduling
  • Packaging
  • Shipping

It depends upon the procedures the responsibilities of that area of the VSM hence defining the extent of the process.

Analysing the Present State

The Current value stream should be analysed threadbare to identify the following:

  1. Identifying activities that add value: The point where value is added to the product or service offered by the company. The value-added activities are the processes where value is added to the inputs so that the final product is able to efficiently satisfy consumer needs.
  1. Identifying activities that do not add value: The people at Toyota Corporation feel that any production process generally has three main types of waste which they term as Muda, Mura and Muri. The lesser these wastes would be, the greater would be the efficiency of the company and, quite naturally, the higher would be the profit. TPS brings in a new awareness about these wastes which under normal circumstances would never be considered at all. This awareness about avoidable waste is the unique contribution of Lean Management system.

There are seven most common types of waste that are usually present in any production system.

  1. Overproduction: This is the worst type of muda in any production system. It is even more harmful since those that are responsible for it do not consider that are doing something that they should not do, rather they are proud of it. This might sound pretty confusing, so it is necessary to further elaborate to clarify the issue. The most common unit of measurement of productivity is the number of units produced during a day or a shift. So, every Production Manager would try to produce as much as possible within a particular day or shift. This might lead to a glut of not only finished output but also work-in-process that will result in completely undesirable blockage of capital thereby sharply increasing the interest burden of the company. Moreover, excess inventory will clutter both the shop floor and also the warehouse meant for finished goods. That the warehouse meant for raw materials will also reach the point of bursting due to this wholly unwarranted spree of overproduction needs no special mention.
  2. Avoidable transportation: The transportation does not pay for the any adjustment to the product which the customer would pay for. Besides the more transportation of the product the more risks are involved like misplacing, spoiling, deferring, etc. and also the cost of transportation.
  3. Inventory: If the inventory does not take a shape of the product it adds up to the waste of capital expenditure in the business process.
  4. Motion: Here motion is not of the product but of the repetitive assets and the incurred charges by the manufacturing procedure.
  5. Defects: Many functions like introducing additional outlays, alterations happened in the specific fraction, rearrangements of the production process, etc.
  6. Over processing: This is also a waste that often escapes the eye. If more labour that what is absolutely necessary are employed in a particular process and if each such labour is actively engaged in the production process then such a situation is termed as over processing. Such over processing does not add value to the product but surely increases the cost of production.
  7. Waiting time between processes: This is a very common phenomenon in any production process when output from preceding process faces delay or waits idly because the succeeding process is not yet ready to receive it. The time lost in waiting is essentially lost production units as the efforts spent in terms of material and labour prior to the node where the delay occurs are not converted into production. That is to say, the company would not have lost any production even if the preceding units did not produce those many units that are kept waiting. Hence, the efforts spent in producing those units add to the cost of production without any commensurate increase in output.
  1. Identify those activities that do not add value but cannot be pruned: As has already been mentioned, there are certain activities that must be retained even though they do not add any value.  Care must be taken to not suspend those activities.

Drawing a map that represents the Future State

While drawing the map that reflects the desired Future State following points must be remembered:

  1. Eradication of unnecessary endorsements or shifting them to prevent the non essential work.
  2. Ensuring proper documentation of information flow which can be either on paper or through electronic medium.
  3. Implementing lean management techniques in warehouse management.
  4.  As a corollary of the above requirement, putting in place a rational system of inventory control.

Planning to implement the Future State

Many companies use lean progression techniques at this point that include Kaizen, Kanban, JIT, and the like. The time consumed to implement the plan drawn will be reimbursed by the tagging off the processes well.

Implement the Plan

Implementation of this plan does not happen overnight and the minimum time it takes is a week. It must be remembered that the transformation from Current State to Future State should be gradual as any sudden jerk might totally upset the production schedule and badly affect the output level.

Evaluation of results and retracing the entire process, if necessary

The final stage of this analysis is in a sense an act of stock taking as it involves measurement and analysis of improvements that are expected and locating the loopholes that might still be there and are preventing the company from fully enjoying the benefits Lean Management. These loopholes need to be plugged and, if necessary, the entire process has to be repeated till all loopholes are totally eliminated.

To make the mapping process clear and cost effective more often VSM is drawn by hand in pencil. It can be corrected and altered easily when required. Now-a-day’s many software tools are available and they can be used if manual method seems to be too cumbersome or time consuming.

 

CURRENT STATE MAP

Advantages derived from VSM

VSM is an optical structure which analyses of the overall procedure flow. This allows the process to be redesigned to remove the obstacles from the flow of the materials or functions. VSM is based on the lean management concept and uses techniques like takt time and demand pull based production scheduling. Lean Management uses VSM as the principal tool to set off the procedure in motion. To achieve this, waste areas are underlined in the process and subsequently facilitate business activities to eradicate them.

It must, however, be remembered that a value stream map must be drawn using symbols and language that is easily understood by all concerned persons.

The primary benefits of value stream mapping are:

  • It ensures unity of direction as it ensures all efforts are directed towards achieving the overall corporate goal.
  • It makes the communications simple by providing the visual representation.
  • Everyone can view the waste in the process hence helps focusing in the right direction.
  • Helps to get the basis on which the lean initiatives are taken for the customer.
  • It is cost effective as no sophisticated software or hardware is necessary. However, in the initial stages some effort is required to do the basic work. Equipments used are pen and paper.
  • On the basis of value stream effective discussions and decisions are done.
  • It elaborates awareness about consumer requirements and clarifies the flow of materials and information through the enterprise.
  • Experienced and efficient workers can repeatedly perform VSM to achieve a better business system.

Negative aspects of VSM

There are some disadvantages of Value stream mapping which are as:

  • Only one product or one merchandise type is studied as per VSM.
  • VSM only represents a graphic presentation of the condition on the structural ground at specific time.
  • VSM is not a regular overview of the real situation of the production.
  • With the suggested new systems or blueprint, testing could be challenging.

VSM is mostly made use of to identify the scope of further reductions in lead time. Many well known companies use VSM to achieve outstanding efficiency by ensuring completely uninterrupted and totally lean flow in their production processes. The immediately perceptible advantages are reduction in manufacturing lead time, superior quality output and low inventories.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEVELOPING FUTURE STATE

 

 

 


Mapping the Future Stream of Values

While mapping the value stream in a Future State, bottlenecks where inventory piles up, processes that have poor quality, and operations that require excessive coordination should all be marked with kaizen bursts, as those would be areas of focus to improve the current status of operations. Operations where work gets pushed downstream should also be highlighted.

Once the problems with the current state map are identified, a new VSM, the future state map, is created. This becomes the blueprint for the operation’s Lean transformation. All activities required to achieve the future state should be put into an action plan.

Ideal future state maps should balance need, opportunity, and resources. Teams will often have far more ideas for improvement than can reasonably be achieved in the future state map’s time frame. The future state VSM does not portray a wish list. Rather, it portrays how value stream will really look in future. As projects are completed, current and future state maps should be updated. The effect is that the future state map is always 6-12 months out (Rother and Shook 2003).

Mapping the Present State stream of values is the first step that needs to be taken to achieve tye desired state in future. This would show work processes as they currently exist .This would also give us insight of the requirements of changes in the process. Current or Present State Value Stream allows us to understand of where else the opportunities can be used. Present State Value should be drawn up by a team that would comprise of people from all related departments and it should include the following details:

  1. Total demand per day or per month as the case may be
  2. This demand needs to be broken down customer-wise
  3. Daily inflow of raw material inputs
  4. Daily outflow of finished products
  5. Inventory levels at each stage of production in terms of days of production
  6. Production cycle time
  7. Available working hours per day

PRESENT STATE EXAMPLE

Drawing the map of Future State values

The map of value streams in Future State is more difficult to draw than a map of Current State value streams. It requires a keener strategic, artistic and commercial approach. When a map of Future State values is drawn, certain Lean Management techniques as Cellular Manufacturing, Kaizen, Lot Sizing, Takt Time and Reduction of Setup Time should be liberally used.

 

Measuring Takt Time

If there is a demand for 50 vehicles per day and if the available production time is 8X60 = 480 minutes, the Takt time available at each production station is 480/50 = 9.6 minutes. A job must not stay for more than 9.6 minutes at each production node to ensure that requisite numbers of vehicles are produced to satisfy the existing demand.

Identify bottleneck processes

A bottleneck process is one that has the longest cycle time in the entire production process. There is an old saying that a chain is as strong as its weakest link. Almost in similar lines it might be said that a bottleneck process determines the output of the entire process and thus becomes the basis for scheduling a production programme.

Work balance chart is a very important tool in rational scheduling of a production programme.

Identify lot sizing / Setup opportunities

This is an extremely crucial and sensitive activity. Generally conventional production processes tend to produce that much amount that would satisfy the demand for succeeding process for at least the next seven days. That implies an unnecessary inter-process inventory build-up amounting to 3.5 days of production. This reduces agility of the organisation to adjust to sudden changes in demand but reducing lot sizes arbitrarily would also result in increase in setup time. So, a judicious reduction in lot size has to be implemented that reduces unnecessary stockpiling of inventory without radically increasing setup times.

Identify potential workcells                       

This essentially consists of balancing and smoothening out inevitable differences in production cycle times so that production is carried on in an uninterrupted manner without unnecessary stockpiling of inventory at any stage.

From the bar diagram cited above we observe that cycle times for “Cin and Debur” and “Packaging” are considerably lesser than Machining and Honing operations. Incidentally these two operations are very well balanced. So, the only plausible way to balance cycle times of the entire production process would be to increase the cycle time of “Cin and Debur” activities by substituting automated activities with manual or semi-manual operations.

However, there is not much scope of increasing cycle time in “Packaging” department as it is already a predominantly manual process.

Determine Kanban locations

As there are only five cells, intra scheduling is not an issue as all these cells would be a part of the continuous flow of jobs and hence any internal Kanban is not necessary.

Kanban, however, is applicable at the beginning and end points of the production process. That is, at the point where raw materials enter the factory and at the point where the finished products are despatched, to ensure lean management and reduced levels of inventory. Thus, inventory levels would be best indicators of Kanban.

Establishing proper schedules

Proper management supply chain is essential for lean management and for that stable forecasts are necessary. These forecasts would allow suppliers to accordingly schedule their production to ensure timely and uninterrupted delivery of raw materials and also provide sufficient time to the work cells so that they are able to arrange proper manpower to carry out production in an uninterrupted manner. Generally the forecasts should be made on a monthly basis. Procurement department must also ensure availability of funds so that regular payments are made to suppliers and this can be possible only when annual orders are placed on suppliers with strict instructions for staggered and uninterrupted delivery.

 

Calculation of Lead and Cycle Times

This is the concluding step of the mapping process and it throws up the result that management eagerly waits for.

THE ‘COMPLETED’ FUTURE STATE

 

Shortcomings of value stream mapping

 

  • If there is more than one product that require different set of raw materials, this method is not suitable for portraying the Future State.
  • This method is unable to quantify and suitably factor in delays that might occur due to reasons beyond the control of production department. There might be transportation problems while semi-finished components are transferred from one process to another and there might also be less than optimum movement of material within the production premises owing to poor plant layout. These are reasons that cannot be tackled by the production department and they should be given proportional leeway while lead time, cycle time and takt time are calculated. But this system has no in-built systems to provide such cushions.
  • While it is termed as mapping of value stream it does not quantify value in terms of money. Hence, the impact of such a method is lost on management which is primary concerned with turnover and bottom-line.
  • Is most suited for continuous assembly line operations that operate on a demand-pull system. Such operations are mainly adopted by manufacturers who operate on a large scale and deal with only a few products.
  • Pays scant attention to efficient utilisation of space on the shop floor. This is a very important factor in determining overall production efficiency and any calculation of value stream without considering this factor would seldom provide a correct picture.
  • This method does not have the in-built agility that is extremely necessary to handle sudden and unexpected changes in demand schedules that is almost a daily occurrence in fashion and construction industries.

 

 

 

 

 

 

 

 

 

 

 

 

DISCUSSION


 

Thoughts on Lean Manufacturing

Lean manufacturing defines the value of a product or a service from the customers’ perspective. They do not care about how much effort and inputs have been put in or which special technology has been used to create the product or service they are buying. Their evaluation of the product or the service is done by the ability of the product to satisfy their requirements. The most outstanding feature of Lean Manufacturing is guaranteed quality which is automatically achieved either by sending a warning signal to workers or by halting the manufacturing process which is restarted only after the fault is fully rectified (Lean Manufacturing Basics, Aza Badurdeen).

In the event of a stoppage of work due to quality problems, workers involved in that process are made aware of the reasons as to why that defect surfaced and are sufficiently trained to ensure that such defects never recur. If necessary, a new production process is introduced if the defect had occurred due to a loophole in the production process itself.

If there is a quality problem with a particular product or if it is unable to completely satisfy the customer, minimal changes are made to the existing product till it is able to completely satisfy the customer. The entire product is not discarded. As soon as the customer signals his approval a corresponding signal is sent to production department to commence production with indicated alterations and modifications. The production process is lined up in such a manner only replenishment of stock at each stage of production is done. There is no overproduction leading to unnecessary stockpiling in inventory.

Care is taken to avoid any form of urgent or rushed production as that requires extra manpower that otherwise could be avoided if production is levelled out at an even pace throughout the available lead time. If 1000 units are to be despatched within 25 days, every day 40 units are produced instead of producing the entire quantity within the last five days while doing nothing about this order during the first twenty days.

With passage of time, customers also start believing on the ability of the company to supply regularly and in time. This leads to placing of long term orders having well spaced delivery schedules with no scope of any urgent or rush orders. It is needless to add that such mutual trust between supplier and customer leads to financial gains for both.

Lean manufacturing offers few ready to use and proven solutions for any industry. But to use them we have to customize these solutions to according to the organization. To use these techniques one should start with lean thinking.

Synopsis of Just-In-Time Manufacturing

The basic driving force of JIT Manufacturing is a firm belief that any idle inventory is a drain the scarce resources of the company. This concept, it is needless to emphasise, forms the foundation of Lean Management techniques. Just-in-Time can be achieved only if there is perfect coordination between purchasing, production and distribution functions of an enterprise.

If demand can be accurately predicted, it might be used to calculate the total requirement of raw materials and devise a ration schedule of inflow of raw materials. If the scheduling has been done properly there will never be any unnecessary stockpiling of raw material inventory. However, the production department must also play its role by maintaining a steady rate of consumption of raw materials and distribution department should also ensure that there is no slow moving inventory of finished goods. If all of these three departments act in a coordinated manner, there would neither be any unnecessary stockpiling of neither raw materials nor work-in-process nor finished goods and the enterprise can function effectively by carrying bare minimum levels of stock.

However, the production department must remain vigilant in calculating the requirement of inputs and streamlining the flow of raw materials. Use of software often helps to solve this critical problem by helping production and purchase departments to ensure that required raw materials are regularly supplied to production department just at that very point in time when they are necessary.

JIT inventory scheme can be described as a system that provides material of requisite quality, at the right time, at the exact place and in the precise quantity without the safety network of inventory. The implementers have a broad purpose for this. Hence we can say that JIT is a prescription of constant expansion by eliminating non value adding activities and ensuring cost reduction, improved performance, improved quality, improved delivery and enhancing innovations. These characteristics of JIT automatically improve efficiency and profitability of an organisation.

Advantages derived from Just-In-Time technique

  • Working capital that was locked in inventories is freed.
  • Areas previously used to store inventories are lessened saving upon the rentals and insurance expenses.
  • Reduced output time creates the scope of further output and lends greater flexibility in the organisation as it is able to respond more quickly to customer requirements.

Problems faced in implementing Just-In-Time technique

  • It might be an expensive and difficult proposition to apply JIT procedures in the business as it might require a radical overhauling existing procedures and techniques.
  • It will surely expose the business to risks of disruption in supply chain like supplier’s delivery delay or unexpected orders that have to despatched on an emergency basis.

Total Quality Management

The basic objective of TQM is to do lean management in manufacturing or providing service. TQM techniques increase the customer contentment, reorganize supply chain management and effectively train the workforce. TQM aims to reduce quality defects by statistical analysis, quality audits, teamwork, quality standards, relationship between suppliers and consumers to clearly understand the requirement for the final product.

Sometimes people tend to confuse between TQM and Six Sigma. While TQM focuses on the entire management mode of a company and satisfies the internal desire of a company to improve in all spheres of activity, Six Sigma focuses on improvement of the quality of the finished output and tends to eliminate errors in the production process that might have led to such quality problems (Total Quality Management (TQM) By R. Ashley Rawlins).

Total Preventive Maintenance (TPM)

It is a program used for maintenance of plants and equipments of a manufacturing organisation. The aim is to increase productivity along with greater job satisfaction of employees which would automatically boost their morale.

The machine operator who is in constant touch with the machine is trained to carry out regular routine maintenance of the machine. This does not mean that maintenance department is totally done away with. It only means that the machine operator also becomes a part of the maintenance team that consists of several experts.  As the operator takes care of routine maintenance and immediately informs the experts if there is a problem that is beyond him to tackle, the possibilities of total breakdowns are almost totally eliminated. The machine operator also enhances his job skills by learning basic maintenance over and above the operating skills that he already possesses.

Implementation of TPM

(Plant Maintenance Resource Center 2009)

TPM rests on eight pillars, so to say, and strives to achieve a situation where there will not be any losses due to breakdown of machines or stoppage of production due to some malfunction or the other in plant and machinery of a company.

  1. The first pillar – 5S

A disorganized workplace makes it doubly difficult to identify maintenance problems. Hence, before tackling the disease the patient should be made to follow basic rules of hygiene. Only when a workplace is neat, tidy and well organized is it possible to identify the root cause of a maintenance issue. TPM thus sets out with the objective of organizing the workplace through the following activities:

Seiri (Sorting out): There are three categories of items that are present in every workplace, and they are items that are critical, items that are important but not critical, items that are regularly used but are neither critical nor are they important and items that are not immediately needed but would be required at some later stage. There are of course waste and scrap and redundant items. Critical and important items should be kept at hand and all other items that are not in used at present should be stored at some other place. Gradation of an item is to be determined by its relevance and not on its cost. Such a sorting out and rearrangement would drastically reduce the time spent is searching them.

Seiton (Proper Organisation): Every item should have a designated place where it is to be stored and should be put back to its designated place after use. If necessary, proper tags and identification symbols should be inserted and these tags should be legible even in darker corners of the shop floor. Vertical racks would be ideal to store such items and heavier items should be kept at the bottom while lighter and handy items may occupy higher shelves.

Seiso (Shine the workplace): Cleaning is an important part of this step. It involves cleaning the workplace like no loosely hang wires, free of oil, clear the extra grease, removing the scrap, no oil leakage from machines, etc. 

Seiketsu (Standardization): To maintain the standard of cleanliness in the workplace this is decided by all the workers of the company. To keep up to the standard random inspections or tests are done.

Shitsuke (Self discipline): Following the 5S way the employee should pursue the self discipline. This involves wearing proper uniforms, strictly following work processes, loyalty towards company, staying punctual, etc.

  1. The second pillar – JISHU HOZEN (Autonomous maintenance ):

This is a policy of making machine operators responsible for regular maintenance and minor repairs of the machines they work on. This frees the more skilled maintenance staff to concentrate on more crucial issues rather than spend their time on regular and routine maintenance.

The Jishu Hozen policy can be summarized as:

  1. Continuous operations of the equipments.
  2. Operators provide enough flexibility to operate and maintain the other equipments.
  3. Through active employee participation the defects can be abolished.
  4. Following the stepwise execution of JH activities.

Jishu Hozen activities are aimed at the reduction on the working capital by half as the oil consumption is reduced, cutting back of the process time, etc.

The steps of the Jishu Hozen are as following:

  1. Training of Employees:

The employees must be made aware about TPM and its uses, JH steps and its rewards, etc. Educated employees help in the overall growth as they would understand their responsibilities and would be able to quickly identify any functional problems in the machines and equipments they work on.

  1. Cleaning up of machines:
    • Outer part of the machine should be free from dust, oil and grease; as well the inner part should be taken care of by repairing any kind of leaks, and fastening of any nuts or bolts that might have become lose through regular use, and identifying and, if possible, replacing depreciated parts.
    • Then the tagging step is followed by describing the tags for certain problems, specifying the further skilled maintenance and documenting the tags suitably.
    • Taking adequate care of the areas which are inaccessible by the maintenance staff.
    • The exposed parts of the machine are covered and the machine is started.
  2. Setting up a Maintenance Schedule:
    • There should be a schedule for inspection, cleaning and lubrication of machines and this schedule has to be strictly adhered to by employees who are responsible for these activities. A proper log book should be maintained where details of previous inspection are to be noted.
  3. Routine Inspection:
    • The employees should strictly abide by the inspection manuals that the company introduces for this purpose and always be ready to share their knowledge with others too.
    • With the newly acquired technical knowledge, the operators become more confident of operating their machines and become more aware of its various components.
  4. Special Inspection :
    • New techniques related to lubrication and cleaning up of machines are introduced during such an inspection.
    • Each worker gets a chance to participate in the scheduling with consultation of supervisor.
    • All those parts of the machine which function without any problem are taken out of this special inspection schedule. Which parts would qualify for that distinction would be determined by the workers by virtue of their long term association with these machines.
    • To avoid the defects in JH the good quality machine parts are used.
    • The rate of inspections and cleanups are reduced through the experienced employees.
  5. Standardization :
    • The surroundings of the machinery are organized in this step. Like the necessary items used are organised in the manner were searching to time is reduced.
    • Work place surroundings are modified so that any item that is required can be traced without any problem.
    • This has to be followed by everyone very strictly.
    • Everybody must adhere to the work manual scrupulously.
    • Essential auxiliaries necessary for running the machines are procured through advance planning.
  1. The third pillar – Kaizen or the Early-Phase Management:

Kaizen literally means revolution for betterment. Unlike thorough modernisation that requires substantial investment and a shakeup of existing structures, Kaizen hardly requires any investment and it is initiated by the workers at the shop floor. As they are in constant touch with machines and are directly involved in production process they are the best judges and commentators about the small improvements that might be implemented to cause incremental improvements in the entire production process. When such incremental improvements are taken together, they cause a remarkable improvement in overall functioning of an enterprise. 

  1. The fourth pillar – Planned Maintenance:

Planned maintenance aims at ensuring that machines do not suddenly breakdown causing a complete stoppage of production.  For better management and supervision, planned maintenance is generally further broken down into maintenances that are preventive, breakdown, corrective and protective in nature.

Planned maintenance guidelines are for the machine’s sustenance, reliability, optimum maintenance, availability and reduction spares inventories. The planned maintenance helps in avoiding breakdown of equipment, improved reliability and maintainability, reduced maintenance cost and assurance of spares availability.

Following steps are followed in setting up a planned maintenance schedule:

  1. Every machine is properly and carefully evaluated from the perspective of its productive efficiency and the details of such inspection are noted down in the logbook maintained by maintenance Department.
  2. Wear and tear that is natural with any machine is halted through proper repairs which are aimed at improving the longevity of the machine.
  3. Putting in place a proper procedure of periodically collecting, collating and disseminating all relevant information about each machine that is installed within the premises.
  4. Periodic evaluation of the efficacy of programme of planned maintenance.
  1. The fifth pillar – Quality Maintenance:

The ultimate objective of any organisation is to satisfy its customers. The only way to achieve complete customer satisfaction is to provide products that are of very high quality that is consistently in every batch. Since quality of output has crucial bearing on the very existence of an organisation, every management is very particular about it and pulls out all stops to achieve consistency in standards of output that passes out of the factory gates.

Such consistency or minimisation of non-conformities can only be possible if the tools, equipments and machines operate at their peak capacities and never trouble the workers who can then concentrate entirely on producing high quality output. Quality maintenance takes a very organised, systematic and rational approach to the whole issue and strives to contribute by ensuring machines function without even the slightest of trouble.

The stated objectives of Quality Maintenance are:

  1. Maintaining the machines in such a manner that they function without any trouble.
  2. All activities of Quality Maintenance are directed towards assuring a steady quality each and every batch of output.
  3. Identifying and rectifying defects at their origin before they spread out elsewhere and cause significant disruption of production process.
  4. Try to implement a system that is fool proof and would under no circumstances allow any unexpected hold ups in the production process to take place.
  5. Constructive assistance towards improving operator efficiency.
  1. The sixth pillar – Training and Education:

The basic objective of training and education is to have a well qualified and self motivated workforce that is willing to go that extra mile to serve the interests of the organization. This can be achieved only when employees are aware of why they are carrying out a particular activity. Once they become aware of it they would automatically become more interested in their jobs and it would lead to an army of dedicated and committed workers.

The training should be done in a systematic manner starting with the primary stage when a worker does not know the theory behind the job he is carrying out every day. Upon being imparted the theoretical knowledge the worker would be in a position where he knows the theory but not able to implement it in a practical scenario. Let us take the case of a worker in steel rolling mill. He might be working for years on a particular machine but does not know how it works. Once the required theoretical knowledge is imparted, the worker would be able to describe how the machine works, but in case the machine develops some problem, he would not be in a position to rectify it.

In the third stage the worker is given sufficient training so that he is able to rectify faults in the machine that he operates but he is still not in a position or is confident enough to teach others how to repair or maintain the machine.

The fourth stage ensures that the worker is able to efficiently impart his knowledge to others and is also able to train several other workers. Once this process starts rolling, it would not be long before all the workers become experts in maintenance and the organisation can radically trim down its maintenance department. 

The policy behind the sixth pillar is:

  • To develop and disseminate requisite skills and knowledge among employees.
  • Creating an ambience that would motivate employees to come forward on their own and enhance their skills in areas that they feel necessary.
  • Preparing training materials and procuring latest tools and implements necessary for imparting training at workplace.
  • Impart such training that reduces employee fatigue and consequently raise their morale.

These days, technological innovations are literally falling over one another to reach the market and every organisation needs to be at the cutting edge of technology in order to survive and prosper in the fiercely competitive market conditions. Training and education of employees plays a very big role as they continually upgrade the skills and capabilities of employees of an organisation. Thus an organisation that is equipped with an efficient training and education department will never have to endure downtime due to non-availability of suitably trained employee to run its sophisticated machines.

  1. The seventh pillar – Office TPM

Generally when discussions are being done regarding efficiency and productivity the immediate image that comes to our minds is that of a shop floor. It is undoubtedly true that efficiency at shop floor is of utmost importance but efficiency at offices of an organisation is equally important for the entity to survive and prosper as a commercially viable business unit. As already mentioned earlier, the main objective of TPM is to ensure an uninterrupted productive ambience by maintaining all equipments and machines that are present in a company. It is quite obvious then that such an all pervasive maintenance program would also take within its folds maintenance of equipments used in office. If all desktops functioned without a glitch or all fax machines performed with clockwork precision turning out razor sharp copies one after the other without a break, productivity in offices would surely increase manifold. With increased degree of automation, the importance and relevance of TPM at office is increasing by the day. Each business unit is reducing manpower and becoming more and more dependent on machines. Therefore, if there is breakdown of an office machine, the consequences could be as disastrous as a breakdown in a vital machine at the shop floor.

Introduction of TPM at office would also ensure improvement in efficiency through proper organisation and utilisation of office space and pruning out monotonous work to the minimum extent possible. It hardly needs to be emphasised that reduction of monotony at workplace increases employee efficiency.

Expenses on postage and office stationery, though insignificant when compared to expenses on raw materials and consumables, are nonetheless significant when viewed in absolute terms. TPM in office ensures drastic reduction wasteful consumption of such items which contribute their small mite towards improving the bottom-line of an organisation. Hence, unnecessary though it might seem at first glance, total preventive maintenance in the office of an organisation is equally beneficial to the overall efficiency and productivity of the business.

  1. The eighth pillar – Safety, Health and Environment:

Activities connected with this pillar touch upon the establishing the safe and secure work place and a neighbouring region which is neither polluted nor exploited by our process of production. This is important pillar in all the above mentioned above pillars as it has to be in regular and habitual basis. The achieving the success in this process a group of experts is composed from all the levels of company’s management like managers and workers.

 

 

 

 

 

 

 

 

 

 

 

 

CONCLUSION AND RECOMMENDATIONS

 

 

The basic purpose of any production process is to add value to the raw materials that are introduced in the process by utilizing the available labour and capital in the most efficient manner possible. It is pretty obvious that the production process will most certainly be geared towards producing those items that are in greater demand as any business entity tries to shorten the working capital cycle as much as possible so as to generate maximum amount of profit in the shortest possible time frame. But there is one other element that affects the overall profitability of any organisation, and that is the volume of capital employed. As any student of management accounting is aware of, the quantum of capital employed in plant and machinery is more or less uniform across an industry as all players generally opt for the latest technology so as to enjoy maximum levels of operating efficiency. So, there is not much to differentiate between the competitors in that regard. But the area where the leaders leave the stragglers behind is supply chain management and inventory control. If a proper and taut control over inventory is not maintained, the level of capital employed can never be brought down while keeping the operational efficiency intact.

Tight control over inventory levels can be maintained if and only if an organisation implements Toyota Production System which is another name for the manufacturing system innovated by that giant of automobile industry. But TPS is not restricted to automobile or manufacturing industries only; it can be applied to any form of industry including service industry too. TPS brings in its wake Lean Management techniques that automatically reduce levels of inventory across the board in any industry and also remorseless weeds out non-value adding activities irrespective of how dear or hyped those activities might be. Thus, it is a common sight to suddenly find that some activities that were till the other considered sacrosanct and highly confidential suddenly become irrelevant and redundant overnight. This happens because in enterprises which have been functioning for decades it is bound to have some activities that have remained simply because they were there since ages. Nobody dares to question the effectiveness or necessity of such activities and they keep on being performed without adding any value to the final product and only causing a wholly unnecessary drain on scarce resources at the disposal of the company.

Lean Management techniques identify such activities and prune those out resulting in overall improvement in the efficiency of the enterprise. These techniques also improve employee morale through proper and scientific training and create proper ambience at workplace that further increases productivity and efficiency of workforce.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCES

 

 

 

 

 

 

 

 

 

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  2. Bennett Harry; and Marcus Paul (1951); “We Never Called Him Henry”.
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  4. Locher, Drew. Value Stream Mapping for Lean Development: A How-To Guide for Streamlining Time to Market. Productivity Press, 2008.
  5. ReVelle, Jack B, John W Moran, and Charles A Cox. The QFD Handbook. Wiley, 1998.
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  2. Daniel T. Jones & Womack James P(August, 2003). ‘The Lean Thinking’,Page no 352.
  3. Ferdman, B M. “The dynamics of ethnic diversity in organizations: toward integrative models.” In Issues, theory and research in industrial/organizational psychology, by K Kelly (Ed), 339-384. Amsterdam: North Holland, 1992.
  1. Ford, Henry; with Crowther, Samuel; (1923). “My Life and Work”, United States Of America
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  4. Gilliland Michael (2002), “Is Forecasting a Waste of Time?”
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ANNEXURE

CASE STUDY: BAY STREET

Bay Street is an urban retail developer whose flagship project is a million square foot urban development project for retail outlets at Emeryville in California. Though development and construction of residential units is also a part of the entire project; that part is not the subject matter of the current case study. As the first part project itself was huge, management categorised it into five different sectors from A to E. This was deemed necessary for better management and control while executing the project.

The retail project was initiated as Design-Bid-Build endeavour and the services of an architectural and firm was sought to complete the architectural design as well as the electrical and mechanical designs that would blend perfectly with the architecture. The architectural firm was chosen in August 2000 and they set off to prepare the blueprint of the electrical design within November 2000. By May 2001 the blueprint was finalised and an electrical contractor was given the job of implementing the blueprint. A civil contractor (the PM Company) had already been appointed a couple of months earlier and by early summer that year civil construction had begun in full swing.

By November 2002, the development of retail space was completed with a theatre that had sixteen screens and a seating capacity of more than three thousand seats, sixty five shops and a total of nine restaurants. The second stage of the project that consisted of residential units had an expected completion date of December 2003, but as it is not to be considered here, we would focus exclusively on the first part of the project.

OVERVIEW OF DELIVERY PROCESS

The complexity of the project would be clear from the fact that in each building, other than in building E, there is an electrical room having a low voltage switchboard manufactured by Siemens. Building E has not one but two electrical rooms. Each building has 150 panel boards and 8 MCCs and each one of those is unique because of varying tenant demands. The total electrical requirement of Building A is 4000A (the highest among all the five buildings as it also houses the theatre which alone has a power requirement of 2000A), Building B requires 1600A, and Buildings C, D and E requires 1200A, 1200A and 2300A respectively. The local electricity company allowed a peak load of 4000A for each building and anything beyond that required a special permit.

The purchase order for switchboards was released in February 2002 and all the switchboards were delivered at site in May 2002. By mid-June, work started for setting up the first switchboard in Building A and by mid-November installation of the final switchboard in Building E was almost complete. Though the panel boards and MCCs were ordered simultaneously with switch boards the delivery was taken in a staggered manner.

SCOPE OF IMPROVING THE CURRENT SITUATION FOR A BETTER FUTURE

The discussion regarding opportunities to improve is based on interviews and submission made by persons involved with the job. It is observed that there is still a substantial scope of improvement, especially in the design and procurement stages.

Design Stage

A few suggestions for improvement at design stage require almost simultaneous changes in purchasing stage as well. Moreover, if some other suggestions are to be seriously implemented, it will require some organizational restructuring as well.

Streamlining the Document Flow

A restructuring of the organisational setup would, quite obviously, streamline the flow of documents and information through the organisation and would substantially reduce response and decision making time thereby speeding up the entire project. As of now, in the event of a  minor modification of the electrical design; Design Department of Siemens (the manufacturer of switchboards) has to pass it on to the department in charge of ensuring proper despatch of documents throughout the organisation (some sort of a private post office) which then sends it to the electrical contractor who after perusal and necessary comments and suggestions pass it on to the civil contractor who, again after necessary perusal and comments, passes it on to electrical engineer working at site. The electrical engineer, after studying the pros and cons, sends his comments and suggestions that retrace their way through the same route till they reach the design department of Siemens which then sends it to its production department.

The following diagram shows the process of placing orders and initiating modifications that is at present in vogue in Bay Street Company.

If instead, the design department despatches the modified designs directly to the engineer on site and receive his comments and suggestions equally directly, the whole project could be considerably speeded up by eliminating the unnecessary delay of nearly six weeks that elapse between initiation of design modification and commencement of modification activities at Siemens manufacturing facility.

A possible option would be to send the documents via e-mail but that would only marginally reduce the waiting time as the major part of the delay is caused by the seemingly endless flow of the document from one department to the other in Bay Street Company. Such a restricting of document flow would result in eliminating at least five nodes in the communication process.

Manufacturing Stage

It actually depends a lot on Siemens as to whether it would try and reduce its lead time. The first thing which it can do (with active prodding by Bay Street) is to synchronise its manufacturing and despatch schedules with requirements at site. Bay Street might also insist on receiving deliveries based only on actual demand (something akin to JIT manufacturing theory) instead of receiving them in bulk. This would also help Siemens as it would be ordering for components accordingly which would reduce its work-in-process stock substantially.

 

SUMMARY

It seems that procurement and delivery procedures could be substantially improved by eliminating unnecessary flow of documents and sequencing receipt of consignments in accordance with requirement of components at construction site. The basic motto would be to reduce non-value adding activities. Some of basic reasons for such unreasonably prolonged delays in delivery could be:

  1. The amalgamation of the department entrusted with designing switchboards and the department responsible for procurement of those switchboards with other departments that were not involved in such critical activities
  2. Failure to properly connect the entire flow of activities that go into the execution of this huge project leading to a break in the “pull” exerted by requirements at production site on all the preceding activities. This resulted in stockpiling of inventories at some places while there was inordinate delay in other areas on account of improper streamlining of information flow
  3. Almost unmanageably large lots of documents that kept on moving from one department to the other
  4. Unwieldy bureaucratic organization structure at Bay Street Company

 

Global Marketing in Beverage Industry – Problems and challenges of global marketing in beverage industry as observed through the steady ascent of Coca-Cola and Pepsi as global marketers

Filed under: Corporate Management,Marketing — niranjanchatterjee @ 11:06 pm

 

 

 

 

 

Table of Contents

  1. Objective                                                                                                 1

 

  1. Methodology             3

 

  1. Literature Review

 

  • Global Companies             6
  • Global Marketing             9
  • Coca-Cola as a global company             13
  • The Power of Branding             15

 

  1. Findings and Analysis

 

  • Fierce competition between two cola giants             20
  • Consumers gain as cola war continues             22
  • Cola giants close ranks when faced with common threat             24
  • Coca-Cola and Pepsi – why one went ahead of the other             25

 

  1. Problems and challenges faced by cola companies             30

 

  1. A New Threat – Attempted Global Boycott of Coca-Cola and Pepsi 33

 

  1. Sea change in business approach of multinational companies 34

 

  1. Conclusion 36

 

  1. Bibliography 38

 

 

  1. Objective

The main objective of this research paper is to engage in a detailed analysis of the main drivers that motivate the beverage industry towards globalisation and whether there is at all any such absolute necessity for this industry to attempt any form of large scale globalisation. This study also focuses on the challenges associated with globalisation such as determining proper global pricing and product strategies and considers Coca-Cola and Pepsi as two of the biggest examples of beverage companies that have gone global in a massive way.

The project would begin with discussion on what exactly the term ‘globalisation’ has come to mean in modern business and commerce and would then proceed towards a rational examination of the concept of “brand” and its components and the extent to which proper branding can help a product in getting established in the global market without too much of resistance from all the constituents that form a marketplace.

The project will then undertake a general review and analysis of various determinants that play a substantial role in the success or otherwise of a globalisation venture of a beverage company taking the track records of Coca-Cola and Pepsi as frames of reference.

The next and possibly the most logical issue that this project tackles is the relative advantages and disadvantages that are associated with globalisation and how some companies have been able to glean the maximum advantage while some have not been so successful in doing so. The marketing strategies of the more successful ones like the Coca-Cola and those of the lesser participants like the Pepsi have been analysed and an attempt has been made to locate the exact reasons as to why Coca-Cola surged forward while Pepsi lagged behind. One of the reasons might be a reasonable degree of customisation that Coca-Cola implemented, at least in its advertisements, that Pepsi could do not do with such élan as its arch rival managed to achieve.

No study can be complete without a contrarian view and this study of globalisation cannot be complete without a review of the anti-globalisation ideas that have gained considerable ground in recent years. 

  1. Methodology

There are several methods and techniques that can be applied while conducting a study but the two most prominent approaches are the hermeneutic approach and the positivist approach. The positivist approach maintains that truth is observable and can be measured with correct methods. Further, it is also assumed that truth is an inviolable concept that cannot be influenced by the observer.

The other basic approach is the hermeneutic approach that maintains that the researcher should analyze the text from the author’s perspective while keeping in mind the social and cultural milieu in which the text was written. Actually hermeneutics is very closely related to Weber’s concept of Verstehen. In its basic form, this approach to conducting a study focuses on proper interpretation of text (Cooper and Schindler 1998).

This approach is often considered to be a close approximation to qualitative studies as researchers gather data that have to be interpreted properly and placed in the right context to obtain the correct result. Any error in viewing the data out of the proper social, cultural or economic context will most certainly lead to a wrong conclusion (Phillips and Brown 1993).

In the research undertaken in the present instance, there is no scope of adopting the positivist approach as there is no truth as such that needs to be uncovered and dispassionately observed and analyzed; all that is available is a huge mass of data garnered from secondary sources. The approach would be to collate this secondary data in as unbiased manner as possible and attempt to analyze it keeping in mind the socio-cultural milieu to which the particular data alludes to. Thus, hermeneutic approach would be the most suitable approach in the present context where the data available from secondary sources will be critically analyzed to arrive at concrete logical conclusions.

It might be proper to clarify and emphasize at this stage that secondary sources are data that have already been collected, analyzed and results presented by some earlier research process conducted in the related field. For the purposes of current research process, secondary data consists essentially of relevant information published in journals, magazines and websites (Zikmund 2000).

There are certain advantages and disadvantages of basing a research on secondary sources. The main advantage of secondary data is its ready availability in huge quantity and at negligible cost whereas collection of primary data is a very costly and time consuming exercise which is not always possible for every researcher to undertake on a large scale. Simultaneously, the inherent disadvantages of secondary data can also not be denied as the data available in journals, magazines and websites have been compiled by someone other than the researcher and the credibility and relevance of the data can very well be questioned (Emory 1985).

So, in the current research process, the researcher has exercised considerable precaution and judgment before incorporating any secondary data in the research material and can claim with a reasonable degree of confidence that the secondary data is authentic and entirely credible.

Since we will base our research process entirely on qualitative approach, it is perhaps necessary that we also clarify what exactly a qualitative approach signifies. Though it is difficult to give a technically accurate meaning of qualitative approach, all that can be said about this approach is that it concentrates on processes and meanings that cannot be concretely quantified in terms of amount, quantity or frequency. However, such an approach provides a deeper understanding of the researched variable in the larger context of interrelated social forces that combine together to continually influence the researched phenomenon (Hamel 1993).

There are a sizeable number of experts that believe although qualitative approach might not be that sound statistically or mathematically, it indeed provides a far greater understanding of a phenomenon in its socio-cultural milieu which helps the researchers to formulate logical theories about why and how a phenomenon occurs under certain specific circumstances (Markus and Robey 1988).

  1. Literature Review
  2. 1 Global companies

Globalisation in the sense of interdependence among nations is possibly not a very well comprehended concept. International trade and investment is actually controlled by a comparatively miniscule set of multinational enterprises and it has been observed that the largest 500 multinational enterprises account for over 90% of the world’s stock of foreign direct investment and they, themselves, conduct about half the world’s trade (Rugman 2000).

But a large number of these companies are not ‘global’ companies as such since most of them have the vast majority of their sales within their home leg of the ‘triad’, namely in North America, the European Union (EU) or Asia. Kenichi Ohmae, who was a leading McKinsey consultant in Japan at that time, had published a ground breaking study – “Triad Power” in 1985 where he argued that triad – the geographic space consisting of the United States, the EU and Japan shares a number of commonalities: low macroeconomic growth; a similar technological infrastructure; the presence of large, both capital-intensive and knowledge-intensive, firms in most industries; a relative homogenization of demand and protectionist pressures (Ohmae 1985).

This concept was possibly echoed earlier, though not in so categorical terms, by Theodore Levitt when he said consumers, though spread across the length and breadth of the world, are gradually becoming more and more alike in their tastes and preferences and this is resulting in the emergence of humongous global markets for standardised products on an unprecedented scale. Levitt could foresee that large corporations have been able to realise the massive scope of reaping the benefits of such a huge market by increasing the production levels and enjoying economies of scale. He could also envisage how such benefits of economies of scale would translate into cost reductions that would result in price reductions which would be impossible for local competitors to emulate thus resulting in a free playing field for giant multinational companies.

The main reason as to why such accustomed differences in national and regional preferences would gradually melt away, according to Levitt, was an astonishing progress of technology that has revolutionised the way people communicate with each other and travel from one end of the world to the other. Phenomenal improvement in communication and transportation has made the world a lot smaller space where the practice of yesteryears followed by multinational companies of maintaining product and price differentiation among various markets is no longer possible as the world or, major portions of it (this admission was the closest that Levitt could go towards the concept of ‘triad’ as put forward by Ohmae one year later), have become one vast market where they have to sell the same product in the same way everywhere. Thus, Levitt felt the age of multinationals have gone and now is the age of global corporations that sold standardised products in every corner of the markets they serve (Levitt 1984).

As both Ohmae and Levitt agree that the biggest examples of such globalisation can be observed in the ubiquity of Coca-Cola, Pepsi and McDonald that have actually become ‘global’ in the sense that these brands have grown beyond the ‘triad’ and penetrated literally all corners of the world. This issue is more relevant in the case of Coca-Cola and Pepsi that have been selling their standardised products in every market and dominate each one of them. McDonald has accommodated local tastes and preferences and has introduced local flavours in Middle East, Indian and Chinese markets (Bremner 2007) Coca-Cola and Pepsi have, however, been able to satisfy multitudes local tastes and preferences and have consistently emerged successful in every corner of the world.

  1. 2 Global marketing

The principle of global marketing works upon an age old adage that says “buyers everywhere are same but different” which means all buyers anywhere on the globe have common needs but the preferences are different. Any company functioning with this principle tries to come up with a single inimitable promotion strategy for its product in an extremely cluttered advertising arena (Rugman and Girod, Retail multinational and globalization: the evidence is regional 2003).

This brings to a sharper focus the significance of global marketing where marketing activities are synchronized and incorporated across very large number of countries essentially with the main rationale of achieving cost efficiency. The process can involve various essential activities such as standardised product strategy, identical brand names, unvarying packaging, similar advertisement messages, and coordinated sales campaigns across world markets (Vahlne and Johanson 2002).

However, one must not confuse between exporting and marketing globally. Generally, global marketing has some specific features such as most of the companies operating globally try to integrate sourcing and production with marketing, which though geocentric in nature, offers mostly a uniform marketing mix across various markets spanning several countries and even continents. Certainly, a truly global company instead of offering different products for each and every country brings in the market a distinct high quality branded product as a universal offering. Though at a first glance one might not be able to locate any appreciable difference with export, where an organisation also offers a product across international markets, the basic difference between export and global marketing is that while in the case of former a product is offered in a market after careful considerations of nature of the market and cultural affinities of the consumers of that market, in case of latter, the product is offered across a wide swath of markets that might have significant difference in terms of nature and culture of consumers. This standardisation of the product that is put on sale in widely varying markets is the main feature of global marketing (Schmitt and Simonson 1997).

Thus the most appropriate definition of global marketing would be; marketing activities by companies that emphasize three main features: global integration, standardization of effort, and coordination across markets.  In simple terms it actually means integration and coordination of all marketing activities across different markets spread across different countries into a single standardised format. It is perhaps needless to add that even though it is called global marketing it obviously does not mean that a company has got to enter each and every country in the world. It simply means widening business horizon to take advantage of opportunities and remain prepared against threats on a global basis.

It does not require too much of imagination to realise the enormous amount of market volatility a global marketer has to tackle while carrying on a global business. The basic problem that a global marketer has to tackle is to strike a balance between global marketing strategies of the company and the swings in the local market. The best possible way to achieve this is to develop the ability to ‘think globally and act locally’.

Global marketing has never been easy for any company as it also involves the chaotic task of maintaining equilibrium between standard and nonstandard approaches (standardisation and customisation) which, as any level headed marketer would admit, is absolutely necessary to retain the relevance of a global company in local markets. However, the degree of non-standardisation that a company might allow to creep into its product portfolio would depend entirely on similarities and differences in world markets (Keegan 2001).

The basic principle of global marketing is that the main difference between markets is not so much in tastes and preferences of consumers and their cultural leanings but mainly in the rules, regulations and laws that are prevailing in each country. Thus a common single strategy for marketing a product should work equally well irrespective of the market where it is applied.

The global market is now not what it was a few decades ago. Many countries have lowered their tariff barriers and are continually embracing free trade policies to further open up their markets to foreign and global players. Thus local producers are increasingly being subjected to competition from global players and with progressively shortening product cycles and ever improving technology, only those that can offer the best products at cheapest prices will survive; the rest will simply vanish from the commercial scene. Several international management experts feel that in near future only those companies that operate on a global basis will survive and prosper – others simply have no chance (Kay 1995).

Like any other marketer, a global operator would also love to develop consumer loyalty which happens to be the only protection against economic turmoil that the world economy is currently going through. Consumer loyalty ensures the survival of a brand, global or otherwise, through worst forms economic turmoil and downturn as consumers will rarely desert the brand even when marginally cheaper locally manufactured substitutes are available. Though consumers can be lured to buy a product through temporary price reductions, such price discounts are surely not the way to foster consumer loyalty. The only way to forge an emotional bond with consumers is to present a product that satisfies an overriding need of the consumer. In current world economic scenario, only global marketers have the wherewithal to spend money on elaborate research and development to come up with products that genuinely have a superior quality and are able to comprehensively fulfil customer requirements.

A global marketer thus needs to undertake serious market research to understand whether there is a scope for fulfilling some unfulfilled demand that existing products in the market are unable to satisfy and manufacture a product that fills in the utility gap. Once such a product is presented to customers, their loyalty towards that product is assured.

A product that has a large number of committed buyers obviously enjoys a high degree of brand equity and the marketer must continuously take pre-emptive steps to ensure a sustained advantage for the producer by enhancing the brand equity.

For that, an analysis is necessary to ascertain loyalty of frequent buyers as they are a source of constant revenue and also to quantify the impact of price reductions, discounts and intense promotional campaigns on consumer loyalty. These are important parameters that need to be monitored on a regular basis (Srull & Wyer, 1989). A global marketer has to, as already stated, thus ‘think globally and act locally while making such decisions as they are likely to vary significantly between markets and between countries.

  1. 3 Coca-Cola as a global company

As in 2004, Coca-Cola stood 129th in the Fortune 500 list and recorded 38.4% of its sales in North America, 22.4% in Europe and 24.9% in Asia. Out of total Coca-Cola sales in Asia, 74% of it was in Japan and the company was trying very hard to increase its market share in China (Rugman and Verbeke 2004).

(Pie Chart created by author)

There is a conundrum however, that marketers are yet to solve. It has been observed that countries that urge the world to respect and recognise their individuality and culture also urge the global corporations to transfer latest products in their markets almost simultaneously as they appear in first world markets (Wan and Hoskisson 2003). Coca-Cola and Pepsi though would not have to contemplate much on this issue as they have already penetrated deep into almost all of world’s markets.

The author of this project simply cannot resist the temptation of recounting an anecdote, though apocryphal, concerning Mr. Raj Narain, the health minister of the Janata Government that was formed in India in 1977. It is widely believed that Mr Narain, while debating in the Indian Parliament on some issue related to general standards of civic amenities available in Indian villages had commented that, while the Indian Government had not been able to provide clean drinking water to all its villages, Coca-Cola had been able to deliver its product in each and every Indian village. Nobody has taken the trouble of scouring through the records of Parliament to verify whether Mr. Narain had indeed uttered these words or not, but one thing is absolutely clear, and that is, Coca-Cola could win over every market it entered – partly through its inimitable taste and partly through its equally inimitable channels of distribution.

  1. 4 The power of Branding

There are two definitions of branding that are in circulation for years and we can term them as ‘erstwhile’ and ‘established’. While the ‘erstwhile’ or the most simplistic definition of brand denote a name or a logo or a trademark that signified ownership, the ‘established’ definition of brand includes the added values that a brand imputes on the product. While the products are made in factories, brand values are essentially a matter of personal perception that stay in the mind and have a longevity that far exceeds that of the product  (Blamer and Greyser 2003).

These values might or might not be directly noticeable but are attributed to the product through intelligent mix of continuous advertisements conceived by communications experts and delivered through proper channels as determined by experienced mass media advertisers. An example might be the brand of Starbucks that does not only bring back the experiences of exquisite coffee but also remind a person that the company is among the top five best employers (Schmidt & Ludlow, 2002).

Quite a few management experts perceive brand as simply the physical experience that a consumer recalls every time he is exposed to the brand and views a brand as an important and extremely effective tool for advertising, sales promotion and marketing. This somewhat constricted perception of brand is often termed as brand experience which many experts claim to be one of the most important bases on which a consumer makes a final decision.

Brand managers who are of this view, try to build a brand around the unique selling point of a particular product and a properly calibrated brand management builds up a favourable image of the product in the minds of prospective customers who get convinced about the superiority of the product much before the actual purchase.

If such a brand exists, advertising and sales promotion becomes that much easier since the unique selling points of that product need not be repeated or stressed in advertisements or sales promotion programs. A mere reference to the brand would be enough to cause a recall of all the USPs of the product.

Branding thus is a very effective tool in creating a favourable impression in the minds of prospective customers. This is many a time carefully manipulated by brand managers to instil a perception of value in the product so much so that customers willingly pay a higher price for it even though the raw materials and ingredients used in it are not in any way different or superior to those used in manufacturing competitive products. Customers can be motivated to pay a price that defies logic through a carefully managed advertising campaign (Olins, 2003).

Marketing experts describe this phenomenon as brand value and this can be built up only by orchestrating other aspects of marketing. When a brand reaches a stage where it can be instantly recognized over large sectors of targeted market places, without the name of the manufacturer, it is said to have obtained brand franchise as it has become matured enough to stand on its own without any help of manufacturer’s goodwill. This, as already stated earlier, can be achieved through sustained advertising, sales promotion and marketing.

A case in point is Coca-Cola and Pepsi that have so much brand franchise (built through years of sustained advertising and sales promotion) that the name of the manufacturers and their status as possibly two of the largest producers of soft drinks and beverages are completely irrelevant to the consumer who is already convinced about the efficacy of the soft drinks they offer at the time of purchase (O’Guinn, Allen, & Semenik, 2006).

It would be most logical at this stage to discuss a little about corporate brand equity. Brand equity is an intangible value associated with a brand that motivates a customer to pay a price that is higher than competitors’ products that have similar ingredients and satisfy similar needs. Example of brand equity could be the products of Coca-Cola and Pepsi that sell in market at a considerable premium over comparable local substitutes.

Corporate brand equity refers to reputations of companies that are held in high esteem by consumers and it is reflected in market-to-book ratio which is the ratio of net asset value of companies and their market capitalization. It is on an average 4.7 for the S&P 500 companies (Haigh & Knowles, 2004).

Corporate brand can also be considered as another form of address that carries with it certain inviolable tenets of business ethics and norms that act as a shield to protect the organisation as well as all its stakeholders from any form breach in corporate ethics. Corporate brand actually acts as very strong covenanted identity about the manner in which the company carries on its business and produces products that serve the best interests of consumers (Balmer March, 2002).

 

Source: AC3ID Test™ trademarked by J. M. T. Balmer, 2001.

The world has become a smaller place courtesy improved transportation facilities and widespread reach and penetration of internet. Marketers now have the entire world as their market and they have made full use of it as is evinced in increased preference by consumers for branded products. They are increasingly buying brands instead of products and are willing to pay premiums for leading brands. Thus a strong brand is especially a great asset of those firms that are global in the truest sense and offer soft drinks and beverages as Coca-Cola and Pepsi. A strong brand as can be seen has an identity of its own and can command an unprecedented amount of loyalty. Such a loyal clan of consumers is every marketer’s dream, especially in these bleak and gloomy times of an economic downturn (Srull and Wyer 1989).

  1. Findings and Analysis
  2. 1 Fierce competition between two cola giants

So it is not unnatural for these competing companies to bitterly fight with each other in an attempt to dominate consumers’ mindscape. With gloomy financial forecasts that do not predict a quick end to current economic downturn, both Coca-Cola and Pepsi have turned their attention to reviving consumer spirits through Pepsi’s “Every generation refreshes the world” and Coca-Cola company’s “Open happiness” that will replace it hugely successful “Coke side of life” which, quite obviously, is the brighter side. This however is not the first time that these competitors have unleashed advertisement blitzes to uplift the spirits of their consumers across the whole world. The -“Have a Coke and a smile” and “Joy of Pepsi” instantly come to the mind of any discerning observer of this never ending rivalry between Coca-Cola and Pepsi. But now it seems that both these giants are feeling an extra sense of urgency to do their bit in livening up an otherwise gloomy landscape.  Jeff Cioletti, editor in chief of Beverage World, felt that such uplifting campaigns are indeed necessary for both these giants to be close to their consumers’ hearts in these distressing times (Zmuda 2009).

Very recent stories of fisticuffs between delivery men of Coca-Cola and Pepsi over shelf space in a supermarket however have nothing to do with corporate rivalry; it was more a personal and localized matter between two individuals.

But one must never forget that this war between Coca-Cola and Pepsi is not restricted to American markets only. They fiercely fight with each other in every market of the world. A case in point would be the way they fought tooth and nail when Coca-Cola made its appearance in Delhi market where Pepsi was already enjoying a head start of three years. Coca-Cola fired the first salvo by proclaiming more or less literally from every roof top that the real thing was back. Pepsi responded with a brilliantly crafted rejoinder that started off with a bold declaration “Today Pepsi would like you to try a Coke.” and ended with a statement that has become one of the best examples of how to drag through dirt a competitor without breaking the norms of clean and healthy advertising: “Coca-Cola and Coke are registered trademarks of the Coca-Cola Company. Pepsi is the choice of a new generation.” Admittedly, Coca-Cola had very little to offer as a riposte. What followed however went beyond the realms of advertising and bordered on criminal offence as many Pepsi billboards and signboards were found smeared with black paint. Pepsi filed a police complaint laying the blame squarely on the doorstep of Coca-Cola, but, as expected, nothing substantial or concrete could be unearthed regarding the culprits that had actually defaced Pepsi’s advertisements.

Pepsi waited for an opportune moment and struck with full force on the day Coca-Cola was launched in Delhi. It hiked the price of Pepsi Cola from Rs. 5 to Rs. 6 per 250-ml. bottle that left Coca-Cola managers scrambling for cover to find a suitable counter strategy as they realised retailers were bound to hawk both Pepsi and Coke at Rs. 6 a bottle which would effectively neutralize Coke’s penetration price of Rs. 5 for a 300-ml. bottle. Neel Chatterjee, general manager, marketing, of Pepsi Foods Ltd, said that they had sold an average 29,000 crates the same day. He estimated that Coke would have sold about 18,000 crates that day (Easwaran 1994).

(Pie chart created by author)

  1. 2 Consumers gain as cola war continues

Pepsi had filed an anti-trust suit against Coca-Cola in May, 1998 alleging that Coca-Cola was using its substantial superiority in fountain-dispensed soft drinks in restaurants and movie theatres to stifle any move that Pepsi was making in entering that market.

While replying to the charges levelled by Pepsi, lawyers of Coca-Cola argued that “The `cola wars’ have brought consumers in the United States and, throughout the world, the benefit of low prices, extraordinarily broad availability, and wide consumer choice.” The lawyers went on to further declare that though Coca-Cola dominates the overall soft drink market others were not completely marginalised as was evident from the figures provided in Beverage Digest that stated that Coca-Cola has a 43.9 percent share, followed by PepsiCo with 30.9 percent and Dr Pepper Co. with 14.5 percent (Walsh 1998).

(Bar Chart prepared by author)

  1. 3 Cola giants close ranks when faced with common threat

Though these two cola giants are at each other’s throats most of the time, they also close ranks if they perceive there is a common threat that might harm businesses of both. It had happened in Middle East where the cola giants have perhaps fought the toughest and bitterest battle outside of United States. Initially Coca-Cola was way behind Pepsi and was actually referred to as “red Pepsi” as it was gradually clawing back after a hiatus of 25 years of boycott by Arab nations as retaliation against doing business with Israel, a Jewish state.

However, both these giants took a battering due to the regional instability that has become chronic to this region. In fact, anti-American sentiments took such a serious turn that Coca-Cola had to close its principal Middle East office in Bahrain and shift its strategic personnel back to Europe in March, 2003. Coca-Cola Egypt, the parent company’s largest subsidiary in the region was forced to float a $150 million share offering in March following losses of more than $100 million.

Pepsi also had to suffer several setbacks on account of this market instability that resulted from the political and social instability in this region. They are also facing challenges from home grown soft drinks and both have decided to push their non-core brands harder in a market that is gradually becoming populated with non-carbonated drinks.

These two companies have also closed ranks in India when they faced a scathing censure from an environmental watchdog that alleged in August, 2003 that samples of drinks produced and marketed locally by the two companies contained “residues of four extremely toxic pesticides and insecticides: lindane, DDT, malathion and chlorpyrifos … enough poison to cause – in the long term – cancer, damage to the nervous and reproductive systems, birth defects and severe disruption of the immune system”. The following day, as across the subcontinent young radicals took to the streets to smash bottles of Coke and Pepsi and call for a country-wide boycott, the two companies took the unusual step of holding a joint press conference to refute the allegations (Lidstone 2003).

  1. 4 Coca-Cola and Pepsi – why one went ahead of the other

As already stated in this thesis, Pepsi is behind Coca-Cola by a good 14% of global market share and the most obvious question that immediately crops up in any rational researcher’s mind is what could be the reason for Pepsi falling behind Coca-Cola as it was founded only seven years after Coca-Cola which was established in 1885 by John Pemberton as a patent medicine.

The early founders of the brand Coca-Cola, going back to the 19th century, had a grand vision of globalisation and wanted the drink to be available everywhere on planet earth and, they have succeeded to a large extent in achieving that highly ambitious target.

Just to put things in proper perspective, it may be stated that Coca-Cola has been in Africa for about 80 years – the first franchise was opened in Johannesburg in 1928. Today there are 160 manufacturing plants across the continent. Coca-Cola holds the number one position in the non-alcoholic beverages (excluding tea and coffee) segment and controls around 30% of the market. Coca-Cola Africa is readying itself for one of the biggest sporting events of the world – 2010 FIFA World Cup in South Africa (Versi 2007).

This information only puts in sharper relief the continuous surging forward of Coca-Cola while Pepsi remains stuck to its pre-eminence in Middle Eastern markets Saudi Arabia and other Arab countries where Coca-Cola was forced out of the market due to political reasons rather than commercial and economic.

Before we get into the analysis of this anomaly it would be better to accept the fact that from the customer’s standpoint, the difference between Coca-Cola and Pepsi is basically a matter of perception rather than actual taste. Both are sweetened carbonated beverages with Pepsi being a little sweeter than Coca-Cola and that might be one of the reasons as to why many people prefer Pepsi over Coca-Cola in a blind test but would prefer to drink Coca-Cola if they are asked to drink an entire can. Some say that the there is also a difference in the degree of carbonation between the two but it has been confirmed through laboratory testing that the extent of carbonation depended on the location of manufacture and on an average the degree of carbonation is almost the same in case of both Coca-Cola and Pepsi (Balabanis, et al. 2001).

Samuel McClure and his colleagues have found through elaborate scientific observation done on a batch of 67 volunteers that it is basically a matter of perception that is accentuated by visual messages and marketing messages that prompts a customer to choose one drink over the other. The researchers started with asking these 67 volunteers about their personal choices first by asking them and then subjecting them to blind tests. They actually gave subjects a couple of sips of either Coca-Cola or Pepsi and as they drank what was given to them, the researchers scanned the subjects’ brains by using the technique known as functional magnetic resonance imaging (fMRI). This technique of brain mapping uses harmless magnetic fields and radio signals to measure blood flow in regions of the brain since such flows indicate levels of brain activity. While this experiment was done, each volunteer was exposed to either anonymous pictures or photos of Coca-Cola or Pepsi cans before they took their sips.

The experiment allowed the researchers to study the regions of human brain that were activated when the subjects used information only related to taste as compared to when they also had information about the brand.

It was observed that while brand recognition about Pepsi did not have any specific effect on the perception zones of the brain, knowledge about the brand when Coca-Cola was sipped had a remarkable effect on “dorsolateral prefrontal cortex” and the hippocampus. Both these areas and, hippocampus in particular, tend to modify human behaviour and reaction by recalling cultural information. Thus when the subjects were sipping Coca-Cola, their perceptions about the brand played a great role in enhancing their enjoyment rather than the taste of the soft drink alone. No such exception was however noticed when they drank Pepsi (McClure, et al. 2004).

This perception or image about the brand Coca-Cola has been built up through decades of sustained advertising and though Pepsi was never shy of advertising its presence or product, its endeavours must have definitely fallen short of the potency of the sustained and varied campaigns unleashed by Coca-Cola over almost century and a quarter since it first came in the market. This, as this experiment also strongly suggests, might be one of the main reasons as to why Pepsi could not measure up to the stature of Coca-Cola as the leader in soft drinks market (Ruigrok and Wagner 2002).

One needs to draw another distinction at this stage between Coca-Cola and Pepsi. We are comparing here only the performances in the soft drinks sector but we must remember while Pepsi generates most of its revenue around the globe from its snack divisions, Coca-Cola is purely a beverage company. Thus, it is perhaps obvious that Coca-Cola will be a couple of steps ahead of Pepsi in this struggle for market share, if it wants to survive. Moreover, when it comes to investment, Pepsi prefers to channelize funds in only those markets where it is the dominant player (as in Middle East) whereas Coca-Cola, which has long been proud of the fact that it operates in every corner of the globe and is a leader in most of the markets that it operates in. As a result of this inherent difference in corporate attitude, Coke earns more than 60% of its revenue from outside of United States while Pepsi earns most of its revenue from within the United States (Wilbert 2006).

So, we have been able to cite one more reason as to why Pepsi has fallen behind Coca-Cola in the age old rivalry between cola giants. But there are other reasons too that have contributed to this scenario.

One of the major outlets of cola drinks in the United States is through fountains and Coca-Cola has a huge lead over Pepsi in this segment. Throughout the 1980s Coca-Cola had more than 80% of market share in this sector (Allen 1994).

Though it reduced to 65% with Pepsi’s share increasing to 22% by 2000, still Pepsi was way behind its main rival. Pepsi tried to force its way into this sector by coming to some form of agreement with food-service distributors who along with napkins, ketchup, French fries and hamburger buns also provide soda syrup that is used in soda fountains in 90% of the restaurants across United States. But when Coca-Cola could sense that Pepsi is trying to directly challenge its market monopoly in this area it warned the five major distributors of this syrup that they cannot simultaneously supply soda syrups of both Coca-Cola and Pepsi, they have to choose between one of these producers and, if they insisted on supplying both the manufacturer’s product, Coca-Cola would be constrained to terminate their contract with such a distributor. Though Pepsi approached the court of law claiming that Coca-Cola is trying to push out Pepsi from this market by exercising its near monopoly status, there still remains a huge gap between the two competitors in this market. This happens to be one of the major reasons as to why Coca-Cola is ahead of Pepsi in terms of overall market share of cola drinks (Ghemawat 2003).

  1. Problems and challenges faced by cola companies

Coca-Cola and Pepsi have of late been plagued by a series of local competitors that have grabbed a considerable share of the market but more than that have for the first time posed a challenge to these two cola giants. These two superpowers of the cola world had all along projected themselves as invincible and this challenge to their unquestioned supremacy might just be the beginning, opening the floodgates of a bigger challenge when the consumers also start thinking that they have genuine alternatives other than Coca-Cola and Pepsi to choose from whenever they feel like drinking a bottle of chilled carbonated beverage.

UAE’s Star Cola and state-owned ZamZam Cola of Iran gain their strength from the image of ethical, Islamic alternative to American Coca-Cola or Pepsi. But these products are limited to their countries of origin and if there are any exports they are essentially to other Gulf countries only.

Two other enthusiastic entrants in the Middle East market are UK-based Qibla Cola and Paris-based Mecca Cola. Mecca Cola had already signed an agreement to set up a bottling plant in Jebel Ali Free Zone during the middle of 2003 and had set for itself a target of 10% of the total cola market in the region. Qibla Cola also was in the process of setting up a bottling plant in UAE and was streamlining its distribution infrastructure in Egypt and Saudi Arabia.

Advertisements of both these brands have an underlying religious appeal of being genuinely Islamic and they try to take full advantage of the simmering anti-Americanism that has always been in this part of the world. One advertisement of Mecca Cola runs “No more drinking stupid, drink with commitment”. Though surely rather awkward but the underlying religious appeal is hard to miss. Both these brands profess to donate 10% of their profit to charitable causes and Qibla Cola identifies itself rather too blatantly with the Palestinian cause and tries to don the garb of a champion of ‘free trade’. Mecca Cola is also having problems of getting its name registered in Saudi Arabia and yet to commence operation in that vast cash rich market.

Though it would be a complete misnomer to say that these new entrants have dented the hegemony of Coca-Cola and Pepsi, it is a fact that both these behemoths are facing declining sales. Coca-Cola attributes this to a steady rise in the demand for non-carbonated beverages like juices and water. The real danger to their supremacy is not form Mecca Cola or Qibla Cola but from from crossover producers such as Egypt’s Fayrouz, which produces non-alcoholic malt beverages for the halal market. The marketing tactic for Fayrouz is very clever. It was originally in the non-alcoholic malt drink market, but by launching a new range of flavours it took on the big American producers and its orange and apple flavours are now outselling Mirinda and Fanta.

Coca-Cola and Pepsi have responded by pushing their non-cola brands and in Yemen, Coca-Cola has been able to achieve substantial increase in the sale of Canada Dry while the sale of classic Coke has remained constant.

Some researchers have come to the conclusion that the real competitor to Coca-Cola and Pepsi in Middle East is water. This is borne out by the fact that while the  sales of bottled water have grown by more than 40 per cent in the last four years, reaching 2,202 million litres in 2002, per capita consumption of carbonated soft drinks  over the same period declined by 16 per cent (Lidstone 2003).

Coca-Cola also got embroiled in a series problems and contamination scare that dented the sales in Europe very heavily. Economic slowdowns in emerging markets like South Korea also damaged global sales. In the meanwhile a racial discrimination lawsuit in Atlanta tarnished the company’s carefully manicured image. As if this was not enough, Doug Ivester suddenly resigned the chairman’s post (McClatchy-Tribune Information Services 2000).

  1. A New Threat – Attempted Global Boycott of Coca-Cola and Pepsi

A full page advertisement in the New York Times on 4th July, 2003 made a scathing attack on how corporate power has managed to complete its stranglehold on the government of United States. This negative feeling towards the erstwhile flag bearers American free spirit and spirit of enterprise did not materialise overnight, it took nearly six odd months, almost from the time George Bush ordered “Operation Iraqi Freedom,” citing dubious information of Iraq having a large storehouse of weapons of mass destruction. The world looked on in horror as the only superpower of the world suddenly started acting like a rogue state. The world-wide reaction against United States took the form of a rethink about the relation that would be maintained with corporate America and the conclusion was pretty obvious. Coca-Cola, the most ubiquitous symbol of corporate America was suddenly on the line and saying no to the United States was saying no to war. And saying no to United States suddenly became very easy as one could simply refuse to enter McDonald’s outlet or not drink a bottle of Coca-Cola or Pepsi. This boycott was never organised in a formal way but it started off on its own. The London-based Boycott America website (www.boycottamerica.org) launched in the wake of the Iraqi invasion, took the issue much beyond Iraq and the Bush administration’s military adventurism. It referred to American threat to environment as the country successfully stalled protocols aimed at curbing climate change and its threat to the world’s food chain with the proliferation of genetically modified organisms as additional reasons to press on with the boycott. Though such boycotts are usually short-lived and die a quiet death as emotions cool down, one must admit that there is a very strong undercurrent in large parts of the world against things that are American, mainly American global companies.

  1. Sea change in business approach of multinational companies

Multinational corporations no longer produce products. They are now solely in the image business. They no longer build factories. Today they build advertising campaigns. They no longer invest in plant and machinery or land and buildings but they invest in images. They scour across the globe in search of worst working conditions, which translates into the lowest wages and costs. They fire their employees while cultivating customers and continuously driving down living conditions all over the third world.

Coke and Pepsi typify the most successful of all the branders. Their assets rest on World Trade Organization protected amalgam of image and license. The scenario is pretty uncomplicated as it were. Coke and Pepsi own an image – one that ultimately represents American cool. In nations around the world people manufacture their own Coke and Pepsi under license, using their own water and bottles, often using their own sugar. They then sell it to themselves, using their own distribution networks, sending the profits off to the United States. These two companies, which in essence dominate the world’s beverage market, produce nothing tangible.

They sell cool while vacuuming money up from around the world. In doing so they are spreading a toxic culture of obesity – the same culture that is killing citizens in the U.S. homeland, where soda pop consumption has doubled since the mid 1980s, contributing to a 50 percent rise in the obesity and diabetes rates during the same time span.

The most sophisticated and attractively crafted advertisements in media outlets around the world seduce people to consume Coca-Cola and Pepsi, conveniently suppressing the highly damaging information that each bottle of these beverages contains an average of eleven tablespoons of sugar. Developing nations are left to deal with the health consequences while Coke and Pepsi investors deal up the profits (Niman 2003).

 

  1. Conclusion

Though there is indeed some very sound logic in the statements of those who oppose American giant global companies, the fact remains that as long as capitalist system of production is going to continue, maximisation of profit will remain as the sole motive of any business house or an entrepreneur. Thus there will always be an attempt to reduce costs and one cannot really find any fault with the global companies if they throng third world countries in search of cheap labour.

The highly impassioned statements that these global giants are exploiting helpless people might sound very soothing to the ears as we secretly pat our backs on being ‘ethical’, but any person who has the slightest knowledge about the ground reality prevailing in these nations would most surely agree that those workers (generally women and underage children) would have either way worked since they cannot survive otherwise. So, it is always better to toil at a place where payment (however meagre it might be) is assured.

All those crusaders for prevention of child labour are mostly unaware of the dire truth that in third world countries a child is considered as an additional pair of hands that would augment the family’s income. If the global companies have not come to the scene, these children would have had to toil under much starker conditions.

In any case, use of child labour has always been an issue against Nike, Gap and other global companies. Coca-Cola and Pepsi are always manufactured in factories where untrained and underage workers are never employed. Thus, these two global companies cannot be accused of being complicit party to exploitation of children and women.

However, there can be no argument to support Coca-Cola and Pepsi as they constantly motivate people to consume more and more of their respective colas that contain as much as eleven tablespoons of sugar in each bottle. Global companies Coca-Cola and Pepsi surely play havoc with global health and some restrictive action in this regard is always welcome.

 

 

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Managing Warehouses – A quantum shift from reducing overhead expenditure to attaining competitive advantage in distribution logistics

Filed under: Corporate Management — niranjanchatterjee @ 11:00 pm

Objective

Now-a-days consumers want punctual delivery and any delay in distribution might result in the consumer going elsewhere. In this era when competition at marketplace has reached fanatic levels, a marketer can ill afford to let such things happen. Thus, streamlining distribution channels have become absolutely essential for every marketer. Storage, quite obviously, is an important aspect of streamlined distribution channels, and warehouses have always been viewed as strategic units for keeping and storing goods in a scientific and systematic manner so as to maintain their original quality, value and usefulness. There has also been a radical improvement in the functioning of warehouses as they are no longer mere storage service providers and have really become logistical service providers in a cost efficient manner.

This main objective of this project is to highlight the importance and substantial contribution by warehouses in day to day distribution function of commercial enterprises.

Methodology

Two most prominent techniques that can be applied while conducting a study are the hermeneutic approach and the positivist approach. The positivist approach maintains that truth is observable and can be measured with correct methods while hermeneutic approach maintains that the researcher should analyze the text from the author’s perspective while keeping in mind the social and cultural milieu in which the text was written. This approach is often considered to be a close approximation to qualitative studies as researchers gather data that have to be interpreted properly and placed in the right context to obtain the correct result. Any error in viewing the data out of the proper social, cultural or economic context will most certainly lead to a wrong conclusion (Phillips and Brown 1993).

In the research undertaken in the present instance, hermeneutic approach would be the most suitable approach as data available from secondary sources will be critically analyzed to arrive at logical conclusions. It must be emphasised that secondary sources are data that have already been collected, analyzed and results presented by some earlier research process conducted in the related field (Zikmund 2000). For the purposes of current research process, secondary data consists essentially of relevant information published in journals, magazines and websites.

Since we will base our research process entirely on qualitative approach, it is perhaps necessary that we also clarify what exactly a qualitative approach signifies. Though it is difficult to give a technically accurate meaning of qualitative approach, all that can be said about this approach is that it concentrates on processes and meanings that cannot be concretely quantified in terms of amount, quantity or frequency. However, such an approach provides a deeper understanding of the researched variable in the larger context of interrelated social forces that combine together to continually influence the researched phenomenon (Hamel 1993).

There are a sizeable number of experts that believe although qualitative approach might not be that sound statistically or mathematically, it indeed provides a far greater understanding of a phenomenon in its socio-cultural milieu which helps the researchers to formulate logical theories about why and how a phenomenon occurs under certain specific circumstances (Markus and Robey 1988).

Literature Review

Julekha Dash has observed that US companies have long been known to have looked beyond their borders whenever they have either tried to outsource their production processes from cheaper origins, or, wanted to expand their markets and customer base. But transporting goods becomes a complicated affair once international borders are crossed and the problem becomes especially acute when global operations gradually start gaining in importance. It is then that the managers become worried to know how much their total global inventory is and where exactly it is sitting and how best can this widely dispersed inventory be managed so as to ensure effective, punctual and efficient distribution of merchandise (Dash 1997).

V.A. Zeithaml, L.L. Berry, and A. Parasuraman agree that this is very crucial especially in retail business where products experience quick turnover. In such situations inventory needs to be measured from point-of-source all the way through to the customer to affect more strategic decision-making aimed towards increasing customer satisfaction and ensuring higher return on investment in supply chain. Warehouses play a crucial part in this entire setup (Zeithaml, Berry and Parasuraman 1987).

It is a common piece of managerial wisdom that inventory costs can be brought down by centralising stocks. Thus there is always a heavy pressure on companies to reduce the number of warehouses, especially in Europe where commercial borders no longer exist after the establishment of European Union (Leonidu 2004). However, while cutting down on warehouses would undoubtedly reduce costs marginally, it would severely impede the company’s ability to reach and service consumers within few hours. If all companies religiously cut down on warehouses, the overall industry level of customer service goes down (with the customer having no other alternative but to accept it) without any particular company bearing the brunt of consumer ire. But in reality, there will always be some company or the other that would try to gain long term competitive advantage by focussing on consumer satisfaction by promptly and punctually delivering consignments to customers’ doorstep. Such prompt service can be possible only if the number of regional warehouses is increased (Garvin 1987).

During the eighties, automotive industries blindly followed the dictum of reducing costs by centralising stocks and reducing the number of regional warehouses. Some manufacturers went to the extent of eliminating the entire level of regional warehouses and were serving entire Europe through a couple of central warehouses. This critically weakened their ability to provide same day service to the customers which is generally considered an industry standard that is available in the whole of United States (Kedia and Chhokar 1986).

In fact, one automobile company is already in the process of setting up warehouses near the service centres to readily supply the spare parts that might be needed to ensure that customers get the much necessary same day service for such an essential facility as a motor car (Cateora and Graham 2001).

Ulrich Fincke and Edwin Goffard opine that a tradeoff must surely be done between the extra market share that can be obtained through increasing consumer satisfaction by providing same day service and the extra cost of setting up additional warehouses. According to these authors, offering same day service to 75% of European market including major population centres and overnight service to the rest 25% of European market would require twice as many warehouses and that would entail an additional expense of 10% more than providing overnight service to the whole of Europe. Though it would surely increase the cost of operations, enhanced levels of customer satisfaction might counterbalance it by providing a tactical and long lasting advantage over competitors. The authors, however, admit that if same day delivery service is to be spread all over Europe, it would require about four times more than the existing warehouses and the cost would rise by about 30% (Fincke and Goffard 1993).

Anil Kumar and Graham Sharman are very forthright when they state that customers are consistently demanding deliveries to be made on time. These authors further inform us that the standard delivery windows in supermarkets used to be four hours from the expected delivery times, but now top suppliers deliver within one hour of expected delivery times, and, very often the deviation is as less as fifteen minutes. The customers have become more and more demanding and are less prone to accept any delay in deliveries. During a six year period starting from 1983, IBM reduced its component suppliers from 200 to 40. During the latter part of 80s both DEC and AT&T reduced the number of semiconductor suppliers by more than 50%. Oilfield industry is particularly harsh about on time deliveries; it has zero tolerance on late supplies. Hewlett-Packard evaluates its suppliers on five attributes: technology, quality, responsiveness, delivery, and cost. Out of these, delivery and cost are the easiest to monitor and thus suppliers go out of their way to stick to delivery schedules in order to retain their ratings with Hewlett-Packard (Kumar and Sharman 1992).

Such a drastic improvement in timeliness can only be possible by streamlining of delivery logistics and warehousing (Christopher 1993).

American President Company, one of the most prominent shipping lines of United States, delivers auto parts to a Japanese assembler located in the US from the parent manufacturer situated in Japan within fifteen minutes of the stated delivery schedule. They used to reroute a ship, if necessary, and airfreight through chartered flights, if that was required, to ensure that a load of headlights reached the US based assembler within a quarter of an hour of the expected delivery time. But now things have become a lot easier as the shipping company has made arrangements to maintain strictly monitored levels of inventory in its personal warehouse that is located at a convenient distance from the production facility on US soil (Czinkota and Ronkainen 2001).

Battaglia, however, discovered that poor delivery performance in quite a few companies was actually the result of much deeper problem. Marketing people deliberately underestimated demand as a matter of policy as they could earn bonuses if they exceeded the forecasted demand. Production department had, in good faith, based its budget on forecast forwarded by marketing and thus was grossly under resourced to meet actual demand. As this aspect is more related to internal human resource issues rather than problems related to logistics, it has not been discussed any further in the present project (Battaglia 1994).

Ecommerce has become the new order of marketing and it is but natural that literature dealing with logistics will have deliberations by experts on the role warehouse can play in streamlining operational flow for online vendors. Acquiring customers online and retaining them is possible only by providing complete satisfaction right from initial acceptance of the order to delivery at the doorstep (Barks 1994).

As Bhise, Farrell, Miller et al agree, online companies have to do all that a brick and mortar company does, i.e., enter orders, pick the stock, package it, and ship the consignment, and on top of that, they have to also answer to consumer queries fast and accurately all the while making use of the data that is being generated through such interactions (Bhise, et al. 2000).

This difference requires paradigm shift in operational procedures in both, manufacturing and warehousing. The enormous quantum of information that is generated must be put to good use to create region-wise database of buying habits, tastes and preferences of customers so that production cycles are properly scheduled and warehouses are sufficiently stocked up with merchandise that have a fair possibility of being ordered (Fox 1991).

Warehouses are enjoying this newly acquired spotlight of attention and are trying to reinvent themselves. They have gone into consolidation activities where materials/merchandise from different production zones are received and consolidated into a single shipment to be forwarded to a particular customer. Modern warehouses have also engaged themselves into what is known as “Breaking the bulk” where bulk receipts of goods are broken into smaller quantities and are packed and put on transport according to the requirements of clients to their places of business. Warehouses are also increasingly getting involved in light assembly, cross-dock warehousing, contract warehousing, import and export services, pick-and-pack operations, freight brokerage operations and transhipment services. All these value-added operations are not only increasing revenue inflow but also consolidating the position of warehouses as a very important contributor to the value chain (Anderson 2006).

Nowlan clearly sets down the ground rules that any warehouse management needs to follow to generate steady stream of profit from warehouses. The first step to convert a warehouse from a cost centre for selling and distribution overhead expenditure to a source of profit is to admit that warehouse is in effect a marketing tool and take necessary steps to ensure that it indeed remains so. However, not very many warehouse owners accept that these static storage spaces can indeed generate profit; rather, most owners feel that warehouses are a necessary nuisance in the supply chain. But this notion can be changed by proper housekeeping. Imagine a scenario where a company executive is about to decide on a bulk supplier and visits the warehouse of two competing suppliers. In one instance the executive finds that the shelves are in semi-disarray and workers not sure of where materials are. While in the other instance the shelves are in order and workers are well-informed and alert. It is quite obvious that the second company will have a far greater chance of bagging the order. The first warehouse, according to Nowlan, encourages sloppiness and this habit gradually permeates through the entire company leading to considerable reduction of profits (Nowlan 2004).

Bob Footlik, President of Evanston, Illinois based Footlik & Associates, which provide consultancy in materials handling and industrial engineering industries, is a great admirer of Brock White Co., a distributor that specializes in materials for the concrete and masonry construction markets. It has 13 locations in the upper Midwest and Canada, with headquarters in St. Paul, Minnesota. Though this company primarily deals with commercial construction, it has some walk-in retail business as well, located in warehouses that have showrooms where the merchandise is displayed as well as sold. A spokesperson of Brock White Co. clarifies that they have showrooms attached with each of their warehouses so that customers get a chance to see, and in most places, also feel a product before they actually buy a product. The showroom at St. Paul has “tool walls” that are nothing but mobile kiosks that can be brought to the customers instead of customers walking up the aisle to reach them. Grainger Inc. also does in a larger scale in all its branches what Brock has done in St. Paul. Y.C. Chen, Grainger’s senior vice president of supply chain management, says that the chain retailing giant does not arrange merchandise according to brand names but in such a way that it’s easy for customers to find a solution to the problem they are trying to solve (Rungtusanatham, et al. 2003).

The other aspect that any professionally managed warehouse should pay attention to is customer feedback. Both Brock and Grainger have specific programs to collect consumer feedback and work upon the comments made by customers. Grainger also captures the information if at any point of time in any of its outlets a customer comes and complains of not getting what he or she is looking for. This information is shared with all other outlets and logistics department accordingly sets up production and replenishment schedules so that there is no repeat of the incident anywhere in any of the outlets of Grainger. Brock White Co. arranges annual events where regular clients are asked to give their honest feedback about the services of the company.  At one such gathering, customers complained of inordinate delays in delivery of goods even when they were pre-ordered thus frustrating the basic purpose of pre-ordering. Brock realised that customers wanted to enter the warehouse, collect their merchandise and take the exit route as fast as possible. To ensure that customers do not have wait inordinately, the warehouse management system was revised, bar-coding was upgraded and the process improved. None of these methods necessitated huge capital outlay or elaborate employee training but the impact on the bottom-line was quite phenomenal (Bolumole 2003).

Evolution of Warehouses – an analytical overview

Warehouses are undergoing quantum change

There surely was a time when warehouses were considered a necessary nuisance that had to be endured in order to sustain the supply chain. These warehouses were usually situated in some dreary corner and generally consisted of some ill-maintained drab buildings where an equally disinterested group of employees used to somehow ensure that the basic functions of the warehouses were carried on in a sloppy manner. But things have undergone a radical makeover as intense competition at the market place and increasing consumer demands have forced companies to ensure on-time deliveries for sustaining themselves in these tough times.

Today’s warehouses are sophisticated buildings called “distribution centres” that are being owned by well-run corporations and staffed by well-trained people. The architecture and construction of modern warehouses are also being tuned with an eye towards seamless fusion with complex and high performing system of logistics and product delivery. These buildings are becoming taller with clear height reaching an average of 36 feet that allows more goods to be stacked at a higher level and more efficient utilisation of available floor space. Such stacking movement and arrangement of goods within the warehouse are made easier with automatic conveyors, computer operated cranes and forklifts and also usage of logistics automation software for warehouse management. Thus, functioning of a warehouse has now become more efficient and it always remains in tandem with other activities associated with efficient logistics. With such a complete makeover of warehouses, firms have also started thinking of warehouses as focal points for a sophisticated workforce and constructing a sophisticated warehouse as a novel means of expressing core corporate values to the society (Cooper and Lambert 1997).

Mercedes-Benz has constructed a state of the art “Master Parts Distribution Center” that reflects most accurately the core philosophy of Mercedes-Benz which is to effortlessly combine functionality and style. Though it is yet to reach the planned total area of 1.2 million square feet, the structure stands magnificently clad with a metal skin featuring glass in areas that are exposed to public view. A visitor is reminded of the feeling associated with a classic Mercedes-Benz automobile while passing through the metal screen entrance element that also serves to diffuse southern light and subtly announce the presence of a Mercedes-Benz facility to the neighbourhood community.

The interior of the building, especially the warehouse area has been designed in a unique way with high glass clerestories providing an abundance of natural light and its structural system accommodating long spans with few columns while slabs have been levelled to accommodate automated picking systems. Mercedes-Benz has realised the strategic importance of this futuristically designed warehouse and quite rightly has incorporated 60,000 square feet of offices, a training centre, and amenity spaces for its work force within the complex. Supply chain experts have long been advocating the need of integrating warehouses with the other functional areas of a company; Mercedes-Benz has actually done it at its “Master Parts Distribution Center” (Klimek 2006).

Social significance of warehouses

At this point one must mention the other very important contribution of warehouses towards not only the supply chain but the entire economy and society as a whole. It is common knowledge that agricultural products are harvested during specific seasons while they are consumed throughout the year. Warehouses play a significant role by stockpiling those agricultural outputs during harvesting seasons to maintain a steady supply throughout the year (Stock and Lambert 2001).

John Karolefski feels that most truckers seem to overlook the contribution of warehouses in creating and maintaining the boom time that transport industry has been enjoying for the last two decades. But it is a simple and undeniable fact of commerce and economics that without the presence and active participation of warehouses, there would never have been such upward swing in interregional and international trade, and, without such an upswing, the truckers would never have got such tempting business opportunities. The strongest links in supply chains of varied forms of global industry have undoubtedly been logistics firms that have sound backup of well maintained and efficient warehouses. It cannot be ignored that supply chains are occasionally subjected to severe strains on account of production or transportation bottlenecks at supply end that more often than not occur due to circumstances beyond the control of managements of both facilities. In such situations where almost everybody seem helpless, warehouses act as buffers and absorb the shock by maintaining uninterrupted flow of merchandise till the situation on the other two fronts normalise. The most obvious positive impact of absorbing supply chain shock is price stability which is a very important requirement for maintaining steady progress of commerce and business (Karolefski 2007).

E-commerce and renewed emphasis on warehousing

Warehousing has indeed received a boost with the surge in e-commerce as high flying executives of internet marketing companies realised that, after all, every Internet order is filled in a warehouse somewhere, and the efficiency of the warehouse is the major success factor for those engaging in e-commerce. CEOs the world over have become much more aware of the relevance and crucial importance of warehouses in maintaining efficient supply chains that finally prove to be the cutting edge in today’s highly competitive marketplace (Johnson 2001).

E-businesses that have crossed a certain threshold size tend to construct their own facilities. It is a general rule of the thumb that roughly ten thousand orders a day can sustain an investment of $70 million in order-processing systems and a warehouse of one million square feet (Dayal, Landesberg and Zeisser 2000). Delivery capacity is equally sensitive to the extent of penetration in a particular neighbourhood and an online supplier can afford to set up own delivery mechanism or set up a mini warehouse only if the penetration level is at least 15% of the total households in a zone or locality (Hagel III and Rayport 1997).

Amazon.com, the online retail giant undertook a massive $300 million, 3.5-million-square-foot expansion of its distribution and warehousing system in 2000 to acquire superior control over all aspects of its operation and attain better flexibility and independence in introducing newer products (Houlihan 2001). Dayton, the famous retail chain, adopted another strategy. It acquired catalog house Rivertown Trading to give a solid boost to Target stores’ on-line venture (Bartlett and Ghoshal 2001).

Some e-businesses have certain specific traits that often force them to set up warehouses or distribution points even when business volumes strictly do not justify such an investment. A case in point is that of Peapod’s grocery venture where growth of business depends to a large extent on developing relationships with customers. These relationships depend squarely on the supplier’s ability to fulfil the commitment to deliver orders in no more than two hours. Thus, Peapod’s had no other option but to develop fulfilment centres at San Francisco and Chicago. Each such centre has a localised warehouse that stocks more than 12,000 different grocery products and taken together, Peapod’s has a distribution network that consists of 150 delivery vans and 1,400 employees to service San Francisco and Chicago (Parasuraman, Berry and Zeithaml 2001).

Peapod’s also generates enough consumer data, so much so that it markets information to clients such as Coca-Cola and Kraft Foods and also undertakes on-line promotions of products produced by these two fast food giants. Chief executive Officer of Peapod’s, Bill Malloy admits that the information that the company captures regarding grocery purchasing behaviour of its vast and varied clientele happens to be one of their biggest assets. The grocery distribution company also had helped Sara Lee Corporation to test consumer preferences in packaged-meat and bakery categories. In fact, such assistances, be it in the form of raw data or rational analysis of accumulated data, happen to be one of the substantial sources of revenue flow for Peapod’s. This company has attempted and been successful in optimising online and offline marketing mix to increase sales. Notwithstanding its brilliant use of latest techniques of communication, one should not lose sight of the enterprising attitude of the decision makers of this company when they did not shy away from investing capital to set up warehouses and delivery systems since they could foresee the immense revenue earning potential of such investments (Gilliam 2007).

Some shortcomings in supply chain and warehousing that tend to put a drag on e-commerce

Sales return is an integral part of sales and this is an area where operators of ecommerce are sadly lacking. We are all aware how Nordstrom, Bloomingdale’s, L. L. Bean, and other companies have built rock-solid reputations by the graciousness with which they receive defective or unwanted merchandise from customers. Customers, hence, have no hesitation in buying whatever they feel like from these outlets. If internet retailers want to really match up to the reputation of these retail chains, they must also make adequate logistical arrangement and reserve specific areas of warehouses to accept sales returns with the same agility that they exhibit while shipping the consignment for the first time (Wood 1993).

Unfortunately though, very few companies operating on the internet design their packages for easy repacking and return. Customers thus have no option but to buy fresh packing material and take the trouble of either packing the consignment themselves or pay professional mail order employees to properly pack the consignment if the merchandise happens to be costly or fragile in nature. Then of course the package has to be personally taken either to the post office or to the designated delivery services for onward despatch to the supplier. In between the customer also has to ensure that proper credits or refunds are transferred to his account by the supplier. As it is, each step is not that bothersome, but all of them taken together more often than not generate negative feelings about the supplier in the mind of the consumer (Van Oldenborgh 1994).

As most of internet purchase is basically impulse buying, it might so happen that a customer might hesitate to make another purchase if he or she had faced a lot of hassles while returning some items that were purchased earlier. It is not necessary that the customer will hesitate buying only from that particular vendor; there will be a general lack of interest in making any form of online purchase. Thus the entire logistics of handling sales returns must be made more robust by internet companies if they really want to compete with their brick and mortar counterparts (Jones and Sasser Jr. 1995).

Lean Warehousing

There is complete agreement among management experts across the world that lean operations actually lead to healthy bottom-line. Some companies, after being reasonably successful in implementing lean manufacturing techniques in their factories have started thinking about incorporating lean operation at their warehouses also. The basic concept of lean operations at warehouse consists of identifying and optimising processes that add value to the customer. A simultaneous move must also be undertaken to identify and reduce all those operations that result in avoidable waste or are non-value added in nature. When the target of achieving lean warehouse operations is concurrently tackled from these two opposing vantage points, the chances of being successful brighten considerably.

OPW Fueling Components, based in Cincinnati, Ohio, and a leading manufacturer of fuelling products for gas stations and convenience stores, could successfully implement lean manufacturing in its operations a few years ago. The immediate benefit of it was a 79% reduction in production cycle time and that motivated the management to implement lean concepts in all areas of operation including its warehouse. 

Tom Ciepichal, vice president of operations of OPW, said that the first steps towards lean warehousing had already been taken by the company when it started minutely observing and tracking the processes associated with storing, picking and shipping finished goods and noting the movements made by employees of the warehouse as they went about completing these tasks. The management also took a closer look at how things were stored in the warehouse and gradually introduced bar coding system and supply chain management software to incorporate better visibility in the operations at warehouse. The physical layout of a warehouse also plays a very important role in implementing lean operations and OPW management examined in great detail the layout of the warehouse and whether it complemented the smooth flow from picking and packing to shipping within an optimal time cycle.

But there are people who are still not fully convinced about the existence of a separate discipline as lean warehousing. Bruce Strahan, a partner with The Progress Group (http://www.theprogressgroup.com), felt that lean warehousing has not yet become a full fledged discipline like its more famous counterpart, lean manufacturing, but some pioneers as OPW have already taken steps towards the right direction. Jim Apple, another partner in the Progress Group, had a slightly different opinion in that he thought though people are interested in the concept of lean warehousing; they are yet to take any concrete steps towards achieving it.

Apple further feels that there are certain intrinsic and fundamental differences between the workings of a factory and a warehouse and they must always be kept in consideration while planning for implementation of lean techniques in a warehouse. While a production manager has reasonable knowledge about the production schedule to be followed in the shop floor during the next five or seven days, a warehouse manager can hardly do such pre-planning as in most companies the policy of same day despatch is strictly followed. This obviously means that while the production manager has enough opportunity to properly synchronise the work flow and ensure minimum wastage and blockages in the work process the warehouse manager has hardly that opportunity as he has practically no control in deciding the product mix that is to be handled in the warehouse on a particular day. As he is not in a position to accurately forecast the product load and mix, there would always be a waste; either in the form of excess labour and excess materials, or, in the form of work stoppages due to shortage of men and materials. And, one cannot really blame the warehouse manager for it since he is hardly, if ever, given a confirmed work schedule in advance. This variability that is intrinsic in the functioning of a warehouse creates a big, almost insurmountable, hurdle in implementation of lean warehouse operations.

While on the topic of lean warehouse operations many people have a notion that it is only related to reduction of labour and inventory as they feel reduction of wage bill and inventory carrying cost are the only two objectives of lean operations at warehouses.  Stephen Parsley, principal engineer, Daifuku America, feels that leanness without agility does not mean anything as to be lean means the process has simply reduced unwanted flab whereas to be agile means the process has inherent flexibility and scalability to adapt very quickly to any sort of changes in operational parameters. It is quite obvious that a company will never be agile unless its employees are well trained and are capable to very quickly adjust to changes in operating plans.

The original lean production system at Toyota identified seven cardinal wastages that disturb lean operations and they are: overproduction, waiting, downtime, unnecessary product movement, excess inventory, unnecessary motion and defective products. Best practices as faster setups and error proofing have been designed to reduce these seven cardinal wastages and also to reduce other non-value added activities.

OPW purchased certain products from the market and stored, picked, staged and combined them with those produced in-house before shipping the final output to the customers. Tom Ciepichal, vice president of operations of OPW, observed that there was a lot of staging and sitting in queues during this entire process that caused a lot of unnecessary delays and bottle necks in the supply chain. The response to this problem came in the form of better layout design of the warehouse and more organised and scientific methods of storing where the purchased product was kept closer to the despatch dock to ensure lesser handling while they were combined with other products before being despatched to customers.

Though it is impossible to predict with reasonable accuracy the product mix that has to be handled by a warehouse on a particular day, it is always be possible to predict to a certain extent and optimise a certain part of those activities. An example might make clarify the issue more.

Apple and Strahan of The Progress Group (http://www.theprogressgroup.com) recently were trying to help out a leather goods manufacturer. These two consultants observed that the biggest problem of the company was to gift wrap the consignments during holiday season when more than 95% of all the consignments had to be gift wrapped. The consultants realised that even though the packages might contain different items, the packaging part will be common for almost all the consignments. So, they went ahead and set up a dedicated assembly line that could gift pack all those orders with half the number of employees that were needed to do that work in the previous season.

Some experts are also advocating the use of ‘touch-once’ principle in warehouse operations to increase efficiency. The idea is every time you are touching the product to move it, you are adding to the cost. So, to minimise cost the product should be touched the least number of times possible. One example of practical implementation of such ‘touch-once’ principle would be creation of buffer storage at receiving dock before material is issued to production area, or, is combined with other products before being despatched in small assorted packages to final consumers. The other option would of course be to ask vendors to supply the product in completely packaged form with inner polythene packing, boxes and cartons so that these packages only have to put in larger packs that contain other items for onward delivery to final consumers. The process can be made even leaner by installing a mechanical picking system and all that the worker at the warehouse needs to do is to place these pre-packaged items in the proper bin for the mechanised system to pick up each unit and place it in the final shipping container.

“Postponement” is another way in which lean warehouse operation can be achieved. By postponement one means temporary delaying the manufacture of the finished product till confirmed order is received. Thus the company does not store finished goods but only work-in-process at various stages of completion. This actually reduces the inventory carrying cost and thus the total overhead cost of maintaining the warehouse. This is actually the procedure followed by Toyota in the manufacturing process of Scion line of cars. While the basic platform is manufactured in Japan according to certain predetermined production schedules, the various models, viz., tC, xB or xD are manufactured according to specific demands either at Toyota’s Long Beach production facility or at a dealer’s production facility, if that happens to be logistically more economical. Toyota has also made a marketing coup by taking this agility in its production and inventory system even further by allowing customers to mix and match the various specifications of these three models to create unique designs and models for themselves. Thus, customers get the satisfaction of getting their unique cars within a very short time while Toyota retains its leanness by keeping inventories at the minimum.

Synchronisation of operations is the key to lean warehousing

Manufacturers are depending more and more on technology that can synchronise the supply of deliverables from outside vendors with items and parts manufactured in-house so that the final output meant to be despatched to customers can be packed in a seamless flow without any inventory pile up or stock-outs anywhere in the entire chain. This is known as “in-line sequencing” where parts that pop up at the line exactly match units of the semi-finished product that are being carried down by the line; only to be further finished with the incorporation of these parts. This production line should ideally end at the back of a delivery truck that has backed up at the loading bay of the warehouse.

Lean operation is basically concerned about managing the flow of activities. In traditional warehouses, the orders are picked up and kept in readiness near loading bays while waiting for the trucks to turn up. In lean warehouses, the arrival of trucks are synchronised with delivery dates promised to customers and, working backwards, the release of orders are synchronised with arrival of trucks so that the unnecessary wastage of labour and other resources associated with intermediate storage is completely done away with while making maximum use of available floor space.

However, the most important lean principle that is at the heart of all lean operations is a burning desire to better the current conditions and a total commitment to continuous improvement, with a never-wavering focus on the elimination of non-value adding activities. Once a successful initiative is completed, opportunities of improvement must be identified in other areas and worked upon assiduously so that the organisation starts reaping the benefits of such endeavours (Trebilcock 2004).

Location of warehouses – a tactical decision

The main race is now to minimise the time that should be spent in sending products to the retailers’ shelves and it is becoming even more acute with ever shorter product life cycles – the time interval between introduction of new models, by either the company that marketed the first model or by its competitors. Often product cycles are becoming as less as few weeks from the generally accepted norm of eight to ten months or even a few years that was very common a decade earlier. Retailers are thus demanding supplies within days and the luxury of a six week sea transit across the Pacific is a luxury that hardly anybody can afford.

So, one option being assiduously pursued by organisations is to try and bring warehouses nearer to the consumers. If that can actually be done, the benefits are all too obvious and well known to all the stakeholders in such an endeavour. The shipping costs would come down as the distance travelled would become lesser and deliveries could also be speeded up through use of direct routes. The other lesser appreciated benefit is that, if the warehouse and customers are situated in the same time zone, it become that much easier for customers to communicate and correspond in real time with warehouses and it creates an extremely favourable impression in the minds of customers. Marketers are aware of this and Steve Sensing, VP Operations, Supply Chain Solutions, Ryder System, Inc. notes that several US manufacturers are already improving their routes into Mexico, and their facilities near the border. Some marketers also want to circumvent the heavy traffic and consequent long hours of wait at main airports and harbours by locating smaller airports and ports like Tacoma or moving into more rural areas.

Companies are also moving into places like California’s Moreno Valley, about 30 miles from Riverside, to avoid restrictions that are imposed on movement of trucks and heavy vehicles within city limits that tend to severely compromise efficient functioning of warehouses and to take advantage of cheaper real estate at a slight distance away from the main city centre (Dutton 2008).

At a conceptual level, managers are coming round to the common view that warehousing and distribution are critical to the successful marketing of products: if the product is not where customers want it, when they want it, it is unlikely to sell. So, they are gradually warming up to the idea of integrating marketing and logistics activities and admitting that firms that are integrated can expect to provide higher levels of customer service, at lower costs, as well as create more satisfied customers and increase profits over the long term (Mollenkopf, Gibson and Ozanne 2000).

Theoretical attempts to incorporate inventory cost in the total cost of maintaining a warehouse

While designing a network, logisticians have to decide about the number, location, and size of warehouses in the network. Marketing managers have also to determine the customers that are to be supplied from each warehouse. Setting up and maintaining a network is an extremely costly process. Logistics managers try to reduce the cost burden through an optimally designed network where an equitable trade off is struck between transportation and fixed warehousing costs. When the number of warehouses is less, the fixed costs are lower but transportation costs are pretty high. As more warehouses are added to the network, the fixed costs automatically start climbing and the variable transportation costs start falling for two main reasons. First, additional warehouses greatly reduce the number of miles travelled because the total distance a unit is shipped, from the supplier to the warehouse and then to the customer, gets closer to a straight-line. Second and this is equally vital, the most expensive portion of the journey – from the warehouse to the customer which is usually less than a full truck load – is greatly reduced. So, the logistics managers try to attain the optimal balance of fixed costs of maintaining warehouses and variable costs of transporting merchandise to and from these warehouses (Barney 1994).

What these calculation leave out is the inventory carrying cost in these warehouses. However, as the number of warehouses increases, it is a well known fact that the inventory level increases too as has been conclusively proved by the square root law (Zinn, Levy and Bowersox 1989). Thus inventory costs should be included while calculating the overhead expenditure in running and maintaining a warehouse. But not much published literature is available on this topic because researchers mainly use mixed-integer linear programming to solve such optimisation problems while in reality the relationship between number of warehouses and inventory is not linear (Ballou 2001). As a halfway house, some researchers have assumed that inventory carrying costs are independent of the network design, i.e., inventory levels remain constant regardless of the number and location of warehouses (Miranda and Garrido 2004). However, almost all researchers in this field of study unanimously agree that the inventory carrying costs must surely be incorporated especially if the number of warehouses is fairly high. Else, the actual cost of running and maintaining those warehouses will always be shown as less than what they actually are. But the mathematical complexities that are inherent with such a mix of linear and non-linear cost equations have not yet been fully overcome by researchers though many quick fixes are being bandied around as compromise measures. Jayaraman, for example, adds inventory costs to a network design model, but only considers in-transit inventory and linear cycle stock, not safety stock. This is, therefore, only an approximation or a partial treatment of the entire problem (Jayaraman 1998).

Croxton and Zinn have attempted to incorporate all aspects of inventory cost in their model and claim that inclusion of inventory in designing networks almost always reduces the required number of warehouses. This would help networks that already have a large number of warehouses as a reduction in number will obviously reduce the overhead burden to a certain extent (Croxton and Zinn 2005).

Conclusion

Reduction in number of warehouses need not always be the most logical step

Reducing the number of warehouses is often the most favourite alternative of managements when faced with issues regarding cost reduction and lean supply chains. But it has been found that very often economies of scale are overestimated while taking such a decision. Some costs, as handling costs and consequently space costs are generally considered to be a function of the number of orders handled and remain unaffected by reducing the number of warehouses. There are quite a few other related costs that are also independent of the number of warehouses. Thus, the claim that overheads will be drastically reduced if warehouses are closed down need not always be factually correct. In fact, before a decision to close down a warehouse is taken, the possible impact on customer satisfaction and smooth functioning of the supply chain should be given a serious and deliberate thought (Caves 1984).

While designing the optimum number of warehouses and a suitable supply chain structure, proper emphasis must be given to what might be the future expectations of consumers regarding delivery times and what could possibly be the business moves by competitors and rivals. After these basic data are collected, some rough calculations about warehouse maintenance costs also needs to be done along with a rudimentary cost-benefit analysis of perceived logistic advantage vis-à-vis cost of setting up each warehouse. These analyses should be more than enough to decide upon a preliminary design of supply chain and strategic positioning of warehouses to make that supply chain not only lean but also supremely agile. However, companies rarely analyse the perceived benefit in any great detail; rather, management energies are spent on doing cost calculations in excruciating detail based on assumptions that might often be totally divested of reality (Christopher, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, 2nd Edition 1998).

Once the basic structure is designed including the number of warehouses that would be necessary to maintain efficient distribution channels and consequently greater customer satisfaction, the finer details of where exactly the warehouses would be situated and what would be their respective sizes should be left to logistics experts who would delve further into costs and monetary equivalent of perceived benefits. These logistics experts usually take help of simulation models that derive a lot of the cost data by using regression analysis but the accuracy of the forecast would surely depend on how expertly data has been extrapolated from available regression curves. While going through these details it would be worthwhile for the management to keep in mind that scale of economies seem to decline faster than suggested by mathematical models. As the size of warehouses increase, so does the throughput time in such warehouses, and very soon a situation arises where the economies of scale fail to work and size in effect becomes a bottleneck in the supply chain. So, the managers who have been entrusted to draft a design of distribution set up consisting of optimum number of warehouses, must keep this very important factor in mind while working on the proposed structure (M. Christopher 1971).

Responsibility for logistics function need not always be centralised to achieve maximum efficiency

There is an age old notion among senior managers that centralisation of decision making invariably reduces costs by doing away with highly disposable committees that crowd every level of management and also lowers chances of miscommunication or lack of convergence among several departments, functions and individuals in an organisation. These senior managers have several theories to back their contention. But it has been observed in real situations that though centralisation of logistics indeed reduces costs but the savings never match up to the levels expected. Moreover, centralisation of logistics leads to loss of personal touch with customers and this might at times prove too costly.

This becomes a Hobson’s choice as it were for management and the root cause of the problem lies in management’s inability to properly analyse the nature of logistics function. Logistics function actually consists of two different aspects – one of which can be called planning, where designing a warehouse or a transportation system or strategising about how distribution processes can be made more efficient are tackled; and, the other consists of actually executing the planned manoeuvres while controlling ordering, dispatching, picking, packing, and other related activities on a day to day basis.

There is absolutely no doubt that the planning part of logistic function must be centralised but the execution part should ideally be decentralised and managed at warehouse levels with warehouse managers reporting to regional sales managers. This would introduce a vitally needed flexibility in the distribution system that will most certainly increase consumer satisfaction. An example might clarify the issue further.

Suppose an important customer desperately needs a particular product. If the warehouse manager reports the incident to the regional sales manager, the regional sales manager might even send a person in a taxi with the required goods if the customer is really that important. However, as the regional manager will also be responsible for warehouse costs, he/she would surely ensure that such special deliveries will never become commonplace and will be resorted to only when they are absolutely necessary. But if deliveries are centralised, the customer would never get what he wanted through special deliveries no matter how urgent the requirement might be. This would surely increase customer dissatisfaction which, if not attended to in early stages, might result in the consumer leaving for good.

The point that is being emphasised at this juncture is if some control is left at local level, distribution system will be more agile and flexible and would be better equipped to tackle sudden changes in market parameters (Hobbs 1996).

ABC classification of products need not necessarily be the basis for determining where products are to be stocked

Many companies use the ABC categorisation of products to determine where products are to be stocked with the typical distribution being “A” products at stores, outlets, or dealerships, “B” products at regional warehouses and “C” products at central warehouses. ABC method of classification lays entire emphasis on money value of the items and does not attach any importance to customer delivery-time expectations or urgency or economic value an item might have with the customer. There are several related examples in the automobile sector.

Brake pads, spark plugs, filters, and badges usually are hottest selling items and are thus are classified as “A” parts, and stocked at every dealer. An electronic fuel injection system is decidedly much more costly than spark plugs, but as such systems are rarely purchased, they are categorised as “B” parts. However, while a customer can very well do without a badge for seven days, unless the fuel injection system is functional, the car would not move forward even an inch. Thus an electronic fuel injection system is much more important to a customer than say a badge; not because it is costly but because it is crucial for the car to remain operational.

An optimal distribution of items that caters to both – customer satisfaction as well as logistics costs – can be done only when consumer expectations of delivery times are taken into account. Consumer expectations are measured in by the length of time the consumers are prepared to wait for the delivery of a particular product.

Consumers are indifferent as to when they receive a consignment as long as it is delivered within the expected time but there is a sharp drop in consumer satisfaction if the delivery is delayed beyond the expected time. Consumer satisfaction is at its highest if the delivery is done within the expected time. It must also be realised that while customer expectations vary from product to product, the same product might have different customer expectations in each customer segment and geographical market. Thus a completely radical approach is necessary to solve this seemingly intractable stocking problem (Gregson 1977).

After customer expectations are assessed for all the products, they can be categorised in two main types – there will be some product groups or families that are required to be stocked at certain logistical levels at retail outlets or regional warehouses in order to satisfy high consumer expectations while there will be other product groups or families that can be stored at central warehouses as consumer expectation for these products are sufficiently low and consignments can be conveniently delivered from central warehouses to regional warehouses or retail outlets well within the duration of consumer expectation (Mentzer and Kahn 1995). For these products, an optimal stocking policy has to be laid down after a careful comparison of cost of ordering optimal lot sizes from a warehouse with the cost of ordering the product on a need basis.

Thus in our example, stock mix at retail level would consist of only two types of products:

  • Products that cannot be obtained from regional warehouse within the customer expectation period, and
  • Products those are not required at retail level according to calculation of customer expectation, but whose optimal ordering lot is at least two thus making it economical to store them at retail level.

This method of determining optimum inventory level can be extended to regional warehouses and central warehouses too and the positive benefits of reduction in cost and increase in consumer satisfaction can then be reaped at each logistical level (Scott and Westbrook 1991).

Customer satisfaction as the key factor in determining distribution logistics

If customer expectation is considered to be the key limiting factor in the entire logistics function, it becomes easier to reach higher levels of customer satisfaction at comparatively far lower levels of cost. Such an approach systematically outlines an optimal distribution strategy starting from the point of sale and working backwards right up to the procurement of raw materials for production, taking into account and incorporating customer expectation at each stage.

Since customer expectation is such an important parameter in this form of distribution logistics, it becomes necessary to know how exactly it can be obtained with a fair degree of accuracy in the real world. The only way to know customer expectations is by visiting different markets and surveying and interviewing different classes and groups of customers to determine class-wise and group-wise expectations. Once customer expectation of a product or a group of products or a family of products is known, the optimum assortment structure can then be logically determined very easily. Optimum assortment refers to identification and bifurcation of products according to their stocking locations, i.e. identifying which products will be stored at retail outlets and which products could be stored at regional warehouses.

Huge multinationals that sell a vast array of products to a wide swath of society feel less interested in measuring customer expectation, not because it is a complicated concept but because of the huge complexity that seems inherent in any attempt to sincerely record customer expectation for so many products that are consumed by so many people coming from such diverse social and economic backgrounds.

The best way out of this imbroglio is to cluster the product range into a few product families, and group the customer delivery-time expectations according to customer segment and region. The problem now becomes manageable as relevant data can be obtained by interviewing a number of local sales managers and retailers. The acquired data can then be verified by interviewing a few customers. One must, however, remember that customer expectations change over time, especially because of competitors’ actions. Thus consumer expectations data need to be updated at regular intervals to keep the entire analysis and exercise relevant and useful in improving bottom-lines of commercial enterprises.

Armed with that data, optimal delivery structure can be easily designed once the best combination of material and information flow options that ensure a low-cost but high-performance distribution network is determined.

From the information obtained in the first two steps, the number of warehouses that is required for smooth and efficient running of the entire material flow system can be extrapolated. However, their precise location and size can be confirmed only after collecting handling costs, inventory costs, and transportation costs associated with each proposed warehouse and rigorously analysing these data (Skjoett-Larsen 1999).

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Competitive strategy of Toyota

Filed under: Corporate Management — niranjanchatterjee @ 10:58 pm

Table of Contents

  1. Executive Summary. 2
  2. Introduction. 3
  3. How Toyota charted its independent production strategy. 5
  4. Corporate Strategy and Business Strategy. 9
  5. SWOT Analysis. 11
  6. PESTLE Analysis. 14
  7. Porter’s Five Forces Analysis. 17
  8. Force Field Analysis. 19
  9. BCG Matrix. 20
  10. References. 22

 

 

 

Executive Summary

Toyota Motor Company has remained a wonder to all researchers that have delved into the mysteries of the famed Toyota Production System. Though numerous automobile companies have tried to replicate it the result was always far from satisfactory probably because none of the companies could implement the entire Toyota Production System in its entirety.

The story of ascendancy of Toyota Motor Company from its humble beginning rooted in the rubble of Second World War and reaching the position of the largest car maker of the world beating General Motors way back in 2008 is indeed awe inspiring.

The political, social and economic conditions were genuinely unique in Japan when Toyota Motor Company was incorporated and Toyodas never hesitated to grab the opportunity that was handed to them on a platter by United States of America.

Toyota took the first bold step by moving away from the Ford Production System and devised its own unique Toyota Production System that suited not only its long term goals and strategies but also seamlessly matched its resources, capabilities and prevailing market demand.

The competitive strategy adopted by Toyota through the last seven decades when analyzed now with the help of several management tools still seem to be the best that could have been adopted at different points in its astounding growth curve.

Introduction

Hardly six decades ago, Japanese goods were the subject of worldwide derision but the scenario underwent a sea change as the hitherto latent powerhouse of Japanese industry slowly started flexing its muscles. The awe inspiring story of Japanese ascendency to industrial supremacy was intimately related to its political history and, most certainly, with the history of one of its industrial giants – Toyota Motor Company.

Japan was till then manufacturing basic electrical gadgets that were generally flimsy and bore no guarantee of trouble free service (Juran 1993). People bought Japanese goods only when there were no ready substitutes manufactured in Europe or United States available at stores. Standing at that point in time even the staunchest optimist and a diehard supporter of Japanese industry would have hesitated to give this country a chance of not only competing but also outsmarting in most cases European and US manufacturers in such a durable good as automobile. Japanese automobiles have indeed become ubiquitous in almost all countries of the world and such is the onslaught from Japanese auto makers that some of the erstwhile lions of this industry have scurried to take cover behind mergers and acquisitions.

This metamorphosis, a virtual transformation of a caterpillar into a butterfly, did not, however take place through the handiwork of some genie; it took years of single minded application and unwavering focus of Japanese industrial captains who were resolute in pulling back the country from the yawning precipice of total economic bankruptcy that stared in their face at the end of Second World War that nearly devastated entire Japanese industrial infrastructure. Japanese are a nation of proud people and it was extremely difficult for them to stomach the comprehensive defeat they suffered in the hands of Allies and the entire society rallied around to the clarion call by industrialists to revive their lost glory and make an almost improbable (at least it seemed at that time) attempt to reach the top of the industrial ladder among all nations around the globe. It might be worthwhile to mention at this juncture that this hard to believe transformation that Japan could achieve has till now not been replicated by any other country.

Economic historians are largely of the opinion that Japan had experienced a unique juxtaposition of diverse economic, social and political crosscurrents that would perhaps never be present together at any time in future. Russia was fast emerging as a threat to United States, who was eager, almost hypochondriac if one may so, to halt this communist superpower in its tracks before it becomes a serious obstacle to US hegemony over world affairs. Keeping this objective in mind United States signed a military alliance with Japan and actively encouraged companies based in US to license technology and knowhow to Japanese producers so that their industry could become viable at the earliest. Though American gesture was couched in grandiose sobriquets of magnanimity and humane attitude, the basic objective of Americans was to create a strong industrialized nation at the backyard of their mortal foe the Soviet Union which would act as a bulwark against any future expansion plans of the communist behemoth that was ruled by another megalomaniac Stalin. As a part of their newfound camaraderie and cooperation with Japanese industry, United States military also sought help from Japanese companies to get their vehicles serviced and repaired if necessary. Japanese were no sloth bears to let go of this unexpected bonanza as they grabbed this heaven sent opportunity with both hands and Japanese automobile industry got to know the intricate details of the latest technology that were put into American vehicles (Williams, et al. 1994).

Japan had one of the most educated and dedicated workforce in the world that was further supplemented through induction of erstwhile soldiers who were not only well disciplined but also technically sound and had been trained in the armed forces to walk that extra mile if necessary without even a whimper of protest (Spear and Bowen 1999). Moreover, they had that fire of humiliation and eagerness to pay back erstwhile adversaries in the same coin by demolishing their industrial supremacy burning in their hearts. So, motivating workers was never a problem in Japan – they were mostly self motivated. A strong sense of loyalty that permeates the social and emotional fabric of Japan also had an important role to play at this juncture. Each Japanese worker thought of the company as his own and life long association with one company was more the norm rather than an exception. Moreover, Japanese industry captains realized one vital thing very quickly – if they are to match up to European and American producers they have to be extremely meticulous about quality as that is the only parameter that differentiates one manufacturer from another. Kiichiro Toyoda, president of Toyota Motor Company, understood this basic fact earlier than most of his compatriots and got around to the notion that quality is not one among many problems that had to be overcome but the only problem that needs to be surmounted if Japanese automobile industry had any chance to compete with European and US rivals. This precedence of quality above anything else gave Japanese automobile industry a significant advantage over others and Toyota became the face of Japanese industrial revival (Ohno 1988).

How Toyota charted its independent production strategy

Kiichiro Toyoda, the then president of Toyota Motor Company, was an ardent admirer of assembly line production system at Ford Motor Company and sent his cousin Eiji Toyoda to US in 1951 to study the famed production system from close quarters. Ford was then able to achieve stupendous levels of output and the gains from economies of large scale were generously passed on to customers who got quality product at eminently affordable prices. It is perhaps necessary here to quote some statistics to highlight the phenomenal production capacity of Ford Motor Company. While Toyota could produce only a total of 2,685 motor cars during the thirteen years of its lifetime, Ford was at that point in time producing 7,000 motor cars daily (Womack, Jones and Roos 2007).

Henry Ford understood rather early in his career that specialization is the key to increased productivity. So, he broke down the entire production process into quite a large number of identifiable and specific jobs and allocated each such job to a specific group of workers. Initially, the cars remained static at a particular place while each group of workers took their turns in finishing their allocated jobs on those stationary semi-finished vehicles by moving from one vehicle to another. However, the real breakthrough came when these semi-finished cars were put on mobile assembly lines and workers remained static at one place. Productivity increased by a mind boggling 88% and inventory of components lying on the shop floor also reduced drastically thereby reducing working capital requirement and increasing return on capital employed (McKay and Wiers August 2004).

No matter how much Eiji Toyoda was impressed by the enormous production capacity of Ford he was pragmatic enough to realize that Toyota at that point in time did not have enough customers and thus planned for an output that could be absorbed by Japanese market only. So, instead of producing large volumes of a single product, Eiji Toyoda devised a production system that would efficiently produce small volumes of a fairly large portfolio of products and Toyota Production System was born (McCoby 1997).

Taiichi Ohno who was then production manager at Toyota perchance observed if production is done in small batches inventory levels reduced drastically thereby freeing working capital locked in inventory and reducing interest costs substantially. Moreover when workers worked over small batches manufacturing defects could be identified almost immediately thereby preventing further labor and material expenses on the defective output.

Ohno went to Ford’s factory at Detroit quite a few times to observe its famed production system from close quarters and felt Toyota should not blindly replicate Ford’s production process but needed to tighten quite a few more areas if it wanted to achieve success.

Ford had in place a foreman who supervised the workers and there was a separate housekeeping department that periodically cleaned the workplace. There was also a separate maintenance department that inspected machines at a regular frequency to ensure no unwanted breakdowns occurred during production. There were also quite a few quality inspectors that inspected semi-finished products at random to ensure adherence to quality standards and there was a rework area right at the end of the assembly line. Moreover, there was an additional gang of workers who covered up for unexpected absenteeism.  Ohno felt expenses incurred on all these groups did not add value to the production process and decide to make it leaner (Rother and Shook 2003).

Ohno abolished the post of foreman and entrusted gang leaders to perform the job of supervision. Further, housekeeping of their respective areas was made the responsibility of each group of workers. Each group was also entrusted with carrying out minor repairs and regular maintenance of machines under their custody and checking the quality of their output also became their responsibility. Ohno felt shop floor should be populated only by those that are directly linked to production and thus reduced a considerable amount of production overhead (Tolliday 1998).

Ohno also introduced a novel concept whereby he ensured some time is set aside for each group of workers when they would discuss among themselves to find out ways and means of bettering the current levels of productivity. This concept was eagerly lapped up by western manufacturers and it came to be known as ‘quality circles’ in industrialized nations. Toyota, quite obviously, stuck to the Japanese name of kaizen which has till date been the mainstay of Toyota’s production process (Imai 1986).

Ohno also did away with the concept of rework area right at the end of the assembly line. He ensured that defects be rectified right where they occurred to prevent any further expense on the defective piece and introduced jidoka – an automatic mechanism of self regulation somewhat on the lines of power looms designed by Sakichi Toyoda that stopped the moment one thread broke. To further bolster the system that prevented defective outputs from proceeding further along the production line Ohno also introduced another equally novel concept called andon system where every worker had the right to stop the assembly line the moment any one of them detected a defect. As soon as the assembly line was halted related workers would gather around and solve the problem that caused the defect and production line would be restarted only after the problem has been fully analyzed and solved so that recurrence of similar problem would never happen in future. Though there were numerous stoppages initially, production lines have hardly been interrupted since 1990 even though every worker still retained the right of stopping the production line if any defect is spotted.

Ohno also came down heavily on unnecessary inventory and introduced Just-in-time (JIT) inventory system that was based on the dictum “Producing only what is needed, in necessary quantity and at necessary time (Toyota Production System 1995).” To reduce levels of inventory at shop floor he introduced kanban system that ensured preceding processes would produce only that amount that would be required by succeeding processes. This removed unnecessary stockpiling of inventory at production bottlenecks. The other technique introduced by Toyota is Value Stream Mapping.

(University of South Australia 2008)

This method visually follows the flow of material right from its entry as raw material and exit as finished product. Value added at each step of production process is noted thereby identifying processes or procedures that do not add value and enabling management to focus on processes that add substantial value to the product. There are basically four main steps:

  • Preparation
  • Current State
  • Future State
  • Planning and Implementation

Constant reference to “future state” or the desired target motivates workers to achieve it at the fastest possible time (Locher 2008).

The other innovation of Toyota was the introduction of 5S:

  • Seiri (Removing all that is unnecessary)
  • Seiton (Everything should be in their designated places)
  • Seiso (Cleanliness)
  • Seiketsu (Strict conformity to predetermined standards)
  • Shitsuke (Relentless application of the above four tenets)

These 5Ss improved workplace ambience and motivated workers to give their best.

Toyota also introduced one other novel concept known as Quality Function Deployment (QFD) which is a path breaking idea in the field of production and marketing since production is done according to customer requirement and not the other way round. This system ensures complete absence of unwanted stocks of finished goods as the company has produced only what the customers wanted (ReVelle, Moran and Cox 1998).

Toyota also introduced the concept of Total Productive Maintenance (TPM) that ensured regular maintenance of machines is done by including maintenance time within the normal production cycle time. This drastically reduced production losses due to machine breakdowns (Wireman 2003).

Corporate Strategy and Business Strategy

The success of failure of any business enterprise depends upon the strategy adopted by its owners or managers. But one needs to differentiate between corporate strategy and business strategy at the outset before taking the discussion any further. Corporate strategy comprises of the entire gamut of decisions taken by the top brass that sets in clear and unambiguous terms the basic goals, objectives and purpose for existence of the organization. It also states what the organization wants ultimately to evolve into in terms of human, social and economic parameters and how it would like to interact with its stakeholders that consist of employees, customers and the community as a whole. Corporate strategy is applicable to the whole organization and is reflected in its policy decisions over a long period of time and is more often than not embedded in the inherent cultural ethos and power structure of a company. Business strategy, on the other hand, is not so all encompassing and often times relate to how a company would respond to certain specific business and market conditions especially in devising ways and means to beat competition in a particular business environment (Rumelt 2011). Corporate strategy determines what would be preferred field of operation while business strategy determines how best the company would operate in a given market situation (Berg 1965).

The corporate strategy of Toyota was to maintain highest possible levels of quality at minimum possible cost. With this objective in mind the top brass of Toyota went about setting a production process that was not only unique but could never be replicated by any other automobile company in the world. This production process was unique in more senses than one. It was extremely rigid and simultaneously flexible and allowed innovations while laying down in minutest details about how many turns each nut should have in order to make a perfect fit while fixing seats on an automobile body. Further, it was almost fastidious in keeping in-process inventory in control so as to lower production overheads to the minimum. After all, Toyota had to also compete on price front and be able to produce quality which bettered western standards at less than half the cost. The basic corporate philosophy of Toyota of maintaining a lean and agile company was also evident in how it entered the intensely competitive western markets and how it succeeded to beard the reigning lions in their own dens (Spear and Bowen 1999).

However, any strategy can be successful only when it is flawlessly matched with available resources so corporate strategists must not only be able to minutely assess corporate capability and available resources but also current and future market demand along with associated risks in pursuing a particular trajectory. This indeed is a process that is not only complex but also fraught with innumerable risks and based on accurate quantification and identification of corporate competence and resources (Andrews 1997) and equally accurate estimation of threats in business environment. Such an analysis is often referred to in business parlance as SWOT Analysis.

SWOT Analysis

  • Strengths
    • Toyota’s strength lay in its dedicated, well trained and disciplined workforce that did not mind bending their backs to achieve higher levels of productivity. Moreover, Toyota employees were eager learners and fiercely loyal to their company and were prepared to follow to the tee as it were instructions of their supervisors.
    • There was a debilitating sense of humiliation and an equally fierce desire to give it back to the western world in the Japanese society and Toyota workers were deeply influenced by it as they thought the only way to get even with their conquerors would be to excel them in industrial development.
    • Though they admired Ford’s Assembly Line Production process the top management of Toyota was not at all carried away by the prevailing glamour and glitz of Ford Motor Company. They visited several times the factories of Ford and minutely observed their production process but were not averse to adjust it to fit Japanese environment. This independence of thought and courage to chart a new path was perhaps the greatest strength of Toyota Motor Company.
  • Weaknesses
    • The biggest weakness they had to overcome was a universal perception that Japanese products were not dependable. While such a perception could be fought off through markedly reduced prices in case of cheap electronic and other gadgets as watches, it was extremely difficult to fight off this perception for a high value item as an automobile especially since durability and dependability of an automobile is the primary criterion of choice for a customer.
    • As the Second World War ended Japanese industrial structure was in a state of near devastation and it was a herculean effort for industrialists to rebuild what they had and bring back the tempo and work ethic in a society that was scarred by a war that first used the nuclear bomb.
    • Quality was never an issue with Japanese manufacturers who concentrated on volumes and least costs. To effect a complete change in mind shift where quality became supreme while keeping costs at a minimum was indeed a huge challenge that confronted Toyota Motor Company. 
  • Opportunities
    • The opportunities were virtually unlimited in the sense that Toyota was an underdog that was never considered a worthy opponent by any of the reigning automobile giants of United States and Europe. Being an underdog always brings with it the added advantage of not being seriously watched or scrutinized by competitors. The condescension of western manufacturers was further compounded by Toyota’s virtual rejection of Ford production system and this helped it to consolidate and strengthen its position virtually unnoticed by its competitors. So, when it emerged in the market competitors were totally unprepared and had no defense or counterattacking plan in place. Toyota utilized this opportunity to the hilt to climb to astounding heights.
    • United States of America due to international political compulsions of its own willingly transferred latest automobile technology and offered concessions and other form of assistance to Japanese industry in general and automobile industry in particular. This was an opportunity that Japanese could not even dream of as they could lay their hands on latest automobile technology that United States used in its advanced military vehicles. This opportunity provided the Japanese the much needed quantum jump in technical expertise and instilled in them a quality consciousness that was hitherto nearly absent in Japanese industrial landscape (Martins and Terblanche 2003).
  • Threats
    • There was a constant threat of customers turning their faces away from Japanese automobiles that did not have practically any esteem value which is a very important ingredient in customers’ purchase decision of automobiles. Other than lack of esteem value there was also the threat of failing to satisfy customer expectations in terms of comfort, standards of safety and comfort. It is a natural behavior of customers to shy away from new entrants in automobile market where visibility of products of a manufacturer is a very crucial for convincing potential customers into buying products of a manufacturer. So, there was a constant threat of whether that crucial volume could be achieved by Toyota Motor Company which would make it a cognizable presence in foreign automobile markets.
    • Japanese automobile industry got a tremendous boost through American help but there was a constant threat whether United States would continue providing unstinted help even when it realised that its domestic automobile industry faced competition from Japanese products. If United States withdrew its hand of cooperation at initial stages when Toyota and the rest of Japanese industry was struggling to get back to their feet it would have spelt doom for this nascent company.

PESTLE Analysis

Any business gets influenced by internal as well as external factors and forces. SWOT Analysis mainly focuses on the internal forces and factors within an organization while PESTLE Analysis concentrates on external factors and forces that are more often than not beyond the control of company management. As most of these factors are uncontrollable, management needs to be extra cautious and should always try to remain proactive to possible changes in external environment so that it is never caught unawares.  

  • Political

Political factors did indeed play a significant role in the ascendancy of Japanese automobile industry. If Soviet Union did not arrive in the scene as a communist superpower United States would never have gone out of its way to assist Japanese automobile industry to get back to its feet so quickly. Also, it would not have allowed Japanese motor cars to enter its domestic market without raising a protective tariff barrier. Japan could get these twin benefits simply because of the prevailing political climate.

  • Economic

The economic condition of Japan was very weak at the end of Second World War. While this would have crippled any other economy, Japanese economy took it up as a challenge and strived to get over the worst phase at the quickest possible time. The weak economy also had another beneficial impact. Labor was very cheap as compared to western countries and Toyota could take full advantage of this as it could price its products well below the prevailing market price in western countries (Lynch 2005).

  • Socio-Cultural

Japanese are by nature very hard working and disciplined. Moreover, they value loyalty very much and would rarely, if ever, violate group codes of conduct. The prevailing ethos in Japanese society helped industrial captains to a great extent especially during the crucial period of reconstruction. They very well knew that United States was helping them to consolidate its own geo-political interests and might not be so generous when it realizes that Japan has started challenging its domestic industries. So, the entire Japanese society as it were was in a tearing hurry to achieve self sufficiency at the shortest possible time. This attitude and approach to work immensely helped Japanese automobile industry to get a firm a footing and a huge boost in its most vulnerable phase (Pearce and Robinson 2007).

  • Technological

Toyota could lay its hands on latest American automobile technology thanks to US military that got its vehicles repaired by this company. So the gap in technological expertise that Japanese automobile makers had was quite unexpectedly bridged through American largesse.

Legal

Japan was a defeated nation and hardly had the ability to put in place a proper legal framework to regulate its industries and corporate activities. Actually there was no need of any such strictures as such as the entire country responded valiantly to the clarion call of industry captains and the prevailing government and other stakeholders worked overtime to remove any hurdles, real or perceived, that could be in the pathway of regeneration of Japanese industry.

  • Environmental

Any talk of environment pollution surely sounded as a big joke to a nation that had very recently borne the brunt of a nuclear bomb. So, any sort of environmental concerns were practically non-existent in Japan just at the end of the Second World War. Toyota and other industrial heavyweights in Japan did not have to waste even a single minute on these issues.

Porter’s Five Forces Analysis

(tutor2u 2009)

In order to survive and prosper in an intensely competitive market place a firm must learn how to adapt to changes in external forces and factors over which the management has little or no control. The strategy adopted by the firm should be firmly based on its anticipation of future realignment of forces and a fair idea about nature and characterisitics of its future competitors (Levitt 1986).

Michael Porter postulated extent and intensity of competition in any market is determined by the following five basic forces (Porter 1980):

  • Potential Entrants

It is not easy to set up an automobile company considering the enormous amount of capital and technical expertise that is necessary to set up one. Moreover, in a market where brand recognition and brand positioning is of vital importance to gain a toe hold, it is next to impossible for a new entrant to enter the market and create an imbalance in the prevailing market share scenario. Thus Toyota with its formidable market reputation and previous history of being a giant killer need not be too much worried about fresh competition. Even if any such competition does indeed materialize, the company is lean and agile enough to forestall maneuvers of any such new entrant.

  • Competitive Rivalry

This is a veritable minefield in automobile industry. With each big player in the market bringing out new models after almost every six months and buyers becoming more and more discerning it is indeed an uphill task for any automobile company to consistently be ahead of the pack. But Toyota has excelled in this regard by drastically reducing lead time in handing over customers their new cars. The case in point can be explained through Scion line of cars produced by the company. The basic platform is manufactured in Japan in accordance with some predetermined schedule and they are transported to United States in that semi-finished state. The various models, viz., tC, xB or xD are manufactured according to specific confirmed orders either at Toyota’s Long Beach production facility or at dealer’s workshop depending upon which would be logistically and technically feasible and more economical. Thus Toyota is able to keep at bay competitive rivalry while keeping customers happy not only through speedy delivery but also by allowing them the luxury of customising their cars according to their individual tastes and preferences (Goldsby, Griffis and Roath 2006).

  • Substitutes

Substitutes are available by the dime and the dozen as it were but Toyota is able to sell its cars without much anxiety and tension simply because it has been able to provide exquisite quality at very reasonable price through its inimitable Toyota Production System. Other competitors are simply unable to match Toyota’s quality at prices which Toyota quotes.

  • Buyer’s Bargaining Power

This depends almost entirely on the financial strength of buyers and their ability to set off one producer against another. But this also does not have much impact on Toyota simply because its products are priced so reasonably that it is just not possible for competitors to quote prices that are lower than that quoted by Toyota. Moreover the quality of Toyota’s products also is in most cases superior to its competitors. Thus buyers have little or no influence on Toyota.

  • Supplier’s Bargaining Power

Toyota has followed a policy of depending on a few suppliers and the mutually beneficial relationship has been going on for decades together resulting in deep rooted bonding between Toyota and its suppliers. Hence, the issue of suppliers flexing their muscles to gain an economic advantage is not really applicable to Toyota. It hardly faces any sort of supplier pressure. Tensions and frictions when they do surface are amicably settled across the table.

Thus it might be concluded that effective marketing does not depend only on thorough market survey about consumers’ tastes and preferences but also on an equally thorough research on the intricacies of industry and industrial intelligence about present and prospective competitors (Grant 1991).

Force Field Analysis

The technique of Force Field Analysis identifies driving forces and restraining forces that are present in any situation and top management of a company tries to promote driving forces while stymieing restraining forces that prevent a desirable change from taking place. The current state is achieved at the equilibrium point between driving forces and restraining forces and management should strive to disturb that equilibrium so that driving forces gain supremacy over restraining forces.

(ACCEL team development 2012)

Though it is not known whether Taiichi Ohno performed any analysis similar to that depicted above, he sure did weaken the restraining forces of excessive manpower and stockpiled inventory through kanban while boosting the driving forces of increased productivity through kaizen and andon systems. The net result was a stupendous increase in productivity at Toyota Motor Company.

BCG Matrix

“Boston Box’ or BCG Matrix is a very popular managerial tool that identifies the strategically significant business divisions or product lines of a company and ranks them in a matrix that has relative market share and market growth on two axes. Though this tool was originally aimed at companies having multiple products portfolio it is now also used by single product companies to improve their profitability.

The Boston Consulting Group Box (“BCG Box”)

(tutor2u 2009)

This decision making tool helps a business to determine investment allocation among its different product lines so as to maximize overall corporate return on investment (Lancaster and Reynolds 2005).

  1. Toyota needs to determine whether it would invest heavily on a product lying in ‘question marks’ quadrant to pull it up to the ‘stars’ quadrant.
  2. To regulate investment in such a manner that a company remains in the quadrant it now is in. Toyota’s Multiple Purpose Vehicles could be a very good example of such a decision.
  3. To scale down investment in certain product lines so as to free capital urgently needed in some other product lines. Toyota needs to be very careful about such decisions as any reduction of investment would automatically prevent any further quality improvement in these product lines and might push down one product line presently enjoying ‘star’ status to ‘cash cow’ status.
  4. To firmly decide to disinvest in product lines that refuse to budge from ‘dogs’ quadrant in spite of the best efforts of the management.

References

ACCEL team development. “Force Field Analysis.” ACCEL team development. 2012. http://www.accel-team.com/techniques/force_field_analysis.html (accessed February 9, 2012).

Andrews, Kenneth R. “The Concept of Corporate Strategy.” In Resources, Firms, and Strategies: A Reader in the Resource-Based Perspective, by Nicolai J. Foss (ed.), 52-59. Oxford: Oxford University Press, 1997.

Berg, Norman. “Strategic Planning in Conglomerate Companies.” Harvard Business Review, May-June, 1965: 79-92.

Goldsby, Thomas J., Stanley Griffis, and Anthony Roath. “Modelling Lean, Agile, and Leagile Supply Chain Strategies.” CSCMP Publications & Research. August 31, 2006. http://cscmp.org/resources/publication-research-lp.asp (accessed August 6, 2009).

Grant, Robert M. Contemporary Strategy Analysis. Blackwell, 1991.

Imai, Masaaki. Kaizen: The Key To Japan’s Competitive Success. Irwin: McGraw-Hill, 1986.

Juran, Joseph, M. “Made in USA: A Renaissance in Quality.” Harvard Buisness Review, July-August 1993.

Lancaster, Geoff, and Paul Reynolds. Management of Marketing. Burlington, MA.: Elsevier/Butterworth-Heinemann, 2005.

Levitt, Theodore. The Marketing Imagination. The Free Press, 1986.

Locher, Drew. Value Stream Mapping for Lean Development: A How-To Guide for Streamlining Time to Market. Productivity Press, 2008.

Lynch, R. Corporate Strategy (4th edition). Prentice Hall, UK, 2005.

Martins, E, and F Terblanche. “Building Organisational Culture that Stimulates Creativity and Innovation.” European Journal of Innovation Management, Vol. 6 (1), 2003: 64-74.

McCoby, Michael. “Is There a Best Way to Build a Car?” Harvard Business Review, Nov-Dec 1997.

McKay, Kenneth N, and Vincent C S Wiers. Practical Production Control: A Survival Guide for Planners and Schedulers. J. Ross Publishing, August 2004.

Ohno, Taiichi. Toyota Production System: Beyond Large-Scale Production. Productivity Press, 1988.

Pearce, John A, and Richards B Robinson. Strategic Management: Formulation, Implementation and Control. Irwin: McGraw-Hill, 2007.

Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors . Free Press, 1980.

ReVelle, Jack B, John W Moran, and Charles A Cox. The QFD Handbook. Wiley, 1998.

Rother, Mike, and John Shook. Learning to See. Lean Enterprise Institute, 2003.

Rumelt, Richard. Good Strategy Bad Strategy: The Difference and Why It Matters. New York: Crown Business, 2011.

Spear, Steven, and H. Kent Bowen. “Decoding the DNA of the Toyota Production System.” Harvard Business Review; September-October, 1999: 96-106.

Tolliday, Steven (Editor). The Rise and Fall of Mass Production. Edward Elgar Publishing, 1998.

Toyota Production System. 1995. http://www.toyota.co.jp/en/vision/production_system/ (accessed May 31, 2009).

tutor2u. “Porter’s Forces Model.” tutor2u. 2009. http://tutor2u.net/business/strategy/porter_five_forces.htm (accessed February 9, 2012).

—. “Product portfolio – the Boston Matrix (or Boston Box).” tutor2u. 2009. http://tutor2u.net/business/strategy/bcg_box.htm (accessed February 9, 2012).

University of South Australia. Process and value Stream Mapping. July 15, 2008. http://www.unisa.edu.au/strategic/lean-mgt/Documents/PVSM%20workshop%20G%20email.pdf (accessed December 29, 2009).

Williams, K., C. Haslam, S. Johal, and J. Williams. Cars: Analysis, History, Cases. Providence: Berghahn Books, 1994.

Wireman, Terry. Total Productive Maintenance. Industrial Press Inc., 2003.

Womack, James P, Daniel T Jones, and Daniel Roos. The Machine That Changed the World: The Story of Lean Production– Toyota’s Secret Weapon in the Global Car Wars That Is Now Revolutionizing World Industry. Free Press, 2007.

Assessment in Human Resources Development – Critical Analysis of HRD intervention

Filed under: Corporate Management — niranjanchatterjee @ 10:52 pm

Introduction

With businesses crossing domestic frontiers and communications and travel becoming increasingly smoother and hassle free, competition is now not limited only within domestic markets, it has spilled over to the international arena. Only those organizations that remain efficient will be able to survive the competition which is only going to be more and more acute with each passing day.

While financial and physical resources can be acquired pretty easily, human resources are neither that easy to procure and, what is most important, nor that easy to retain. But a properly structured human resource development program can bring about substantial improvement not only in the bottom line of the company but also effect substantial change in the lives and careers of numerous people. And, every management guru would vouch that a dedicated and efficient workforce is a sure recipe for near permanent success no matter how tough the external competition becomes.

This essay has been organized in two distinct but intrinsically related compartments. In the first part, prominent theories dealing in employee development and organizational learning have been discussed and their relevance in current economic context is critically evaluated. This critical evaluation obviously looks into the practicality of these theories and comments on their applicability in real life situations.

The second part of the essay is devoted to analyze real life situations where these theories of human resources development have been applied and the lessons drawn from such practical experiments.

Theories of Strategic Human Resource Development

The economic and business scenario is changing very fast and qualifications and competencies which were till yesterday considered crucial and critical towards effective functioning of an organization are suddenly becoming obsolete and unless employees reorient, retrain and reequip themselves with newer and more relevant skills, they would also become obsolete much like the machines which are discarded due to the advent of later day technology. (Rouda & Kusy Jr, 1995)

Jack Mezirow’s Transformative Learning Theory – a review

Jack Mezirow believes that under normal circumstances an individual usually never questions his or her way of looking at things and expects past experiences to repeat with unfailing regularity in future too. But on being faced with a cataclysmic incident such as sudden loss of employment or means of earning a livelihood, some individuals may start questioning their long held beliefs and assumptions. The cataclysmic event need not always be loss of job; it could even be a particularly severe criticism by the superior at work place, or an unflattering evaluation of a term paper by the professor at college or university. Mezirow terms such a shattering of long held beliefs and convictions as a disorienting dilemma and states that such disorientation is necessary to trigger a critical evaluation and oftentimes deconstruction of past experiences which almost invariably lead to the creation of a new set of beliefs and perceptions. Transformative Learning Theory emphasizes this shift in perspectives as being crucial for any adult learning and training scheme to be successful. (Mezirow, Learning as Transformation: Critical Perspectives on a Theory in Progress, 2000)

Whenever exposed to a new concept or a new method or process of doing a job, an adult tries to review and evaluate the newly acquired bit of information in the light of previously set benchmarks and refuses to accept anything which does not conform to those parameters. (Mezirow, Transformative Dimensions of Adult Learning, 1991) This inability to accept anything which does not neatly fit into the already existing structure of perceptions is the largest stumbling block an adult faces when attempting to learn new techniques and skills to remain relevant in the ever changing scenario of modern market place.

According to Mezirow any adult learning program will be successful only when there is a progressive reduction of dependence of the learner on the teacher so much so that the learner is ultimately able to independently decide on what needs to be learnt under the changed set of circumstances. This new found awareness in the learner would be also be pretty useful in deciding what further is to be learnt and what, if necessary, be unlearnt in order to survive and succeed. However, the teacher must also be fully appreciative of the need of the learner to become independent as quickly as possible.

Thus, Mezirow feels that any meaningful adult learning is possible only when an adult willfully desires to undertake a paradigm shift in long held perspectives after logically, analytically and critically evaluating the current environment and rationally accepting the necessity for such a change in order to overcome the existing hurdles and succeed in a changed atmosphere.

Another perspective on the crucial aspect of rationality in Mezirow’s theory of adult learning

However, quite a few experts believe that any decision taken by an adult individual to break away from the pattern of long held beliefs is based more on intuition and emotion than on rational assessment of the current situation.

Experts that discount rationality in favor of intuition feel that there are three distinct stages in a transformational learning process. The first stage commences when a person gradually becomes sensitive to the alterations that have taken place in external environment where long held perspectives are no longer relevant. In the second stage this sensitivity to the change almost always makes the individual receptive to newer paradigms and the third stage begins when a feeling of inevitability and consequent grief over lost meaning structures engulfs the individual. The three stage process transforms the entire personality of an adult individual where he or she realizes the need to learn new skills and unlearn old ones, if required, to effectively tackle the prevailing environment. Thus, the need to change and imbibe new knowledge is the result of an emotional decision rather than a rational one. (Cranton, 1994)

Experiential Learning Theory – one more way of looking at adult learning

The other equally popular theory related to adult learning is based on real life experiences of adults. Generally this sort of learning technique is applied during training programs for professions more associated with field work where the participants learn as they go. This theory of adult learning is constructed on the basis of direct involvement with a particular phenomenon rather than theorizing about it and attempting to form a rational response. This directness of approach differentiates it from Mezirow’s theory of adult learning where very often the response is more of an intellectual exercise than a faceoff with reality. (Fraser, 1995)

David Kolb is possibly the most famous exponent of Experiential Learning Theory and he lays down four different requirements that are absolutely necessary in an adult for him or her to be able to participate in a learning process. A person should firstly have the cognitive ability to properly record and remember all facets of an experience. Once such an experience is firmly entrenched in the psyche, the second requirement in a person is that he or she should be able to observe and reflect on that experience in a detached manner. The third requirement in an individual is the ability to form abstract concepts – something akin to the rational responses in Mezirow’s theory – from the experiences that have been recorded, and the fourth requirement that is absolutely necessary in an individual to be an active participant in an adult learning process is the ability and willingness to test the newly developed responses in real life situations.

Based on these requirements Kolb and Fry have formed their famous cycle of learning:

(Kolb & Fry, 1975)

Kolb knows that it is well nigh impossible for an individual to be equally adept at all the four abilities. Keeping this in mind he has categorized learners into four different groups as Convergers, Divergers, Assimilators and Accommodators. Each category has strengths in one or more than one area and is weak in the rest, but that does not render any of them as ineffective learners. Each one can excel in certain specific areas of learning and execution.

An accommodator, for instance, is most adept at internalizing a concrete experience and would always be more than eager at active experimentation of newly formed ideas and concepts. Such an individual will not be averse to taking risks and is perfectly suitable for situations that demand an instant response. This category of people take an intuitive approach at solving problems and depend more on so called gut feelings rather than rational intelligent reasoning before jumping into action. Kolb and Fry have done similar detailed analysis on the strengths and weaknesses of other three different categories of learners. This categorization has done away with all previous one dimensional notions of suitability and effectiveness of learners. Thus we now have an approach where people of diverse abilities are accommodated on a single platform and an organization is able to make better use of human capital at its disposal. (Tennant, 1997)

Some issues about Experiential Learning Theory

Some psychologists are of the opinion that Kolb’s theory does not pay adequate attention to the process of reflection which is essential before any concept is crystallized. The other equally serious issue with this model is it does not pay adequate importance or weight to different cultural experiences or conditions. Diverse cultures impact differently on an individual’s capability of reacting to similar stimuli. Kolb, however, has based his entire theory on a predominantly western cultural milieu. But the biggest issue about Kolb’s theory is that it fails to establish a sound relation between knowledge and the process of learning.

Peter Jarvis further developed Kolb’s model to give it more universality and improved the basic model into one that considered possibilities of non-learning, non-reflective learning and some aspects of reflective learning.

(Jarvis, 1994)

This development over Kolb’s basic model also suffers from some of the underlying flaws of the original model in the sense that it does not have enough empirical evidence to back it up and it still cannot get over the highly debatable concept of thinking in stages.

HRD Intervention – Ways to make it more effective

HRD intervention is always done with the primary motive of improving corporate performance and also personal improvement of employees taking part in such an intervention. Generally the most common type of HRD intervention is employee training but it has been observed that while training has been found to be a very effective tool in large capital based projects, it has had minimal effect when it has been imparted in areas of daily operation. Maybe years of habit of doing same procedures over and over again have lent some sort of legitimacy to them and any attempt to improve the system is usually given a cold shoulder by employees. So, to make an HRD intervention really effective in an operational area, it has to be a combination of both organizational development and career development of individual employees, with possibly the scope of the latter being at least twice than that of the former. (McLagan, September 1989)

Organization Development

An organization development is a planned effort by the top management to revamp organizational efforts and improve overall efficiency of the organization in all areas of operation. It is a planned intervention and it aims at the entire organization as a whole. The activities undertaken in organization development come under the general purview of Total Quality Management (TQM), Reengineering, Strategic Planning and Team Building. It is of crucial importance to choose the proper tool of intervention to make it really effective.

An organization should go for OD only when it is ready to improve the efficiency of its workforce so that it is able to do same, or even more, work with a lesser amount of manpower to remain competitive in the international arena and be at par with the fast changing business environment the world over. It has been observed in many real life instances that such exercises in organization development become most effective when they are handled and monitored by external agents instead of in-house employees. This happens possibly because external consultants are less affected by internal politics and power plays that are integral part of any corporate entity. But the most important issue in this entire exercise is to ascertain whether the organization is ready for the change and David Gleicher laid out a handy formula to find that out:

Dissatisfaction x Vision x First Steps > Resistance to Change

(Jacobs, 1994)

From the formula (which very aptly reflects a real life situation) it is obvious that all three ingredients, namely, dissatisfaction with the current situation, a vision of a desired situation where the corporate entity wishes to be in, and achievable first steps that need to be taken to reach that desired situation must all be present in an organization for it to be ready for a quantum organizational development. If any of these three ingredients are zero or very near zero, the product of these three factors would be zero or very near zero and will fall far short of resistance to change which will dominate the scene. So, any HRD intervention would lead to no benefit at all.

Assuming that a company is ready to go for an organizational development program, the ideal scenario would be one in which research data is systematically collected and fed into the system and data and hypotheses are jointly evaluated to identify the changes and alterations that need be done both in the process and in the parameters to make the entire activity successful. (French & Bell, 1990)

The external consultants are usually flexible enough to make necessary amendments to the program as long as such amendments lead to an overall development of the organization by making the employees more prepared to face the harsher challenges of increasing competition.

Personal Career Development of Employees

It is but natural that any organizational development program will receive full support of employees only if it also incorporates programs of personal career development of. So, any consultant who plans a HRD intervention for development of the organization also ensures that sufficient inducements for employees are in-built in the program.

But reality is something different. A survey held some time back among HRD professionals revealed that they consider career development of individual employees to be last on their priority list and thus it is no wonder that many career paths simply lose their way in corporate maze and labor turnover has assumed menacing proportions in most big corporations these days. However, progressive companies have procedures in place for career development of their employees, but the onus and enthusiasm for developing the career must come from the employees as they should put their hands up and be counted to become prepared for the challenges of tomorrow.

There are various well established methods of training employees and the most popular among these is training under real time industrial environment. In a particular company in US, each employee has to draft an individual development plan at the start of the year, much like a performance review, and get it vetted by the training manager. This development plan is a separate document and is not related to any other form of review of that particular employee. HR department assimilates all such development plans and chalks out HRD interventions in such a way that a majority of the employees are personally benefitted while the organization gets better geared up to face competition. (Stout, 1995)

The unique benefit of such self designed developmental courses is that these reveal the genuine desires and requirements of each employee and helps the HR consultants to create opportunities for balancing personal and corporate goals. The usual steps that need to be taken to design a proper development program begin with an assessment of the existing levels of skills, knowledge and expertise of the employee. This assessment should be as impersonal and as realistic as possible to make the resultant program really effective. The second step should be to put in as clear terms as possible the new skills, knowledge and expertise which the employee desires to acquire. The third step would be to put in clear quantitative terms the gap between where the employee is and where he or she wants to be after the development program is over. A clearly quantified description of the gap puts in proper perspective both the learning purpose and learning objective of each individual employee.

Once these objectives are in place, target dates for achieving each objective and learning strategies and learning resources can be finalized. The strategies could range from interviews, discussions, classroom study and even be real time mill trials and resources could range from co-workers, supervisors, equipment manuals, technical conferences and even vendors or suppliers. Class room instructions, laboratory trials and even relevant field experience.

Like any other program a program related to career development of individual employees must also have adequate windows for posting feedbacks and be flexible enough to incorporate changes and alterations that become necessary in light of feedbacks. In this entire development program, the office supervisor and co-workers will have a huge role to play since any development and training is essentially a continuous process and it must lead to an effective team building for the organization to reap maximum benefit from a group of more qualified and better skilled employees. (Senge, 1994)

Conclusion

The modern day business scenario is changing very fast and a new power equation is taking shape in the world of manufacturing, trade and commerce. Twenty first century will witness the power of knowledge and skill and those organizations that are well equipped to face this challenge will be able to survive this paradigm shift in perceptions in brick and mortar world of economics. Learning and acquiring newer skills will be the watchword not only for individual employees but also for organizations if they are to stay afloat in the cesspool of intense competition of international marketplace. In the present situation thus adult learning acquires a new meaning and importance. The theories of adult learning are becoming even more significant with each passing day and HRD interventions are becoming ever more crucial for the survival and success of corporate entities.

References

Cranton, P. (1994). Understanding and Promoting Transformative Learning: A Guide for Eduactors of Adults. San Francisco: Jossey-Bass.

Fraser, W. (1995). Learning From Experience. Empowerment or Incorporation. Leicester: National Institute of Adult Continuing Education.

French, W., & Bell Jr, C. (1990). Organization Development: Behavioral Science Interventions for Organization Development. Englewood Cliffs NJ: Prentice-Hall.

Jacobs, R. (1994). Real Time Strategic Change. San Francisco: Berrett-Koehler Publishers.

Jarvis, P. (1994). Learning, ICE301 Lifelong Learning, Unit 1(1). London: YMCA George Williams College.

Kolb, D. A., & Fry, R. (1975). Toward an Applied Theory of Experiential Learning. In C. (. Cooper, Theories of Group Processes. London: John Wiley.

McLagan, P. A. (September 1989). Models for HRD Practice. Training and Development Journal , 49-59.

Mezirow, J. (2000). Learning as Transformation: Critical Perspectives on a Theory in Progress. San Francisco: Jossey-Bass.

Mezirow, J. (1991). Transformative Dimensions of Adult Learning. San Francisco: Jossey-Bass.

Rouda, R. H., & Kusy Jr, M. E. (1995). Beyond Training – a perspective on improving organizations and people in the paper industry. Technical Association of the Pulp and Paper Industry.

Senge, P. (1994). The Fifth Discipline: The Art & Practice of The Learning Organization. New York: Currency-Doubleday.

Stout, D. (1995). Performance Analysis for Training. Niagra Division of Consolidated Paper Inc.

Tennant, M. (1997). Psychology and Adult Learning 2e. London: Routledge.

August 22, 2013

Human Capital Management

Table of Contents

1)      A perspective of international human resource management 2

2)      Case Study 1 – Lincoln Electric in China. 5

a)      A brief history of the organization. 5

b)      The Lincoln Electric (Shanghai) Welding Company. 6

3)      Case Study 2 – Training for transnational managers at Johnson Wax, IBM, 3M and McGraw-Hill 12

4)      References. 16

 

A perspective of international human resource management

Globalization and liberalization earnestly followed by economies and governments across the world have created an all new set of paradigms in companies that operate across political boundaries and interact with multi-cultural workforce. Negotiations have now to be done at multiple levels with labor and trade unions at different countries to reach mutually acceptable and amicable resolutions (Prahalad & Doz, 1987). The obvious fallout of such a complex situation is an automatic loss of managerial flexibility as what might be perfectly acceptable for a union in one might be completely abominable in the eyes of another union in another country where the organization operates. Moreover, the terms and conditions of appointment and remunerations and perquisites in one country might sound outrageous in another country. Basic issues that make transnational human resource management such a daunting task are (Poole, 1986):

  • Degree of unionization and technological competence in a specific country
  • Levels of governmental intervention varies from country to country
  • Influence of religion, if at all, on labor unions of a particular country
  • Influence of mainstream political parties on labor unions
  • Managerial strategies in tackling such diverse scenarios

Such a multifaceted environment might also result in multiple agreements within the same organization.

The situation gets even more critical as expatriate managers are often sent to foreign locations to tackle labor issues arising at offshore locations. Any issue related to labor can be successfully tackled only when cultural divides that normally exist between people of different countries, cultures and traditions are bridged (Shenkar, 2001). While on the issue of cultural differences a reputed group of management authors opine cultural differences per se are not something absolute and predetermined but largely depend on historical interlocutions between concerned countries. Stereotyping foreigners, which is an integral part of every culture, has its roots in level and nature of interaction between two nationalities over centuries (Chapman, et al., 2008). According to authors, this approach is not any different from four-dimensional approach of Hofstede in categorizing a culture (Hofstede, 1983) but actually supplements it in a large way. The authors are firm in their opinion that any international manager needs to have a workable knowledge of bilateral history to overcome any ingrained prejudices or biases that he may have to face simply because of his nationality as he steps in a foreign location. But one must admit Hofstede’s cultural matrix and its logical inference of cultural distances is still one of the best guides for an expatriate manager as they prepare for a foreign stint (Kogut & Singh, 1988).

Any expatriate manager could be, rather, should be given training regarding host country’s cultural typicality and should be made aware of negotiating styles prevalent in the country the manager is supposed to perform their duties. However, no training is better than hands on experience, so an expatriate manager has to stumble and find their way through uncertain territories once they are on foreign shores. The only issue that they must never let go out of their sight is empathy towards foreign culture. To help international managers in negotiating across political and national boundaries, some authors have prepared a ten-point checklist (Salacuse, 1998):

  1. What is the final goal of the negotiation process (Is it a legal contract or striking a long standing and sustainable business relationship?)
  2. What is the approach to the negotiating process (Would it be a mutual win/win or a more dominant win/lose?)
  3. What would be the style adopted by negotiators during the process (Would it be formal or informal?)
  4. What would be the nature of communication (Would it be direct or indirect?)
  5. How much sensitive should the parties be towards time factor and punctuality (Would it be high or low?)
  6. What should be the optimum level of emotionalism in the process (Would it be high or low?)
  7. What will be the final form of the agreement arrived upon (Would it be a generalized agreement or would it be extremely specific regarding details?)
  8. How should the agreement constructing process unfold (Would it be top-down or bottom-up in nature?)
  9. What would be constitution of the organization (Would it have only one leader deciding important issues or would decision be taken through consensus?)
  10. What would be degree of risk taking during the negotiation process (Would it adopt a high-risk approach or would it stick to the more conservative low-risk approach?)

Cultural differences have a great impact on perceptions of negotiating parties and it quite often happens that these parties work on different objectives throughout the negotiation process thus making the entire process rather choppy and difficult to traverse. American executives would most probably define a negotiation process to be successful only if a legally enforceable contract emerges out of the process, but Japanese and most Chinese executives would define successful completion of a negotiation process as a situation where foundation stone for a long-term business relation is laid. Therefore, an American or a Japanese or a Chinese executive should be aware of these subtleties prior to engaging in a negotiation process (Pye, 1982).

Culture indeed has a great influence on the negotiating style of an individual and a manager has to negotiate for the most part of his professional day with either outside entities or subordinates or with peer groups. Thus, an expatriate manager needs proper grooming about cultural backgrounds of entities they have to negotiate to emerge successful in a negotiation process. While Japanese, Indians and Chinese mostly view negotiation process as an integrative bargaining endeavor, majority of Spanish do not have the same perception, rather, they view negotiation as a distributive bargaining process (Salacuse, 1998).

Thus, it might safely be concluded that culture divide creates big hurdles in the communication and negotiation process undertaken by a manager and expatriate managers must take special care to bridge this hiatus to the extent possible. Also, there is a difference from professional and social culture of the people of a country and the cultural labyrinth that an expatriate manager faces is a complex combination of the two (Salacuse, 1993).

Case Study 1 – Lincoln Electric in China

A brief history of the organization

Lincoln Electric Company was founded in 1895 by John Lincoln and was subsequently joined in 1907 by his younger brother James Lincoln. The company started off with manufacturing small electric motors at Cleveland, Ohio and within 1911 also included arc welding equipment and battery chargers for battery operated vehicles within its product range. Arc welding equipment soon became its core product and leading revenue generator and with path breaking innovations in this product line, the company soon became the leading name in the world in this particular item. Just to put things in proper perspective, it might be stated that more than 90% of the company’s $1.2 billion global sales was generated by arc welding equipments alone.

By 1914 the younger brother was at the helm of affairs of the company and, being gifted with more managerial acumen than his elder sibling, he charted a divergent path from what was followed by majority of the companies during that period by introducing piecework remuneration system rather than opting for prevailing time based payment system. But that did not mean he considered his employees as mere inputs to the production process and was blind to their welfare and development. He introduced Employee Advisory Board that constituted of elected representatives from almost all operating units and also made it a routine of holding regular meeting of this Board with owners and senior managers of the company. With passage of time, the company introduced life insurance policies to each employee in 1915, started am employee training and skill development school in 1916, implemented employee stock ownership plan in 1925 and also incorporated employee suggestion program in 1929. The company progressed further to streamline its job evaluation system to rationalize job rates and introduced a properly designed merit rating system to determine employee bonuses. Since 1939, the company has consistently shared profits with its employees. After successive regimes of home grown managers, Anthony Massaro became the first Chairman and CEO without having a prolonged tenure with the company as an employee.

The Lincoln Electric (Shanghai) Welding Company

This was Lincoln’s first foray in China and the plant was inaugurated by company Chairman Anthony Massaro on May 13, 1998. The company was established as a wholly-owned subsidiary of a Singapore-based joint venture between Lincoln Electric and its distributor partners. Lincoln Electric was the majority shareholder in the joint venture and solely responsible for the management of the company in Shanghai. Jeffrey Kundrach was appointed General Manager of this unit.

He and some of his fellow expatriate managers were faced with the same intriguing question of how to successfully implement the company’s managerial policies in a country so culturally distant from the occidental culture of United States. Should the management totally avoid existing managerial policies at home or should it try to find an acceptable mix and match of home policies and some element of local flavor so that local employees are suitably motivated to perform at their peak abilities. For Lincoln Electric (Shanghai) the problem was all the more acute as it was well known in the west for its very successful piece-rate payment scheme that paid employees only for what they produced, and a bonus system that provided employees with year-end bonuses based on their performance (Lincoln, 1991). Though several management experts of west were of the firm opinion that this was one of the reasons for the company’s dominant position in western markets, they were not quite sure whether this model would work in China.

It must be mentioned at this juncture while Lincoln transferred used machinery in Indonesia, it rolled out latest technology at both its plants at Shanghai and Cleveland. The basic idea behind it was if both plants have same technology, they would benefit by sharing their mutual experiences. So, the stake was rather high at Shanghai plant to ensure high productivity with a completely new set of workers that had very little experience of Lincoln style of functioning. The hiring process at Lincoln Shanghai thus was rather elaborate.

Each worker was interviewed for two days and was observed while working at shop floor so that he can be observed by higher management and the worker also gets a feel of real time functioning. The basic idea was to get the right person for the job at hand and ensure that he does not leave due technical incompetence. However, there was no system of guaranteed employment or salary package and it depended entirely on productivity of individual workers. Each worker was provided with a booklet that detailed in Mandarin operational procedures of the job assigned to him.

Within the first year of operation Lincoln Shanghai had in 1999 a head count of forty employees at shop floor, another ten at Quality Control Department and twenty other people employed in administrative and service jobs in the company. The sales personnel were reporting to the representative office in Shanghai and with the other offices in Tianjin, Xian, and Shenyang. The first year was marked by very large growth, so much so that the Shanghai factory was planning to introduce other products of Lincoln as well in this manufacturing unit.

However, the single most worrying point in manufacturing at the Shanghai unit was maintenance of quality – one of the main reasons for the fame and goodwill earned by the company in United States of America and Europe. The company was determined to retain the high standards it had already set for itself in matters of quality. The company put in place a regular system of Quality Audit by experts from United States to ensure no slackness or complacence set in this regard.

Such a near perpetual quality audit threw up a rather fortuitous avenue for interacting more closely with workers. It allowed management to sit down with workers at least twice a year and frankly deal with issues of individual efficiencies and inefficiencies and discuss ways and means to improve productivity of those that were lagging behind while finding out means to ensure that those that were more efficient retained their superior efficiency. However, this was possibly the right time to introduce the incentive system that so famously served the Cleveland so well over decades, but some members of the top management thought that introduction of bonus system would not be as great a motivator for works as would a properly designed piece rate system at Shanghai unit. Though none of the top management denied bonus was a very effective system of not only evaluating individual efficiency but also simultaneously provided efficient workers something tangible other than only appreciation by the top management.

In spite of such tangible benefits of productivity linked bonus system, Lincoln was not yet ready to introduce this system at Shanghai unit. The prevalent mood of management was though bonus is a genuine motivator, it appears only twice during a year and there might be lot of hectic activity during periods approaching declaration of bonus while leaving the rest of the year in a relatively uninspiring mode. A properly calibrated Piece Rate System would be a much better motivator as it operated throughput the year without any peak or bust periods. Thus, the organization would benefit far more than any such seasonal thrust in the form of bonuses.

The company also reaped the benefits of a workforce that was more than amenable to remuneration schemes tried out by the management. Moreover, it was far easier to set up free and forthright communication channels between management and shop floor employees than it could be in Australia. This was true in spite of the very big and genuine language barrier between largely expatriate managers and local workforce. It was far easier for senior managers to stroll down the production lines and physically pat the backs of workers and enquire about their well being. Not only did they respond but they actually responded enthusiastically as they felt their endeavors were recognized and felt proud and contented due to that. Thus, it implied that the workforce, though new to Lincoln culture, already started trusting the management and a Piece Rate System would work perfectly in an environment of such healthy mutual trust.

However, there were several serious cultural barriers that needed to be crossed and language was one of those which might pose a very big hindrance to effective communication – the lifeblood of effective management and motivation. Also, Piece Rate wage system exposed workers to poor company performance and it might also result in sustained depression of worker remuneration, especially during times of downswings in the economy or the industry where Lincoln is operating. This might send wrong signals about the company’s intentions in a country that is not habituated with such a flexible wage rate system. Chinese government might also decide to interfere if it finds workers are continually subjected to reduced earnings for no fault of theirs. In Cleveland, workers could speak out their mind and offer suggestions to improve the prevailing scenario but that should not be expected in China as it has a society where workers are traditionally considered to be at the lowest rung of corporate hierarchy and expected to faithfully carry out orders of superiors than offering them suggestions and tips for improving the current scenario.

Though aware of the risks involved, management at Shanghai unit continued with the Piece Rate system while continually encouraging workers to become more forthright and participative in the management process. This happened because of a few influential members of the managerial team who felt that barriers of communication and traditional Chinese mindset would not be that a big a hurdle that could not be crossed through sustained managerial efforts towards bridging that gap. This small but enthusiastic band of managers believed Chinese workers would welcome a remuneration system that is easy to understand, transparent and rewards efficiency as Chinese are inherently competitive and would never shy away from proving their worth by competing with their peer group. The situation was more favorable as the traditional concept of an egalitarian remuneration framework where very little difference in salaries existed between different grades of workers was gradually giving way to differentiated salary structure as more and more foreign as well as Chinese firms opted for Piece Rate system. So, principally there should not be any impediments in successfully implementing a performance based remuneration system; the main and most crucial element was its implementation at an opportune moment.

The main issue was not only setting up a fair system of Piece Rate but also make it appear fair in the eyes of the workers. Once they are convinced that the system is indeed fair, more than half the problem is solved. Thus, a lot of homework is necessary to fix the rate structure so that it is able to sustain itself through varied and often extreme economic and business scenarios. One of the worst things that might happen to an already implemented Piece Rate system is management realizes that the system has set such high rates that it would not be possible to maintain during leaner periods and goes back to revise those rates. It has a tremendous demoralizing effect on workforce and might lead to massive labor turnover and low employee morale as they simply fail to understand (as such it is also not expected that shop floor workers would be able to understand such macro level company wide economic compulsions) why their earnings are curtailed when they were making so much money only a fortnight earlier. It might lead to an almost irreparable loss of goodwill of the company in labor market and management might find it extremely difficult to recruit new employees.

The trust factor which is so very important in maintaining the health of an organization might just disappear altogether and it would become an impossible task to turn things around. The unit is newly set up and the equipments and technology are also new, thus, everyone, right from the workers to the top management are in some sort of a learning curve and it is not possible to introduce a fixed Piece Rate system in such a scenario. Rather, it would be better to start at comparatively lower rate and constantly modify it by little adjustments till the learning stage is over. Just because a few workers perform at a level which is 20% more than the basis cannot be the reason for drastically altering the rates. Any such impulsive action might erode the trust base for ever.

Lincoln’s Shanghai unit took full two years of continuous modification of the remuneration system to finally reach that sustainable remuneration structure that effectively motivated the workforce while boosting its commitment towards higher levels of productivity.

Case Study 2 – Training for transnational managers at Johnson Wax, IBM, 3M and McGraw-Hill

Training workforce on a global scale is an extremely complex issue and actual experiences and approaches to the issue of four business organizations operating in different industries have been clubbed together in this case study to provide a comprehensive picture.

Johnson Wax, headquartered at Wisconsin arranges for training of managers located in their subsidiaries at forty different countries in the world. This company does not, generally, modify its training courses to suit cultural and attitudinal idiosyncrasies of countries it operates in as it strongly believes in maintaining uniformity in its corporate culture and attitude. In spite of that, the company has observed and accordingly incorporated some changes in its training programs to suit peculiarities of some countries as it has found in some cases the imparted training is superfluous in one country while it is futile in some other country.

As for example, the company did not impart its team building training to employees of Brazil as it found that the concept of working as a team is so ingrained in Brazilian psyche that imparting any training on that aspect not only would be a complete waste of time and efforts but also might become counterproductive as Brazilian employees might consider it downright insulting or lack of faith of the company on their commitment and loyalty.

In China, however, trainers at Johnson Wax felt it to necessary to counter the prevailing fatalist attitude among employees for better coordination and higher productivity. Chinese employees have strong belief in destiny and any training on self-development often has little or no effect on employee motivation and morale. The prevailing attitude among Chinese employees is that if one is destined to be supervisor it is totally pointless to make any attempt to become a manager as destiny has not ordained that post for that particular individual. Setting objectives and undertaking performance appraisals against those targets is a very common and routine managerial activity in the United States, but is often considered redundant and even improper in some countries. So, trainers should also keep this latent but extremely potential difference in mind while imparting training to employees from different nationalities and cultures. Johnson Wax would ideally like to have its HR directors across the world advice the training managers on what would be the best fit for employees of a particular country by considering the impact of indigenous culture on the entire program. Local general managers should ideally be kept in the loop in this entire process as they are the ones with their ears to the ground and would possibly the best judge of whether a particular program is appropriate for a country or not. The head of training at corporate headquarters at Wisconsin would ideally love to have a dedicated training manager at each location that would be able deliver training in local language but some of the foreign units are not large enough to make such a move economically feasible.

Johnson Wax would have loved to emulate IBM in this regard but it is not quite possible for Johnson Wax to spend so much money on training its employees across the world. IBM has an education wing directly connected and catering to each of its 132 units across the world. As it is not a feasible idea to have a dedicated education centre at each location, IBM divides its worldwide operations in five geographic zones and in each zone there is an education centre that works as a coordinating hub within the zone. Therefore, each country has a specified education centre with which it can interact and coordinate. It is but natural that size of these education centers varies widely – while some centers have only a few staff, the education center at the United States employs more than 2000 people. But the moot issue is, every unit of IBM in the world has a specified education centre with which it can coordinate when need for training arises or thought appropriate by the top management. However, it must also be mentioned here that with rapid advancement of technology it is not always necessary that trainer and trainees need to be physically proximate and a technology company like IBM takes full advantage of internet to make every course available for every employee situated anywhere in the world. But heads of every zonal training centre still remain responsible for devising training programs and very often even training materials within their jurisdiction.

3M adopts an even more decentralized approach than IBM in imparting their training programs. The company has subsidiaries in fifty two different countries across the world and each subsidiary is responsible for training it imparts within its ambit. However, to keep some semblance of uniformity, the training centre at its European headquarters at Dusseldorf coordinates between units spread across Europe without in any way impeding autonomy of each centre. While subsidiaries develop and impart training to its employees, US headquarters is always at hand to offer suggestions and consulting that a subsidiary may request for. Such a situation evolves especially when a new product or technology is developed in the United States and subsidiaries are asked to produce or implement it. In fact, top training executives of 3M are extremely open minded in this regard and have no problems at all with the notion of a training program developed in Europe or any other continent and imported to the US. This attitude is surely an extremely welcome deviation from the usual attitude of ethnocentric domination.

Situated at somewhat the opposite end of the spectrum is McGraw-Hill which believes in sending trainers from headquarters to subsidiaries spread in different corners of the world. However, the company tries to modify and accommodate local sensibilities to the extent possible in the centralized training program. Actually the case at McGraw-Hill is somewhat different from the others. Before merger of the company’s US and international operations there was not much training programs to speak of. It was only after the merger took place did the top executives wake up to the idea of imparting training to its transnational employees for better coordination and cohesion among staff and higher, more streamlined productivity metrics. Generally the need for a training program is put up by regional subsidiaries and trainers from corporate headquarters travel there to impart training.

But the company’s basic aim is to develop in due course of time local trainers in each subsidiary as sending trainers from headquarters each and every time there is a need for training is not an economically feasible proposition. So trainers from headquarters typically arrive quite a few days in advance before the actual program starts and try to soak in the local ambience to the extent possible and also interact with prospective trainees to get a feel of their needs, aspirations, doubts and queries that keep swirling in their minds. In this way, trainers are better able to tailor their training programs to make those interesting and easily intelligible to those for whom it is intended. Trainers from headquarters are acutely aware of the need to modify programs to suit local idiosyncrasies to make those really effective as anything forcibly imposed from above might actually turn out to be counterproductive. They consciously try to rein in their personal ethnocentricity to the extent possible while delivering these training programs.

In this regard, these trainers coordinate extensively with local general managers to gauge the type, extent and intensity of training required as local general managers are best suited to provide genuine feedback. Sometimes such interactions carry on for weeks and even months before a training program is actually given the go ahead. These trainers also interact regularly and intensively with training managers in other companies and independent training consultants to enrich themselves from their knowledge, expertise and real life experiences. All these efforts tend to temper these training programs to a great extent when they are delivered in foreign shores and employees located in subsidiaries do not have that much trouble in identifying themselves with either course content or global culture and aspirations of the company.

References

Chapman, M., Mattos, H. G.-D., Clegg, J. & Buckley, P. J., 2008. Close neighbours and distant friends—perceptions of cultural distance. International Business Review , 17(2), p. 217–234.

Hofstede, G., 1983. The cultural relativity of organizational practices and theories. Journal of International Business Studies, pp. 75-89.

Kogut, B. & Singh, H., 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies 19(3), pp. 411-432.

Lincoln, J. F., 1991. Incentive Management. 3rd ed. Cleveland, Ohio: The Lincoln Electric Company.

Poole, M., 1986. Managerial Strategies and ‘Styles’ in Industrial Relations: A Comparative Analysis ?. Journal of General Management, 12(1), pp. 40-53.

Prahalad, C. K. & Doz, Y. L., 1987. The Multinational Mission: Balancing Local Demands and Global Visions. 1st ed. New York: Free Press.

Pye, L., 1982. Chinese negotiating style. 1st ed. Cambridge, Mass.: Oelgeschlager, Gunn, & Hain.

Salacuse, J. W., 1993. Implications for practitioners. In: Culture and negotiation. Newbury Park, Calif.: Sage.

Salacuse, J. W., 1998. Ten Ways that Culture Affects Negotiating Style: Some Survey Results. Negotiation Journal, pp. 221-240.

Shenkar, O., 2001. Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32(3), pp. 519-535.

August 9, 2012

Web Hosting Online

Filed under: Corporate Management — niranjanchatterjee @ 10:52 am
Tags: , , ,

A website is not merely a medium of interacting with prospective clients. It is in fact the first interaction a prospective customer has with a company and, hence, if the website is well designed and, more specifically, well maintained, it is equivalent to more than a million dollar spent on attractive advertisements.

But a website should be easily approachable for it to make an impact on customers and this is where the importance of choosing a proper web hosting service comes into picture. Choice of a web hosting service online is nothing but choosing between several competing combinations of network connectivity, hardware systems and, of course, facilities provided by competing web hosting services. The last thing a web master would want is low speed or poor connectivity or even worse, a complete breakdown of services. This might happen if there are a number of active websites that consume large chunks of computing power and bandwidth on the servers of the web hosting company. As a result, all other websites would literally crawl at snail’s pace causing frustration among prospective visitors who might drop the idea of visiting the website due to inordinate delay in accessing it.

Such frustration among prospective visitors would give a very bad name for a website and company and any hope of success in e-business would fold up prematurely. The irony of the whole issue is that a company might lose business not because of poor products or services but simply because of a poor choice of web hosting service.

The only way out of such impasse is to confirm whether the web hosting service has on offer cluster technology. It is the latest technique adopted by web hosting services where they host websites simultaneously on an array of servers. In this way, no matter how big or active other websites might be, each and every website hosted by the company will have ample bandwidth at their disposal to function normally.

The other issue that needs to be settled before one chooses a web hosting service is the level and extent of support that particular web hosting company will provide. A client needs to talk to human beings when in need of support and not automated answering machines or computerized answering mechanism that blurts out preprogrammed answers when some keys are pressed. Even if the company promises human support at the other end, one needs to confirm the depth of knowledge those assistants possess. Else, there might be a situation where one might find talking to a “parrot” at the other end that can only mouth certain jargons irrespective of whether it makes sense or not, or, utter some meaningless statements that are aimed at buying time without any attempt to solve the issue at hand.

While shopping for web hosting services online one might go over to those sites that review and rank web hosts. But before blindly believing what these so-called reviewers have got to say about web hosting online companies one should be aware that many of these review sites are actually run and maintained by web hosting companies themselves. So, any hope of obtaining genuinely unbiased reviews is, to be honest, extremely remote. However, one has to make the best use of what is available and first garner information these review sites provide and then use individual discretion and judiciousness to separate wheat from chaff and arrive at a rational conclusion.

Small Business Grants

Filed under: Accounting theories,Corporate Management — niranjanchatterjee @ 10:48 am
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Small businesses have one thing in common among them irrespective of which sector they would like to conduct business in. They have people brimming with innovative ideas and ample gumption but rarely, if ever, requisite funds to fructify ideas that keep swirling in their brains. One is actually forced to recall the dot com boom when youngsters barely out of college and with path breaking ideas getting ample financial backing from venture capitalists. But with the eventual bursting of dot com bubble, many venture capitalists have learnt the hard lesson of not getting carried away by the enthusiasm of young blood and instead opting for a detailed and unbiased cost-benefit analysis before hitching on to bandwagon of young entrepreneurs. Small business funds have thus become less easy to manage and small entrepreneurs are racking their brains to find some source of ever elusive funds to put the ideas they have into concrete action.

Governments of all countries are aware of this fund crunch and wish to help these small entrepreneurs as such initiatives are a sure shot remedy to raise levels of employment and national income. However, all those advertisements put up by government agencies loudly proclaiming that a mere application would see government funds pouring in at entrepreneurs’ doorsteps are not so easy to get. The idea that to get small business grant is almost as easy and hassle free as taking an evening stroll in neighborhood park is just a pipedream, one cooked by glib advertisement professionals.

Often these grants are very specific in their queries and criterions and many a decision to allow a grant hinges on issues like sex, race and business location and business revenue earned till date and number of years the business has been in existence. The obvious issue that vexes and often frustrates small business owners is that had they been so efficient that they could run their business profitably over the years they would not have approached for funds and, what is most important, they would not have still remained small! So, some of the requirements of funding authorities, it seems, are designed to put off small entrepreneurs rather than encouraging them.

Hence, before embarking on the arduous process of getting a small business grant from government agencies an entrepreneur must think hard and arrive at certain concrete answers about the future of the business. The first rational step would be to look up the Catalog of Federal Domestic Assistance to find which particular grant best suits the business. There are literally numerous small business grants doled out by the government and some of those are directly specifically towards businesses that are run from backward or underdeveloped areas or run by members of minority community and even for small businesses run by women. So, it helps an entrepreneur a lot to be able to locate the right slot where their business neatly fits in. That helps an entrepreneur to focus their energies in a proper and concentrated manner right from the very instant they begin their hunt for small business grants.

The first thing which an aspiring or a small entrepreneur must ensure is that they have filled in the grant application form accurately by providing correct data about all that is required of them to furnish. There should not be any form of ambiguity and error in filling in the form as it will then surely be disqualified for any further consideration. It might also be beneficial to personally interact with the relevant grant official (if local laws permit that) to know in further detail the requirements that need to be satisfied before any such small business grant is approved. It perhaps needs no elaboration that keeping in touch with the grant official and attending to all his queries, however irrelevant or inconsequential they may seem at first glance would make release of the small business grant that much easier and hassle free. However, as has already been mentioned, though briefly, any form of undue gratification of the granting official should be strictly avoided since chances are that any such maneuver might not only mar the prospect of getting a small business grant but also might end up in the small entrepreneur being behind bars for unlawful activity.

The small entrepreneur must also be ready with a medium term business forecast complete with projected cash flows and asset addition over the years and a clear forecast about future market trends and movements. Such forecast plan documents should ideally be prepared by experts in this field rather than the entrepreneur trying their hand at it. Any hint of amateurishness on the part of the small entrepreneur is sure to derail any chances of getting a small business grant.

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