A Factory Without General Stores

A Factory Without General Stores

I was introduced to the MD of a multinational Glass Fibre unit in Hyderabad through a common friend in 1999. He had just taken over the job as MD after a year and half working on the project of buying up this unit from an Indian Corporate group on behalf of the MNC and now after the takeover he was given the responsibility of managing the day to day operations and scale up the unit to a higher level.

Soon after he took over he found there were a lot of operational issues which used to bog him down and he had to spend a lot of time resolving these issues which need not have come up to him at all. When I met him I was sharing with him my recent experiences with other businesses in India helping them adopt the concept of Business process re-engineering and how I found some dramatic changes and improvements when the management took it up seriously. He narrated an event that happened the previous day in his unit. He suddenly found on his table along with many other documents a note asking for approval for Rs 28/- towards an emergency medical expenses incurred in the factory along with the medical shop bill. He was furious but could not do anything except call the concerned people and give them a piece of his mind. He was told that since this purchase amount was not in the approved category as per company policy this has to be cleared by MD.

Hence when he met me he was immediately reminded of this and many more instances of a highly broken procurement process when he had to intervene everyday knocking out valuable time. He asked me to work on an assignment to Re-engineer their procurement process first.

When we started the assignment he felt that to make a quick impact on the power of this approach we must look at one of the areas where there would be immediate and dramatic change which will compel every one to adopt BPR in all aspects of their work. As usual we formed a cross functional team and were looking at the various areas where procurement was playing an important role. Suddenly the team members started talking about the complex ways in which they had to deal with the running of the factory canteen and the system of coupons and the amount of work involved in administering the same. And how many times they could get their canteen food even without the coupon when they happened to forget it in their homes. The team felt that if they could re-engineer the canteen process which affects every employee then BPR would become easily adoptable in other areas. 

After analyzing all the aspects involved in the management of the canteen, the team found two important home truths based on the actual working. While there was a lot of administrative work associated with printing, distributing and accounting of coupons, in practice since the work load is huge the accounting of the coupons for making bill payment to the canteen contractor was in fact done in a cursory way only and most of the time whatever the bill the contractor submitted got passed based on an average cost per person estimate per meal. Suddenly the team realised that if the final act of procurement, the bill payment, actually gets done without 100% accounting for the coupons, and the actual payment was getting made based on an estimate of the average cost per person which is not documented, why not do away with the coupons altogether and pay the contractor only based on an agreed rate based on the number of people opting to eat at the factory canteen. Needless to say the first objections came from the finance and administration people. The admin said what if someone eats more dosas than the other or eats more food than others. There will be IR issues. The finance department said what if the contractor charges for people who don't eat. By this time the MD, who was still rankled by the experience of the Rs 28/- medical bill, gave his ruling asking everyone to implement the redesigned process immediately. 

Very soon the management found that 5 people from admin and 2 from accounts apart from a large number of almirahs needed to store the coupons and room space were released from their work associated with managing the canteen coupons system and they could be assigned other work. Most important aspect was that both the workers and the canteen contractors were happy since they had a most cordial relationship since the management said workers can eat however much they want and the contractor now got paid based on the number of  workers registered for canteen food. Very soon the management and the contractor found that workers on their own ate only that much food they needed to sustain and not excessively and the canteen contractor knowing well that his income is fixed based on numbers, found ways to reduce waste in the canteen. Win win for all.

This experiment encouraged everyone to take a relook at the complete procurement process. Like in any such continuous process unit the centerpiece of their operations apart from the glass making furnace which has to run for 24x7, 365 days continuously for 8 to 10 years before it is scrapped and rebuilt, the general store played an important role. This is the back bone for ensuring that the Glass furnace doesn't stop for any reason. Hence a lot of inventory was carried here just in case they will be needed suddenly. When we asked everyone connected with running of the plant how often many of the store items were really used the answer was from daily to once in a year to “not recall when we last used” this kind of story for most of the items.

The team also found that they had more than 3000 items of value about Rs 80-90 Lakhs in the general stores and nearly 600 plus suppliers were in their approved list most of whom were multiple vendors for the same items. Despite all this when an indent was raised it took at least a month and in many cases more than a month to procure any of the standard items in the store. We also found out that many items that the general store carried as inventory also were standard inventory in the supplier's premises, most of whom were dealers for these items of factory supplies. Since there were many suppliers for any item no supplier was sure of the quantum of business they could get from the company and hence they waited for firm orders before taking up actions for supply.

When the team was in the process of setting goals for the procurement process, they said why not we crash the inventory levels by 90%, number of vendors by 90% and the time taken to supply by 90%, the MD suggested why not we think out of the box and do away with the general stores and let the suppliers keep the stock and give us just in time. This was too much for any one to accept but then MD insisted that he wanted the re-engineered process to do away with the general stores and he can use that space for the factory production expansion he has planned.

When the redesign got completed the team found that it is not impossible to do away with General Stores if the number of vendors got reduced from 600 to 30 with literally a single vendor for each category of item like electrical, hardware etc. The vendors now had annual rate contracts with a provision of automatic review of the rate as the market moved with a guarantee of a substantial volume of business provided they dont fail even once in their commitments. The bill payment process also got simplified with the indentors directly dealing with the approved vendors and using IT passing the bills for payments by finance. As the technology improved even direct funds transfer to the vendors bank accounts were arranged.

When I met the team after a year I was surprised to find that the general store had in fact been replaced by a new manufacturing area and now they got calls from the vendor reminding them about when the time for replacement has come for some of the critical store items. The story did not end here. When the annual accounts were presented to the global head they were surprised to find zero inventory in the general store and they sent a special audit team to find what was going on. When they found out the re-engineered process made it possible to run the factory without general stores, they commended the Indian management and recommended that 77 plants located in different parts of their operations world wide should adopt this best practice.

PS: Image Copyright of Glasfeser_Roving.jpg taken from Google images

Principles, Practice and Politics Of Management

 Principles, Practice and Politics Of Management

One of the first lessons in management schools is titled Principles and Practice of Management and they form the core basis of understanding how the modern organizations are supposed to be managed based on these core principles and practices. However as one gets into the real work world every student of management and even those who don't have formal management education background soon come to realize that there is one more "P" that governs the management philosophy of our organizations which is not formally stated anywhere. I decided to call it "Politics" of Management.

No management literature ever overtly recognises the existence of this P even though there are several euphemisms used to describe this. One of the papers I came across used a concept called Informal Networks to describe this phenomena. Here the author described how the real power structure in an organisation is dictated by not the formal hierarchy but some informal relations individuals enjoy with the power that be. I came across this first time when I started my career over 37 years ago when I found that the Personal Assistant to the Managing Director who also used to work as an errand boy for the MD's wife once in a way was wielding unusual power over everyone in the organizations including other directors!!.

The politics of management is inevitable in an organisation since by the very nature of its structure the organizations are based on the importance of exercising power through some form of hierarchical  relations between people and when there is power to be wielded there is bound to be some form of alignment around the power structure leading to jockeying for power and control. In a well managed  organisation this politics is effectively directed and controlled for the benefit of the organisation by good leadership. But the situation gets complicated when the politics overtakes the role of management at the cost of the organisation. 

As a management consultant I had several opportunities to have a ring side view of how this Politics of Management works across the organizations. Before I proceed further I must clarify what I mean by Politics of Management. As the word Politics imply it is all about finding ways to capture power and wield it. One of the ways of capturing power is directly bid for it through the hierarchical process with higher roles and responsibilities. This is available only for a few who are good at rising up the narrowing organizational ladder to the top. But for a large number of people this path is closed for a variety of reasons but still they have personal ambition or opportunity arising out of a role to wield power and exercise control. 

My early years were spent working as management consultant for small and family owned businesses. In every one of these businesses I noticed the business owner had one or two individuals working for them for several years and whom they trusted. While the organisation brought in outsiders to man the various roles and responsibilities created due to the growth of the business, these individuals had the "ear" of the owner and by virtue of that proximity wielded enormous power. In some business families usually this person would also belong to the community to which the owner's family belongs. Well there was nothing wrong with this model so long as the owner got good advice and guidance and also "intelligence". However I found in most of the cases where I had been approached for addressing some serious management problems faced by these small businesses, I found that many of their problems were linked to these informal power centers misleading the owner against other "outsiders” who are usually professionals doing their jobs. Thus it became my responsibility to highlight this distortion to the owner without antagonizing these informal power centers to address these problems effectively.

Subsequently when I started working with large corporates I found that the politics of management are in full flow across many levels. There, in several management board meetings where I was invited to attend, I saw how the different functional heads take stand on issues based on the power equations they wielded with the chief executive. In one case I came across a curious situation where one of the Vice President's father was a director on the board of the firm and he was ambitious to take over as the chief executive. During the period when we were working as consultants this individual systematically sabotaged the initiatives of the CEO to set right some major problems under the direct charge of this VP and one day we found the  CEO removed from his job and he was elevated to the CEO position.

In another case we were working for a multi unit business group and our role was to help one of the business units going through serious problems by adopting the concept of Business process re-engineering. The current CEO had recently taken over as the head of this unit and he came from outside this group with very good credentials. However he had to report to the top management group of the multi business group through a Unit Head who was a power center himself. The unit head was an old hand with the group with the ear of the Chairman. Apart from this there were other few employees who were reporting to the new CEO who also had a direct link to the chairman on account of their long association with the group. In the course of our first six months of work the new CEO started turning around the unit by doggedly implementing the BPR recommendations which exposed some of these old timer's wrong doings and ineptness in the past. All hell broke lose and one fine morning the new CEO got a marching order from the chairman after a year on the job. I was witness to the working of Politics of Management here at very close quarters.

However if the CEO is a very strong and focused person he can easily deal with the negative aspects of the politics. In a MNC company we had recommended a change in the way the sales process is handled which effectively reduced the current power structure of the Regional Managers. During the implementation one of the regional managers told his boys that they have to follow his instructions only and not bother about the new way of work approved by the MD and the top management. When the MD got to know of this he immediately called up the Regional Manager and told him that he either learn to adapt to the new model or he can look for another job. 

With the advent of Information Technology and the democratization of information I had hoped that the politics of management should come down. However I have had occasions to interact with some of the recent rising stars of the IT industry and many others who had adopted IT extensively in automating their business processes. To my astonishment I found that the politics of Management instead of coming down is very much there and in many cases it is on an increase as seen by the recent series crashes of global economic power houses. Many subsequent studies have shown that these setbacks are mostly due to management decisions dictated by political considerations rather than good principles and practice of management.

As I said in the beginning this topic is never publicly discussed but it is an undercurrent prevailing in all organizations. In India we have a saying when there are two people discussing a topic they could be friends. But when there are three people discussing the same then they form political parties. It is in the nature of human beings to be political in their social equations. In any group behavior this is very evident when people align themselves to one or the other group. Moreover human beings in my opinion are not capable of equal relationships. In all relationships you either control the relationship or you get controlled. This is all the more so in organizations. Even Late Jack Welch the famous former CEO of GE  used this dictum "Control your Destiny or someone else will" as a management philosophy very successfully. The issue is how does good management practice ensure that this Politics is directed effectively for the good of the organisation.

PS:Title image is copyright of Organisation-power-politics-management.jpg and used from Google images

Competition and Pricing Responses

 Competition and Pricing Responses

Practically every business faces this problem particularly when you don't have any monopoly situation prevailing for most of the businesses. As a marketing consultant in the early days and later as a management consultant advising on the business process improvements for medium and large businesses, this was a major issue which required to be addressed for most of my clients.

I remember once I was asked to address a team of field sales people by a large consumer marketing company which was nationally distributing high brand value and relatively high priced products. During the sales conference all the salesmen started complaining that since their products are priced high in relation to their competition, they were finding it difficult to meet their sales targets. The sales manager who had asked me to address them had also briefed me on this problem and took my help in making the sales people understand how to position high brand value with high quality in the minds of the customer and use it as a selling proposition to realize high prices demanded. 

The easiest response when faced with competition is to drop the price. That is a lazy mind response from a marketing manager or the management. And like your product it is the easiest response to copy by any competition. And it ends up in bloodying the battlefield for every one. Similarly giving gifts and incentives as sales promotional tools help in the short term but again the schemes can be easily copied and bettered and the net result is another set of bloodied battlefields.

The basic premise of my advice to management is never to compete on price but find ways to add value to customer experience of owning your product or service which creates value perception beyond costs and let everyone focus on communicating this value proposition to sell your desired price. Every marketing research and our own experience shows that no one remembers the price but everyone remembers a bad experience.

Let me explain with some real cases. All of us are familiar with how large companies try to beat competition with price drop. This was a response one of my clients wanted to use to prevent a competitor from getting a toe hold in their respective customer base. At this time we were doing a Business Process Reengineering exercise for their complete supply chain management from procurement to order fulfillment and as part of the exercise we along with their team met many of their customers to see what they were looking for from the client in terms of value. In practically every case we got two major feedback. One, the client should improve their delivery performance and two, there were some product quality issues which they had raised especially during monsoon season and they would like that to be addressed. When our team specifically raised the issue of how important the price dimension is, they said that they value only the two issues more than price. If the client cannot deliver on time and deal with the quality issues then they will look for another vendor based on price.

Recently I had to help a small business unit referred to me with a marketing problem. They wanted to add more customers and found that wherever they approached a prospective customer there prices were higher than what some competition was quoting. They were not sure why their new prospects would even consider them for a trial when they are priced higher. After looking at all the issues connected with their costing it was coming out clear that all competitors who were quoting lower prices could fulfill those orders with such low prices only if they compromised on the specifications.

I advised the client that while all customers won't be concerned with such specification compromise there will be some potential customers who would be bothered about such matters and suggested that they discuss with the end users of their prospect companies to influence the purchase department on the need to maintain specifications of supplies. When the trial order was placed in all such cases my client unit did not have any problem with the approval with such customers and those who had quoted lower prices and delivered had their supplies rejected on non conforming to specs. Caught with this dilemma the purchase managers had no choice but to focus on my clients for regular supplies and did not make a big fuss on their prices. To bolster their case further I suggested that they show their complete costing to the customer to establish the integrity of their prices.

In a matter of six months they were able to add a dozen new customers to their existing customer base. More than that this also gave them the confidence that while trying to get a new business the focus should be on what is of value to their customer. In some cases along with quality just in time supplies become more important. And if you find ways to reduce cost then this lower cost can be used as an advantage to reduce prices if needed without compromising on quality and service.

Recently we have been experiencing severe competition in all major business sectors. Unless you are still in a business where shortages are endemic or it is controlled by a licensing regime, all this competition has an impact on prices. Such competition also forces companies to find ways to cut costs. I have found that such attempts are fraught with danger since costs cutting measures can also lead to reducing the ability of the organisation to serve the customer better. Thus instead of getting more customers by reducing costs the organisation can lose customers arising out of bad service or other aspect of value to customers. Some time back a computer dealer mentioned this dilemma he faced. In order to match competition at the time of selling all dealers were quoting below cost price to get an order. But they started asking customers to pay for all after sales service at additional costs to make up for their sales loss. Moreover many of them stopped giving on site service insisting that you have to send the computer back to bench for any service problems. One can imagine what happened to the poor customers who while gaining at one end lost heavily at the other end. And as a user of a computer we all know how important a good service support is.

While competing on price cannot be avoided if one can find ways to ensure that such prices do not lower the value delivered to the customer then it will be useful. How does one achieve that? Many management gurus advise us that when you run a business the reason for its existence is the customers. Hence what is good for your customers is good for you. At the same time it is the people in the organisation who do work to deliver that value. And if these people follow the right processes which are designed to deliver that value then competing on price can be made very profitable for all concerned. I have found that creatively adopting concepts like Business Process reengineering, Lean Management and Theory of Constraints we have been able to help many organizations compete effectively while improving business performance. The size of the business is not an issue, it is the commitment to creating customer value and a leadership willing to back this commitment which made these organizations compete effectively.

Finally, can we avoid price competition at all? The answer is no. But as is happening in many technology driven businesses if you can find ways to add new values and features which did not exist before then you can find ways to relaunch or reinvent your product or services at much higher prices than prevailing before. The case of mobile phones is a good example which everyone can understand. But in many industries it is possible to to realize higher prices by adding more values to your offering there by reducing the total costs for the customer. In the case of a packaging manufacturer, we advised them that instead of simply supplying the packaging material where the price competition is severe they should handle the last stage of packing and shipping for the customer and charge based on per unit shipped. Thus instead of getting paid for per unit of material now they got paid for shipping per unit of the customers product. The value price realised was an order of magnitude several times the unit price of the material. But one of the un-intended benefits was they ended up completely eliminating any competition for their packaging material business with these customers. Similarly in the transport business we found that many goods transporting companies moved away from a highly price competitive goods transport business to third party logistics management business focusing on inward and outward supply chain management including cash management services to add value to their clients business at higher unit price realization. 

So my mantra is don't compete on price as a cost but compete on price as a value experienced by customers.