Operations

Responsibility audits are a management tool for demonstrating the potential qualitative and financial benefits of mirroring core values and ethics in day-to-day practice. Waddock and Smith argue that corporate financial performance and socially responsible practices are positively correlated. They outline a responsibility auditing process that improves both the bottom line and a firm's stakeholder relationships with owners, employees, suppliers, customers, local communities, and government entities. Companies typically overlook the hidden costs of problematic or less responsible practices. The authors cite examples of how operating responsibly often saves money (in overhead, employee turnover rates, insurance costs, and other non-value-added expenses) and may even create profitable new opportunities. Eight companies beta tested the authors' responsibility audit by comparing their operating practices with their formally stated vision, values, and mission. All uncovered deficiencies in four operating areas: employee relations, quality systems, community relations, and environmental practices. The audit process consistently revealed that when a company adopted proactive, responsible practices, it reaped measurable improvements in efficiency and productivity, lowered legal exposure and risks to the company's reputation, and reduced direct and overhead costs. By creating an adaptive and proactive corporate culture from the top down, operating responsibly becomes a core business strategy.

As companies rapidly expand the use of outsourcing, executives are discovering that the management of outsourcing projects requires a new blend of leadership qualities. Firms involved in outsourcing are seeking managers with capacities for lateral leadership -- the ability to negotiate results "outward" across boundaries rather than issue orders "downward" through a hierarchy. The authors interviewed 54 managers and surveyed 423 managers working at diverse firms and organizations from 1997 to 1998, and they present their findings in this article. Companies are looking for four specific capabilities in managers responsible for outsourcing initiatives: -- Strategic thinking. The ability to understand whether and how to outsource in ways that improve competitive advantage. -- Deal making. The ability to broker deals in two directions simultaneously -- securing the right services from external providers and ensuring their use by internal managers. -- Partnership governing. The ability to oversee the relationship proactively to ensure service quality and financial benefit for both sides. -- Managing change. The ability to anticipate resistance to change and to surmount it constructively. Managers employed at large and small companies in both the manufacturing and financial services sectors consistently stressed the importance of all four capabilities. Whether hiring anew or promoting from within, managers are willing to pay a significant premium for these skills. Two-thirds said they would pay at least 6 percent additional for each capability, and one-third were prepared to pay 11 percent or more. The authors point out that lateral leadership of outsourcing initiatives works best when top management is solidly supportive and when companies have built a finely honed system to quantify results and pinpoint accountability. For companies that are increasing their outsourcing of services and products, this new blend of leadership skills requires novel ways of recruiting and developing managers because relatively few possess the full repertoire of lateral capabilities required for effective sourcing.

Manufacturers have four strategic options when facing the dynamics of consolidating channels.

Some industry observers claim that the steady increase in trade promotion expenditures in the packaged goods industry is symptomatic of a shift in power toward retailers and away from manufacturers. As firms sell more goods on deal, managers complain that promotions are eroding the power of brands. More preferable, they say, are "everyday low prices" (EDLP) rather than strategies that involve price discounts and other allowances. Trade promotion is a prime cause of the "bullwhip effect" in channels, and EDLP is perceived as a solution. However, the authors point out that EDLP may cause its own unexpected side effects. Because certain incentives and trade deals may perform important functions, managers must consider the second- and third-order effects of discontinuing them. The same logic applies to channels, so managers must assess how channel members are likely to react to various pricing strategies. In this article, the authors discuss the underappreciated role of well-designed trade promotions. Using the example of a single manufacturer selling to and through a retailer, they show how certain promotions increase total channel profits and the manufacturer's share of those profits beyond levels achievable with a single price and without promotions. Furthermore, they believe that firms can implement these promotions in ways that avoid many issues associated with retailer forward-buying and gray markets. In fact, certain trade promotions may benefit the manufacturer as much as the retailer -- if not more. Although some trade promotions create more problems than they solve, not all forms of trade promotion are bad. Manufacturers can effectively influence a retailer's selling activity and coordinate the distribution channel by using price-up and deal-down strategies that link manufacturer prices to the price featured by the retailer. However, manufacturers and retailers must set margins in a sustainable way, which requires a combination of margin and volume that produces acceptable profits for both channel partners.

Understanding technical complexity is intrinsic to developing effective strategies for managing factory operations. The practices that the author observed during a three-year study of ten color picture tube factories highlight two contrasting forms of managing processes -- the control method (suitable when most contingencies are anticipated and the organization can be structured clearly) and the learning method (suitable when problem recognition, definition, and solution are likely to differ for every situation). Detailed survey data from fifty-four of sixty-three existing color picture tube plants also augment the author's in-depth case studies. Factors relevant to effectively managing production in a factory are logistical complexity (a high volume of transactions or tasks) and technological complexity (the inherent intricacy of the system and its technologies). This paper focuses on the special dictates of technological and process complexity that strain traditional information and process-control systems. A hybrid of flow/assembly and continuous processes, color picture tube manufacturing consists of 200 key production steps, involving more than two dozen process technologies -- chemical, electrical, optical, and mechanical. At the best-performing factories, appropriate problem-solving techniques, experiment-based learning methods, and organizational procedures for routine tasks aid in managing this complexity. Complex processes need "generalist engineers" who are knowledgeable about engineering functions and processes beyond their usual domains. Emphasis shifts from "local" process control to "process-wide" management -- managing process interactions and sharing and coordinating information from different processes. Company policies and incentives to develop problem-solving capabilities, acquire detailed engineering knowledge, and hone the analytical skills of workers are critical to the effective functioning of these complex operations. Adopting learning-based methods of process management promotes an organization's ability to create, acquire, process, and retain new knowledge in an era of increasing complexity and uncertainty.

How Toyota’s product design and development process helps find the best solutions and develop successful products.

To remain competitive, manufacturers increasingly need a support system of transportation, telecommunications, services, and knowledge centers. In the United States, some cities and government agencies are building individual components of a supporting infrastructure. But a strategic approach in which public and private sectors cooperate to create a business environment that enhances manufacturing agility is needed. An example of such a system is the Global TransPark in North Carolina, which has fully integrated air, rail, highway, and sea transportation systems, as well as telecommunication and state-of-the-art electronic data interchange technologies to support manufacturers' logistical requirements. It contains the four elements that the authors say are necessary to agile manufacturers: 1. A seamless transportation network, with traffic management, vehicle control and safety systems, electronic toll payment, and emergency management systems. The network integrates air, sea, and land transportation through materials handling systems that accommodate various industries. 2. Telecommunications networks that provide information on markets and orders, track and manage material flows, and pool R&;D information. 3. Access to financial institutions, marketing and sales agents and consultants, legal services, exposition centers, and foreign trade zones. Agile manufacturers need commercial and service support, along with community amenities like good schools and cultural facilities. 4. A source of scientists, engineers, and managers. Such knowledge centers provide access to R&;D labs, colleges and universities, and a trained workforce. What is needed, according to Kasarda and Rondinelli, is a cooperative approach to create an environment that fills all these requirements. Such an approach needs government and industry to work together to integrate infrastructure components.

Indirect purchases represent a large part of a company’s costs, yet many companies have neglected such expenditures, sheltering them from rigorous competitive scrutiny in favor of supplier partnerships. The authors suggest that companies should examine their indirect purchases more closely. First they delineate indirect purchases & #8212; those not directly associated with end products or services & #8212; into five major expense clusters: advertising and marketing, technology, overhead, human resources, and those specific to the business such as store fixtures or collection agencies. Three problems prevent most companies from managing these purchases effectively: (1) inadequate information & #8212; companies have confusing, inaccurate data about indirect purchases; (2) insufficient resources & #8212; the people negotiating purchases lack skill or have other incentives in making purchasing decisions; (3) improper techniques & #8212; few companies gather sufficient information or solicit competitive proposals. Kapoor and Gupta propose five approaches for improving purchasing programs that are rooted in a competitive, free-market view: 1. Measure pragmatically. Managers should be extremely selective and focused when defining pricing data for purchasing. 2. Assign resources selectively. Companies should increase the resources assigned to indirect purchasing and clearly define the roles of people assigned to administer supplier relationships. 3. Demystify business requirements. Companies must establish precise quality requirements for indirect purchases. 4. Clarify the pricing basis. Lax pricing practices work to the buyer’s disadvantage. In order to compare prices, the buyer must establish discipline in pricing by creating and enforcing a standard vocabulary. 5. Leverage the free market. Buyers must be willing to use free-market competition to reduce costs and must take business away from suppliers if necessary. The five approaches run counter to the prevailing “partnership” purchasing model, according to the authors. In a supplier partnership, they suggest, companies give up their right to investigate alternative sources by making a commitment to work with a partner through good and bad. Such partnerships may be appropriate when there are few viable alternatives or when changing suppliers would be difficult. Otherwise, they say, companies should establish free-market competition as their standard operating procedure and form partnerships only on an exception basis.

Distorted information along a supply chain can lead to tremendous inefficiencies. How can companies mitigate them?

In a study of lean production in a global computer company, Levy determined that the necessary flow of goods and information was costly and difficult to achieve. Managers frequently underestimated the associated costs because they did not plan for a complex, dynamic supply chain. However, some aspects of lean production such as reduction of defects and engineering change orders may facilitate globalization. In the case of CCT, a PC company, Levy compared various aspects of domestic and international sourcing. Distance was often responsible for severe delays, and the company frequently used air rather than sea freight to expedite deliveries. The expense wiped out the location's cost advantages. Managers often did not plan for the extra inventory needed to cope with fluctuating demand when the source of supply was one month away. Distance affected the accuracy of sales forecasts and impaired communications. Design-for-manufacture issues, which relied on face-to-face communication, also suffered. And production problems, which normally took a day or two to resolve with local suppliers, took almost a week with foreign suppliers. Quality control was also hampered. Levy warns companies to plan for the additional costs of operating an international supply chain. He suggests locating value chain activities close to each other, for example, in Mexico and the United States. Managers need to anticipatefrequent disruptions and see the chain as a dynamic system, with some links more critical than others.