Operations

All companies would like to offer custom products that delight their customers. For many, the challenges seem overwhelming, and they settle for manufacturing standard products in bulk, guided by long-term forecasts. Because demand is rarely forecast correctly, companies miss potential sales and must pay to store and manage excess product. In an effort to purge inventory, they offer discounts and other incentives. Profits erode, and the companies lose sight of what customers really want. Some companies attempt to offset those effects by optimizing pieces of the value chain. They create island solutions, such as lean factories, believing that such initiatives will make them more responsive. The authors argue that those efforts ultimately fail because they are not customer- centered. Citing results from their research, sponsored by the 3DayCar Programme at Cardiff Business School in Wales and the International Motor Vehicle Program at MIT, they show that island solutions sometimes backfire because they degrade other parts of the value chain. Instead, they urge companies to aim for a true build-to-order strategy, in which managers systematically improve the value chain’s flexibility in three areas: process, product and volume. Because the emphasis at each stage is on how to meet customer demands efficiently, optimization becomes more holistic and ultimately more profitable. To improve process flexibility, companies can link customer requirements directly to production, synchronizing customer-oriented production schedules in real time with suppliers. To improve product flexibility, they can push customization closer to the customer and can use common support structures to reduce the impact of product variety. To improve volume flexibility, the authors suggest ways companies can reduce reliance on full capacity or use differentiated pricing to reward customers for ordering products well in advance. The authors urge managers not to settle for halfhearted transitions to build to order. They recommend two critical first steps: First, understand key aspects of customer demand; second, adjust all processes accordingly. Only then can companies truly implement responsiveness across the value chain.

Which e-businesses will prevail? New research on e-fulfillment may hold the key. After all, getting a customer’s online order is not enough: E-businesses also must show that they can deliver products quickly and efficiently. Hau L. Lee and Seungjin Whang, professors of operations, information and technology at Stanford University’s Graduate School of Business, have studied a few successful online companies and their innovative ways of applying order-fulfillment strategies. Although the principles are not new, Internet technologies enable them to be applied in new and expanded ways. The two core concepts for improving e-fulfillment efficiency are making more use of information flows instead of physical product flows and capitalizing on existing pipelines and infrastructures. Those concepts underlie five key e-fulfillment strategies: logistics postponement, dematerialization, resource exchange, leveraged shipments and clicks-and-mortar. Whether the strategy expands on time-tested models or is a breakthrough, the trick is to determine the best one for a given situation. A computer company might use logistics postponement. By capturing more-accurate information, it could assemble final goods on demand and thereby save money by postponing delivery decisions until after receiving the final word on what the customer wants. Other companies might use dematerialization, converting physical products into information flows, just as a music CD can be converted to MP3 format or Egreetings.com substitutes digital flows for paper greeting cards sent by regular mail. With resource exchange, an e-company that needs to move a load from Hong Kong to San Francisco might borrow a ship from another company that needs a cost-effective way to return its empty vessel to California. Webvan uses the leveraged-shipment strategy, making the most of existing networks. With its clicks-and-mortar model, CVS covers the last mile by having customers pick up their online orders. Some online purchasers in Japan do the same: 7dream.com utilizes the ubiquitous 7-Eleven stores to enable a group of Japanese companies to do bulk deliveries. Pointing out ways that companies are extending e-fulfillment value beyond cost containment, the authors also demonstrate how secondary opportunities are taking companies beyond the last mile.

U.S. automakers have followed the lead of Japanese-owned operations in the United States and are practicing lean manufacturing, which focuses on delivering the best product of the highest quality at the lowest cost on time every time. A key part of lean manufacturing is just-in-time (JIT) delivery -- getting the right part to the right place at the right time. For automakers to effectively practice a lean approach, it would seem critical that suppliers make the transition from traditional mass-production systems to lean systems internally and in their logistics practices. In fact, the logistics practices and internal management policies of the automakers -- in other words, of the customers themselves -- have an even more profound impact on the supplier's ability to respond with lean systems. So found the authors in an unprecedented study on the performance of U.S. suppliers to the automotive industry in North America. To compare the policies and practices of the Big Three automakers and the Japanese transplants, the authors surveyed supplier plants that made comparable products for both U.S. and Japanese customers. Their comprehensive data demonstrate the impact of customer policies on supply-chain management: U.S. suppliers perform at much higher levels when they are supplying Japanese automakers than when working with U.S. automakers. How did the Japanese transplants develop superior, lean supply chains in North America? They worked with their suppliers to develop lean capabilities. They leveled their own production schedules to avoid big spikes in demand, which enables suppliers to hold less inventory. They created a disciplined system of delivery "time windows" that designate when specific parts shipments are due. They developed lean transportation systems to handle mixed-load, small-lot deliveries. They encouraged suppliers to ship only what was needed by the assembly plant at a particular time. Most important, the Japanese operations understand that creating a lean supply chain requires a give-and-take partnership across all the links in the supply chain.

Executives can become so wedded to a project, technology or process that they continue with it even when it’s seriously course.

This article analyzes survey data to explore how companies with specific supplier development programs overcame common pitfalls in assisting their suppliers improve their performance. The authors provide a process map for deploying supplier-development initiatives. After identifying critical commodities and suppliers, a cross-functional team meets with top managers at the supplier firms to discuss areas of improvement as well as key metrics and cost-sharing mechanisms needed to evaluate the success of the effort. Lastly, firms need to monitor and modify their supplier development strategies, as appropriate. The survey data indicate that organizations generally experience three types of pitfalls, mostly in the final stages of the process. Supplier-specific pitfalls stem from a lack of initial commitment. Companies can avoid these by using evaluation systems that compare measurements and performance among suppliers, holding kaizen events at supplier sites, identifying cost-saving opportunities through target pricing, and designating a supplier employee to ensure that buyer-supplied training is put into practice. Tying a supplier's performance improvement to receiving future orders is a particularly dramatic way to get the attention of managers at a supplier. Some buyers also offer their resources to suppliers, such as providing personnel support for some period of time to improve operations or building training centers for supplier use. Buyer-specific pitfalls also stem from a lack of commitment. Consolidating purchases to one or a few suppliers is one approach to creating the volume needed to justify investing in a supplier-development effort with the remaining suppliers. Examining how these suppliers impact the quality of products or using total-cost-of-ownership data can yield further proof of the benefits of supplier development. Buyer-supplier interface pitfalls originate in the areas of trust, alignment, and communication. Although written contracts may be important, some buyers rely more on close relationships rather than on contracts to build trust. Others use "expectation road maps" to tell suppliers where they are going and better ensure buyer/supplier alignment. Financial incentives, "designed in" supplier products, and expected contract renewal are also incentives for gaining a supplier's commitment to a supplier-development effort.

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.