Now, customers are replying, "I want all three."
THE PRINTING EXAMPLE
Consider the printing industry. Traditionally, it's had three main kinds of competitors, and each company positioned itself within a "triangle of service."
* Cheap: One kind of printer emphasized low cost, perhaps through using lower-skilled workers, secondhand equipment, and making sure each machine was fully booked weeks in advance to ensure minimum downtime. To get low prices, customers put up with mediocre quality and long delivery schedules -- acceptable in markets such as advertising flyers and newspaper inserts.
* Good: Other printers went out of their way to hire the most skilled presspersons, using the finest four-colour and six-colour presses, and were able to apply luxury touches such as pattern varnishes. They were popular with customers producing brochures advertising luxury goods, annual reports and coffee table books. While quality might be spectacular, prices were high with long lead times.
* Fast: Quick-print and photocopy shops achieved remarkable turnaround times. They could take a computer disk into one end of the process, and produce 100 bound copies in a few minutes. Much of the commercial printing industry has gone this route. The tradeoff: little colour available, limited choice of sheet size, and high cost.
REASONS FOR CHANGE
Why are simplistic strategies such as these, found in many different industries, no longer sufficient? Because it is possible to do better, and that makes it necessary to do so.
Barriers surrounding regional markets are collapsing. Through electronic mail, faxes and other technologies, it is now possible to deal effectively with a supplier hundreds or even thousands of kilometers away. This is partly because so much of business today is the transfer of information, not the movement of physical items.
Therefore, companies find themselves competing against not just the best in their region, but the best nation-wide or even globally. The result is "raising the bar" in competition -- if a company doesn't improve to global standards it is out of the running.
Quality is becoming a given: without it, a supplier is not given the chance to bid. The next variable for customers is speed, looking for suppliers that can meet their demands within a given time frame. Among suppliers that meet these criteria, the customer may well choose the company with the lowest price.
Performance leaders are those that achieve the lowest structure, the highest quality of products and services, and the fastest speed of processing. But how can this be done -- simultaneously?
TIME IS THE LEVER FOR PERFORMANCE
Dealing with operations as a complete human/machine system means focusing on time to effectively manage the three components which drive cost, quality, and speed.
Inputs: resources. Costs are driven by the amount of resources consumed in business processes -- in effect the time applied to products or services by people, material and machinery. Returning to our print shop example, resources include not only the time of presses and operators, but also the work of engineers, maintenance, order processing and other personnel whose work is necessary, but indirect to the main process. To maximize the productive use of resources and to lower costs, means reducing the applied time for all those involved.
Throughputs: activities. Quality is achieved when processes are predictable and reliable -- ideally, each activity is performed correctly the first time, every time. Increasingly, quality initiatives concentrate on shortening the cycle time of activities by building control measures into the work itself, and by simplifying processes to eliminate opportunities for variation and error. In effect, short cycle time targets do not allow time for failure and rework. In a print shop, this would apply to the time to run each job, and the change-over from one job to the next.
Outputs: products and services. Speedy service is measured by the overall response time to fully satisfy customers, which may be much greater than the sum of all the cycle times involved. The need to respond quickly is challenging functionally organized businesses where processes flow across many departments before delivery is achieved. It makes no difference to the print shop's customers if the presses run faster, if the completed job sits on the loading dock for an extra day because there were not enough trucks to deliver it.
Why is time so crucial? The more time things take, the more they cost. Cutting direct labour time is easily understood as a cost-saving step. Less obvious is the need to reduce the time of support personnel, too often considered a "flat" or unchangeable cost. As well, reducing the time allowed to produce each result forces the organization to improve its processes, increasing quality of outputs.
THE THREE WAVES OF PROCESS IMPROVEMENT
Companies have been working on improving processes for some time now, and the history can be seen as three waves of progress. Each wave concentrated on a different kind of process, and the competitive edge shifted through each period.
1) In the early days of the industrial revolution, materials processes were the main focus of those who wanted to improve competitive success. Companies were thought to rise and fall on their ability to transform and transport materials. The professions of industrial and mechanical engineering developed and applied various techniques such as time and motion studies and flow-charting. Many companies can still benefit from current technologies in this area, such as robotics and cellular manufacturing.
2) In the second half of this century, being good at information processes became the focus of improvement efforts. Capturing data and transforming it into information became more important than transforming material, especially in service industries. Information systems analysts redesign organizations to take advantage of electronic means of communication, often dispensing with paper forms entirely. With information technologies continuing to emerge, most companies have yet to realize the potential from these innovations.
3) But today's organizations are realizing that success demands a more complete picture: improving the entire business processes. Again there has been a shift in focus beyond materials or information to the human transactions between customers and suppliers -- the transformation of a customer requirement into satisfaction. A business should not be thought of as just a flow of materials or information; the reason for those flows is that a promise was made and must be kept. Improvements come from business process analysis to determine how the company contracts, designs and produces outcomes for specific clients. New techniques, such as groupware, are emerging to perfect all of the communications and coordination work involved in today's complex business relationships.
TRANSFORMING BUSINESS RELATIONSHIPS
Business process is the new frontier for improvement, operating on the principle that many work activities are driven by relationships, and the need to communicate clearly and efficiently. In many cases, there is a need to redesign traditional relationships, particularly between buyer and seller. Some examples:
* A garment maker finds its costs for handling fabric are high. When a fabric bale is received from the fabric manufacturer, a swatch is taken from the bale and sent to the quality control lab for testing. If approved, the bale is taken from storage to the cutting room, and any excess is returned to storage in hopes it can be used on another job. Under the redesign process, the relationship with the fabric manufacturer is much closer. The garment maker contracts for the manufacturer to do the quality testing prior to shipping, and to deliver the correct size of bale needed for each particular job. This demands a radical alteration of world view between the two companies, from what is often an adversarial one into one of trust -- but costs of handling fabric are much reduced.
* A grocery chain uses two suppliers for its private label frozen orange juice, believing that only by playing off one against the other is it possible to keep both honest. A great deal of time is spent analyzing competitive bids and negotiating with suppliers. Under a new model, the grocery chain invests time and effort up front in conducting an in-depth analysis of both suppliers to determine which is the overall best. Having made its choice, the store finds its investment in analysis pays off through time no longer spent in bid analysis.
* A computer diskette manufacturer places computer terminals, connected to its mainframe, on the premises of major customers. Those customers are then connected directly to its internal records, and can request production of a given quantity of diskettes. Once again, the relationship has shifted: the manufacturer is trusting customers with its internal data, but gains benefits in reduced cost of order processing and a more satisfied customer.
Organizations are understanding that there are benefits to having not just individual buys from a customer, but a relationship. It all hinges on trust.
BUILDING THE NECESSARY TRUST
A close relationship always breaks down if one partner believes that the other cannot be trusted. To build this trust, a company must be able to deliver on the quality, speed and cost factors we looked at earlier.
Three major approaches have been developed to deal with each of these factors. Too often, they are each applied separately, without addressing the other two aspects, and the result is often failure or at least disappointment.
Activity Based Management focuses on cost. In ABM, the organization looks at each outcome it produces such as a service or a product, and determines what activities are necessary to produce those outcomes. By determining its costs, the organization can decide if that particular outcome is worth having, and if there is a better way to produce it. Some companies have found that the product they thought quite profitable, is actually losing money when all relevant costs are added in. Others find that the best way to provide an outcome is to out source it.
Total Quality Management, on the other hand, is an often radical change in the way an organization works. It looks at desired outcomes, and determines better ways to reach those outcomes often through using the power of modern information technology to transform business relationships.
As can be seen from the diagram, all three approaches intersect. ABM and BPR both look at processes to see what steps add value to the process, and seek to eliminate those that do not. BPR and TQM both focus on customer needs. TQM and ABM both consider which customers are most profitable and look for ways to improve the situation, and make sure that the cost of quality does not exceed what the customer is willing to pay. All are dependent on analyzing the activities of the organization, and often the analysis work done for one approach can be useful in doing another.
Where does one begin? In our experience, ABM is the best starting point. The understanding of the organization, learned through the ABM process, gives one an understanding of what steps to take first in BPR. It's simply too disruptive to redesign the whole organization at once through BPR. It's better to select targets through ABM that are most critical to success and show the most need for improvement. Information gained through BPR also gives the statistical and financial measures needed to track progress developed through TQM.
The end result is an organization that can have it all: delivering quality, responding quickly, and at a highly competitive cost.
Ron Clutz is a Partner with KPMG Management Consulting in Montreal
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|Date:||Dec 22, 1994|
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