Leveraging The Big Data

The term 'Big Data' refers to huge amount of data (in Terabytes or even in Petabytes) that a company has access to. It not only refers to stored data but also the data which is being continuously streamed in through various sensors and other data collection points. However, 'Big Data' doesn't represents this huge data but the opportunity that it holds.

Big data has moved from a concept to reality because:

• Information technologies has made it possible to extract (from database, image, audio, video, sensors etc..), manage and process the data without significant latency.
• Advances in data analysis like machine learning algorithms which can provide predictive intelligence and pattern analysis to mine unstructured data.

Everyone now understands the Big Data and the value it holds. The challenge lies in dealing with it. There are two approaches to leverage the Big Data:

1. Start with the problem statement: Define the need or problem statement first and then work backwards to identify the analysis and data required. This approach works when there is clear understanding of the business need. If some of the data required to meet the business need is not available, efforts are made to collect that data or redefine the business need.
2. Dig for Gold: Executives are not always clear what can be done out of the big data. In that case, the suggested approach is to play with the data and derive some sense out of it. While experimenting by combining the data and applying algorithms, one gathers insight and increases the chances of finding the 'Gold'.

One can argue in favour of either of the approaches. However, success of both the approaches hinges on the 'Data Scientist'. It is an emerging profile with the required skillset in applying maths, statistics and algorithms to the data and spotting patterns, trends. A data scientist also acts as the bridge between the Executive who understands the business need and a database engineer. Companies are increasing relying on a data scientists to make sense of the unwieldy data sets in their organisation.

Big Data is the new gold mine for organisations. And tools are techniques are evolving to effectively mine it. Though organisations realise that they cannot ignore it, not everyone really knows where exactly the gold lies. Irrespective of the approach taken, perseverance and experimentation are key to unlock the value in big data.   

Open Innovation Ecosystem

Open Innovation has become quite popular in recent years. Organisations have realised that they need to leverage the capabilities outside the organisation to build innovative & competitive operations, products and services. Companies have realised that great ideas can come from outside, distinctive resources and capabilities may lie outside and even sharing internal resources with external players can unlock greater potential. Increasingly, companies are working on partnerships with academic insititutions, start-ups, investors, government agencies, companies and individuals.  

An ecosystem with a sense of community is required to enable diverse players to engage and form productive relationships for Open Innovation. Efforts in this direction include establishing marketplaces to bring innovators and sponsors together, Eg: IX (Innovation Exchange). Building communities, expert's database and platform to exchange ideas, run competitions and fund projects like Innocentive, Nine Sigma etc. Then in software space, there are open source communities like Eclipse and others. 

More often, companies rely on personal one to one relationships for Open Innovation. While the future is many to many interactions; trust, governance and intellectual property are some of the issues that weigh down the the progress.

First CSR, now CSV! Convergence of Business & Society

Earlier, corporations only concern was their business and competition. Society & Environment came into equation only in late 60's with rise of CSR (Corporate Social Responsiblity). CSR became important to corporations to comply with regulations, society's expectations and to preserve their reputation. Over the time, various approach to CSR came in practice. 

Philanthrophy emerged to be a widely used approach. It is simple to implement and does manage to grab a positive mind share of the public. However, it has hardly any operational or strategic connect to the business.

Another approach to CSR have been to forumulate internal regulations which a business complies with. This was done in order to insulate the business from any risks to brand image arising out of interfaces with external stakeholders like suppliers, distributors, customers, NGOs etc. The benefits were more in terms of avoidable costs of negative publicity and loss of brand equity.

Gradually, CSR's connect with Business strategy became more obvious as focus shifted to markets at 'Bottom of Pyramid'. Also, several business realised that CSR initaitves can lower the cost of externalities on their business. For instance, reducing carbon footrpint has direct benefits of reduced fuel costs and earned carbon credits. CSR became increasingly realised as imperative for building long-term sustainable and competitive business model.

However, business conditions continued to evolve.

• Due to recession, capitalism as a whole became a target. Companies were accused of being greedy and in-sensitive to society.
• Fundamental shifts took place in market conditions whice was fuelled and accelerated by social networking. Consumers now want empowerment and a say in building their product/service experience. Society is now more vocal about its expectations from businessess.
• New products and services now require co-creation and collaboration among firms from diverse industries. Increasingly, we now talk about business ecosystems and working partnerships.

A response to these changing business conditions came in form of CSV ('Creating Shared Value' by Michael Porter & Mark Kramer). Though treated separately, it can also be considered as another evolved form of CSR. CSV attempts to remove any conflicts between business profits and society welfare by espousing innovative ways to enlarge the pool of economic and social value. For instance, a food company looking into improving productivity of farmers and agri supply chain can create a far better social benefits. The food company in turns gain by a strong inbound supply chain and increased sales volumes.

Most of the time, impact of Creating Shared Value on business benefits is not very obvious and hazzy. Certain amount of commitment and staying on the course is required till one gains clarity. And more than often, innovative approaches are required to identify and leverage the sweet spots where business and social benefits converge.

Industries of Tomorrow....

What would industries after 30 years look like? Similar to industries of today or radically different! We should explore possibility of radical changes because of slow but fundamental shifts happening around us. Lets discuss them:

Democratization of Design & Manufacturing: Product design is moving out of confines of R&D Dept with suppliers and customers participating in the process. Several Auto OEMs invite suppliers to design the car parts which are supplied by them. Customers are encouraged to give design suggestions. 3D printing will further make manufacturing available to masses and consequently design.    

Increasing Commercial Significance of Community Platforms: Platforms like Facebook, MySpace, Twitter have revolutionized the basic act of social interaction. As these community platforms gained wide acceptance, social media marketing became prevalent. Several start-ups broke into scene which provide a community platform for people with complimentary needs to interact and exchange services (Eg: www.myridebuddy.com). On some platforms, the participants are both provider and consumer of the service (Eg: www.waze.com).

Rise of Integrators: Developments in ICT have made it possible to integrate data from various sources, including real-time data, and run analytics. Now data is out of silos and available to derive intelligence and insights from it. This has led to new business models where firms integrate data and provide services like multi-modal trip planning, traffic simulations etc. Eg: www.rideamigoscorp.com, Mapunity

So what kind of industries and business models these shifts to democratization, community participation and integration will lead to? Some of the defining characteristics could be:

• Society and Business will converge: Business will be primarily oriented towards addressing social and environmental needs.  
• Orchestration by consumer: Industries will organize around consumer experience. Consumers will configure and design their experience and businesses around will adapt and serve accordingly.

It would not be a surprise if industries like healthcare and transportation cease to exist and industries of Well-being, Happiness, Mobility & Leisure emerge. Its exciting times ahead and we could witness a renaissance in industries.

Tracking the Evolution in HRM (Human Resource Management)

I am not an HR Practitioner and have always been on the other side or lets say, on the receiving side of HR. Recently, I was involved in a consultancy assignment related to setting up a high-tech center. Human Resource Management (HRM) was one of the key focus areas and we couldn't onboard an HR expert for the assignment. So, we went ahead and tracked the evolution of HRM (professional experience of team members helped) and the future.

From my study, evolution of HRM can be understood as three versions of approaches.

The HRM 1.0 can be characterized as a 'Policing' approach, where the focus was on controlling employees. Do's and Don’t's list was prescribed and enforced. Salaries and labor issues were the major HR tasks. This approach worked in the production environment of past which had an authoritarian work culture.

Then came Knowledge Workers and hence the HRM 2.0 approach of managing employees. Knowledge workers have specialized knowledge and were expected to work with less supervision and more self-motivation. Hence the rules of the game changed. It was now more bottom-up approach with focus on improving employee experience, talent attraction and retention. HR personnel work towards continuous education & learning, team building and managing expectations of knowledge workers. HRM 2.0 approach is widespread but has its share of criticism .

With changing times when Customer service and Innovation are becoming survival imperatives rather than a competitive advantage, a distinct approach is required. Hence the HRM 3.0, which is geared towards facilitating employee. It’s a top-down approach where the company's strategy and objectives are the starting point and HR process is aligned to it (as illustrated below).

The workforce is expected to thrive in an uncertain and dynamic environment, adopt new work practices, remain customer oriented and champion innovation. Such a workforce needs to be supported and facilitated to meet these expectations. HR function in an organisation would need to step out of the existing mould to engage such a workforce. HRM 3.0 is gaining ground and is highly relevant for high-tech and service industries.

Lessons for Business from Defense & Security Planning... (2/2)

This is the concluding part of the topic discussed in last post. In this post, an attempt is made to outline application of Capability based planning in business environment.

Applying Capability Based Planning to Business World

Now, we shall return to business world and map the learnings from an equally if not more complex defense world. Like defense, business too at earlier times had to deal with a limited set of threats like that from a competitor, or a substitute product or a new entrant. Porter's 5 forces was a great tool to examine the possible threats. Once threats were identified, the appropriate response plans were drawn up. Earlier, Pepsi and Coke had no threats except each other and were busy fighting their Cola wars.

But times have changed. The business environment is now far more complex. New sources of threats have emerged. Many of them being non-market. The pace and impact of events have increased tremendously. Bad news spreads like wildfire. Nike and the 'Sweat Shop' incident is a case in point. Also one cannot predict how an event might affect. Executives often lament that business environment has changed and their plans are no longer valid.

In such an uncertain and volatile business environment, traditional threat based planning often falls short. A capability based planning approach in business world would imply accepting the uncertainties as fundamental driver and concentrating on scenarios of how threats materialize irrespective of their source. Following graph illustrates various scenarios of how threats can materialize for a business.

 

Under Capabilities based planning for business, the first step is to build a menu of various detail scenarios of 'how ' threats will materialize. Then, each scenario needs to be analyzed on following three dimensions and prioritized.

Severity: Scenarios which may have adverse effects and are to be planned for adequately. For instance, a natural calamity can disrupt supply and kill the production.

Probability of Occurrence: Scenarios whose possibility of occurrence is high need to be given priority. For instance, high frequency of competitive product launch and marketing campaigns are a norm in various industries.

Detection Ability: In some case detection itself is difficult for a given scenario. For instance, it is not easy for a company to detect the negative sentiments in viral media and how they might coalesce and snowball. In such cases, capabilities are to be developed for early detection and warning or quick response plans must be put in place.

Similar to Risk Priorities Number of FMEA (Failure Modes & Effects Analysis) a priority number can be worked out against each scenario.

Next step would be to define actions (either offensive or defensive) to counter each scenario. One may have a combination of actions or alternate actions for a given scenario. This is an intermediate but an important step before we arrive at capabilities. It’s in this step, an executive needs to tap their business acumen, management thinking and emerging trends to devise effective actions. For instance, in response to a scenario of 'Diverse and Un-predictable customer preferences for fashion goods' a retailer can choose to build its forecasting and S&OP process or go for daily replenishments to stock higher variety of SKUs and turn them faster.

Once the actions are decided against each scenario, then comes defining and listing capabilities to execute those actions. One may find similar capabilities addressing various scenarios. One would also notice that there can be various levels of a capability to choose from. For instance, to have a capability to address supply disruptions, a company can go for higher inventory or take a bold step to diversify its supply base. Both have different cost implications and impact. Hence a judicious mix of capabilities and its level needs to be worked out.

Conclusion

Defense and Security is perhaps the only area which rivals the complexity and volatility of the business world. With some of the best minds working in Defense and Security planning, it’s prudent to learn from them. The principles of Capabilities based planning are equally valid for a business and the methodology can be adapted with some tweaking. Capabilities based planning is a paradigm shift for business planning which would give a business, the confidence to not only survive but excel in an uncertain environment. 

Lessons for Business from Defense & Security Planning.. (1/2)

This is a two part topic. In first part we explore the underlying similarity in a business environment and a nation's Defense and Security environment. Then we look at evolution in Defense & Security Planning and understand Capabilities based planning approach. 


The application of Capabilities based planning in business environment will be dealt in second post on the same topic.

Introduction

The business environment has become more dynamic and unpredictable with time. Some would claim that the complexity is increasing exponentially. Planning is a big challenge in such a rapidly changing and volatile environment. The starting point of conventional corporate planning is directed towards specific threats emanating from a competitor, substitute product etc. or directed with a specific objective to capture a given market share or enter new segment. But rapid changes in external conditions like govt. policy, regulations, consumer behavior, social turmoil, economic turmoil, vagaries of nature etc., often render even the best-laid plans ineffective. Maybe its time to rethink the current Paradigm of our approach to planning.

In search for new paradigms, let’s shift our focus from business to other areas which share the same unpredictability and dynamism. One such area is that of national defense and security which comprise of military, homeland security, intelligence etc. This is an area, different from business world but with far more uncertainty, sudden changes and perils. Hence, defense planning is a good candidate to search for new paradigms.

Evolution in Defense & Security Planning

Defense strategy and planning itself has evolved over time.  Earlier, defense planning was threat based. The threat could be a specific nation or specific terrorist organization or a specific channel (air, sea or water). With time, defense environment has become complex, the variables and volatility has increased manifold. Lack of and asymmetric intelligence adds further complexity. A country can no longer predict with confidence the source, time and extent of the threats. Threats can emanate from a change of government in other countries, from social tensions which fuel terrorism, shifting alliances, conflict over resources, new weapons development etc. 9/11 is a typical example of such unpredictable threat which led to a totally new approach to defense planning called capability based planning. 

Capability Based Planning for Defense & Security

Under capability based planning, the focus is not on identifying the threats but building capabilities to respond to any threat. This marks a tectonic shift in defense planning where uncertainty has been acknowledged as the fundamental driver. And best way to address uncertainty is to build on-demand, flexible, adaptable and robust capabilities which can generate a speedy and appropriate response in face of a threat. The key part of planning process is to identify various scenarios of attack. It doesn’t matter who attacks. What matters is how you may be attacked; by crippling your food supply, by attacking the energy supply, by online virus, by a proxy war etc.. These scenarios are analyzed and actions are listed that need to be taken to neutralize them. The actions are prioritized which is followed by identification of capabilities and their levels required to perform those actions. The identified capabilities and their levels have to be further studied in terms of investment requirement. This is a sort of portfolio management of capabilities which is required in face of limited resources that a nation has for investment in defense.

Applying Capability Based Planning to Business World

This would be covered in next post. So stay tuned....

Can 3D Printing Redefine the Automotive Industry? An Alternate Future...

( The below blog was published at http://www.infosysblogs.com/manufacturing-talk/2012/04/guestpost_by_ashutosh_agrawal.html   

The post has embedded links to interesting videos and information. )

3D printing has been hailed as a technology which could change the way we do manufacturing. 3D printing along with stereo-lithography and similar technologies, growing at CAGR of 26%, are expected to reach $5.2 billion by 2020. The technology is capable of making complex metal parts, intricate mechanisms, civil construction components to even food items. The Star Trek's Replicator device may be well around the corner. Automotive industry is a leading user and consumes 17.5% of total commercial 3D printing services, second to consumer products/electronics. Present application by auto companies is limited to large size 3D printers for rapid prototyping in Product Development. However, with dropping prices (personal 3D printers costing around few thousand dollars) and maturing ecosystem (Machine builders, CAD S/W providers, Designers, Makers, Aggregators & users), 3D printing is poised to become mainstream and a game changer. Possibilities are endless for automotive industry. Let's explore some of the potential futuristic scenarios:

 - Mass Customization: Imagine a buyer in front of a large touch screen, trying out various combinations of bumper, rear view mirror, headlights, spoiler, dashboards, steering wheels and other interior/exterior styling parts on a basic car frame. A dealer rep assisting him to further nip & tuck the designs. As soon as buyer confirms his choices, the 3D printing machine at dealer starts making those parts. Next day, the buyer walks out of the showroom with a car customized to his tastes and unique on roads. Is it possible to provide such service? Yes! 3D printers are capable of producing complex shapes in various colors & materials. Does such service makes business sense? Of Course! customization is 30 percent of what draws a person to a brand. Cost of producing cars that do not meet customer requirements is $80 bil/year for car manufacturers. 

- DIY Personalization: Imagine a car enthusiast designing a sporty spoiler for his car. He has the attachment frame in the CAD software and builds the rest of the design on top of it. He also refers to some Off-the-shelf designs for ideas. Once done, he clicks the print button and his personal 3D printer gets on to work. If his 3D printer cannot manage the dimensions, he sends the design to a nearby vendor who prints it and delivers it in few hours. This new spoiler is his third in last one year. And his next dream project is a cool dashboard. Is it possible? Yes! 3D printers are increasingly becoming affordable. Commercial paper printer manufacturers are now making 3D printers. One can imagine a 'Knight Rider' car or a 'Ghost Rider' bike running on the roads. 

- Spares & Service: 3D printers can also be used to print spares and tools. Its not that far-fetched with similar application in marine transportation being explored. Repair centers and even consumers can print spares & tools on demand. We also have 3D scanners which can scan a tool along with its movable parts (like an adjustable wrench) and replicate it in a 3D printer. Only a limited stock of critical spares will be required in future.

- Crowd Sourcing Product Design: Traditional product design relies on market feedback from customers. 3D printing will enable customers to design the product for companies. The guess work and gamble on market research will be eliminated. A company can crowd source product designs from prospective customers and adopt them. As consumers dream up new ideas and design, the product innovation will be prolific and dynamic.  

3D printing will enable automotive companies to address long tail market. However, there are wider implications. For instance, 3D printing will :

• Empower auto consumers like never before: Only imagination is the limit to extent of personalization we could see. It will unleash new ways for consumers to make a personal statement through 'my ride'.  
• Disrupt the automotive value chain and roles: New players like 3D part Designers & Makers will enter the value chain. Much of manufacturing activities will shift from OEM & Suppliers to the downstream Dealers & Consumers. Role of an Auto OEM will go beyond product design & manufacturing to include aggregation & orchestration.
• Throw up Socio-Legal Challenges: How does one manage IP issues, Design safety, Accountability (for injuries/damages due to faulty parts) in a democratized design and manufacturing? New policies & regulations will have to be drawn up for the same.

When and to what extent the afore mentioned scenarios will materialize, no one can predict. However, one can confidently expect that 3D printing will become mainstream. A strategic roadmap to leverage 3D printing will enable auto companies to not only stay ahead but also influence the market and the industry. As Peter Drucker said 'The best way to predict your future is to create it'. 

Aggregating Fragmented Land Holdings: Imperative for Multi-fold Increase in Agricultural Productivity

Fragmented land holdings is an unique characteristic of Indian agriculture. As per GOI surveys, In 2002-03, the share of small and marginal farmers was 86%. Two-thirds of Indian population is still locked in agriculture with landholdings getting divided among siblings with each passing generation. As a consequence, the average area per holding decreased within a decade from 1.34 ha to 1.06 ha in 2002-03.

The fragmentation has an adverse impact on productivity. The yield in India for several crops is about 4 to 10 times lower than the world best. A smallholder faces several constraints which hamper his farm productivity as discussed in article below. A major challenge in front of us is to aggregate the small & fragmented land holdings with an objective to promote investment in scientific methods and application of best agricultural practices.

In the following article, which was published in a leading Agri-business magazine, I have highlighted various means by which we can aggregate land holdings and promote collective farming to bridge the productivity gap.

Changing Contours of Automotive Industry

This is a re post of my blog post at Infosys Manufacturing Talk  http://www.infosysblogs.com/manufacturing-talk/2012/02/guest_post_by_ashutosh_agrawal.html 

Automotive industry which is about 11% of developed-world GDP is undergoing a transformation of sorts due to various market and non-market forces. At one end, car makers are grappling with shifting customer preferences. On other end, various political-socio-economic factors like recession, rising fuel prices, urbanization, government policies are impacting the industry dynamics. Some of the key trends which are changing the very contours of the automotive industry are:

• Automotive design is increasingly influenced by safety, urban planning and environmental concerns: Hybrid & Electric cars will grow steadily and ICEs will dominate only till 2020. Fuel Efficiency (91%) and Safety (81%) are top consumer purchase reasons. Urban planning norms has also become important, for instance New York City laid down design guidelines for 'taxis of tomorrow'.

• Entry of New Players & Changing Roles in Value Chain: With rise of electric vehicles, grid electricity providers will become a part of value chain. Battery, electric motor, inverter producing companies will enter the value chain in future. Urban congestion is driving Smart Mobility which would create mobility ecosystems and change the roles of various automotive players and their business models.

• Growing importance of digital technologies to meet customer demand for extreme personalization and empowerment: A Yahoo-IMRB survey found that 62% of future car buyers say that they will look for information on internet. Customers are expecting personalized products and services. Customization is 30 % of what draws a person to a brand today.

• A Car which goes beyond mobility: Demand for rich customer experience and features has set the stage for path-breaking 'Connected Car' concept which brings Smart Navigation, Communications, Entertainment, Increased Safety & Security, Marketing and Commerce to its customer. It is expected that consumption of telematics apps would grow by 97.5% over the next 5 years.

• Supply Chain Risk Management: Recent supply chain disruptions like the Earthquake in Japan, Egypt unrest have adversely impacted various automotive companies. Automotive companies are coming to terms with volatility of business environment and looking for ways to rejig their operations model to become more resilient and adaptable.

• Growing Importance of Reverse Supply Chain and After-market: EU ELV Directive 2005/293/ECmandates recovery/recycling targets of 95% by 2015 for End-of-Life Vehicles. Sustainability driven regulations will put the spotlight on reverse supply chain. The automotive recycling industry has$22 billion in sales annually in USA alone. With margins on car sales under constant pressure, After-market (which accounts for about 60% of total OEM revenues) will become key revenue source in future. Emerging markets are expected to clock 5 to 15% growth in aftermarkets.

In past, trends in automotive industry were characterized by globalization. In future, it would be characterized by changing business models and industry landscape. 

Reconciling ABC (Activity Based Costing) & Throughput Accounting

Recently, I got into an interesting conversation on ABC (Activity Based Costing) and Throughput Accounting. I was of the view that both have fairly common ground and do not conflict. However, I couldn't garner a convincing argument at that time. Hence this blog post where I attempt to reconcile both ABC & Throughput Accounting. 

Lets begin with Throughput Accounting. Throughput is Sales - Variable Cost. The variable cost here includes the 'True' variable costs like raw materials and to some extent the sales commissions. All other costs are considered fixed and as Operating Expense. Hence, the bottom-line, i.e. Net Profit is calculated as Throughput - Operating Expense. Its obvious that to increase Profit, one must aim to Increase Throughput while keeping the Operating Expense constant.

Considering the scenario where the constraint is internal, Throughput Accounting says that one must evaluate Throughput generated per Unit time on constraint (T/c) for each product of the product portfolio. Then to maximize the overall Throughput, the product with the highest T/c should receive the priority on the constraint followed by the one with next highest T/c.

Now lets come to Activity Based Costing (ABC). ABC claims that traditional accounting do not reflect the true cost of a product. ABC says that the true cost of a product is a function of the activities that go into making of that product. Traditional accounting allocates overheads without taking into account the activities involved in making that product. To clarify this with an example, a product 'SP' requires a special process and hence is routed to a Special Machine. An another product 'GN' doesn't require the special process. The traditional accounting will allocate the overhead cost of Special Machine to all the products based on a cost driver. This would under-estimate the cost of SP and over-estimate the cost of GN. ABC addresses this situation by changing the cost drivers to reflect the activities that go into a product. It would tell us that the fixed cost of that Special Machine is in fact solely dependent on producing SP. 

Lets take another example of procurement activity. Not all product will have same amount of procurement activity going in. Under ABC, the allocation of procurement overhead should be in accordance with the extent of procurement activity for each product. The products with higher procurement activity will have higher allocation. The cost driver can be 'Variety of Sourced Parts in a Product' or 'Weight of Sourced Parts in a Product' depending on the nature of products.

Till now, we have clarified Throughput Accounting and ABC in their own language. Lets proceed further and combine the language.

What ABC does in principle is to treat the fixed costs as variable. By allocating a fixed cost to a product's activity, its treatment changes to 'cost per unit' of that product and hence variable with volume.  In Throughput Accounting, the same fixed costs are Operating Expense. So within the context of Throughput Accounting, the ABC treats even the Operating Expense as variable. TOC (Theory of Constraints) proponents may term this against the tenets of Throughput Accounting, but lets continue to examine further with TOC spirit. 

Lets examine the assumption that true variable costs are only raw materials and sales commission.

Consider the earlier example of products SP & GN. Assume that SP has a higher T/c (Throughput per Unit time on Constraint) compared to GN. Hence SP needs to be produced and GN to be shelved. This would increase Throughput and hence Net profit (assuming that Operating Expense remains same). Refer below:

But if we were to eliminate SP, then the corresponding Special Machine will no longer be required. It can be sold off and all associated costs are erased. The Operating Expense will reduce, maybe to the extent to compensate the loss in Throughput to yield a higher Net Profit than before. Refer below:

 

Is this against the basic tenet of TOC which says that the objective of a company is 'To make money now and in future'.  No!! In the end its about Profit, not Throughput. But then, how do we resolve the following conflict.

The conflict can be resolved with an injection: 'ABC helps to locate other quasi-variable costs which are hidden inside Operating Expense. '

Lets challenge this new understanding by applying it to our products SP and GN:

• If, SP has higher T/c compared to GN. Hence the initial product portfolio decision would be to produce SP and eliminate GN.
• Now, ABC tells us that the high cost of a Special Machine is associated only with SP. So, we include the cost associated with Special Machine as the variable cost for SP and recalculate T/c. If T/c is still higher for SP, then we produce SP as before. But if T/c is lower for SP, then the decision should be to eliminate SP and produce GN instead. The assumptions are that market doesn’t become a constraint if either SP or GN is produced and the Special Machine can be sold at its Net Depreciation value.

• What if market becomes the constraint for GN and we cannot eliminate SP completely. Then no benefit will come as Special Machine and its associated cost will still exist. Then we take out the cost associated with special machine from variable cost and go back to our decision of producing SP. Hence, the cost associated with Special Machine is variable with make or eliminate decision for the SP product, not with each SP unit.

• What if we sell the Special Machine and contract a third party to perform the special process? Then the cost of special process becomes variable with each unit of SP. ABC will help bring that out. Then, we recalculate Throughput and T/c by including the variable cost of third party process. If T/c of SP is now lower, then we choose GN and produce it to market demand. Rest of the constraint time is allotted to SP.

From the above discussion, one can at least conclude that both ABC & Throughput Accounting need not be at loggerheads and ABC can be leveraged within Throughput Accounting for effective decision making.

In a broader sense, ABC based management is generally used in organizations to identify the high cost activities and hence prioritize them for improvement and reduce wastage. In Throughput Accounting context, it would impact and reduce the Operating Expense. TOC initiatives are more strategy oriented and aimed towards bringing significant impact. ABC based management is more process improvement oriented. And both are not in conflict. I have tried to clarify the same in my previous post on how strategic performance models co-exist with process improvement models. Of course, caution should be exercised to align them and ensure that improvement activities do not create new bottlenecks or hurt global optima.

To conclude, in TOC spirit, both Throughput Accounting and ABC are not in conflict and there is harmony between them. 

Having put forth my viewpoint, I now invite readers to debate it to further improve our understanding.

Frameworks' Deluge: Demystifying Business Frameworks for Performance Management and Business Excellence

A very happy new year to the readers. It has been my constant endeavor to provide different prespectives on issues which concern business and society.

Approach to business and management has become more structured in modern times. Numerous tools in form of models and frameworks are available to business mangers to perform effectively in the complex business world. However, from my experience, managers  often feel overwhelmed and lost in deluge of these models and frameworks. This happens when managers lose touch with the original thinking and intent behind frameworks and models.

In my following post, the first in 2012, I have tried to clarify, with graphical illustrations, a selection of business models and frameworks which often confound business managers.


Introduction

Today one often hears the names of business frameworks like Balanced Scorecard, Lean Policy Deployment, EFQM Model, Malcolm Baldrige Model, Business Performance Improvement Resource (BPIR) model, Singapore Quality Award (SQA) framework and others. Many organizations also create their own hybrids which only adds to the list. Also these frameworks have led to a cottage industry of consultants who help with their implementation.

Before jumping on the bandwagon and adopting a framework, an organization needs to know the purpose behind each framework and select judiciously. Otherwise the framework may end up just being the flavor of the week. To evaluate and differentiate frameworks, one needs to understand first their Core Intent, Inspiration and Geography focus. Of these, Core Intent is the most apt criteria to categorize the frameworks. Following are the two categories of ‘Business Excellence Frameworks’ and ‘Strategy Performance Management’ Frameworks explained. 

Business Excellence Frameworks

As evident form the table above, all models have their roots in Total Quality Management movement. TQM essentially says that quality is all-pervasive; it is responsibility of everyone and applies to all activities in an organization. The TQM concept was further structured and enhanced with a performance measurement system into the 'Business Excellence' models known today. Quality bodies in different regions took independent initiatives to come up with their own implementable frameworks and hence the reason we have several models similar to each other.

Selection Criteria: Choice of a business excellence model hence would primarily be governed by the geographical region in which company is operating. A US company could go for Malcolm Baldrige and an European company could go for EFQM. A company can also in turn look at its customer base to decide which model to go for to enhance its image. Other factor that could influence the choice would be availability of consultancy support for implementation.

Strategy Performance Management Frameworks

As evident from table above, Balanced Scorecard and Lean Policy Deployment Matrix essentially serve the same purpose, i.e. implementing business strategy. It involves percolating strategy to operational activities and managing performance. It’s worth mentioning that companies have been implementing strategy before these models arrived. These models are derivatives of in-house systems of various organizations.

Selection Criteria: Both the models have global appeal. The choice is fairly simple here. Companies need to select the one which gels well with their internal systems. For instance, companies with strong 'Lean' focus would prefer to go for Lean Policy Deployment Matrix.

Points of Divergence

Now we come to the contentious issue. What is the difference between the two categories? Are they mutually exclusive or overlap. One can easily argue that both

• Spell out operational level performance measures and targets

• Both measure performance and provide feedback

• Both talk about improvement

So do we really need both? Yes, because both serve different objectives. Let’s examine them further to clarify.

Strategy Performance Management frameworks

In these frameworks, Business Strategy is the input which drives the selection of performance measure at various levels. It is focused towards achieving strategic goals by aligning local actions in the organization.

Refer the figure below. The business strategy is defined in terms of strategic objectives and strategic initiatives are launched to meet them. Targets are cascaded to every level which ensures overall achievement of strategy objectives. 

Business Excellence frameworks

Under this category, Internal assessment and Benchmarking drives the selection of performance measures and targets. The focus is on continuous improvement of organizational processes with an aim to be the best-in-class in the industry.

Refer the figure below. The internal assessment and benchmarking throws up the performance gaps. The process improvement programs are launched to close the gaps. These are on-going programs which cover both governing and operational processes. For instance, strategy formulation and implementation processes (which is a governing process) itself needs improvement on on-going basis. An improvement program can also be about improving the balanced scorecard process itself.

The differences are quite evident by now. They are summarized below. As evident, both have different intent and differ in their approach.

Points of Intersection

However, there are points of intersection between the two frameworks.

1. Both categories’ frameworks drill down to local actions and targets. This essentially means that quarterly performance targets of employees will have measures coming from both.
   
   
2. The initiatives under the two categories can potentially overlap. This is evident from the figure below. A strategic initiative to reduce product development time (essentially to increase speed to market) will closely match with process improvement efforts for product development. Similarly, strategic initiative of multiskilling will have bearing on employees’ incentives and rewards process.

  

Conclusion

It’s clear by now that both the framework types are required for competitive success. One cannot replace the other. For instance, processes like Strategy formulation and implementation need improvement even though no strategic initiative will directly address them.

Combining them would be a mistake as it will dilute the original intent behind the frameworks. However, given the areas of intersection and limited organizational resources, it is imperative to avoid conflict and align both frameworks within an organization. A common steering committee which is responsible for both frameworks (Strategy Performance Management and Business Excellence) can ensure the alignment in both planning and end results.