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.

Are You The 'Knight Rider' of Your Data?

This is re-post of co-authored blog available at Infosys' Manufacturing Talk :  http://goo.gl/wZDP8

Post by
Partha Pratim Dutta, Senior Technology Architect, Manufacturing, Infosys Limited
Ashutosh Agrawal, Senior Consultant, Manufacturing, Infosys Limited


Do you remember the American TV series called "Knight Rider" or the Hindi movie "Tarzaan : The Wonder Car"? KITT(the artificially intelligent Pontiac Trans Am in "Knight Rider") and Tarzaan, both were advanced, artificially intelligent and nearly-indestructible cars.  I always dreamt of having one of these.

What was a dream then, is a reality today. More and more cars today are coming out with hundreds of on-board sensors, capable of measuring everything from tyre pressure to driver's condition. It can alert us in case of emergency and in certain cases, can take the necessary evasive action as well. We call them "Connected Vehicles".  Using the on-board communication network, they are capable of connecting to a central server to dump the data or upgrade themselves with a newer processing algorithm. This data can be mashed up with other contextual and historical data (just like KITT) such as infrastructure data (e.g. road condition), local climate data, historical patterns etc., and can help us in identifying things which our naked eyes can never detect.

Insights like these presents a whole new set of opportunities to the value chain providers. For example, some car insurance companies monitor the drivers driving style, routes traveled more often and customize the insurance plans and premium accordingly. Moreover with the "connected vehicle" concept gaining ground, "vehicle to vehicle connectivity" or "vehicle to infrastructure connectivity" scenarios have enabled us to have more safety and discipline around driving. In Japan, for example, at many toll junctions cameras and sensors monitor the traffic pile up at each toll gate and guide the incoming vehicle onto a particular lane where it is less.

Is this an Invasion on Your Privacy?
But unlike Michael Knight (KITT's owner), we as owners of these smart cars, do not own or have control over the data that we generate. All these services uses our own data that we generate and gives us back the relevant portions of it as services at some price. You may be comfortable with these services but how comfortable are you in compromising your privacy for these services and if you are comfortable, how far will you go for that? How comfortable will you be in making your data public, such as details around the last accident that you had? Or how comfortable will you be in letting people know where exactly you are at any point of time?
Every customer views their privacy differently. Currently, there is no control/policy in the auto world which allows a customer to control this data. The customer doesn't know who all have access to this  data or how this data is getting processed. There may be situations when you have no other option but to share your data - such as when your Insurance Company needs it to validate your claims. But in other situations - like your movement getting tracked, you can be selective in letting people know who can see you and till what point of time. And at the same time, it being your data, you should get the desired service and benefit if you decide to share your data. For example, if a customer decides to let the car companies (or its competitor) collect this data to figure out how the newly launched car is performing, the customer may ask for a special discount while buying the car.

Solution: Control your Data
The solution may lay in layering up a Big Data analysis platform with "User Access Control" module. The solution should be able to process a huge amount of data in minimal amount of time, provide pattern identification and give absolute control of those data/findings to the user. And the user decides, what to share (and what not to) and makes sure to get the desired service and benefit when this data is shared. The solution needs few key design dimensions to be addressed:

1.       Data Aggregation from variety of sources - mostly unstructured sources

o   Probable technology choices : EAI and  EII techniques, Search crawlers

2.       Storing and managing the unstructured data set along with structured data

o   Probable technology choices : Column oriented datastore like Apache HBase, Apache Cassandra

3.       Usage of a parallel/distributed framework to process the huge data

o   Probable technology choices : Distributed file system like HDFS and framework like Apache Hadoop

4.       Using clustering, classification and collaborative filtering techniques to extract the relevant portions of data

o   Probable technology choices : machine learning libraries like Apache Mahout

5.       Allowing access to the right set of data to the right people for the right amount of time

o   Probable technology choices : Access control framework like User Managed Access or UMA

6.       An elastic infrastructure needed for storing and processing the huge data(E.g. IaaS Platform)

The concept and some of the technology standards and framework (like UMA) are still at its infancy. But there are instances where applications are using a similar setup to give the control back to the user. Facebook is a good example of it and the "Locker Project" is another initiative to help manage your "Digital Exhaust" or "Digital Footprint".  This kind of platform cannot be owned or controlled by a single company or organization. Rather the need is for a conglomeration where several such organizations can come together and build an ecosystem, something in similar lines like CIBIL. Compared to the maturity of social data and its usage, this scenario may still have some more time to reach a critical stage, but if we can control it before it reaches that stage, adoption of the connected vehicle concept will be much widespread.

India Bio-fuel Market: Caught in headwinds

Bio-fuel is an interesting subject in India's renewable energy scenario. Its one of the most High Potential and Under-Utilized renewable energy sources in India. Both macro-economic and environmental factors favor bio-fuels but yet it has failed to take off.  Technology, Govt. policies, Supply chain are some of the fronts where serious challenges lies. It forms an interesting case of how the interplay of market and non-market forces constrain a market from developing and reaching its true scale and potential.

Based on my study and interactions, the Key Success factors for a sustainable bio-fuel business are:

• Off-take Contracts with Oil Marketing Companies (Remunerative prices if possible)

• Secure financing from Govt. institutions for Gestation period.

• Large plantation to provide economies of scale in farming, processing and transportation. (Or ensure high raw material supply through contracts).
• Choose the location wisely depending on support for bio-fuels from state govt.
• Use high yielding cultivars and best farming practices. Go for non-food crop land or intercropping with food crops.
• First preference to crops which are economically viable and approved for blending. Eg: Jatropha, Pongamia, Molasses
• Alternate bio-fuels from Sugarbeet, Sorgham, Sugarcane, Algae, cellulosic only if financial support is secured from Govt. or Pvt. agencies and a guaranteed off-take agreement from OMCs(Oil Marketing Companies) or other.

The presentation, pruned for public viewing, can be accessed at 

http://www.box.com/s/2lo6188ptyhkzkg887r1 

Total Green Management

The future of Green Movement based on parallels with Quality movement.

Tracing the history of Quality movement and the trajectory of Green movement, one cannot help but spot similarities. The reactive approach of inspection was the starting point for quality movement. Similar to carbon footprint measurement that heralded the Green movement. Inspection gave way to proactive quality control approach in critical areas like production. Green movement has been following similar path whereby companies are proactively working on reducing carbon footprint of key areas like factory operations, logistics etc.

Hence, going forward, one can predict that the stage is set for 'Total Green Management' on the lines of 'Total Quality Management' which was the next and defining phase in quality movement. Total Quality Management talked about all-pervasive quality which is responsibility of everyone and applies to all activities in an organization. In similar way, going Green and environmental responsibility should be evident in all activities and not confined to a particular department.

One may ask if we can really equate Quality and Green? Both Quality and Green are those attributes which concern stakeholders (customers, society, govt. and others). Time for Quality came when customers' concerns regarding product quality gained prominence. Now is the time for Green when customers and other stakeholders like society and Govt. have been expressing serious concerns. Due to stakeholders’ pressure, like Quality, Green is also on the trajectory of becoming a business essential. And soon, like quality, Green will be also expected to be in-grained in all organizational activities. The touch points would expand to Product Development, Supply Chain, Supporting Systems and Processes, Enterprise Assets and other areas. Today, many companies would claim to be doing so already. A litmus test to verify their claims is to check whether Green reflects in every employee’s monthly/quarterly goal setting. Unless that happens, Green has not really become all-pervasive. A separate body running organization-wide Green initiatives cannot qualify under Total Green Management.

Today, Green is a top-down with senior management driving Green initiatives. Total Green Management is bottom up. Lower rung employees are to be encouraged and empowered to initiate Continuous Green improvements similar to what they do for Continuous Quality improvement through Kaizens, Quality circles etc. Then only one can achieve Total Green Management in spirit.

Today Green is caught in same dilemma as 'Optimum Quality' of the past. Organizations are trying to figure out ‘Optimum Green Effort’ where the costs of Green initiatives intersects the costs of avoidance like litigation costs, carbon tax, brand image risks etc (Depicted in figure below). This optimum point may as well turn out to be an illusion considering following factors:

- Negative externalities like environmental degradation, societal activism and legislation are not going to allow costs of avoiding Green initiatives tapering off dramatically.

- At the same time, the fact that most Green initiatives generate energy, fuel and cost savings, the cost of Green efforts will reduce.

Both effects combined, the optimum intersection point may never be reached similar to what had been realized for Quality (Depicted in figure below). The total cost will only decrease with increasing Green effort.

Value Chain Embedded & Distributed Engineering

There is growing pressure on a company’s engineering function to address issues which span far and wide in value chain. Hence engineering needs to leave the confines of its dept. New legal regulations, sustainability related expectations, cut-throat competition require product and process re-engineering throughout the value chain. The optimal and sustainable way of doing so is to embed the business transactions of value chain partners with engineering and engage them in co-creation on continuous basis. And one can do so effectively by leveraging existing IT infrastructure, reinforcing it with latest information technologies and backing it with a governance model and performance measures. Lets examine in detail the challenges which engineering function faces and how to address them.

Challenge 1: Growing Expectations from Engineering Dept.

Earlier companies were more Engineering-driven. The engineering dept. alone used to decide on new product and process changes. As the business world became more competitive, companies started becoming more Market-driven. As a result, today engineering depts. have become more tuned to customer and other stakeholders’ needs and incorporate their feedback in both product and process design. However, still both product and process engineering are confined to respective departments and a company’s lab is the epicenter of all engineering activities. 

The arrangement has served well in developing in-house R&D expertise to outpace the competition. However, going forward, this arrangement is not sufficient to impart competitive edge in increasingly fast-paced and interconnected business world. The demands being put on engineering dept. have literally exploded in recent times. The list below, though not exhaustive, is a good indicator of huge expectations that product and process engineering will have to meet in future.

Meet customers’ and compliance requirements

- Meet customers’ both explicit and implicit needs

- Compliant with legal standards (Conflict Minerals, RoHS, REACH etc.)

- Compliant with various product labeling requirements

Reduce product development, production cost & distribution cost

- Design for Manufacturability

- Design for Maintainability

- Optimized packaging with high cube utilization  

Faster Time to market

- Reduce physical prototype iterations

- Share knowledge and enable design reuse

- Concurrent engineering and virtual validation

Technology Leader

- Stay ahead in product technology curve

- Stay ahead in process technology curve

Sustainability

- Safe and environment friendly during customer use. Low carbon footprint during usage.

- Safe and low carbon footprint during production (starting from a Tier 3/4 supplier)

- Easy to dispose/recycle with low carbon footprint

- Design for Environment (Using Bio-mimicry, Green Chemistry, Closed Loop Manufacturing etc.)

- Support corporate ‘Green’ or ‘Ethical’ Branding with right product and process design

Reduce enterprise risks

- Mitigates supply chain risks and insulate from supply chain disruptions

- Mitigates legal risks associated with production and product failure

- Avoid risks to reputation stemming from actions/practices of supply chain partners

Challenge 2: Increasing Dependency on Value Chain Partners

The value chain of a company today constitutes of a complex web of interdependent relationships with external agencies.

• The corporate strategies adopted by companies in present times are focused on developing core competencies, the side-effect of which is heavy reliance on other value chain partners for other business functions. 
• Suppliers not only produce parts but also do the research and development work for the same. 
• ‘Extended Producer Responsibility’ (OECD, 2006) principle has stretched the responsibility of a producer and calls for greater collaboration with value chain partners. 
• Regulations like ‘Conflict Minerals’ (SEC, US, 2010) cannot be met by a company alone and would require the company to engage its downstream value chain partners.

Hence changes in both market and non-market environment are impacting the whole value chain and hence deserves a united response from all value chain partners.

The Way Forward: Paradigm Shift in Engineering Function

In such a scenario, meeting the growing expectations on engineering becomes far more challenging. The response warrants a paradigm change where engineering moves out of the confines of its departmental silo and seamlessly integrates into the value chain. For instance, engineering collaboration can be embedded in routine supplier interactions. Supplier metrics can be enhanced to reflect engineering related KPIs. 

As shown in the illustration above, engineering function is plugged into all value chain interactions from supplier to customer. By doing so, the whole value chain can be leveraged for a superior product and process design to respond effectively to changes in external environment. 

Illustrative Impact Areas/Examples

• A good example is ‘Food safety’ related legislation (FDA, US, 2011) which impacts product and processes at every step of journey from farm to fork. The responsibility of compliance lies with leading food companies who in turn need to engage their value chain partners to redesign processes to ensure safer food and traceability.
• Another example is the dynamic Hi-tech industry which is divided into specialized players. A Fabless firm to remain competitive has to sync its engineering activities with the developments in manufacturing processes. A firm can do that on continuous and sustainable basis only if it has strong engineering channels with Foundry suppliers along with routine transactional interactions.
• A logistics provider can help with their experience on efficient packaging design, labeling, use of right packaging material to comply with regulations on ‘Toxics in Packaging’ (Northeast Recycling Council (NERC), 2009) and similar others.
• Involving customers during design and development can benefit engineering focused companies like medical diagnostics equipment, industrial machine tools and others. For instance, production personnel in a factory that has been using a machine tool for 5 years knows more about that machine’s behavior compared to the manufacturer himself. Why not engage the customer’s production team to be part of machine tool design? 
• Embedding engineering channels in value chain drives innovation both ways. The channels can bring innovative insights and ideas from value chain partners. The same channels can be used to drive product and process innovation throughout the value chain. This makes a company more demand-driven rather than engineering-driven.
• Established communication channels with customers provide opportunity for Demand Shaping. For instance, internet retail companies leverage their customer touch-points to influence product choice and shape demand. 

Implementation: Leveraging Existing Infrastructure & Cloud

After going through the merits, the next obvious question is how one makes it work. One necessarily need not build entirely new infrastructure for the purpose. Existing infrastructure can be enhanced or cloud computing can be leveraged to integrate a specialized function like engineering with usual transactional interactions in value chain. 

To illustrate with an example:

A company has an intranet portal for its suppliers to log in. The functionality of the portal can range from providing order information to monitoring supplier performance metrics or even CPFR (Collaborative Planning, Forecasting and Replenishment). 

The same platform can have an extra portal for engineering where a supplier can be provided with relevant engineering master data. In addition, the portal allows sharing of relevant drawings, engineering software tools (using SaaS model), comments, reports, templates, best practices etc. The extra portal would not cost much but allow engineering collaboration with suppliers on wide range of areas like Value Engineering, Design for Environment, legal compliance etc. 

A governance model with proper security and permissions would ensure that the supplier access is controlled and company’s confidential information does not leak through the supplier. 

Existing supplier performance metrics can be appended to reflect product and process engineering performance. Some examples of performance metrics could be ‘# of Design Suggestions Received’, ‘% of Suggestions Implemented’, ‘Component Cost Reduction’, ‘Sustainability Action Points completed’, ‘Legal Compliance Status’ etc. 

Similar to above, engineering function can tap into other value chain interactions with logistic providers, dealers, customers, experts etc. For instance, engineering interactions can be embedded in warranty process, spare parts ordering process, reverse supply chain and customer service process to improve component and product design. The overall benefits could be traced to enterprise level performance measures like ‘Time to Market’, ‘Product Success Rate’, ‘Product Cost’ and others.

Following are key pieces that need to be put together for effective implementation:

• IT: Information Technologies are now capable of providing a common platform for business transactions as well as sharing design data and collaborating on it. Cloud based computing further enhances cross-functional and service based interactions by:
• Giving access to design & engineering software tools using SaaS (Software as a Service) & IaaS (Infrastructure as a Service) to the value chain partners who cannot afford the high hardware infrastructure and license costs. 
• Moving the product development process and workflows to cloud and hence making the geographical and organizational boundaries irrelevant between a company and its partners.
• Governance: A governance model ensures controlled access and distribution of content.
• KPIs: Metrics monitor the system performance and ensure that desired value is being derived. 

Closing Remark

The demands on engineering function are only going to increase and span far and wide in value chain. Optimal way of dealing with it is to engage with value chain partners in co-creation along with business transactions. And one can do so effectively by leveraging existing IT infrastructure, reinforcing it with latest information technologies and backing it with a governance model and a set of performance measures.

Partnership Development: A Cornerstone for Business Strategy & Excellence

Last year, in one of my blog post http://frontiers2explore.blogspot.com/2010/06/competing-networks-holistic-approach-to.html, I emphasized that companies do not compete alone, their networks compete with other networks. In my other blogpost http://frontiers2explore.blogspot.com/2011/01/collaboration-new-wave-of-business.html, I dwelled upon various areas of collaboration including external collaboration. Both posts indicate that ability of a company to develop and manage partnerships is important to sustain a competitive advantage. In this post, various business scenarios that warrant partnership development are discussed which emphasize the direct linkage between 'partnership development' and 'business strategy & excellence'.  

Business Ecosystem: The concept of business ecosystem is two decades old but its relevance has been only growing with time. Today its adoption has gone beyond high-tech community. Any company irrespective of the industry is a part of a larger business ecosystem. 

For instance, the business ecosystem for a company making energy saving building materials will include green building design, building automation, life safety system, utility services, fire safety systems, hybrid energy systems, HVAC, lighting systems and other providers. All of these providers share something in common and i.e. 'Green Buildings'. Collective success of them will expand the market of 'Green Buildings' and hence the market for each provider.

Agri-business is another good case to understand business ecosystem. Agri-ecosystem consists of input providers like seed, farm equipments, fertlisers, pesticides etc, food processors, retailers, farmers and customers. Also the ecosystem includes advisory providers, regulators, logistics providers and others. Now consider a seed company. What can the company do to increase its sales more than its competitor when there is not much scope of product differentiation in seed business. The conventional business approach would focus on sales and marketing. But some companies have gone a step further to take a stake in success of their customer 'the farmer'. The success of the farmer benefits the company in two ways: First, it increases farm productivity and hence increases the demand of the seeds. Second, it builds the market reputation of the seed provider. But the success of the farmer depends on various other factors apart from seeds like, nutrient management, weed and pest management, irrigation, market prices he gets for his produce etc. Hence, the seed provider needs to engage the players in agri-ecosystem. Some seed companies are beginning to do so.

Business ecosystems are dynamic and new ones emerge over time. For instance, rise of mega cities and urban congestion is creating an Urban Mobility ecosystem comprising of transport providers, automotive OEMs, payment gateways, insurance, utility providers, location based service providers and others. Automotive dealers and OEM need to be cognizant of this development and ensure that they can sell their vehicles in this ecosystem. Some automotive OEMs are taking lead in creating such ecosystems and positioning their vehicles for on-demand use.

The be successful, one needs to identify the relevant ecosystem, partner with its constituents and then sell to the ecosystem. Doing so no only grows the whole pie but also increase your share in the pie.

Knowledge Intensive R&D: In knowledge intensive industries like Pharma, high-tech, software industries, R&D generates intellectual property (IP). IP becomes a source of competitive advantage and companies file patents to protect them. At the same time, companies have to take care not to infringe on others' IP because patent litigation can be very expensive and risky. Product development not only requires working with in-house IP but also that of competitors. Competitors can also act as Complementors. Hence it makes sense to partner with your competitors for mutual gain. Companies sign non-exclusive cross-license agreement where parties get 'freedom to operate' in each other's IP. 

Product complexity is increasing and products now combine the best of research in different fields. A company cannot expect to specialize in every field. Hence a company needs to co-create with companies specializing in other fields. One can see such partnerships in high-tech industry where a fabless manufacturer has to collaborate with manufacturers, EDA vendors and IP providers in product development phase.

Shifts in Value Chains: Roles of players in an industry's value chain change over time. For instance, one would normally see companies moving up the value chain. OEMs taking up a system integrator role and offering solutions rather than products. 1st Tier Suppliers increasing their participation in product development and assembling modules for final product. Consolidation may happen among upstream commodity suppliers to achieve economies of scale and increase their supplier power. New players like remanufacturers, recyclers, 3rd party logistics may gain importance in value chain. 

A company which focuses on its core competence needs to develop strong relations with other value chain players to adapt to changing business environment. For instance, an Automotive OEM will keep its core-competence in Power Train technology in-house and outsource other design works to capable suppliers. This would free up the resources for OEM to concentrate on next-gen technologies like electric cars, hybrids, mobility solutions etc. With growing pressure on environmental friendly handling of reverse supply chain, an OEM, rather than building the capabilities in-house, can partner with a reverse logistics provider. 

Industry Standards: Acceptance of an industry standard is always preceded by competing standards.  Betamax vs VHS and Blueray vs HD are typical examples of competing standards in past. The key success factor to win an industry standard war is the supporting network of companies from different stakeholder groups. For instance, to develop industry standard for infotainment, several OEMs, hardware and software services providers have come together to form GENIVI alliance. Currently we are seeing the standard war in 3D between LG & Samsung and strengths of their respective networks will decide the winner.

Sustainability for survival: Several companies have discovered that sweet spot where sustainability serves their business needs and hence enter mutually beneficial partnerships with communities/NGOs/Government/Companies. For instance, Microsoft is partnering with community colleges to improve education standards and hence also address its business need of skilled manpower. Starbucks partners with CI (Conservation International) to reach out to coffee growers who are important to their business. 

Above scenarios prove that partnerships is emerging as key strategic asset to stay ahead and respond to the dynamic and evolving business environment. Today ability to develop and sustain partnerships is a competitive capability but tomorrow it would become another survival skill.

Proactive Enterprise & Brand Image Risk Management

"How an Organization can Manage the Risks posed by Viral Media to its Image and Brand "

This was the subject of my paper which I had the opportunity to present at CIBMP Conference on Innovations in Management at London. http://www.cibmp.org/library/global-conference-on-innovations-in-management-2011/

Below is the abstract of the paper. 

In today’s connected world, bad news travel fast and enterprises are frequently caught at the receiving end immaterial of whether there is any truth in bad news or not. By the time an enterprise gains back its senses, comes out of denial and responds; irreversible damage is already done to the public perception of its product, brand and company. Also there is detrimental effect on morale of employees of the company.

At the same time, the viral nature of today’s online world also provides companies the opportunity to proactively trace negative vibes and mitigate them. Also it allows companies to proactively spread good truths in public sphere to keep negative opinions at bay.

A proactive approach enabled with leading information technologies helps enterprises to leverage viral media to protect and enhance its image in public domain. The key aspects of such an approach is the extraction of information from various media sources including social media, analysis of information and devising action plan with both soft and hard action points.

A presentation on the paper can be downloaded from http://www.box.net/shared/h5i6m21jyize6ch4hofx 
The online link of paper is at http://www.cibmp.org/Papers/Paper%20632.pdf 

Principle of 'Inclusion' & Obligations of Business

The word 'Inclusion' here stands for a principle which implies 'The disadvantaged, marginalized or under-privileged is not left behind'. The principle has gained steady importance with growing multi-cultural society, activism in all facets of society and gap between have & have-nots. 

Lets explore various dimensions of this principle, how it can be promoted and imperatives for  a business.

Responsibility of Government

Governments have long realized that exclusion, i.e. alienation within a section of society harms the whole. Riots, terror and protests then become the means to vent the feelings. Governments frame policies/laws to ensure that all members of society feel valued, have equal access to resources, opportunities and feel a part of mainstream society. Political, Social and Economic inclusion are the three dimensions which governments focus on.

Economic Inclusion:

Economic exclusion occurs when a certain section of society do not have access to education, employment opportunities, banking, loan facilities etc. 

For instance, the poor villagers in south asia do not have access to bank loans and pay high interest rates to moneylenders. Microfinance, more rural banks, electronic id are some initiative towards financial inclusion. 

Poverty leads to exclusion from education and hence governments offers subsides, free education, mid-day meals and several other schemes to give equal opportunities to education and hence improve their employment potential. 

Political Inclusion:

Under-representation in political space and not having a political voice can lead to exclusion. The identity on which a group alienates himself can be anything - religion, caste, region, colour, tribe,  gender, language etc. The trouble starts when a group of people believe that they are being discriminated against and being left out of political space. Going forward, the group becomes fixated on that identity and separates itself from mainstream society. Governments hence sometime mandate a minimum number of representatives from such groups to give them a political voice and hence counter the alienation. 

Whether this approach is right or gives rise to identity politics is entirely an another debate altogether.

Social Inclusion:

Social exclusion occurs when members of mainstream society discriminates against a section of society. Again, divide can be created along many lines - religion, caste, region, colour, tribe,  gender, language, rich/poor, natives/migrants, age etc. The long term solution is to educate the society to live in a multi-cultural environment and not only accept but celebrate the differences. The training of which needs to start from school-days itself. Rights, freedom, fairness, justice, law and order are key enablers of maintaining social harmony. 

Government plays a key role by promoting community building and reconciliation exercises. Laws are also resorted to drive social inclusion. Non-Governmental Organisations (NGOs) have a major footprint in social inclusion initiatives.

Social inclusion issues cover a wide range. From the divide between natives and migrants to inclusion of mentally and physically challenged in education and sports.

These three dimensions (Political, Social & Economic) of inclusion overlap with each other and any exclusion issues in them feed into each other. All the three dimensions are to be addressed together to achieve inclusion. 

Obligations of Business

With growing focus towards inclusion, its natural that business world is expected to contribute in their own way. Companies can generally do their bit by following: 

Supplier Diversity:

It encourages businesses to source goods and services from vulnerable supplier base like that owned by  minority section, women, disabled etc. This initiative helps in economic upliftment of weaker section and hence contributes to their inclusion. For instance, agri-business companies are expected to include small-holders (farmers with small land holdings) in supply chain.

Equal Opportunity Employment:

The businesses are expected not to discriminate candidates based on gender, race, religion, colour, origin, disability etc., when considering them for hiring, firing, promotion, benefits, training and other workplace situations. Building an inclusive work culture in a diverse workforce is always a challenge but also provide tangible benefits if organisation is able to leverage diversity in perspectives and insights.

A caveat here. All inclusion measures discussed above does not mean to compromise meritocracy and fairness. Because then it would again mean wrong-ful exclusion.

Products & Services:

Businesses that provide essential products and services have an obligation towards inclusion by ensuring that no section of society is excluded from access to their products and services.

For instance, educational institutions are expected to keep their doors open for students from modest background and hence run scholarship schemes. They are also expected to extend the education to students with disability and hence have reserved seats and special facilities for them.

Healthcare is another area where companies like healthcare providers, pharma cos, insurers are obliged to support inclusion. Pharma companies have an obligation to ensure that their medicines are not out of reach for cash strapped members of society. Though one would argue that Pharma companies invest heavily in R&D and have right to profit-making. However, any profit-making by denying the needy puts them on the wrong side of the debate. 

Companies in food sector are expected to contribute towards food inclusion (provide access to sufficient, safe and nutritious food to meet the dietary needs in socially acceptable way) which has been long an area of public policy and government run programs. 

The obligation towards inclusion also extends to other important sectors where companies have to ensure that people at Bottom of Pyramid have access to their products and services. Many companies have redesigned their operations, products and services to target weaker sections and are also making money in the process. FMCG and Banking sector provides several examples.

Inclusion should not be confused with philanthropy or charity. The roots of inclusion principle lie in basic tenets of human rights and dignity and hence has to be approached in same spirit. A business is under obligation to ingrain the inclusion principle without compromising on meritocracy and profitability.