BENCHMARKING

Courtesy: Professor Satish Ailawadi
( can be contacted at ailawadi24@yahoo.com)

Definitions of benchmarking

(1)“A continuous systematic process for evaluating the products, services and work of organizations that are recognized as representing best practices for the purpose of organizational improvement.”

(2)“ A continuous search for, and application of , significantly better practices that lead to superior competitive performance.”

(3)“A disciplined process that begins with a thorough search to identify best-practice-organizations, continues with the careful study of one’s own practices and performance, progresses through systematic site visits and interviews, and concludes with an analysis of results, development of recommendations and implementation”.

(4) “Benchmarking is an external focus on internal activities, functions, or operations in order to achieve continuous improvement.”

(5) “Benchmarking is systematic and continuous measurement process – a process of continuously measuring and comparing an organizations business processes against process leaders anywhere in the world to gain information which will help the organizations to take action to improve performance.”

Why Benchmarking ?

•Successful companies in every industry engage in a variety of practices, which lead to achievement of high level of performance.

•Benchmarking has become one of the most important tools of business management in corporate that attempts to gain and maintain competitive advantage.

•The central essence of benchmarking is about learning how to improve business activity, processes, and management.

The Benchmarking Process

•Benchmarking involves looking outside a particular business, organization, industry, region or country to examine how others achieve their performance levels and to understand the processes they use.

•Thus, benchmarking helps explain the processes behind excellent performance.When lessons learnt from benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organization or in key areas of the business environment



Types of Benchmarking

Supply Chain in Diwali - Ops funda!

Oye, to all.... here's my take on Diwali :) yenjoy.... learn Ops fundas aswell !!!

Give and Take - Inventory Management Mom Style!!!


Operations Managament is the essence of life. It's all encompassing as well as it permeates everything! Take for instance this mail. The inputs are my weird thoughts, the output is the mail and the process of typing it, the value add ---------- yeah right :)!!!!

Diwali - the festival of light, is also the season where Mom's all across the globe face up to the big challenge of Inventory control. It's the time for the deluge, the give and take and the smooth maneuvering of gifts from one hand to the other.

Take my home for example. In Diwali, my Kitchen plays the role of a warehouse and MOM the part of the Inventory controller. Her job is not only to procure - gifts for people; but also find the right suitors for the parcels that are received from other people! Its not as simple as it sounds.

The thing about Gifts (mostly sweets and things to eat) is that , you need to do an ABC analysis of the inventory at all times and match the inflow value with the outflow value. If the outgoing value to the source is not atleast approximately equal to the incoming one from that source, it leads to supplier dissatisfaction. Whereas, if the outgoing value is greater than the incoming one, it leads to dissatisfaction of the inventory manager - my MOM .


The second challenge lies in the fact that at all times, the average space utilization of the gifts kept in the kitchen remains the same. So no matter how much MOM tries, the replenishment is always ready. Whenever she is absolutely ecstatic that the final gift was delivered, fresh stock arrives uninvited, with the additional burden of replenishing stock of equal value in order to send a return gift.

The third challenge is how to minimize the spend on gifts, by tactfully directing gift from A to Z and B to H and J to R and so on. At all times, the value of the interaction i.e. A to Home and Home to A should remain approximately equal. And its no easy task, mind it! MOM's through years of experience - recieve, evaluate, procure, inspect, handle, store and deliver gifts with such precision that each and every relationship becomes stronger and not one person is dissatified. It becomes almost second nature, involuntary to them. The challenge also lies in inspecting the gift, without spoiling the wrapper , in order to ensure that the gift has not been customised and codified to our name!

Also, the biggest challenge lies in the security of this inventory from a certain "ME" who has his eyes on the stock at all times. Pilferage - being a threat, stock counting is done twice a day and as it is inevitable, fresh order is placed in order to reach the minumum stock level, to prevent loss of dignity!!! The quantity ordered is instinctively calculated at "Economical" Order Quantities!!!

Finally, having a huge closing stock also creates health hazards for "ME" - because I generally recycle everything by eating it !! I generally END PRODUCT, i.e. I generally make "Finished product" a reality - I finish it alright !!! So the challenge is to have minimal to zero inventory at end of season. At this time, the tit-for-tat theory goes for a toss, and generosity comes to the fore. Even though obsolescence of stock is impossible (thanks to ME) , the stock is handed out in charity to the underprivileged. Not that I am complaining, but one person that is not satisfied is me :) Insatiable is my Nick name anyways.

If you come to think of it, JIT, lean supply chain -minimizing waste are fundas that are so astutely used during Diwali, the festival of light. Salute to MOM's and at some places Dads who manage this festival of give and take with such aplomb. As for my Mom, as I said, she has an addtional task at hand during this season, because for me personally - Diwali isn't the festival of " LIGHT ", my funda is Diwali - the festival of getting "HEAVY " :) hehehehehehehehe. So, a salute to her :)

Fundamentor...

Why I like the IIMA style of learning

Here at the Univ of Koeln, as a part of my course I am doing what is called a Business Project with a leading German company (to avoid any issues later let me call it Company C). It is a live consulting assignment where C wants to evaluate the strategy it adopts for process P and evaluate whether the money spent on department D (which is a profit center) is worth it. Now the structure of the team is such that there is an academician (lets call him Mr X), who on the behalf of the prof has to act like a guide and there is a representative from C who liaisons with us on behalf of C. As is evident, the grades we get will be governed by what the TA thinks of our work and whether C is happy or not depends on the results we give them. Now the nature of the problem is that, the German system is a bit skewed in the sense that when you submit a report or use something you have to support it with adequate literature. The attitude is “I am not a researcher; some researcher has done work and shown that this works so I will use his/her work”. The work we do for C is consulting and hence there are so many things which work in the principle of prototyping. You collect data from the company, study it, make a hypothesis, and decide whether the results support your data. Now for work like this the probability that someone else has done exactly the same thing is very less because each company is different. And here is the fun part. Company C is happy with us because we are on the right track and am giving them useful insights, but Mr X is not because we don’t have literature to support what we are doing. Cost-benefit analysis is a tool that has been used since ages, asking me to find some thesis paper or literature where cost-benefit analysis has been used is like asking me to give supporting literature to show that 2 + 2 = 4. If some company is spending money on A and wants to see whether the benefits B it gets are commensurate logically implies that some kind of cost benefit analysis needs to be done. And Mr X simply wouldn’t understand. It’s so frustrating. Let’s hope that this person is an exception and not a representative sample.

Now contrast this with the way we study at IIMA. Whenever we use someone else’s work we have to reference it. Even if it is just a few words and there is a strict checking of whether what we write is copied from somewhere. You can borrow ideas, give credit to the person and use it to suit your needs. There is credit given to application of the theory and commonsense logic above all ! Infact, this strictness has somehow ingrained in most of us a quality where none of us would even inadvertently use work directly from the net. We research, we read, we google, we search, then we understand, we digest it, we apply it and then produce the output. So no matter what we do, whether its some case we are solving, some assignment or some project report, unless there is something we put of our own, we don’t feel we have done something worthwhile. Contrast this with the pedantic approach of Mr X. This is not the only example. There are few more cases. Profs insisting that you learn definitions by rote, if a model has x components that you should name the x components in the order in which the original author of the model has mentioned it, in your thesis paper you have to have a bibliography with atleast 15-20 references to well known journals…. Well what do I say, the freedom that the system gives, which I mentioned in my previous post, is more or less nullified by such approach to learning. But as they say, you gain some, you loose some.

DEPRECIATING VALUE OF THE DOLLAR AND THE GATES THAT IT IS OPENING

This article has been written by Sudeep Bhargava of Globaladroit (www.globaladroit.com)

The depreciating value of dollar in comparison to the major currencies across the globe is a matter of great discussion. Indian software industries and the exporters are feeling the pressure because of the depreciating value.

The value of dollar which was as high as 49.5 rupees per dollar a few years ago, has now come down to around 39.5 rupees per dollar. This marks over 18% degradation in the value.

Is this some way a boon for the Indian business system? I feel YES. I firmly believe that this is an opportunity which has been bestowed to the Indian business to INNOVATE. This is time to rethink about the current business models that are being followed.

This gives an opportunity to look into your business models and shell off the “non value adding” steps which are unnecessarily eating into your operational costs. In other worlds, this could be the time to go “lean”. Applying simple lean principles can give the Indian industry the competitive edge that they badly want to be competitive in the world market.

Improving the “way you work” and not only the quality of the final product or service would see the Indian business develop the competitive advantage. Probably there is no better time than this to apply the principles of Six Sigma and Lean which have given excellent results to the Fortune 500 companies.

One key question to ask is how to develop other sources of competitive advantage, such as building high-level capabilities which cannot easily be replicated by competitors, or how to change the mix of activities carried out in India versus other countries.

In order to do this, we will have to change their mindset: We will have to stop thinking of themselves as Indian companies and think more like global companies of Indian origin.
Indian companies will need to analyze their portfolio of costs and move production to where it makes the best economic sense. Already, the Indian IT firms are trying to address rising wage costs by moving production within India to lower cost regions like Kolkata or Bhubaneswar and to Tier-II and Tier-III towns.

The challenge that the Indian economy faces is not that of an economic bubble burst but of moving on to the next growth trajectory and economic development. Going by the model proposed by Porter, India has to embark on a journey that needs sowing the seeds for catapulting India into an innovation driven economy unique value.

India will have to definitely accelerate its reform processes and start working to become an innovation driven economy, as that would determine whether the country would become a developed nation by the year 2020. The focus should be on building processes that would be driven by innovation; this would make the economy resistant to external shocks and vagaries of economic cycles and currency fluctuations.

The bottom line is, our policies should concentrate on enhancing our capability in manufacturing, promote entrepreneurship, and provide incentives for innovation.

A comparison: German vs. Indian way of education.

Before I get into any details; a disclaimer: This post is based solely on my observations while at the University of Köln on exchange and has by no means any scientific basis. So please treat it accordingly. So here goes.

Well the system here is on the other end of the system compared to what we have back at IIMA. Here first of all the Bachelor, Master system and hence have no strict conditions about time limits for finishing the degree, unlike us where there is the usual 4 yrs and 2 yrs. (Though they are now converting to the bachelor and master system to ensure universal acceptability of the degrees) The advantage of their old system was that you could take longer than required and interspaced your terms with as many internships as you wished. I know of people who have 4 or 5 internships before they graduate. This not only helps you to fund your own education, but also get a first hand feel of what you are learning. This coupled with the very open system of courses makes it a potent combination for exploring your career and likes. There is no restriction on the courses you take. A person registered for economics can also take courses in the political science stream or philosophy without anyone questioning him/her. And along the same lines, the responsibility of completing the required courses and credits lies solely with the students themselves. Contrast this with the very fixed and structured system we have back home where everything has been pre-decided based on the stream you choose. If you want to become a electronics engineer, you take courses A, B, C, D and if you want to become a CA you take courses X, Y, Z; but what if I don’t know whether I want to be a CA or an engineer? Well I guess this has something to do with our societal structure and income levels as well where there is not enough time or money with everyone to experiment with their life to see what it is that suits them. Not that either way is better but they are two very distinct ways one more exploratory the other more structured and well planned, pre-decided based on the basic skills essential for one to work as a particular profession.

So on one end you have a prescribed guide book. Learn this much and you will be an engineer, the other is more research oriented. Look at the way the courses are structured. Here though there is classroom teaching and the number of contact hours in class are very less compared to India but the amount of time you spend on your own independent study are comparatively higher. Most courses require you to write a thesis / seminar paper where the more research you do , the more thinking you put in the better grades you get. This system is designed to cater to innovation and creativity. Contrast this with a system where you have a lot of classroom teaching with an even larger number of practice assignments. This may not be the case but in my opinion this system is more designed to produce mass engineers who can do what they are taught to do, well mechanically within the predefined frameworks they have learnt and mastered. Though there will always be some who are really good. Recently there was a lot of talk about outsourcing etc where the developed nations spoke about how the developing countries like India and China are poor at innovation and that the best they can do is take away jobs that the mechanical and thus free up the people there to work on innovation and new products etc. Well, it might not be completely wrong either. Look at the professors here. At least at the Univ of Köln, the only time you are called a professor is when you get “a chair” i.e. when someone sponsors you at the University for “Life”. Thus you have guarantee of tenure, lot of freedom to pursue your own research, structure and decide how many and what courses you want to offer etc. At the same time, the fact that you need to have a PhD, need to have published X number of papers in international journals etc makes it very difficult for any lecturer to get a chair. Once you are a full tenured professor, you have your own library, lots of research assistants who are doing their research under you, who help you with not just the administrative work of your courses. So in effect each professor is more like an independent school in himself in a manner of speaking and students go and check the professor’s website for what courses he is offering and register for them etc. They you also inform the univ that you will be taking the exam for the particular course. Also there are very few courses that have “restrictions” on the number of people who can take the course. Their logic is, if someone is interested why stop someone from taking it. (in contrast to back home where people have to bid for courses) I have seen classrooms that are as huge as an auditorium used for lectures and are full. And in a way, since the education system is more geared towards research and less of classroom teaching the student professor ratio though important is not a limiting factor.

I am not saying that one system is better than the other. One is well suited to developing the required skill sets to pursue a decided profession in the shortest possible time and the other is more suited to exploring what you want to do but at the expense of time. Both have their pros and cons but that is for another post :P

Applying Newton’s Laws to NPD - II

In the November issue article we saw how the Newton’s laws of motion can be applied to new product development Ref November issue “Applying Newton’s Laws to New Product Development (NPD)”. This article will deal with the detailed analysis of each component and will provide the mathematical correlation between the two conjectures.

In Newtonian mechanics you have to be in one reference plane so that all the activities like motion, acceleration etc can be defined with respect to it. Similarly, while doing the analysis of NPD we will use two reference planes i.e. Company’s reference plane and Customer’s reference plane. By the reference plane I mean the way things are professed and the way it is conceptualized. As the reference plane changes from the customer point of view to company point of view, there is tremendous change in perception and hence aligning the reference planes becomes a gargantuan task. Even though it’s a difficult task, if done successfully it would prove to be immensely beneficial to the company and the customer.

In the first law we saw that “The customer will remain at rest or in other words not buy your product or will buy the bare minimum of products from you unless he is applied by the intangible force of Value addition”.

To move a football at rest, someone must kick it and to throw a stone upwards, one has to give it an upward thrust. Clearly, some external agent is needed to provide force to move a body from rest. Hence to increase the consumption of the product the companies also have to apply intangible force in terms of value addition.

Let us see what the value from the customer point of view is. Value to the customer is the worth in terms of technical, economic, service and social benefits a customer receives in exchange for the price he pays for an offering. Hence
Value = f (technical, economic, service, social benefits) …….. (1)
i.e. the value is the function of these four major components and is directly proportional to each components. Value is considered as the vector quantity as it has both magnitude and direction as the perception of value for customer is different and that of company is different, with respect to the reference planes discussed. Hence the first law states that if the Value addition is done through the change in any four components of equation (1) the customer will increase the consumption of that product. Value can be considered as the Force in that of Newtonian mechanics:
Force = Value
F = V…………………………..………………..... (2)

In the second law we saw that “The frequency of purchase of your product is directly proportional to the number of problems that the product solves for the customer.”
In Newtonian mechanics
Force = mass * acceleration
F = m * a………………………………………… (3)
Mass and acceleration are the factors, which define how fast the body will move and are directly proportional to the force applied on it. If same force were applied to a heavier body and the lighter body, then the lighter body tends to accelerates faster than that of heavier body.

The Mass can be correlated to the “Mindset Rigidity” of the customer. Changing the perception of a customer is a very difficult task. Due to this impenetrability it becomes all the more essential to look at techniques like change management, newer promotion strategies, influential brand ambassadors etc. But this discussion is beyond the scope of this paper we consider, but Mass in Newtonian mechanics can be regard as equal to Mindset rigidity of the customer. Hence,
Mass = Mindset Rigidity
m = MR……………………………………….… (4)

Higher the mass, higher force is required to move the body. Similarly grueling the rigidity of the mind of the customer, higher force is required in terms of perceived value addition to influence his buying decisions.

Acceleration of the equation (3) can be correlated to the frequency of purchase of the product.
Hence,
Acceleration = Frequency of Purchase
a = FP…………………………………………… (5)
or, Value = Mindset Rigidity * Frequency of Purchase ……………….from (1,2,3,4,5)
V = MR * FP
FP = V/MR
i.e. Frequency of Purchase = f (technical, economic, service, social benefits) / Mindset rigidity
The above equation shows that Frequency of purchase is directly proportional to the value and inversely proportional to the Mindset rigidity.
i.e FP α V
and FP α 1/ MR
Above equations implies that there are two ways to increase the consumption of the product offered by company. The company can provide more value to the customers in terms of the technical, economic, service and social benefits or they can influence the purchasing decision of the customer by changing their mindset rigidity.

In the third law we saw that “For every action of a company on the product front it has an equal and opposite reaction from its consumers”
This can be understood by considering the following fig.

The Value provided by the company is in terms of usage benefits to the customer, his need accomplishment etc and is like force (Va) acting on the product. The product is similar to an object under the Newtonian mechanics. The Value forgone by the customer is the money what he is paying to buy that product and this is also a force (Vc), which is acting on the product but is in opposite direction of (Va). The customer is bound to think, whether he should buy this product or can do without it? If the Va is greater than the Vc then the customer buys the product i.e. the product moves from company’s hand to the customers hand, else the product lies with the company only.

Assessing and truly understanding value in business markets is the stepping-stone to increasing profitability. Hence gauging and communicating what your products and services are worth to customers are very essential for a company’s success. Finally the customers when deciding to buy the product for use, compares the differential gain i.e. the difference between the value and price. The customer would buy the product when the perceived value is greater than the price. For attaining and retaining loyal customers every company should provide a differential gain greater than that given by the competitors.

i.e. (Value – Price)Company > (Value – Price)Competitors for customers to buy your product.
This can be done by providing same value to customer at lower price or providing more value at same price. Rarely does the price and value change at the same time.

When company looks at coming out with tons of new products, it has to check whether the value it is providing is more than the price. But many a times companies make a mistake in judging the perceived value, as company and customer are in different planes. Hence company should carry out pilot surveys and price the new product according to the perceived value. Once this is done, an intangible force works on the customer and the company makes headway in bending the rigidity of the customer. But this is not a one-time fix, the company should constantly gauge the competition and the changing perceptions of the customer and come up with newer deals – i.e. provide higher value at same price or same value at lower price.

Newton had the feeling of “Eureka”, when the apple fell on his head; it was an external stimuli. Similarly a company should keep throwing apples i.e. value at the customer, so that they also get a feeling of “Eureka” and keep buying the product.

Future Strategy for Integrated Logistics Supply Chain Management

Introduction

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves. It is an integrating concept, concerned with planning, sourcing, making and delivering goods and services from the initial supplier to the end customer. As the external environment is changing rapidly companies have daunting task to maintain sustainable competitive advantage over a long run period.

The logistics cost forms a major chunk of GDP and has to improve a lot in developing nation mostly. For e.g. there is an immense potential for cost savings for India if it can bring down its logistics costs from the current level of 13% of GDP to a level similar to that of the US – 8.7% of GDP. The savings would be around $20 billion resulting in a potential 4.3% cut in prices of Indian goods globally, making them more competitive

As the competition is getting stiffer the improved service and reduced costs can only be achieved through better management of flow of goods from plant to user. To capitalize on this opportunity, the focus should be on following:

Thinking of physical distribution process as a system in which all the components and functions must be properly balanced.

Taking a fresh look at the responsibilities, capabilities, and organizational positions of executives in traffic, warehouse management, inventory control and other functions which make up the overall system.

Re-examining the company’s physical plant and distribution procedures in the light of technical advances in such areas as transportation, data processing and materials handling.

In this paper I shall first examine the pressing need for improved management of companies ILSCM and then discuss the future of integrated logistic supply management across the industry, which will depend on huge transformation and what companies should follow. An effective and efficient ILSCM is the key to success as it helps in developing sustainable competitive advantage and strategic fit among process for any organization.

Need of Integrated LSCM (Logistics & Supply Chain Management)

SCM remains a high priority for manufacturers as a way to improve margins, retain & increase market share. Early supply chain management success included improved relationships between warehousing and transportation within companies resulting in reduced inventory and better response times to customer requests for products and services.

SCM then entered a logistics stage where other functional areas within companies joined forces to incorporate manufacturing, procurement, transportation, distribution, and marketing to more effectively compete in the marketplace. This stage was aided by the use of telecommunications, electronic data interface, and other technological advances that made the transfer of information more transparent across the functional areas between companies.

The future Strategy for ILSCM – Matching Supply Chains with Products

The first step in devising an effective supply chain strategy is to consider the nature of the demand for the products one’s company supplies. Many aspects are important – for example, product life cycle, demand predictability, product variety, and market standards for lead time and service (the percentage of demand filled from in-stock goods). The products on the basis of their demand patterns, falls into one of the two categories: they are either primarily functional or primarily innovative. And each kind category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chain is a mismatch between the type of product and type of supply chain.

Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which don’t change much over time, they have stable, predictable demand and long life cycle (usually more than 2 years). But their stability invites competition, which often leads to low profit margins of around 5% to 20% only.

To avoid low margins, many companies introduce innovations in fashion or technology to give customers an additional reason to buy their offerings. Although innovation can enable a company to achieve higher profit margins, the very newness of innovative products makes demand for them unpredictable. In addition, their life cycle is short- usually just a few months- because as imitators erode the competitive advantage that innovative products enjoy, companies are forced to introduce a steady stream of newer innovations. The short life cycle and the great variety typical of these products further increase unpredictability.

With their high profit margins (usually 20% to 60%) and volatile demand, innovative products require a fundamentally different supply chain than stable, low-margin functional products do. To understand the difference one should recognize that a supply chain performs two distinct types of functions: a physical functions and a market mediation function. A supply chain’s physical functions is readily apparent and includes converting raw materials into parts, component, and eventually finished goods, and transporting all of them from one point in the supply chain to the next. Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products reaching the marketplace matches what consumers want to buy.

Each of the two functions incurs distinct costs. Physical costs are the cost of production, transportation and inventory storage. Market mediation costs arise when supply exceeds demand and a product has to be market down and sold at a loss or when supply falls short of demand, resulting in lost sales opportunities and dissatisfied customers.

Right Supply-Chain Strategy

Fig1. Matching supply chains with products
The above matrix shows the matching of supply chain with products. The Efficient supply chain is the process where the supply of predictable demand is met efficiently at the lowest possible cost. The manufacturers focus on maintaining high average utilization rate and they focus on shortening lead time as long as it doesn’t increase cost. The Responsive supply chain process is for responding quickly to unpredictable demand in order to minimize stock outs, forced markdowns, and obsolete inventory. Manufacturers deploy excess buffer capacity in this regard.
For companies to be sure that they are taking the right approach, they first must determine whether their products are functional or innovative. The next step is for managers to decide whether their company’s supply chain is physically efficient or responsive to the market. Having determined the nature of their products and their supply chain’s priorities, manager can employ a matrix to formulate the ideal supply-chain strategy. The four cells of the matrix represent the four possible combinations of products and priorities.

Managers at many companies continue to lament that although they know their supply chains are riddled with waste and generate great dissatisfaction among customers, they don’t know what to do about the problem. The root cause could very well be a misalignment of their supply and product strategies. Realigning the two is hardly easy. But the reward- a remarkable competitive advantage that generates high growth in sales and profit – make the effort worth it.