Archive for the ‘Supply Chain & Operations’ Category

The dangers of outsourcing

Conventional wisdom says companies should outsource manufacturing and operations to take advantage of lower wages and faster operational scalability. Aside from the question of whether this strategy (particularly when it involves offshoring) always delivers the promised benefits, you may also wonder whether outsourcing makes long-term strategic sense. The demise of Kodak, the iconic U.S. photography company, suggests organizations need to be wary of outsourcing strategic business activities. Outsourcing has been occurring for decades, based on the idea that moving labour-intensive work offshore would significantly reduce cost, without jeopardizing a firm’s competitiveness.

Kodak’s fall shows this is a dangerous assumption. Companies can unknowingly reduce their competitiveness when strategic work such as manufacturing and product design is outsourced. In other words, they stand a good chance of loosing the secret sauce that drives meaningful differentiation. Moreover, outsourcing accelerates the diffusion of knowledge and talent to outsiders thereby lowering barriers to entry. The result is higher levels of competition and a lower return on invested capital.In addition, many operations that were once performed more economically offshore can now be in-sourced at a similar cost and much lower risk.

Founded in 1893, Kodak was the dominant player in the camera, film and processing business with a strong reputation for product and manufacturing innovation. Ironically, Kodak developed the world’s first digital camera in 1975, yet was never able to leverage that early success to take advantage of the market shift to digital photography. Instead, the way Kodak expanded its digital business sowed the seeds of its demise. In 2013 the firm declared bankruptcy.

Harvard Business School Professor Willy Shih had a front row seat, having served as president of Kodak’s Digital & Applied Imaging business through the turn of the 21st century. “Much of the camera technology was invented in the United States, but U.S. companies gave it all up,” Shih said. He contends that when Kodak moved pieces of their operations overseas many years before, they lost technical expertise, product innovation and manufacturing skills. When digital cameras became the rage, Kodak had lost the ability to put together a compelling digital camera solution. As a result, they were unable to compete in this rapidly growing market. Coincidentally or not, other companies such as Dell, Blackberry/RIM and HP saw their fortunes decline during the same time they aggressively offshored major parts of their value chain.

From a strategic perspective, manufacturing a product can trigger new ideas that lead to improved operational efficiencies and product innovation, especially when there is close contact between users and designers at the production level. Maintaining key operations also allows companies to retain vital research and development, support and manufacturing knowledge, which are key to producing next-generation products. These long-term spillover effects can explain why successful consumer technology companies such as Apple and Google limit outsourcing to manufacturing, and keep product design, branding and customer support in-house.

Outsourcing need not be a risky strategy. The following are three things leaders should consider in deciding which activities are performed internally and which can be left to others:

Focus on what’s important

Many of the managers we speak with do not know what makes their organizations tick. Leaders need to know the key capabilities (e.g., assets, brands, people, knowledge, and resources) that deliver their unique value proposition so they can safeguard them.

They also need to understand what new capabilities (e.g., digital competencies) are required to generate growth three to five years out.

Double down on the core

Continue or increase investment in your differentiating, core capabilities that drive your market position and return on assets. These areas would include innovation, brand building, customer service or employee training.

Take steps to in-source strategic activities (those that are needed for growth) from external vendors.

Optimize existing relationships

For the foreseeable future, outsourcing is here to stay. It is unrealistic for companies to do everything in-house. In other cases, it is essential to unwind outsourcing arrangements or build up internal capabilities.

For these ‘sticky’ deals, managers should review and optimize their existing relationships to: Insist on and enable providers to deliver continuous improvement in terms of innovation, service levels or cost savings; ensure the company has mechanisms to capture the same learnings in areas such as product manufacturability and process efficiencies as their outsourcer; consider a dual outsourcing and in-house strategy for some activities to maintain flexibility and knowledge accumulation.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Fixing strategic procurement

The current approach to strategic procurement (or sourcing) might be outliving its usefulness in many companies. The original idea was to bring disciplined buying policies and formalized supplier management to the procurement function in order to improve operational and financial results. Like many well-meaning initiatives, however, its implementation has been a mixed blessing. To achieve its potential, managers should rethink and enhance how strategic procurement is executed.

Penny wise, pound foolish

The promise behind strategic procurement was to reduce input and administrative costs, minimize risk and increase supplier collaboration by employing a variety of practices, including: reducing the number of vendors to maximize negotiating leverage and cut the cost of procurement; insisting that suppliers pitch their services through formal request for proposal (RFP); and centralizing buying authority to prevent ad hoc purchases. For numerous firms, the reality has not met expectations, for many reasons:

1.  Barriers to cost reduction

Many private and public sector organizations have not realized long-term cost savings and, in fact, are seeing higher costs. Cost stickiness traces to numerous factors, many of which were unanticipated: using a small number of approved vendors can incite them to engage in oligopolistic pricing behaviour; suppliers end up passing along their higher administrative and pitching costs, and; excluding lower cost providers from an approved vendor list limits price competitiveness.

2.  Reduced innovation & choice

The initial approach to strategic procurement was developed for a relatively stable business world. Yet, today’s economy is anything but that. Yesterday’s approved vendors (chosen because of their size, pedigree etc.) may not be the highest value suppliers today if they have not kept pace with new technological and business model developments. As a result, the client may not be exposed to cutting edge insights and technology. Moreover, incumbent vendors have a vested interest in restricting the amount of innovation that drives down pricing (read: their profits) or is outside their core competence. One of our packaged goods clients revamped their entire strategic procurement strategy after they got tired of watching their competition get to market first with new technologies and a steadily improving cost structure, all generated within their supplier network.

3.  Hamstringing operational performance

Forcing suppliers to engage through a poorly crafted statement of work or bidding process can inadvertently increase the risk of bad operational performance. In one high-profile example, many of the problems with the launch of the Healthcare.gov portal were blamed on the U.S. government’s procurement processes as well as requirements definitions. This is not solely a public sector concern. We have seen many expensive initiatives go off the rails because the original RFPs were focused more on satisfying the requirements of the procurement team than with meeting critical business needs like quickly getting to market or maximizing quality.

Gaps in implementation

According to our experience and research, procurement problems trace to missteps in program execution rather than business model design. The issues vary and could include: focusing on purchase price rather than total, long-term cost; relying on negotiations and supplier leverage strategies rather than broader ‘win-win’ collaboration opportunities; under-investing in procurement capabilities, and; over-involving purchasing in every supplier interaction.

Reinvigorating the model

Strategic procurement needs to evolve into a more bespoke capability. “Historically, strategic purchasing has been used to drive costs down by leveraging economy of scale along with the hope that being a significant customer carries clout,” says Mitchell Lipton, operations manager at auto parts supplier CTS. “In today’s economy there is still a place for strategic purchasing but it is no longer a one-size-fits-all solution.”

Senior leaders should realign their procurement organization to business needs and look for opportunities to add value across the entire design-sourcing-manufacturing continuum. They can do this by asking four important questions:

  1. Where can procurement work more effectively with other key functions — without getting in the way — to ensure strategic alignment?
  2. How can buyers expand beyond a short-term cost-savings mindset to include an emphasis on long-term value such as greater collaboration, continuous learning and innovation creation?
  3. What is the right mix of local and specialized versus national and generalist suppliers?
  4. What tools, processes and skills are needed by the buying organization to improve its performance?

Twenty-first century procurement is no longer just focused on cost or guaranteed delivery. According to Lipton, “In business today the key is speed and staying ahead of the value curve. When dealing with suppliers the most important attribute is flexibility and a philosophy of continuous improvement. You need a supplier that can respond to your changing needs plus has a culture of finding how to do it better.”

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

4 dangers to be way of in 2014

The holiday season is a time for celebrating — and prognostications for the coming year. I’m typically an optimist, but not this time.  Though many factors point to a rosier 2014, every company faces some significant direct and indirect risks, many of which lurk below the surface. Fortunately, these dangers can be alleviated with good analytics and planning.

Recent positive economic news (e.g. the strength of equity markets, low interest rates and the abatement of EU and U.S. debt crises) have given corporate managers some cause for optimism. It would be understandable, but hazardous, for managers to let their guard down.  Many risks continue to menace organizations, four of which are:

Stagnating prices

Raising prices is a quick path to higher profits. To wit, a 1% increase in prices with a 30% margin can improve the bottom line by 20%.  Just try making it happen. Since the financial meltdown of 2008, it has been difficult to raise prices while maintaining market share. In Canada’s retail sector, for example, the arrival of Target and Marshalls plus recent grocery price wars, is expected to depress industry profitability for some time.  Many other sectors like services, manufacturing and communications are finding it difficult to sustain margins due to buyer pressure, global competition and steadily increasing costs.

Mitigating the risk

From a pricing perspective, firms need to more aggressively sell their products in markets that are less price sensitive or that are rapidly growing markets, both locally and in the developing world. Furthermore, those companies with differentiated value should look to take pricing up by better aligning price points to the unique benefits delivered.

Cost pressures

Global consultancy EY estimates that a 1% reduction in costs can produce the equivalent of a 10% increase in sales.  Achieving this is another story. In many firms, most of the easy supply chain and headcount rationalization savings have already been tapped. Moreover, the era of low raw material and wage inflation may be coming to an end, tracing to two key drivers —  the recent uptick in consumer demand and the possibility that China’s growth engine will reignite, driving up raw material costs. Adding fuel to the fire is continued exchange and interest rates volatility, which can play havoc with costs.

Mitigating the risk

Product and operational innovation is the key to driving margin improvement.  On the cost side, it is possible for organizations to further reduce cost without cutting key capabilities. For example, managers can reduce development costs and better target needs by co-creating products with their customers and leveraging rapid experimentation practices. Innovative operational strategies can drive higher efficiencies through the implementation of initiatives that reduce complexity, as well as crowdsourcing and gamificationpractices.

Supply chain disruptions

As has been shown many times, unforeseen events like natural disasters or political crises can seriously disrupt a firm’s operations, dramatically impacting product supply and revenue. Risks are magnified when a company’s supply chains are regionally concentrated and highly integrated.  For example, Japan’s Fukoshima nuclear disaster led to global shortages of spare parts  and shuttered assembly plants for Honda and Nissan. A recent report by Swiss Re, a reinsurance company, highlights the ongoing risk of major natural disasters such as flooding, earthquakes and storms.  The report identifies above-average risk for many global economic hubs including: Tokyo, Hong Kong-Guangzhou, New York, Los Angeles and Amsterdam-Rotterdam.

Mitigating the risk

Maintaining a low-cost supply chain must be balanced with the need for added production flexibility and agility.  Managers can minimize this operational risk by having: multiple supply-chain partners for critical and expensive inputs; close and symbiotic relationships with each vendor; and the internal capability (e.g., engineering, procurement) to quickly shift production if necessary.

Cyber attacks

Computer attacks and viruses represent a clear and present threat to every enterpriseand industry.  This year, the Securities Industry and Financial Markets Association released a report that showed  more than half of the world’s securities exchanges had experienced cyber attacks during the past 12 months. Janet Napolitano, the outgoing U.S. homeland security chief, recently said, “Our country will, at some point, face a major cyber event that will have a serious effect on our lives, our economy, and the everyday functioning of our society.” Importantly, these cyber attacks can appear out of the blue.  According to software provider Symantec, 40% of all the computers that were impacted by the Stuxnet virus, which allegedly targeted Iran’s nuclear infrastructure, were located outside of Iran.

Mitigating the risk

Reducing the impact of cyber attacks requires an acknowledgement of the threat, an understanding of internal vulnerabilities and the business continuity plans to deal with potential disruptions. Furthermore, IT managers should work together with their industry peers to explore industry early warning systems and safeguards.

For more information on our services or work, please visit the Quanta Consulting Inc. web site.

Offshoring’s burn victims

RBC’s recent imbroglio over its Indian IT outsourcing practices illuminated the pitfalls of dealing with offshore providers.  Unfortunately, the Bank’s experience is not unique.  Contrary to conventional wisdom, IT offshoring has not been a boon for every North American firm pursuing that strategy.   Quality and service have struggled to meet stricter North American performance and service standards. Moreover, India’s labour cost advantage is declining for a variety of macro economic reasons. Finally, pervasive business and brand risks remain.  Leaders need to relook their existing offshore relationships to ensure they still make business sense and consider new compelling, ‘Made-in-Canada’ alternatives.

Offshoring IT operations have always been difficult and risky; the RBC/iGATE flap is merely the public tip of the iceberg.   Alex Rodov, CEO of a leading Canadian IT testing firm QA Consultants, has seen the damage of these arrangements first hand:  “Offshoring is no longer the bargain it once was.  It is not uncommon to see higher – not lower – costs, more hassles, delayed time to market and compromised quality.”

Our research uncovered the following example of an offshoring ‘burn victim:’

Financial Services project is “A Bridge Too Far”

A leading financial services company was looking to launch a major, new online offering.  The firm did not have the internal capabilities to build this platform themselves.  They chose to outsource the initiative to a large Indian IT services provider.  This is where the problems began. The Indian firm underpriced the project to get the deal.  They also took the client’s business and technical requirements ‘as is’ without vetting its feasibility.

Ultra low cost pricing is a common strategy for offshore providers to gain market share.  In this case, unfortunately, it did not leave them much margin room to validate the client requirements or assign enough experienced staff.  As a result, the provider missed gaps in the software architecture and did not fully understand the client’s needs and expectations.  Not surprisingly, each version of the delivered code did not meet quality expectations.  Furthermore, the cultural, time and language differences hampered alignment around expectations and trouble-shooting. The provider tried to redress the quality issues by throwing more staff at the problem – and then tried to get the client to pay for them.  Not only did this generate more friction in the relationship but it also failed to address the root cause of the problem namely misaligned goals, poor Indian staff quality and an unbridgeable cultural and linguistic divide.

This is not a case of a single deal gone bad but rather one example of the real difficulties commissioning knowledge-based work thousands of miles away.  This story did not end well.  The initiative had a target budget and delivery of $3.2 million and 7 months respectively.  It eventually was delivered in 22 months for a total cost exceeding $65 million.

Declining India…

Blaming one party or another is too simplistic.  Failure has many fathers.  Business conditions have fundamentally changed – and not in India’s favour.  For one thing, India is losing its luster as the lowest cost place to undertake IT activities. According to 2010 U.S. Bureau of Labour Statistics, India’s average per hour cost advantage has shrunk to only 6-7x U.S. rates (versus a 20x times advantage 10 years earlier).  Furthermore, the quality of the Indian workforce has never lived up to expectations.  The Wall Street Journal has reported that 75% of technical graduates are unemployable by their IT sector. Finally, bridging the relationship/cultural divide has proven to be more challenging and pervasive than anticipated.   In all its forms, distance really does matter.

…Emerging Canada

At the same time, Canadian IT service companies have become more competitive, taking advantage of moderating Canadian wage rates, a steadily increasing, educated (and stable) workforce and a growing sentiment that we need to cultivate strong local businesses. The emergence of globally competitive Canadian IT services firms is giving North American companies more choice, not to mention highlighting the value of good old fashion Canadian innovation and hard work.  To wit, QA Consultant’s roster of blue chip clients such as Loblaw, Bank of America, Praxair and Canadian Tire, demonstrates that leading North American firms recognize the business and reputational advantage of staying closer to home when outsourcing key processes.

Most likely, the optimal outsourcing strategy will include a mixture of local and offshore operations, with the ultimate decision based on an assessment of total delivered cost, the importance of local control and predictability and; a prudent evaluation of brand and intellectual property risk.  Managers should approach these decisions objectively and not be afraid to challenge conventional wisdom that lower cost and higher performance can only be found offshore.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Sync your supply chain and business strategy

It is self evident that a company’s supply chain should be aligned with its core business strategy and value proposition.  For example, a retailer following an everyday, low-cost positioning should have a supply chain built to minimize cost and maximize inventory turns, potentially at the expense of other capabilities such as innovation or sustainability.  Yet, our research suggests many organizations retain supply chains that are out of sync with their core business goals, leading to lower financial and market share results.  Fixing this problem is part analytics, part strategic planning and part organizational redesign.

Syncing your strategy and supply chain is a ticket to superior performance.  There are many examples of market-leading firms with strategic congruency including Dell,Walmart, Nordstrom, Cisco and McDonald’s. These firms diligently manage their supply chains to support their core positioning and deliver superior value — not to mention creating industry barriers to entry.  For example, Walmart has achieved outstanding operational performance by developing sophisticated inventory management, logistics and procurement systems.   These capabilities have played a key role in Walmart delivering on its everyday-low price brand promise while achieving industry-leading margins and profitability.   In another case, Dell vaulted to the leadership of the PC industry in the 1990s by offering low-cost and customized products through a build-to-order manufacturing model backed up by extensive procurement and inventory-management competencies.

Most companies, however, are not strategically coherent.  This can occur for a variety of reasons.  For example, firms competing in multiple product categories face a myriad of competing demands from different product teams and functional departments, leading to a convoluted supply chain design and bloated product portfolio.   In other cases, weak centralized management control combined with an outsourced and global supply chain will often result in misalignment.  Finally, some firms do not posses a consistent strategic position in their marketplaces.  Instead, supply chain decisions ebb and flow depending on short-term market conditions rather than long-term considerations like sustaining a differentiated market position.

One of our consulting projects illustrates the causes and dangers of supply chain incongruence. We were engaged by a customer-driven industrial goods company to help fix its customer satisfaction problem.  The company was losing revenue, facing higher cost-to-serve expenses and experiencing historically low customer satisfaction scores.  Its distributors were getting short shipped of high-velocity items and incurring extra costs through persistent errors in filling orders.  After a thorough analysis, we discovered the problem was not localized to the logistics group (as assumed by management) but had to do with the design of the supply chain. Over time, major parts of its operations had drifted away from the firm’s core positioning around maximizing customer satisfaction.  Specifically, production planning was being under-resourced and the product management and procurement teams had quietly (and independently) shifted their focus towards launching multiple products and aggressive cost reduction respectively. Our solution got their supply chain back on track by enhancing their product life cycle management policies, improving order fulfillment capabilities and moving production to a more flexible manufacturing model.

Senior leaders need to develop the right supply chain and capabilities for their business strategy and keep it there.  To do this, we recommend a simple three-step approach:

Clarify

Although many companies pursue a hodge-podge of strategies, they tend to focus on a couple of parameters (singly or in combination) like cost leadership, premium positioning, or service excellence.  However, many managers may not know what levers drive their success and what to leave for their competitors.  By undertaking a thorough strategic planning process, leaders will understand their ‘winning’ positioning, where they merely need to meet competition and what they can ignore because of poor strategic fit.

Prioritize

Misalignments often occur when short-term management decisions undercut the optimal supply chain model.  This is understandable given the dynamic nature of some markets and quarterly financial imperatives. One example could be the launch of a cost savings initiative for a premium car brand.  The purchasing department may choose the lowest cost, but least reliable and innovative, parts suppliers. Managers need guiding policies and discipline to ensure their supply chain decisions and capability investments efficiently reinforce their core business strategy and value proposition.

Measure

As the saying goes, you can’t manage what you don’t measure. I will add the truism that you need to measure the right things, too.  Unfortunately, numerous organizations rely on incomplete metrics, which do not measure the link between corporate strategy and supply chain design. Leaders must focus on or identify key performance indicators (KPI) that reinforce strategic coherence. For example, one KPI — ‘shipments on-time, and complete’ – is a good proxy in customer-drive product companies for supply chain performance areas including production, customer service and logistics performance.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Cutting the cost of IT

In most organizations today, IT is firmly planted near the top of the strategic agenda.  Businesses continue to require new software and hardware to interact with customers, manage supply chains, and process transactions. However, the bygone days of CIOs getting a blank check for the latest IT application is long gone.  Infrastructure and operating (I&O) cost reduction is now an important priority. Even after multiple rounds of cost cutting over the past few years, many CEOs and CFOs continue to look hungrily at IT budgets that could now approach 15-20% of total spending in many companies. Fortunately, opportunities abound. A proactive and systematic cost reduction initiative could reduce IT expenditures in the short term by 10%, and 25% over the following 3 years.

According to Gartner Research, I&O costs make up 60% of the typical enterprise IT budget.  These costs encompass all the activities that deliver IT to the organization, including: facilities, hardware, software, services, labour and network costs.  Up to 80% of these costs fall into 3 omnibus areas:  data center operations, network fees and supporting the lines of business.    Shaving these expenditures is a major opportunity area in most firms.  In a 2011 survey of IT executives, Gartner found that only a minority of companies were more than halfway down their IT cost savings path.

There is no magic bullet to reducing IT expenditures while ensuring ‘always on’ computing remains responsive to dynamics business needs. Our work with savvy CIOs has identified many cost reduction best practices, some of which include:

Consolidate IT

Significant savings of 15-20% can be garnered by consolidating IT through server rationalization, moving to standardized software platforms, negotiating better IT provider terms and by optimizing the data center.   For example, many IT managers out of habit or risk aversion put all their computing needs in the most robust and secure data centers.  This not need be the case.  Lower tier requirements (e.g., development, testing environments) and applications (e.g., training, HR) can be placed in lower-tier facilities with minimal business impact. Furthermore, lower-tier facilities can still be used for hosting production environments and critical applications if they use virtualized failover— where redundant capacity kicks in automatically— and the loss of session data is acceptable (as it is for internal e-mail platforms for example).

First virtualize, then buy

Most IT infrastructures operate at less than 15% capacity on average due to uneven demand, decentralized purchasing and “siloed” resourcing.  Driving up utilization through grid or virtualized computing is a cheaper and easier option than buying expensive hardware & software and building new data center to handle the new assets. “Dedicated infrastructure will usually be an order of magnitude lower in utilization than an intelligently shared infrastructure,” said Gary Tyreman CEO Univa Corporation. “Using grid computing to share infrastructure across multiple applications is more efficient, saves money and simplifies capacity planning and governance.” We have seen many companies use server virtualization and grid computing to boost IT utilization rates in excess of 75% while reducing energy, facilities and operating costs.

Target power and cooling efficiencies

Power and cooling are significant cost centres and barriers to higher IT utilization.  Many companies can cut 5-20% in operating costs by deploying energy-efficient power and HVAC equipment and making simple infrastructure upgrades. Furthermore, augmenting cooling can also boost scalability.  In many cases, older data centers have dated air-conditioning systems that limit the amount of server, storage, and network equipment that can be placed in these sites.  Capacity can often be inexpensively and quickly improved by upgrading infrastructure cooling efficiency, using free cooling and installing energy management systems.

Troubleshoot better

Adding hardware, software and facilities isn’t always the most direct or effective way of making applications more available. The vast majority of IT downtime is the result of architecture, application or system design flaws not hardware or software problems. Instead of looking first to upgrade the infrastructure, smart firms are adopting integrated problem management capabilities that gets to the root cause of problems, significantly reducing infrastructure costs and maximizing application up-time.  Additionally, major cost savings can be gained by pushing IT support down from expensive tiers to lower, less expensive tiers that are able to satisfactorily resolve the user’s issues.  Right-sizing IT support should include the deployment of low cost, self-service portals to handle issues like password resets and ‘how-to’ queries.

These days, the cost of IT is too big to be ignored.  CIOs can quickly increase IT’s returns on assets and operational performance without increasing business risk by: thoroughly understanding their cost base (and how it compares to their peers); diligently pursuing ‘low hanging’ cost reduction opportunities and; deploying new architectural and virtualization schemes that deliver more IT for less money.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Next generation manufacturing, today

Recent advances in digital fabrication technologies have the potential to revolutionize how companies build products and target consumers. Manufacturers can now produce many customized products and prototypes ‘when needed, as needed’ with the same economics as high volume production.  DF technologies will transform many industries including apparel, consumer & industrial products and healthcare – as well as local economies, which may experience a manufacturing revitalization.   Savvy manufacturers are exploring how they can leverage these new technologies to compete better.

The rapidly evolving field of DF is doing for manufacturing what the Internet did for information-based goods and services.  DF turns traditional, volume-based manufacturing economics upside down. In the conventional “subtractive” production model, the existence of scale economies means that it costs much more money to produce one unit than it does to produce say 100,000 units.  When DF technologies and approaches are employed, it now becomes cost effective to manufacture much smaller batches of customized products on demand, while shortening the cycle time between design and production.

Not surprisingly, DF has disruptive characteristics. “3D printing can provide the garage entrepreneur with the same productive capabilities as the large corporation,” says Abe Reichental, CEO of industry leader 3D Systems.

Additive technologies

At the heart of DF has been the development of additive-based technologies like 3D printers.  These machines allow firms to take digital designs and rapidly print (i.e. build) products or parts from a variety of materials using bonding or fusing techniques. The 3D printer’s advantages in programmability, quick set up times and rapid change-overs enable firms to produce small batches and prototypes for the same cost per unit as long production runs.  Furthermore, companies can rapidly adjust production to meet customer demand and changes in taste.

3D printing is best suited for products or parts that are expensive to inventory, need high levels of customization and require quick production runs. In the healthcare sector, the 3D printing future is already here. Over 10 million 3D-printed hearing aids are currently in circulation worldwide. 3D printing is being adopted by industry leaders such as GE, Medtronic, Boeing and Mattel as well as a host of smaller enterprises to make a myriad of items such as aerospace parts, iPhone accessories, orthopaedic implants, jewelry and toys.

The future looks promising:  additive technologies are evolving on a path similar to Moore’s Law: machine capability is growing while cost is decreasing exponentially.  Jeff Immelt, CEO of engineering giant General Electric, is convinced.  “I think it’s going to be big, I really do… [particularly for] shortening cycle times between designing products and making them.”  This advantage could help North American manufacturers compensate for higher wage costs compared with those in emerging economies such as China.

Of course, DF has its limitations.  The technology is not mature enough to handle large or complex products.  Furthermore, additive technologies cannot match the low cost and throughput of conventional manufacturing for routine parts.

Open Source Manufacturing

Perhaps the most intriguing facet of the DF revolution has been the emergence of an ‘Open Source’ manufacturing movement. Booze & Co. describes this as the rise of a ‘Maker Culture’ – a self-organizing community and supply chain made up of hundreds of connected manufacturers, consumer groups, on-line shopping sites, and hacker groups.

The Maker Culture encompasses an ecosystem of players.  Online fabrication services like i.materialise and Sculpteo provide on-demand 3D printing for personalized small volume production, at rates that are affordable to individuals and small businesses. Customers forward a digital design and receive the corresponding physical item by mail a few days later.

New open design repositories and DF-powered supply chains are sprouting up on the Web.  Thingiverse is an online hub where people can freely download each other’s designs and programming code for such ubiquitous products as bottle openers, gears, and coat hooks.  Distributed manufacturing networks like Makerfactory and 100kGarages connect digital manufacturers directly with a global market. Potential customers post job requests, which are then bid on by individual fabricators.

Similar to their programming cousins, Makers are forming open source collaboratives and workshops around the world. These spaces are not centrally owned or organized, but they share information collectively and collaborate on each others projects. Makers are expected to publish their plans and specifications, typically under an open source license.  This allows others to copy, adapt, and co-develop designs, along with ensuring credit and mutual access to ideas. This cultural shift has the potential to germinate a diverse, dense and innovative network of local vendors centered around large original equipment manufacturers or by industry.

The rise of DF has important implications for every manufacturer.  Those that embrace the technological and cultural opportunities will benefit from lower production costs, greater innovation, a faster design-to-build cycle, and the support of a more responsive supply chain.

For more information on our goods and services, please visit the Quanta Consulting Inc. web site.

Transformational analytics

Companies regularly collect reams of data from their customer interactions and operations. Increasingly, they are looking to build capabilities that can synthesize this raw asset into actionable insights (a competency known as Data Analytics), dramatically improving operational performance, enabling promotion & product ‘mass customization’ and spawning new business models. Leveraging data, however, is easier said than done.  Many companies do not have a data-analytics vision and, therefore, tend to underestimate its potential impact.  Before investing in capabilities (the combination of talent, technology and math), managers should first consider how analytics can transform their business.

For select firms, data and the capabilities that manage it is a competitive differentiator, on par with other valuable assets like a brand. Recent academic research shows that companies that use DA to guide decision making are more productive and experience higher returns on equity than competitors that don’t. However, not all industries offer the same opportunities.  Some sectors like entertainment, construction and services will have modest requirements for high performance analytics, given their market dynamics and structure,.  Based on our consulting experience, we believe that companies in retail, manufacturing, banking, telecom, wholesale, and healthcare industries are best positioned to exploit the breakthrough opportunities provided by data analytics.

Brian Ross, president of Precima, a part of the LoyaltyOne analytics solution is on the front lines of transformational DA.  “We believe that today’s advantage is quickly becoming tomorrow’s necessity.  The first step in this transformation starts at the top. The C-Suite has to establish the long-term vision and align the organization to build the capabilities, processes and tools.”  Strategy-minded leaders should consider the following four areas for breakthrough DA:

1. Optimizing operations

Powerful analytics can significantly improve operational performance, reduce cost and minimize risk.  For example, collating supply chain data onto one integrated platform will allow manufacturers to better collaborate with suppliers during product development, reducing cost, shrinking development time and minimizing the risk of costly errors. In other cases, analytics can enable the deployment of self-optimizing manufacturing systems. McKinsey has written about impact of data analytics on the oil industry.  Operational data from wells, pipelines, and mechanical systems can be collected and analyzed, feeding back real-time commands to control systems that adjust oil flows to optimize production and minimize downtimes. One major oil company has used this approach to cut operating and staffing costs by 10-25% while increasing production by 5%.

2. Transforming marketing & productsAdvertisement

Real time data analytics enables companies to quickly customize products and promotional offers on the fly for different customer segments.  As an example, retailers can track the behavior of individual customers through their usage patterns — both at their site, through social media and from location-specific smartphones — and predict their likely behavior in real time. Once they can predict behavior, retailers can better drive purchases by triggering customized offers, special discounts, or product bundles. In another example, McKinsey works with a personal-line insurer client who leverages DA to tailor insurance policies for each customer, using constantly updated profiles of customer risk, home asset value and changes in wealth.

According to Brian Ross, “Our most telling case studies today lie in enhanced one-to-one communications between vendor and customer. We have seen DA deliver impressive results of 90+% sales lifts, direct response rates as high as 87% and 4% retention gains.”

3. Enhancing decision making

The capability to quickly process and synthesize large amounts of data opens up the possibility of using controlled experiments to test different scenarios around important investment, marketing and operational decisions.  For example, Amazon assigns a number of their web page views to run experiments; they seek to understand which factors promote sales and drive higher user engagement.  McDonald’s has equipped some restaurants with sensors that gathers operational data through tracking store traffic and ordering patterns. The gleaned insights are used to model the impact of variations in menus, restaurant designs, and training on sales and operational productivity.

4. Enabling new business models

Firms with world class analytics competencies have the opportunity to germinate totally new business models and services.  McKinsey has worked with a global manufacturer that learned so much from analyzing its own data that it decided to create a new business doing similar work for other companies. This service business now outperforms the company’s manufacturing one. Information aggregation is another business model that can be spawned from analytics.  Consider this:  UPS regularly collects a mountain of data on shipment patterns, energy usage etc. on the estimated 3-5% of U.S. GDP they ship annually. This data could be mined, synthesized and then sold to organizations that provide economic forecasting services.

Within five years, analytics will be a game-changer for many companies.  However, building capabilities will not be easy or inexpensive. Developing a bold vision of analytics; transformational impact is a good first step.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Cut complexity, boost profits

Companies in industries as diverse as consumer and industrial products, banking, IT and telecom looking to sustain growth and reduce risk will naturally evolve towards a high degree of business complexity. The level of complexity will be directly correlated with the range of products and services offered, the intricacies of the operations, and the organizational structures deployed. Not surprisingly, complexity (both visible and hidden) come with an expensive price tag including unnecessary input, production, and selling costs as well as operational lethargy. Companies that can eliminate needless complexity and prevent its return will build margins, increase agility and improve resource allocation.

Cutting complexity is a significant enterprise-wide opportunity for organizations. Complexity reduction projects can produce more than $10-million in annual savings by eliminating labour redundancies, consolidating raw material inputs and optimizing supply chain networks. Moreover, indirect benefits such as higher productivity, fewer errors, and better employee engagement were forecasted to generate up to twice the amount of direct savings. The Boston Consulting Group estimates firms with the right strategies and cost transparency can realize a 25% to 100% increase in profit margins.

Excessive complexity is often found in organizations with the following traits:

A strong ‘customer is king’ mission

Many companies go overboard satisfying customers with little regard to the long-term organizational impact. Managers regularly offer new products, features and marketing programs to customers as specials or targeted against small niche segments. Inevitably, product proliferation occurs, and with it comes complexity challenges around inventory management, production scheduling, and sales efforts.

Matrix-intensive organizations

For many firms, a matrix structure is the default organizational model.  As these companies grow, so does the complexity especially when the structures and processes are poorly designed and implemented (e.g., overlapping roles & responsibilities, inadequate information flows, unclear decision rights). Complexity is manifested through process redundancy, increased conflict over mandate & priorities, and slower decision making.

Complicated supply chains

Most large firms maintain a large (often global) network of suppliers plugged into a convoluted supply chain. Managing this network is inherently difficult in the best of times. However, one small change in the external environment like adding a new supplier or connecting to a new IT system can dramatically increase operational complexity within the firm.

It should be pointed out that not all complexity is created equal. Clearly, some actions and choices are needed to reduce business risk, maintain core competitiveness and retain important clients.  However, problems arise when the revenue or value derived from these activities is far below the actual, enterprise-wide cost of delivering them. The management challenge is to separate the good complexity from the bad complexity and to deal with the bad. 

To do this, managers need visibility into the problem, some strategies for tackling complexity across the organization and the fortitude to prevent its return.

1.      Understand the problem

You can only fix what you can see. Conduct a product, department or company-wide review to comprehend the scope of the complexity problem. You could start by analyzing how each SKU within the product portfolio or extensive activity in a major value chain contributes to revenue, margin or enterprise-wide cost.

2.     Identify the culprits

Complexity follows the “80/20” rule – typically, 80% of complexity will trace to 20% of products or activities. The analytical challenge is to identify these 20% margin-killers, while safeguarding “good” complexity like strategic stock keeping units (SKUs) or prudent risk management activities.  Once the culprits are identified, managers should break them down into their component parts for analysis. For example, SKUs can be broken down into ingredient and packaging inputs. A value chain can be mapped into discrete processes, touches and approvals etc.

3.     Start Pruning

Once managers have the data, it’s time to reduce the logjam. Below are three common strategies for cutting complexity:

Consolidate and streamline

With products, look for opportunities to eliminate poorly performing SKUs and to consolidate the number of raw material and packaging inputs that go into the remaining portfolio. To reduce operational complexity, consider ways to minimize or remove unnecessary touches in areas like internal reviews, team & communication practices, and sub-optimal processes.

Bundle to increase standardization

Some companies have the ability to standardize complexity. For example, automotive and PC makers have been successful at combining dozens of product features, styles etc. into standard consumer bundles that could more readily be manufactured, inventoried and sold in volume.

Price for complexity

Some businesses must learn to live with certain complexity due to key client or regulatory demands.  In these situations, managers should look to recoup some of the cost of complexity by raising prices – and communicating these reasons to customers so as to manage churn.

Never going back

Pruning can often be the easy part. The bigger challenge might be ensuring the complexity doesn’t not return. Managers need to take steps like instituting disciplined product line management systems to make sure complexity does not creep back.

Although a strong customer focus, powerful supply chain or large product portfolio can differentiate a company, it can also burden it with undue complexity – much of it hidden and insidious.  Firms can unlock significant savings and accelerate the speed of their business by systematically tackling the complexity challenge.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

The perils of offshoring

For North American companies looking to stay competitive, outsourcing some or all of their back-office business operations to India has achieved the status of dogma. However, in the past couple of years poor outcomes, changing cost dynamics and continued cultural challenges have swung the value and performance advantage back to North American providers in many cases.

The times they are a-changin’

Firms migrated operations to India to save money, focus on their core competencies, and move way from a fixed cost structure.  Today, faith in offshoring must be tempered by reason.  In the last few years, India’s significant advantages have yielded to some harsh economic realities.   New cost dynamics and the reality of doing business halfway around the world with a very different culture have reduced the attraction of offshoring many operations, particularly those in knowledge intensive industries.

India’s fading appeal

Four key developments, unlikely to dim in the medium term, are contributing to offshoring’s declining appeal:

Shrinking wage differentials

India’s primary advantage, low labour costs, has been steadily declining.  According to the U.S. Bureau of Labor Statistics, India’s average per-hour cost advantage in 2010 had shrunk to only 6-7 times U.S. rates versus 11 times the rate in 2001. This shrinking differential traces to a combination of Indian wage inflation and North American wage moderation.   If present trends continue, this gap could shrink to five times the U.S. rate by 2014.

Pervasive cultural challenges

India remains a culturally challenging place to do business; a situation unlikely to change in the medium term.  The differences–language, cultural mores, business practices–generate high indirect costs by introducing complexity, miscommunication and risk.  Furthermore, persistently high labour turnover in all Indian firms complicates attempts to close this ‘cultural gap’.

Higher than expected administrative costs

When they began outsourcing, firms understood there would be transaction costs — travel, communication, compliance and relationship management.  What virtually every company has experienced are administrative costs typically three times higher than their estimates and all tracing back to geographic and cultural challenges.  In some cases, these costs can make up close to 20% of the total project cost.

Increased business risk

Today, effective risk management (e.g., protecting intellectual property and sensitive data, business continuity) is a strategic prerequisite for many companies.  Lingering doubts remain that sensitive data and intellectual property sent over to India (or any other emerging economy) is as secure as it would be in North America.  Not surprisingly, some government regulations continue to prevent certain types of IP and sensitive data from leaving North America.  Furthermore, India remains in the center of one of the world’s most dangerous regions, with instability on all of her borders and inside to boot.

Case in point: IT services

IT services provide a good illustration of the challenges of offshoring. For the past 10 years, CIOs and professional services firms have enthusiastically offshored to India large swathes of their IT work in order to reap the advantages of lower wages and round-the-clock development.

In many cases, however, the promise has not kept up with reality.  India no longer possesses the same IT cost advantage versus innovative Canadian firms.  Alex Rodov, managing partner of North America’s largest dedicated software testing firm, QA Consultants, contends that “Canadian IT labour rates on average are no more than 20% higher than India’s.  After you factor in the high administrative costs, lack of visibility and hassle of doing business around the world, then our delivered costs are roughly equivalent.”  Secondly, India’s workers continue to suffer from poor productivity.  Despite working in modern facilities, most Indian IT workers (including recent grads) lack basic technical skills and rudimentary English language proficiency.  In fact, the Wall Street Journal has reported that 75% of India’s technical graduates are unemployable by their IT sector.

Finally, the integrated structure favoured by most Indian software enterprises — firms develop and test their own code — poses real quality and delivery risks. “This [model] often leads to poor outcomes.  Testing should never be done by the same firm and people writing the code,” says Rodov, “as they lack objectivity and independence.  Furthermore, when a project runs late or is over-budget, the same Indian firm will prioritize development, often cutting corners with vital testing operations.”

For many business operations the pendulum is beginning to swing back to North America. Many companies have done the math and now realize that some local providers can deliver better value and lower risk versus an offshore Indian solution. A forthcoming article looks will look at how innovative North American firms are beating the offshorers at their own game.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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