Tag Archives: supply-chain

It’s time to make the hard decision

Toyota, as you’ve probably heard, is shutting down operations in Australia. This has triggered the expected wave of commentary claiming that this is the end of manufacturing in Australia and that unless the government does something about this industrial relations problem then the entire car manufacturing supply chain (i.e. everything from final assembly back) will collapse with disastrous consequences for the Australian economy.

This point of view is both disingenuous and unhelpful as it ignores the fact that the viability of car manufacturing in Australia is strongly influenced by both economic trends outside our borders and by systemic challenges within the car industry itself. Australia might be an island, but that does not mean that events outside our borders will not affect us. Industrial relations might be part of the challenge, but it’s not the whole story.

Pouring more money into the domestic car manufacturing supply chain may provide short term relief, but it does not address the root cause of the problem.

We need to make the hard decision.

If car manufacturing is to be part of our industrial mix in the longer term then we need to transform the domestic industry, creating a new operating model that enables a stable manufacturing industry in Australia within the global context.

If we cannot create a sustainable car manufacturing industry in Australia, then we should immediately start to transition the resources (people and assets) to new industries that do have a future here.

Simply propping up an industry who time has come will only ever be a short term solution, and one which is a disservice to the generation just entering the workforce.

Capital has won over labour

The global car industry is in trouble. There’s too many factories and not enough people buying cars.

Similar situations are not uncommon in other capital intensive industries. Decades spent automating and streamlining processes has transferred costs from labour to capital. This has been great for customers as it lowers the unit cost of the goods manufactured. The manufacturers, on the other hand, find that their business, or even their entire industry, can all too easily be pushed into a never ending cycle of boom-and-bust. We only need to look to containerisation and the development of the global container network to see these forces in action.

Containerisation transformed the old, manual, approach to shipping into a highly automated and efficient global logistics network. Goods were packed into large metal containers and craned onto and off ships, rather than relying on stevedores to manhandle individual barrels. This resulted in a dramatic reduction in shipping costs and time (somewhere between 60% and 80%), since the majority of the work was in the manual loading and unloading.

However, building a container network required a huge investment. New ships were commissioned, larger ships with complex racks to hold the containers. Fleets of containers were required to carry the goods. Docks also need to be changed from the fingers sticking out of a bank that was suitable for manual loading, to the large container terminals that host huge cranes.

These investments allow shipping companies to slash the cost of shipping. It also made these businesses very inflexible. Previously shipping companies could trim costs when demand dropped off, parking ships and laying off their crews. Now, with huge investments in container infrastructure, the shipping companies were forced to keep the boats moving during the down turn, as the revenue was needed to service loans or pay dividends to investors.

Times were good when demand was high, with the low shipping rates helping to drive volume up. When times were bad when demand was low, as the boats needed to keep moving even if it meant that they were losing money.

Car Manufacturing in Australia

Australia finds itself wanting to protect its traditional car manufacturing industry when the dynamics of the global car industry and economy conspire against us.

Car manufacturers need to improve factory utilisation if they are to remain profitable. Shutting factories down for a few weeks is not enough, nor is trimming labour rates, as the majority of their costs are in the plant and equipment contained within these factories, and not in the labour required to operate and management.

With too many (expensive) factories and not enough people buying cars, car companies are looking to consolidate their operations. Ideally the final resting place for these factories will be adjacent to major markets in a comparatively low cost geography. (Despite the balance of costs being in equipment, moving from a high to a low cost geography can still shave 10% off the total cost of manufacturing.)

Similarly, reducing the time from final assembly to delivery to the customer by placing the factory as close as practical to the customer, helps to reduce costs by reducing the time it takes for product to flow through the supply chain. This cuts the amount of working capital required as well as cutting the time required to push product updates through the supply chain.

Ideally, given current manufacturing technology, one of these manufacturing centres will be right in the middle of South-East Asia, enabling quick and convenient access to the the fastest growing car markets in the world. Thailand looks good. Another would be somewhere in the centre of the Americas, allowing it to service both North and South America. Perhaps Mexico or the southern states of the US? Eastern Europe might get a look in for a third manufacturing hub, but then it might just be easier to service Europe out of S.E. Asia or the Americas. (Note that niche plays such as BMW are the exception to this rule, as they are not selling into the mass market.)

So what does this mean for car manufacturing in Australia? Australia fairs rather badly on both the dimensions we just considered.

As a high cost country we can expect cars manufactured domestically to cost roughly 10% more than those manufactured in a low-cost hub. Unfortunately wage bargaining will be little help unless we’re willing to slash wages to the same levels as Mexico and Thailand, which is something that the Australian public is unlikely to find palatable.

Our position below S.E. Asia and a long way from the US and Europe also puts us at a disadvantage. While shipping a car from Australia to S.E. Asia, the Americas or Europe will not significantly affect the final price, the delay pushes up working capital requirements while the longer supply chain is more challenging to manage.

We can’t expect our domestic car industry to export its way out of this problem. Nor is the domestic market large enough to sustain it when cheaper imports are flowing in from overseas manufacturing hubs. The car industry is, after all, a global industry.

Pouring money into the industry might support it in the short term, but at what cost? If it cannot complete globally then it will eventually succumb to the pressure. And given the perilous state of the global and domestic car industries, that time will probably be sooner than later.

In the mean time we’re encouraging a generation of eager and talented young adults to build their lives around a career and an industry that we know will no be able to support them. They deserve better.

Can technology save us?

One solution to our dilemma is to find a model for the industry that can work for Australia.

Consider, for a moment, the replicator from Star Trek. Or, if you’re less inclined to science fiction, the recent explosion of 3D printing and the maker movement.

If we can slash the investment required to manufacture cars by slashing the investment required to build a factory, then the decision on where to locate that factory might tip in our favour. If a rather large 3D printer costing AU$10,000 could print a car, then every dealer would have one. Why ship a finished car from one of the manufacturing hubs when you can pick the model and options you want, have it printed, and pick it up in a day or two.

3D printing might be some way off, but there are people out there looking at this problem. iStream, for example, is the result of looking at the manufacturing process to see if there is a better, faster and cheaper way to manufacture cars. The result is a manufacturing plant that is 20% the size of a conventional factory, and which reduces the typical capital investment by up to 80%.

If we can use technology such as iStream, or one of its descendants, to reduce the factory footprint then we might be able to arrive a solution that can be sustained by our domestic market.

Taking this path would require an investment at the national level. The major car manufacturers are struggling with their older, more capital intensive, operating model and have no interest in a new approach. If we are to take this route then we cannot rely on the existing brands.

Should we cut out losses?

If technology cannot save us, if the consensus is that it is not possible to build a sustainable, mass market, car industry in Australia, then we need to consider our options.

Should we copy a page from Germany’s playbook, and invest in building a high-value, niche industry? An Australian equivalent to BMW or Mercedes?

Or are there other manufacturing industries that can absorb the work force? Should we, for example, invest in becoming the leading manufacture of pre-build housing? (We already have some form in this area.) What industries can we excel in? As others have pointed out, ending car production is not the end of the world.

It’s time to make the hard decision

Pointing out the key role the car industry has historically played in our economy, and focusing on how we might keep the industry alive, is ignoring that fact that the domestic troubles are part of a larger global trend, a trend that we can do little about.

Regardless of the path we each, as individuals, prefer, the debate we need to having is on how will we choose between the the options available too us.

Manufacturing is not returning to the West

There’s many claims over the last year or so that “manufacturing is returning to the West” and “China’s days as the world’s factory are numbered”{{1}}. These claims are misguided.

[[1]]Vivek Wadhwa (23 July 2012), The End of Chinese Manufacturing and Rebirth of U.S. Industry, Forbes[[1]]

We’ve just reached a time where manual and skilled labour is no longer a major manufacturing cost, causing final assembly to slowly drifting toward the customer base it serves. This shift reduces the length of the supply chain from assembly to your front door resulting in a reduction in turn-around time which, in turn, reduces working capital requirements and allows manufacturers to push product updates through the supply chain faster.

Manufacturing isn’t leaving China and other low cost manufacturing centres. What has changed is that it now makes good sense to manufacture some high value but low volume and bulky products in other major markets, such as the U.S.

The problem with thinking that manufacturing is returning to the first world is the implicit assumption that this also means that the old manufacturing jobs will return. They won’t. They no longer exist. It also ignores that fact that the huge scale of manufacturing in China will help it to grab the lions share of the world manufacturing market for some time to come.

Manufacturing as a manual process

Consider Henry Ford’s assembly line from 1913: a complex, labour intensive process that created a large number of good, blue collar jobs.

566px-Ford_assembly_line_-_1913Source: Public Domain

When we think of manufacturing this is the image we usually have in head. It’s a bit like those train crossing signs that have a caricature of a steam engine on them. It might not be the current reality, but it’s the image we use to understand what’s going on around us.

As transport costs dropped, work moved to lower cost countries

Back in Henry Ford’s day transportation was expensive. Factories were often located close to the markets they served to minimise transport costs, with management struggling to ensure that enough raw materials arrived at the factory to keep it busy. However, the development of railroads, steam ships, and the shipping container network incrementally cut the cost of transport until it cost roughly the same to move a box across the world as it did to move it across the country.

As Marc Levinson points out in his book, The Box{{2}}:

[[2]]Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. iBooks.[[2]]

As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs, which come to loom larger. Globalization, the diffusion of economic activity without regard for national boundaries, is the logical end point of this process. As transport costs fall to extremely low levels, producers move from high-wage to low-wage countries, eventually causing wage levels in all countries to converge. These geographic shifts can occur quickly and suddenly, leaving long-standing industrial infrastructure underutilized or abandoned as economic activity moves on.

This is the shift we’re thinking of when we consider off-shore manufacturing: China as the source of cheap (and fairly unskilled labour).

Today, manufacturing is not a manual process

Apple released an interesting video the other day{{3}}. It shows the manufacturing process for the new Mac Pro.

[[3]]Greg Koenig (22 October 2013), How Apple makes the Mac ProAtomic Delights[[3]]

SourceApple

What’s interesting about this process is how few people are involved.

Manufacturing has changed a lot in the last few decades. What was once dominated by manual labour is now an automated and highly efficient process. Machines have replaced people. We can see this in many of the factories that are returning to the West: they’re all highly efficient, highly automated, capital intensive operations that require very little manual or skilled labour.

7395855880_053e6daede_cSource: Steve Jurvetson

Machines, however, have yet to replace engineers

While capital has won over manual and skilled labour, that same is not true for engineers: knowledge workers.

As Roger Martin found in his research for a recent HBR article{{4}}:

[[4]]Roger L. Martin (October 2013), Rethinking the Decision Factory, Harvard Business Review[[4]]

I vividly remember working with the CEO of one of North America’s largest bread manufacturers in 1990–1991. He had just replaced a labor-intensive and antiquated plant with the most advanced bread bakery on the continent. He proudly told me that the new computerized ovens and packaging machinery had reduced direct labor costs by 60%. But meanwhile, a throng of new and expensive knowledge workers had been added at both the head office and the plant—engineers, computer technicians, and managers—to take care of the sophisticated computer systems and state-of-the-art equipment. The new plant wasn’t quite the unalloyed good that it appeared at first sight. Variable costs of manual labor fell, but the fixed cost of knowledge workers rose, making it critical to keep capacity utilization high—which was possible in some years but not in others.

While the West has been worried about losing it manufacturing capability, many of the off-shore manufacturing destinations have been investing in education. China, for example, now has a huge engineering workforce that companies can draw own to sort out their manufacturing problems.

It’s this incredible ability to mobilise huge workforces that is keeping many manufactures in China. An article in the New York Times from last year has an Apple anecdote that shows this in action{{5}}.

[[5]]Charles Dugigg & Keith Bradsher (21January2012), How the U.S. Lost Out on iPhone Work, The New York Times[[5]]

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

Moving closer to the customer

The rapid pace of change in today’s market is driving companies to reduce the time between final assembly and when the product drops into the customer’s waiting hands.

Zara is the poster child for this shift, with a supply chain can create a new product and then have it in the stores in around two weeks. Zara has used this ability to disrupt the traditional annual, seasonal fashion cycle, resulting Zara becoming one of the largest retailers in the world.

Apple’s recent decision to make the Mac Pro in the U.S. is part of a trend to move the manufacturing of high value but low volume and bulky products closer to the customer. Elon Musk’s Tesla is also part of this trend.

Manufacturing automation technology has reached the point that it makes more sense to locate the manufacturing of these products closer to the customer, allowing transport costs and delivery times to be minimised.

We shouldn’t assume, however, that this trend will end with manufacturing returning to the West.

It’s easy to forget the more people live in Asia than in the entire rest of the world combined. If manufacturing is moving to be closer to the customer, then we need to remember that there are more customers in Asia than in the rest of the world. China’s position as a manufacturing powerhouse appears safe for the time being.

CK6aONG

Source: valeriepieris

What we mean by “export” is changing

So just where will this trend take us? (And, by extension, will our old export industries return, bringing their jobs back with them?)

The future of manufacturing and export seems – like to many industries – connected to the knowledge economy.

Those old manufacturing jobs are never coming back. They no longer exist. Similarly, thinking in terms of operating a factory and then exporting to another country is also looking somewhat antiquated.

Today (or perhaps, tomorrow) a manufacturer is a simply company that is run from one country and, from there, manages the sale of products in another.

Kogan{{6}} is a great example of this. The business is run from South Melbourne, Australia, which is where the products are designed. The products themselves are made in China and (in many cases) shipped directly to the United Kingdom where they are sold via the company’s UK web site (which is also managed from Port Melbourne, but hosted somewhere “in the cloud”).

[[6]]Kogan @ PEG[[6]]

An even more interesting example is another local business which sells safety barriers that are placed around robots in factories to ensure that workers aren’t accidentally injured. They recently started exporting to Europe. They did this by setting up a small, automated factory in Germany to service the European market. The barriers are designed in Australia and the designs are beamed directly to the machines in Germany, machines that consume resources from all over the globe.

So manufacturing – as we’ve traditionally understood it – is not returning to the West. The blue collar jobs that went overseas are not coming home to give our rather lacklustre economies a boost.

We can also expect China to remain an manufacturing powerhouse for the foreseeable future. The huge scale of operations over there, and the ability to rapidly redeploy these resources, will allow China to grab more than it’s fair share of the world manufacturing market.

Manufacturing, like so many industries{{7}}, is changing, and changing rapidly. What’s most interesting though, is how a new generation of companies are emerging that are finding ways to exploit this situation to “export”, and create new, knowledge intensive jobs at home in the process.

[[7]]The destruction of traditional retail @ PEG[[7]]

Source: Steve Jurvetson

The destruction of traditional retail

Le Bon Marché à Paris (1875)

A steady stream of news stories is trying to convince us that online is killing retail, that online has an unfair advantage and show rooming is evil. There’s some handwaving around omni-channel and claims that that if you sharpen your approach a bit then you will be able to stand out from the online crowd and stay alive, but it’s all a distraction. The problem is that ‘retail’ is just not something we need as much as we used to.

It’s not that we no longer need retail stores. We don’t, however, need as many of them as we have today.

Retail stores serve many purposes, but the most common is to be the last stage in someone else’s supply chain. This role – the retail store that is little more than a convenient place to make a purchase – is dying.

The internet and smartphones mean that we can now shop and purchase when and were we want. We’re no longer forced to pick between the meagre offerings at a nearby store.

Browsing is something we do in a spare moment, sitting in front of the TV with our tablet or via smart phone during our commute on the train. We purchase when we realise that we’ve found something we want or need, where ever we are at the time.

The other uses for local shops and businesses will remain:– community gathering places, restaurants etc. Life for your typical retail store is looking grim though, as they are simply something that we no longer need as much of as we used to.

Continue reading The destruction of traditional retail

Decisions are more important than data

Names and categories are important. Just look at the challenges faced by the archeology community as DNA evidence forces history to be rewritten when it breaks old understandings, changing how we think and feel in the process. Just who invaded who? Or was related to who?

We have the same problem with (enterprise) technology; how we think about the building blocks of the IT estate has a strong influence on how approach the problems we need to solve. Unfortunately our current taxonomy has a very functional basis, rooted as it is in the original challenge of creating the major IT assets we have today. This is a problem, as it’s preventing us to taking full advantage of the technologies available to us. If we want to move forward, creating solutions that will thrive in a post GFC world, then we need to think about enterprise IT in a different way.

Enterprise applications – the applications we often know and love (or hate) – fall into a few distinct types. A taxonomy, if you will. This taxonomy has a very functional basis, founded as it is on the challenge of delivering high performance and stable solutions into difficult operational environments. Categories tend to be focused on the technical role a group of assets have in the overall IT estate. We might quibble over the precise number of categories and their makeup, but for the purposes of this argument I’m going to go with three distinct categories (plus another one).

SABER
SABER @ American Airlines

First, there’s the applications responsible for data storage and coherence: the electronic filing cabinets that replaced rooms full of clerks and accountants back in the day. From the first computerised general ledger through to CRM, their business case is a simple one of automating paper shuffling. Put the data in on place and making access quick and easy; like SABER did, which I’ve mentioned before.

Next, are the data transformation tools. Applications which take a bunch of inputs and generate an answer. This might be a plan (production plan, staffing roster, transport planning or supply chain movements …) or a figure (price, tax, overnight interest calculation). State might be stored somewhere else, but these solutions still need some some serious computing power to cope with hugh bursts in demand.

Third is data presentation: taking corporate information and presenting in some form that humans can consume (though looking at my latest phone bill, there’s no attempt to make the data easy to consume). This might be billing or invoicing engines, application specific GUIs, or even portals.

We can also typically add one more category – data integration – though this is mainly the domain of data warehouses. Solutions that pull together data from multiple sources to create a summary view. This category of solutions wouldn’t exist aside from the fact that our operational, data management solutions, can’t cope with an additional reporting load. This is also the category for all those XLS spreadsheets that spread through business like a virus, as high integration costs or more important projects prevent us from supporting user requests.

A long time ago we’d bake all these layers into the one solution. SABER, I’m sure, did a bit of everything, though its main focus was data management. Client-server changed things a bit by breaking user interface from back-end data management, and then portals took this a step further. Planning tools (and other data transformation tools) started as modules in larger applications, eventually popping out as stand alone solutions when they grew large enough (and complex enough) to justify their own delivery effort. Now we have separate solutions in each of these categories, and a major integration problem.

This categorisation creates a number of problems for me. First and foremost is the disconnection between what business has become, and what technology is trying to be. Back in the day when “computer” referred to someone sitting at a desk computing ballistics tables, we organised data processing in much the same way that Henry Ford organised his production line. Our current approach to technology is simply the latest step in the automation of this production line.

Computers in the past
Computers in the past

Quite a bit has changed since then. We’ve reconfigured out businesses, we’re reconfiguring our IT departments, and we need to reconfigure our approach to IT. Business today is really a network of actors who collaborate to make decisions, with most (if not all) of the heavy data lifting done by technology. Retail chains are trying to reduce the transaction load on their team working the tills so that they can focus on customer relationships. The focus in supply chains to on ensuring that your network of exception managers can work together to effectively manage disruptions in the supply chain. Even head office focused on understanding and responding to market changes, rather than trying to optimise the business in an unchanging market.

The moving parts of business have changed. Henry Ford focused on mass: the challenge of scaling manufacturing processes to get cost down. We’re moved well beyond mass, through velocity, to focus on agility. A modern business is a collection of actors collaborating and making decisions, not a set of statically defined processes backed by technology assets. Trying to force modern business practices into yesterdays IT taxonomy is the source of one of the disconnects between business and IT that we complain so much about.

There’s no finer example of this than Sales and Operations Planning (S&OP). What should be a collaborative and fluid process – forward planning among a network of stakeholders – has been shoehorned into a traditional n-tier, database driven, enterprise solution. While an S&OP solution can provided significant cost saving, many companies find it too hard to fit themselves into the solution. It’s not surprising that S&OP has a reputation for being difficult to deploy and use, with many planners preferring to work around the system than with it.

I’ve been toying with a new taxonomy for a little while now, one that tries to reflect the decision, actor and collaboration centric nature of modern business. Rather than fit the people to the factory, which was the approach during the industrial revolution, the idea is to fit the factory to the people, which is the approach we use today post LEAN and flexible manufacturing. While it’s a work in progress, it still provides a good starting point for discussions on how we might use technology to support business in the new normal.

In no particular order…

Fusion solutions blend data and process to create a clear and coherent environment to support specific roles and decisions. The idea is to provide the right data and process, at the right time, in a format that is easy to consume and use, to drive the best possible decisions. This might involve blending internal data with externally sourced data (potentially scraped from a competitor’s web site); whatever data required. Providing a clear and consistent knowledge work environment, rather than the siloed and portaled environment we have today, will improve productivity (more time on work that matters, and less time on busy work) and efficiency (fewer mistakes).

Next, decisioning solutions automate key decisions in the enterprise. These decisions might range from mortgage approvals through office work, such as logistics exception management, to supporting knowledge workers workers in the field. We also need to acknowledge that decisions are often decision making processes which require logic (roles) applied over a number of discrete steps (processes). This should not be seen as replacing knowledge workers, as a more productive approach is to view decision automation as a way of amplifying our users talents.

While we have a lot of information, some information will need to be manufactured ourselves. This might range from simple charts generated from tabular data, through to logistics plans or maintenance scheduling, or even payroll.

Information and process access provide stakeholders (both people and organisations) with access to our corporate services. This is not your traditional portal to web based GUI, as the focus will be on providing stakeholders with access wherever and whenever they need, on whatever device they happen to be using. This would mean embedding your content into a Facebook app, rather than investing in a strategic portal infrastructure project. Or it might involve developing a payment gateway.

Finally we have asset management, responsible for managing your data as a corporate asset. This looks beyond the traditional storage and consistency requires for existing enterprise applications to include the political dimension, accessibility (I can get at my data whenever and wherever I want to) and stability (earthquakes, disaster recovery and the like).

It’s interesting to consider the sort of strategy a company might use around each of these categories. Manufacturing solutions – such as crew scheduling – are very transactional. Old data out, new data in. This makes them easily outsourced, or run as a bureau service. Asset management solutions map very well to SaaS: commoditized, simple and cost effective. Access solutions are similar to asset management.

Fusion and decisioning solutions are interesting. The complete solution is difficult to outsource. For many fusion solutions, the data and process set presented to knowledge workers will be unique and will change frequently, while decisioning solutions contain decisions which can represent our competitive advantage. On the other hand, it’s the intellectual content in these solutions, and not the platform, which makes them special. We could sell our platform to our competitors, or even use a commonly available SaaS platform, and still retain our competitive advantage, as the advantage is in the content, while our barrier to competition is the effort required to recreate the content.

This set of categories seems to map better to where we’re going with enterprise IT at the moment. Consider the S&OP solution I mention before. Rather than construct a large, traditional, data-centric enterprise application and change our work practices to suit, we break the problem into a number of mid-sized components and focus on driving the right decisions: fusion, decisioning, manufacturing, access, and asset management. Our solution strategy becomes more nuanced, as our goal is to blend components from each category to provide planners with the right information at the right time to enable them to make the best possible decision.

After all, when the focus is on business agility, and when we’re drowning in a see of information, decisions are more important than data.

The Boundaryless Value-Chain

I’ve uploaded another presentation to SlideShare. (Still trying to work through the backlog.) This is something that I had been doing logistics companies and a few public forums, such as The Open Group.

How real-time computing will transform supply chain decision-making

This presentation will provide a plain-English account of how real-time computing will transform supply chain decision-making and control. Peter Evans-Greenwood will illustrate the emerging leading practices with lessons learned from case studies, featuring clients across the globe.

The biggest challenge for today’s supply chains is to be adaptive. While tremendous gains have been made over the last thirty years, today’s applications are not as flexible as promised. New tools and techniques are required to capture and automate the non-linear, exception-rich, business logic that we currently rely on employees to deliver. Extending the technology stack will allow us to leverage the higher capacity of technology to deliver globally optimal solutions and to introduce innovations such as the moving warehouse into all our supply chains.

Accelerate along the road to happiness

Our ability to effectively manage time is central to success in today’s hype-competitive business environment. The streamlined and high velocity value-chains we’ve created are designed to invest as little time (and money) as possible in unproductive business activities. However, being fast, being good at optimizing our day-to-day operations, is no longer enough. We’ve reached a point where managing the acceleration of our business—the ability to change direction, redeploy resources to meet new opportunities more rapidly than our competition—is the driver for best in category performance. If we can react faster than our competition then we can capitalize on a business opportunity (or disruption, as they are often the same) and harvest any value the opportunity created.

Time is our overarching business driver at the moment. We hope to be the first to approve a mortgage, capturing the customer before our competitors have even responded to the original application. We strive to be first to market with a new portable music device (Walkman or iPod), establishing early mover advantage and taking the dominant position in the market. Or we might simply want to quickly restore essential services—power, gas or water—to our customers, as they have become intensely dependent upon them. Globalization has leveled the playing field, as we’re all working from the same play book and leveraging the same resources. The most significant factor for success in this environment is the ability to execute faster than our competition—harvesting the value in an opportunity before they can.

This focus on time is a recent phenomena. Not long ago, no further back than the early nineties, we were more concerned with mass. The challenge was too get the job done. Keep the wheels turning in the factories. Keep the workers busy in their cubicles. Time is money, so we’re told, and we need to ensure that we don’t waste money by laying idle. Mass was the key to success—ensuring that we had enough work to do, enough raw materials to work on, to keep our business busy and productive.

When mass is the focus, then bigger is better. This is a world where global conglomerates rule, as size is the driver for success. Supply chains were designed so that enough stuff was available right next to the factory, where supply can be ensured, that the factory would never run out of raw materials and grind to a halt. Whether shuffling paperwork or shifting widgets, the ability to move more stuff around the business was always seen as an improvement.

This is also the world that created a pile of shipping containers too behold in the Persian Gulf, during the Gulf War in the early nineties. With no known destination, some containers couldn’t be delivered. Without a clear understanding of where they came from, others couldn’t be returned. A few of these orphaned containers were opened in an attempt to determine their destination or origin; however the sweltering Arabian sun was not kind to their contents, which included items such as raw poultry, so a stop was soon put to that. The containers just kept piling up. 22,000 of 50,000 containers simply became invisible, collecting in a pile that went by the jaunty name of Iron Mountain.

Iron Mountain: 22,000 containers that became invisible
Iron Mountain: 22,000 containers that became invisible

Our answer was to stop focusing on mass, on having enough stuff on hand to keep the wheels of industry turning. We have to admit that Iron Mountain proves that we could move sufficient mass. The next challenge was to ensure that materials arrived at just the right time for them to be consumed by the business. We moved from worrying about mass, to managing velocity.

Total quality management and process improvement efforts finally found their niche. LEAN and Six Sigma rolled through the business landscape ripping cost out businesses where-ever they went. Equipped with books on Toyota’s Production System and kanban cards, we ripped excess material from the supply chain. Raw materials arrive just-in-time, and we avoid the costs associated with storing and handling vast warehouses of material, as well as the working capital tied up in the stored material itself. Quality went up, process cycle times shrunk, and the pace of business accelerated. Much like the tea clippers from China in the 1800s, with the annual race to get the first crop back to London for the maximum profit (with skipper paid a profit share as an incentive along with their salary), we’re focused on cranking the handle of business as fast as possible.

Zara, a fashion retailer, is the poster child for this generation of business. The fashion industry is built around a value-chain that tries to push out regular product updates, beating up demand via runway shows and media coverage to support a seasonal marketing cycle. Zara takes a different approach, tracking customer preferences and trends as they happen in the stores and trying to deliver an appropriate design as rapidly as possible, allowing customer demand to pull fashion. By focusing on responding to customer demand, wherever it is, Zara has built an organization designed too minimize time from design to marketed product. For example, onshore, high-tech, agile production is preferred to low-tech but low cost, offshore production which involves long production delays. Zara takes two weeks to take a product to market, where the industry average is six months; the lifetime of Zara’s products is measured in weeks, rather than months; and the products offered in each store are tailored to the interests of the community it serves rather than a long term marketing plan.

The change in product life-cycle has created a material change to customer buying habits. Traditionally customers’ will visit a fashion store a few times a year to see what a new season brings. There is no real pressure to buy in any particular visit, as they know they can return to buy the same garment later. Zara, however, with it’s dramatically shortened product cycles, drives different behavior. Customer visit more often, as they can expect to see a new range each visit. They are also more likely too buy, as they know that there is little chance of the same garment being available the next time. This approach has made Zara the most profitable arm of Inditex, a holding company of eight retail brands, and one of the biggest success stories in Spanish business.

The dirty secret of high velocity, lean businesses is that they are fragile: small disturbances can create massive knock-on effects. As we’ve ripped fat from the value chain, we’ve also weakened its ability to react to, and resolve, disruptions. A stockout can now flow all the way back along the supply chain to the literal coal face, stalling the entire business value-chain. Restoring an essential service is delayed while we scramble to procure the vital missing part. Mortgage approvals are deferred while we try reallocate the work load of a valuer dealing with a personal emergency. Or our carefully synchronized product launch falls apart for what seems like a trivial reason somewhere on the other side of the globe.

Our most powerful tools in creating todays high velocity businesses—tools like straight-through processing, LEAN and Six Sigma—worked by removing variation from business processes to increase throughput. The same tools prevent us from effectively responding to these disruptions.

Opportunities today are more frequent, but disruptive and fleeting. An open air festival in the country might represent an opportunity for a tolling operator to manage parking in an adjacent field, if the solution can be deployed as sufficient scale rapidly enough. Or the current trend for pop-up retail stores (if new products rapidly come and go, then why not stores) could be moved from an exceptional, special occasion marketing tool, into the mainstream as a means to optimize sales day-by-day. Responding to these opportunities implies reconfiguring our business on the fly—rapidly integrating business exceptions into the core of our business. This might range from reconfiguring our carefully designed global supply chain, through changing core mortgage approval criteria and processes to modifying category management strategies in (near) real time.

Sam: Waiting while his bank sorts itself out
Sam: Waiting while his bank sorts itself out

We’re entering a time when our ability to change direction, adapting to and leveraging changes in the commercial environment as they occur, will drive our success. If we can react faster than the competition then we can capitalize on a business opportunity and harvest any value the opportunity creates. Our focus will become acceleration: working too build businesses with the flexibility and spare energy required to turn and respond rapidly. These businesses will be the F1 cars of business, providing a massive step in performance over more conventional organizations. And, just like F1, they will also require a new level of performance from our knowledge workers. If acceleration is our focus, then our biggest challenge will be creating time and space required by our knowledge workers to identify these opportunities, turn the steering wheel and leverage them as they occur.

Update: A friend of mine just pointed out that the logical progression of mass → velocity → acceleration naturally leads to jerk, which is an informal unit of measurement for the third derivative.

Why we can’t keep up

We’re struggling to keep up. The pace of business seems to be constantly accelerating. Requirements don’t just slip anymore: they can change completely during the delivery of a solution. And the application we spent the last year nudging over the line into production became instant legacy before we’d even finished. We know intuitively that only a fraction of the benefits written into the business case will be realized. What do we need to do to get back on top of this situation?

We used to operate in a world where applications were delivered on time and on budget. One where the final solution provided a demonstrable competitive advantage to the business. Like SABER, and airline reservation system developed for American Airlines by IBM which was so successful that the rest of the industry was forced to deploy similar solutions (which IBM kindly offered to develop) in response. Or Walmart, who used a data warehouse to drive category leading supply chain excellence, which they leveraged to become the largest retailer in the world. Both of these solutions were billion dollar investments in todays money.

The applications we’ve delivered have revolutionized information distribution both within and between organizations. The wave of data warehouse deployments triggered by Walmart’s success formed the backbone for category management. By providing suppliers with a direct feed from the data warehouse—a view of supply chain state all the way from the factory through to the tills—retailers were able to hand responsibility for transport, shelf-stacking, pricing and even store layout for a product category to their suppliers, resulting in a double digit rises in sales figures.

This ability to rapidly see and act on information has accelerated the pulse of business. What used to take years now takes months. New tools such as Web 2.0 and pervasive mobile communications are starting to convert these months into week.

Take the movie industry for example. Back before the rise of the Internet even bad films could expect a fair run at the box-office, given a star billing and strong PR campaign too attract the punters. However, post Internet, SMS and Twitter, the bad reviews have started flying into punters hands moments after the first screening of a film has started, transmitted directly from the first audience. Where the studios could rely a month or of strong returns, now that run might only last hours.

To compensate, the studios are changing how they take films to market; running more intensive PR campaigns for their lesser offerings, clamping down on leaks, and hoping to make enough money to turn a small profit before word of mouth kicks in. Films are launched, distributed and released to DVD (or even iTunes) in weeks rather than months or years, and studios’ funding, operations and the distribution models are being reconfigured to support the accelerated pace of business.

While the pulse of business has accelerated, enterprise technology’s pulse rate seems to have barely moved. The significant gains we’ve made in technology and methodologies has been traded for the ability to build increasingly complex solutions, the latest being ERP (enterprise resource planning) whose installation in a business is often compared to open heart surgery.

The Diverging Pulse Rates of Business and Technology

This disconnect between the pulse rates of business and enterprise technology is the source of our struggle. John Boyd found his way to the crux of the problem with his work on fighter tactics.

John Boyd—also know as “40 second Boyd”—was a rather interesting bloke. He had a standing bet for 40 dollars that he beat any opponent within 40 seconds in a dog fight. Boyd never lost his bet.

The key to Boyd’s unblemished record was a single insight: that success in rapidly changing environment depends on your ability to orient yourself, decide on, and execute a course of action, faster than the environment (or your competition) is changing. He used his understanding of the current environment—the relative positions, speed and performance envelopes of both planes—to quickly orient himself then select and act on a tactic. By repeatedly taking decisive action faster than his opponent can react, John Boyd’s actions were confusing and unpredictable to his opponent.

We often find ourselves on the back foot, reacting to seemingly chaotic business environment. To overcome this we need to increase the pulse of IT so that we’re operating at a higher pace than the business we support. Tools like LEAN software development have provided us with a partial solution, accelerating the pulse of writing software, but if we want to overcome this challenge then we need to find a new approach to managing IT.

Business, however, doesn’t have a single pulse. Pulse rate varies by industry. It also varies within a business. Back office compliance runs at a slow rate, changing over years as reporting and regulation requirements slowly evolve. Process improvement and operational excellence programs evolve business processes over months or quarters to drive cost out of the business. While customer or knowledge worker facing functionality changes rapidly, possibly even weekly, in response to consumer, marketing or workforce demands.

Aligning technology with business

We can manage each of these pulses separately. Rather than using a single approach to managing technology and treating all business drivers as equals, we can segment the business and select management strategies to match the pulse rate and amplitude of each.

Sales, for example, is often victim of an over zealous CRM (customer relationship management) deployment. In an effort to improve sales performance we’ll decide to role out the latest-greatest CRM solution. The one with the Web 2.0 features and funky cross-sell, up-sell module.

Only of a fraction of the functionality in the new CRM solution is actually new though—the remainder being no different to the existing solution. The need to support 100% of the investment on the benefits provided by a small fraction of the solution’s features dilutes the business case. Soon we find ourselves on the same old roller-coaster ride, with delivery running late,  scope creeping up, the promised benefits becoming more intangible every minute, and we’re struggling to keep up.

There might be an easier way. Take the drugs industry for example. Sales are based on relationships and made via personal calls on doctors. Sales performance is driven by the number of sales calls a representative can manage in a week, and the ability to answer all of a doctor’s questions during a visit (and avoid the need for a follow-up visit to close the sale). It’s not uncommon for tasks unrelated to CRM—simple tasks such as returning to the office to process expenses or find an answer to a question—to consume a disproportionate amount of time. Time that would be better spent closing sales.

One company came up with an interesting approach. To support the sales reps in the field they provided them with the ability to query the team back in the office, answering a clients question without the need to return to head office and then try to get back in their calendar. The solution was to deploy a corporate version of Twitter, connecting the sales rep into the with the call center and all staff using the company portal via a simple text message.

By separating concerns in this way—by managing each appropriately—we can ensure that we are working at a faster pace than the business driver we supporting. By allocating our resources wisely we can set the amplitude of each pulse. Careful management of the cycles will enable us to bring business and technology into alignment.

Applications let us differentiate, not!

Being involved in enterprise IT, we tend to think that the applications we build, install and maintain will provide a competitive advantage to the companies we work for.

Take Walmart, for example. During the early 80s, Walmart invested heavily in creating a data warehouse to help it analyze its end-to-end supply chain. The data was used to statically optimize Walmart’s supply chain, creating the most efficient, lowest cost supply chain in the world at the time. Half the savings were passed on to Walmart’s customers, half whet directly to the bottom line, and the rest is history. The IT asset, the data warehouse, enabled Walmart to differentiate, while the investment and time required to develop the data warehouse created a barrier to competition. Unfortunately this approach doesn’t work anymore.

Fast forward to the recent past. The market for enterprise applications has grown tremendously since Walmart first brought that data warehouse online. Today, applications providing solutions to most business problems are available from a range of vendors, and at a fraction of the cost required for the first bespoke solutions that blazed the enterprise application trail. Walmart even replaced that original bespoke supply chain data warehouse, which had become something of an expensive albatross, with an off-the-rack solution. How is it possible for enterprise applications to provide a competitive advantage if we’re all buying from the same vendors?

One argument is that differentiation rests in how we use enterprise applications, rather than in the applications themselves. Think of the manufacturing industries (to use a popular analogy at the moment). If two companies have access to identical factories, then they can still make different, and differentiated, products. Now think of enterprise applications as business process factories. Instead of turning out products, we use these factories to turn out business processes. These digital process factories are very flexible. Even if we all start with the same basic functionality, if I’m smarter at configuring the factory, then I’ll get ahead over time and create a competitive advantage.

This analogy is so general that it’s hard to disagree with. Yes, enterprise applications are (mostly) commodities so any differentiation they might provide now rests in how you use them. However, this is not a simple question of configuration and customization. The problem is a bit more nuanced than that.

Many companies make the mistake that customizing (code changes etc) their unique business processes into an application will provide them with a competitive advantage. Unfortunately the economics of the enterprise software market mean that they are more likely to have created an albatross for their enterprise, than provided a competitive advantage.

Applications are typically parameterized bespoke solutions. (Many of the early enterprise applications were bespoke COBOL solutions where some of the static information—from company name through shop floor configuration—has been pushed into databases as configuration parameters. ) The more configuration parameters provided by the vendor, the more you can bend the application to a shape that suits you.

Each of these configuration parameters requires and investment of time and effort to develop and maintain. They complicate the solution, pushing up its maintenance cost. This leads vendors to try and minimize the number of configuration points they provide to a set of points that will meet most, but not all customers’ needs. In practical terms, it is not possible to configure an application to let you differentiate in a meaningful way. The configuration space is simply too small.

Some companies resort to customizing the application—changing its code—to get their “IP” in. While this might give you a solution reflecting how your business runs today, every customization takes you further from a packaged solution (low cost, easy to maintain, relatively straight forward to upgrade …) and closer to a bespoke solution (high cost, expensive to maintain, difficult or impossible to upgrade). I’ve worked with a number of companies where an application is so heavily customized that it is impossible to deploy vendor patches and/or upgrades. The application that was supposed to help them differentiate had become an expensive burden.

Any advantage to be wrung from enterprise IT now comes from the gaps between applications, not from the applications themselves. Take supply chain for example. Most large businesses have deployed planning and supply chain management solutions, and have been on either the LEAN or Six Sigma journey. Configuring your planning solution slightly differently to your competitors is not going to provide much of an edge, as we’re all using the same algorithms, data models and planning drivers to operate our planning process.

Most of the potential for differentiation now lies with the messier parts of the process, such as exception management (the people who deal with stock-outs and lost or delayed shipments). If I can bring together a work environment that makes my exception managers more productive than yours—responding more rapidly and accurately to exceptions—then I’ve created a competitive advantage as my supply chain is now more agile than yours. If I can capture what it is that my exception managers do, their non-linear and creative problem solving process, automate it, and use this to create time and space for my exception managers to continuously improve how supply chain disruptions are handled, then I’ve created a sustainable competitive advantage. (This is why Enterprise 2.0 is so exciting, since a lot of this IP in this space is tacit information or collaboration.)

Simply configuring an application with today’s best practice—how your company currently does stuff—doesn’t cut it. You need to understand the synergies between your business and the technologies available, and find ways to exploit these synergies. The trick is to understand the 5% that really makes your company different, and then reconfiguring both the business and technology to amplify this advantage while commoditizing the other 95%. Rolls-Royce (appears to be) a great example of getting this right. Starting life as an manufacturer of aircraft engines, Rolls Royce has leveraged its deep understanding of how aircraft engines work (from design through operation and maintenance), reifying this knowledge in a business and IT estate that can provide clients with a service to keep their aircraft moving.