•  Culture as Foundation
•  Synchronous Flow Manufacturing
•  ISO 9000 and QS-9000
•  Statistical Methods
•  The Internet
•  Predictions on how the Internet will affect the near future
1.  The car dealer will be obsolete
2. Retailers Pay Attention (Anyone Want a Used Shopping Mall?)
3.  Obsolescence of Cities
4.  Obsolescence of Full-Service Stockbrokers
• Developments since 1997: see how these predictions are coming true.

Introduction

This chapter discusses how attitudes and events have shaped the culture of the Mountaintop work force. The organization's history plays a key role in shaping its culture, so we will discuss this first. Many events, some good and some bad, can shape an organization's culture. In today's dynamic and turbulent business environment, many organizations are in states of discontinuous change (Hodge & Anthony, 1991). If the organization is to survive and prosper, it must adjust all its parts to accommodate change.

Culture is a vital part of any organization, and it pervades every aspect of its operations. Every journey needs a starting point, especially a journey to excellence. This chapter describes the starting point of the Mountaintop journey. The journey has included positives and negatives, but most importantly it focuses on any organization's most important asset: people.

Introduction

People have historically viewed production as an art, rather than a science. Frequent expediting, late deliveries, long production lead times, and constant fire-fighting are common in most manufacturing facilities. People expect a manufacturing manager to cope with such symptoms every day. Goldratt's Theory of Constraints explains that these symptoms are not independent. They come from a core problem that exists in most manufacturing organizations. Most managers live in the cost world, and they try to manage organizations by optimizing locally. This chapter will explain the cost model's dangerous deficiencies, and break some paradigms. It will then explain the theory of constraints (TOC) and SFM.

Basic Operational Metrics

The Theory of Constraints (TOC) defines a simple organizational goal, and three straightforward measurements. The goal is simple, but common measurements often displace it. An organization's goal is to make money now and in the future.

Theory of Constraints: Performance Metrics

Throughput

Why doesn't TOC define throughput as the sale price minus all the direct costs? TOC deals with engineering and managerial economics, not cost accounting. Companies often get into trouble when they use their cost accounting systems to guide their actions. The cost accounting system should, and legally must, be the basis of tax returns and financial reports. It rarely, however, has much to do with real-world business judgments. That's where engineering economics, and concepts like marginal and opportunity costs, must prevail.

TOC works with the marginal value of each transaction: the difference between making and selling a unit, and not making and selling a unit. While accounting systems treat hourly labor as a direct and variable cost, it's really a fixed cost. The factory pays the workers for eight hours a day whether it uses them or not. Hourly labor becomes a variable cost only when the factory starts paying overtime. Similarly, even direct overhead is not a variable cost. Tom Peters (1987, 587-588) says, "You can't shut the heat off around one machine." Therefore, the true marginal value of a transaction is the sale price minus the raw materials.

Inventory

There is again a similarity between TOC and engineering economics. Traditional cost accounting systems looks at materials, WIP, and finished goods. TOC looks at all the money the business has invested in the operation. Engineering economics looks at alternate uses and opportunities for money. If we can get a million dollars in throughput from a two million dollar investment, that's great. If it takes a billion dollar investment to do this, the money should be in mutual funds, or even the bank. The basic question is, "How much money do we have to tie up to generate the throughput?"

Operating Expense

Together, these three measurements can help determine whether any manufacturing system is doing well. Net profit is simply the total throughput minus the total operating expense. Return on investment (ROI) is the ratio of net profit to inventory. At first, it does not look like there is anything radically new about these definitions. A closer look reveals that differences in relative emphasis on these three metrics creates the basic distinction between the cost and throughput worlds.

What are ISO 9000 and QS-9000, why are they important, and how does Mountaintop approach them? Some companies view ISO 9000 as a costly, time-consuming nuisance. They want to get the registration certificate so they can do business in Europe. Similarly, some companies treat QS-9000 as a necessary evil; they have to comply with it to sell parts to the automotive industry.

Harris' Mountaintop plant, and other progressive factories, recognize ISO 9000 as a systematic program for assessment and improvement of a quality system. It does not matter whether our customers require ISO or QS-9000 registration. The programs' discipline help us identify and correct weaknesses in our quality system, and improve it. ISO 9000 and QS-9000 are valuable investments that repay the time and effort spent on them many times over. Their systematic assessment of the quality management system can improve productivity and quality, and help the company make money (Scotto, 1996).

Roadmap to ISO 9000 Certification

The Decision

ISO is the International Organization for Standardization in Geneva, Switzerland. The ISO 9000 standards for quality are only one of the standards this organization generates. ISO is not a European organization; most of the world, including the United States, belongs to it.

The initial concern was that the new European Community would use the ISO 9000 standards to limit imports from non-European countries. The alternative, positive view was that the standards would serve as a common denominator for quality systems. Standardization would encourage international trade, and provide internal benefits to an organization.

Mountaintop saw three distinct benefits of the program:

1. External Benefits
• Retention of existing customers.
• Gaining new customers, especially in Europe.
• Entry into new markets.
• Fewer dissatisfied customers.
2. Internal Benefits
• Greater control of business.
• Better internal discipline.
3. Quality Cost Benefits
• Reduce Scrap and Waste

See our new book on ISO 9000: 

A comprehensive treatment of industrial statistics would require at least an entire book, and this chapter provides some references. This chapter discusses key ideas, and principles for using statistical tools effectively. If it gives the reader an awareness of the key issues, it has achieved its purpose. The first part of the chapter will discuss some general principles, and how Harris Mountaintop teaches them to employees.

Many industrial problems do not follow the traditional models and assumptions. The second part of the chapter will give the reader the benefit of Harris Semiconductor's experience with real-world problems. Again, this chapter cannot provide detailed instructions for handling them, but it provides some references. The chapter's goal is to promote awareness of these nonideal applications.

Key Issues

1. Users of statistical techniques must understand hypothesis testing and its associated risks. Significance levels are often difficult to understand, and Mountaintop's in-house courses use figures and diagrams to explain the idea.
• All statistical tests carry a risk (the significance level) of concluding that an effect or problem is present when it isn't.
• Statistical tests also carry a risk of not detecting an effect or problem when it is present. The test's power (ability to detect the effect or problem) increases as the effect or problem increases. Increasing the significance level makes the test more powerful, but it also causes more false alarms. "There ain't no such thing as a free lunch (TANSTAAFL)": the only way to increase power without also increasing the false alarm rate is to use a bigger sample.
2. Managers, engineers, technicians, and operators must know the value of design of experiments. Many industrial experiments are ineffective, or produce misleading results, because of improper design.
3. Traditional SPC training assumes that manufacturing processes conform to the normal (Gaussian) distribution. Most SPC software, and most practitioners, rely on this assumption when they set up their control charts. Real manufacturing processes, however, often do not cooperate with this assumption. Harris Semiconductor has paid close attention to these situations, and has adopted methods for handling them.

"We can get on the nets as full-fledged adults, with whatever net names we want to adopt, if Father gets us onto his citizen's access."

"And why would he do that? We already have student access. What do you tell him, I need citizen's access so I can take over the world?"
 

-Orson Scott Card, Ender's Game

The Internet is the third major advance in communications technology: the printing press and the telegraph were the first and second. Three "I's" describe the Internet and its ability to share information: instantaneous, international, and interactive. The Information Superhighway will create an apocalyptic crisis for businesses and other organizations during the next fifteen years. "Crisis" means "danger" and "opportunity." Those who exploit the Internet will prosper, and those who don't will be grease spots.

Harris Semiconductor is using the Internet to serve customers and improve quality. Mountaintop is investigating new developments in browsers and supporting software, and how they can help deliver information and services. Hypertext markup language (HTML) is the Internet's standard building block. A Harris Web page provides a detailed example of HTML, and shows how it affects the page's appearance and function.

Rapid Technological Change: A Perspective

The Internet as a Crisis: Danger and Opportunity

And on the pedestal these words appear:

"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
             - Percy Bysshe Shelley (1818)

The Internet's capability for instant, graphical, and interactive communication is turning every marketplace and political arena into a free-fire zone. Within this zone, an organization has three options. It can retreat (get out of the market or business). It can advance through the zone as quickly as possible, and both Alexander the Great and General Patton endorsed this approach. In business, this means embracing and exploiting the changing technology. The third option is to do neither, stand like a deer in the oncoming headlights, and get chopped to pieces.

Organizations need aggressive, dynamic, and adaptive characteristics to succeed in this environment. Bill Gates (1995) says that the Internet will lower or remove entry barriers, and create a frictionless marketplace. "Frictionless" means distribution costs will consume much less of the product's or service's value.

This competitive environment is an open, flat, accessible playing field- or battlefield. There is no barrier to entry or movement, no cover, and nowhere to hide. The implications are clear for organizations that rely on "Maginot Lines" of entry barriers or distribution channels to protect their market shares.

Here are some predictions on how the Internet will affect the next decade or so.

The automobile dealer (showroom) will be obsolete

"Car salespeople had better start looking for real jobs. There are already online car brokers that cut the salesperson out of the loop. One buyer saved $4000 off the list price by using Auto-By-Tel (http://www.autobytel.com) (Wiener, 1996). Levinson (1994, pp. 204-206) recommends Just-In-Time factory ordering, without a car dealer as intermediary. The author stands by this prediction." (Leading the Way to Competitive Excellence, p. 296)

Levinson (1994, pp. 204-206) says, "Here is a venture for an innovative car manufacturer that likes the Just-In-Time (JIT) philosophy. The idea is to make cars to order instead of making inventories. The current practice is to make cars and put them on dealer lots. The manufacturer usually floor plans the cars. This means loaning the dealer money to carry the inventory. Interest on the loans adds to the customer's cost. The dealer also must earn a profit on each sale. Most of us know about some shady tactics car dealers use to do this."
(Examples of shady practices include holdback. For example, the manufacturer "holds back" 2-3% of the dealer invoice price, and gives it to the dealer at the end of the year. If the dealer invoice is $20,000, the dealer gets $400 to $600 at the end of the year, so the dealer can sell a car below dealer invoice and still make money. Dealers also try to pack in advertising charges, "environmental protection packages" (generally worthless, or worth much less than their price), and other extras.)
"Why do automakers need a showroom to sell cars? Any reputable service station can provide the warranty service. Consider the following arrangement. To keep the production line running, the manufacturer makes subassemblies like engines, bodies, and transmissions. Instead of showrooms, the manufacturer has retail outlets that take orders. Authorized service stations could perform this function. Customers could specify their cars on minicomputers. For example, a CD-ROM (Compact Disk, Read-Only Memory) could contain every car, and every option. The customer also could get descriptions of each option, and its price, from the computer. The computer also shows each body and upholstery color. A representative would be available to answer technical questions. When the customer finishes his or her selections, the computer generates an order. The customer signs a contract and makes a down payment."

O.K., I wrote this before the Internet became popular and almost universally accessible, and projected CD-ROMs at retail outlets. The Internet makes it much easier. The arrangement (1) cuts the non-value adding car salesman out of the loop, (2) cuts the non-value adding showroom (and its overhead) out  of the loop, and (3) avoids ending the model year with inventories of cars that no one wanted. Instead of a showroom and a lot full of cars (inventory), a dealership could keep only one of each model for display and test drives. Now, see Murphy and Saxena's discussion of Synchronous Flow Manufacturing. A business makes money by increasing throughput, not keeping inventory!

Retailers Pay Attention (Anyone Want a Used Shopping Mall?)

There is a story that, if you throw a frog into a pot of boiling water, he will jump out immediately. If you put him in a pot of warm water and heat it slowly, however, he will not notice the problem until it is too late and he is cooked. Leading the Way to Competitive Excellence applies this lesson to the retail market segment.

From the chapter:
"Memo: to the Frogs Sitting in the Pot on the Stove"
"Subject: Your Prospects for Long-Term Survival"
"Dear Frogs; The water (or market segment) in which you are sitting is only lukewarm today. There is, however, a big fire under it, and it's called the Internet. If you don't start hopping soon, you will be dinner."

"In 1995, sales over the Internet totaled $350 million, or 0.021 percent of the retail industry's $1.7 million." The chapter cites data from Sandberg, Jared, "Making the Sale," Wall Street Journal, 17 June 1996, page R6. A semilog plot of actual (1995) and projected (1996-2000) online shopping revenue shows an 85 percent annual growth rate, which means that tiny 0.021 percent of all retail sales will become very significant very quickly. The book states, "The national economy is not going to grow 85 percent a year, so the only way for Internet sales to continue this growth rate is to take sales from traditional marketers."

"Mene, Mene, Tekel, Upharsin: You have been weighed in the balance, and are found wanting. Your market share is divided, and given to the Medes, Persians, and anyone else who has an Internet presence."

"Frog legs? We're sitting in this cozy pot (although it is starting to get a wee bit warm), and someone is talking about frog legs. It'll never happen- we own this market segment, don't we?" Articles in PC Computing have verified this prediction (in print, 1997); you heard it here first.

Cities will be Obsolete

"The Internet, and telecommuting, could easily make cities obsolete. Cities evolved thousands of years ago to meet two specific needs: security and centralized commerce. A city was easy to defend if its inhabitants built a wall around it, and most cities had central marketplaces."
"Today, cities have traffic congestion, high living costs, high taxes, and often high crime rates. Environmentalists are complaining about air pollution, and they want cities to limit automobile traffic. Cities no longer provide any military benefit; the Second World War showed them to be convenient targets for air raids. Land in cities is so expensive that no one is likely to build a new factory in one. Urban businesses include service industries like banking and finance, entertainment, and retail shopping."
"Knowledge workers, the people who work in the banking and finance industries, can often perform their jobs wherever a computer is available. They do not need to live in the city, or even drive into it. Meanwhile, city stores have to pay exorbitant rents, high taxes, and other overhead costs. Suburban malls have already crushed many downtown retail districts, and online shopping will only accelerate this trend. Nothing, however, can replace a live Broadway performance, or a live opera. These may be the only urban businesses that will survive the oncoming tide of change."

Full-Service Stock Brokerages

"There are already plenty of online discount brokerages. E*Trade Securities (http://www.etrade.com) charges a flat $15 to $20 commission for trades of up to 5000 shares.  Andrew Klein of Spring Street Brewing, Inc. says, "Brokerage fees on the Web are coming down, and will eventually near zero because the cost of each additional transaction is so minuscule" (O'Connell, 1996)."

Developments since 1997

Developments since Leading the Way to Competitive Excellence was published reinforce these predictions. Taylor & Jerome's "Karma" in PCComputing, May 1999, p. 87, discusses how economic Darwinism will cull non value-adding middlemen from the gene pool of commerce:
 
• "Travel agents are toast." Taylor & Jerome cite Priceline.com as an online competitor for travel agents.
• I've been using EaasySabre to check fares and schedule my airline travel for several years (since 1994 or 1995).
• "Car dealers are cadavers."
• You heard it here first. Actually, The Way of Strategy predicted the demise of these non value-adding middlemen in 1994.
• "Insurance salesmen are an endangered species."
• "Full-service brokers are knocking on Death's door."
• See the section above.
• "Bankers are about to buy the farm." Taylor & Jerome cite Intuit's Cash Finder as a way to shop around for the best loan rates.
• Find out how much that loan is really costing you. See Ganesha's JavaScript financial calculator.
• "Small-time [Internet service providers] Charlies are sinking fast."

You heard it here first

From "Top 10 Reasons to Shop on the Internet- Now!," in PC Computing, December 1999 (p. 206)
• "Retailers are desperately aware that the Internet is cannibalizing- not augmenting- their sales. According to Jupiter [Communications], 94 percent of online sales in 1999 were hijacked from conventional channels. In the coming months, many retailers will jump at the chance to shutter their pricey storefronts, slash their overhead, and do business entirely on the Net."
• "The sunglasses you'll pay $200 for at the boutique cost $40 on the Web."
• The article reminds Internet shoppers, "You won't be paying a store owner's rent." Again, traditional retailers must pay rent, insurance, utilities, salaries, and so on to maintain physical storefronts.
• "... dozens of Web sites [e.g. MySimon.com] are ready to sic their bots on hundreds of Internet merchants to find the best deal going. And it takes a matter of seconds." Compare this to price-comparison shopping the old-fashioned way, by going from one store to another.

Holstein, William J. "Kicking a Virtual Tire," U.S. News and World Report, October 25, 1999

"Ford CEO Jacques Nasser, in linking up with Carpoint, argued that changes triggered by the online world could alter the way his company makes cars. In his vision, a consumer should be able to go online and configure a car just the way he or she wants it... That information should go to the factory and even to suppliers, like the companies that make brakes or seats. Nasser foresees huge savings because Ford wouldn't have to build inventory that sits on dealers' lots. It would build only cars individual customers want, the same way Dell and Gateway now make PCs." At this point, who needs the car dealer's showroom or sales personnel?

Coleman, Calmetta Y. and Gumbel, Peter. "St. Louis Mall Declares War on E-Retailing," Wall Street Journal, 11/24/99, B1

"The Saint Louis Galleria informed its 170 retail tenants in a letter last week of a new policy prohibiting any in-store 'signs, insignias, decals or other advertising or display devices which promote and encourage the purchase of merchandise via e-commerce.'" ... "In an era when many retailers brandish their Internet addresses on their shopping bags, an e-commerce ban is a harsh move. But the Galleria's owner, Hycel Partners 1 LP of St. Louis, says the new policy addresses a deep concern of mall owners everywhere- the possibility of losing rental income to online sales." The mall's rental income, of course, comes from higher prices for the customer and/or lower profits for the seller.

I direct mall owners to the section above: the pot is now more than slightly lukewarm, it's getting downright uncomfortable. Internet-savvy customers can get the retailer's Internet address from a search engine, and they may resent the mall's attempt to prevent them from buying online. "The letter [from the Galleria] has also gone down like a lead balloon at the Bombay Co.... 'No one has ever improved business by making it more difficult for the consumer,' says President Carmie Mehrlander."
 

"Mene, Mene, Tekel, Upharsin: You have been weighed in the balance, and are found wanting. Your market share is divided, and given to the Medes, Persians, and anyone else who has an Internet presence."


Sisodia, Rajendra S. and Sheth, Jagdish N. "Car Retailing Needs a Tune-Up," Wall Street Journal, 12/20/99,  "Manager's Journal" feature, editorial page

"Auto retailing is a marketing dinosaur. It is the last refuge of the old-fashioned hard sell, a 'push oriented' model devised under the theory that a loaded dealer is a motivated dealer. While most manufacturers have moved to just-in-time production, the car industry still practices what we call just-in-case marketing. The average dealer has a huge 60- to 70-day inventory."