Thank you for visiting my supply chain blog!
This blog contains all of the case studies and papers I wrote while pursuing my second bachelor's degree in supply chain management. I now work in the oil & gas industry in a supply chain-related role. Please feel free to connect with me on LinkedIn or follow me on Twitter.
Saturday, November 9, 2013
On March 17, 2000, lightning hit a power line in Albuquerque, New Mexico, and caused a fire at the Philips (Philips Electronics, NV of the Netherlands) radio frequency chip manufacturing plant. Although the fire was extinguished within ten minutes, millions of microchips were damaged, which triggered a far-reaching chain of consequences for two of Europe’s largest electronics companies: Nokia Corp. in Finland and Telefon AB L.M. Ericsson in Sweden. The damaged chips were crucial components in the mobile phones that both companies sold worldwide. Their dramatically different responses to the disruption in the flow of chips inspired one Norwegian supply chain researcher to title the incident “Ericsson versus Nokia – the now classic case of supply chain disruption,” a clear illustration of how to and how not to handle supply chain disruptions (Husdal, 2008).
Philips’ first action was to notify its 30-plus customers that would temporarily be affected by delays in chip production. The fire had been minor, and key personnel projected that the cleanup would take about a week. Three days after the fire, both Nokia and Ericsson received the same phone call from Philips about the disruption to its shipments. Since Nokia and Ericsson accounted for 40 percent of the plant’s shipments, Philips also decided these two companies’ orders would be filled first when the plant resumed operations. However, it took Philips six weeks to restart production and months to catch up on its production schedule. With the cell phone market growing at over 40 percent annually, this was a delay which neither company could afford.
Even before the call from Philips about the problem, Nokia’s Chief Component Purchasing Manager had noticed a problem with Philips’ shipments. In a culture that encouraged bad news to travel fast, he promptly notified the company’s senior officials (DeAngelis, 2010). Nokia’s production planner began a daily check of the production status of the parts needed from Philips instead of the customary once-a-week check required by Nokia’s advanced monitoring process. Nokia was scheduled to roll out a new generation of four million handsets that depended upon Philips’ chips (Sheffi, 2005). As soon as it became apparent that the delay would be prolonged, Nokia implemented the response routines it had developed for such situations, and a team of 30 supply chain managers and officials was assembled to spread out over Europe, Asia, and the U. S. to work the problem.
Within two weeks, Nokia had taken three key steps. Nokia first tied up spare capacity at other Philips’ plants and every other supplier it could find. Within five days, two of Nokia’s current suppliers of other parts had responded. Secondly, because Nokia’s cell phones were based on a modular product design concept, it was able to reconfigure its basic phones to accept slightly different chips from other suppliers in the U.S. and Japan. Lastly, a team of Nokia and Philips engineers collaborated to develop alternative plans. As Nokia’s top trouble-shooter stated, “For a little period of time, Philips and Nokia would operate as one company regarding these components” (DeAngelis, 2010). Nokia was thus able to maintain production and satisfy customer demand. By year end, its profits had risen 42 percent, and its share of the global market had increased from 27 to 30 percent (Sheffi, 2005).
Ericsson was not so fortunate. Ericsson’s managers had not noticed any discrepancies in Philips’ shipments prior to its phone call, and lower-level employees did not communicate news of Philips’ problem to their bosses. They assumed Philips would ship the parts after a one-week delay and did not investigate further. Even when Ericsson realized the seriousness of its problem at the end of March, the head of the mobile phone division did not get involved until early April. By then¸ the company had few options. Nokia had tied up Philips’ and other suppliers’ free capacity. Ericsson had no other source of supply because several years earlier it had decided to buy key components from a single source to cut costs and to simplify its supply chain. As later stated by Ericsson’s Marketing Director for Consumer Goods, the company did not have a “Plan B” (DeAngelis, 2005). The impact of Philips’ shutdown took more than nine months to resolve. At the end of 2000, Ericsson reported a US $2.34 billion loss in its mobile phone division (Sheffi, 2005). The following year, the company announced plans to begin withdrawal from the mobile phone production market, and it eventually merged with Sony in order to survive.
Lost sales amounted to most of the financial hit suffered by Philips because direct damage to the plant was covered by insurance. The impact to Philips was relatively minor compared to the impact on its customers. Ericsson bore the brunt of the disruption because it did not have alternative suppliers, and it did not proactively manage supply chain risk. Ericsson subsequently signed on secondary suppliers for key parts and now has a completely different supply chain risk management system in place. Nokia demonstrated a classic textbook solution to the supply chain disruption, not only surviving but also emerging in a much stronger market position than before the fire.
Copyright 2012 James L. Alyea. All Rights Reserved.
DeAngelis, S. (2010). The split second disruption to the supply chain. Enterra Insights. Retrieved from http://enterpriseresilienceblog.typepad.com/enterprise_resilience_man/2010/12/the-split-second-disruption-to-the-suppy-chain.html
Hopkins, K. (2011, December 21). Value opportunity three: improving the ability to fulfill demand. Bloomberg Business Week, special advertising section. Retrieved from http://www.businessweek.com/adsections/2003/ptc/ptc_10.htm
Husdal, J. (2008). Ericsson versus Nokia – the now classic case of supply chain disruption.
Husdal.com. Retrieved from http.www.husdal.com/2008/10/18/ericsson-versus-nokia-the-now-e…
Latour, A. (2001, January 29). Trial by fire: a blaze in Albuquerque sets off major crisis for cell-phone giants. Wall Street Journal. Retrieved from http://web.mit.edu/course/15/15.795/WSJ_Nokia%20HandlesSupplyChainShock.pdf
Mukherjee, A. (2008, October 1). The fire that changed an industry: a case study on thriving in a networked world. Financial Times Press. Retrieved from http://www.ftpress.com/articles/printerfriendly.aspx?p=1244469
Sheffi, Y. (2005). Big lessons from small disruptions. The resiliant enterprise. Retrieved from http://resilient-enterprise.mit.edu/public/res_ent_chap1.pdf
Tang, C. (2006, March). Robust strategies for mitigating supply chain disruptions. International Journal of Logistics Research and Applications, Vol. 9, Issue 1. Retrieved from http://www.scribd.com/doc/3961976/Robust-Strategies-for-Mitigating-Supply-Chain-Disruptions
About Jimmy Alyea (James Alyea):
Sunday, August 5, 2012
Examining Purchasing Social Responsibility
The concept of purchasing social responsibility (PSR) is defined by Carter and Jennings as “the involvement of purchasing managers in the socially responsible management of the supply chain” (2002) and as “purchasing activities that meet the discretionary responsibilities expected by society” (2004). Discretionary activities are those based upon an organization’s judgment rather than upon legal requirements or ethical issues. Carter and Jennings consider five discretionary undertakings of supply management--diversity, the environment, human rights, philanthropy, and safety--to be interrelated parts of a broader concept of purchasing social responsibility (PSR) rather than stand-alone areas of management and of research.
Purchasing managers should be concerned with PSR because of their unique position to leverage strategic roles to set company standards for socially responsible practices. Purchasing’s organizational importance has changed from that of providing the lowest-cost supply solution to that of coordinating and integrating procurement processes, both internally and externally, to one of adding value to the supply chain. Through interaction with other key functional areas of an organization, as well as externally with suppliers and customers, purchasing managers can positively impact social responsibility performance in the supply chain both upstream and downstream. For example, contract language and conditions can require that suppliers (and second- and third-tier suppliers) observe environmentally sound practices, provide safe and humane working conditions, and permit periodic audits of their compliance in these areas. On the other hand, irresponsible actions by supply managers and their suppliers in areas such as human rights and the environment can significantly damage a firm’s performance and reputation, which can lead to backlash from customers, stakeholders, regulatory agencies, activist groups, and the media.
Another PSR area of significance to purchasing organizations is the understanding by supply management of the interrelatedness of individual discretionary undertakings of social responsibility, such as diversity and philanthropy, within a broader framework of purchasing social responsibility. With this understanding, Carter and Jennings (2004) point out that supply managers can leverage the knowledge gained in implementing one area of PSR when determining how to implement and manage other PSR activities. Specifically, the similarity of the drivers, barriers, and effective tactics used to overcome these barriers to implementation of an initiative such as minority business enterprise (MBE) sourcing may, in many cases, be applied to implementing and managing programs in other areas of PSR such as human rights issues in suppliers’ plants.
To help supply managers fully understand the interrelationships among key social-responsibility elements, the ISM’s (Institute for Supply Management) Commission on Social Responsibility identified seven core principles and practices of PSR in 2002. ISM (2008) believes that utilizing these guidelines will enable purchasing professionals to strengthen an organization’s culture, improve trust in internal and external relationships, anticipate challenges more readily, and reduce business risks, while adding significant long-term value to their organizations and to society.
The best corporate social responsibility initiatives often come from within a company whose employees readily embrace new ideas and truly care about making changes for the better. As reported by Carter and Jennings (2004), top management leadership by example, combined with shaping an organizational culture that embraces fairness and good corporate citizenship, has a direct and significant effect on purchasing social responsibility (PSR). Supply management professionals are a key to helping organizations identify methods and opportunities to support future social responsibility initiatives. They are uniquely positioned to take a leadership role within the organization and with suppliers. With their wide range of contacts and sphere of influence throughout the supply chain, they can be pivotal in the success of “raising the bar” and removing barriers to developing and implementing new PSR programs. By working across boundaries, purchasing managers can take the lead in highlighting what needs to be done in terms of social responsibility, now and in the future.
Innovative employee initiatives of front-line purchasing personnel who are aware of customer demands and trends—such as concerns for product safety, environmental impact, and product origin--are also important to shaping forward-looking PSR programs. Carter and Jennings (2004) found that although individual values of supply management employees do not directly impact PSR programs, their values can play a key mediating role in initiatives instituted by employees. The implication for purchasing managers is that employees selected to develop new PSR programs should be ones whose personal values and beliefs support PSR and align with the activity under consideration. Additionally, successful employee initiatives concerning the enhancement of PSR activities are more likely to occur in a people-oriented environment that allows for missteps and risk-taking in order to capture opportunities and encourage innovation.
The Institute for Supply Management’s (ISM) seven core Principles of Social Responsibility (2008) provide a framework for purchasing organizations to lead the way in developing proactive programs as new PSR issues arise or are foreseen. These guidelines are organized by the following dimensions of social responsibility involving the purchasing function: community, diversity, environment, ethics, financial responsibility, human rights, and safety. They can be used by supply management to define and put into place, both internally and externally, ambitious and demanding goals for the future. ISM recommendations for interacting with suppliers on social responsibility issues can be used to encourage collaboration, partnerships, and open communication lines for the sharing of product innovation, new technology, and the use of best practices in order to better position the supply chain to meet future PSR challenges. For example, early supplier involvement in such areas as product design for reuse and disassembly, waste reduction, reduction of packaging material, and product life-cycle analysis can increase commitment and opportunities for firms to be environmentally responsible and to stay ahead of rising public expectations and demands for environmental friendliness.
Other ways in which purchasing can influence an organization’s future social responsibility agenda is by having clear policies firmly in place concerning issues such as safety and human rights and by following through on their utilization. To address diversity, purchasing can encourage or require the use of minority business enterprise procurement programs in certain areas of its own and its suppliers’ organizations. It can refuse to do business with firms that are irresponsible in dealing with human rights issues such as paying workers a living wage and providing humane working conditions in factories. Other important PSR considerations can be included in the supplier selection process and in procurement contracts. Social responsibility audits can be conducted periodically to insure compliance although guidelines and standards need to be developed for consistency in evaluating findings. Similarly, purchasing needs to develop performance metrics for most of the PSR dimensions in order to build a convincing business case for their implementation. A purchasing organization that does more than “talk the talk” on socially responsible practices will be in a stronger position to influence its firm’s social responsibility agenda as it evolves in a complex and dynamic environment.
Social responsibility has to be a companywide, cross-functional effort that is embedded in an organization’s culture and that extends outside the organization as well. Although no one function or person can do it all, supply management is well suited to be the facilitator for developing, coordinating, and implementing a firm’s socially responsible initiatives and for guiding its future progress.
Carter, C. R. (2006). Purchasing social responsibility—what is it, and where should we be headed? In J. L. Cavinatto, A. E. Flynn, & R. G. Kauffman (Eds.) The Supply Management Handbook, Seventh Edition (pp. 393-407). New York: McGraw-Hill.
Carter, C. R., & Jennings, M. M. (2000). Purchasing’s contribution to the socially responsible
management of the supply chain. Focus Study: Center for Advanced Purchasing Studies. Retrieved from http://www.ism.ws/files/sr/capsarticle_purchasingscontribution.pdf
Carter, C. R., & Jennings, M. M. (2004). The role of purchasing in corporate social
responsibility: a structural equation analysis. Journal of Business Logistics, 25.1.
Retrieved from http://web.ebscohost.com.ezproxy.uhd.edu/ehost/pdfviewer/pdfviewer?vid=3&hid=14&sid=62c64b61-3153-4887-9dc1-b54b2cd26ff9%40sessionmgr13
ISM principles of sustainability and social responsibility. (2008). Institute for Supply Management. Retrieved from http://www.ism.ws/files/SR/SSRwGuideBook08.pdf
Monday, July 30, 2012
“The Challenges and Opportunities associated with Purchasing Outsourcing”
Outsourcing of procurement activities is on the rise and is being broadly adopted across many industry segments (Morphy, 2012). The current economic environment has increased interest in purchasing outsourcing as companies look for new ways to sustain profits through increasing operational efficiencies and make significant reductions in their cost structures. While outsourcing of HR and F&A (finance and accounting) is a common practice, procurement outsourcing is becoming increasingly accepted as a more viable strategy for both cost and performance improvements. A strategic approach recognizes that the primary benefit, however, is not in reducing costs of the procurement organization, but of creating value from corporate spend. Since the early 2000s, leading organizations have changed their perspective of procurement organization from that of a cost center to a profit center, which has given a new dimension to procurement as a “game changer.”
Traditionally, the focus of procurement outsourcing has been on transactional purchasing activities that involve select portions of indirect spend. These include processing purchase requisitions and purchase orders, managing simple RFQs, and invoice matching and payment. However, the increased availability of global skills in terms of process and technology has created the opportunity not only to standardize and automate procurement processes, but also to leverage improved performance and best-in-class services by moving value-added activities to a third party specialist. With companies increasing their focus on core business processes to gain a competitive advantage, they are more open to outsourcing strategic procurement efforts such as contract management. Areas within the procurement process can be categorized as core and non-core activities and selected ones identified as individual opportunity areas to be outsourced. The supply base has developed significantly in recent years and features a number of major service providers like IBM Global Services and Accenture that are capable of supporting high-quality outsourced strategic procurement efforts.
With the wide range of service provider skills and offerings currently available, selecting the right procurement service provider (PSP) presents a major challenge. There are many new entrants in this immature and confusing market, and in some cases such as category-specific specialists, offerings are still under development. While a firm that engages a call-center vendor can feel secure about the services to be provided, the same cannot be said of the procurement manager who is considering outsourcing strategic sourcing or category management. Exercising “buyer’s caution” is the strategy to be followed when evaluating the specifics of services offered and vendors’ competencies. Vendors should be assessed in such areas as category expertise and use of best practices, technological tools and degree of automation utilized, size and appropriateness of supplier network, ability to analyze spending patterns and aggregate spend, level of supplier management provided, track record/references for handling processes of similar size and scope, and willingness to sign a carefully constructed Service Agreement (SLA), among other things.
Just as vendor solutions vary widely, so do contract methods, and the ultimate success or failure of an outsourcing agreement may very well lie in the contracting process. A detailed contract should include SLAs that define responsibilities and service-level expectations, as well as provide process-specific metrics and milestones, a clear statement of the value-based pricing by which solution fees are determined, a dispute resolution process, and an exit strategy in the event of an unforeseen situation such as bankruptcy. At the present time, there are no standardized contracts for the three categories of PSPs: transaction-focused providers; category specialists; and comprehensive service providers, such as IBM and Accenture, which offer business process outsourcers and procurement specialists. The many different types of procurement contracts and the variety of options for each provider classification represent a major challenge in the outsourcing decision and vendor-selection process.
Outsourcing a procurement operation or activity to a PSP presents other considerations for an organization, such as a need for transparency in pricing/costing. Depending on the extent of outsourcing, significant change management is often required. Firms need to manage carefully the transition of business processes to PSPs to facilitate continuity and to ensure that internal employees do not feel threatened and are motivated to make the process work. Supply management professionals worry about losing direct contact with suppliers and staying up-to-date on new procurement technology and current trends in the marketplace. Data integration raises concerns about the use and ownership of proprietary information and technology. In short, procurement is not as easily outsourced as other functions because procurement results tie directly into a firm’s cost of goods sold and profit and loss statement.
Purchased goods and services account for a little more than half of every dollar of revenue, and 80 percent of their cost is set by the end of the design and sourcing cycles (Morphy, 2012). Thus, sourcing can provide the single largest opportunity for an organization to reduce costs. Procurement outsourcing is well suited to companies faced with increased global competitive pressures and rising demands to cut costs and improve shareholder value. Industry research by the Boston-based Aberdeen Group reports that procurement outsourcing can provide dramatic improvements in procurement efficiency and effectiveness as follows:
- an increase of 28% in average savings from sourcing
- an increase of 18% in spend under management
- an improvement of 31% in contract compliance
- an increase of 32% in the percentage of suppliers enabled
In addition, operational costs can be reduced 15 to 20 percent through process improvement, staff right-sizing, labor arbitrage, and achieving economies of scale (qtd. from Huber & Minahan, 2011). Aberdeen’s research into U.S. and European companies’ sourcing, procurement, and supply management practices indicates that even the largest firms do not have the skills, expertise, and infrastructure required to effectively manage procurement across all spending categories. In general, because most companies do not handle procurement very well when left to their own devices, companies of any size—small, medium, or large—could utilize some level of procurement outsourcing to their benefit, particularly for indirect goods and services.
Senior management must realize that viewing procurement outsourcing as a long-term endeavor and making substantial investments in sourcing policies will produce tangible results. Adopters need to assess carefully the comparative costs and risks of insourcing versus outsourcing specific procurement activities, manage potential risks, and put sufficient effort into process design and optimization. It is critical for supply management professionals to understand that outsourcing the management of procurement activities does not release them from responsibility and that outsourcing procurement must be managed on a continuous basis. Because the procurement outsourcing market is a “buyer’s market,” firms should work with PSPs to devise the solution that best fits their business environment and strategic objectives.
Aberdeen Group. (2006). You will outsource procurement: here’s why and how. mThink Knowledge. Retrieved from http://mthink.com/content/you-will-outsource-procurement- heres-why-and-how
Huber, B. & Minahan.T. (2011). Procurement outsourcing: not an all or nothing value proposition. TPI Information Services Group. Retrieved from www.tpi.net/.../papers/Ariba-TPI-Procurement-Outsourcing.pdf
Morphy, E. (2012, July 27). Latest trend in SCM: outsourcing procurement. E-Commerce Times. Retrieved from http://www.crmbuyer.com/story/19783.html
Friday, July 27, 2012
Identifying the key steps to designing an effective supply strategy
Developing a supply strategy is a process that when integrated with a firm’s other business processes, contributes to a firm’s overall goals of competitive advantage and profitability. A simple, but effective purchasing portfolio model may be constructed using a supply segmentation technique that classifies products or services to be sourced in order to formulate distinctive supply strategies for each. Although the specific supply strategies, tactics, and supply management approaches developed will be balanced and tailored to an individual firm’s needs, certain basic steps are common to their development.
The first step is to categorize the types products and/or services to be sourced. Products are evaluated on the basis of the internal “risk” a company would encounter if the item were no longer available or of low quality, followed by an assessment of each item’s “value” (both monetary and intrinsic) to the company. The value of a relatively low-cost item might be high when it adds significant value to the organization’s output. This could be because it makes up a high proportion of the output (for example, raw fruit juice used by a fruit juice maker) or because it has a high impact on quality (for example, the cloth used by a high-end clothing manufacturer). A detailed “spend analysis” that is aggregated across divisions, strategic business units, and suppliers should also be developed for all sourced items. This helps define key spend categories and assess impact on a firm’s profitability.
The next step is to graph each unit or group of units on a chart on the basis of two dimensions: supply market complexity and the cost/value of each unit. Each dimension has two possible values, “high” and “low.” The horizontal (X) axis represents cost/value (measured as the total annual dollar amount spent on each) and the vertical (Y) axis represents market complexity. Market complexity is determined, in part, by the number of suppliers, available capacity, product specifications (unique or standard), and availability of substitutes. An upscale specialty jeweler such as Tiffany’s would face a highly “complex” market with few suppliers, limited capacity, unique product specifications, and no available substitute products, whereas a mall-environment jewelry store would deal in a simple or low- complexity market with numerous suppliers and substitute products available. Market analysis helps a firm assess the current supply market structure and available purchasing options and supply risks, as well as analyze trends and forecast future supply problems.
After completing the market analysis, the previously classified products/product groups can be segmented on a purchasing portfolio matrix consisting of four quadrants that represent distinctively different supply environments:
Quadrant I, “tactical” (low market complexity, low cost/value);
Quadrant II, “leverage” (low market complexity, high cost/value);
Quadrant III, “critical” (high market complexity, low cost/value); and
Quadrant IV, “strategic” (high market complexity, high cost/value).
The items in each quadrant require development of specific supply management goals and strategies of varying complexity. For example, the supply management focus on items in the strategic quadrant is on increasing competitive advantage through strong buyer-supplier relationships such as strategic alliances, joint ventures, and sole sourcing and through medium- to long-term supply contracts. Mutual trust provides access to new technology that is important for developing value-ads that increase customer satisfaction and loyalty. In contrast, the standardized, generic products in the high-volume leverage quadrant do not require long-term supply contracts or supplier partnering strategies because products and suppliers are interchangeable and supply risk is minimal. With a goal of decreasing unit costs and increasing profit margins to contribute to corporate profitability, managers can utilize traditional supply strategies. These include aggressively seeking lower-cost suppliers from a large supply base, finding substitute products, and leveraging buying power to obtain volume discounts and competitive bids.
Distinctive differences may also be found in the supply market characteristics of the critical and tactical quadrants, with a corresponding adjustment of supply management goals and supply strategies. To illustrate, the supply risk of items in the low-value critical quadrant is high, so management’s goal is to minimize supply disruptions even if additional cost is required. Strategies to assure supply may entail keeping extra stock and developing contingency plans to deal with unexpected situations. When possible, ways should be found to move critical items into the tactical quadrant to reduce their supply risk. In the tactical quadrant, which consists of low-value, non-critical items, supply management’s emphasis is on reducing acquisition costs that may consume up to 80 percent of a purchasing department’s time. Strategies include utilizing integrated supplier relationships such as electronic data interchange and supplier-managed inventory systems to reduce transaction and logistics costs in this category.
Each stage of the supply segmentation technique is an important building block in the systematic process of constructing a purchasing portfolio analysis model based on the relationship between market complexity and cost/value. The portfolio matrix forms a simple, but clearly focused framework for analyzing supply environments in order to develop feasible supply strategies for the sourcing of products in each quadrant. This model presents a multi-stage process of developing supply strategies that minimize a firm’s supply risk and highlight opportunities to improve a firm’s overall buying position not only in the short term, but also in the long term. As such, it encourages CEO’s to look at the “big picture,” and it changes the traditional operating perspective of “purchasing” to one of strategic supply management.
Thursday, June 28, 2012
Analysis of, “Continuous Quality Improvement as a Survival Strategy:
The Southern Pacific Experience”
When the Southern Pacific Railroad (SP) was purchased for $1 billion by businessman Philip Anschutz in 1988, the company was in a period of decline and struggling to survive. For every dollar collected from shippers, it was costing SP $1.03 to haul their freight. Southern Pacific had been without leadership for almost two decades and had been held in trust the preceding five years following a failed 1983 merger. Anschutz found himself with a 150-year-old railroad with low morale, hostile customers, thin management, and not enough investment in plant and equipment and training. In addition, the new company was not a single entity, but rather a collection of divisions and subsidiary railroads, each fiercely independent. He knew he had to fix the company quickly, but also sensibly: his solution, a total re-focus on customers and a Deming strategy of continuous quality improvement (CQI).
In 1989, Anschutz made top management changes by bringing in an expensive, but highly experienced team of all-stars who had held senior positions in companies with successful CQI programs. Kent Sterett, a long-time proponent of Juran’s strategic-planning processes and a former judge for the Baldrige Award competition, brought a fresh perspective on quality. He had set up Union Pacific’s pace-setting Quality Management System, and he did the same for SP in 1990 (Welty, 1992). The new executive team made a series of benchmarking trips to such quality leaders as Xerox and Milliken where it was impressed by the first-line employees’ involvement in quality. After a pilot program tested in SP’s Eastern region showed that quality could make a difference, Anschutz began implementing a three-phase quality improvement turnaround strategy in 1990.
Because of the company’s rapidly deteriorating situation, Anschutz was operating on a tighter time schedule than was traditionally thought to be wise for implementing CQI. Using Juran’s planning-based approach to improvements, a strategy was developed based on Malcolm Baldrige Award criteria to help top management lead the quality-improvement process. The CIO, COO, and the Vice Presidents became the Quality Council. The design phase began with one-on-one leadership training for upper management. Based on information gained from the previous benchmarking trips, management group sessions were used to identify techniques that would be most beneficial to SP and its unique needs and to determine key-performance indicators. A mission statement was developed, objectives for 1991 were set, and a five-year strategy was designed.
With an action plan and a framework in place, management began to introduce its quality improvement strategy to employees in November, 1990. In a geographically dispersed company with multiple cultures operating in a turf-protecting mode, changing the behavior of the entire workforce was a monumental task. Not only was the company operating with a workforce that was older in age than is typical in U.S. industry (some were third generation SP workers), but it was one that was more than 90 percent unionized by 14 different craft unions. If all employees had been confronted instantly with QI, anarchy would have probably resulted from trying to tackle too much at once.
Instead, role modeling by top management and a series of 125 “town hall” meetings led by corporate officers, not first-line supervisors, were held to tell more than 13,000 workers about the quality-driven approach to doing business. Executive work days were initiated during which corporate officers were out on the track and yards working side-by-side with employees. Their presence demonstrated the importance of “team play” and helped dissolve distrust that existed between labor and management. Fifty union leaders were brought to San Francisco and shown the dismal operating performance data, after which they were asked to participate in critiquing the new CSI strategy. All but 2 of the 14 unions participated. In addition, forums were set up with union representatives and employees to open communication lines and to identify the common grounds of quality for both groups. Involving union leaders in management meetings was a first for the industry, but it worked!
SP’s formal quality program began in May, 1991. Almost immediately, a blind survey was sent to 600 customers to monitor customer satisfaction (Delsanter, 1992). Because current customers were never certain if their shipments would arrive on time, initial findings showed customers wanted consistent, quick, on-time service, every day. These survey results were used as a baseline from which subsequent surveys were analyzed for progress, and improving service reliability became the cornerstone of SP’s quality efforts. As SP’s chairman Philip Anschutz stated, the old way of doing business—“you need us more than we need you”—was out (Lustig, 1992). He wanted to show customers that the new way—with buzzwords such as “quality” and “customer driven”—was in. To communicate its commitment to customers, management created “the New SP” train that began a 45-day, 20-city, 11-state tour in March, 1992. At the train’s last stop, SP President Mike Mohan re-emphasized the train’s message to customers: “SP’s goal is to meet or exceed your needs!”
To this end, SP invested significantly in quality education, with a strong focus on the team approach. All courses were rolled out in 1991. Railway-specific training courses included team leadership training, facilitators training, and team members training. Also included were courses for statistical process control and management quality improvement training. By November, 1991, more than 600 team leaders had completed training, and 400 quality improvement teams had been formed, with approximately 12 percent of employees working on problem solving (Delsanter, 2009). By mid-1992, 900 teams were operating, with 20 percent of SP’s workforce participating in one or more teams, 25 percent of which were cross-functional. Newly formed Regional steering committees included a “quality facilitator” to support team activities when a line supervisor was unsupportive. These teams were dedicated to building customer satisfaction through a continuous quality improvement process.
Launching a quality improvement process in record time takes total top management commitment and a clear understanding of the quality process. SP has done this, with some of the most experienced “quality” people in the industry managing the CQI program. Hallmarks of the program include strong leadership, role modeling and other involvement by top management; benchmarking; developing action plans; involving unions; involving managers in process improvement; and providing quality education and team training for all employees. Normally, these activities would have been done one at a time. In SP’s case, they were done in parallel or almost simultaneously, but they were done correctly by knowledgeable leaders employing a combination of Juran, Deming, and Japanese quality concepts that best fit SP’s unique circumstances.
As of this writing (Spring, 1993), SP owner Anshutz appears to have been correct in his conviction that CQI was the correct survival strategy to bring about a successful turnaround. While not yet getting SP to the break-even point, there was a $43 million improvement in the bottom line during 1991-1992, the first year of the CQI program. It will not take nearly that much improvement in 1993 to make the company profitable. By closely listening to what its customers want and by applying the quality process, SP is transforming itself into a customer-driven, cost-effective transportation provider. If it continues at its present pace, it will be successful.
In 1996, Southern Pacific was the sixth-largest railroad in the U.S. with over $3 billion in revenues and over 15,000 miles of track. At the end of 1995, an agreement was made with Union Pacific Corp. to purchase Southern Pacific Rail Corp. for $3.9 billion (Ortega, 1995).
Copyright 2012 James L. Alyea. All Rights Reserved.
Carman, J. (1993, Spring). Continuous quality improvement as a survival strategy: the
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Delsanter, J. (1992, February). On the right track. TQM Magazine 4.1. Retrieved from
Lustig, D. (1992, October). The “new” Southern Pacific. Trains 51.10. Retrieved from
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Ortega, F. (1995, August 4). SP’s chairman turns attention to oil and gas and new areas. Wall
Street Journal. Retrieved from http://search.proquest.com.ezproxy.uhd.edu/docprintview/39862909
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