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.
Thank you,
Jimmy Alyea
Twitter: Twitter.com/JimmyMBA
LinkedIn: www.LinkedIn.com/in/JimmyAlyea/
Saturday, November 9, 2013
The Importance of Diversifying Your Supply Base
by Jimmy
Alyea
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’ response.
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.
Nokia’s response.
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’s response.
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.
End result.
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.
References:
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
Purchasing Social Responsibility
Examining Purchasing Social
Responsibility
by Jimmy Alyea
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.
Copyright 2012. James L. Alyea.
All Rights Reserved.
For more information, please contact Jimmy Alyea:
Works Cited
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
Purchasing Outsourcing
“The Challenges and Opportunities
associated with Purchasing Outsourcing”
by Jimmy Alyea
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.
Copyright 2012. James L. Alyea. All Rights Reserved.
For more information, please contact Jimmy Alyea:
Works Cited
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
Key Steps to Designing an Effective Supply Strategy
Identifying the key
steps to designing an effective supply strategy
by Jimmy Alyea
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.
For more information, please contact Jimmy Alyea:
Thursday, June 28, 2012
Continuous Quality Improvement Strategy
Analysis of, “Continuous Quality Improvement as a Survival
Strategy:
The Southern Pacific Experience”
by Jimmy Alyea
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.
For more information,
please contact Jimmy Alyea:
Carman, J. (1993,
Spring). Continuous quality improvement
as a survival strategy: the
Southern Pacific experience.
California Management Review
35.3. Retrieved from
http://search.proquest.com.ezproxy.uhd.edu/docview/2161493050034158
Delsanter, J. (1992,
February). On the right track. TQM
Magazine 4.1. Retrieved from
http:/dx.doi.org/10.1108/09544789210034158
Lustig, D. (1992,
October). The “new” Southern
Pacific. Trains 51.10. Retrieved from
ABI/INFORM complete, Trains.com
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
Welty, G. (1992,
November). SP’s quality comeback. Railway
Age 193.11. Retrieved from
http://search.proquest.com.ezproxy.uhd.edu/docview/203752918
.
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