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In this article I explore a number of theories that deal with operations management, including total quality management (TQM) and Six Sigma, business process reengineering (BPR), lean management, virtual organisations and strategic cost management.
Total quality management was a very powerful process in its day for dealing with inefficiency - particularly the cost of errors and waste. In the mid-1980s a veritable army of consultants swept through organisations to rid them of error-prone processes. A central idea was that of 'zero defect', as exemplified in this story told at the time:
Some Western buyers visited a Japanese shoe factory. Much impressed, they asked for a million pairs of shoes - with no more than five defective pairs.
The first box duly arrived; there were five pairs of defective shoes. The buyers rang to complain. They were told: 'Well, you ordered a million pairs and no more than five defects. So we shipped you the defects. We don't actually do defects.'
TQM was originally a Japanese philosophy brought to the West by W Edwards Deming. When the flood of consultants retreated (everyone had been TQMed), another influx came in through TQM reborn - or Six Sigma. This again focused on zero defect but was more institutionalised; people were almost regarded as 'initiates' and graded up to 'black belt'.
One needs to be very discerning about these corporate theories and belief systems. The acid test is, as we saw in my articles on the topic, what economic value actually comes out?
The significance of TQM to accountants is that it suggests that one of the key drivers of cost is the cost of quality defects; this can be up to 10 percent of the total cost structure, and some have estimated more.
Business process reengineering is a challenging process that seeks to simplify complexity. In effect, it is a combination of
- process mapping (descended from 'organisation and methods', from scientific management);
- applying automation: IT to cut out and simplify processes;
- organisational simplification;
- change management.
Basically, BPR - the original gurus of which were Michael Hammer and James Champy - is another example of a 'theory' that is a collection of disparate techniques which have then been moulded into a unified, structured process - not unlike the blue- and red-oceans material we looked at last year on strategy and the balanced scorecard. There doesn't seem to be too much of it around at the minute - which is odd, as it thrived around the time of the early 1990s recession.
My observations of clients who use BPR is that they often don't realise that this is pretty fundamental organisational change and needs to be managed as such; often, the failure is in the implementation.
BPR is relevant to accountants as it can be a most useful challenge to redundant processes within finance - witness supplier payments, the production of management reports/accounts etc.
This can be defined as the process of ensuring that investment is limited to those processes and resources that add value to the end customer. Also, there should be zero waste.
To enable that to happen, great attention needs to be given to smooth flow in value-adding activities. Having lots of stock lying around is thus not consistent with that and is to be avoided by having 'pull' processes (the Japanese labelled this kanban).
This philosophy has its roots in the car industry; before the term 'lean' was coined, Ford laid huge emphasis on efficient manufacturing processes. 'Lean' can be traced back to scientific management in the form of work studies. The actual crystallisation of the process was at Toyota.
Indeed, such a process is a philosophy - like TQM (and there are common elements with that and BPR) - and thus it is a cultural phenomenon. Here lies the rub: to implement it requires some culture shift and organisations are often resistant to doing that. So while lean management might seem a very attractive idea, the failures can easily outweigh the successes.
Lean management is important for accountants as it highlights that business models based on low cost may be based on low wastage and not on lower customer value.
Turning more directly to organisational theory we need to address virtual organisations. These are characterised as those with few physical assets (such as internet-based organisations), those that may not be discrete legal entities, those based on alliances/partnerships, and those with a geographically dispersed workforce - or a combination of these.
Even where the whole organisation isn't virtual it is possible to find 'virtual teams'. This is becoming more prevalent in the finance department - where accountants sit physically in a business team while reporting to senior finance management.
This can have the advantage of much greater intimacy and added value - and also lower cost as there is less need for a very hierarchical structure within finance.
A lot of this is enabled by technology - especially by email and mobile. Virtual organisations were foreseen at least in part by organisational guru Charles Handy as long ago as 1994 - before the internet and emailmania had taken off.
One thing to take away from this idea is that there are frequently a lot more organisational models to choose from than the straightforward functional hierarchy. Other areas worth studying include self-managed teams. This is not only of relevance to the FD in terms of finance staff, but also in advising on cost management elsewhere in the business.
Strategic cost management
While there are clearly some useful things to draw from all these approaches, one might get left feeling that, individually, they aren't quite as powerful as they are claimed to be. One feels a certain hunger for a more integrative approach.
I define strategic cost management (SCM) as 'managing costs for shareholder value'. To ensure that costs are never managed in isolation, they should also be appraised according to both short- and longer term benefits.
Another rule is that costs should never be managed in such a way that will undermine the strategy and competitive advantage. This means that it is a no-no to reduce costs now if the value destroyed in the future will exceed the savings.
My five phases of SCM are: issue definition; diagnosis (why are costs too high/ineffective?); challenging options; evaluation; and implementation.
The first four phases are perhaps best done at least in part through some kind of workshop activity. Typically, a couple of days should take you through the majority of the first three phases. Implementation can take months.
Useful tools for the diagnosis include value and cost-driver analysis, helping to do the trade-off between value and cost. If the reality is that costs are plainly too high, then it can be permissible to simplify the process by just asking the question, 'Why?' and representing that as a simple 'fishbone' analysis. Value and cost drivers are described in my articles on economic value.
For challenging options there are various checklists. For example, imagine that you were an alien taking over this company: how would you manage costs here?
Just as in TQM, BPR and lean management, the biggest constraints are the soft ones - for example, leadership and culture. So it is opportune that next month we move on to leadership.
Dr Tony Grundy is an independent consultant and trainer, and lectures at Henley Business School