process-improvement-solutions.com Blog

There is a lot of debate going on about our Energy Problem and how the current stimulus is trying to tackle our Energy crisis. Yesterday, President Obama unvelied a $2.4 Billion grant to the private sector with the primary objective being to boost innovation in battery technology.

Solar firms in California have been significant receipts of grants in the energy renewables sector. This specific grant targeted towards battery technology in the automotive space was targeted towards firms in the midwest especially in Indiana and Michigan such as EnerDel (automotive lithium-ion batteries will receive $118.5 million in a matching grant), Delphi Automotive Systems LLC ($89.3 million), Allison Transmission ($62.8 million), Remy Inc. ($60.2 million) and Purdue University ($6.1 million).

Just as the Strategic Defense Initiative (SDI) program (aka Star Wars) funded research (mostly in the defense industry) in the 80s spawned numerous innovations even though the SDI as envisioned did not pan out, this (the current fiscal stimulus) too is likely to sow the seeds for innovative solutions for our gargantuan “Energy” problem.

The entire eco-system needs evaluation and new solutions – transportation and its power source (i.e engine/motor), fuel, fuel source, power generation, distribution, consumption. The current stimulus actually hits all of these aspects of the energy eco-system and is using the private sector and consumer incentives to change the behavior and investment/development focus.

Obviously not everything will bear fruit, even if 20 to 30% of all these efforts succeed, we would be well on our way to becoming an energy efficient society.

Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.

Starbucks has a dilemma – How to grow the top line? Lean is an effort to do that. How is it so? Isn’t lean supposed to reduce costs? Yes. However, in this case it is more about the top line. Piqued? Read on….

Since his return, Mr. Shultz, the founder, has focused on making Starbucks well more focused – return to the core competencies in consulting speak. He reduce products offered (like sanwitches etc) and now lean (8/4 WSJ Article) to speed up the cycle times and reduce throughput aimed at adding capacity to handle the peak demand without adding resources (labor or capital).

At a fundamental product strategy level, if the objective is to offer the consumer quick turn around, then the neighbourhood gas outlet or McDonald strategy would be more appropriate. If the objective is to offer the coffee experience and high quality coffee, then the Starbucks model would be great.

It now appears, that Starbucks is trying to be more like McDonald by being faster and leaner with less products and McDonald is trying to be Starbucks by offering premium coffee!!

In the fast food world, handling peak demand is what differentiates the best of the breed and McDonald is the leader in this aspect discussed in one of my earlier blogs – MickeyDs Got It Right!

McDonald is able to pull this off because of stadardization of all processes including store layouts etc. Pulling this off in the fresh premium coffee house that focuses on the consumer experience and store ambience would be very challenging and most likely not as effective. Leaving it to the individual stores to come up with their own unique process is almost certain to ensure that the effort will cause more damage to the brand (the consumer experience) than any gains from efficiencies (ask Home Depot). There is probably a happy medium here some where and perhaps that is what Starbucks is trying to achieve.

McDonald will most likely abandon premium coffee and Starbucks will have a short term bounce from reduced costs (already has). Over the long term, the premium consumer that desires the coffee experience might be lured away by a yet another niche player unless Starbucks figures out what it wants to be.

The problem is that to grow (the top line), it (Starbucks) needs to go after those lost sales during peak demand at the expense of consumer experience which is its core.

Therein lies the dilemma…..

Shaker Cherukuri
Managing Principal
Process Improvement Solutions

My response to WSJ article on Caterpillar dated 7/22/09 (also posted on WSJ online comments section). Caterpillar got burned due to huge capacity expansion in 2007/2008 because they thought they knew what was coming. So I believe, they are holding the cards close to their vest and focusing on the bottom line now (at least you know what you are getting when you focus on the supply side).

Also I think they are benefiting from the huge LIFO reserve created during the pre 2008 inflationary world. This reserve is being depleted since the existing inventory is being used instead of new inventory.

What do you do with all that inventory of tires that were stockpiled when Oil was at $100+ and capacity constraint at the tire manufacturer’s caused the tire prices to go through the roof ? It seemed prudent to stockpile those tires then, not so now.

Perhaps it is time to switch to FIFO accounting for the inventory in case of deflation?

Update (October 26, 2009)
For Q3, 2009, Caterpillar reported $7.29 billion in revenues (down 44% from 2008 Q3) and $404 Million of earnings (down 54% from 2008 Q3) of which $120 million was attributed to LIFO reserve liquidation (29.7%) and $129 million to tax benefits (31.9%).

Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.

DC Metro Collision blog on YouTube
It appears that the rail cars in the metro collision in DC were owned by some banks and leased back to the DC metro authority to extract the value of the tax asset (depreciation). DC metro does not pay taxes and the banks do. Structuring a financial transaction to extract the maximum benefit from a capital asset is fairly common practice in most capital intensive businesses. For example, aircrafts are leased by most airlines since they usually do not have earnings and cannot benefit from depreciating the asset at the front end. So GE and AIG are the biggest lessor of aircrafts (AIG I think has spun off or created a separate entity for this business) since they get to depreciate the asset and the airlines get to be the lessee.

The life calculation of the asset and the associated risk analysis should be a critical component of such a financial transaction since essentially you are choosing to operate the asset for certain duration. The question in the DC metro case is: Whose responsibility was it to maintain the rail cars in operating condition? Was it the bank that owned the cars or was it the operating authority? It does not seem like that age of the cars was a contributing factor in the crash. However, newer rail cars most likely could have mitigate the impact of the collision.

That is true for any asset in general – Cars, homes, appliances etc. Newer models have more safety features and can protect the users in case of accidents. Does that mean we replace everything frequently? How often? Obviously that is not realistic. It is a tradeoff. In the case of airlines, the maintenance, repairs and replacement life cycles are the responsibility of the airlines or the suppliers like GE that sign a contract to maintain the engines or in some cases even own the engines and the airline pays by the hours of usage. So GE (capital) owns the aircraft, leases it to the airline and then GE Aviation owns the engines and the airlines pay GE aviation by the hour for the use of engine!! GE has a dedicated team that does all the risk assessment for these capital assets and the financial gains from these contracts are thoroughly audited. These teams are shared resources between GE aviation and GE Energy since the energy business enters into similar contracts with the power plants for the Gas Turbines that share the core technology with the aircraft engines (I was a Senior Program Manager at the GE energy risk assessment team while at GE).

I digress. Getting back to the issue at hand (DC metro collision). The collision was most likely caused by a procedural system failure. The control system failed? Maybe. Was it designed to detect the stalled train? Were the standard operating procedures followed by all involved? Did the standard procedures account for the chain of events that occurred? Was there an environmental factor? Did the control system malfunction? Was it the controller or the sensors or the software or a combination? Did the life of the rail cars and its components play a factor in causing the crash? It will take an exhaustive Root Cause Analysis to get the bottom of such an event. It takes time and a structured approach.

Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.

Air France Flight 447 Root Cause Analysis – A possible hypothesis < Youtube
It appears that a chain of events and the associated "system failure" caused this crash. A fully automated, highly sophisticated aircraft with multiple backups designed to make the system fault tolerant cannot simply fail. However, if one were to expose the system to an environment that is beyond the design limits and them combine that with human judgment error, then a very highly improbably cascade effect can cause the failure.

Electronic components in computer systems are susceptible to spurious noise signals induced via transducers that either malfunction or fail. To preclude this, there are usually multiple transducers (sensors) and multiple controllers in a multimillion dollar aircraft. It is hard to believe that all these redundancies failed at the same time in combination with human error followed by structural failure. An exhaustive Root Cause Analysis will most likely take a long time and lot of resources with multiple projects to get to the bottom of this unfortunate accident.

Shaker Cherukuri
Managing Principal
Process Improvement Solutions Inc

The new strategy at P&G appears to be reverse of what GE adopted recently under Mr. Immelt. GE went from too focused on operations and efficiency improvement under Mr. Welch to emphasis on slick marketing and creating an ecosystem for growth as a process (building on the Six Sigma heritage). This transformation accelerated in 2005 when I was at GE with the creation of infrastructure BUs.

In P&G’s case, it appears that the new strategy is to grow the margins by focusing on operations and efficiency improvement instead of single minded focus on growing the top line via new premium products and acquisitions. P&G is starting the process of repositioning for the new environment as discussed in my blogs.

Madison Avenue will need to reposition due to the dynamics of the new environment and work with their clients to help them figure out how to target the right segments once the right segments are established and product positioning strategy is laid out. Will require longer partnerships rather than the traditional model of bringing on the ad agency towards the tail end as showcased in the Emmy winning series Mad Men. The show is set in the 50s/60s so obviously is not ment to be a case study on marketing and advertisement strategy for the 21st century. I mentioned it here since it does depict the typical working relationship between product manufacturers and advertisement firms and not much seems to have changed based on the WSJ article yesterday on P&G..

P&G appears to be taking the bull by the horns and changing the way consumer products are brought to the market and using this opportunity to optimize their own operations and business processes which should help increase the Gross Margins.

Shaker Cherukuri
Managing Principal
Process Improvement Solutions Inc
317 258 3552

My reponse to 3/18 WSJ article on How to Innovate in a downturn: For an existing business, the key to survival and capitalize on a downturn is repositioning. It requires ingenuity, creativity, vision and most of all guts to take the plunge. Unmet needs can not be quantified in a spreadsheet and a business plan. An IPOD, a PC or a cell phone could never have been justified in a business plan. But of’ course for every success like the IPOD or a cell phone, there are numerous failures – the path to success is littered with creative destruction. An eco-system that fosters this creative destruction is what fosters growth in a innovative economy like the US.

IPOD was a major reposition for Apple, the cell phone was a major reposition for Nokia. Dell filled the unmet need in PC space and Intel’s repositioning to focus on the micro processors instead of the DRAMs was a stroke of genius. As Mr. Grove put it – only the Paranoid Survive.

Moving forward, the macro economic landscape has changed. The de-leveraging will cause the US consumer to retrench and will no longer be the driver of world economy (about $10 Trillion of the $40 Trillion world GDP was the US consumer I think – 75% of the $14Trillion US GDP).

How can the US consumer learn to live within means, save and not leverage excessively and still maintain a good standard of living? I believe this is where the unmet needs are in the coming decade. Perhaps a reverse process where the savings glut in the US is invested in the consumers of Chindia? Just a thought.

$3 billion people (close to 50% of world population) entering middle class with huge savings, should at some point cause tectonic shifts in the world dynamics (it has been happening, but I suspect this de-leveraging process will speed up the process).

Shaker Cherukuri
Principal
Process Improvement Solutions Inc
317 258 3552

“Quality is a marathon, not a sprint” – That is the key statement made in yesterday’s WSJ article about GMs Chevy Malibu by the Toyota spokesman. What does he/she mean by it? Read on….

Sustainable quality is possible only by inculcating a culture that enables the creation and propagation of quality. All the processes of the “system” need to be self regulating and self correcting (the famous TPS principles). In the short term, it is possible to produce a quality product via extensive inspections and “sorting”. This increases the production costs by generating lots of scrap due to low yields.

The initial quality here is a reference to the infant mortality part of the bath tub curve. If you just cherry pick the good parts, you can reduce the infant mortality (i.e improve initial quality). The failure rate of the population during the useful life is a function of good design margins and tolerance limits. This can only be improved by better designs and manufacturing processes. The trick is to design the product right to meet (exceed) the consumer’s demands (VOC) and then create a manufacturing process that is capable of manufacturing all components, subsystems and systems consistently well within the tolerance limits so you do not have to have a quality inspection at all!! The durability is whole different issue. This is where things like galvanized steel used to make the BMW chasis (discussed in a earlier blog) help make the system more durable.

This sort of eco-system takes years to create since you have to partner with your suppliers and enable them to produce like you do. The Malibu is definitely a very good product. With a lot riding on it, GM put lot of effort into it. The question is, did it pay off? Is it profitable? Is the quality the result of an excellent design and manufacturing process or is it due to extensive inspections and sorting? Is this sustainable?

The bigger issue at GM is that there are too many products. If I want to buy a minivan from Honda or Toyota, there is only one option. Why does GM have so many variations of the same product?

Now is a great time for GM to differentiate and reposition itself by offering products and services that offer a unique value to its customers. The legacy fixed costs are being reduced due to external forces (which was not possible before). GM needs to capitalize on this gift and focus on creating the capability to run a marathon and not just a sprint.

Shaker Cherukuri
Principal
Process Improvement Solutions Inc.
3209 W. Smith Valley Road, Suite 224
Greenwood, IN 46142
317-258-3552

The basic premise of a March 9th WSJ article on Lean is that in an automated system, the managers are unable to cut costs by letting people go. There is no one left to let go. There is all this capital equipment that is collecting dust, but no one wants to let it go. It is sunk cost. Substituting labor for capital (equipment) when demand is high might be the solution to increase capacity, the reverse might be needed when demand is low as eluded to by Toyota in the Feb 24th WSJ article. The decision needs to be made at the margin and not be based on the sunk cost of the capital equipment. Lean is about matching your supply chain and internal capacity with demand – not just having less people (labor) and more machines (capital equipment).

Looking ahead, with less demand, it might be cheaper to go back to an older process that required more people and less equipment – which is what Toyota was taking about. As for temporary issues in a JIT system causing issues with the supply chain or internal operations – that is usually an acceptable tradeoff due to the benefit of a JIT system over the long term. Dell did not abandon its JIT supply chain from Taiwan when an earthquake in Taiwan disrupted its supply chain for a few weeks. The shift from 90% of people in agriculture to 5% today is structural. What I am talking about here is a tactical short term issue of substituting capital equipment for labor since the variable cost of operating the capital equipment at lower capacity might be higher than producing at lower capacity with labor which can be phase in incrementally which may not be possible with the capital equipment.
Shaker Cherukuri
Principal
Process Improvement Solutions Inc.
3209 W. Smith Valley Road, Suite 224
Greenwood, IN 46142
317-258-3552

The Federal Reserves decision yesterday to purchase over 1 Trillion dollars worth of US Treasuries and other securities is akin to going all in. The fed has three basic weapons in its arsenal to tackle the monetary policy to aid and abet the fiscal policy decisions of the administration and the congress:

1) Interest Rates
2) Open Market Operations
3) Reserve Requirements

So far, the Fed has been using 1 and 2. Interest rate target is now zero. The mechanism for this is buying and selling the US treasuries until the short term rates reach is target. Essentially the Fed is adjusting the demand until the rate reaches its target. Once the target is zero, this weapon is exhausted.

Under open market operations, the Fed is basically using its power to expand its balance sheet to flood the system with money by going into the open market and buying “stuff”. By doing so, the fed is pumping money into the system. The fiscal policy just called for 1 Trillion stimulus. The Fed is accommodating that buy announcing 1 Trillion monetary stimulus. Most of this will go to the Treasury and the Treasury will issue Bonds to the Fed.

Before all this started (before September 2008), the M1 money supply was about 1 Trillion (M1 is the actual amount of dollars in circulation in the global economy and consists of physical currency (M0), checking deposits and bank reserves with the Fed). From September 08 to March 09, this doubled to 2 Trillion since the Fed pumped money into the banks (as The Chairman stated in his 60 minutes interview, the Fed simply inflated the banks’ accounts with the Fed). No actually bags of money were shipped to the banks just as no bags of money gets shipped to ones bank account when one gets his/her paycheck – this is the difference between M1 and M0 and are usually quite close.

Now the Fed has announced that it is going to buy 1 Trillion dollars worth of securities, which is adding another trillion dollars to the M1 money supply. So this effectively takes the M1 from $ 1Trillion to $3 Trillion!! Sounds ominous for the US Dollar. However, when you think about it, the world economy is about $40T (US is about $14T, 35%). Since most of the commerce is conducted in US dollar, the $40T world GDP was supported by a mere $1 Trillion of M1 money supply. Now that has/will triple to $3 Trillion and will most likely require expansion of the M0 as well (that is the actual physical dollars – printing money).

Most of the Federal deficit until now has been financed by selling US Treasuries to others (domestic and foreign entities) which brings the existing US dollars back to the US. It appears that now, the need for government borrowing has exceeded the supply of global savings hence the Fed is accommodating that need by expanding its balance sheet and increasing the money supply. The M1 supply is still (at $3 Trillion) only about 20% of US GDP and less than 10% of world GDP.

The Fed has kept a tight lid on the M1 money supply and is now opening the flood gates slowly when needed. The US dollar is the biggest asset/weapon US has. Let us hope the problem gets fixed before the weapon gets blunted due to overuse (i.e the preferred vehicle for world savings shifts away from US dollar). There is still the option 3 (reduce reserve requirements), but that might exacerbate the leverage situation, hence has not been used right now (they might be too low begin with). It will be used to take the liquidity out when economy recovers and inflation shows up.

The situation today is akin to WWII. The war and weapons are different. US went all in then; it is doing so again now….
Shaker Cherukuri
Principal
Process Improvement Solutions Inc.
3209 W. Smith Valley Road, Suite 224
Greenwood, IN 46142
317-258-3552