Perspectives on Various Issues of Interest

The Soccer Team

Economic Downturn & Inventory Management

An article published on February 9, 2009 in Wall Street Journal reported that after falling sharply for a year, U.S. inventories shot up by $6.2 billion unexpectedly in the fourth quarter of 2008, according to the latest U.S. Commerce Department figures. The surge underscores the rapid demand decline that is hitting large and small manufacturers.

The economic downturn is hitting companies so hard and so fast that even those that have made huge strides implementing inventory-control systems haven't been able to react quickly enough to avoid a costly buildup.

The upshot is that companies up and down the line are slashing prices and throwing the brakes on new production. As they rush to clear away the excess, their actions tend to magnify slowdowns already under way. Tighter inventory systems have lessened, but not eliminated, this pileup effect, economists said.

"The system went from full speed ahead to stop," said Ronald DeFeo, chief executive of Westport, Conn., mining and construction equipment maker Terex Corp. "We're working like crazy to stop our suppliers at the door and send them away -- and they're doing the same thing. So it's reverberating back through the system."

 Another factor making inventory management more difficult has been growing globalization. Red Wing Shoe Company Inc. in Red Wing, Minn., produces in three U.S. plants, but also outsources some lower-priced lines to Asian factories. Chief Executive David Murphy said he has been able to quickly curb production at his U.S. plants as demand slowed, but his inventories of imported shoes have swelled, in part because those orders were placed far in advance of the downturn.

"We've had customers who placed orders with us, and we purchased shoes based on that, but then those customers canceled orders," he said. "Some of it was our own internal sloppiness, but we're also dealing with long lead times."

Consider the U.S. auto industry: While auto makers closed factories to reduce inventory, they failed to cut it deep enough to keep up with the massive decline in sales compared to the prior year.

At the end of last month, the industry had 116-days of sales of light vehicles sitting on dealer lots, compared to 78 days a year ago.

Some companies are using outside consultants to help slash inventories. Carlisle Companies Inc., a Charlotte, N.C., conglomerate that makes everything from lawnmower tires to commercial roofing, began working with TBM Consulting Group two years ago to streamline its operations, including its inventory systems. The company's goal is to slash $100 million in inventory by the end of this year.

Source: Aeppel, Timothy ,  “Firms Race to Regain Control Over Inventories” Wall Street Journal, February 9, 2009.

Recession & Buyer-Supplier Relationship

An article published on February 11, 2009 in Wall Street Journal reported that a grocery chain has removed from its Belgian stores about 300 Unilever products that it says are priced too high, a sign of mounting tension between retailers and suppliers as the recession grinds on.

The stare-down shows how fraught relations between retailers and their suppliers are becoming amid the severe slump in consumer spending. Grocery stores across the globe are putting growing pressure on food and drink companies to lower prices or to offer other more favorable terms.

The move by Brussels-based Delhaize SA, which operates the Food Lion chain and other grocery stores in the U.S., comes just days after Unilever reported strong fourth-quarter profit that was driven in large part by its ability to command big price increases despite the ailing economy.

Delhaize says its conflict with Unilever is rooted in the supplier's effort to push a broad range of goods into its stores, including some that the grocer says it would prefer not to stock because they are unpopular. If the supermarket doesn't buy the whole range of products, Delhaize says, Unilever has threatened to raise prices by an average of 30% for the remaining items.

"They want to impose their product assortment on us," says Lisbeth Rogiers, a spokeswoman for Delhaize, which operates more than 2,500 stores in five countries, including more than 1,500 in the U.S. "That is unacceptable for our customers, and we always put our customers at the center of our decisions."

Unilever wants Delhaize to promise it won't stop selling Unilever products without consulting the company first, Unilever spokeswoman Aurélie Gerth says. The Anglo-Dutch consumer-goods giant wants to increase prices for Delhaize by an average 2.5%, she adds.

Deborah Weinswig, an analyst for Citi Investment Research, believes Wal-Mart's plans to freshen up its Great Value brand will trigger more price cutting on the national brands sold at Wal-Mart. And if Wal-Mart reduces its national-brand prices, "I think the food retailers will have to follow or they will be at risk of losing market share," she says.

In January 2009, mid-Atlantic grocer Weis Markets, which operates 155 stores, lowered or froze prices on 2,400 targeted staple items. Similarly,Terry Leahy, the chief executive of British retailer Tesco PLC, urged suppliers to pass on to stores the recent drops in commodity and oil prices.

Source: Rohwedder, Cecilie and Patrick, Aaron O. and Marting, Timothy,  “Big Grocer Pulls Unilever Items Over Pricing” Wall Street Journal, February 11, 2009.

Procter & Gamble & Car Wash Business

An article published in Wall Street Journal reported that Procter & Gamble wants to start a new business model of franchising car washes. The giant manufacturer of household staples makes products such as Pampers diapers, Crest toothpaste and Gillette razors.

P&G is under mounting pressure to find new sources of revenue growth, particularly as more cash-strapped shoppers think twice about buying its premium-priced products. Wall Street is increasingly skeptical that the mammoth company can garner meaningful gains in its slow-growing product categories and a tough economy.

To jump-start plans for a nationwide chain of Mr. Clean Car Wash franchises, P&G in December acquired the franchise assets of Atlanta-based Carnett's Car Wash, which has 14 locations. "We need to look for new opportunities to allow us to grow," says Bruce Brown, P&G's chief technology officer. "That isn't limited to things within our current business model."

Known for exhaustively testing new ideas, Procter & Gamble has been quietly experimenting with service businesses in recent years. Since 2007, it has operated two Mr. Clean Car Washes near its Cincinnati headquarters. Last year, it unveiled three Tide dry-cleaning shops in Kansas City, Kan., area. In 2007, P&G said it bought a minority stake in membership-based medical services firm MDVIP, based in Boca Raton, Fla.

Professional car washing, which rings up about $35 billion in sales a year in the U.S., according to P&G estimates, won out as the company's first major franchise push. "We want to blow this out to a national network of car washes," Mr. Brown says.

The car-washing business has a handful of competitive advantages, says Nathan Estruth, vice president of P&G's FutureWorks, which develops new business ventures. It lacks a dominant national chain, aging baby boomers are reluctant to wash cars themselves and more water-strapped communities are pushing professional car cleaning as a conservation measure. Forming a franchise system, rather than owning locations, means "we don't have to enter a capital-intensive business," he says.

P&G, which scrutinizes shoppers down to the seconds it takes to notice a bottle on a store shelf, says it will offer franchisees detailed information about car-wash locations, consumer targeting and advertising response rates -- techniques developed during the Cincinnati-area tests that P&G will combine with the Arnetts' experience.

P&G knows people may cut down on car washing in the recession. But franchise guru James Amos notes that the franchise industry typically grows during economic slowdowns. With more people out of work, "there's a larger pool of franchise candidates," says Mr. Amos, chairman of P&G's franchising-subsidiary board.

Source: Byron, Ellen, “Mr. Clean Takes Car-Wash Gig,” Wall Street Journal, February3, 2009.

Design Manufacturing Integration - A Complementary Asset in the Use of Advanced Manufacturing Technologies

 
In an article published in 2007, my co-author and I describe and test a theory of complementarities between design–manufacturing integration (DMI) and usage of advanced manufacturing technologies (AMT). This study extends prior AMT research by examining the role of complementary assets in explaining how AMT adoption contributes to manufacturing performance. In addition, the study provides a finer-grained analysis of associations between Process and Planning AMT usage and various aspects of manufacturing performance.We analyze data from 224 manufacturing plants in order to test the hypotheses that DMI moderates the relationships between AMT usage and manufacturing performance. Regression analysis results indicate that DMI plays the role of complementary asset to AMT usage when quality, delivery and process flexibility are considered. A complementary role is not observed for cost efficiency and new product flexibility. In fact, the results suggest that combined high levels of DMI and AMT usage can be costly. We discuss the implications of the findings for a contingency theory of AMT success, for future research, and for managerial practice.

The significant main effects of AMT on manufacturing performance uncovered in our analysis in some ways confirmed arguments forwarded in prior studies, and in other ways offered some surprises. Both Planning and Process AMT are positively associated with new product and manufacturing process flexibilities. Associations with delivery performance are not as significant. A positive bivariate correlation between Process AMT usage and delivery disappears in the regression analyses. These findings support the notion that AMT’s greatest potential benefits apply to manufacturing flexibilities. Interestingly, however, our results also suggest that Planning AMT usage may be costly, as it is associated with lower cost efficiency relative to competitors. The high costs of implementation for
advanced planning technologies such as ERP have been well documented. One interpretation of this result is that high implementation costs have not been sufficiently offset by transactional efficiencies.

In fact, our data analysis indicates that both Processing and Planning AMT usage are negatively associated with cost efficiency when high levels of DMI are present. Using the complementary
assets perspective one could surmise that the resources required to install the routines and communication protocols associated with DMI are especially costly when specialized technologies must be analyzed and integrated into the design, planning, and execution of production operations. For example, the creation of design-for-manufacture guidelines may be more difficult and costly when more sophisticated manufacturing technologies are present, especially if the technologies are new to the firm. Both AMT and DMI activities require a significant amount of overhead resources, including highly trained engineering, maintenance, and other technical staff. Costs associated with these resources, as well as significant capital equipment costs, may offset direct cost efficiencies offered by
AMT. It is also possible that a manufacturing organization’s DMI activities may involve people that are inadequately trained or experienced in the use of Process and Planning AMT.

Since our data are cross-sectional, it could alternatively be argued that these findings indicate that companies with higher cost structures are more likely to use AMT. For example, if a company is pursuing a strong product differentiation strategy based on wide product variety, it may accept having higher costs than competitors who offer simpler product lines. In this case, AMT usage may not necessarily be expensive; rather it may be more common in companies that have high costs of production because of complexities in their products or processes. In order to investigate this possibility, we repeated the regression analyses with two additional variables as controls: (1) "our manufacturing strategy emphasizes being the lowest cost producer" and (2) "our manufacturing strategy emphasizes highly customized products" (7 point scale, strongly disagree–strongly agree). The results with the added controls were essentially unchanged; the negative main effect of Planning AMT and both negative interaction effects remained significant at the same levels as before. These findings argue against the alternative interpretation.

Though potentially costly, DMI activities appear to produce benefits in terms of product quality, delivery, and process flexibility. Positive associations of DMI main effects with performance improvement were indicated for quality, delivery and new product flexibility, with the strongest direct effect being evidenced for quality performance. In accordance with our expectations, DMI appears to be especially important in achieving Process AMT’s potential benefits to quality, delivery, and process flexibility. Process AMT usage is positively associated with each manufacturing performance dimension. However, relationships between Process AMT usage and manufacturing performance dimensions are actually negative when DMI is low.

Process AMT usage is thought to improve product quality through the greater consistency that automation provides. It is thought to improve delivery and process flexibility through improved changeover and processing speed which allow small production lot sizes and less work-in-process inventory. Importantly, our findings suggest that Process AMT usage is less likely to lead to these improved capabilities if the firm is not able to create substantial integrative capabilities. Arguments for the necessity of integration again stem from the high levels of appropriability and uncertainty that are endemic to AMT adoptions. Design–manufacturing integration activities address ambiguities and interdependencies that surround product and process functional specifications. Thus, DMI leads designers to a deeper understanding of AMT capabilities and limitations. This greater understanding leads to better applications of technology, and better fit between product and process designs. Presumably, a manufacturing organization that achieves high levels of DMI creates a source of
competitive advantage that compensates for AMT’s widespread availability. It is likely that the capabilities of Process AMT are best utilized when product designers are made fully aware of them through DMI activities. Our results offer evidence of the purported benefits of concurrent engineering and design-for-manufacture types of integrative activities.

As for the benefits of Planning AMT, the results indicate that they pertain mostly to improvements in flexibility, the strongest positive association being with process flexibility. The results indicate that a positive association between Planning AMT usage and process flexibility is made even more positive when high levels of DMI are present. Planning AMT purportedly offers at least two main benefits. It can improve efficiency by optimizing production schedules in order to more fully utilize manufacturing resources. In addition, the computational power and speed of Planning AMT offers the ability to create more complex and responsive schedules, thereby allowing greater flexibility in production. DMI augments these benefits.We posit that, in the same way that DMI uncovers technical dependencies between product design and machine processing requirements, DMI also serves to clarify the impacts on production flows that result from aspects of product complexity and variety created in product design. The interaction of Planning AMT and DMI reflects the combination of greater planning and product flow visibility provided by Planning AMT with the insights of manufacturing experience made available through DMI. By integrating these two sources of knowledge into product design decisions, companies may achieve higher levels of process flexibility. For example, product designers may create
more effective uses of shared components within product architectures, leading to more efficient
production flows and to faster lead times.

It is important to note that DMI involves both "organic" and "mechanistic" organization design aspects. While the organic practices underlying DMI focus on social integration by means of broad role descriptions for the design and manufacturing personnel and by horizontal communication protocols (e.g., via concurrent engineering); the mechanistic practices focus on procedures, guidelines and rules for efficient integration of design and manufacturing activities (i.e., design-for-manufacturing). In contrast to the concurrent engineering literature that mostly focuses on organic practices, our conceptualization of DMI considers a combination of mechanistic practices (use of manufacturability guidelines, use of Design for Manufacture/ Assembly methods) as well as organic practices (coordination mechanisms for design–manufacturing issues, manufacturing involvement in new product development). Thus, we contend that a more holistic characterization of DMI in this study presents a richer role of DMI and firmly positions the construct within the extant literature base investigating AMT–performance relationship. Even so, our study of DMI is limited by its focus on one-way communication of manufacturing knowledge to product designers. Valuable extensions of this research would examine DMI from more of a two-way perspective that also includes communications of product knowledge to manufacturing process designers and managers.

Overall, the different effects on different dimensions of manufacturing performance uncovered in this research might be used to explain inconsistent findings regarding AMT’s relationships to profitability and growth. Trade-offs appear to be at work. Investors in AMT may lose cost advantages in trade for improved quality, delivery, and flexibility. The findings have several interesting implications for managers seeking to maximize the potential of AMT. Our results suggest that managers seeking to improve time-based outcomes do well to invest in Process and Planning AMT. Thus, Process and Planning AMT investments would support a time-based or product differentiation-based manufacturing strategy. In general, the data from our study and others suggest that AMTs are not well suited for strategies that emphasize low cost.

DMI enhances AMT-driven capabilities, though it too may be costly. The net effect of DMI on each of the dimensions of manufacturing performance is in most cases strongly positive and at worst negligible. So DMI appears to be a good investment. However, in order to reap maximum benefits from DMI in conjunction with AMT, managers should be prepared for potential monetary costs, and there may be an associated learning curve. We speculate that risks associated with DMI are probably tied to suboptimal implementation or poorly developed supporting resources. History, culture, and leadership may also be important factors that explain why some firms are more adept at DMI than others.

Source: Swink, M. and Nair, A. 2007. “Capturing the competitive advantage of AMT: Design-Manufacturing integration as a complementary asset,” Journal of Operations Management, Vol. 25 (3): 736-754