Monthly Archives: August 2008

Asian Lessons in Managing Capital Projects

A recent article in the McKinsey Quarterly on “Managing Capital Projects: Lessons from Asia” (registration required) about how some Asian companies are better at managing capital projects than rivals elsewhere caught my attention because many companies are still buying traditional, on-premise, behind-the-firewall enterprise application software (despite the proliferation of good SaaS alternatives) — and these are always intensive capital projects. While not all of the lessons learned in a traditional capital project that revolves around physical assets will be directly applicable to such a project, the fact of the matter remains that, as a supply & spend management professional, you will have to manage these projects from time to time — and any free advice you can find is definitely worth a quick read. Furthermore, since resources required for new capital projects are becoming scarce around the world, now, more than ever, you cannot afford to screw up.

Lessons from Asia are particularly relevant now as more than 50% of the world’s capital investment is projected to take place in Asia over the next seven years. Furthermore, there have already been some major successes in China and India, including a recent oil refinery and petrochemical complex in Jamnagar built by India’s largest private-sector enterprise for 20% less capital than was required by similar plants elsewhere.

After weeding out local Asian conditions that were neither common nor transferable elsewhere (such as land costs, taxes, and regulations), as well as current global best practices, the study described in the article identified five innovative practices that break with the conventional wisdom of western companies and set the recent Asian successes apart. These five strategies are:

  • Set Aggressive Goals
    While safe and realistic targets for cost, quality, and execution time adds assurance that goals will be met on time, it increases costs and creates expectations of tolerance for delays. In contrast, best-in-class Asian CEOs typically set high, even unrealistic, targets and make explicit trade-offs between time and cost — which usually results in an over investment in the equipment and labor that generally form a relatively small part (< 5%) of a large capital project. This allows companies to work on a number of projects simultaneously, preventing downtime.
  • Invest Broadly
    Asia’s best companies regard project management as a core competence. While they may outsource various parts of a project, they retain an active role as overall integrator and manager. Generally, they will manage all critical aspects in-house and only outsource standard equipment / project work on a turnkey basis.
  • Reconsider Low Cost Suppliers
    Asia’s leading capital project managers obtain lower costs and faster service by aggressively sourcing even critical equipment from promising vendors that have developed strong capabilities and reputations in their home countries but that may lack extensive experience in global markets.
  • Avoid Gold Plating
    Leading Asian companies believe in challenging all assumptions and in understanding the reasons for designs and specifications by subjecting them to rigorous value-engineering tests. This often allows them to drive out 10% more cost than a Western organization would believe possible.
  • Flatten the Organization
    Leading Asian companies realize that the fast-paced nature of capital projects makes a flat organizational structure essential and typically only have two layers between line staff and project managers, who report directly to the CEO or another board member. Furthermore, while the CEO will be involved in all critical decisions, project managers are given full authority to supervise support functions and manage resources and can make decisions themselves if the budget is not threatened.

What really interested me is how these have their equivalents in capital-intensive software projects:

  • Set Aggressive Goals
    Especially if you bring in a third party to do the implementation. Furthermore, agree on reasonable SLAs and hold the third party to the SLAs when it is realistic to do so.
  • Invest Broadly
    Make sure your people and the third party integrators and consultants have the tools they need to work effectively. If middle-ware exists that already performs the ETL tasks that are required, don’t pay your team to reinvent the data wheel.
  • Reconsider Low Cost Suppliers
    You don’t always need IBM Global Data Services. With the right tools, the crack developer at the local IT shop might be able to do the job just as well.
  • Avoid Gold Plating
    Thoroughly investigate the requirements before assuming an implementation will take a certain amount of time or require a (large) number of third party consultants.
  • Flatten the Organization
    The implementation team should be flat. Leave the politics to the politicians.

Claro’s Crystal Customs

Our last post on Claro re-introduced you to Claro and their successful sourcing practice. Today’s post is going to cover the other parts of their consulting practice and their particular areas of specialty.

Claro now has four primary areas of specialization:

  • Sourcing & Procurement
    From Spend Analysis through Contract Management to Procure-to-Pay, Claro has capabilities across the sourcing and procurement spectrum and their partnership with Ketera (acquired by Deem) allows them to not only utilize modern e-Sourcing tools on a client’s behalf, but leave them behind as well. (Of course, a client should do its own analysis of marketing leading and best-of-breed sourcing and procurement solutions, including Ariba (acquired by SAP), BIQ (acquired by Opera Solutions, rebranded ElectrifAI), Emptoris (acquired by IBM, sunset in 2017), Enporion (acquired by GEP), and Iasta, among others, before blindly choosing the Ketera solution, because, even though Ketera might be the right fit, it might not.)
  • Insurance and Claims Management
    First party and third party claims management on behalf of insurance companies and organizations that need to make a large number of insurance related claims
  • Healthcare
    Revenue Cycle Management, DRG/Clinical Documentation Support, Healthcare Process Improvement, Self-Pay Management, Drug Discount Programs, and other healthcare services. Claro has worked with over 450 hospitals across the US both individually and in health systems of up to 25 hospitals. They’ve also worked with large academic medical centers.
  • Bankruptcy
    Claro has just started a new bankruptcy practice out of their New York office to help those clients that are being hit hardest by a market that has given us the double whammy of stagflation.

Their background gives them particular strength in insurance and healthcare. For example, they recently helped one of the largest insurance providers in the country optimize their benefit plans to save themselves, and their clients, millions of dollars. They’re also one of the few consultancies that has leave-behind software for hospitals that helps those hospitals improve their service offerings while capturing more insurance payments.

Furthermore, in healthcare, they can help a hospital save money and increase revenue by helping them improve their DRG/Clinical Documentation. In the US, there are now approximately 700 Diagnosis-Related Groups and the proper classification of a diagnosis is critical as the benefit paid to a hospital for a given illness is often fixed based on the original DRG classification. Misclassifying a complex pneumonia as a simple pneumonia can cost a hospital hundreds, if not thousands, of dollars. Claro’s expert group, which includes medical doctors, can help a hospital improve it’s processes to insure that the diagnosis is correctly captured every time and that the hospital is able to claim all of the insurance premiums that it is due.

When you combine their insurance expertise with their healthcare process expertise and their sourcing expertise, one quickly sees that they often do their best work in hospitals and health care systems as they can improve efficiency, save money, and increase insurance billings in a single project. They’re definitely one of the few small jewel consulting firms to look at if you’re a health care provider.

Overcoming Worker Resistance in Process Improvements

Sometimes, despite your best efforts, certain members of your organization will resist change tooth and nail. That’s why a recent Industry Week article on “How to Bring About Process Improvement When Workers Resist” caught my eye. The article, about Dover Corps. efforts to reconcile processes and operations between a plant in Tulsa, Oklahoma (Norris) and in Edmonton, Alberta (Alberta Oil and Tool), overviewed a good approach that might help you convince two competing divisions, or even two businesses within the same conglomerate, to play nice.

The article started off by noting early that processes are only as good as the people who implement them, and if John doesn’t like Bill and Bill thinks John is an idiot, no change initiatives can succeed and that systems are held together by purpose, relationships, and information. This is important because, at the very least, you will need a team that is willing to work together if you are to have any hope that your efforts to integrate disparate processes will work.

Dover Corps. began its process by putting all types of employees — union factory workers, maintenance personnel, front-line supervisors, engineers, and scheduling personnel — through three programs: on-line assessments, a relationship workshop, and individual sessions with an executive coach. The goals were to demonstrate:

  • the behavioral style of each individual to them, and how their style affects their communication with people throughout the organization
  • the best way to communicate with people of different behavioral styles
  • that many communication problems can be solved by adapting your style to better understand what another is trying to say
  • the ability for everyone to learn new ways of doing things

The process was very effective for Dover Corps. Results included:

  • recognition, and improved focus, on the strategic constraint for both companies
  • increased profits, despite the fact that 33% of constraint capacity at one location had to be taken temporarily out of service for repairs and upgrades
  • 87.5% reduction in setup time at one location
  • 80% improvement in rework

Finally, the article shared some key lessons learned, which contain some useful advice:

  • Work on relationships before you work on an issue.
  • Folks are folks (are folks). Whether you’re in the executive suite or on the shop floor, relationship building should work.
  • People need to be engaged in a proactive manner before they are pushed into a new process.

The Vendor in Black (Repost)

The sun did not shine.
We had no time for play.
So we sat in the office.
On that dark, stormy day.

I sat there with Sally.
We sat there, we two.
And I said, “How I wish
We had good tools to use!”

We’re deep in the red.
Our paychecks are stale.
So we sat in the office.
And tried not to wail.

So all we could do was to
Sit!
Sit!
Sit!
Sit!
And we did not like it.
Not one little bit.

>BUMP!<
And then
something went BUMP!
How that bump made us jump!

We looked!
Then we saw him step in on the mat!
We looked!
And we saw him!
The Vendor in Black!
And he said to us,
“Why do you sit there like that?”
I know you are broke
And your paychecks are flat
But we can find
Savings to tuck under your hat.”

“I have some tools that you can use,”
Said the Vendor.
“I have some new tricks,”
Said the Vendor in Black.
“A lot of good tricks
I will show them to you
Your boss
Will not mind at all if I do.”

Then Sally and I
Did not know what to say.
Our boss was out of the office
For the day.

But Diligence said, “No!, No!
Make that vendor stand by!
Tell that Vendor in Black
You do NOT want to try.
He should not be here.
He should not be about.
He should not be here
When our boss is out!”

“Now! Now! Have no fear.
Have no fear!” said the Vendor.
“My tricks are not bad,”
Said the Vendor in Black.
“Why, we can find
lots of savings, if we try
with a report that I call
vendor-GL_code drive by!”

“Please get out!” said Diligence.
“This strikes me as void!
Please get out! said Diligence.
I do NOT wish to be unemployed!”

“Have no fear!” said the Vendor.
“My tool will always work.
It will find you savings
Wherever they lurk.
With a click of a button.
And your ERP app.
It will find you savings!”
Said the Vendor in Black.

“Look at it!
Look at it now!” said the Vendor in Black.
“It’s finding you savings.
To tuck under your hat.
It’s comparison report.
Can handle two divisions.
Broken down by category.
Into subdivisions.
And look!
Pie chart comparisons for one and for all!
But that is not all!
Oh, no.
That is not all … ”

“Look at it!
Look at it!
Look at it now!
It can handle AP data,
with the module that knows how.
It doesn’t cost much more.
Than the basic module costs.
But it’s worth the price.
To prevent savings loss!
And with extra reports.
Your savings explode.
You’ll find hidden treasure.
With that extra code.
Don’t fear the price tag.
It’s a nominal fee.
You heard me clear.
Have no fear!
Just a nominal fee!”

That is what the vendor said.
Then he fell on his head!
He came down with a bump!
From up there high on the wall.
And Sally and I,
We saw ALL our prospects fall!

And Diligence he gloated.
While grinning he did.
He sad, “Did I not tell you?”
Oh, yes! I sure did!
This was not a good game,”
said Diligence in a fit.
“No, I did not like it,
Not one little bit!”

“Now look what you did!”
Said Diligence to the Vendor in Black!
“Now look at this mess!
Look at this! Look at that!
You took all our money.
Sank us deep in the red.
You made us false promises.
Then you fell on your head.
You SHOULD NOT be here.
When our boss is gone out.
You get out of this office!”
Said Diligence with clout!

“But I like to be here.
Oh, I like it quite a bit!”
Said the Vendor in Black
To Diligence with wit.
“I will NOT go away.
I do NOT wish to roam!
And so,” said the Vendor in Black,
“So,
so
so …
I will show you
Another module you should own!”

And then he ran out,
And, then, fast as a fox,
The Vendor in Black
Came back in with a box.
A shiny blue box.
It was sealed with red tape.
“Now look at this,”
Said the Vendor.
“Take a look!”

Then he climbed on the soapbox.
And with a tip of his hat.
“I call this module Enhanced-Data-Blocks,”
Said the Vendor.
“In this box, two CDs.
I will load for you now.
You will like these apps,”
Said the Vendor with a bow.

“I will unseal the tape.
You will see something new.
Two apps. And I call them
App One and App Two.
These two apps will not hassle you.
They integrate well.”
Then, out of the box
came CDS for App One and App Two!
He installed them at once.
Then said, “They’re ready to use.
Would you like to try out
App One and App Two?”

And Sally and I
Did not know what to do.
So we decided to try out
App One and App Two.
We loaded them both.
But Diligence said, “No! No!
Those Apps should not be
on our system! They must go!
“They should not be installed
When our boss is not here!
Uninstall! Uninstall!
Said Diligence, wrought with fear.

“Have no fear, Diligence,”
Said the Vendor in Black.
“These apps are good apps.”
And he gave them a nod.
“They are great. Oh, so great!
They were built to work well.
They will save you more money
and make you feel swell.”

“Now, here is a new trick that I like.”
Said the vendor.
“They augment your data,”
Said the Vendor in Black.

“No! Not in our system!”
Said Diligence, quite hot.
“They should not change the data
in our system! They should not.
Oh, the errors they’ll make.
The mistakes I will find.
Oh, I do not like it!
Rewind, Rewind!”

Then Sally and I
Saw them merge our transactions.
We saw those two Apps
Put our systems in traction.
Bump! Thump! Thump! Bump!
For hours on end there was no reaction.

App One and App Two!
Power Down! Power Up!
Our processors maxed!
It was not abrupt!
In want of more memory,
swap space was used.
And our brand new SAN,
those Apps did abuse.

Then those Apps they spit out
A slew of reports.
Across all our data,
they said we were short.
And I said
“I do NOT like the way that they run.
If our boss saw this,
would he have bought one?”

Then Diligence said, “Look! Look!”
And trembled with fear.
“Our boss is on her way back!
Do you hear?
Oh, what will she do to us?
What will she say?
Oh, she will not like it
To find our systems this way!”

“So, DO something! Fast!” said Diligence.
“Do you hear!
I saw her! Our boss!
Our boss is near!
So, as fast as you can,
Think of something to do!
You must get results from
App One and App Two!”

So, as fast as I could,
I loaded Excel.
And I said, “With Excel
I can get meaning I bet.
I bet, with Excel,
I can use those reports yet!
Cut and Paste, Slice and Dice
Make our new reports useful and nice!”

“You see!” said the vendor
“Our new apps work great.
You’ll save.
Yes you’ll save.
Oh you’ll save
Ain’t that great!”

Then he left us the box
with the CDs inside.
And the Vendor went away
gleaming with pride.

“That is good” said Diligence.
“Vendor’s gone away. Yes.
But our boss will come back
She will find this big mess!
And the mess is so big
And through all systems spread,
We can not clean it up.
We are so dead!”

And THEN!
Who was back in the office?
Why, the Vendor!
“Have no fear of the mess,”
Said the Vendor in Black.
“I solve all your problems,
And so …
I have here another module
to answer your woes!”

Then we saw Vendor install
App Three, Your Original View.
For another small fee
our data renewed.
Our original views,
and our new views too
plus a hundred reports
and a slew of canned graphs
in bright shiny colors
to show us our gaffs.

Then Vendor was gone
with a tip of his hat.

Then our bass walked in
And asked of us two
“Did you accomplish your goals?
Tell me. How did you do?”

And Sally and I did not know
What to say.
Should we tell her
The things that went on here that day?

Should we tell her about it?
Or hope she never finds out?
Well …
What would YOU do
If your boss asked YOU?

This entry was originally posted on February 17, 2007.  It is being reposted not only because the spend analysis vendors were making a lot of noise last quarter, but because the spend analysis consultants are finding their workload at an all-time high — which means that many companies are waking up to the fact that there are only a handful of technologies, like spend analysis and optimization, that can save them money in this agflation-recession environment.  However, it has to be true spend analysis and not 100-reports-in-a-box.  In other words, when selecting your vendor, due to the large number of spend analysis solutions on the market that are not, at least in the doctor‘s view, true spend analysis solutions, it’s buyer-beware.  

Downstream Supplier Performance Management

As per a recent Industry Week article, collaboration in the 21st century must be a tightly coupled relationship, not only between retailer and manufacturer, but also between manufacturers and all downstream suppliers and stake holders; including logistics, raw material, sub-contractors, packaging and quality / validation services, and, yes, even legal and finance. Otherwise, the chances of the right product hitting the right place at the right time are not very good, and neither are the chances of the final costs being on target. To this end, if you are to manage downstream supplier performance effectively, you need to be aware of the issues and trends. According to the author of the Industry Week article, Phil Friedman of QAD, there are four key issues and trends that consumer product manufacturers and retailers need to be aware of if they are to effectively manage downstream supplier relationships. They are:

  • Your raw material suppliers need visibility into your current demand plan.
    A root cause of missed delivery dates is a raw material supplier’s lack of visibility into a manufacturer’s current demand plan, which is often a constantly changing target in a demand-driven supply network. If a raw-material supplier believes a slowdown is coming, when in fact an upswing is just starting, delivery dates will likely be missed. Similarly, packaging suppliers need to align production, delivery, and, sometimes, design and art to support a manufacturer with tight schedules.
  • You need in-transit visibility since being in transit doesn’t guarantee you’ll get your shipment on time.
    You need to be aware of where the item is and whether there are any variances with respect to the original schedule. Otherwise, you won’t know that an item is going to be late until its late. However, if you know that your shipment sat on the dock three days longer than expected, and that it is going to be three days late, two weeks before the expected delivery date, you can adjust production schedules accordingly.
  • You need to know that supplier material meets quality standards before it is incorporated into your product.
    As recent years have demonstrated, poor quality materials can lead to massive recalls and significant hits to your brand and your bank account. Your suppliers should be able to prove to you that their materials meet specifications before they ship them to you, possibly through independent third party testing and validation.
  • You need to get all of your regulatory and business requirement ducks in a row well before you need the first shipment.
    As the article points out, orders are often missed not because the product is not ready, but because letters of credit are in error, quality assurance liability bonds have not been signed off by legal, and one delay after another causes raw material or contract manufactured products to sit and wait.

So if you make sure you are working in concert with your suppliers, distributors, partners, and internal counterparts, you can be sure that you’ll be a lot less likely to miss your delivery dates.