Nicos Leon - Senior Business Consultant

CE Marking - Stands for what ? Conformité Européenne or Chinese Exports?

2010-11-07T10:07:00.000+02:00

Yes, don't laugh. You can see the well known CE sign on products but not the Genuine Conformité Européenne CE sign but the Chinese Exports CE sign. Watch this video.

If you have encountered a case like this please add your comment.

Quality and Productivity - Friends or Enemies? Take the Poll

2010-11-04T20:08:00.001+02:00

Some say that Quality and Productivity are mutually exclusive. If you want to increase quality you have to do more tests, costs will go up and by consequence productivity will go down.

Others say that Quality and Productivity go hand in hand.

What is your opinion? I have prepared a poll to get your views.

The Poll will be open till November 22. It will be interesting to see what the majority thinks.

To vote press here

Achieving a Breakthrough Performance in Hospitals

2010-11-03T13:28:00.000+02:00

The Theory of Constraints (TOC) is a methodology that has been introduced some 25 years ago through a novel "The Goal" by Eli Goldratt, a physicist that has applied scientific thinking to management.

The theory of constraints (or Constraints Management) has been applied in various sectors, initially in production. Today it is applied in Project Management, Retail, Banking, Services, Supply Chain, Prisons, Education etc.

One of the applications that the theory has tremendous success is Hospitals and especially the management of patients queuing and ER.

Here is a small video explaining how this method has been applied successfully for the British NHS.

I will be covering various applications of the theory of constraints in future posts. Do come again and post your comments and suggestions.

Apple Could Buy Facebook, Twitter, Zynga, Others with Its $51B - Mobile and Wireless from eWeek

2010-10-28T15:11:00.000+03:00

Google has $31B in cash but Apple has more $51B

Apple Could Buy Facebook, Twitter, Zynga, Others with Its $51B - Mobile and Wireless from eWeek

Business thinking is changing

2010-10-27T21:01:00.000+03:00

Thomas Power : latest business ideas on social marketing

Tip from John Medina

2010-08-06T11:28:00.001+03:00

John Medina is a renown scientist and author. His best seller book is "Brain Rules".

In this book he gives a tip useful to all of us. We all can profit form a 25 minute nap each day started 12 hours after the mid-point of our previous sleep period and refill our batteries for the rest of the day.

If you go to bed at 12:00 and get up at 8:00 then 4:00 is the mid-point. Adding 12 hours you arrive at 16:00. A 25 minutes nap at 16:00 will increase your productivity over 30% for the rest of the day.

Is it possible that this failing joint venture be saved?

2010-08-03T17:28:00.002+03:00

The following story is completely fictitious. I tried to put as much detail as possible in order to simulate a real case.

There are two companies in two completely different industries.

Company A produces a family of products and during the production process a by-product is also produced. The by-product is useless for them and they literally throw it away (this implies of course a certain cost.)

Company B produces a certain number of similar products and the production process they know well, if adapted, could be used to manufacture some other product whereas the by-product of Company A could be a suitable raw material. This third product could be sold through the same distribution channel as their main products.

Both companies after some meetings, they decide that they could cooperate around this idea and that the cooperation could be beneficial to both. They thus decide to set up a joint venture on a 51-49% basis (Company A gets 51% and the Management and Company B 49%).

Both companies want to make the biggest possible profit out of this JV. For this reason Company A has set a relatively high price for the raw material (the by-product) it supplies. Company B has set a cost figure for her know-how and has set the selling price of the new product slightly lower than her other products. The new product is sold through Company B existing distribution channel. The JV after a few years is losing money.

The manager explained to the board that if the two partners don’t change attitude, the situation cannot be turned around. He explained to them that what he was monitoring during the previous months was the Value Added produced by the company (Income from Sales minus all Direct Costs such as raw materials and possible other direct costs such as transportation costs of orders to customers and sales people bonuses) versus the Running Costs of the Business (i.e. the cost of being in business such as Salaries, Rent, Utilities, Royalties for know-how, etc.). During the last year the Value Added produced was constantly lower than the Running Costs and that if this inequality is not overturned, the situation would not ameliorate. He suggested that Company A lowers the price of the raw material (after all prior to the creation of the JV, they were throwing it away) and that Company B lowers the Royalty Costs. He mentioned that he has done whatever is possible to cut all other costs.

The board listened to the manger and after an internal deliberation they decided that he was responsible for the bad shape of the company and and fired him. They then appointed a new one.

What would you suggest the new manager to do?

Here are some reading suggestions from Amazon.

How to Turn Around a Financially Troubled Company

Making Public Enterprises Work: From Despair to Promise - A Turn Around Account

Turn Around: A Strategy for Successful Restructuring

Save Your Business: How to Avoid Trouble in a New Business or Turn It Around If You're Already in Trouble

Taking Charge: Management Guide to Troubled Companies and Turn Arounds

New CEO attempts to achieve delicate balance: Beckman tries to grow clinical diagnostics business, turn around sales to drug makers.(Beckman Instruments ... An article from: San Diego Business Journal

The Practical Guide to Joint Ventures and Corporate Alliances: How to Form, How to Organize, How to Operate

International M&A, Joint Ventures and Beyond

Strategic Alliances: Three Ways to Make Them Work (Memo to the Ceo)

Merger, Acquisition, and Joint Venture Templates and Tools

The CIO's Role in Project Failure

2010-07-30T15:10:00.001+03:00

A discussion started on Linkedin a few weeks ago on the role of CIOs in Project Failure. The discussion was triggered by this article on eCameron, Inc. blog on the Internet.
The essence from the article is that CIOs are crucial in creating successful projects. Their comprehension of the business and its problems set the culture for IT.
I liked Nico Viergever's contribution to the discussion. Here is what Nico wrote. I have obtained permission from Nico to publish it here.

CIO's are a prerequisite for failing projects.

Underlying to local efficiencies and their ineffectiveness as described by ToC is the very popular functional organization. In this form an organization is organized by technical specialism’s, not by focus on customer needs and effectiveness. C-level functions are a direct symptom of a functional organization, focus completely on local efficiency and are therefore a direct threat for effectiveness.

Apart from that one should never confuse goal and means. IT is never a goal unless you are an IT supplier. So talk about business goals and how IT can (maybe) support the business goals with their tools. And realize there is really no place for a (internal) supplier to set the “goals”, like a CIO would do.

I think that this could not be told better.

Clay Shirky: How cognitive surplus will change the world

2010-07-30T11:46:00.000+03:00

Clay Shirky looks at "cognitive surplus" -- the shared, online work we do with our spare brain cycles. While we're busy editing Wikipedia, posting to Ushahidi (and yes, making LOLcats), we're building a better, more cooperative world.

Control Chain Group

2010-07-25T13:21:00.001+03:00

I am a founding member of CCG (Control Chain Group) a group of experts offering advice, support and products to manufacturing operations to assist company, supply chain, production, engineering and IT executives to set up their vision, strategy and tactics regarding manufacturing operations and information. We can assist Functional and IT managers and teams in charge of implementing the changes: project porfolio, architecture, design and realization.

Here is the the complete list of the CCG associates.

Language that sells by MICHAEL A. DALTON

2010-07-14T20:29:00.001+03:00

Υou may have the greatest new product or service in the world, but if you can’t get buyers’ attention and communicate in their language, you will struggle with accelerating new product development.

Michael Dalton, the author of a new book titled "Simplifying Innovation" gives four levels that marketing and sales must follow to effectively capture customers’ attention and lead them through the buying process. These are:

Strong Benefit
Unique Advantages
Features
Functions

Dalton insists : speak in the buyers language. He means by that that benefits might be at an executive or middle management level, but features and functions should be directed towards the users and other functional experts that will interact with the product.

In the discussion that takes place on Linkedin Guillermo Bill Cabiro added :

Sell top management based on improvement in Net Profit, ROI and/ or Cash Flow.

Sell Middle Management based on Delta in Sales Throughput, Inventory-Investment and/ or Operating Expense.

Sell Operational folks based on the technical product features / customer benefits. (eg. units/ hour, higher gloss, better adhesion, lower scrap, higher consistency, etc.)

The complete article is worth reading.

Peter Benson's presentation on ISO 8000 Data Quality

2010-07-11T18:11:00.000+03:00

See this presentation to understand how the ISO 8000 standard can address Data Quality

Quality levels and the notion of good enough

2010-07-10T13:29:00.001+03:00

What exactly do we mean by the word quality? Is quality subjective or objective?

We distinguish products and services from their quality and use a quality 5 steps scale:

Top Quality
High Quality
Middle Quality
Low Quality
Unacceptable Quality

Somewhere between steps 1 and 3 there is a point we qualify as good enough. Good enough is an objective term. Something that for me is good enough, may be not enough for some one else, or vice versa.

Even though a higher quality than good enough is achievable, can we say that it is useless?

Ενιαία Κωδικοποίηση Αναλεξικογράφηση Υλικών

2010-07-09T11:54:00.000+03:00

Κατεβάστε το άρθρο μου με τίτλο "Ενιαία Κωδικοποίηση Αναλεξικογράφηση Υλικών" το οποίο αναφέρεται πάνω στην Ποιότητα των Δεδομένων

Types of Constraints

2009-03-21T18:08:00.002+02:00

The theory of constraints is based on the existence of a constraint, so it is useful to delve into the nature of this core concept. A constraint is a resource that limits a company's total output. For example, the constraint may be a machine that can only produce a specified amount of a key component in a given time period, thereby keeping overall sales from expanding beyond the maximum capacity of that machine. The key determining question to ask in locating this type of constraint is – if we had more of it, could we generate more sales? Physical constraints of this type tend to be easy to locate within a company, because there is usually a large amount of work-in-process piled up in front of it, waiting to be processed.

The most common system constraint cannot be seen or touched – it is the operational policy. A policy is a rule that dictates how a system is operated. Examples of policies are batch sizing rules and resource utilization guidelines. For instance, a policy may state that a work station completely fill a pallet with work-in-process before sending it on the next work station, since this makes it more efficient for the materials handling staff to move inventory through the factory. The trouble is that the next work station may be the constrained resource, which has to halt operations while waiting for the pallet to be filled. In this case, the policy should have allowed a more continuous flow of inventory to the constrained resource, which means that much smaller batch sizes would have improved the utilization of the constrained resource.

Policy constraints are usually difficult to find and eliminate. Finding them is difficult because policies are not physical entities that can be readily observed; instead, they must be deduced from the operational flow of the production system. Eliminating them can be even more difficult, since they may be strongly supported by employees, who require considerable convincing before agreeing to change a policy that they may have used for years. Though there may be considerable resistance to a policy change, the actual fix can be extremely inexpensive. Once eliminated, a policy constraint can result in a larger degree of system improvement than the elimination of any physical constraint.

A concept impacting the presence of policy constraints is the paradigm constraint. This is a belief that causes employees to follow a policy constraint. A classic paradigm constraint is the belief that every work center must be run at full tilt in order to increase its efficiency, which is a teaching of traditional cost accounting theory. However, this paradigm can result in a policy constraint to create a bonus plan that rewards factory managers for running all equipment at as close to 100% capacity as possible. The result is an excessive investment in inventory, and the divergence of resources away from the constrained resource. Thus, a paradigm constraint can be a powerful roadblock to the elimination of a policy constraint.

Another constraint may be a raw material, for which there is not enough to ensure that all orders can be filled. This less common problem tends to arise during bursts of peak industry-wide sales, when materials suppliers are caught with insufficient production capacity to meet all demand (which means that the constraint has now shifted to the supplier!). This type of constraint will be immediately evident to the materials management staff, which cannot schedule jobs for release to the production area until sufficient materials are available.

Another possible constraint is the sales staff, for which there are not enough people to bring in all possible customer orders. This constraint is made evident by a large number of sales prospects at the top of the sales funnel or a large potential market size, but very few actual sales being generated.

A company may so improve its operations that its current capacity can handle all orders currently placed by customers. If so, the constraint has now shifted into the marketplace. The company must now use its higher capacity to offer better pricing deals or service levels to the market in order to increase its share of the market.

A company can also intentionally position a constraint on a specific resource. This happens when the capacity of a particular resource would be extremely expensive to increase, so managers prefer to focus their attention on maximizing the efficiency of the work center without actually adding capacity to it. It is also useful to avoid positioning the constraint on a resource that requires complex level of management, such as one where employee training or turnover levels are extremely high. Thus, the positioning of the constrained resource should be a management decision, rather than an accident.

Types of Capacity

2009-03-21T18:07:00.003+02:00

The total capacity at each work center is divided into three parts.

Productive capacity, which is that portion of the total work center capacity needed to process currently scheduled production.
Protective capacity, which is that additional portion of capacity that must be held in reserve to ensure that a sufficient quantity of parts can be manufactured to adequately feed the bottleneck operation.
Idle capacity is any remaining capacity. Only idle capacity can be eliminated from a work center.

If the capacity to be eliminated is protective capacity and not idle capacity, then the constrained resource will not have any inventory on which to work, and must shut down until its inventory inflow can be replenished. Thus, the reduction in capacity in order to cut costs may seem like a reasonable decision in the short term, until such time as a sufficiently large manufacturing problem results in a throughput drop precisely because of the missing capacity. Consequently, cost reduction must be exercised with great care in order to avoid capacity cutbacks.

Sayings by Famous People

2009-03-09T15:16:00.002+02:00

It is important that an aim never be defined in terms of activity or methods. It must always relate directly to how life is better for everyone… The aim of the system must be clear to everyone in the system.
W. Edwards Deming (1900 - 1993)

“Management of a system requires knowledge of the inter-relationships between all the sub-processes within the system and everybody that works in it”
W. Edwards Deming (1900 - 1993)

Neuton wrote «Natura valde simplex est et sibi consona» which means “Nature is exceedingly simple and harmonious with itself”

Systems almost always have the peculiarity that the characteristics of the whole cannot (not even in theory) be deduced from the most complete knowledge of the components, taken separately or in other partial combinations.
Ernst Mayr, Biologist 1904-2005
The Growth of Biological Thought

“Knowledge has value, intelligence has power.”
Professors Helen N. Rothberg and G. Scott Erickson
From Knowledge to Intelligence - Creating Competitive Advantage in the Next Economy
Elsevier Butterworth–Heinemann (2005)

“In the brain, thinking is doing.”
Alfred Einstein

"the cynic knows the cost of everything and the value of nothing."
Oscar Wilde

You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You must do the thing you think you cannot do.

- Eleanor Roosevelt

Systems Intelligence

2007-04-08T19:25:00.002+03:00

Systems Intelligence is a new discipline developed in 2002 by Raimo P. Hämäläinen and Esa Saarinen at the Systems Analysis Laboratory of the Helsinki University of Technology.

It is an extension of Systems Thinking which according to the developers Hämäläinen and Saarinen is only the beginning.

Unlike Systems Thinking Systems Intelligence:

is primarily outcome-oriented and not a descriptive effort only
involves driving and actively embracing change

Becomes a challenge for personal learning.

The theoretical understanding of Systems Thinking does not need to increase Systems Intelligence and can be summarized in the 5 levels model they developed :

5 Levels of SI for self-evaluation and measurement of SI

Seeing oneself in the System – Ability to see oneself and ones roles and behaviour in the system. Also through the eyes of other people and with different framings of the system. Systems thinking awareness.
Thinking about Systems Intelligence – Ability to envision and identify productive ways of behaviour for oneself in the system and understanding systemic possibilities.
Managing Systems Intelligence – Ability to personally excercise productive ways of behaviour in the system.
Sustaining Systems Intelligence – Ability to continue and foster systems intelligent behaviour in the long run .
Leadership with Systems Intelligence – Ability to initiate and create systems intelligent organizations

You can read more here

Investment Decisions - A Pragmatic Approach

2007-03-20T18:58:00.001+02:00

Nicos Leon
Dipl. Ing.
Business Consultant

The goal of every enterprise is to make profits through the delivery of goods and services to its customers. Management of the firm is responsible to choose the way this goal is implemented. A task which requires them to analyze the general macroeconomic, social conditions and the business environment in which the company they lead operates. To then design and craft a strategy that will ensure the successful journey of the company towards this Goal in the future. Within the framework of this strategy, Management must decide, plan and implement the necessary investments and choose the most appropriate competitive strategy for their companies.

The process starts with the feasibility study of the investment, which in the part dealing with the study of the market, determines the existence of the market for the product and revenues from this market. In the part of the study dealing with the necessary investment, the adequate equipment for the needed production capacity is determined, the relevant expenses are estimated and the feasibility of the investment is established.

The Notion of Value Added

Every company is a system of interconnected components; it is fed by raw materials and produces revenues. If we deduct the acquisition costs of the raw materials from the company revenues we obtain the value added that is produced by the company. This Value Added has to cover the transformation costs and the profit.

It’s this value added that will pay all the company running costs, the wages and the social charges of the personnel, the operating expenses of the company offices and factory, the costs of sales promotion, etc. All these fixed expenses exist no matter if the company is profitable or not. The remaining amount is what we call EBITDA (Earnings before Interests, Taxes, Depreciation and Amortization). EBITDA will cover the interest, the taxes and the replacement cost of the fixed assets. Once these fixed costs have been covered what remains is the Net Profit.
Management’s task to constantly create the necessary conditions for the maximization of this value. Maximization is reached through the achievement of lower purchase prices of the raw materials and through the achievement of higher selling prices of the products. These two parameters (raw materials purchase prices and products selling prices) depend on the negotiating abilities of Management and the company managers. If the rate of inflow of the value added is higher than outflow rate of the operational expenses, the company is profitable. The faster the company can generate this flow difference, the more profitable it is.

The Notion of Depreciation of the Investments
What’s wrong with current thinking?

The means of transforming raw materials into finished goods ready to be delivered to the customers are the company’s human resources and its equipment. The necessary capital for the acquisition of the equipment is either the company capital or long term loans or a mix of the two.

The acquisition cost of an asset having a life cycle longer than a year and participating in the revenue generation of the company, when it is put into operation, is capitalized. It participates in the cost formation of the products through the depreciation of the investment. The tax and investment laws of every country, based on the principle of “accrual accounting”, determine the ways that are allowed to allocate the asset’s total cost throughout the years of useful lifetime of the assets, depending of the nature of the asset. Every company by applying the law allocates the acquisition costs of its productive assets choosing the standard allocation method, either by equal parts allocation (linear depreciation) or unequal (declining depreciation).In such a way the company results – and consequently its taxable revenues – depend on the opted depreciation method.

But the scope of an investment is to generate quicker more profits for the company. By booking on annual revenues the corresponding portion of depreciation of the asset every year, the effectiveness of the investment, its contribution to the profitability of the company, is not taken into account. The depreciation figure is thus arbitrary. Two investments of the same amount generating different revenue rates are considered equivalent.

In order to overcome this inability of traditional cost accounting, the CFOs apply various methods at the stage of taking investment decisions. The method more often used is the Net Present Value method and sometimes the method of investment payback. These methods contain some inherent limitations which I will explain below.

The Net Present Value Method

According to this method all future cash flows are brought to their present value by the application of the following formula:

Whereas Κ1, Κ2, Κn are the future cash flows, r is the discounting rate and n is time.
This method takes into account the fact that interest rates and inflation do exist. Even though the method is more accurate than the traditional depreciation method, it has the disadvantage that it doesn’t take into account the level of the amounts and considers that merely by applying a coefficient on the future cash flows independently of their level the problem is solved.
Every organization has a different credit capacity and it is not enough that they accept to pay any interest rate for a credit to be approved. Even if he accepts a higher spread, the amounts it is able to raise depend on their credit limit.

The payback method

According to this method the time duration of retrieval of the capital invested is examined. This method as the previous one has the limitation that it doesn’t take into account the money availability. Two alternative investments of different amount but with the same payback time are considered equivalent. The investment alternatives even in big companies are always more than the available funds. Another limitation of the method is the fact that the cash flows occurring after the payback time are not taken into account. But it is clear that the moment the invested amounts are returned back, the company has invested the amount till that moment without any return.

Taking the proper investment decisions

It is clear that if we don’t take into account both the level of the amounts involved and time at the same time, we will not be in position to take the proper decision. We need a measure that combines time and euro amount. This measure is euro-days (money X days) or the area of the diagram money – time. The flush method described hereunder takes into account both parameters and in my opinion it is more complete.

The Flush1 Method

This method is mainly an amelioration of the payback method as it examines cash flows during the whole life time of the investment. It is evident that the money used for the investment is recuperated through the throughput (difference between sales price and raw materials cost used for its production) of the products produced by the investment and sold to customers, minus the operating expenses during the period examined.

Till the moment of recuperation of all moneys that have been used for the investment, the investment is in the risk area K1.

In other words, till the moment the amounts used for the investment have not been balanced by net revenues realized (moment T1), the invested funds have not brought any returns, they are as if they were in interest free deposit.

It’s only when the investment enters the opportunity area K2 that the investment starts to be really exploited and the returns are collected.

It’s only at the moment T2, when the risk area equals the opportunity area (K1= K2), that we can say that the investment has completely balanced the investment risk. This point is called flush point .

It’s after the flush point that all investment risks have been reversed and the investment is fully successful.

There is an analogy of this in “statics” with the calculation of moments of a force in relation to a point. Moment = Force X distance between the point the force is applied and the reference point. Making the analogy of the inflows and outflows of cash as forces of opposite sign and the time durations as distances, we are searching the point where all positive and negative moments are equal. It’s only when the area time-money of the two investments are equal that the investments may be considered to be equivalent.

Monitoring the investment

Based on the principles of accrual accounting the company credits its results with the corresponding depreciation amount. This amount is taken into account for the calculation of the cost of the products sold. At the end of the period this amount is allocated to the products sold.
During the year the company may have to decide whether or not to accept or refuse an order. Or will have to prepare an offer for a quotation and adds during the calculation an amount for depreciation. As explained in the beginning of this text the depreciation as per GAAP is useful only for the calculation of the taxable revenue of the company and not for cost calculation. The true selling price of any product is determined by the market. The marginal cost of the product is the amount the company has to bear if it accepts the order.

The difference between the selling price and the marginal cost (is this the same as the totally variable cost?) is the throughput; the sum of the throughputs of all products sold during the period is the amount that will cover the periods’ operational expenses, and the remainder will be used for the return of the investment cost (if the investment is in the K1 zone) or will be the opportunity revenue (if the investment is in the zone K2) or the net profit (if the investment has passed the point T2 or flush point)

It is thus important that the organization knows in which area and what moment in the life cycle the strategic asset is (Risk zone, opportunity zone, or zone after flush point) in order to be in position to evaluate correctly the real production cost and take the adequate decisions regarding prices of its products ( offers etc.)

1 The term flush was coined by Eli Goldratt in his book "Critical Chain" North River Press 1997