Quality and Innovation

Point 1: Transparency in business and in government means that you know what’s going on (or can find out). You have access to information about the organization’s processes and results, it is clearly presented, and it is understandable. It is difficult, if not impossible, to understand accountability when transparency does not exist. In the emerging ISO 26000 standard for social responsibility, both transparency and accountability are important.

Point 2: In data management, we struggle with the concept of provenance: how to track what happened to your data at every step of its journey – from being collected, to being operated upon by a host of processes and algorithms, to being evaluated, analyzed and visualized.

McClatchy reports today that the U.S. government is having problems with both. In “Where did that bank bailout go? Watchdogs aren’t entirely sure”, Chris Adams describes the murkiness of the issue:

Although hundreds of well-trained eyes are watching over the $700 billion that Congress last year decided to spend bailing out the nation’s financial sector, it’s still difficult to answer some of the most basic questions about where the money went.

Despite a new oversight panel, a new special inspector general, the existing Government Accountability Office and eight other inspectors general, those charged with minding the store say they don’t have all the weapons they need. Ten months into the Troubled Asset Relief Program, some members of Congress say that some oversight of bailout dollars has been so lacking that it’s essentially worthless.

Bottom line: achieving transparency requires successfully managing provenance. But in the case of the bailout, are transparency problems an information technology issue, or a policy issue?

AIG is falling. Bailouts are flying. All of the rules of business have changed, and the seismic shift is both electrifying and frightening. But there are opportunities to be embraced, and many of them are summed up in this article entitled “Why Small Companies Will Win in This Economy“. Here is my favorite part, a veritable mantra for the 2010’s:

Small is the new big. Sustainable is the new growth. Trust is the new competitive advantage.

Thanks to Betsey Merkel (Twitter: @betseymerkel) who initially Tweeted this. And thanks to Valdis Krebs (Twitter: @valdiskrebs) without whom I wouldn’t have seen Betsey’s insightful retweets and started following her too.

Andrew Grove’s political commentary today in the Washington Post (“Mr. President, Time to Rein in the Chaos”) was interesting to me not because of the opinions presented, but because of his unorthodox suggestion: successful change management can emerge when leaders deliberately allow pain, then rescue the masses once the pain has become too unbearable:

I have found that to succeed, an organization must travel through two phases: first, a period of chaotic experimentation in which intense discussion is allowed, even encouraged, by those in charge. In time, when the chaos becomes unbearable, the leadership reins in chaos with a firm hand. The first phase serves to expose the needs and options, the potential and pitfalls. The organization and its leaders learn a lot going through this phase. But frustration also builds, and eventually the cry is heard: Make a decision — any decision — but make it now. The time comes for the leadership to end the chaos and commit to a path.

We have gone through months of chaos experimenting with ways to introduce stability in our financial system. The goals were to allow the financial institutions to do their jobs and to develop confidence in them. I believe by now, the people are eager for the administration to rein in chaos. But this is not happening.

Would you, as a manager, take this kind of approach if you knew it would effect the change you wanted?

The ethical implications of this strategy are remarkable to me. First, put yourself in the frame of mind where you’re thinking about organizational change management – adopting a new software package, or reorganizing the hierarchy. Change like this is tough, and often results in mental and emotional pain as people adjust to the new state of the workplace – not physical pain, but definitely pain in the sense of its official definition. But is it appropriate to allow this pain in order to achieve benefits – both for those who have “suffered” and the organization as a whole?

I have no answers to offer – but think that this dilemma might be illuminated further by understanding the ethical standards for pain management and research that have already been explored by the medical community.

According to some researchers, it’s the end of the world as we know it – sometime this century, in fact. Economists and policy researchers have actually envisioned it coming for about three centuries, though.

The most recent tap on this subject came on March 7, 2009, when journalist and Hot, Flat, and Crowded author Thomas L. Friedman published an Op-Ed in the Washington Post, entitled “Is the Inflection Near?” He describes how the economic, financial and political systems that we have established in the world – particularly in the west – are inherently unsustainable, and that in order to achieve a truly green world, our fundamental systems for living life must shift:

Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: “No more.”

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese …

We can’t do this anymore.

What would you think if I told you that this was actually not a new idea, and that the notions Friedman presents were determined by a simulation done over thirty-five years ago? Furthermore, what if I let you in on the fact that people have been thinking about this conundrum since the late 1700’s? It may sound outlandish, but in this case, truth is stranger than fiction.

The simulation that I refer to was done in 1972, with a model called World3 which was coded in the object-oriented Modelica environment. It’s the subject of the Club of Rome commissioned study called “The Limits to Growth” (full text is here). Although the model has received criticism for some of its assumptions, a redaction in 2002 upheld many of the outcomes of the model. In 2009, Dr. Dennis L. Meadows (who directed this research) was awarded the 25th Japan Prize from The Science and Technology Foundation of Japan. Recall that the Japanese were the ones who initially recognized Dr. W. Edwards Deming for his contributions to revitalizing the economy – decades before the Americans embraced Deming’s teachings – and spawned the quality revolution in U.S. business in the late 1970’s and 1980’s that has embossed the landscape of how we do business today. From the Japan Prize announcement:

Dr. Dennis L. Meadows served as Research Director for the project on “The Limits to Growth,” for the Club of Rome in 1972. Employing a system simulation model called “World3,” his report demonstrated that if certain limiting factors of the earth’s physical capacity – such as resources, the environment, and land – are not recognized, mankind will soon find itself in a dangerous situation. The conflict between the limited capacity of the earth and the expansion of the population accompanied by economic growth could lead to general societal collapse. The report said that to avert this outcome, it is necessary that the goals of zero population growth and zero expansion in use of materials be attained as soon as possible. The report had an enormous impact on a world that had continued to grow both economically and in population since World War II.

We also have a rich literature dating back centuries that has studied the relationships between population, environment and technology. In the 1700’s, English economist Thomas Robert Malthus studied these relationships in terms of the projected effects of uncontrolled population growth. “Before Malthus, populations were considered to be an asset. After Malthus, the concept of land acquisition to support “future large populations” became a motivating factor for war.” (citation) The 20th century Boserupian Theory of Ester Boserup, in contrast, suggests that advances in technology will drive the capacity of the world to support population. Researchers like Steinmann & Komlos (1988) have simulated the interplay between both paradigms over time and suggest that there is a cyclical dominance. (I note that references to Malthus and Boserup, let alone Meadows’ World3 model, are rarely on the lips of policymakers.)

In my opinion, it is not climate change we should be worried about per se, but the social, economic and global political system that drives human interactions with each other and with the environment. Climate change may be a symptom, but it is just a tracer for the attitudes of unbounded material growth that are contributing to the effects (if you want to learn about climate change and policy, Prometheus is a good place to start – my point is not to argue the merits of “is it” or “isn’t it” happening because others including Pielke, Jr. do that very well). Regarding climate change, we need to decode what the data is trying to tell us about how we’ve structured our large-scale systems of interaction with one another – rather than merely trying to control our personal “carbon footprints” or recycle more (though these may be important ingredients in the solution).

There is nothing new under the sun. Only today, the forces of production, consumption and population have metamorphosed into a crisis of sustainability – a “perfect storm” to test our ability to live and work in the limit case.

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Steinmann, Gunter & Komlos, John (1988). Population growth and economic development in the very long run: a simulation model of three revolutions. Mathematical Social Sciences, Vol. 16, No. 1, Aug 1988. 49-63 pp. Amsterdam, Netherlands.

A couple days ago, Sonia Simone presented an article entitled “Four Old-School Reasons Why You Can Thrive in this Recession”. The general philosophy of her insights is straightforward:

It’s impossible to really see massive change when we’re still in the middle of it. But there are a handful of things you can bank on. One of them is that human nature doesn’t fundamentally change, even though the environment can change radically… So it might be time to think about the ancient traits that have helped entrepreneurs since the dawn of history, and how they relate to the emerging 21st-century economy.

She presents four notions: self-reliance, great ideas, “the village is your customer”, and “it’s in your DNA”. The one I want to focus on is #3 (if you want to read about the others, please visit the full article). When the village is your customer, Simone notes, quality becomes the focal element of the production and customer service processes. Hundreds of years ago, and into the early decades of the 20th century, people knew their neighbors in the community who made the products and provided the services. Personal relationships would form between you and your baker, your pharmacist, your doctor, your grocer, and so on. If your grocer sold you rotten food, for example, he would violate a trust relationship that you had established over a long period of time. Not only would breaking this trust hurt his business, but it might hurt his feelings too if you shared your discontent with your neighbors or gave him a dirty look while walking down the street.

But times changed remarkably. By the late 20th century, production, consumption and service had all become anonymous – the guy who services your car is probably not someone you know personally, nor is your mailman a personal friend. As a result, less personal impetus to provide high quality translated into an organizational imperative to deliver high quality. Without the driving force from within to provide excellent products and services, the company would naturally become the enforcer of high quality. (And without this enforcement, well, it would be a roll of the dice whether you got high quality products and services or not.)

Now fast forward to 2009 and the Web 2.0 world:

the village is back. If we blow it, customers publicly rap on our window (with social media, blogs or Twitter) and give us a piece of their mind.

Once again, our reputation and our products are one and the same. What we create doesn’t have to be perfect, but it does have to show that we give a damn.

The inconvenient part is that the village isn’t stuck with you. If your baguette isn’t great, your customer can FedEx something from an artisanal bakery in Napa or Madison or Boca Raton.

The cool part, though, is that if you make something handmade (even if it’s delivered in pixels), personal, and/or magnificently useful, your village can and will find you. Whether you make homespun yarn or an interactive course on how to start a dog-walking business, your product can find its own profitable village of happy customers.

On a related note, my next door neighbor is a dentist. She’s been trying to get me to sign up as a patient at her office for a while, but I’m nervous (not because I don’t like or trust her,which I do, but because she’s a dentist). Every time she asks me when I’m going to make an appointment, and I nervously shirk, her response is usually pretty consistent: “Do you really think I’m going to hurt you, knowing that I have to look at you every day across the yard?”

The personal relationship is a driver for providing high quality. How can we make personal relationships a component of a quality-driven strategy?

Today’s Washington Post includes an article on “How We Can Restore Confidence” in our economy. Confidence, after all, is one of the energetic drivers of the economy – without it, spending grinds to a halt, and the delicate equilibrium of economic flow is jeopardized. The author, Charles T. Munger, reflects on the reasons for the meltdown:

Many contributors to our over-the-top boom, which led to the gross bust, are known. They include insufficient controls over morality and prudence in banks and investment banks; undesirable conduct among investment banks; greatly expanded financial leverage, aided by direct or implied use of government credit; and extreme excess, sometimes amounting to fraud, in the promotion of consumer credit. Unsound accounting was widespread.

How did we, as a society, collectively allow these things to happen? Because many people were motivated by the huge profit potentials associated with real estate speculation, new financial instruments, and expanded financial leverage. This motivation towards self-interest, according to sociotechnical researcher Brian Whitworth of Massey University in New Zealand, tends to destabilize society by breaking down institutions and other systems intended to promote social order.In “A Social Environment Model of Socio-Technical Performance” he explains why [with my annotations in brackets]:

“While traditional technology like word processing supports individual competence, socio-technical systems support some sort of community synergy and have defenses against anti-social defection” [that is, acting against the interests of the group in a detrimental way (e.g. violation of human dignity, theft, cheating)]. “The social environment model suggests that people in society recognize both [social good and self-interest], and [tend to]combine them by anchoring one and applying the other. Anchoring social good then applying self-interest explains the highly profitable market trade systems of the last century, where individuals seek profit under social good laws. However contented individuals could anchor individual good, and then seek community benefit [through their positive, pro-social, individual contributions; Whitworth suggests that systems like online troubleshooting boards exemplify this approach because individuals have no incentive other than "good citizenship" to help others]. The latter is proposed to underlie the surprising successes of socio-technical systems.“

“Anchoring social good” is an intended outcome of public policy, which seeks to curb acts against society by instituting punishments. “Anchoring individual good” and seeking to apply one’s personal motivations for the greater good is a defining characteristic of successful socio-technical systems (like Amazon and eBay). The latter is aided by effective community policing where people take it upon themselves to enforce the rules of “good citizenship”.

This leads me to ask: what’s the socio-technically inspired public policy equivalent that might help us rectify the global financial crisis? I don’t have any good answers, but I think this research provides an interesting backdrop to analyze the situation against.

Just-In-Time (JIT) practices are a cornerstone of the fast-paced, 21st century globalized economy. But as the October 2008 financial meltdown has so starkly indicated, when just a few of the assumptions on which a critical system is based change, all hell can break loose. What effect could the economic crisis have on businesses that rely on JIT?

There are several scholars who have studied JIT in depth – the pros, the cons, and of course the implementation details. But one recent article stands out most, to me, as I try to gauge how the seismic shift might impact business. In 2006, Tony Polito (an Associate Professor in the Department of Marketing and Supply Chain Management at East Carolina University) published an article in the Journal of the American Academy of Business detailing the ubiquity and fragility of Just-In-Time practices. If you’re involved in a business that uses or depends on JIT, you should be aware of his conclusions – forewarned is forearmed! I’ll summarize them here to save you some time, so you can start thinking about the structural health and viability of your own business processes.

First of all, it’s important to recognize that JIT is indeed a cornerstone of business practice in the U.S. and abroad. Polito notes a 2001 survey in which 92% of manufacturers believed that JIT was critical, and a 1990 study showing that 98% of customers at that time expected “JIT treatment”. He remarks that “global corporations are mistakenly reliant on extensive supply chains that are disastrously under-buffered [by sufficient excess inventory].”

Polito calls out five “major constraints” on the JIT process:

• Customer-Driven and Economic Conditions: “JIT savings are based on the implicit assumption that additional inventory is always available for quick delivery at the same price as old inventories.” Effective JIT also depends on capital availability, and relative stability of customer demand. In a challenged economic environment, capital is not as readily available to companies and consumers alike, and customer demand wanes.
• Logistics: If transportation fails, so will your supply chain. This can happen not only as a result of economic turmoil, but also due to rising energy costs, labor disruptions like strikes, and catastrophic weather events like hurricanes and floods. The proposed solution is, again, to increase buffer stock.
• Organizational Culture & Conditions: Worker-based collective decision making, trust, and decentralized control are also noted as essential ingredients for JIT. If the people doing the work don’t have the freedom to improve their own processes, the health of the JIT-based supply chain will suffer. Trust across international boundaries is also critical; foreign suppliers or recipients of product may unexpectedly change their policies to reduce risk, especially if credit is an ingredient in the business relationship.
• Intractable Accounting & Finance Practices: After describing some specific roadblocks that disparate financial systems between supply chain partners can present, and calling out limitations based on financial accounting methods themselves, Polito recommends that improvement of processes prior to improvement of measures may help.
• Small Supplier Difficulties: One of the criticisms of JIT is that it silently offloads costs from larger companies onto the smaller partners, and many small suppliers have implemented “JIT premiums” to offset this effect. Relaxing JIT requirements could have a positive effect on these members of your supply chain, which could also reduce your costs, so examining the pressures on your smaller suppliers is warranted in an economic downturn. There might be hidden opportunities for both sides.

What does this mean for managers? Among other things, increase long lead-time inventories, compare the costs of stockouts with the benefits of not having stockouts, re-examine the risks that your upstream and downstream partners may perceive, and assess the resilience of your smaller suppliers within an economic crisis. You might also think about resetting expectations with your customers regarding how quickly you can deliver.

Polito’s article is available on his web site at http://www.tonypolito.com/wri_jit5.pdf – I strongly encourage everyone to give it a read as it provides far more detail, and illuminating examples that are not presented here in my summary.

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Polito, T. & Watson, K. (2006). Just-in-time under fire: the five major constraints upon JIT practices. Journal of the American Academy of Business, Cambridge. 9(1), March 2006, 8-13.