Strategic Performance Management: Achieving Long-term Competitive Advantage through Performance Excellence (Management for Professionals) 3030987248, 9783030987244

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Management for Professionals

Marc Helmold

Strategic Performance Management Achieving Long-term Competitive Advantage through Performance Excellence

Management for Professionals

More information about this series at https://link.springer.com/bookseries/10101

Marc Helmold

Strategic Performance Management Achieving Long-term Competitive Advantage through Performance Excellence

Marc Helmold IU University of Applied Sciences Berlin, Germany

ISSN 2192-8096     ISSN 2192-810X (electronic) Management for Professionals ISBN 978-3-030-98724-4    ISBN 978-3-030-98725-1 (eBook) https://doi.org/10.1007/978-3-030-98725-1 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

If you’re competitor-focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering. Jeff Bezos

Acknowledgements

Fierce competition in many industries, megatrends, the COVID-19 pandemic, the ongoing globalization, and the permanent liberalization of markets have changed the face of economies and businesses drastically. Companies, which want to survive in this dynamic and hostile environment, must establish suitable and long-term strategies and performance criteria. Strategic management provides overall direction to an enterprise and involves specifying the organization’s objectives, developing policies and plans to achieve those objectives, and then allocating resources to implement the plans successfully. This book provides a holistic and practical approach to strategic and performance management. It combines all functions of the value chain and contains best practices in performance. It explains comprehensively how these new paradigms enable companies to concentrate on value-adding activities and processes to achieve a long-term sustainable and competitive advantage. The book contains a variety of best practices, industry examples, and case studies. Focusing on best-in-class examples, the book offers the ideal guide for any enterprise to achieve a competitive advantage across all business functions focusing on value-adding activities. The book is dedicated to Takako, Ayumi, and Manami. Berlin 2022 Marc Helmold

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 erformance Management as Part of the Corporate Strategy��������������   1 P 1.1 Definition of Performance Management��������������������������������������������   1 1.2 PM Objectives������������������������������������������������������������������������������������   2 1.3 PM as Part of the Strategy Over the Entire Value Chain��������������������   3 1.3.1 Corporate Strategy������������������������������������������������������������������   4 1.3.2 Business Strategy��������������������������������������������������������������������   4 1.3.3 Functional Strategy ����������������������������������������������������������������   5 1.3.4 Alignment of Strategies����������������������������������������������������������   5 1.4 Strategic Triangle��������������������������������������������������������������������������������   6 1.5 Strategic Analysis��������������������������������������������������������������������������������   6 1.5.1 Analysing Important Factors��������������������������������������������������   6 1.5.2 Analysing the Environment����������������������������������������������������   8 1.5.3 Analysing the Industry������������������������������������������������������������   8 1.5.4 Analysing the Strengths and Weaknesses of the Own Enterprise��������������������������������������������������������������������������������   9 1.5.5 Analysing the Core Competencies������������������������������������������  10 1.6 Strategic Choice����������������������������������������������������������������������������������  10 1.6.1 Generic Strategies ������������������������������������������������������������������  10 1.6.2 Boston Consulting Group Matrix (BCG Matrix)��������������������  11 1.6.3 Ansoff Matrix��������������������������������������������������������������������������  13 1.6.4 Blue and Red Ocean Strategies����������������������������������������������  16 1.7 Strategic Implementation��������������������������������������������������������������������  16 1.7.1 Assessment of Suitability, Acceptability, and Feasibility ������  16 1.7.2 Suitability��������������������������������������������������������������������������������  17 1.7.3 Acceptability ��������������������������������������������������������������������������  18 1.7.4 Feasibility��������������������������������������������������������������������������������  18 1.8 Strategic Pyramid��������������������������������������������������������������������������������  19 1.8.1 Mission and Vision������������������������������������������������������������������  19 1.8.2 Qualitative and Quantitative Lean Goals and Objectives ������  20 1.8.3 Core Competencies ����������������������������������������������������������������  20 1.8.4 Strategies��������������������������������������������������������������������������������  20 1.8.5 Strategic Architecture��������������������������������������������������������������  20 1.8.6 Control and Execution������������������������������������������������������������  21

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1.9 Core Values ����������������������������������������������������������������������������������������  21 1.9.1 Strategies Must Focus on Value Creation ������������������������������  21 1.9.2 Case Study: Siemens Strategy������������������������������������������������  22 References����������������������������������������������������������������������������������������������������  22 2

 erformance in Procurement and Supply Management������������������������  25 P 2.1 Procurement����������������������������������������������������������������������������������������  25 2.2 Supply Side ����������������������������������������������������������������������������������������  25 2.3 History of Supply Management and Procurement������������������������������  29 2.4 Procurement and Supply Management Objectives ����������������������������  29 2.5 Supply Management Process��������������������������������������������������������������  30 2.5.1 Six Phases in Procurement and Supply Management������������  30 2.5.2 Supplier Strategy��������������������������������������������������������������������  32 2.5.3 ABC Article����������������������������������������������������������������������������  38 2.5.4 Supplier Selection ������������������������������������������������������������������  40 2.5.5 Supplier Evaluation����������������������������������������������������������������  43 2.5.6 Supplier Development������������������������������������������������������������  47 2.5.7 Supplier Integration����������������������������������������������������������������  49 2.5.8 Supplier Controlling ��������������������������������������������������������������  51 2.6 Control via Digital Supplier Dashboards and Cockpits����������������������  53 2.7 Case Study: Apple’s Outsourcing Strategy ����������������������������������������  54 References����������������������������������������������������������������������������������������������������  55

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 erformance Management in Operations Management������������������������  57 P 3.1 Performance Management in Operations Management and Production ������������������������������������������������������������������������������������������  57 3.2 History of Operations Management����������������������������������������������������  58 3.3 Elements of Operations Management 4.0������������������������������������������   59 3.3.1 Virtual Factory������������������������������������������������������������������������  59 3.3.2 Digital Value-Chain Integration����������������������������������������������  61 3.3.3 Lean Simulations��������������������������������������������������������������������  61 3.3.4 System Integration������������������������������������������������������������������  61 3.3.5 Internet of Things��������������������������������������������������������������������  61 3.3.6 Cybersecurity��������������������������������������������������������������������������  61 3.3.7 Cloud Computing��������������������������������������������������������������������  61 3.3.8 Additive Manufacturing����������������������������������������������������������  62 3.3.9 Augmented Reality ����������������������������������������������������������������  62 3.3.10 Big Data����������������������������������������������������������������������������������  62 3.4 Principles of Operations Management 4.0������������������������������������������   62 3.4.1 Digital Synchronization of Networks ������������������������������������  62 3.4.2 7R Principle����������������������������������������������������������������������������  63 3.4.3 Gemba, Gembutsu, and Genchi: Right Place of Happening��  64 3.4.4 Muda, Muri, Mura������������������������������������������������������������������  65 3.4.5 Heijunka����������������������������������������������������������������������������������  66 3.4.6 Poka-Yoke ������������������������������������������������������������������������������  67

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3.4.7 Jidoka��������������������������������������������������������������������������������������  67 3.4.8 Chaku Chaku Line������������������������������������������������������������������  67 3.5 Case Study: Mazda Operations Management Strategy����������������������  68 References����������������������������������������������������������������������������������������������������  70 4

 trategic Management Tools and Excellence Models ����������������������������  71 S 4.1 Balanced Scorecard (BSC) ����������������������������������������������������������������  71 4.1.1 Better Strategic Planning��������������������������������������������������������  74 4.1.2 Improved Strategy Communication and Execution����������������  75 4.1.3 Better Alignment of Projects and Initiatives ��������������������������  75 4.1.4 Better Management Information��������������������������������������������  75 4.1.5 Improved Performance Reporting������������������������������������������  75 4.1.6 Better Organizational Alignment��������������������������������������������  75 4.1.7 Better Process Alignment��������������������������������������������������������  76 4.2 European Foundation of Quality Management (EFQM)��������������������  76 4.2.1 Concept of the EFQM Excellence Model������������������������������  76 4.2.2 Continuous Process����������������������������������������������������������������  77 4.2.3 Self-Assessment����������������������������������������������������������������������  78 4.2.4 Application of the EFQM Excellence Model ������������������������  78 4.3 Baldrige Excellence Model����������������������������������������������������������������  78 4.4 Business PM Improvement Resource Planning (BPIR) ��������������������  79 4.5 Performance Management to Excellence Model (P2ME)������������������  79 4.6 Case Study: EFQM Model at BMW��������������������������������������������������  80 References����������������������������������������������������������������������������������������������������  81

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 trategic Management Objectives, KPI, and OKR��������������������������������  83 S 5.1 The Performance Management Cycle������������������������������������������������  83 5.2 Performance Excellence����������������������������������������������������������������������  85 5.3 Key Performance Indicators (KPIs)����������������������������������������������������  87 5.4 Objective Key Results (OKRs) ����������������������������������������������������������  87 5.5 Case Study: Microsoft’s Strategy and Objectives������������������������������  88 References����������������������������������������������������������������������������������������������������  92

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 roblem-Solving and Performance Management Tools ������������������������  93 P 6.1 Introduction to Problem-Solving��������������������������������������������������������  93 6.2 A3 Method������������������������������������������������������������������������������������������  93 6.3 8D Process������������������������������������������������������������������������������������������  96 6.4 Kepner-Tregoe������������������������������������������������������������������������������������  97 6.5 TRIZ����������������������������������������������������������������������������������������������������  99 6.6 Plan-Do-Check-Act (PDCA)�������������������������������������������������������������� 102 6.7 Six Sigma�������������������������������������������������������������������������������������������� 102 6.8 Value Stream Mapping (VSM) ���������������������������������������������������������� 104 6.9 RPR Method��������������������������������������������������������������������������������������� 104 6.10 Brainstorming ������������������������������������������������������������������������������������ 105 6.11 Mind Mapping������������������������������������������������������������������������������������ 105 6.12 Design Thinking���������������������������������������������������������������������������������� 105

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6.12.1 The Concept of Design Thinking�������������������������������������������� 105 6.12.2 Understanding ������������������������������������������������������������������������ 106 6.12.3 Observing�������������������������������������������������������������������������������� 106 6.12.4 Defining a Point of View�������������������������������������������������������� 106 6.12.5 Finding Ideas�������������������������������������������������������������������������� 106 6.12.6 Prototyping������������������������������������������������������������������������������ 107 6.12.7 Testing������������������������������������������������������������������������������������ 107 6.13 Case Study: Problem-Solving with Kepner-Tregoe at Bayer AG ������ 107 References���������������������������������������������������������������������������������������������������� 108 7

 erformance Management in Sales���������������������������������������������������������� 109 P 7.1 Definition of Sales Management�������������������������������������������������������� 109 7.2 Sales Management Process ���������������������������������������������������������������� 109 7.2.1 Introduction to the Sales Management Process���������������������� 109 7.3 Sales Strategy�������������������������������������������������������������������������������������� 111 7.4 Sales Operations���������������������������������������������������������������������������������� 111 7.5 Sales Organization������������������������������������������������������������������������������ 112 7.6 Sales Technology�������������������������������������������������������������������������������� 112 7.7 Sales Incentives���������������������������������������������������������������������������������� 113 7.8 Sales Performance������������������������������������������������������������������������������ 114 7.9 Benefits of Structured Sales Management������������������������������������������ 115 7.10 Sales Funnel���������������������������������������������������������������������������������������� 115 7.10.1 Purpose of the Sales Funnel���������������������������������������������������� 115 7.10.2 Awareness ������������������������������������������������������������������������������ 115 7.10.3 Interest������������������������������������������������������������������������������������ 116 7.10.4 Consideration�������������������������������������������������������������������������� 116 7.10.5 Intent �������������������������������������������������������������������������������������� 116 7.10.6 Evaluation ������������������������������������������������������������������������������ 117 7.10.7 Purchase���������������������������������������������������������������������������������� 117 7.11 Case Study: Marketing and Sales Strategy in Porsche ���������������������� 117 7.11.1 Introduction of Porsche���������������������������������������������������������� 117 7.11.2 Porsche Marketing Mix���������������������������������������������������������� 118 7.11.3 Porsche Marketing Strategy���������������������������������������������������� 119 References���������������������������������������������������������������������������������������������������� 121

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 conomic Pricing, 3C Pricing, and Cost Estimation Concepts ������������ 123 E 8.1 Economic Pricing Model�������������������������������������������������������������������� 123 8.1.1 Introduction: Supply and Demand������������������������������������������ 123 8.1.2 Understanding Supply and Demand �������������������������������������� 124 8.1.3 Demand ���������������������������������������������������������������������������������� 124 8.1.4 Supply ������������������������������������������������������������������������������������ 125 8.1.5 Supply and Demand Curves���������������������������������������������������� 125 8.1.6 Shifts Versus Movements�������������������������������������������������������� 125 8.1.7 Equilibrium Price�������������������������������������������������������������������� 126 8.1.8 Impacts on Supply and Demand �������������������������������������������� 126

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8.2 3C Pricing Model�������������������������������������������������������������������������������� 127 8.2.1 Introduction to the 3C Pricing Model ������������������������������������ 127 8.2.2 Customer �������������������������������������������������������������������������������� 128 8.2.3 Competitors���������������������������������������������������������������������������� 128 8.2.4 Costs���������������������������������������������������������������������������������������� 129 8.3 Cost-Plus Pricing�������������������������������������������������������������������������������� 129 8.4 Cost Estimation���������������������������������������������������������������������������������� 131 8.5 Case Study: Product Strategy and Premium Pricing of Mercedes������ 132 8.5.1 Mercedes as Luxury Car Maker���������������������������������������������� 132 8.5.2 Premium Pricing of Mercedes������������������������������������������������ 133 References���������������������������������������������������������������������������������������������������� 133 9

 udits and Quality Management Systems (QMS)���������������������������������� 135 A 9.1 Quality Management System (QMS)�������������������������������������������������� 135 9.2 Audits�������������������������������������������������������������������������������������������������� 136 9.2.1 Audit Types ���������������������������������������������������������������������������� 136 9.2.2 Quality Management Systems (QMS)������������������������������������ 137 9.3 Case Study: 5S Audits in Berliner-­Kindl-Schultheiss Brewery���������� 138 References���������������������������������������������������������������������������������������������������� 139

10 B  usiness Transformation and Project Management������������������������������ 141 10.1 Transformation and Adaptability of Strategies and Tools���������������� 141 10.2 Business Transformation Strategies�������������������������������������������������� 142 10.3 Project Management Strategies�������������������������������������������������������� 144 10.4 Project Management Criteria������������������������������������������������������������ 147 10.4.1 Project Management Success Factors���������������������������������� 147 10.4.2 Integration Management ������������������������������������������������������ 147 10.4.3 Performance Management���������������������������������������������������� 147 10.4.4 Time Management���������������������������������������������������������������� 147 10.4.5 Cost Management ���������������������������������������������������������������� 148 10.4.6 Quality Management������������������������������������������������������������ 148 10.4.7 People and Human Management������������������������������������������ 148 10.4.8 Communication Management���������������������������������������������� 148 10.4.9 Risk Prevention Management ���������������������������������������������� 148 10.4.10 Procurement Management���������������������������������������������������� 148 10.5 Recommendations for Executing Project Management�������������������� 149 10.6 Case Study: CRRC Project Management in the United States �������� 149 References���������������������������������������������������������������������������������������������������� 150 11 P  erformance in Finance Management ���������������������������������������������������� 151 11.1 Financial Crisis Prevention and Crisis Symptoms���������������������������� 151 11.2 Restructuring and Financial Restructuring �������������������������������������� 153 11.2.1 Definition of Restructuring �������������������������������������������������� 153 11.2.2 Strategic Restructuring���������������������������������������������������������� 154 11.2.3 Structural of Restructuring���������������������������������������������������� 155 11.3 Financial Stability Assessment Tools������������������������������������������������ 156

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11.3.1 Creditreform�������������������������������������������������������������������������� 156 11.3.2 Creditsafe������������������������������������������������������������������������������ 156 11.3.3 VDA Rating�������������������������������������������������������������������������� 156 11.3.4 Dun & Bradstreet (D&B)������������������������������������������������������ 157 11.3.5 RapidRatings������������������������������������������������������������������������ 157 11.4 Case Study: Insolvency of SolarWorld AG�������������������������������������� 157 References���������������������������������������������������������������������������������������������������� 158 12 Performance Through Kaizen������������������������������������������������������������������ 159 12.1 Definition of Kaizen�������������������������������������������������������������������������� 159 12.2 Kaizen Versus Innovation������������������������������������������������������������������ 161 12.3 Visualization Management���������������������������������������������������������������� 162 12.4 Case Study: Mercedes’ Lean Management System�������������������������� 162 References���������������������������������������������������������������������������������������������������� 164 13 P  erformance Management to Focus on Value-Added Activities������������ 165 13.1 Value-Added and Waste�������������������������������������������������������������������� 165 13.2 Waste Identification Through Ishikawa Diagram ���������������������������� 165 13.3 Advantages and Disadvantages�������������������������������������������������������� 166 13.4 5S Management Concept������������������������������������������������������������������ 167 13.5 Seven Types of Waste in Manufacturing: TIMWOOD �������������������� 170 13.5.1 Transportation ���������������������������������������������������������������������� 170 13.5.2 Inventory ������������������������������������������������������������������������������ 171 13.5.3 Motion���������������������������������������������������������������������������������� 171 13.5.4 Waiting���������������������������������������������������������������������������������� 172 13.5.5 Overproduction �������������������������������������������������������������������� 172 13.5.6 Overprocessing �������������������������������������������������������������������� 173 13.5.7 Defects���������������������������������������������������������������������������������� 174 13.5.8 Case Study: Alstom in China������������������������������������������������ 175 References���������������������������������������������������������������������������������������������������� 178 14 P  erformance Management Excellence Through Change ���������������������� 179 14.1 Definition of Change Management�������������������������������������������������� 179 14.2 External and Internal Reasons for Change���������������������������������������� 180 14.3 Change Management Concepts�������������������������������������������������������� 181 14.3.1 Change Management Concept of Kurt Lewin���������������������� 181 14.3.2 Change Management Curve of Elisabeth Kübler-Ross�������� 182 14.3.3 Change Management Phase Model of Kotter ���������������������� 187 14.3.4 ADKAR Change Management Model���������������������������������� 189 14.3.5 McKinsey 7S Model ������������������������������������������������������������ 190 14.4 Case Study: Change Management in Nissan������������������������������������ 191 References���������������������������������������������������������������������������������������������������� 191

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15 I nnovations as Part of Performance Management��������������������������������� 193 15.1 Introduction to Innovation Management������������������������������������������ 193 15.2 Technical Relevance and Attractivity������������������������������������������������ 194 15.3 Strategic Relevance of Innovation Management������������������������������ 195 15.4 Resource Intensity���������������������������������������������������������������������������� 195 15.5 Future Potential of Innovations�������������������������������������������������������� 196 15.6 Fields and Tasks of Innovation Management������������������������������������ 197 15.7 Case Study: Digital Innovation in a Bakery in Tokyo���������������������� 197 References���������������������������������������������������������������������������������������������������� 198

About the Author

Marc  Helmold  (MBA) is a Professor at the IUBH University in Berlin. He teaches Bachelor’s, Master’s, and MBA in performance management, supply management, general management, strategic management, and supply chain management. From 1997 until 2017, he had held several top management positions in the automotive and railway industries. Between 1997 and 2010, he worked in several companies like Ford, Ford-Mazda Japan, Porsche, and Panasonic Automotive in managerial functions and executed lean workshops throughout the value chain. From 2013 until 2016, he was the General Manager of Bombardier Transportation in China and led the sourcing and spare parts sales activities. Since 2016, he has been a Professor at the IUBH, and he has his own consultancy. In this capacity, he improves the performance of companies

xvii

Abbreviations

A3 Problem-solving method A6 A-6 Negotiation Concept ADKAR Awareness, Desire, Knowledge, Ability, Reinforcement AI Artificial intelligence AM Additive manufacturing APA Advanced purchasing agreement AR Augmented reality BCG Boston Consulting Matrix BSC Balanced scorecard BME Bundesverband Materialwirtschaft, Einkauf und Logistik BMW Bayerische Motoren Werke BOS Alstom (formerly Bombardier) Operating System CSR Corporate Social Responsibility DIN Deutsche Industrienorm DSCM Downstream supply chain management ECR Efficient consumer response ERP Enterprise resource planning EXW Ex works IOP Internet of Things IOP Internet of People IPO International Procurement Office ISO International Organization for Standardization IUBH International University Bad Honnef JIT Just-in-time KPI Key performance indicator MPS Mercedes Benz Production System OEE Overall equipment effectiveness OKR Objectives and key results PDCA Plan, do, check, act PDSA Plan, do, study, act PE Physical education PESTEL Macro analysis PPS Production planning system QR Quick response xix

xx

SFM Shop floor management SCM Supply chain management SWOT Strengths, weaknesses, opportunities, threats TIMWOOD Seven types of waste in manufacturing TÜV Technischer Überwachungsverein UN United Nations USCM Upstream supply chain management USP Unique selling propositions VD Virtual design VW Volkswagen 5S Seiri, seiton, seiso, seiketsu, shitsuke 7R 7 Rights

Abbreviations

1

Performance Management as Part of the Corporate Strategy

When you’re dying of thirst, it is too late to think about digging a well Japanese say

1.1 Definition of Performance Management Performance management (PM) is a discipline and activity, which is an integral part of any enterprise and organization. PM refers to the control of service provision within the framework of the management of an organization. The time taken to provide services and the resulting commitment of resources are measured and controlled. As a result, the work done (performance times time) should be assessed. Depending on its definition, PM can only refer to the performance of an organization or also to the performance measurement of individual employees and employee groups in relation to the processes with which certain tasks are carried out (Helmold & Samara, 2019). Performance management integrates performance measurement, management, and performance improvement as shown in Fig. 1.1. PM is a structural and systematic approach. It describes the management of enterprises, processes, employees, departments, and organizations to ensure that goals and objectives are being reached efficiently and effectively. The goals and objectives are derived from customer’s expectations which are the bases of the strategic mission and vision. Performance measurement and management have to be executed over the entire value chain from the upstream over the operation to the downstream supply-chain management. Performance management involves defining what effective performance looks like, as developing the tools and procedures necessary to measure performance. The overall goal of performance management is to ensure that the organization and all of its subsystems (processes, departments, teams, employees, etc.) are working together in an optimum fashion to achieve the results desired by the organization. Performance management can be done externally (e.g. measurement by customers, by shareholders or analysts, measurement of supply base) and internally (management of organization). PM must include the entire value chain and all elements including USCM, operations, DSCM, and support functions like finance, HR, and IT. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_1

1

2

1  Performance Management as Part of the Corporate Strategy

Performance Measurement

Enterprise

Performance Management

Performance Improvement

Fig. 1.1  Performance management elements. Source: Author’s source

Purely financial PM and M are not successful. The questions related to PM are the following: • • • •

What is performance management? How can I measure performance? Where do I measure performance? How is your performance measured externally?

1.2 PM Objectives The objective of PM is a systematic, multidimensional performance measurement, management, and control. Performances at different levels (employees, teams, departments, processes) are pursued with the aim of continuously improving individual and corporate performance. In performance management, among other things, learning effects and employee motivation are built up. A performance measurement system serves as the database to support balanced performance recording. What all performance management approaches have in common is that, in contrast to balance sheet and accounting-oriented control instruments, they do not only relate to the analysis, planning, management, and control of financial variables, which are primarily oriented towards the past. Instead, performance management integrates, in particular, future-oriented, non-financial parameters in order to enable holistic planning and control of the company’s performance and efficiency. This is usually achieved by creating a model that, based on the current status, has further development of the service processes as its content. Service is to be understood here both as a process flow, in the sense of service provision, and as a result. The process-­ centred performance analysis is the basis of process performance management. As a rule, a balanced mix of parameters for measuring financial results, process

1.3  PM as Part of the Strategy Over the Entire Value Chain

3

efficiency, quality, and employee and customer satisfaction is sought. As an instrument for measuring performance in this context, for example, the balanced scorecard (BSC) or other performance management tools can be used.

1.3 PM as Part of the Strategy Over the Entire Value Chain PM focuses on the process of planning, controlling, executing, and optimizing the flow of materials, information, money, and people over the entire length of the internal and external value chain, i.e. from the supplier of the raw materials to the end customer (Werner, 2020). This is primarily intended to improve the efficiency of the processes, increase customer benefits, and optimize resource requirements in order to ultimately supply customers and markets with goods that are economically successful. SCM is a core function and must be integrated into the overall strategy of the enterprise (Helmold & Terry, 2021). Performance management operates at three levels: strategic, tactical, and operational. At the strategic level, company management makes high-level strategic supply-chain decisions that are relevant to whole organizations. The appropriate supply-chain strategy is a key success factor for any business and is one of the keys to sustainable success (Werner, 2020). Strategy helps organizations to maximize their resources and environment and allows them to develop new ways to stay ahead of competitors. Even with great ideas, or great products and services, you are unlikely to be successful in the long term without an appropriate strategy. A sustainable and long-term strategy must be the integral part of the corporate strategy (Helmold et al., 2019). Strategic management is a framework that is dealing with recognizing and making the important changes towards its mission and vision by using resources and assets in the most efficient way (Helmold & Samara, 2019). It is a framework which links strategic planning and decision-­ making with the everyday business of operational administration. Strategic management is very important for an organization’s long-term success, which is making companies able to compete in a hostile and competitive environment (Johnson et al., 2017). Translation of strategic management plans into practice is the most important aspect of the planning itself in any organization. Strategic and lean plans can include actions like entering new markets, global sourcing, make or buy strategies, deployment of new products or services, centralization or decentralization of activities, or aligning leadership and resources as outlined by various authors (Helmold, 2021). The three levels of strategy, developed by Gerry Johnson and Kevan Scholes along with other major managerial thinkers, are a way of defining the different layers of strategy which, in tandem, orient the direction of the organization and define its success (Johnson et al., 2017). The three levels are: 1 . Corporate supply-chain strategy level 2. Business and tactical supply-chain level 3. Functional or operational supply-chain levels

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1  Performance Management as Part of the Corporate Strategy

When synchronized and coordinated, successful strategies at each of these levels will contribute to a successful overall organizational strategy including right measures to prevent and avoid inefficiencies in the supply chain and other functions of an enterprise (Khojasteh, 2018). This is the top layer of strategic planning, and is often associated with the organization’s mission and values, though it is developed in a much more significant depth (Helmold, 2020). Corporate strategy is defined by those at the very top of the organization—managing directors and executive boards—and is an outline of the overall direction and course of the business. In effect, it defines: • General, overall strategy and direction in terms of markets, supply, and supply chains • Which markets the organization will operate in • Which suppliers and supply chains to procure from • How the markets will be entered and the general activities of the organization • How to prevent risks in the upstream or downstream supply chains • How to apply a supply chain risk management (SCRM) measure

1.3.1 Corporate Strategy Corporate strategy is crucial as it will define all other decisions that are made within the organization along the line. Smaller, newer organizations which are targeting a very specific niche market, or operate with a small set of unique products/services, will find it far easier to develop a corporate strategy as there are fewer variables to consider. However, larger and more developed organizations will find the process much simpler, as they may need to diverge from activities and behaviours which define who they are in order to reach out into new markets and to take new opportunities.

1.3.2 Business Strategy Business strategy generally emerges and evolves from the overarching corporate strategy which has been set by those at the helm. They are usually far more specific than corporate strategy and will likely be unique to different departments or subdivisions within the broader organization. In general, they use corporate strategy as an outline to: • Define specific tactics and strategies for each market the organization is involved in • Define how each business unit will deliver the planned tactics Due to their nature, they are more common in larger firms that engage in multiple activities, than they are in small businesses. However, they can still be engaged in

1.3  PM as Part of the Strategy Over the Entire Value Chain

5

by smaller organizations who wish to define how they go about each different subsection of their operations, by breaking down the overall scope of the corporate strategy.

1.3.3 Functional Strategy The functional long-term strategy, also defined as market-level strategy, refers to the day-to-day operation of the company, which will keep it functioning and moving in the correct direction. While many organizations fail because they do not have an overarching corporate strategy, others fail because they have not developed plans for how to engage in everyday activities. Even with an overall direction you wish to head in, without a plan for how to successfully operate, an organization will be unable to progress. These will be numerous and will define very specific aspects and operations within smaller departments, teams, groups, and activities. Overall, they define: • Day-to-day actions which are required to deliver corporate and business strategies • Relationships needed between units, departments, and teams • How operational goals will be met, and how they will be monitored It is at this level, the lowest in strategic development, that leaders should define how different departments and functions will work together to achieve higher goals. There will be managers that will oversee departments (e.g. manufacturing and HR) that do not perform the same functions, but need to be synchronized in order to achieve the goals set out by the corporate and business strategies.

1.3.4 Alignment of Strategies Though corporate strategy will get all of the attention, it is success at the bottom of the hierarchy—through day-to-day functions—which will truly define where the organization as a whole will succeed. You need to build from the ground up, in small steps, in order to keep moving forward. If operations break down, so does the organization. As mentioned previously, it is crucially important that each level of strategy is synchronized, both from top to bottom and horizontally across the organization. Feedback should down from both corporate strategy to functional strategy, and vice versa, in order for all three levels to ensure that they are operating in line with one another (Helmold, 2021). Strategy itself will not define organizational success; however, it is a very good place to start. Once sound strategies are in place, an organization can move forward and begin to execute said strategies. They may need some adjustment along the way—and you should be prepared to do so, in response to feedback from different levels and from the external environment—but they should be initially developed in such a way that they will keep the organization in line with its long-term objectives.

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1  Performance Management as Part of the Corporate Strategy

1.4 Strategic Triangle The process of strategic management cycle is a process with three elements as outlined in Fig. 1.2 (strategic triangle or strategic cycle) (Johnson & Scholes, 1997). The three steps are (1) the strategic analysis, (2) the strategic choice, and (3) the strategic implementation and will be described in the following sections. The triangle raises the following questions: 1 . Where are we in terms of strategy and positioning in our supply chains? 2. Where do we want to go? 3. How do we achieve this?

1.5 Strategic Analysis 1.5.1 Analysing Important Factors The strategic analysis of an organization is about understanding the strategic position of the organization in terms of lean management. This stage requires a Performance Management

Strategic Analysis Introduction of sustainable and long-term Strategies that provide a competitive advantage

Mission Vision Corporate Level Business Level

Analysis of Elements that Impact my Organisation and the Future

Functional Level

Strategic Implementation

Core Values Strategic Objectives

Strategic Choice

Selection of suitable Strategic Options

Fig. 1.2  Strategic triangle. Source: Author’s source, adopted from Johnson et al. (2017)

1.5  Strategic Analysis

7

profound analysis where the organization stands in terms of lean management tools and processes (Johnson & Scholes, 1997). The existing competencies and resources of the organization need to be assessed to determine if there are any opportunities to be gained from these and to determine if they need to be enhanced in order to pursue strategic objectives and goals (Johnson & Scholes, 1997). The major stakeholders which influence the organization and the opinions or viewpoints must be taken into account as the purpose of all of the strategic analysis is to define the potential future direction of the organization. The purpose of this phase (strategic analysis) is to create a suitable starting position and to understand the key influences on the present and future state of the organization and what opportunities are afforded by the environment and the competencies of the organization (Johnson & Scholes, 1997). Assessing the strategic position consists of evaluating the following elements as shown in Table 1.1. Since strategy is concerned with the position a business takes in relation to its environment, an understanding of the environment’s effects on an organisation is of central importance to the strategic analysis. The historical and environmental effects on the business must be considered, as well as the present effects and the expected changes in environmental variables. The analysis of the environment can be done via the macro- and microanalysis (PESTEL, Porter’s five forces). Additionally, strengths, weaknesses, opportunities, and threats complete the assessment of the environment (SWOT). This step is a major task because the range of environmental variables is so great. Another area of the strategic analysis is the evaluation of the strategic capability of an organization and where it is able to achieve a competitive advantage. Considering the resource areas of a business such as its physical plant, its management, its financial structure, and its products may identify these strengths and weaknesses (Johnson & Scholes, 1997). The expectations of stakeholders are important because they will affect what will be seen as acceptable in terms of the strategies advanced by management. Stakeholders can be defined as people or groups inside or outside the organization, who have an interest in the activities of the organization. A typical list of stakeholders for a large company would include shareholders, banks, employees, managers, customers, suppliers, government, and Table 1.1  Strategic analysis elements and tools

Source: Author’s source

8

1  Performance Management as Part of the Corporate Strategy

society. Culture affects the interpretation of the environmental and resource influences (Helmold & Terry, 2021).

1.5.2 Analysing the Environment A PESTEL analysis or PESTLE analysis is a framework or tool used to analyse and monitor the macro-environmental factors that may have a profound impact on an organization’s performance. This tool is especially useful when starting a new business or entering a foreign market. It is often used in collaboration with other analytical business tools such as the SWOT analysis and Porter’s five forces to give a clear understanding of a situation and related internal and external factors. PESTEL is an acronym that stands for Political, Economic, Social, Technological, Environmental, and Legal factors. However, throughout the years people have expanded the framework with factors such as demographics, intercultural, ethical, and ecological resulting in variants such as STEEPLED, DESTEP, and SLEPIT. In this chapter, we stick simply to PESTEL since it encompasses the most relevant factors in general business. Each element will be elaborated as shown in Fig. 1.3.

1.5.3 Analysing the Industry Porter is best known for his strategic frameworks and concepts in his paper, which was published in 1980 (Porter, 1980). The five forces model (industry analysis) has five elements that can be utilized to assess the attractiveness and competitive situation of the industry as outlined in Fig. 1.4. The five elements are: 1 . Rivalry among competitors 2. Bargaining power of suppliers

(Political) (Economic)

(Legal) Makro Analysis (PESTEL)

(Environment)

(Social) (Technological)

Fig. 1.3  PESTEL analysis. Source: Author’s source

9

1.5  Strategic Analysis Threat of new Substitutes

Industry Analysis Bargaining Power of Suppliers

Rivalry amongst Competitors

Bargaining Power of Buyers

Threat of new Market Entrants

Fig. 1.4  Industry analysis. Source: Author’s source

3 . Bargaining power of buyers 4. Threat of new market entrants 5. Threat of new substitutes The stronger the threat posed by these five competitive forces, the less attractive the industry under consideration and the more difficult it is to achieve a sustainable competitive advantage. Companies should therefore try to be active in an industry with an attractive industry structure and to build up a defensible position in their industry, i.e. a position in which the five competitive forces are as less threatening as possible. Companies can also influence the five forces with the help of appropriate strategic orientation. This can increase the attractiveness of an industry. If, however, companies influence the distribution of competitive forces to the advantage of their own competitive position without being aware of the long-term effects or consciously accepting them, this can also destroy the structure and profitability of an industry.

1.5.4 Analysing the Strengths and Weaknesses of the Own Enterprise The SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company’s competitive position and to develop strategic planning. SWOT analysis assesses internal and external factors, as well as current and future potential. This technique, which operates by “peeling back layers of the company”, is designed for use in the preliminary stages of decision-making processes and can be used as a tool for evaluation of the strategic position of organizations of many kinds (for-profit enterprises, local and national governments, NGOs, etc.). It is intended to specify the objectives of the business venture or project and identify the internal and external factors that are favourable and unfavourable to

10

Internal

1  Performance Management as Part of the Corporate Strategy

Strengths

Weaknesses

External

SWOT Analysis Opportunities

Threats

Fig. 1.5  SWOT analysis. Source: Author’s source

achieving those objectives. Users of a SWOT analysis often ask and answer questions to generate meaningful information for each category to make the tool useful and identify their competitive advantage (Fig. 1.5).

1.5.5 Analysing the Core Competencies The core competency concept describes a product, feature, process, skill, brand, or activity that a company can perform better than the competition and has thus achieved a competitive advantage. It is determined by certain characteristics like customer value or benefits, protection against imitation, differentiation, diversification, and innovation or unique features as shown in Fig. 1.6. In business, a competitive advantage is the attribute that allows an organization to outperform its competitors.

1.6 Strategic Choice 1.6.1 Generic Strategies Strategic choice typically follows strategic analysis. Strategic choice involves a whole process through which a decision is taken to choose a particular option from various alternatives. There can be various methods through which the final choice can be selected upon. Managers and decision makers keep both the external and internal environment in mind before narrowing it down to one. It is based upon the following three elements: first, the generation of strategic options, e.g. growth, acquisition, diversification, or concentration; second, the evaluation of the options to assess their relative merits and feasibility; and third, the selection of the strategy or option that the organization will pursue. There could be more than one strategy chosen but there is a chance of an inherent danger or disadvantage to any choice

11

1.6  Strategic Choice

Value for Customers

Core Competencies Protection against Imitation

Unique Features and Innovation

Diversification

Differentiation

Fig. 1.6  Core competencies. Source: Author’s source

made. Although there are techniques for evaluating specific options, the selection is often subjective and likely to be influenced by the values of managers and other groups with an interest in the organization (Helmold et al., 2020). The generic strategies differentiation and cost leadership are good methods to define, in which direction a company should go to increase profitability and to acquire a competitive advantage (Porter, 1980, 1985; Helmold et  al., 2019). Mintzberg provides five definitions of strategy, plan, ploy, pattern, position, and perspective (Mintzberg et al., 1995). Firstly, strategy is always a plan. A plan integrates intended actions and activities based on previous assessment of the situation. Secondly, as plan, a strategy can be a ploy too, really just a specific manoeuvre intended to outwit an opponent or a competitor. If strategies can be intended (whether as general plans or specific ploys), they can also be realized. In other words, defining strategy as plan is not sufficient; we also need a definition that encompasses the resulting behaviour. Thirdly, strategy is a pattern. The definitions of strategy as plan and pattern can be quite independent of one another. Plans may go unrealized, while patterns may appear without preconception. Plans are intended strategy, whereas patterns are the realized strategy. Fourthly, strategy is a perspective. A perspective is not just of a chosen position, but consists of an ingrained way of perceiving the world (Mintzberg et al., 1995) (Fig. 1.7).

1.6.2 Boston Consulting Group Matrix (BCG Matrix) The BCG matrix is named after the Boston Consulting Group (BCG), whose founder Bruce Henderson developed this matrix in 1970 (Fig. 1.8). This concept should clarify the connection between the product life cycle and the cost experience curve. The matrix is often visualized as a scatter or bubble diagram; the area of a circle then represents the sales of the respective product. The BCG matrix is, put simply, a portfolio management framework that helps companies decide how to prioritize their different

12

Narrow Scope

1  Performance Management as Part of the Corporate Strategy

Cost

Differentiation

Leadership

Broad Scope

Generic Strategies

Cost

Differentiation

Leadership

Fig. 1.7  Generic strategies. Source: Author’s own figure, adopted from Porter (1985) Existing Products

Existing Markets

Market Penetration

New Markets

New Products

Market Development

Product Development

Ansoff Matrix Diversification

Fig. 1.8  BCG strategies. Source: Author’s source

businesses and supply chains. It is a table, split into four quadrants, each with its own unique symbol that represents a certain degree of profitability: question marks, stars, dogs, and cash cows. By assigning each business to one of these four categories, executives could then decide where to focus their resources and capital to generate the most value, as well as where to cut their losses. The products or business units of a company are assigned to one of the four areas based on their values. Each area embodies a standard strategy. It should give a good recommendation on how to proceed. The life cycle of a typical product runs from the question mark to the star and cash cow to the poor dog. There are also products that do not follow this ideal path. Many product failures and flops do not even reach the star range. An imitating product, on the other hand, may skip the question mark area. The question marks, normally young

1.6  Strategic Choice

13

products, are the newcomers among the products. The market has growth potential, but the products only have a small relative market share. Management is faced with the decision of whether to invest or abandon the product. In the case of an investment, the product requires liquid funds, which it cannot generate itself. A typical strategy recommendation is selection and possibly an offensive penetration strategy to increase market share. The stars are the company’s most promising products. You have a high relative market share in a growth market. They already cover the investment needs resulting from market growth with their own cash flow. The strategy recommendation is investment and possibly a skimming strategy to increase profit margins without endangering market share. The cash cows (milking cows) have a high relative market share in an only slightly growing or static market. They produce stable, high cash flows and can be “milked” without further investment. A fixed price strategy or price competition strategy is appropriate. The poor dogs are the discontinued products in the company. They have low market growth, sometimes market contraction, and low relative market share. At the latest as soon as the contribution margin for these products is negative, the portfolio should be adjusted (disinvestment strategy). In addition to assessing the individual products using the standard strategies, the entire portfolio should also be considered. Pay attention to the static financial equalization—the products in the portfolio should support and finance each other. A question mark can only expand if, for example, a cash cow finances this expansion. Future developments can also be seen. The products should be evenly represented in the individual areas—a company without question marks would have little chance in the future market. The matrix reveals two factors that companies should consider when deciding where to invest, company competitiveness, and market attractiveness, with relative market share and growth rate as the underlying drivers of these factors. Each of the four quadrants represents a specific combination of relative market share, and growth: • Low growth, high share: Companies should milk these “cash cows” for cash to reinvest. • High growth, high share: Companies should significantly invest in these “stars” as they have high future potential. • High growth, low share: Companies should invest in or discard these “question marks”, depending on their chances of becoming stars. • Low share, low growth: Companies should liquidate, divest, or reposition these “dogs”.

1.6.3 Ansoff Matrix The product-market matrix in Fig. 1.9 (also Ansoff matrix, after its inventor Harry Igor Ansoff or Z-matrix) is a tool for the strategic management of companies. It can be used by a management (= company management) who has decided on a growth strategy as an aid for planning this growth. When it comes to market penetration, the focus is on gaining additional market shares with existing products. The company is trying to sell more of its products to existing, new, and competitive customers.

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1  Performance Management as Part of the Corporate Strategy

High Market Growth

Low Market Share

High Market Share

Question Marks

Stars

Low Market Growth

BCG Matrix Dogs

Cash Cows

Fig. 1.9  Generic strategies. Source: Author’s source

Existing marketing activities usually have to be adapted to achieve this goal. Although the product portfolio does not change, companies often have to experiment with new advertising concepts in order to further promote product adoption in the existing market. However, this market penetration can only be successfully implemented up to the point at which the market has not yet been fully saturated. The focus of the market development strategy is on creating new sales markets for existing products. By entering new market segments or opening up further geographical regions, a company puts itself in the position of attracting new target groups for its existing products. A regionally operating bakery can also offer its own products nationwide, for example by setting up digital sales channels, and thus generate growth. Of course, the implementation of this strategy is initially offset by considerable investment costs. The chances of success should therefore first be assessed by means of careful planning and a comprehensive risk analysis. If opening up new markets is not an option, it is often worth taking a look at the product development strategy. The existing range is expanded through product innovations or creation of product variants in the existing market. The resulting added value should encourage consumers to buy. This strategy is particularly attractive for companies in niche markets in which acquiring new customers and upselling would be almost impossible with a pure market penetration strategy. The reluctance to enter new markets is reinforced by high development costs and risk of failure of the newly developed product. The most risky quadrant of the Ansoff matrix is that of diversification. This requires the development of a new product while at the same time opening up a new market. The associated investment costs in terms of product development, business analyses, setting up local subsidiaries, etc. can quickly mean the end of a company if the corresponding ROI is not achieved. The diversification strategy can be broken down into horizontal, vertical, and lateral diversification, depending on the degree of risk tolerance of a company:

1.6  Strategic Choice

15

• Vertical diversification • Horizontal diversification

1.6.3.1 Horizontal Diversification Horizontal diversification describes the development of a new product that is still factually related to the product range previously offered. The existing value chain can continue to be used with minimal adjustments. With horizontal diversification, a company expands its offerings at the same economic level to reach new customers. An example of this type of diversification is the development of the iPad, which with its introduction gradually expanded Apple’s existing smartphone and computer portfolio. 1.6.3.2 Vertical Diversification With vertical diversification, a company deepens its commitment to sales-oriented activities (forward integration) and/or the actual manufacturing process of its products (backward integration). Diversification does not take place on the same level of the value chain as with horizontal diversification, but on the upstream or downstream one. With forward integration, a company takes the sales of its products and services into its own hands, for example by opening its own branches or an online shop. Backward integration describes the safeguarding of a company’s reference markets, for example by taking over production processes that were previously outsourced to external companies. While horizontal diversification aims to reduce dependency on one product line, vertical diversification focuses on reducing dependence on suppliers and dealers. The acquisition of the necessary skills and know-­ how for the successful implementation of sales and production processes is in turn associated with high investment costs and thus increased financial risks. 1.6.3.3 Lateral Diversification With the lateral diversification strategy, companies expand into completely new markets that have no material connection with the existing business. The aim and purpose of this alignment are to minimize the dependence on developments in the existing market segment. Google can be mentioned as a good example in this context: In addition to the search engine core business, the company expanded early on into other market segments such as telecommunications (fibre), biotechnology (Calico), or autonomous automotive technology (Waymo). The lateral diversification strategy is used by multinational companies in particular to respond flexibly to changes and trends in the market. The necessary know-how is usually acquired through the acquisition of specialized companies that are already represented in the market of interest. Accordingly, this strategy requires enormous investment costs and harbours not only financial but also immaterial risks, such as a diluted brand image due to product offerings that are too diversified.

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1  Performance Management as Part of the Corporate Strategy

Table 1.2  Blue ocean strategy

Source: Author’s source, adopted from Kim and Maubourgne (2015)

1.6.4 Blue and Red Ocean Strategies Blue ocean strategy in Table 1.2 is a method for developing permanently profitable business models from the field of strategic management: The basic idea is that only through the development of innovative and new markets, which really differentiate and provide relevant benefits for the broad mass of customers or non-customers, “blue oceans” offer lasting successes. Among other things, this is to be achieved through competition that has become meaningless, new customer acquisitions, and optimized cost structures. The concept of the blue ocean strategy was developed by W.  Chan Kim and Renée Mauborgne at the INSEAD Business School, where it was initially referred to as value innovation. Based on empirical studies over a period of 15 years and based on the analysis of more than 100 leading companies, examples of companies were found that opened up new, previously unused sub-markets and thus made the previous competition irrelevant. The term ocean describes a market or branch of industry in connection with the blue ocean strategy. “Blue oceans” are understood as untouched markets or branches of industry with little or no competition. Anyone who plunged into the blue ocean would find undiscovered markets or industries. “Red oceans”, on the other hand, designate saturated markets, characterized by tough competition, overcrowded with competitors who all offer the same service or the same products. The term “red ocean” is based on the image of bloody fights of predatory fish (the competitors), while the “blue ocean” is free from bloody fights.

1.7 Strategic Implementation 1.7.1 Assessment of Suitability, Acceptability, and Feasibility Strategic implementation is concerned with the translation of the selected strategy into action (Johnson & Scholes, 1997). The ways in which strategies are implemented are described as the strategic architecture or framework of the organization (Johnson & Scholes, 1997). Successful implementation of the chosen strategy will

1.7  Strategic Implementation

17

be dependent on several factors such as stakeholder’s expectations, the employees, the company culture, the will to change, and the cooperation within the organization. These elements and how the management and employees work together to adopt the new plan will decide about how successful the strategy implementation is. The available skills and/or the ability to develop new skills when required for the planned change and issues like the structural reorganization and resulting cultural disturbance would also affect success. Resource availability and planning for the utilization of such resources need to be addressed as part of the implementation plan. The entire process necessitates the management of strategic change and will concern handling both hard and soft factors of the organization, i.e. structure and systems and culture and motivation. Implementing a strategy has three elements: • Organizational structure and layout: Where and how should the organization be split into European, US, and Asian divisions? How autonomous should divisions be? What parenting style should be applied? • Resources: Enabling an organization’s resources should support the chosen strategy: What are the appropriate human and non-human resources? What assets need to be acquired? • Change management: Most strategic planning and implementation will involve change, so managing change, in particular employees’ fears and resistance, is crucial. Johnson and Scholes argue that for a strategy to be successful it must satisfy three criteria (Johnson & Scholes, 1997). These criteria can be applied to any strategy decision such as the competitive strategies, growth strategies, or development strategies: 1. Suitability—whether the options are adequate responses to the firm’s assessment of its strategic position 2. Acceptability—considers whether the options meet and are consistent with the firm’s objectives and are acceptable to the stakeholders 3. Feasibility—assesses whether the organization has the resources it needs to carry out the strategy

1.7.2 Suitability Suitability is a useful criterion for screening strategies, asking the following questions about strategic options: • Does the strategy exploit the company strengths, such as providing work for skilled craftsmen or environmental opportunities, e.g. helping to establish the organization in new growth sectors of the market? • How far does the strategy overcome the difficulties identified in the analysis? For example, is the strategy likely to improve the organization’s competitive ­position,

18

1  Performance Management as Part of the Corporate Strategy

solve the company’s liquidity problems, or decrease dependence on a particular supplier? • Does the option fit in with the organization’s purposes? For example, would the strategy achieve profit targets or growth expectations, or would it retain control for an owner-manager?

1.7.3 Acceptability Acceptability is essentially about assessing risk and return and is strongly related to expectations of stakeholders. The issue of “acceptable to whom?” thus requires the analysis to be thought through carefully. Some of the questions that will help identify the likely consequences of any strategy are as follows: • How will the strategy impact shareholder wealth? Assessing this could involve calculations relating to profitability, e.g. net present value (NPV). • How will the organization perform in profitability terms? The parallel in the public sector would be cost/benefit assessment. • How will the financial risk (e.g. liquidity) change? • What effect will it have on capital structure (gearing or share ownership)? • Will the function of any department, group, or individual change significantly? • Will the organization’s relationship with outside stakeholders, e.g. suppliers, government, unions, and customers, need to change? • Will the strategy be acceptable in the organization’s environment, e.g. higher levels of noise?

1.7.4 Feasibility This assesses whether the organization has the resources it needs to carry out the strategy. Factors that should be considered can be summarized under the M-word model: • Machinery: What demands will the strategy make on production? Do we have sufficient spare capacity? Do we need new production systems to give lower cost/better quality/more flexibility/etc.? • Management: Is existing management sufficiently skilled to carry out the strategy? • Money: How much finance is needed and when? Can we raise this? Is the cash flow feasible? • Manpower: What demands will the strategy make on human resources? How many employees are needed, what skills will they need, and when do we need them? Do we already have the right people or is there a gap? Can the gap be filled by recruitment, retraining, etc.?

19

1.8  Strategic Pyramid

• Markets: Is our existing brand name strong enough for the strategy to work? Will new brand names have to be established? What market share is needed for success—how quickly can this be achieved? • Materials: What demands will the strategy make on our relationships with suppliers? Are changes in quality needed? • Make-up: Is the existing organizational structure adequate or will it have to be changed?

1.8 Strategic Pyramid A useful tool for the translation of the corporate strategy and strategic objectives into negotiations is the strategic pyramid as shown in Fig. 1.10 (Johnsons & Scholes, 1997). Strategy in this context is the long-term positioning as well as the decision of the enterprise on which business fields and which strategies to choose. Strategy is therefore “the fundamental, long-term direction of three to five years and organization of a company in order to gain competitive advantages in a changing environment through the use of resources and competences and to realize the long-term goals of the stakeholders” (Johnson & Scholes, 1997).

1.8.1 Mission and Vision Enterprises must manifest in their strategy to strive for lean excellence (Helmold & Samara, 2019). The mission is the starting point of the strategic pyramid. The

Mission Statement

Lean Vision Goals & Values Objectives (specific)

Core Competencies Strategies Strategic Architecture Control & Execution (KPI System)

Fig. 1.10  Strategic pyramid. Source: Author’s own figure

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1  Performance Management as Part of the Corporate Strategy

mission statement of an enterprise is the long-term purpose of the company and the strategic direction as defined by Johnson and Scholes (1997). The vision or strategic intent describes more specifically what an organization aims to achieve and the long-term aspirations (Johnson & Scholes, 1997).

1.8.2 Qualitative and Quantitative Lean Goals and Objectives The mission and vision are followed by generic goals and specific objectives. Generic goals are not quantified and more general, but specific objectives are quantified and specific (Helmold et al., 2019). The strategists Johnson and Scholes distinguish longer term and generic (English: Goals) as well as shorter and quantified objectives (English: Objectives) for the company (Johnson & Scholes, 1997). Quantified goals can include sales, financial, quality, logistics, cost, and alpha goals.

1.8.3 Core Competencies The next level in the strategic pyramid is the identification of core competencies. Core competencies are those competencies which allow companies to gain a superior or competitive advantage and that are very difficult for your competitors to emulate (Johnson & Scholes, 1997). These describe the resources, skills, knowledge, or any other feature that leads to a competitive advantage. Core competencies must be perceived by customers and clients (Helmold et al., 2020).

1.8.4 Strategies After defining mission, vision, goals, and core competencies, the elements must be translated into strategic objectives and key performance indicators (KPI). The long-­ term implementation of these elements is defined as the formulation of strategic objectives and important for the negotiations (Helmold et al., 2019). In implementing the strategic goals, negotiations will take place with many stakeholders (Helmold et al., 2020). Become a lean differentiator by answering customer demands.

1.8.5 Strategic Architecture In addition to buildings, machines, plants, offices, resources, or employees, the infrastructure in the sense of strategic management also includes knowledge and innovations of the company that ensure long-term success (Helmold et al., 2019). This requires facilities, buildings, factories, or offices that represent the strategic infrastructure. In addition, however, other success criteria such as resources, knowledge, experts, name recognition, network, or innovations are of central importance.

1.9  Core Values

21

1.8.6 Control and Execution The final element of the strategic pyramid is the performance control (control and execution) and a target-performance comparison. A suitable tool for this step is the balance scorecard (BSC) or an action plan. The instrument of the BSC was already developed in 1992 by the professors Norton and Kaplan. The BSC is an instrument in strategic management and includes four categories (Johnson & Scholes, 1997): 1. Customer satisfaction 2. Financial category 3. Internal processes and improvements 4. Learning organization In practice, it seems that companies are adapting or expanding the original four dimensions to their specific needs (Johnson & Scholes, 1997).

1.9 Core Values 1.9.1 Strategies Must Focus on Value Creation Porter postulated three generic or broad alternative strategies which may be pursued as a response to the competitive pressures. They are termed generic strategies because they are broadly applicable to any industry or business. They are differentiation, cost leadership, and focus. A focus strategy may be further defined as cost focus, differentiation focus, or cost and differentiation focus. A differentiation strategy may be based on the actual unique product features or the perception thereof, conveyed through the use of advertising and marketing tactics, in the eyes of the customers. Obviously, the product or service feature must be one the customer needs or desires. Moreover, such enhanced features and designs or advertising and marketing will increase costs, and customers must be price-insensitive—willing to pay for the differentiated product or service. This willingness to pay for the differentiated product of service is what provides the company relief from competitive pressure, cost pressure specifically. Firms pursuing a cost leadership strategy must make lower production and distribution costs their priority (Helmold & Terry, 2021). By keeping their cost lower than that of their competitors, firms using cost leadership can still price their products up to the level of their competitors and still maintain higher gross profit margins. Alternatively, these firms can price their products lower than those of their competitors in the hope of achieving greater market share and sales volume at the expense of gross profit margins. A focus strategy is based on a particular market, customer, product, or geographic. A focus strategy is a concentrated, narrowly focused niche strategy. Figure 1.11 shows the example of a Mission Statement of Bombardier Transportation in China International Procurement Office.

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1  Performance Management as Part of the Corporate Strategy

Fig. 1.11  Example of mission statement and vision. Source: Author’s source

1.9.2 Case Study: Siemens Strategy The company Siemens has outlined its mission, vision, goals, strategic objectives, core values, and cultural specifics in its strategy outline “Siemens Vision 2020” (Siemens, 2019). The president and CEO, Joe Kaeser, outlines the key elements of the Siemens strategy for the coming years. He stresses that with the positioning along the electrification value chain, Siemens has know-how that extends from power generation to power transmission, power distribution, and smart grid to the efficient application of electrical energy. And with the outstanding strengths in automation, Kaeser confirms that Siemens is well equipped for the future and the age of digitalization. The Siemens Vision 2020 defines an entrepreneurial concept that will enable the enterprise to consistently occupy attractive growth fields, sustainably strengthen its core business, and outpace its competitors in efficiency and performance. All goals are focused on a long-term success (Siemens, 2019). The mission of Siemens can be defined as “We make real what matters, by setting the benchmark, in the way we electrify, automate and digitalize the world around us. Ingenuity drives us and what we create is yours. Together we deliver” (Siemens, 2019).

References Helmold, M. (2021). Innovatives Lieferantenmanagement. Wertschöpfung in globalen Lieferketten. Springer. Helmold, M., & Samara, W. (2019). Progress in performance management. Industry insights and case studies on principles, application tools and practice. Springer.

References

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Helmold, M. (2020). Lean Management and Kaizen Fundamentals from Cases and Examples in Operations and Supply Chain Management. Springer Cham. Helmold, M. et al. (2019). Erfolgreiche Verhandlungen Bestin-Class Empfehlungen für den Verhandlungsdurchbruch. Springer Wiesbaden. Helmold, M., & Terry, B. (2021). Operations and supply management 4.0. Industry insights, case studies and best practices. Springer. Johnson, G., et al. (2017). Exploring strategy (11th ed.). FT Prentice Hall. Khojasteh, Y. (2018). Supply chain risk management. Advanced tools, models, and developments. Springer. Kim, C., & Maubourgne, R.  A. (2015). Blue Ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard Business Press. Mintzberg, H., Quinn, J. B., & Ghoshal, S. (1995). The strategy process. Revised Euro-pean edition. Prentice Hall. Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. Free Press. Porter, M.  E. (1985). Competitive advantage. Creating and sustaining superior performance. Free Press. Siemens (2019). Siemens strategy. Retrieved from www.siemens.de. Werner, H. (2020). Performance management. Grundlagen, strategien, instrumente und controlling. Springer.

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Performance in Procurement and Supply Management

What gets measured gets improved Peter Drucker (1909–2005)

2.1 Procurement Procurement is the act of obtaining goods or services, typically for business purposes. Procurement is most commonly associated with businesses because companies need to solicit services or purchase goods, usually on a relatively large scale. Procurement, purchasing, or supply management generally refers to the final act of purchasing but it can also include the procurement process overall which can be critically important for companies leading up to their final purchasing decision. Companies can be on both sides of the procurement process as buyers or sellers though here we mainly focus on the side of the soliciting company. The major elements can be summarized as follows: • Procurement is the process of purchasing goods or services and is usually in reference to business spending. • Business procurement requires preparation, solicitation, and payment processing, which usually involves several areas of a company. • Procurement expenses can fall into several different categories, depending on the procurement demand. • Competitive bidding is usually a part of most large-scale procurement processes involving multiple bidders.

2.2 Supply Side The supply side is the function, which secures that inputs are available for the transformation process as shown in Fig. 2.1. Transformation is any activity or group of activities that takes one or more inputs, transforms and adds value to them, and provides outputs for customers or clients. Inputs, for which the supply management © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_2

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2  Performance in Procurement and Supply Management

is responsible, are mostly products and services coming from suppliers in the upstream side of the value chain. These products or services are directly involved in the transformation into end products to customers. However, inputs can also be indirect categories or services, which are not directly included in the transformation process (desks, machines, training services, etc.). The term supply management as key value-adding function replaces old definitions of procurement or purchasing (Helmold & Terry, 2016). This definition is in line with Porter’s description of value chains. A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. The concept comes from business management and was first described and popularized by Michael E.  Porter in his 1985 best seller, Competitive Advantage: Creating and Sustaining Superior Performance, in the upstream supply management or the supply side. Figure 2.2 displays the operations, the upstream supply side (supply management), and the downstream supply side (customer or demand side). In Porter’s value chain framework (see Fig.  2.3), inbound logistics, operations, outbound logistics, marketing and sales, and service are categorized as primary activities. Secondary activities include procurement, human resource management, technological development, and infrastructure. As many companies have external value chains (purchase of goods, services) of more than 80%, supply management has here the most significant role in any enterprise. In many enterprises, functions are still working independently from each other, leading to a large amount of waste and inefficiencies. Many industries are currently faced by fierce competition. This is forcing manufacturing companies to concentrate on core competencies and to transfer the production of components, goods, and services to external suppliers (Aberdeen Group, 2005, 2006). The number of value-adding activities has decreased constantly and now lies between 10% and 30% in this industry (Dyer, 2000). The company Apple has no production and decided to outsource the manufacturing of iPads or iPhones to the company Foxconn. Such a development has had a great influence on the structure of supply chains and supplier relationships. Supply chains (the terms “supply chains” and “supply networks” are used synonymously in the literature) have become more complex and international, as pointed out by several authors. Christopher and Peck see the level of complexity increasing in the upstream supply-chain management of

Value Chain: Input-Transformation-Output

Supply Management Input

(Raw Materials, Materials, Services etc.)

Operations Management Transformation

Output (Sales of Products and Services to Customers)

(Creation of Products and Services)

Fig. 2.1  Supply management managing upstream performance. Source: Author’s source, adopted from Helmold and Samara (2019)

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2.2  Supply Side

Tier 3

Tier 2

Tier 1

Tier 1

Tier 2

Supplier Supplier

Supplier Supplier Supplier Supplier

Supplier

Supplier Supplier

Supplier Supplier er

Customer

Customer Operations Ope O peerati tions ons nss n .0 M anageemen nt 4 0 Management 4.0

Supplier

Customer

Supplier Supplier

Customer

Customer Customer

Customer

Supplier

Downstream Supply Chain Management Demand or Customer Side

Upstream Supply Chain Management Supply Side (Supply Networks)

Fig. 2.2  Supply networks within the value chain. Source: Author’s source, adopted from Helmold and Samara (2019)

Secondary Functions

Research and Development Finance and Controlling Human Resources

Margin

Primary Functions

Primary Function: Supply Management 4.0 Operations Management 4.0 Inbound Logistics

Assembly

Marketing & Sales

Outbound Logistics

After Sales

Enterprise Functions

Fig. 2.3  Porter’s value chain. Source: Authors source, adopted from Helmold et al. (2020)

manufacturing companies in many industries, a trend which is characterized by the growing transfer of activities to suppliers and supplier networks, high numbers of supply-chain layers (tiers), and ongoing globalization of supply chains. As a consequence, vulnerability and risk exposure have risen significantly. The rapid increase in supplier activities therefore directly affects supply management, as emphasized

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2  Performance in Procurement and Supply Management

by Emmett and Crocker (2009). In recent years, many companies have reduced their value-adding activities and implemented efficiency-oriented cost reductions, e.g. outsourcing, single sourcing, low-cost country sourcing, platform concepts, lean management, and design-to-cost approaches (Aberdeen Group, 2005). Supply management has become more important in core and peripheral business areas and is aimed at building resilient supply chains. Resilience is based on being able to anticipate, manage, and prevent supply-chain disruptions at an early stage. On the other hand, supply risks have risen due to increased dependency on supplier networks. In their research “An Empirical Analysis of the Effect of Supply Chain Disruptions on Long-Run Stock Price”, Hendricks and Singhal (2005) found out that enterprises without operational slack and redundancies in their supply chains experience negative stock effects. The authors revealed the tremendous impact of supply-chain disruptions on stock price performance and shareholder value. Supply disruptions can easily lead to high recovery cost, waste, and sharp decreases in sales. External customers become dissatisfied and internal core functions (e.g. assembly) are disturbed. In most cases, supply disruptions have negative impacts on brand image, sales figures, and the company’s own financial situation as stressed by many authors writing about supply disruptions and resilient supply chains. Recent incidents in the media about disruptions caused by upstream supply management inefficiencies from China show that the supply management excellence approach needs to tackle these issues in a proactive and sustainable way. Supply management risks have mainly been investigated at the direct level of tier-one relationships, but consideration has not been fully extended to sub-­ suppliers, i.e. tiers one, two, three, and beyond. The new concept of supply management therefore seeks to address these concerns by investigating how disruptions can be anticipated, prevented, and managed over the entire value chain including all tiers on the supply and demand sides as shown in the the figure by Slack et al. (1995). Recent supply disruptions show that current supply management organizations, supply management tools, and concepts are not smart and resilient enough to avoid these supply-chain discrepancies. Recent articles for example in the magazine “Automotive News” show that all car producers are facing severe problems due to suppliers’ problems. Not only the automotive industry but also many other industries face these issues. The lean supply management concept was developed by Taiichi Ohno (1990), who worked for Toyota Motors. It derived from a bundle of instruments which come from sophisticated production methods or supporting functions such as logistics. The ideal interplay and optimal combination of all instruments are essential for success. The vision of lean production is based on the just-in-time (JIT) philosophy and the Toyota Production System (TPS: Japanese = トヨタ生 産システム) and focuses on the elimination of waste and the minimization of stock.

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2.4  Procurement and Supply Management Objectives

2.3 History of Supply Management and Procurement Figure 2.4 shows the evolution of supply management and procurement. In supply management and traditional procurement, the focus was on the securing of deliveries on time. Supply management was a support function. In the next stage, supply management 2.0, procurement started managing suppliers systematically with tools like supplier selection or supplier development. Suppliers were categorized, classified, and segmented. Non-performing suppliers were not selected. In supply management 3.0, procurement became more international and strategic. As companies concentrated on core competencies, ongoing outsourcing changed the role of procurement. In supply management 4.0, procurement is the most important primary function in an organization. As the key function, procurement has to manage digitally global supply networks.

2.4 Procurement and Supply Management Objectives Supply-side objectives are important. The seven rights (7R), which are the major objectives according to the lean supply management philosophy, can be defined as:

Supply Management 1.0 • Supply Function or Procurement to secure Deliveries • Supply as Support Function

1950

Supply Management 2.0 • Supply manages systematically manages Suppliers • Supplier Strategy • Supplier Segmentation • Supplier Evaluation

1970

Supply Management 3.0 • Automation of Supply • Outsourcing of Non Core Competencies • Computerization • Synchronization with Suppliers • Global Supply

2000

Supply Management 4.0 • Digitization • Suppliy Networks • Integrated Value Chains • Management of global valueadding Supply Networks • Supply Management as Key Function

2021

Fig. 2.4  History of supply management and procurement. Source: Author’s source

30

1. 2. 3. 4. 5. 6. 7.

2  Performance in Procurement and Supply Management

Right products Right quality Right time Right quantity Right location Right people Right cost

The right product refers to the right specification and requirements by the demanding customer. The products must have the required dimensions, layout, material, colour, etc. The right quality means the clarification of all requirements in terms of quality and improvement measures to have the optimum quality levels. Quality is normally measured by hard factors such as non-conformities, field rejects, or defects at receipt (0 km defects). The right quantity is the placing of a specific order quantity triggered by internal and customer demands. Supply management has to transfer the customer and company demands to the supply networks. The right time means that products ordered have to be at the buyer’s place in time, neither too early nor too late. Supply management has to recognize suppliers’ lead times. The lead time for any product starts from the order until the physical receipt of goods at the ordering party. The right location can be defined as the place, where the products are required. Shipment of products from China to Europe takes more than 8 weeks, so that the right location is closely linked to the lead time of products. The meaning of right people extends the current definition of the five rights in line with the modern and lean philosophy of the new paradigm of supply management. Suppliers in global markets need to have the right sales people, project managers, and operators to meet the requested criteria. Project managers must have sufficient language skills and operators must be trained to produce good-quality parts. People are  more involved in a changing and global trade situation and becoming  more important. Any product needs to have the right cost level; otherwise it will not be demanded and bought.

2.5 Supply Management Process 2.5.1 Six Phases in Procurement and Supply Management Industries or companies which have outsourced a large scope of their products to global supply networks would especially benefit from such research in supply management, supplier relationship management, and supply networks. In conclusion, it is evident that proactive supply management requires a subset of principles (see Fig. 2.5): The principles can be described as follows: (1) supply management is a function which is managing the entire value chain; therefore supply management must be incorporated into the mission, values, and strategies of every organization; (2) supply management best practices are focused on a multilayer approach, involving not only tier one, but also tier two and three levels; proactive supply

31

2.5  Supply Management Process Procurement Management Definition of Strategies Digitization Strategic Suppliers Make or Buy

Performance Management

Supplier Strategy

Supplier Selection

Secondary Functions

Supply

Operations

Supplier Development Quality Performance

Integration of all Functions Primary Functions

Supplier Evaluation

Marketing & Sales

Cost and Finance Performance

Supplier Inegration

Supplier Controlling

Concentration on Value-added Processes

Delivery Performance

Other Performance Objectives

Fig. 2.5  Supply management process. Source: Author’s source

management can only be introduced and executed if the corporate objectives are communicated and cascaded throughout the organization; the setup must be centralized as a single point of contact to suppliers; (3) advanced and innovative supply management has standardized tools and processes; (4) supply management best practice companies have sophisticated B2B platforms/supplier portals in terms of quality, cost, and delivery and other suitable KPI; (5) supply management and mitigation action activities have to be preventive, proactive, and sustainable; activities have to be oriented long-term; (6) supply management requires a collaborative approach, including strategic alliances with suppliers; such activities should be organized centrally; (7) proactive supply management can be performed with a key account manager in terms of being a single point of contact for the supplier (customer); (8) performance indicators have to be mutually agreed upon and may comprise both hard and soft factors. The assessment process should consist of quality, cost, delivery, and technological criteria; (9) the learning organization should, among other things, be characterized by the capability and competencies of coaching suppliers; (10) all the above-mentioned principles should be combined with a philosophy of continuous improvement (Japanese: Kaizen) and reflection (Japanese: Hansei) to achieve a best practice model in supply management. Companies that want to distance themselves from their competitors through best-in-class supply management must implement the ten principles and adopt a collaborative approach in dealing with their supply base. Appropriate management of one’s supply base can lead to competitive advantage. The strategic objective of supply management is the establishment, design, and management of supplier networks and the successful collaboration within these networks as the figure shows. The network consists of internal and external suppliers. The collaboration between supply partners and the management of the interactions are the key responsibilities of the supply management function. A sophisticated information system is a prerequisite for proper interactions.

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2  Performance in Procurement and Supply Management

2.5.2 Supplier Strategy By shifting value-adding activities and non-core competencies to supplier networks that are in competition with each other, new performance concepts, strategies, and processes arise that have to be mastered. For a long time now, the focus in the future has not only been on increasing company-internal cost advantages, but much more on the exchange of information and the exploitation of global cross-company potential. In general, supplier management aims to provide a uniform method for analysing potential and existing suppliers in order to make strategic decisions based on the results. At the operational level, this means making the performance of suppliers comparable, uncovering optimization potential and reducing procurement costs. The strategic dimension of supplier management, on the other hand, aims primarily to define suitable procurement strategies based on a transparent basis for decisionmaking in order to reduce supply risks and dependencies and to increase procurement quality. The strategic goals of supplier management deal with the medium- to long-term optimization of the company’s supplier base. Based on the category or material group-specific procurement strategies, it is important to define precise development measures that enable a continuous increase in delivery quality or a reduction in procurement costs. The supply risk can be sustainably reduced, for example, through the collaborative optimization of cross-company processes. The early establishment of possible alternative suppliers and the targeted control of the procurement volume prevent the company from becoming dependent. Figure  2.6 shows the first of the six phases of supplier strategy. In addition, the relationship with strategically important suppliers that are difficult to substitute should be strengthened through cooperative and integrative measures. This ensures the competitiveness of your own company. Due to the long-term orientation, all measures to achieve the strategic goals should be regularly checked as part of a continuous process and adjusted if necessary. Figure 2.7 shows the main elements in the phase of the supplier strategy with segmentation of suppliers, development of a material group strategy, feasibility studies on in-house or third-party production, evaluation of degrees of digitization in supply chains, and constant review of sustainability requirements of suppliers. The main tasks can be described as follows:

Supplier Strategy

Supplier Selection

Supplier Evaluation

Supplier Development

Supplier Integration

Selection of the appropriate Suppliers for the right Commodity Use of the right tools in supplier management Correct classification into preferred, alternative or market supplier rs suppliers Correct weighing of the depth of added value and the scope Selection of the right digitization strategy and connection of suppliers • Ensuring sustainability across the entire value chain • • • • •

Fig. 2.6  Supply management process. Source: Author’s source

Supplier Controlling

33

2.5  Supply Management Process

Supplier Strategies (Segmentation)

Sustainability (Supply Network)

Digitalisation (Network)

Supplier Strategy

Categorisation (Commodities)

Make or Buy

Fig. 2.7  Elements of the supplier strategy phase. Source: Author’s source

–– –– –– –– –– ––

Choosing the right suppliers for the right material groups Use of the right tools in supplier management Correct classification into preferred, alternative, or market suppliers Correct weighing of the depth of added value and the scope Selection of the right digitization strategy and connection of suppliers Ensuring sustainability across the entire value chain

2.5.2.1 Supplier Segmentation Every supplier strategy must be based on core elements such as classification, categorization, digitization, in-house or external production, and sustainability. Figure 2.8 shows these elements. As part of the supplier segmentation, the suppliers are grouped into company-wide classes according to preferred suppliers, alternative, benchmark, market, and other suppliers. Preferred suppliers are selected suppliers with excellent performance characteristics in terms of innovation, quality, costs, delivery reliability, sustainability, and processes. Preferred suppliers are given preferential treatment and are given specified volumes, order volumes, and procurement quotas. Preferred suppliers are usually involved in the development and product creation process of their own company at an early stage. The relationship is based on partnership. Alternative suppliers are suppliers who can be used alongside the preferred suppliers. Alternative suppliers are in the group of bidders, but their performance is not as good as the preferred suppliers in terms of quality, costs, delivery, and other characteristics, so they usually only receive smaller volumes and

34

2  Performance in Procurement and Supply Management

Quality Performance

Cost and Financial Performance Delivery Performance

Other (alpha) Performance Objectives

Evaluation Q-C-D + alpha

Preferred Suppliers

Selection based on Q-C-D + alpha criteria

Alternative Suppliers Benchmark Suppliers Market Suppliers Other Suppliers

Possible Selection (inside bidder pool)

Possbility to become Alternative Supplier

Possbility to become Benchmark Supplier

No Consideration

Fig. 2.8  Supplier segmentation and classification. Source: Author’s source

procurement quotas. The alternatives are followed by benchmark suppliers who serve as benchmarks and can be included in the group of bidders. Benchmarking in supplier management is a useful method for the systematic and structured acquisition of information and for the comparison of suppliers based on characteristics such as innovative strength, technological leadership, cost efficiency, or quality awareness. Benchmarking is thus a constant creative process to improve the supplier portfolio by determining and comparing the best-known services of existing suppliers and the comparison with new suppliers who show particularly strong performance characteristics (English: benchmark = the best; best practice). By adopting and continuously improving the identified best practice processes, the performance of your own area, competitiveness, and ultimately customer satisfaction are improved. Seen in this way, a benchmarking project within the scope of a tender offers the possibility of comparison with the best solutions, reveals deficits and weak points, clarifies the need for action, and can be used as an ideal tool for the development of new suppliers and constant competition. Benchmarking is not just a comparison of key figures or operations, but is a comprehensive, holistically applicable process analysis for improving performance that can be used for all performance areas and the entire company. The benchmark suppliers are followed by market suppliers and all other suppliers. Market suppliers can be included in the group of benchmark suppliers if their supplier management has been qualified and evaluated. All other suppliers are not taken into account (Helmold & Terry, 2016).

2.5.2.2 Commodity Strategies A material or product group or category (English: commodity or category) combines different individual parts or categories in a material group, which are usually made from the same basic material or raw material or can be divided into the same category. The differentiation of material groups can be freely defined and can be

35

2.5  Supply Management Process

relatively coarse or fine; this depends on the respective purpose. Examples of material groups are iron or ferrous metal, copper, plastic, rubber, leather, and wood. Other subdivisions are made, e.g. according to electrical, mechanical, aluminium, or steel. The primary goal for bottleneck materials is to secure the supply. To reduce the supply risk, one should look at the global procurement markets. As a rule, the local markets offer only inadequate sources of supply for shortage materials. By expanding the number of suppliers, the dependency on individual suppliers for bottleneck materials is reduced. The focus is not on the cost of the material, but on securing the supply. Since these are mostly low-value individual parts, product development is not very important. A reduction in the supply risk can be achieved by standardizing bottleneck materials. Figure 2.9 shows the possible material group strategies. This matrix is subdivided into strategic, lever, bottleneck, and non-critical material groups and market segments (suppliers). In the case of strategic material groups and market segments, it is advisable to enter into close ties with suppliers. This can take place through collaboration, joint or competitive development projects, collaborations, or even company mergers (e.g. founding a new company or a joint venture). For leverage products, companies should bundle volumes and proactively approach potential suppliers in order to achieve the ideal strategy. Purchasing cooperations can also help to gain advantages in the market. In the case of bottleneck products, the strategy must be based on the security of needs, so that long-term contracts prove advantageous. Global tenders and substitution are further strategies for ensuring the security of supply. For standardized products, on the other hand, it is

Strategic Partnerships

Strategic Products

Leverage Products

Use Market Power

Bottleneck Products

Uncritical Products

Competition

Operational Sourcing Activities (potentially one full service supplier)

Uncritical Market Segment

Bottleneck Market Segment

Fig. 2.9  Commodity strategies. Source: Author’s source

Leverage Market Segment

Strategic Market Segment

36

2  Performance in Procurement and Supply Management

advantageous to regularly examine the market and exploit the potential. C-parts management  (small parts like washers,  screws, threads etc.) can be done  from a single source after a detailed market study (Helmold & Terry, 2016).

High

2.5.2.3 Make or Buy Strategies A make-or-buy decision addresses the in-house production or external procurement of a product. It is about producing a product (make) or buying it (buy). The operational function of production is always understood to mean in-house production. Goods are manufactured with their own resources, employees, production factors, and production processes. In-house production means internalization, i.e. the organization of economic activities and the production of a material group in your own company organization. External production, on the other hand, means that material groups and production volumes are outsourced to suppliers. In the case of external production, there are usually only variable costs. In the case of in-house production, the fixed costs are added. The difference between the two variable cost amounts is used to cover the fixed costs more with each piece (fixed cost degression) until they are completely covered. Figure 2.10 shows recommendations for action for companies according to the strategic importance and relevance of the material group on the Y-axis and skills and competencies for developing and manufacturing the material group on the X-axis. Companies must therefore concentrate on their own skills and competencies for the development and production of the material group and prefer a strategy of in-house production (make) in this segment, especially if the strategic importance and relevance of the material group are very high. With the same level of skills and competencies for a product group, but relatively low strategic relevance and value, a hybrid strategy with partial outsourcing can take place. However, companies must ensure that the knowledge for this material group remains in their own company. If your own company does not have competencies in a special material group that is of high strategic importance, we recommend cooperative partnerships with one or a few suppliers (external production or buy). Due to its strategic

Strategic Relevance of Commodity

Outsourcing Buy

Own Operations Make

(Partnerships)

(Conzentration)

Make oder Buy

Outsourcing Buy

Low

(Using Market Potential)

Low

Own operations Make (Partial Outsourcing)

Own Capabilities and Abilities

Fig. 2.10  Make or buy strategies. Source: Author’s source

High

2.5  Supply Management Process

37

importance, it is worth pursuing long-term contracts, collaborations, or joint project developments with suppliers. With less relevant material groups and no know-how in your own company, the market potential and competition can be fully exploited. The decision to purchase from a third party should therefore be carefully considered. It is therefore important to think about the basic advantages and disadvantages in advance. Some important ones are noted below. The advantages of outsourcing are: –– Concentration on core competencies and focusing of activities and resources on one’s own core business –– Possibility and opportunity to establish a proactive and preventive supplier management –– Reduction of the vertical range of manufacture and transformation towards a lean production structure –– Long-term optimization of the cost structure by reducing fixed costs and changing from fixed to variable costs –– Improvement of the liquidity situation and, if necessary, improvement of the balance sheet ratios (e.g. by reducing the level of indebtedness if investments for which loans have to be taken out are not made) –– Flexible reaction to changes in demand is possible and part of the entrepreneurial risk is shifted to the supplier –– Possibility of partnerships and the preservation of innovations that are not in one’s own area of competence Disadvantages of outsourcing are: –– Far-reaching cuts in existing structures in the event of outsourcing and unrest in the workforce –– Loss of know-how and personnel with a possibly significant dependence on one provider –– Long-term loyalty to suppliers limits flexibility to actively react to market changes –– The possibility that trade secrets will not be kept, especially in international business –– Increasing coordination effort, especially in logistics and other departments that are involved in the value creation process

2.5.2.4 ABC-XYZ Analysis The ABC-XYZ analysis is a method in supplier management for the classification of material groups according to consumption and value and according to the predictability of the consumption of procurement volumes in a company. The ABC analysis is often combined with the XYZ analysis for the procurement of products, the planning of production quantities, and other logistical issues. While the ABC analysis is primarily about the value and importance of customers, products, suppliers, or purchased parts, the XYZ analysis analyses their predictability and the

38

2  Performance in Procurement and Supply Management

possibility of making forecasts. It is made up of the ABC and the XYZ analysis as shown in Fig. 2.11. The classification looks like this:

2.5.3 ABC Article –– A article: high value proportion of approx. 70–80% –– B item: average value share of approx. 15–20% –– C article: low value share of approx. 5–10%

2.5.3.1 XYZ Item –– X articles: articles with constant demand and high predictive accuracy –– Y article: article with fluctuating demand and medium forecast accuracy –– Z item: item with irregular demand and poor forecast accuracy AX and BX articles have a high share of value and can be easily forecast in terms of consumption, as they are subject to uniform consumption. They are therefore relatively easy to control. AZ and BZ articles are to be regarded as problematic. They make up a high proportion of sales, but are difficult to control due to their irregular needs. If too many articles in this category are stored, the storage costs increase. Insufficient storage can lead to bottlenecks in production.

Value and strategic relevance

A

B

Medium value product or material, mostly low-volume items. Medium strategic importance.

Low value product or material, mostly lowvolume articles. Low strategic importance.

X

• High share of value • Planned consumption • Detailed planning • Low or no inventory • Ensure fast availability at the supplier • JIT deliveries

• Average value share • Planned consumption • Detailed planning • Low or no inventory • Ensure fast availability at the supplier • JIT deliveries

• Low value share • Planned consumption • Low capital commitment • Uncritical treatment

Y

• High share of value • Irregular consumption • Detailed planning • Possibly. Create a safety reserve with the supplier • Ensure fast availability at the supplier

• Average value share • Irregular consumption • Detailed planning • Treatment like AY or BY • Ensure availability at the supplier

• Low value share • Irregular consumption • Consumption cannot be planned • Build up safety reserves as long as there is no bottleneck in the warehouse

Z

• High share of value • Chaotic and sporadic consumption • Agree on a safety reserve with the supplier • JIT deliveries

• Average value share • Chaotic and sporadic consumption • Agree on a safety reserve with the supplier • Ensure availability at the supplier • Like AZ or CZ

• Low value share • Chaotic and sporadic consumption • Consumption cannot be planned • Build safety reserves

Predictability and consumption

High value product or material, mostly low-volume articles. Very high strategic importance.

Relatively uniform, low consumption fluctuations. High forecast accuracy, very easy to plan.

Inconsistent, absent or rising trend. Seasonal business with fluctuations. Medium prediction accuracy. Can be planned to a limited extent.

Inconsistent and absolutely irregular demand. Very low prediction accuracy. Difficult to plan.

Fig. 2.11  ABC-XYZ analysis. Source: Author’s source

C

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2.5  Supply Management Process

2.5.3.2 Internationalization Strategies Supplier management must ensure resilience in international transactions and business. In 2019, German companies imported preliminary products to the value of 606 billion euros, which made up a good 55% of Germany’s total goods imports. Two-­ thirds of the imported primary products came from other EU member states, and a further 5.3% and 5.0% from the USA and China (Kolev & Obst, 2020). Supplier management must ensure through a clear structure and risk assessment that international supply chains are stable and do not lead to supply bottlenecks. The COVID-19 crisis in particular has shown that strategies for products from the health sector were not sustainable and good, so that supply bottlenecks, e.g. masks or protective equipment, have come (Helmold et al., 2020). 2.5.3.3 Sustainability and CSR Strategies The primary task of classic supplier management is to create value-adding supply chains based on suitable criteria and strategies. This happens on the basis of the criteria quality, costs, delivery performance, and other significant aspects (QCD plus alpha). In times of political unrest, trade in an international context, climate change, stricter environmental guidelines, rising energy prices, and enlightened, environmentally friendly consumers, supplier management has a key role in ensuring sustainable supply chains. Studies show that “sustainability” as an integral part of the value chain offers companies good opportunities to differentiate themselves from the competition and thus increase sales. Sustainable (Fig.  2.12) includes

Labour Conditions Intellectual Property

AntiCorruption

CSR in the Value Chain

Human Rights

Environment

Social Standards

Compliance with Laws

Fig. 2.12  CSR in operation and supply management 4.0. Source: Author’s source

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2  Performance in Procurement and Supply Management

elements such as working conditions, environmental protection, human rights, anti-­ corruption, social standards, compliance with human rights, and respect for intellectual property.

2.5.3.4 Digitization Strategies The digitization and linking of one’s own company with the supply chain will, in the medium term, significantly increase the distance between companies that successfully apply this to their business model and those that miss this opportunity. Digitization also opens up an opportunity for smaller, faster, and more flexible companies to skip the entire evolutionary stages of organizations, to overtake their competitors and to create their own markets. This also applies to supplier management or, in a broader sense, to the management of the supply chain (Immerthal, 2017).

2.5.4 Supplier Selection Every company has its specific strengths, the so-called core competencies, on which it must concentrate. Core competencies refer to skills, processes, technologies, knowledge advantages, or activities that a company can carry out better than the competition, thus achieving a competitive advantage. Core competencies are the skills of a company to be able to do something better than others. This is a strategic competitive advantage. Core competencies are determined by four characteristics: –– –– –– ––

Customer benefits Imitation protection Differentiation Diversification

The concept is a variation of the resource-based approach that has been opposed to the company’s positioning in the market. When it comes to customer benefits, companies have to ask themselves whether sustainable added value can be provided for the customer based on their core competencies. The imitation protection, on the other hand, aims at exclusivity and unique selling points. Do the companies master the core competencies exclusively or can they be easily imitated by the competitor? Differentiation reflects the duration of the benefit. Does the core ability lead to a long-term and sustainable advantage over the competition? Diversification focuses on the markets and market segments. The key question here is whether the core capabilities offer potential access to new markets. Peripheral competencies, on the other hand, can be outsourced to suppliers, as these do not represent a competitive advantage. The relocation is called “outsourcing” and includes a corporate strategy that outsources individual product scopes, tasks, sub-areas, or even entire business processes to third-party companies. The selection of suppliers when relocating products, processes, and services is part of supplier management and the second phase after the supplier strategy, as Fig. 2.13 shows.

41

2.5  Supply Management Process

Supplier Selection

Supplier Strategy

• • • • •

Supplier Evaluation

Supplier Development

Supplier Integration

Supplier Controlling

Choosing the right suppliers for the right material groups Assessing Performance of Suppliers Defining the right Scope for Suppliers Offer Evaluations and Comparisons of Q-C-D plus alpha Criteria Deciding on right Suppliers and their Scope of Supply

Fig. 2.13  Supplier selection. Source: Author’s source Criteria of Supplier Selection

Supplier 1

Supplier 2

Supplier 3

Supplier 4

Quality

10

10

5

5

Cost

9

5

5

5

Delivery

10

5

5

5

4.

Technology Leadership

5

5

0

5

5.

Relationship Management

10

10

0

5

6.

Innovation Capability

10

5

10

5

7.

Financial Strength

5

5

10

5

8.

Quality Management System, ISO 9001:2015

10

5

10

5

9.

Sustainability (CSR)

10

5

5

5

10.

Other Criteria

10

5

5

5

Total Result

89

60

55

50

1. 2. 3.

-

-

-

Delivery Quality Field Quality Warranty Processing

Material Cost (Recurring) Non-Recurring Cost Cost Reduction Ideas

On-Time-Delivery (OTD) Flexibility Supply and Delivery Concepts, e.g. VMI

Fig. 2.14  Supplier selection matrix. Source: Author’s source

2.5.4.1 Supplier Selection Criteria Before there can be a cooperation and a contractual agreement, a supplier selection must therefore take place on the basis of standardized selection criteria in a supplier selection matrix. Important criteria for the selection of suitable suppliers are shown in Fig. 2.14. One of the central criteria is the quality and nature of the products and services supplied. In addition, there are other important elements that need to be considered. An excellent supplier is characterized not only by high quality, low

42

2  Performance in Procurement and Supply Management

costs, and stable delivery performance, but also in other ways. The following criteria should therefore be considered when selecting a supplier: –– –– –– –– –– –– –– –– –– –– –– ––

High quality of the goods and low error rate A quality management system, e.g. DIN EN ISO 90001:2015 Distinct goodwill behaviour on the part of the supplier if there are complaints Constant readiness for delivery and high adherence to delivery dates Strict adherence to promised delivery times or changes Good accessibility and fixed contact persons at the supplier High flexibility (enables quick reactions, e.g. to customer requests) Price guarantees (how long are negotiated prices promised) Few or well-founded or only moderate price increases in the past Financial stability and good credit ratings Offer transparency (no hidden costs, fees, or minimum quantities) Sustainability and innovation

2.5.4.2 Supplier Risk Management Supplier selection includes measures that companies take before a need arises and a supplier is contacted. One of the main goals of supplier selection is to minimize risk. If a company chooses an unsuitable supplier, it is exposed to one or more of the following risks: –– –– –– –– ––

Failure to perform the contract because a supplier is in financial difficulties Poor performance of the contract Supplier supplies poor quality Lack of adherence to deadlines The price for the services provided is too high

Careful supplier selection is necessary in order to contain these risks. As part of the supplier evaluation, certain criteria are used to assess performance according to a defined system. In view of the trend that the integration of suppliers into company processes is becoming more and more important, the demands on suppliers are increasing. An ideal supplier portfolio is created when certain requirements have to be considered when making the selection. –– –– –– –– –– ––

Selection of suppliers based on the supplier strategy Cross-departmental supplier decisions and coordination processes Selection based on the objective and uniform evaluation criteria Use of qualitative and quantitative criteria Transparent, cost- and time-efficient selection process Selection of the most innovative and best supplier based on the selection criteria

Quality management systems such as DIN EN ISO 9001:2015 also refer to a selection of suppliers taking into consideration central elements such as the selection and evaluation of suppliers. The standard indicates that the processes, products,

43

2.5  Supply Management Process

and services provided meet the requirements and that the companies must determine and apply criteria for selection and evaluation.

2.5.5 Supplier Evaluation The third phase in supplier management is the supplier evaluation. The instrument of the supplier evaluation is comparable systematic assessment, which is to evaluate the performance of suppliers or service providers on the basis of previously defined characteristics, and is mainly used for continuous and preventive supplier monitoring. During observation, the delivery services are regularly monitored in order to identify changes in performance at an early stage. The supplier evaluation helps to an objective and systematic supplier selection, to the development of an optimal supplier portfolio, and to a continuous improvement process. The supplier evaluation is carried out with the help of certain evaluation criteria that are important for the evaluation of the supplier. Evaluation criteria are static and dynamic factors. Figure 2.15 shows an example of a supplier evaluation with internal and external company data.

2.5.5.1 Appropriate Selection of Evaluation Criteria Depending on the complexity and industry spectrum, the departments of quality, purchasing, production, logistics, sales, data processing, finance, or research and development can be included in the process. Supplier management takes on the coordination of this interface between the company and its suppliers. The result of the supplier evaluation is recorded in the form of a holistic degree of fulfilment and can later be used for the strategy derivation and selection. The criteria used to evaluate suppliers should be defined and weighted appropriately for the company. The basis for determining the criteria are the goals that the company pursues in cooperation with the supplier, as well as special requirements for the supplier or for the product or service to be delivered. The assessment criteria are best determined with the help of a requirements analysis. Depending on the exact requirements a company places on the supplier and its product or service, the evaluation criteria can also be different and, above all, their weighting can be different. However, there are

Supplier Strategy

Supplier Selection

• • • • • •

Supplier Evaluation

Supplier Development

Supplier Integration

Choosing the right suppliers for the right material groups Use of the right tools in supplier management Correct classification into preferred, alternative or market suppliers Correct consideration of the depth of added value and the scope Selection of the right digitization strategy and connection of suppliers Ensuring sustainability across the entire value chain

Fig. 2.15  Supplier evaluation. Source: Author’s source

Supplier Controlling

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2  Performance in Procurement and Supply Management

some criteria that must be considered in most cases when evaluating a supplier. These include: –– –– –– –– –– –– –– –– ––

Quality of the product/frequency of errors Costs and pricing conditions Delivery time, delivery reliability, and logistics Terms of payment Capacity Reliability/risk of delivery failure Location and transport Flexibility Sustainability

The most important methods for supplier evaluation are point evaluation methods, profile analysis, and price structure analysis. A point evaluation method for supplier evaluation is a relatively simple way of evaluating and comparing suppliers based on the allocation of weighted points or grades. A point evaluation procedure based on measurable key figures has the best informative value. As part of a profile analysis for supplier evaluation, supplier performance profiles are juxtaposed and compared. In this way, a profile analysis reveals the advantages and disadvantages of the individual suppliers. The biggest difference between the point evaluation method and the profile analysis is that the individual criteria are not weighted in the profile analysis and are also not combined into a single performance value. The price structure analysis is primarily about the criterion of the costs that a supplier causes. For the price structure analysis, the price criterion is therefore broken down into the supplier’s cost and profit components. Material costs, hourly rates, purchase costs, etc. are to be named here as sub-criteria.

2.5.5.2 Supplier Evaluation as Predictive and Preventive Tool These categories can be performance of the delivery, price evolution, production capacity, quality of management, technical capabilities, and service. Once there is a mechanism in place to periodically collect performance data from suppliers, the next step is to review the performance data. Ideally, the format that the data is in should lend itself to comparison and analysis. The data should also be in a format that can be quantified and scored. Many companies use a supplier evaluation or scorecard for this. Moreover, data from different types of assessments such as internal surveys, external surveys, and site visits should be incorporated into the analysis. Since most large organizations have many strategic suppliers and lots of data, it is almost impossible to obtain, organize, and review data from assessments effectively on a large scale without automation or software. When evaluating supplier performance data, the two things to look for (besides the obvious) are large changes in the performance metrics and overall trends. By identifying trends, a company can make projections about where the performance data will be in the future and can take action accordingly. Downward trends and deterioration in performance can signal a problem. Moreover, an abrupt change in performance metrics might signal

45

2.5  Supply Management Process

an imminent problem. However, there could be another explanation. In this case it makes sense to obtain more data from the supplier and to dig deeper to find the source of the problem. It may be a one-time anomaly or it could be something more. Monitoring supplier performance proactively can ensure that exceptions to policies are tracked and personnel and resources are assigned to address the problem quickly. Alerts and notifications can provide up-to-the-minute information to company personnel letting them know of changes in supplier performance. Having a system that can take the assessment/scorecard data and can output it in a report or other format is helpful because members of the team can all access and review the information quickly and easily. The performance evaluation of Mercedes-­ Benz shown in Fig. 2.16 is an example of a supplier evaluation. For a supplier the performance is very bad, so that immediate actions have to be taken. Once there is sudden drop in supplier performance or a downward trend, it is important to take action quickly. Quick action can reduce the risk of disaster significant loss, and gives the company the ability to take steps to prevent bad outcomes. Some actions that can be instigated include communicating with the supplier, conducting further evaluations, developing an improvement plan, or finding an alternative supplier. The actions taken may depend on many factors. These include the supplier’s past performance, level of current performance, strategic importance, possible damages, and overall risk. One of the first things to do is to contact the supplier and find out what went wrong and why. The results of the performance assessment should be provided to the supplier and can create a basis for discussions. The poor performance could have been the result of something outside of the supplier’s control. It could have been a problem with process, personnel, a supplier, or something else. By communicating with the supplier, personnel can determine the cause of the problem and try to work with the supplier to make changes to bring

Supply Management 4.0 Mission, Vision and Values Information available outside / inside the company

Information available outside / inside the company Quality

e.g. Defects

Supplier Evaluation Preventive

Reactive

Delivery

Cost

e.g. Workshops

Alpha-Criteria

e.g. On-Time-Delivery

e,.g. Qualification, CSR Financial Strength Supplier Risk Management

Other Criteria Insolvenzrisiko

Fig. 2.16  Supplier evaluation tool. Source: Author’s source

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the supplier performance back into compliance with the contract or with company policies. If the vendor does not have a good explanation or understanding of why the problem occurred, this may be a sign of trouble. Once the causes of a problem or a set of problems have been identified, the next step is to devise a supplier improvement plan. The plan should be specific to the problem, should involve both company personnel and supplier personnel, and should involve a timeline for addressing the problem or bringing the performance into compliance. This process should also be a collaborative process and should be aimed at improving the overall supply chain. Even if a supplier’s performance is acceptable, the company may wish to invest time and resources in developing suppliers and improving suppler performance. If the problem is too severe, cannot be fixed in a timely manner, or poses too great of a risk, the company may wish to stop doing business altogether with the supplier. This means that the company should carefully find an alternative source of supply and, if possible, reduce its reliance on the supplier in question. Emmett and Crocker (2009) and Dust et  al. (2010) also propose using such criteria for evaluating the performance of suppliers. Interestingly, the interviews revealed that many companies have created sub-criteria of Q-C-D-SF according to their own needs. Regarding the question of how often manufacturing companies in the European transportation industry measure supplier performance, what they do internally with the data, and how they communicate the results to suppliers, several different answers were given. In the best case, data was updated on a weekly basis and made available to suppliers through a web-based tool. Concerning the evaluation of supplier performance, all interviewees outlined three to four categories, like traffic lights: • Category one (green): acceptable with minor deviations and without conditions • Category two (yellow): acceptable with conditions • Category three (red): not acceptable In category one (green), the evaluation is approved and accepted with minor deviations. In category two (yellow) the evaluation is accepted with conditions. Conditional acceptance means that any subsequent action plan has to be approved by the supply management department. If a supplier shows severe deficiencies and is categorized three (red), the evaluation is not accepted. This can mean that a new supplier is not allowed to supply parts. In cases where category three is measured during serial production, specific supply management actions (e.g. management escalation, supplier audits, dual sourcing) might be the consequence. Some of the challenges associated with supplier evaluation may be mitigated by the use of appropriate tools. For simple projects a spreadsheet can be used. But as evaluations become more complex or more frequent, data management and data integrity issues become significant. Web electronic RFP/tendering systems are often used for initial selection projects. Some products provide functionality for combining both initial selection and ongoing evaluation and benchmarking. Without few exceptions, there is no evaluation model which considers the maturity and level of relationship with suppliers. The doctoral thesis “Establishing a best practice model of supplier relationship management (SRM) for multinational manufacturing companies in the

2.5  Supply Management Process

47

European transportation industry” makes suggestions for this aspect. There is also an M.B.A. thesis available, which includes the assessment of the Guanxi for supply management in China. Wider, within established supply management evaluation methodologies, the Carter 10 Cs model is an internationally recognized approach. This model looks at aspects which should be evaluated before contracting and as part of the ongoing supplier performance appraisal. The ten categories can be summarized as the following: 1. Capacity (does the organization have the capacity and capability to deliver the order) 2. Competency (is the organization, its people, or its process competent) 3. Consistency (does the organization produce a consistent output) 4. Control of process (can the organization control its process and offer flexibility) 5. Commitment to quality (does the organization effectively monitor and manage quality) 6. Cash (has the organization got a strong enough financial base) 7. Cost (is the product or service offered at a competitive price) 8. Culture (are the supplier and buyer cultures compatible) 9. Clean (is the organization ethical, funded legitimately, does not engage child labour) 10. Communication efficiency (does the organization have support technology of information integration) to support collaboration and coordination in the supply chain

2.5.5.3 Supplier Evaluation as Management Tool As an essential component of supplier management, the supplier evaluation contributes to the control of supplier relationships, development and maintenance of suppliers, and improved quality and logistics performance. In order to achieve these goals in the best possible way and to get a global picture of the supplier’s performance, an assessment is necessary, which focuses not only on so-called hard facts such as adherence to deadlines and quantities, but also on soft facts such as communication skill fallback. Furthermore, the supplier evaluation is carried out globally according to the same standards and criteria, thus allowing a location-based evaluation and comparability of supplier performance. By expanding the evaluation criteria, we want to optimize future cooperation with our suppliers at all essential interfaces and reward constructive cooperation. The supplier evaluation is often carried out digitally using real-time data, but it can also be carried out monthly, quarterly, or semi-annually.

2.5.6 Supplier Development Supplier development is the fourth phase in the supply management process as shown in Fig.  2.17. The term supplier development describes the activities and

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2  Performance in Procurement and Supply Management Supplier Strategy

Supplier Selection

• • • • • •

Supplier Development

Supplier Evaluation

Supplier Integration

Supplier Controlling

Choosing the right suppliers for the right material groups Use of the right tools in supplier management Correct classification into preferred, alternative or market suppliers Correct consideration of the depth of added value and the scope Selection of the right digitization strategy and connection of suppliers Ensuring sustainability across the entire value chain

Fig. 2.17  Supplier development phases. Source: Author’s source Strategic Supplier Development

Preventive Supplier Development

Design

Ramp-up

Serial

Phase

Phase

Phase

Reactive Supplier Development

Phase-out Phase

After-Service-

Phase

Fig. 2.18  Supplier development. Source: Author’s source

improvements of close, partnership-based, and long-term relationships between customers and supplier networks within the value chain (Helmold & Terry, 2016). Hofbauer et  al. (2019) describe supplier development as a continuous process to improve current or new suppliers. The basis of the development is the results of the supplier evaluation and key figures, which were described in the previous chapter. Emmett and Crocker (2009) define supplier development as a support process through direct or indirect measures. Here, too, the primary goal is to improve supplier performance. Figure  2.18 shows three categories, strategic, preventive, and reactive supplier development, of supplier development in connection with the life cycle of a product. Product phases can be divided into development, start-up, series, phase-out, and after-service phases.

2.5.6.1 Strategic Supplier Development The strategic supplier development already takes place in the development phase. Measures are usually transferred to the start-up phase of a product. The strategic approach to supplier development aims at the long-term, conscious, and continuous (further) development of the supplier’s performance (potential). Strategic supplier development is initiated proactively to maintain competitive advantages over the long term. An essential difference to the merely reactive supplier development lies in the conscious search and selection of fields for development measures. The strategic supplier development is basically carried out through the direct participation of the buyer, who invests in supplier development measures and thus also in the suppliers themselves. An essential feature for the application of direct supplier development is a strategic partnership with the supplier, as amortization of the

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development activity over the relationship life cycle is required. The ability of a supplier to develop in the strategic sense means the creation of scope for action through options for the customer.

2.5.6.2 Preventive Supplier Development Preventive supplier development aims at the early and forward-looking improvement of the suppliers on the basis of performance characteristics by the supplier management. Preventive measures are intended to prevent poor performance in the areas of quality, costs, or delivery performance and usually have a longer time horizon. The need is not yet acute, but sensors and early alarm systems (audits, supplier evaluation, incidents) show deviations in the performance of the suppliers. In the best-case scenario, preventive measures are defined at the start-up of a product before series production. 2.5.6.3 Reactive Supplier Development Supplier development includes measures taken by the customer as a merely reactive improvement in the event of short-term deterioration in performance of a supplier in series, discontinuation, or after-service. It is usually caused by a current, specific problem in the exchange of services with the supplier (poor performance). The development measure has a short-term time horizon. The necessity arises from problems of the supplier, for example to deliver on time (security of supply in operations), as well as quality defects of the product or the service itself. With reactive supplier development, suppliers only become aware of the buyer when acute problems arise, so that they are very short-term countermeasures (troubleshooting). Often suppliers are encouraged to adhere to target agreements (based on key figures), the deficits of which have emerged from the supplier evaluation in the categories of quality, costs, or delivery performance.

2.5.7 Supplier Integration Supplier integration means the integration of the supplier into the company’s corporate structures and processes so that processes and systems are synchronized in

Supplier Strategy

Supplier Selection

• • • • • •

Supplier Evaluation

Supplier Development

Supplier Integration

Choosing the right suppliers for the right material groups Use of the right tools in supplier management Correct classification into preferred, alternative or market suppliers Correct consideration of the depth of added value and the scope Selection of the right digitization strategy and connection of suppliers Ensuring sustainability across the entire value chain

Fig. 2.19  Supplier integration. Source: Author’s source

Supplier Controlling

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order to be able to work together more effectively and successfully, as Fig.  2.19 shows. In the case of supplier integration, independent companies work together to optimize their processes and structures in order to coordinate them as well as it is possible to increase success. This can sometimes be a difficult undertaking, not just for the purchasing department. With a goal-oriented implementation, however, ideally a win-win situation arises for the market partners involved. Supplier integration begins where the company’s own boundaries end. A prerequisite for a functioning integration of external actors in one’s own process chains is therefore an opening to the selected partners. Likewise, there must be a willingness to change internal work processes, ways of thinking, and also key figure/bonus systems. Depending on the industry, there are numerous opportunities for close, long-term cooperation with suppliers. Important processes that need to be taken into account when integrating suppliers include the following areas: –– Research and development: Even further ahead in the value creation process, the involvement of external partners starts in the research and development area. In this way, suppliers and customers can each contribute their specific know-how in joint project teams, bundle knowledge, and achieve synergy effects in the development of new products. –– Purchasing: Often a supplier integration starts due to the naturally existing contacts in the purchasing area, for example with the agreement of specific delivery windows or packaging units up to the fully responsible warehouse management by the supplier. For example, this requires the forward-looking provision of medium- to long-term production and sales plans. –– Production: If supplier integration extends into the company’s production processes, so-called supplier parks are often created in the direct vicinity of the customer, for example to implement just-in-time production. –– IT: An optimal exchange of information can only be guaranteed through IT standards and joint use of corresponding IT applications.

2.5.7.1 Supplier Coaching Supplier coaching is the systematic, collaborative improvement of supplier competencies through the measures carried out by supplier management together with the supplier. Coaching measures can be carried out with suppliers, distributors, and sub-suppliers, with external providers, in a (supplier) academy or in the seminar room. Coaching measures require special coaching competencies of the employees in supplier management. Coaching activities usually cover a specific subject area within the supply chain (project management, quality management, methods of lean production, etc.). No matter whether accompanying the project in the planning phase, series production, or after-service phase, coaching measures lead to rapid improvements. In coaching, the focus of supplier management is on increasing product and process quality. Many companies have set up their own supplier academy (Porsche, ZF Friedrichshafen, Bosch). These help your own company to develop or coach new suppliers or high-risk suppliers to the required degree of maturity with regard to standards or quality requirements. The goal is the

2.5  Supply Management Process

51

sustainable quality improvement of your suppliers. The most relevant factors are quality, time, and costs; practical evidence, e.g. the reduction of scrap and rework; lean, flexible, efficient, and future-proof; and experts and so-called supplier coaches (Eng.: trainers, coaches) in all questions of comprehensive quality, project, and series support. Thereby manufacturing processes of supplier parts are analysed (including manufacturing and testing concepts) and solutions and implementation options for process and product optimization are developed. In addition, standardized supplier management programmes and concepts also support the warranty of target cost processes. The required requalification must be managed and executed accurately by the supplier management function. All measures must focus on sustainability. Coaching in supplier management requires methodological and training skills through analysis and qualification.

2.5.7.2 International Purchasing Offices International purchasing offices or global supplier management centres are part of internationalization and change in the concept of supplier management. Multinational corporations such as Volkswagen, Daimler, Siemens, Bosch, or Bombardier have purchasing offices in regions such as China, India, or Eastern Europe that offer savings potential or are geographically distant from the parent company. Only in November 2015 did Deutsche Bahn open an international purchasing office in Shanghai. On the purchasing side, companies like Bombardier have more than six locations in China. Meanwhile, the added value share of Chinese products in sectors such as the automotive or rail industry is more than 20–30%. In terms of network-­ oriented supplier management, this is referred to as best-cost country sourcing (BCCS). Traditional companies use terms like global sourcing (GS) or low-cost country sourcing (LCCS). Of course, international purchasing or supplier management offices involve costs. For a purchasing office in China, you can get around EUR 50,000–EUR 80,000 p.a. calculation, which makes up a full-time position in terms of full costs (one full-time employee including salary and fringe benefits, office space, travel expenses, training, etc.). The costs for this have to be amortized through savings. It is not only large companies that benefit from international factor costs. Not only multinational corporations but also medium-sized companies have the opportunity to move on the international stage. The German Centre in China provides office space and production capacity in key industries/processes. In addition, international purchasing cooperations can be set up in which the fixed costs for a purchasing office are shared. International offices in supplier management are centres of excellence and should not be confused here with the so-called shared service centres (SSC) that are increasingly emerging.

2.5.8 Supplier Controlling Its origin has the controlling concept in practice. It was formed by Deyhle in analogy to the term marketing and is closely related to the tasks of controllers. The scientific discussion of the term controlling began on a broader scale in the 1970s. The

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first basic understanding of controlling in terms of time assigns it the task of providing business information for management purposes. In this sense, controlling should fulfil a business transparency function. Controlling is then concerned with the systematic definition and assignment (“breaking down”) of the goals to be pursued, measuring their achievement, determining deviations between target and actual values, and developing measures to eliminate them. In other words, controlling aims to lead the company through and with the help of planning and the resulting plans. The latter run through the entire company, from strategic to operational planning. Controlling in this sense can also be understood as a cybernetic process that is illustrated with the control loop of planning and control. As the last phase in supplier management, supplier controlling assesses supplier performance, forms the basis of objective key figures, and forms the basis for supplier control and supplier management (Fig. 2.20). Typical key figures are the adherence to quantities and deadlines for the delivery of goods as well as the rate of complaints. Which key figures are used in individual cases depends on the selected supplier management scenario. There are differences, for example, between central, group-wide supplier control on the one hand and local, plant-related control on the other. The informative value of the key figures depends directly on the quality of the data that is included in the key figure calculation. In industries with little vertical integration, supplier controlling based on key figures is crucial for the success of your own products. The quality of supplier controlling is only as good as the quality of the underlying data. Four case studies from the automotive industry show the state of practice in supplier controlling and form the basis for an integrated architectural design. The architecture for data quality management in supplier controlling identifies the essential design elements and their relationships with one another. The basis for performance measurement, the definition of goals and the review of results in strategic and operational supplier management, is a traceable system of indicators for each supplier. A key figure system consists of various key figures from different areas, which on the one hand can be calculated from the “hard” factors available in the system and, on the other hand, are determined from objectified subjective assessments, i.e. “soft” factors. Excellent key figure systems enable the procuring company to carry out a 360-degree analysis through which preventive measures can be taken. The influence of the various key figures on an overall key figure results from their weighting. The key values determined in an evaluation

Supplier Strategy

Supplier Selection

Supplier Evaluation

Supplier Development

Supplier Integration

Supplier Controlling

• Selection of suitable key figures from significant areas with the help of the specialist departments • Target / actual analysis - joint analysis of all key figures by supplier management in cooperation with the supplier • Definition of goals and actions to ensure long-term performance

Fig. 2.20  Supplier controlling. Source: Author’s source

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2.6  Control via Digital Supplier Dashboards and Cockpits Supplier Controlling KPI Dashboard

Quarter 1 Actual-Plan

Quarter 2 Actual-Plan

Quarter 3 Actual-Plan

Quarter 4 Actual-Plan

Purchasing Spend -

Frame Contracts (Euro) Savings (%) Usage of Frame Contracts (%) …

Process KPI

-

Quantity of Orders (Euro and %) Quantity of Frame Contracts (Euro and %) Quantity of Deliveries (# and %) …

Quality -

Delivery Quality (%) Field Quality (%) Warranty Process and Cycle Time (Time/Case) …

Cost -

Material Cost (Euro) Non-recurring Cost, e,g. Design (Euro) Cost Saving Initiatives (Euro and %) …

Dellivery -

On-Time-Delivery (%) Flexibility (Change of Quantity, Dates etc.) (%) Additional Deliveries (%) …

Financial KPI

-

Turnover (Euro) Profitability (%) Productivity (%) …

Fig. 2.21  Supplier performance dashboard. Source: Author’s source

cycle—and thus the degree of target fulfilment—form the basis for measures to further develop the supplier relationship in strategic and operational supplier management. The key figures that are calculated from automatically determined “hard” factors include quality data such as delivery quality, complaint rate, defects (measured in parts per million, PPM), cost and financial figures, delivery information, quantity reliability, sustainability factors, or innovation figures. Key figures can be kept in a supplier file, which contains important information about the supplier. Figure 2.21 shows key figures in supplier controlling.

2.6 Control via Digital Supplier Dashboards and Cockpits A supply or supplier dashboard (or cockpit) provides management with an at-a-­ glance awareness of the status of certain performance indicators such as inventory and supply operations (see Fig. 2.22). Thus, it is possible to respond to challenges before any incident is happening. The supplier dashboard shows key operational indicators and trends like NCG, OTD, outgoing quality, and sub-supplier performance. Indicators can vary from case to case. A supplier dashboard or supplier cockpit is a one-page summary of the supplier’s critical performance indicators as shown in the example above. The dashboard is supposed to give managers a quick

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Fig. 2.22  Supplier dashboard. Source: Helmold and Terry (2016)

overview of deteriorations and status on quality, delivery, or other critical issues. It enables the supply manager to take immediate actions based on a graph or a colouring.

2.7 Case Study: Apple’s Outsourcing Strategy Apple’s commercial triumph rests in part on the outsourcing of its consumer electronics production to Asia. Drawing on extensive fieldwork at China’s leading exporter, the Taiwanese-owned Foxconn, the power dynamics of the buyer-driven supply chain are analysed in the context of the national terrains that mediate or even accentuate global pressures. Power asymmetries assure the dominance of Apple in price setting and the timing of product delivery, resulting in intense pressures and illegal overtime for workers. Responding to the high-pressure production regime, the young generation of Chinese rural migrant workers engages in a crescendo of individual and collective struggles to define their rights and defend their dignity in the face of combined corporate and state power. As the principal manufacturer of products and components for Apple, Taiwanese company Foxconn currently employs 1.4 million workers in China alone. Arguably, then, just as Apple has achieved a globally dominant position, described as “the world’s most valuable brand” (Brand Finance Global 500, 2013), so too have the fortunes of Foxconn been entwined with Apple’s success, facilitating Foxconn’s rise to become the world’s largest electronics contractor. Figure 2.23 shows the employees and the location of factories in China for Apple iPhone and iPad production.

References

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Fig. 2.23  Foxconn’s manufacturing sites for Apple

References Aberdeen Group (2005). Assuring supply and mitigating risks in an uncertain economy. Supply risk management benchmark. Boston. 11/2005. Dust, R. et al. (2010). Total Supplier Risk Monitoring. Lieferfähigkeit präventiv absichern. MQ, Magazine for Quality and Management, 1–2, 27–29. Emmett, St. & Crocker, B. (2009). Excellence in Supplier Management. How to better manage contracts with suppliers and add value. Best practices in Supplier Relationship and Supplier Development. Cambridge: Cambridge Academic. Helmold, M., Einmahl, R., Rassmann, K. & Carvalho, L. (2020). In IUBH discussion paper. Lessons from the COVID-19 situation: Rethinking global supply chain networks and strengthening supply management in public procurement in Germany. Abgerufen October 31, 2020, from https:// www.iubh-­university.de/wp-­content/uploads/DP_Logistik_Helmold_4_2020fin.pdf. Helmold, M., & Terry, B. (2016). Lieferantenmanagement 2030. Wertschöpfung und Sicherung der Wettbewerbsfähigkeit in digitalen und globalen Märkten. Springer. Hendricks, K.B., & Singhal, V.R. (2005). An empirical analysis of the effect of supply chain disruptions on long-run stock price performance and equity risk of the firm. Production Operations Management, 21(5), 501–522. Hofbauer, G. et al. (2019). Lieferantenmanagement: Die wertorientierte Gestaltung der Lieferbeziehung (BWL kompakt). Oldenbourg München. Immerthal, L. (2017). Lieferantenmanagement im Wandel. Die Digitalisierung im Lieferantenmanagement beginnt mit guter Kommunikation. Beschaffung aktuell. Abgerufen October 31, 2020, from https://beschaffung-­aktuell.industrie.de/einkauf/ die-­digitalisierung-­im-­lieferantenmanagement-­beginnt-­mit-­guter-­kommunikation/. Kolev, G. & Obst, T. (2020). Die Abhängigkeit der deutschen Wirtschaft von internationalen Lieferketten. Institut der deutschen Wirtschaft. IW-Report Nr. 16. 23 April 2020. Abgerufen October 31, 2020, from https://www.iwkoeln.de/studien/iw-­reports/beitrag/ galina-­kolev-­thomas-­obst-­die-­abhaengigkeit-­der-­deutschen-­wirtschaft-­von-­internationalen-­ lieferketten.html. Ohno, T. (1990). Toyota Production System: Beyond Large-Scale Production English edition. Productivity Press. New York.

3

Performance Management in Operations Management

Perfection is not attainable. But if we chase perfection, we can catch excellence. Vince Lombardi (1913–1970)

3.1 Performance Management in Operations Management and Production Operations management is the process and activity of planning, designing, and controlling the process of production and redesigning business operations in the production of products or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed and effective in terms of meeting customer requirements. Operations management is primarily concerned with planning, organizing, and supervising in the contexts of production, manufacturing, or provision of services. It is concerned with managing an entire production or service system which is the process that converts inputs (in the form of raw materials, labour, consumers, and energy) into outputs (in the form of goods and/or services for consumers). Operations management involves the systematic direction and control of the processes that transform resources (inputs) into finished goods or services for customers or clients (outputs) as shown in Fig. 3.1. Operations produce products, manage quality, and create services. Operations management covers sectors like banking systems, hospitals, companies, working with suppliers, customers, and using technology. Operations is one of the major functions in an organization along with supply chains, marketing, finance, and human resources. The operations function requires management of both the strategic and day-to-day production of goods and services. In managing manufacturing or service operations several types of decisions are made including operations strategy, product design, process design, quality management, capacity, facility planning, production planning, and inventory control. Each of these requires an ability to analyse the current situation and find better solutions to improve the effectiveness and efficiency of manufacturing or service operations.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_3

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3  Performance Management in Operations Management Value Chain: Input-Transformation-Output

Input urces, (Raw Materials, Materials, Resources, Human Resources, Money, Knowledge, Building etc.)

Operations Management Transformation

Output (Sales of Products and Services to Customers)

(Creation of Products and Services)

Fig. 3.1  Operations management in the context of the input-transformation-output process. Source: Author’s source

3.2 History of Operations Management Operations management 4.0 is the ongoing digitization and automation of traditional manufacturing and industrial practices, using modern and smart technologies. Large-scale machine-to-machine communication (M2M) and the internet of things (IoT) are integrated for increased automation, improved communication and self-­ monitoring, and production of smart machines that can analyse and diagnose issues without the need for human intervention as shown in Fig. 3.2. Operations management or operations is not a new science. The First Industrial Revolution or operations management 1.0 was marked by a transition from hand production methods to machines through the use of steam power and water power. The implementation of new technologies took a long time, so the period which this refers to is the years around 1780 in Europe and the United States. Its effects had consequences on textile manufacturing, which was the first to adopt such changes, as well as iron industry, agriculture, and mining, although it also had societal effects with stronger middle class. The Second Industrial Revolution or operations management 2.0, also known as the Technological Revolution, occurred around 1870 that resulted from installations of extensive railroad and telegraph networks, which allowed for faster transfer of people and ideas, as well as electricity. Increasing electrification allowed for factories to develop the modern production line. It was a period of great economic growth, with an increase in productivity, which also caused a surge in unemployment since many factory workers were replaced by machines. The Third Industrial Revolution, also known as the Digital Revolution, occurred in the late twentieth century, after the end of the two world wars, resulting from a slowdown of industrialization and technological advancement compared to previous periods. The global financial crisis in 1929 followed by the Great Depression affected many industrialized countries. The production of the Z1 computer, which used binary floating-point numbers and Boolean logic, a decade later, was the beginning of more advanced digital developments. The next significant development in communication technologies was the supercomputer, with an extensive use of computer and communication technologies in the production process; machinery began to abrogate the need for human power.

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3.3  Elements of Operations Management 4.0

Operations Management 1.0 • Mechanization • Production through Steam • Loom and other Devices

1780

Operations Management 4.0 • Mass Production • Flow • Production • Industrialization Taylorism • Electrical Power

1870

Operations Management 3.0 • Automation • Computerization • Electronics • Synchronization with Suppliers

1970

Operations Management 4.0 • Cyber-Technology • Digitization • Networks • Integrated Value Chains • Internet of Things • Synchronization with global valueadding Supply Networks

• Operations with a focus on sustainability and usage of resources • CSR over the entire value chain

4041

Fig. 3.2  History of operations management 4.0

3.3 Elements of Operations Management 4.0 Operations management 4.0 refers to a new phase in the Industrial Revolution that focuses heavily on interconnectivity of the entire value chain, automation, machine learning, and real-time data (Figs. 3.3 and 3.4).

3.3.1 Virtual Factory Rapid product/process realization and enterprise integration have been identified among the major imperatives for enabling the next-generation manufacturing paradigm. This chapter proposes a virtual factory modelling approach to support these imperatives. A virtual factory is defined as an integrated simulation model of major subsystems in a factory that considers the factory as a whole and provides an advanced decision support capability. It seeks to go beyond the typical modelling of one subsystem at a time, such as the manufacturing model, the business process model, and/or the communication network model developed individually and in isolation. A basic virtual factory model of a semiconductor backend factory has been developed for concept demonstration. Application examples are used to demonstrate the integration between business processes and manufacturing system performance. Future work will move further towards the development of the complete virtual factory and its industry applications.

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3  Performance Management in Operations Management Tier 3

Tier 4

Tier 1

Tier 1

Tier 4

Supplier Supplier

Supplier Supplier Supplier Supplier

Supplier

Supplier

Supplier

Customer

Customer

er Supplier

Supplier

Customer

Operations Management 4.0

Customer

Supplier

Customer

Supplier

Customer

Supplier

Supplier

Customer

Downstream Supply Chain Management Demand or Customer Side

Upstream Supply Chain Management Supply Side

Fig. 3.3  Elements of operations management and production in the value chain. Source: Author’s source

Augmented Reality Big Data

3D Technology

Robots

Virtual Factory

Operations Management 4.0

Cloud Com m Computing Systems Integration

Internet of Things Digital Value Chain Integration

Simulations Cyber Security

Fig. 3.4  Elements of operations management 4.0 in the value chain. Source: Author’s source

3.3  Elements of Operations Management 4.0

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3.3.2 Digital Value-Chain Integration Virtual production tends to be used to help visualize complex scenes or scenes that simply cannot be filmed for real. In general, though, virtual production can really refer to any techniques that allow filmmakers to plan, imagine, or complete some kind of filmic element, typically with the aid of digital tools.

3.3.3 Lean Simulations Lean simulations include a set of hands-on experiments to teach employees about systems and process improvement in all areas of the value chain. Lean simulations can focus on design, manufacturing, capacity planning, or supply-chain design. Purpose of simulations is to understand the implications of input variables and alternations of the value-chain elements.

3.3.4 System Integration Lean integration is a continuous improvement methodology for bringing disparate data and software systems together. The goal is to maximize customer value. Lean integration is a management system that emphasizes eliminating waste as a sustainable data integration and system integration practice.

3.3.5 Internet of Things The internet of things (IoT) is a system of interrelated computing devices, mechanical and digital machines, objects, animals, or people that are provided with unique identifiers (UIDs) and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.

3.3.6 Cybersecurity Cybersecurity is the protection of internet-connected systems, including hardware, software, and data, from cyberattacks. In a computing context, security comprises cybersecurity and physical security—both are used by enterprises to protect against unauthorized access to data centres and other computerized systems.

3.3.7 Cloud Computing Cloud computing is a type of computing that relies on shared computing resources rather than having local servers or personal devices to handle applications. In its

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most simple description, cloud computing is taking services (“cloud services”) and moving them outside an organization’s IT system and environment.

3.3.8 Additive Manufacturing Additive manufacturing (AM) is the industrial production name for 3D printing, a computer-controlled process that creates three-dimensional objects by depositing materials, usually in layers. The official industry standard term is the ASTM F2792 for all applications of the 3D technology. It is defined as the process of joining materials to make objects from 3D model data, usually layer upon layer, as opposed to subtractive manufacturing methodologies.

3.3.9 Augmented Reality Augmented reality (AR) is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities, including visual, auditory, haptic, somatosensory, and olfactory.

3.3.10 Big Data Big data is a phrase used to mean a massive volume of both structured and unstructured data that is so large that it is difficult to process using traditional database and software techniques. In most enterprise scenarios the volume of data is too big or it moves too fast or it exceeds current processing capacity.

3.4 Principles of Operations Management 4.0 3.4.1 Digital Synchronization of Networks To deliver on the benefits of digital supply chains, companies must synchronize every aspect of supply-chain optimization, planning, and execution throughout their supply-chain network—bringing together previously disparate disciplines, departments, vendors, and technologies into a single ecosystem that ties everyone and everything together. Information and departments that were previously siloed and disconnected become part of a synchronized digital supply chain, where all activities are orchestrated, information flows freely, and companies can easily adjust to changing demand signals. A synchronized supply chain has four distinct capabilities that can help drive increased sales and profits. The ultimate goal of a synchronized, digital supply chain, for one, is to quickly get the product to consumers who want to buy it, and it is something that siloed, disconnected supply chains cannot

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accomplish. Secondly, for a synchronized supply chain to work, companies have to position materials, capacity, and finished goods to react to demand. To get there, it will take product development, where teams not only build the product to meet the line plan, but also overdevelop in certain categories that are doing well, so they can quickly put new products into production when demand is strong. Vendors can then be evaluated based not only on price and quality, but also on lead time and capacity. Companies may also choose to handle replenishment production closer to home to minimize delivery time while using overseas vendors for basic goods and initial floor sets. With a synchronized supply chain, companies will closely forecast their raw material requirements, place commitments with multiple suppliers, and draw down the commitments as POs are issued and the materials are consumed. This reduces the risk of holding too much or too little inventory to meet demand. The other element of successful supply-chain synchronization is to identify and execute the best supply/demand adjustment. As demand changes, companies must consider what they can do to quickly optimize their assortments. If sell-through on a new style is stronger than anticipated in New York, which means stores will be out of stock in 3 weeks, what are your best options to optimize profit? Do you ship by air freight or boat, or transfer goods from the warehouse, or from one store to another? With the current state of supply chains, it is difficult to sift through massive amounts of data to quickly determine the fastest, most profitable way to get the goods where they need to be. Synchronizing and digitizing the flow of information in a connected ecosystem is the only way to understand and react to changing demand signals. The fourth key to this better connected supply chain is the ability to predict future demand. As planning systems continue to advance, they are beginning to calculate demand based not only on historical sales, but also on current POS data, external events, social sentiment, changing weather patterns, and other factors, each of which impacts demand. These capabilities provide a snapshot of what companies are hoping to accomplish by synchronizing and digitizing their supply chains. Machine learning and AI are increasingly being incorporated into the supply-chain networks, since the massive amounts of data and various options for each opportunity are too vast for humans to quickly and accurately analyse.

3.4.2 7R Principle Operations are concerned with managing an entire production system which is the process that converts inputs (in the form of raw material, labour, energy, and resources) into outputs (in the form of goods and/or services), as an asset, or delivers a product or services. Operations produce products, manage quality, and create service. Operations management covers sectors like banking systems, hospitals, companies, working with suppliers, customers, and using technology. Operations are one of the major functions in an organization along with supply chains, marketing, finance, and human resources. The operations function requires management of both the strategic and day-to-day production of goods and services. Operations management involves the production, planning, organizing, and supervising

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Fig. 3.5  7R principle in operations management

processes of products or services and targets to meet customer demands by delivering the right product or service at the right quality, quantity, time, and place with right people at the right cost. This principle is called the 7R principle and targets the optimal satisfaction of the goal in the operations function. Figure 3.5 highlights the 7R principle with objectives and criteria behind the objectives (Helmold & Terry, 2016).

3.4.3 Gemba, Gembutsu, and Genchi: Right Place of Happening Gemba (現場) is also a Japanese term meaning “the real place”. Japanese detectives call the crime scene gemba, and Japanese TV reporters may refer to themselves as reporting from gemba. In business, gemba refers to the place where value is created; in manufacturing, gemba is the factory floor. It can be any “site” such as a construction site, sales floor, or where the service provider interacts directly with the customer. In lean production and supply management, the idea of gemba is that the problems are visible, and the best improvement ideas will come from going to the gemba. The gemba walk, much like management walk-around (MWA), is an activity that takes management to the front lines to look for waste and opportunities to practice gemba kaizen, or practical shop floor improvement. In quality management, gemba means the manufacturing floor and the idea is that if a problem occurs, the engineers must go there to understand the full impact of the problem, gathering data from all sources. Unlike focus groups and surveys, gemba visits are not scripted or bound by what one wants to ask. Glenn Mazur introduced this term into quality function and supply management department (QFD, a quality system for new products where manufacturing has not begun) to mean the customer’s place of business or lifestyle. The idea is that to be customer-driven, one must go to the customer’s gemba to understand his/her problems and opportunities, using all of one’s senses to gather and process data.

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Fig. 3.6 Bombardier Sifang Transportation: Dr. M.  Helmold and B.  Lannoye. Source: Author’s source

Gembutsu (現地現物) is a Japanese word meaning “real thing”. It is one of the components of the “Three Reals” meaning to go to the real place (gemba) to see the real thing (gembutsu) and collect the real facts (genjitsu). This term simply means that there is no substitute for seeing something with one’s own eyes. Genchi (現地) is the Japanese principle of going to and directly observing a location and its conditions in order to understand and solve any problems faster and more effectively. The phrase literally translated means “go and see for yourself” and is a part of the Toyota Way philosophy (Fig. 3.6).

3.4.4 Muda, Muri, Mura In contrast to the traditional paradigm the objectives of lean production are based on a reduction of throughput times and the elimination of non-value-adding activities. These activities are waste or so-called MUDA (Japanese: 無駄). Both concepts, the traditional and the lean concept, are directed towards customer satisfaction. Nevertheless, the lean concept’s foundation is based on the optimal reaction capability and not based on inventories or waste. Inventories increase the cost of capital and have negative impacts on the shareholder value, whereas short cycle times lead to small inventories. Lean manufacturing or lean production, often simply “lean”, is a systematic method for the elimination of waste (“Muda”) within a manufacturing system. Lean also takes into account waste created through overburden (“Muri”) and waste created through unevenness in workloads (“Mura”). Working from the perspective of the client who consumes a product or service, “value” is any action or process that a customer would be willing to pay for. Essentially, lean is centred

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on making obvious what adds value by reducing everything else. Lean manufacturing is a management philosophy derived mostly from the Toyota Production System (TPS) (hence the term Toyotism is also prevalent) and identified as “lean” only in the 1990s. TPS is renowned for its focus on reduction of the original Toyota seven wastes to improve overall customer value, but there are varying perspectives on how this is best achieved. The steady growth of Toyota, from a small company to the world’s largest automaker, has focused attention on how it has achieved this success. There are three MUs including MUDA that support the elimination of waste within the philosophy of Toyota. In parallel to MUDA (Japanese: 無駄), there are MURA (Japanese: 無ら) and MURI (Japanese = 無理) which are the ground theory for the TPS. MURA means “in balance”, and MURI “overutilization”. While certain capacities are too scarce (bottleneck) there are other resources significantly below their capacity limits. The main objective of procurement and a strategic supplier management is to apply the JIT principle to the suppliers. Value-adding activities have to be rolled out to all suppliers from raw material to module and keiretsu suppliers. The keiretsu supplier is the closest relationship and connection to a supplier (Japanese: 系列子会社). Keiretsu is an integration of suppliers into the own organization and system; in few cases, partial ownership is involved. There are four pillars for the lean production system. These are the integral parts of a lean production and JIT system as shown in Figure 5.16. The four pillars consist of the flow, tact, pull, and zero-defect principle, which have to be introduced simultaneously. In the sense of an optimized supply chain, it is a fundamental activity to implement these four principles towards all areas. Practical examples by Porsche Consulting show that the introduction of the TPS led to radical improvements in terms of errors and defects per car (quality), serial completion time (cost and productivity), and inventory (logistics and delivery). The study reveals that the reduction of defects per car was by 63%. The throughput time could be improved by more than 53%. This caused a positive situation of inventory by 50%. In the JIT approach, it is important that the right part comes in the right quantity in the right quality at the right time to the right place as shown in the 7R principle. This principle focuses on a zero defect strategy and direction. This principle was defined in the previous chapters as part of the objectives. The principles can be regarded as obtaining the right parts at the right quality and at the right time. This has to be in line with the right quantity in the right place by the right people at the right price (Helmold & Terry, 2016).

3.4.5 Heijunka Heijunka (平準化) is a Japanese word that means “levelling”. When implemented correctly, heijunka elegantly—and without haste—helps organizations meet demand while reducing wastes in production and interpersonal processes. The two main objectives are the standardization of operations and the capability of flexible production of alternate derivatives on the same line (Ohno, 1990). Toyota defines heijunka as the overall levelling, in the production schedule, of the volume and variety

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of items produced in given time periods and adds that it is a prerequisite for just-in-­ time delivery. Heijunka allows you to level your production in both volume and product diversity. Lean facilities that have implemented heijunka do not base their production off the actual flow of customer orders. Instead, the company will use the heijunka methodology to calculate the total volume of orders placed in a specific time frame and level them out. This allows the facility to produce the same amount and mix each day, without the ebbs and flows of demand cycles. Balancing your workflow has many benefits to your organization. For instance, if you have an above-average week of orders, followed by a below-average week, you end up paying overtime the first week and sending employees home the following. This is waste in the simplest form that could have been avoided with heijunka.

3.4.6 Poka-Yoke Poka-yoke (ポカヨケ) is a Japanese term that means “mistake-proofing”. A poka-­ yoke is any mechanism in a lean concept, a process that helps an equipment operator avoid (yokeru) mistakes (poka). Its purpose is to eliminate product defects by preventing, correcting, or drawing attention to human or other errors as they occur. The concept was formalized, and the term adopted, by Shigeo Shingo as part of the TPS. It was originally described as baka-yoke, but as this means “fool-proofing” (or “idiot proofing”) the name was changed to the milder poka-yoke.

3.4.7 Jidoka By definition, jidoka (自働化) is a lean method that is widely adopted in manufacturing and product development. Also known as autonomation, it is a simple way of protecting your company from delivering products of low quality or defects to your customers while trying to keep up your takt time. Jidoka can be defined as automation with human touch.

3.4.8 Chaku Chaku Line Chaku chaku (Fig. 3.7) is a way to operate a semi-automated manufacturing line. One (or more) workers walk around the line, add parts to the processes, and then start the process. While the process works on the part automatically, the worker adds the next part to the next process, and so on. The word “chaku chaku” comes from Japanese. Either it can mean “load, load” (着々) or it can simply be the sound the machine makes while unloading (ちゃくちゃく), similar to “clack-clack”. The basic principle of the chaku chaku line is very simple. The worker moves around the line from process to process and only loads the parts into the machine.

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Fig. 3.7  Chaku chaku line. Source: Author’s source

After loading the part, the worker starts the machine and moves to the next process. At the end of the line, the worker starts again from the beginning.

3.5 Case Study: Mazda Operations Management Strategy Mazda Motor Corporation is based in Hiroshima (Japan) (Fig.  3.8) and employs about 50,000 people. Mazda is dedicated to developing vehicles that are distinctive and innovative, using the latest and most advanced technologies to satisfy the diverse needs of customers worldwide. To accomplish this, Mazda created a global R&D network with operations in Japan, the United States, Germany, and China. The Corporate Vision is: “We love cars and want people to enjoy fulfilling lives through cars. We envision cars existing sustainably with the earth and society, and we will continue to tackle challenges with creative ideas.” 1 . Brighten people’s lives through car ownership. 2. Offer cars that are sustainable with the earth and society to more people. 3. Embrace challenges and seek to master the Do (“Way” or “Path”) of creativity. Mazda’s Brand Essence is “Celebrate Driving”. “Celebrate Driving” delivered by Mazda is not just about driving performance. The aim of the branding is this: Choosing a Mazda shall prize the customer and user with confidence and pride. Additionally, driving a Mazda is also leading up to urge to take on new challenges. Not just our products but also every encounter with Mazda evokes the emotion of motion and makes customers’ hearts beat with excitement. All of these are contained in our brand essence of “Celebrate Driving”. This marketing strategy targets

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Fig. 3.8  Mazda Headquarters, Hiroshima. Source: Author’s source

not only existing users, but also new customers who are willing to change from existing brands. Mazda is a company with the headquarters in Hiroshima (Fig. 3.8; Japan) and uses Toyota methods in operations across the factories and supply chain. Toyota is all about the process about eliminating waste. Mazda is using lean tools like 5S, Kanban cards, Andon, and poka-yoke. All of them are used to improve and optimize the processes through small changes (Kaizen). Mazda is all about making cars. Mazda’s lean management starts with the design of each vehicle, in which engineers are brought together with experts from supply chain and manufacturing to make sure that the cars can be produced in the best and most ergonomic way as possible. Mazda states that a car is not simply a bunch of products and metal, but it is a living creature with emotional bond to its driver. That is Mazda’s ultimate goal of Kodo, the “Soul of Motion” design. There are ten plants in Toyota city and just one with two assembly lines in Hiroshima. Toyota has another 2 plants in Japan and 25 across the world. Mazda has one more plant in Japan plus five manufacturing and four assembly plants worldwide. As a result, in 2016 Toyota produced over 10 million vehicles, where Mazda assembled over 1.5 million. With Toyota’s focus on process, there is no surprise that their production system is made to be super effective. Cars were moving fast on the assembly line. Workers had precisely defined, simple tasks to perform within short cycle. Toyota’s operators spend less than half a minute per station (cycle times). Everything was packed in a small area, so the distances between workstations were minimal. On the other hand, everything in Mazda was just slower. The cycle times for each operation in Mazda are longer and workers have more tasks to perform on single units. Mazda is using also lean tools such as Kanban, Andon, and poka-yoke. There is less automation in Mazda. As a result, Mazda assembly line takes significantly

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more space. In Mazda, it takes 15 h from stamping to final inspection in Mazda and 17 h in Toyota’s Takaoka Plant.

References Helmold, M., & Terry, B. (2016). Global sourcing and supply management excellence in China. Procurement guide for supply experts. Springer. Ohno, T. (1990). Toyota production system. Beyond large scale production. Productivity Press.

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Strategic Management Tools and Excellence Models

Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves. Steve Jobs

4.1 Balanced Scorecard (BSC) The balanced scorecard (BSC) in Fig. 4.1 is a strategic planning and performance management tool and was first introduced by the accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton. It was first published in 1992 in a Harvard Business Review article. Dr. Kaplan and Dr. Norton took previous metric performance measures and adapted them to include non-financial information. The BSC is the performance metric used in strategic management to identify and improve various internal functions of a business and their resulting external outcomes. It is used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results, as the information gathered is interpreted by managers and executives, and used to make better decisions for the organization. The BSC system connects the strategic elements like mission, vision, core values, and strategic objectives with the more operational elements such as performance measures, key performance indicators, targets, and actions (projects that help you reach your targets) of the enterprise or organization (Kaplan & Norton, 1992, 1996). The BSC suggests that management views the organization from four perspectives in order to develop objectives, measures (KPIs), targets, and initiatives (actions) relative to each of these points of view: • Financial: often renamed stewardship or other more appropriate name in the public sector, this perspective views organizational financial performance and the use of financial resources. • Customer/stakeholder: this perspective views organizational performance from the point of view of the customer or other key stakeholders that the organization is designed to serve.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_4

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Actions

Targets

Measurables

Objectives

Financial Perspective

Actions

Strategic Planning

Targets

Strategic tegic ctives Objectives

Measurables

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Vision sion

Objectives

Internal Business Processes Perspective Mission

Targets

Measurables

Objectives

Customer Perspective

Actions

Targets

Measurables

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Fig. 4.1  Balanced scorecard (BSC). Source: Author’s own figure

• Internal process: views organizational performance through the lenses of the quality and efficiency related to our product or services or other key business processes. • Organizational capacity (originally called learning and growth): views organizational performance through the lenses of human capital, infrastructure, technology, culture, and other capacities that are key to breakthrough performance. Figure 4.1 outlines the BSC including objectives, measurable, targets, and actions. For each objective on the strategy map, at least one measure or key performance indicator (KPI) will be identified and tracked over time. KPIs indicate progress towards a desirable outcome. Strategic KPIs monitor the implementation and effectiveness of an organization’s strategies, determine the gap between actual and targeted performance, and determine organization effectiveness and operational efficiency. The BSC ensures the following areas: Advantages of the BSC are the following: • It provides an objective way to see if the strategy is working. • It offers a comparison that gauges the degree of performance change over time.

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• It focuses the employees’ attention on what matters most to success in the organization. • It allows measurement of accomplishments, not just of the work that is performed. • It provides a common and simple language for communication by using numeric indicators. • It helps to reduce intangible uncertainty by applying tangible and hard figures. • It shows clarity of mission, vision, and strategy as part of the strategic pyramid. • It is a transparent way in cascading down corporate objectives to all areas in the organization. • It uses customer and stakeholder expectations as focal point and starting point. • It enables permanent and endurable monitoring of performance, objectives, and outcomes. • It ensures a cross-disciplinary and hierarchy traversing communication process. • It enables the integration of performance measures’ objectives and an appropriate level. • It displays cause-and-effect relationships as the instrument for functions and management. • It results in a sustainable action plan and functional action plan, which can be easily reviewed. Disadvantages of the BSC are the following: • It is based on historical data from past and may thus lead to a distorted picture. • It can lead to a lack of long-term commitment and leadership for management due to short-term objectives (micromanagement). • It does not always express the interests of all stakeholders, but a few stakeholders. • It uses only quantitative key performance indicators and the approach may not show the real world. • It has the danger to overload system with key performance indicators (KPIs). • It may have a potential lack of employees’ awareness or a failure to communicate information to all employees. • It is constructed as a management reporting tool rather than improvement tool. • It shows that benchmarking based on KPIs in BSC and specific measures is difficult. Figure 4.2 outlines the logic between the four perspectives. The balanced scorecard is used to improve the performance by strengthening the organization. The improvements will lead to a better Q-C-D plus alpha ratio throughout the organization and thus satisfy the customers. As a result, financial performance will be outstanding. The BSC is used to attain objectives, measurements, initiatives, and goals that result from these four primary functions of a business. Companies can easily identify factors hindering company performance and outline strategic changes tracked by future scorecards. With the balanced scorecard, they look at the company as a whole when viewing company objectives (Kühnapfel, 2019). An organization may use the balanced scorecard to implement strategy mapping to see where value

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Financial Results

Financial perspective

Customer Satisfaction

Q-C-D + alpha

Customer perspective

Process Know How

Product and Service Know How

Internal business processes

Knowledge and Skills

Organisational perspective

Fig. 4.2  Logic behind the BSC. Source: Author’s own figure

is added within an organization. A company also utilizes the balanced scorecard to develop strategic initiatives and strategy objectives. Cascading a balanced scorecard means to translate the corporate-wide scorecard (referred to as tier 1) down to first business units, support units or departments (tier 2), and then teams or individuals (tier 3). The end result should be focus across all levels of the organization that is consistent. The organization alignment should be clearly visible through strategy, using the strategy map, performance measures and targets, and initiatives. Scorecards should be used to improve accountability through objective and performance measure ownership, and desired employee behaviours should be incentivized with recognition and rewards. There are several factors that are linked to the usage of the BSC.

4.1.1 Better Strategic Planning The balanced scorecard provides a powerful framework for building and communicating strategy. The business model is visualized in a strategic map which helps managers to think about cause-and-effect relationships between the different strategic objectives. The process of creating a strategy map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance are identified to create a complete picture of the strategy.

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4.1.2 Improved Strategy Communication and Execution Having a one-page picture of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This “plan on a page” facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to remember is that it is difficult for people to help execute a strategy which they do not fully understand.

4.1.3 Better Alignment of Projects and Initiatives The balanced scorecard helps organizations map their projects and initiatives to the different strategic objectives, which in turn ensures that the projects and initiatives are tightly focused on delivering the most strategic objectives.

4.1.4 Better Management Information The balanced scorecard approach helps organizations design key performance ­indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision-making.

4.1.5 Improved Performance Reporting The balanced scorecard can be used to guide the design of performance reports and dashboards. This ensures that the management reporting focuses on the most important strategic issues and helps companies monitor the execution of their plan.

4.1.6 Better Organizational Alignment The balanced scorecard enables companies to better align their organizational structure with the strategic objectives. In order to execute a plan well, organizations need to ensure that all business units and support functions are working towards the same goals. Cascading the balanced scorecard into those units will help to achieve that and link strategy to operations.

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4.1.7 Better Process Alignment Well-implemented balanced scorecards also help to align organizational processes such as budgeting, risk management, and analytics with the strategic priorities. This will help to create a truly strategy-focused organization.

4.2 European Foundation of Quality Management (EFQM) 4.2.1 Concept of the EFQM Excellence Model The EFQM excellence model (Fig. 4.3) is a non-prescriptive business excellence framework for organizational management, promoted by the European Foundation for Quality Management https://en.wikipedia.org/wiki/European_Foundation_for_ Quality_Management (EFQM) and designed to help organizations to become more competitive. Regardless of the sector, size, structure, or maturity, organizations need to establish appropriate management systems to be successful. The EFQM excellence model is a tool to help organizations do this by measuring where they are on the path to excellence, helping them understand the gaps, and promoting solutions. EFQM is an acronym that stands for European Foundation for Quality Management. EFQM was founded in 1988 with the objective to create a platform where organizations can learn from each other to continuously improve their performance. Benchmarking with other European organizations will lead to sustainable economic growth. EFQM wants to open the chance to the organizations to define their current “level of excellence” and where they need to focus improvement efforts. Moreover, the model helps to ensure that organization decisions incorporate the needs of all stakeholders and are aligned with the organization’s objectives. That

Results

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Strategy 10%

Partnerships & Resources 10%

Processes, Products & Services 10%

People Results 10% Customer Results 15% Society Results 10%

Business Results Key Performance Results 15%

Innovation, Learning and Improvements Fig. 4.3  EFQM excellence model. Source: Author’s own figure, adjusted from the EFQM model

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in turn supports managers and directors in training, sharing ideas, and innovating with the aid of the so-called EFQM model as a common framework. The EFQM model or EFQM business excellence model is the most popular quality management tool in Europe, used by more than 30,000 organizations to improve performance. It supports you to self-assess and reflect. 84% of the EFQM members say that the EFQM model helps to improve their organization. This quality management model aims at sustainable excellence in which quality, efficiency, and sustainability are the key elements. The basis of the EFQM model consists of the total quality management (TQM) concept (Peris-Ortiz et al., 2015). It consists of a universal framework of concepts, thus enabling organizations to share information in an effective way, irrespective of the different sectors, cultures, and life stages in which they are located. Organizations can thus take other organizations as a model, so that they obtain insight into how far they meet the image of a high-quality organization. The EFQM model consists of nine criteria that are subdivided into five enablers and four results: This is the model behind the European Business Excellence Award, an award process run by the European Foundation for Quality Management (EFQM). This framework is used as the basis for national business excellence and quality awards across Europe. The model consists of nine categories: • • • • • • • • •

Leadership Policy and strategy People Partnerships and resources Processes Customer results People results Society results Key performance results

The fundamental concepts that underpin the EFQM excellence model are: • • • • • • • •

Result orientation Customer focus Leadership and constancy of purpose Management by processes and facts People development and involvement Continuous learning, innovation, and improvement Partnership development Corporate social responsibility

4.2.2 Continuous Process The EFQM model must be read from right to left, as a result of which it becomes clear that the result areas focus on “what can be achieved?”, after which it becomes

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clear that these organizational areas focus on “how can these results be achieved?”. The bottom arrow, “learning, creativity, and innovation”, indicates that measuring, evaluating, and adjusting are not one-off actions but a continuous process. In the same process organizations complete a step-by-step development.

4.2.3 Self-Assessment The EFQM model consists of an EFQM assessment that enables an organization to determine where they are in the quality process. The assessment starts with a review of the results. This is the underlying principle of this model. To improve results, measures should be taken in at least one of the organizational areas. The EFQM model and the assessment are represented in five development stages.

4.2.4 Application of the EFQM Excellence Model The assessments allow an organization to gain insight into the quality of its current operational management. Improvements are formulated and these can be implemented by an organization in stages. The assessment itself consists of five steps: • • • • •

Setting standards for all of the nine key areas Determining the current quality of operational management Formulating and prioritizing of improvements Application and inclusion of improvements in the various (annual) plans Actual implementation and monitoring of the remedial actions

4.3 Baldrige Excellence Model This is the model behind the US Malcolm Baldrige National Quality Award, an award process administered by the American Society for Quality (ASQ) and managed by the National Institute of Science and Technology (NIST), an agency of the US Department of Commerce. This framework is used as the basis for over 70 other national business excellence/quality awards around the world. The model consists of seven categories: 1. Leadership 2. Strategic planning 3. Customer and market focus 4. Measurement, analysis, and knowledge management 5. Workforce focus 6. Process management 7. Business results

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The core concepts of the Baldrige Criteria for Performance Excellence are: • • • • • • • • • • •

Visionary leadership Customer-driven excellence Organizational and personal learning Valuing employees and partners Agility Focus on the future Managing for innovation Management by fact Social responsibility Focus on results and creating value Systems perspective

4.4 Business PM Improvement Resource Planning (BPIR) The Business Performance Improvement Resource (BPIR) model provides an alternative, comprehensive, and simple way to classify benchmarking and best practice information within the website. The model classifies information through over 250 business processes. The high-level processes are shown below: • • • • • • • • • • • • • • •

Understand markets and customers Develop vision and strategy Design products, processes, and services Market and sell Produce and deliver for manufacturing-oriented organizations Produce and deliver for service-orientated organizations Invoice and service customers Deliver leadership Develop and manage human resources Manage information and knowledge Manage financial and physical resources Execute environmental management programme Manage external relationships Manage improvement and change Measures of organizational performance

4.5 Performance Management to Excellence Model (P2ME) The PM excellence model by Dr. Helmold focuses on the value chain with its primary and secondary functions as outlined in Fig. 4.4. Primary functions are supply, operations, and marketing and sales. Secondary or support functions are IT, HR, or

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Primary value contributors

Supply side (Suppliers)

Purchasing Management

Value chain

Operations Management

Marketing & Sales

Demand side (Customers)

PM2E

Corporate strategy Organisationl improvement Supply management Supplier and partnerships Cooperation and collaboration Value chain visiblity B2B and B2C collaboration Risk management

Secondary value contributors

Demand scheduling & operations Quality performance Learning and growth Leadership and management Global activities

Information systems

Human resources

Finance and controlling

Business ethics

Digitalisation and AI

Legal

Contineous improvement

Fig. 4.4  PM2E excellence model by Dr. Marc Helmold. Source: Author’s own figure

finance. The model is process oriented and focuses on 15 categories, where value is generated. The 15 categories are: • • • • • • • • • • • • • • •

Corporate strategy Organizational improvement Supply management Supplier and partnerships Cooperation and collaboration Value-chain visibility B2B and B2C collaboration Risk management Demand scheduling and operations Quality performance Learning and growth Leadership and management Global activities Digitalization and artificial intelligence (AI) Continuous improvement

4.6 Case Study: EFQM Model at BMW In 2015 the BMW factory in Regensburg (Germany) won the EFQM excellence award. Year by year the BMW plant in Regensburg could achieve positive results in all fields by the EFQM assessors. Not only costs are in the target focus, but also other elements like service, quality, people, and innovation. Each year the plant agrees to new, increased targets with sustainable improvements. They belong to the

References

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EFQM criteria customer-oriented results, employee-oriented results, society-oriented results, and key results. This BMW plant’s KPI landscape combined with necessary enablers is a real achievement which could be developed over the years with the help of EFQM structures, assessments, and feedbacks. It grew to a perfect interaction between all technologies that (quality, logistics and controlling, paint and body shop, assembly, human resources) work together with harmonized targets to reach positive results. In 2010, the Plant Leadership Circle revised the management process in order to increase its transparency. This is when the process was given its current structure of two interconnected loops, which mark the distinction between the long-term perspective and the short-term derivation of activities over a 1-year period. Each year the strategic and operative excellence is discussed and finally signed in three-level target agreements that go down also to the shop floor.

References Kaplan, R., & Norton, D. P. (1992). The Balanced Scorecard (BSC). Measures that drive performance. Harvard Business Review, 01–02. Kaplan, R., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, 01–02. Kühnapfel, J. (2019). Balanced Scorecards im Vertrieb. Springer. Peris-Ortiz, M., et  al. (2015). Achieving competitive advantage through quality management. Springer.

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Strategic Management Objectives, KPI, and OKR

Quality is everyone’s responsibility. Edwards Deming

5.1 The Performance Management Cycle Performance management (PM) must be an integral part of any enterprise and organization. Performance improvements and permanent adjustments are important factors for the successful implementation of lean structures. Performance management therefore integrates a cycle around performance measurement and analysis (plan), the performance action and implementation (do), the performance management controlling (check), and the performance improvements and adjustments (act) as illustrated in the lean performance management cycle in Fig. 5.1. The figure shows the lean performance management cycle as an iterative and continuous process for the control and improvement of processes, products, or services. The original P-D-­ C-A four-step framework is also known as Deming circle. PM is a basic and efficient methodology. It portrays the administration of enterprises, processes, HR, divisions, and associations to ensure that objectives and destinations are being reached. The objectives and destinations are gotten from client’s desires which are the bases of the key mission and vision in an endeavour. Performance measurement and administration must be executed over the whole value chain and apply to all functions and department. PM reaches from the upstream value chain over the operation to the downstream supply-chain management. Performance management involves defining what effective performance looks like, as developing the tools and procedures necessary to measure performance. The overall goal of performance management is to ensure that the organization and all of its subsystems (processes, departments, teams, employees, etc.) are working together in an optimum fashion to achieve the results desired by the organization. Performance management can be done externally (e.g. measurement by customers, shareholders, or analysts, measurement of supply base) and internally (management of organization). PM must include the entire value chain and all elements

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_5

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84 Tier 3

Tier 2

Tier 1

Tier 1

Tier 2

Strategic Management Objectives

Services Operations Products

KPI, OKR The Value Chain Upstream Supply Chain Management or Supply Side

Downstream Supply Chain Management or Demand Side

Fig. 5.1  Performance management cycle. Source: Author

including USCM, operations, DSCM, and support functions like finance, logistics, human resources (HR), or information technology (IT). Purely financial PM is not successful, so that all stakeholders and functions have to integrate and collaborate in order to achieve the excellent performance. The key questions related to performance management are the following: • • • • • •

What is performance management? Where do I measure performance? What do I measure? How can I measure performance? When do I measure performance? How can I improve the performance?

Enterprises must aim for PM excellence. Permanent measurement and improvements are crucial activities by top management. PM is a core activity and must be pursued by all departments. In addition, there are certain characteristics of PM that can be described as follows: 1. PM has to be executed over the entire value chain from the upstream over the operation to the downstream supply-chain management. 2. PM is a structural and systematic approach in enterprises and organizations. 3. PM must be coordinated and implemented by top management. 4. PM deals with enterprises, processes, employees, departments, and organizations. 5. PM uses tools, mechanics, and procedures necessary to measure performance (BSC, audits, or EFQM).

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5.2  Performance Excellence

Performance Adjustment and Improvements

Performance Measurement and Analysis

(Act)

(Plan)

Performance Controlling and Management

Performance Action and Implementation

(Check)

(Do)

Fig. 5.2  Performance management across the value chain. Source: Author

6. PM goals and objectives are to perform efficiently and effectively. 7. PM goals are relevant to customer and stakeholder expectations. 8. PM goals and objectives are derived from customer’s (and stakeholder’s) expectations which are the bases of the strategic mission and vision. 9. PM uses qualitative and quantitative measurables and key performance indicators (KPIs). 10. PM strives for excellence and permanent improvements. Figure 5.2 shows the value chain from upstream to the own operations and downstream activities. Strategic management objectives, key performance indicators, and objective key results must take the entire value chain into consideration.

5.2 Performance Excellence Performance excellence (see Fig. 5.3) can be defined as achieving and maintaining outstanding and superior levels of performance that meet and exceed the expectations of the stakeholders. There is a huge number of stakeholders for any business or enterprise and to be assessed as excellent these enterprises have to be achieving

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Fig. 5.3  Performance management excellence. Source: Author’s own figure. Author’s source

an outstanding level of performance for all of their different stakeholders, employees, customers, shareholders, owners, and the wider community. To achieve sustained and superior levels of excellence, it is mandatory for enterprises and organizations to permanently assess the situation and to strive for improvement by initiating continuous improvement programmes like the Toyota production system or excellence models. Excellence model allows the management of enterprises and organizations to understand the cause-and-effect relationships between what their organization does (actual performance), the enablers, and the results it achieves in comparison to set objectives (plan). The model comprises three integrated components. Fundamental excellence concepts underlie principles that form the foundation for achieving sustainable excellence in any organization. These principles can be described as follows: • • • • • • • •

Adding value for customers Creating a sustainable future Harnessing creativity and innovation Managing with agility Developing organizational capability Leading with vision, inspiration, and integrity Succeeding through the talent of people Sustaining outstanding results

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The goal of any excellence initiative and programme must therefore be to achieve world-class excellence as illustrated in Fig. 5.3. The system, developed by Dr. Marc Helmold, is similar to the German school grading system (1 = very good, 5/ = failed). Companies usually start as so-called laggards (Level 6). A laggard can be defined as an organization that falls behind similar companies in the same industry. After the laggard the starter comes (Level 5). The next level then is a “standard” performance (Level 4). Standard means in this context that enterprises have an average performance level in a certain sector. The next level is “maturity” in performance including some best practices (Level 3). After the maturity, organizations will achieve the “industry excellence” (Level 2) level. In this level, performance is outstanding within the industry. The last and highest level is the world-class excellence level, in which organizations are benchmarks in terms of excellence on a global scale (Level 1).

5.3 Key Performance Indicators (KPIs) Key performance indicators (KPIs) are a set of quantifiable measures that a company uses to gauge its performance over time. These metrics are used to determine a company’s progress in achieving its strategic and operational goals, and also to compare a company’s finances and performance against other businesses within its industry. A key performance indicator (KPI) is a measure of your performance against key business objectives. High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs may focus on processes or employees in departments such as sales, marketing, or a call centre.

5.4 Objective Key Results (OKRs) The OKR system is a performance tool that sets, communicates, and monitors goals in an organization so that all employees work together in one direction. The development of OKRs is generally attributed to Andy Grove, the “Father of OKRs”, who introduced the approach to Intel during his tenure there and documented this in his 1983 book “High Output Management”. Objectives and key results (OKRs) are a popular leadership process for setting, communicating, and monitoring quarterly goals and results in organizations. The goal of OKRs is to connect company, team, and personal objectives in a hierarchical way to measurable results, making all employees work together in one unified direction by using the SMART objective methodology. OKRs consist of a list of three to five high-level objectives. Under each objective then, usually three to five key measurable results are listed. Each key result has a progress indicator or score of 0–100% or 0–1.0 that shows its achievement. The advantages can be outlined as follows: • Individual goal-focused company alignment: align with your leadership team on top priorities and highest levels

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• Leverage activities each quarter • Fit objectives into company vision, mission, and values to motivate your company with purpose • Visibility into company, department and progress, wins, and road-blocked areas KPIs are important for the plant floor because they are highly effective for exposing, quantifying, and visualizing muda (the lean term for waste), and they are also highly effective motivators. The essence of lean manufacturing and the central theme of the Toyota Production System are to eliminate waste—to relentlessly eliminate all activities that do not add value for your customer. Effective KPIs quantify waste; provide an early warning system for processes operating outside the norm; and offer important hints to where improvement efforts should be focused. KPIs also function as very effective motivators. Motivation theory is a complex field with many diverse opinions. However, there is a wide agreement that a central key to effective motivation is setting challenging but attainable goals (e.g. SMART goals, which are Specific, Measurable, Achievable, Realistic, and Time-specific). SMART goals are ideal candidates for plant-floor KPIs.

5.5 Case Study: Microsoft’s Strategy and Objectives Fiscal year 2019 was a record-breaking year for Microsoft. It achieved more than $125 billion in revenues, $43 billion in operating income, and more than $50 billion in operating cash flow (Microsoft, 2019). The enterprise returned more than $30 billion to its shareholders. The commercial cloud business is the largest in the world, surpassing $38 billion in revenue for the year, with gross margin expanding to 63%. Consumers, students, teachers, and more than 2 billion first-line workers around the world are using Microsoft products. The mission statement to empower every person and every organization on the planet to achieve more is one of the key elements in the strategy of Microsoft. Microsoft IT platforms and tools enable small businesses to be more productive, multinationals to be more competitive, non-profit organizations to be more effective, and governments to be more efficient. At present, Microsoft is a technology company, and every organization will increasingly need to build its own proprietary technology solutions to compete and grow. The organization embraces this approach to adopt best-in-class software and services but also build their own digital capability. Computing is becoming embedded in the world, in every place and everything. This era of the intelligent cloud and intelligent edge is shaping the next phase of innovation, powering intelligent systems and experiences that previously would have been unimaginable, and transforming nearly everything around us. Across Microsoft’s businesses, we are innovating to empower our customers, and investing in large and growing markets to help them digitally transform. Applications and Infrastructure: In a world where every company is a digital company, developers will play an increasingly vital role in value creation and growth across every industry, and GitHub is their home. Since the acquisition of GitHub last fall, growth has accelerated. Today it is used by more than 40 million

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developers, including those who work at the majority of the Fortune 50. Microsoft is building Azure as the world’s computer, addressing customers’ real-world operational sovereignty and regulatory needs. Today, 95% of the Fortune 500 trust Azure for their mission-critical workloads. Data and AI: The variety, velocity, and volume of data are increasing—with 50 billion connected devices coming online by 2030, more than double the number today—and Azure is the only cloud with limitless data and analytics capabilities across our customers’ entire data estate. We brought hyperscale capabilities to our relational database services for the first time this year, and we offer the most comprehensive cloud analytics—from Azure Data Factory to Azure SQL Data Warehouse to Power BI.  The quintessential characteristic for every application going forward will be AI, and we believe that it cannot be the exclusive province of a few companies or countries. That is why we are democratizing AI infrastructure, tools, and services with Azure Cognitive Services, so any developer can embed the ability to see, hear, respond, translate, reason, and more into their applications. Azure Cognitive Services is the most comprehensive portfolio of AI tools available, and this year, we added new speech-to-text, search, vision, and decision capabilities, as well as updates to Azure Machine Learning to streamline the building, training, and deployment of machine learning models. Business Applications: Dynamics 365 uniquely enables any organization to create digital feedback loops that take data from one system and use it to optimize the outcomes of another, enabling any business to become AI-first. This year, we introduced Dynamics 365 AI, a new class of AI application built for an era where systems of record and engagement are converted into intelligence. And the Open Data Initiative launched with Adobe and SAP last fall takes this even further, delivering on our vision to enable data to be exchanged and enriched across systems to provide unparalleled business insight. Microsoft is enabling our customers not only to digitize their business processes but also to bridge the physical and digital worlds with our investments in mixed-­ reality cloud. The new HoloLens 2 is the most advanced, intelligent edge device available, offering two times the field of view and three times the comfort as the previous version. And, together with Dynamics 365 and new Azure mixed-reality services, it enables organizations to digitize physical spaces and interactions and empower their first-line employees with the right information at the right time, in the context of their work. LinkedIn now has more than 645 million members and is the most comprehensive solution for every organization to manage and engage their most important resource—their talent. Our talent portfolio—from Talent Solutions and Talent Insights to employee engagement with Glint and LinkedIn Learning—enables every organization to attract, retain, and develop the best talent in an increasingly competitive jobs market. Modern Workplace: Microsoft 365 empowers everyone—enterprises, small businesses, and first-line workers—with an integrated, secure experience that transcends any one device. We are helping every business build out their system of communication and collaboration to drive their productivity as well as their business

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transformation. We are infusing AI across Microsoft 365 to enable new automation, prediction, translation, and insight capabilities. Meetings are more inclusive in Microsoft Teams, presentations more accessible in PowerPoint, videos more searchable in Stream, and emails more relevant in Outlook. And with Workplace Analytics and Microsoft Search, we distil knowledge and insights from data to help people work smarter, not longer. Office 365 Commercial has 180 million users. Our EMS install base exceeded 100 million. And the Outlook apps on iOS and Android also surpassed more than 100 million users for the first time. Microsoft Teams had a breakout year with more than 13 million daily active users and 19 million customers. Gaming: In gaming, Microsoft is pursuing our expansive opportunity to transform how games are distributed, played, and viewed. Our new breakthrough game streaming technology, Project xCloud, will enter public trials this fall. It will put gamers at the centre of their gaming experience, enabling them to play games in high fidelity wherever and whenever they want, on any device. Microsoft Game Stack brings together our tools and services to empower game developers—from independent creators to the biggest game studios—to build, operate, and scale cloud-first games across mobile, PC, and console. Our growing Xbox Live community is key to our approach, and for the first time we are enabling developers to reach these highly engaged gamers on iOS and Android. Finally, we increased our first-party game studios to 15 this year to deliver differentiated content for our fast-growing subscription services like Xbox Game Pass, which is now available on both console and PC. CSR: Beyond these three pillars, we are working to foster a sustainable future where everyone has access to the benefits and opportunities created by technology. As a reflection of the importance placed on advancing environmental and social progress, Microsoft’s board of directors has a Regulatory and Public Policy Committee that works together with me, my leadership team, and others across Microsoft to oversee our commitments to environmental sustainability and corporate social responsibility. No single company is going to solve macro challenges like climate change alone, but as a global technology company, we are well positioned to enable and accelerate digital transformations that lead to a low-carbon future. That is why we are stepping up our commitment. Over the past year, we expanded our work through our operations, investments, partnerships, and advocacy across initiatives spanning both environmental and social responsibility. We continue to operate carbon neutral across our worldwide operations, driven by an internal carbon tax, as we have every year since 2012. And we have taken new steps over the past year to align our carbon-reduction efforts with the latest climate science by setting a goal to reduce our operational emissions by 75% by 2030, which puts us on a path to exceed the ambitions of the Paris Accord two decades ahead of schedule. This year, we raised our carbon fee to $15 per metric ton, a near doubling of the previous fee, to put sustainability at the core of every part of our business. We are also extending our carbon reduction targets beyond our own operations. We will cut

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carbon emissions by 30% across our global supply chain by 2030. And in October, we extended our carbon-neutrality commitment to our products and devices with a pilot to make 825,000 Xbox consoles carbon neutral. We are committed to ensuring that our data centres are among the most sustainable in the world. By the end of this year, we will achieve our target of powering our data centres with 60% renewable energy and will aim to reach 70% renewable energy within the next 4 years. In fact, when I was in Sweden this spring, we announced our plans to build some of the most advanced and sustainable data centres to date, powered from 100% renewable energy and with zero-waste operations. And, we are also working with our customers and partners to help them use technology to reduce their own environmental footprints and create their own solutions for a more sustainable planet. Our AI for Earth program, as an example, has expanded access to massive environmental data sets that can help others generate valuable insights about the health of our planet, including the conditions of our air, water, and land and the well-being of our wildlife. And it supports organizations that are applying AI to environmental challenges, by helping them harness the full power of cloud computing. We are working with organizations around the world to enable young people— including those who identify as female and under-represented minorities—with the digital skills required for the future. For example, we are the largest funder of Code. org, which teaches coding skills and reaches students in almost every country. We know that there is a broadband gap, and that is why, in the United States, our Airband program is using a mixed-technology approach, including TV white spaces, to connect 3 million people living in unserved rural areas to broadband by 2022. And we are working in more than 20 countries, harnessing this same technology to bring broadband to rural communities elsewhere. We also know that access to affordable housing is a significant barrier for many, and this year, we launched a major initiative to expand housing options for people who work in the Puget Sound region where we are headquartered. We believe that everyone should be able to choose to live in the community where they work, not just our employees and business partners, but all those who serve the broader community, from teachers and small-business owners to first responders and medical practitioners. It is why we are putting $500 million to work in loans and grants to accelerate the construction of more affordable housing in the region. Finally, more broadly, we have expanded our support for the non-profit sector. We work closely with non-profit organizations to help them accelerate their organizational transformation with technology, and, in fiscal year 2019, Microsoft donated or provided discounted software and services worth more than $1.5 billion via Microsoft Philanthropies. Our employees generously donated an additional $170 million (including company match) through our employee giving programme to support non-profits in local communities around the world.

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References Microsoft (2019). www.microsoft.com.

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Problem-Solving and Performance Management Tools

The quality, not the longevity, of one’s life is what is important. Martin Luther King

6.1 Introduction to Problem-Solving Problem-solving consists of using generic or ad hoc methods in an orderly manner to find solutions to problems. Some of the problem-solving techniques developed and used in philosophy, artificial intelligence, computer science, engineering, mathematics, medicine, and societies in general are related to mental problem-solving techniques studied in psychology and cognitive sciences. The term problem-solving has a slightly different meaning depending on the discipline. For instance, it is a mental process in psychology and a computerized process in computer science. There are two different types of problems: ill-defined and well-­defined; different approaches are used for each. Well-defined problems have specific end goals and clearly expected solutions, while ill-defined problems do not. Well-­defined problems allow for more initial planning than ill-defined problems. Solving problems sometimes involves dealing with pragmatics, the way that context contributes to meaning, and semantics, the interpretation of the problem. The ability to understand what the end goal of the problem is, and what rules could be applied, represents the key to solving the problem. Sometimes the problem requires abstract thinking or coming up with a creative solution.

6.2 A3 Method The A3 process allows groups of people to actively collaborate on the purpose, goals, and strategy of a project. It encourages in-depth problem-solving throughout the process and adjusting as needed to ensure that the project most accurately meets its intended goal (see Fig. 6.1). The A3 process is a problem-solving tool Toyota developed to foster learning, collaboration, and personal growth in employees. The term “A3” is derived from the particular size of paper used to outline ideas, plans, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_6

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and goals throughout the A3 process (A3 paper is also known as 11″ × 17″ or B-sized paper). Toyota uses A3 reports for several common types of work: • Solving problems • Reporting project status • Proposing policy changes (policy meaning rules agreed upon and enforced by the group) In most organizations, on most teams, we are not collaborating as strategically as we could be. We leave meetings with ideas half-baked. We often move hastily to begin working on implementing a solution, without aligning around important details. Projects move slowly due to rework and duplicate effort, two symptoms of a lack of alignment. The A3 process allows groups of people to actively collaborate on the purpose, goals, and strategy of a project. It encourages in-depth problem-solving throughout the process and adjusting as needed to ensure that the project most accurately meets its intended goal. The A3 process prescribes to the famed quote by Abraham Lincoln: “Give me six hours to chop down a tree and I will spend the first four sharpening the axe”. The A3 process helps an organization sharpen its proverbial axes by fostering effective collaboration, bringing out the best problem-solving in teams. Collaboration between talented people is critical for innovation and speed. Using the A3 process to foster collaboration can help organizations and teams invest their time, money, and momentum most effectively. Steps of the A3 Process There are nine (well, ten) steps in the A3 process:

Title:

Owner:

Date:

1. Problem Analysis and Problem

5. Proposed Counter Measures

2. Current Condition

6. Plan

3. Goals and Target Condition

4. Root Cause Analysis

Fig. 6.1  A3 method. (Source: Author’s source)

7. Follow Up and review

6.2 A3 Method

95

0: Identify the problem Since the purpose of the A3 process is to solve problems or address needs, the first, somewhat unwritten, step is that you need to identify a problem or need. 1: Capture the current state of the situation Once you align around the problem or need you would like to address, then it is time to capture and analyse the current state of the situation. Toyota suggests that problem solvers: Observe the work processes first-hand and document your observations. Gather around a whiteboard and walk through each step in your process. You can use fancy process charting tools to do this, but stick figures and arrows will do the job just as well. If possible, quantify the size of the problem (e.g. % of tickets with long cycle times, # of customer deliveries that are late, # of errors reported per quarter). Graph your data if possible; visualizations are really helpful. 2: Conduct a root cause analysis Now that you see your process, try to figure out the root cause of the efficiencies. You can ask questions like: Where do we suffer from communication breakdowns? Where do we see long delays without activity? What information are we needing to collaborate more effectively/smoothly? Document these pain points, and then dig deeper. The 5 whys is a helpful tool for conducting a thorough root cause analysis. The basic idea is that you begin with a problem statement, and then you ask “Why?” until you discover the real reason for the problem. You may or may not have to ask why exactly five times—this is simply an estimate. 3: Devise countermeasures to address root causes Countermeasures are your ideas for tackling the situation: the changes to be made to your processes that will move the organization closer to ideal by addressing root causes. Countermeasures should aim to: Specify the intended outcome and the plan for achieving it. Create clear, direct connections between people responsible for steps in the process. Reduce or eliminate loops, workarounds, and delays. 4: Define your target state Once you have selected your countermeasures, you are able to clearly define your target state. In the A3 process, you communicate our target state through a process map. Be sure to note where the changes in the process are occurring so they can be observed. 5: Develop a plan for implementation Now that you have defined your target state, you can develop a plan for how to achieve it. Implementation plans should include: A task list to get the countermeasures in place Who is responsible for what Due dates for any time-sensitive work items Most teams choose to document their implementation plan in their A3. 6: Develop a follow-up plan with predicted outcomes

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A follow-up plan allows lean teams to check their work; it allows them to verify whether they actually understood the current condition well enough to improve it. A follow-up plan is a critical step in process improvement because it can help teams make sure that the: Implementation plan was executed Target condition was realized Expected results were achieved These first six steps are captured in the A3 report. Most teams use a template for their A3. 7: Get everyone on board The goal for any systemic improvement is that it improves every part of the system. This is why it is vital to include everyone who might be affected by the implementation or the target state in the conversation before changes are made. Building consensus throughout the process is usually the most effective approach, which is why many teams choose to include this at each critical turning point in the A3 process. Depending on the scope of the work, it might also be important to inform executives and other stakeholders who might be impacted by the work. 8: Implement! Now it is time for implementation. Follow the implementation as discussed, observing opportunities for improvement along the way. 9: Evaluate results In far too many situations, the A3 process ends with implementation. It is critical to measure the actual results and compare them to your predictions in order to learn. If your actual results vary greatly from what was expected, do research to figure out why. Alter the process as necessary, and repeat implementation and follow-up until the goal is met.

6.3 8D Process Eight disciplines problem-solving (8Ds) is a method developed at Ford Motor Company used to approach and to resolve problems, typically employed by engineers or other professionals. Focused on product and process improvement, its purpose is to identify, correct, and eliminate recurring problems. It establishes a permanent corrective action based on the statistical analysis of the problem and on the origin of the problem by determining the root causes. Although it originally comprised eight stages, or disciplines, it was later augmented by an initial planning stage. 8D follows the logic of the PDCA cycle. The disciplines are as follows: • D0: Preparation and emergency response actions: plan for solving the problem and determine the prerequisites. Provide emergency response actions. • D1: Use a team: establish a team of people with product/process knowledge. Teammates provide new perspectives and different ideas when it comes to problem-solving.

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• D2: Describe the problem: specify the problem by identifying in quantifiable terms the who, what, where, when, why, how, and how many (5W2H) for the problem. • D3: Develop interim containment plan: define and implement containment actions to isolate the problem from any customer. • D4: Determine and verify root causes and escape points: identify all applicable causes that could explain why the problem has occurred. Also identify why the problem was not noticed at the time it occurred. All causes shall be verified or proved. One can use 5 whys or Ishikawa diagrams to map causes against the effect or problem identified. • D5: Verify permanent corrections (PCs) that will resolve the problem for the customer: using pre-production programs, quantitatively confirm that the selected correction will resolve the problem. (Verify that the correction will actually solve the problem.) • D6: Define and implement corrective actions: define and implement the best corrective actions. Also, validate corrective actions with empirical evidence of improvement. • D7: Prevent recurrence/system problems: modify the management systems, operation systems, practices, and procedures to prevent recurrence of this and similar problems. • D8: Congratulate the main contributors to your team: recognize the collective efforts of the team. The team needs to be formally thanked by the organization. 8Ds has become a standard in the automotive, assembly, and other industries that require a thorough structured problem-solving process using a team approach (Fig. 6.2).

6.4 Kepner-Tregoe Kepner-Tregoe (also sometimes called KT analysis) is a company that specializes in problem-solving (also sometimes known as problem-solving method). Kepner-­ Tregoe was founded in 1958 by Charles Kepner and Benjamin Tregoe. The two company founders are considered pioneers of rational working methods and have researched and visualized the basic solution thought patterns of people (Kepner-­ Tregoe, 2020). In the area of these thought processes, problem analysis, decision analysis, rational project management, analysis of potential problems, situation analysis, strategy formulation, and implementation and v. m. are the fundamental methods to permanently establish thought processes. Under the term “Kepner-­ Tregoe” there are several methods to solve different “tasks”. Basically, the term “problem” is differentiated from “decision”. Different tasks that people face require fundamentally different approaches. The processing of these tasks sometimes requires different processes. Exactly this difference becomes clear through the

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D1

D2

Team Formation and Set Up Problem Discription Immediate Containment Actions

D3 Root Cause Analysis D4 Selection of corrective Actions

D5 Implementation and Validation D6 Preventive Actions D7

Closure of the Issue (Final Meeting) D8

Fig. 6.2  8D process. (Source: Author’s source)

situation analysis. Furthermore, the classified tasks can be solved through various processes. Problem analysis is now regarded as “best practice” in the field of operational and service excellence. It enables the identification of unknown causes in order to subsequently eliminate them. Decision analysis provides the rational claim for the best available solution that is to be implemented. Situation analysis determines all necessary tasks; clarifies and prioritizes them; presents them in a special to-do list, the so-called Action Item List (AIL); and prepares the solution with the right tools. The analysis of potential problems is a process to avoid future problems and to be prepared for the damage reduction in an emergency.

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6.5 TRIZ TRIZ (Fig.  6.3) is the Russian acronym (Russian: теория решения изобретательских задач, Teoria reschenija isobretatjelskich sadatsch), which translates as the theory of inventive problem-solving or theory of inventive problem-solving. TRIZ was founded on the assumption that by sifting through a large number of patents, and then selecting and valuing those describing technical breakthroughs, one would discover generally applicable innovative principles and even laws of invention. Figure 6.3 shows the concept of TRIZ, in which specific problems can be resolved with generic problem solutions. The method was initiated by Genrich Saulowitsch Altschuller and Rafael Borissowitsch Shapiro under the influence of Dmitri Dmitrijevitsch Kabanov around 1954–1956. G.  Altschuller and R. Shapiro, who did further research and improvements, recognized three essential principles as early as 1956: • A large number of inventions are based on a comparatively small number of general solution principles. • Only overcoming of contradictions makes innovative developments possible. • The evolution of technical systems follows certain patterns and laws. With the help of this method, inventors try to systematize their activities in order to find new solutions to problems faster and more efficiently. The TRIZ method has meanwhile spread around the world and is “rapidly developing” (Zobel). In the Anglo-Saxon language area, the term TIPS (theory of inventive problem-solving) is also common. The TRIZ contains a number of methodical tools that make it easier to define and analyse a specific technical problem based on a target description in

TRIZ General Solution

TRIZ General Problem

TRIZ

Problem Analysis

Specific Problem

Fig. 6.3  TRIZ model. (Source: Marc Helmold)

Specific Solution

Evaluation and Selection

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order to break it down to its abstract components and to find a solution in the abstract space. The abstract solution is then creatively translated into possible specific solutions. A solution is selected from this amount. This prevents the problem from being prematurely deduced to a solution. Instead, TRIZ uses a stock of already existing solution processes. The methods of classic TRIZ are: • • • •

Innovation principles and contradiction table Separation principles for solving physical contradictions Algorithm or step method for solving invention problems (ARIZ) System of 76 standard solutions and substance field analysis (SFA, formerly also called WEPOL analysis) • S-curves and laws of the development of systems (evolution laws of technical development, laws of technical evolution) • Principle (law) of ideality • Modelling of technical systems with the help of “little men” (dwarf models) Further methods that are assigned to TRIZ, but which are not included in the classic teaching, but were developed by Altschuller’s students, are: • Innovation checklist (innovation situation questionnaire) • Functional structure according to TRIZ (a kind of cause-and-effect diagram, which however does not correspond to Ishikawa Kaoru’s cause-and-effect diagram, is also called problem formulation) • SAO functional model (subject-action-object, an extended functional model based on Miles’ basic work on “value analysis”) • Process analysis • GZK operator (size-time-cost) • Anticipatory error detection • Resource checklists In most cases, TRIZ does not mean the above-mentioned collection of methods and tools, but only refers to the contradiction table and the 40 innovative principles as “the TRIZ”. However, these are controversial in the professional world in terms of handling and mode of operation. The TRIZ contains 40 principles or “40 rules of innovation” (sometimes also 40 innovative principles, 40 IGP—40 innovative basic principles). One of these rules is the “principle of the nesting doll (matryoshka)” (also called “integration”): You transfer an object into the inside of another. These abstract rules are in detail: 1. Dismantling 2. Separation 3. Local quality 4. Asymmetry 5. Coupling 6. Universality

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7. Integration (plug-in doll, matryoshka) 8. Counterweight 9. Previous counteraction (early counteraction) 10. Previous effect (earlier effect) 11. Principle of the “previously placed pillow” (prevention) 12. Equipotentiality 13. Function reversal (inversion) 14. Similarity to spheres (spheroidality) 15. Dynamization 16. Partial or excessive effect 17. Transition to other dimensions (transition to higher dimension) 18. Use of mechanical vibrations 19. Periodic effect 20. Continuity of useful effect (continuity of active processes) 21. Principle of rushing through (skipping) 22. Conversion of harmful into useful 23. Feedback 24. Principle of the “mediator” 25. Self-service 26. Copy 27. Cheap short life instead of expensive long life 28. Replacement of the mechanical system (replacement of mechanical operating principles) 29. Use of pneumo- and hydrosystems 30. Use of flexible sleeves and thin foils 31. Use of porous materials 32. Colour change 33. Similarity (homogeneity) 34. Elimination and regeneration of the parts 35. Change in physical and chemical properties (change in physical state) 36. Application of phase transitions 37. Application of thermal expansion 38. Use of strong oxidizing agents 39. Use of an inert medium 40. Use of composite materials These rules are mostly used in connection with a so-called contradiction matrix or contradiction table. This matrix has different technical parameters in the first row and in the first column (in an identical order). In the individual fields of the matrix, the individual parameters are thus opposed to each other (similar to a season game table in soccer). The diagonal of the matrix remains empty, because here one and the same parameter is facing each other (that could be solved with the physical contradictions). As far as the other fields are concerned, it is assumed that the assigned parameter in the column is supposed to improve, while the parameter in the corresponding row deteriorates as a result. Herein lies the contradiction. The field in

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which row and column cross each other uses individual numbers to name the innovative basic rules of TRIZ that can help to overcome this contradiction. A developer who works with the contradiction matrix must therefore first be clear about which parameters of the system he/she is developing should be improved. He/she then has to determine which other parameters would usually worsen as a result of these improvements. Finally, the developer abstracts these parameters so that he/she can assign them to parameters of the first row and column of the contradiction matrix. Ultimately, this brings him/her to the abstract rules of TRIZ, which are suitable to help overcome the contradictions that arise in the course of development. On the basis of examples and the concretization of rules for the development object, thoughts are stimulated on how the existing development contradictions can be overcome.

6.6 Plan-Do-Check-Act (PDCA) Deming defined the PDCA (Fig. 6.4) sequence for optimizing concepts, processes, and procedures in terms of an incessantly repeating cycle as follows: • • • •

Planning (plan) Application (do) Verification of the results (check) Optimization with standardization (act)

The PDCA cycle is used as a problem-solving strategy. First, the problem is precisely defined and specified so that it can be analysed more clearly and effectively. Then the real cause of the problem is eliminated and the effectiveness of the improvement is checked. If one comes to the result that the improvement was successful, standardization prevents falling back in times before the improvement.

6.7 Six Sigma Six Sigma (6σ) is a management system for process improvement and statistical quality target and at the same time a method of quality management. Its core element is the description, measurement, analysis, improvement, and monitoring of business processes with statistical means. It is a method with a comprehensive set of tools for the systematic improvement or redesign of processes. The work breakdown structure for process improvement projects follows the procedure define-measure-analyse-improve-control (DMAIC). DMAIC (define-measure-­ analyseimprove-control, in spoken language: di-meɪk, to German define-measure-­analyseimprove-control) stands for the phases of a process management process. DMAIC is the core process of the Six Sigma quality management approach and is used to design processes in such a way that they stably maintain a specified Six Sigma performance level. DMAIC is used to improve existing products.

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• Implement • Implement new Standrad

• Analysis • Develop Concept

Act

Plan

Check

Do

• Test • Define new Standard

• Optimize • Check new Standard

Fig. 6.4  PDCA cycle. (Source: Author’s source)

Within the individual phases of a DMAIC or DMADV project, Six Sigma utilizes many established quality management tools that are also used outside Six Sigma. The following table shows an overview of the main methods used: • • • • • • • • • • • • • • • • • • •

Whys Statistical and fitting tools Analysis of variance General linear model ANOVA gauge R&R Regression analysis Correlation Scatter diagram Chi-squared test Axiomatic design Business process mapping/check sheet Cause-and-effect diagram (also known as fishbone or Ishikawa diagram) Control chart/control plan (also known as a swimlane map)/run charts Cost/benefit analysis CTQ tree Design of experiments/stratification Histograms/Pareto analysis/Pareto chart Pick chart/process capability/rolled throughput yield Quality function deployment (QFD)

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• Quantitative marketing research through the use of enterprise feedback management (EFM) systems • Root cause analysis • SIPOC analysis (suppliers, inputs, process, outputs, customers) • COPIS analysis (customer-centric version/perspective of SIPOC) • Taguchi methods/Taguchi loss function • Value stream mapping

6.8 Value Stream Mapping (VSM) The value stream analysis is a business management method for improving process management in production and services. It is also referred to as the value stream recording of an actual state. Value stream mapping (VSM): This first process step of the so-called value stream management provides a model of the material and information flows of the individual value streams. The non-value-adding processes are identified in the analysis. In the following design approach, an improved value stream is designed in the context of a value stream design, in which the non-value-­ adding activities and unnecessary idle times are eliminated. The transition from the actual to the target value stream is planned using the value stream planning. The comparable approach in service management does not minimize idle times, but the individual waiting times between activities.

6.9 RPR Method RPR deals with failures, incorrect output, and performance issues, and its particular strengths are in the diagnosis of ongoing and recurring grey problems. The method comprises: • Core process • Supporting techniques The core process defines a step-by-step approach to problem diagnosis and has three phases: • • • • • • • • •

Discover Gather and review existing information Reach an agreed understanding Investigate Create and execute a diagnostic data capture plan Analyse the results and iterate if necessary Identify root cause Fix Translate diagnostic data

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• Determine and implement fix • Confirm root cause addressed The supporting techniques detail how the objectives of the core process steps are achieved, and cite examples using tools and techniques that are available in every business.

6.10 Brainstorming Brainstorming is an idea generation method developed by Alex F. Osborn in 1939 and modified by Charles Hutchison Clark, the purpose of which is to encourage the generation of new, unusual ideas in a group of people. He named it after the idea behind this method, namely using the brain to storm a problem (literally: using the brain to storm a problem). In brainstorming, ideas and suggestions on a topic are freely expressed and collected. It does not matter how mature and high quality an idea is, but first of all that as many ideas as possible are collected. It is important that all participants collect and publish ideas.

6.11 Mind Mapping Mind map describes a cognitive technique coined by Tony Buzan. It can be used for developing and visualizing a topic, for planning, or for taking notes.

6.12 Design Thinking 6.12.1 The Concept of Design Thinking Design thinking is a customer-centred and iterative method for solving complex problems and developing new ideas. With the design thinking method you succeed in developing a solution that is superior from the customer’s point of view, taking into account economic efficiency, feasibility, and desirability. Design thinking is based on the assumption that problems can be solved better if people from different disciplines work together in an environment that promotes creativity, develop a question together, take into account the needs and motivations of people, and then develop concepts that are repeatedly checked. The process is based on the work of designers, which is understood as a combination of understanding, observation, definition of standpoints, brainstorming, prototype development, and testing. At the same time, the word thinking stands for the fact that, as in a research project, the feasibility and profitability of the innovations are systematically examined. According to another understanding, design thinking means “any process that applies the methods of industrial designers to problems beyond how a product should look” (“any process that applies the methods of industrial designers

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to problems that go beyond the appearance of a product”). Design thinking thus combines three fundamental core aspects: benefit, feasibility, and marketability. Accordingly, the benefits for people, the technological feasibility, and the economic marketability are brought into harmony in order to create a perfect innovation and to solve the problem flawlessly. All points should be weighted equally. The six named and basic steps of design thinking can be described as follows: 1. Understanding 2. Observing 3. Defining a point of view 4. Finding idea 5. Prototyping 6. Testing

6.12.2 Understanding The problem at the beginning is at best defined with a team of several people. It is important to create a general understanding and to bring everyone involved on the same page. Specific questions can be, for example: What should be newly developed? For whom should the development be relevant? Which essential (current or future) framework conditions have to be taken into account? Which final state should the solution achieve?

6.12.3 Observing Observing is about being able to empathize with the customer. An analysis of the customer’s will is possible, for example, through an interview or role play. It is important to let the customer do the talking. Good listening is the most important part of the job; otherwise misunderstandings can arise. The wishes of the customer are always in the foreground.

6.12.4 Defining a Point of View The results of the first two steps are combined. Techniques such as personas or point of view are used to define the point of view both visually and in writing.

6.12.5 Finding Ideas At the beginning of the brainstorming process there is a general brainstorming session in which all ideas, no matter how crazy or utopian, are brought together. The results are structured and sorted according to priorities. Questions about the

6.13 Case Study: Problem-Solving with Kepner-Tregoe at Bayer AG

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efficiency, feasibility, or economic viability of the individual ideas are important. A look at the competition is also not uncommon.

6.12.6 Prototyping A prototype is created for illustrative purposes. Perfection and completion are insignificant. More important is the simpler, the better. Creativity is given free rein. Techniques that are used in prototyping include wireframes, post-its, role-playing games, storyboards, or models. The prototype is tailored to the needs of the customer. It is important that the customer can imagine the solution to his/her problem based on the prototype.

6.12.7 Testing Finally, what has been developed must be tested. Feedback plays an important role in this. Flexibility is also required. If an idea does not work, it can also be discarded. Customers are closely observed during tests with the prototypes. Based on their reaction, further ideas and improvements develop. Design thinkers are also open to new suggestions at this step. If a defect is found during a test, it is eliminated and the steps are repeated with the improved or new prototype. It is quite common for new products to have multiple test phases until the customer is satisfied and the product can be approved.

6.13 Case Study: Problem-Solving with Kepner-Tregoe at Bayer AG Bayer AG is a German multinational pharmaceutical and life sciences company and one of the largest pharmaceutical companies in the world. Headquartered in Leverkusen, Bayer’s areas of business include human and veterinary pharmaceuticals, consumer healthcare products, agricultural chemicals, seeds, and biotechnology products (Bayer, 2021). The company is a component of the Euro Stoxx 50 stock market index. Bayer played a key role in the Wirtschaftswunder in post-war West Germany, quickly regaining its position as one of the world’s largest chemical and pharmaceutical corporations. In 2006, the company acquired Schering; in 2014, it acquired Merck & Co.’s consumer business, with brands such as Claritin, Coppertone, and Dr. Scholl’s; and in 2018, it acquired Monsanto, a leading producer of genetically engineered crops, for $63 billion. Bayer CropScience develops genetically modified crops and pesticides. Pharmaceutical and life sciences companies are challenged each day by the regulatory environment in which they operate. Problem-solving methods, therefore, need to account for not only the pressure of competition and market forces, the challenges of a global distribution and delivery network, the complexities of research

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and development, and the manufacturing process but also the increasing regulation on each aspect of their business. The Kepner-Tregoe problem-solving and decision-making framework greatly diminishes the amount of time taken to resolve issues at each step in the decision-­ making process, thereby reducing the amount of resources spent on issue resolution. For the medical or pharmaceutical industry, this means that companies can focus their efforts on R&D or creating and developing life-saving treatments and gaining a competitive edge in the market. Over the past five decades, Kepner-Tregoe has provided problem-solving training and skill development from the most strategic view down to the most granular of process steps for many medical and pharmaceutical companies. This deep level of experience has informed our problem-solving and decision-making framework to provide major benefits for companies in industries that face regulatory pressure. Companies in the pharmaceutical and life sciences industries with whom we have worked include: • • • • • • • • • • •

AstraZeneca PLC Abbott Laboratories Bayer AG Bristol-Myers Squibb Company Covidien GlaxoSmithKline PLC Roche Diagnostics Johnson & Johnson Merck & Co., Inc. Pfizer, Inc.

References Bayer. (2021). www.bayer.com Kepner-Tregoe. (2020). Kepner-Tregoe  - Consulting Services  - Leadership Development  Business Training. www.kepner-­tregoe.com

7

Performance Management in Sales

Business opportunities are like buses, there’s always another one coming. Richard Branson

7.1 Definition of Sales Management The term sales management is a combination of two words—sales and management. Sales is the art of planning in the mind of another a motive which will induce favourable action. The committee of the American Marketing Association has defined it as selling is the personal or impersonal process of assisting and/or persuading a prospective customer to buy a commodity or a service or to act favourably upon an idea that has commercial significance to the seller. Moreover, controlling is any common activity to achieve a predetermined goal. Hence, sales management can be defined as the planning, direction, and control of selling of business unit including recruiting, selecting, training, equipping, assigning, routing, supervising, paying, and motivating as these tasks apply to the personnel of sales force (Kotler & Amstrong, 2018). Sales management originally referred exclusively to the direction of the sales force. Later the term took on broader significance in addition to the management of personal selling. Sales management includes all marketing activities, including advertising, sales promotion, marketing research, physical distribution, pricing, and product merchandising.

7.2 Sales Management Process 7.2.1 Introduction to the Sales Management Process According to the definition committee of the American Marketing Association sales management meant: “The planning, direction, and control of personal selling including recruiting, selecting, equipping, assigning, routing, supervising, paying, and motivating as these tasks apply to the personal sales force”. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_7

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Sales management is the process of developing a sales force, coordinating sales operations, and implementing sales techniques that allow a business to consistently hit, and even surpass, its sales targets. Sales management is a business discipline which is focused on the practical application of sales techniques and the management of a firm’s sales operations. It is an important business function as net sales through the sale of products and services and resulting profit drive most commercial business. These are also typically the goals and performance indicators of sales management. When it comes to boosting sales performance for any size of operation, no matter the industry, the secret to success is always precise sales management processes, which start with a great sales manager who knows how to inspire and lead a sales department. Besides helping your company reach its sales objectives, the sales management process allows you to stay in tune with your industry as it grows, and can be the difference between surviving and flourishing in an increasingly competitive marketplace. Whether you are an experienced or new sales manager, you should be able to evaluate and gain visibility into your current sales force with the following guide to sales management. Once you have a clear picture of what processes to monitor and how to keep track of them, you will be equipped to pinpoint issues early on, coach people before it is too late, and have a better overview of the tasks the team should be doing to increase its sales. There are three “umbrellas” to manage within the sales process: • • • •

Sales strategy Sales operations Sales process Sales control

Figure 7.1 depicts the elements of the sales management and sales management process. Sales managements contain the elements sales organization, sales strategy, sales objectives, sales reporting, sales forecasting, and sales execution and control.

Sales Organisation

Sales Control & Execution

Sales Strategy

Sales Management

Sales Forecasting

Sales Objectives

Sales Reporting

Fig. 7.1  Sales management elements

Sales Management Process Define and develop strategic Role of Sales Management

Sales Strategy

Develop a strong and competent Sales Force

Sales Operations

Establish Sales Process with measurable Sales Targets

Sales Process

Control of Sales Process & Execution of Targets

Sales Control

7.4  Sales Operations

111

These elements determine the sales process with the role of sales management, the development of a professional sales force, the sales process, and the check and control of the sales process.

7.3 Sales Strategy A sales strategy is a plan to achieve a sales goal and is what directs the selling activities of a start-up business (and in fact any business). Selling is crucial to the success of any business but it must be orchestrated to deliver success, which is what the sales strategy does. A sales strategy is therefore a must for every business; every business needs a sales strategy. Creating a winning sales strategy means knowing the answers to the key questions: • Where are we standing in terms of sales management? • What are the key building blocks of a sales strategy and where do we want to go? • How do you build a successful sales strategy? The sales strategy describes how a business will win, retain, and develop customers. In “lean start-up” terminology it is referred to as the “customer development strategy”. The lean start-up is an approach that is different to the traditional approach to starting a business, as the lean start-up favours experimentation over elaborate planning, customer feedback over intuition, and iterative design over grand upfront design development. There is an important point that I want to make from the outset and that is a sales strategy is different from marketing strategy. A marketing strategy is the overall approach to marketing products. More specifically, it is how you build a sustainable competitive advantage for the company’s products through positioning and differentiation by managing the marketing mix of the seven Ps. A sales strategy is more about how you win, retain, and develop customers. Of course, the marketing strategy goes hand in hand with the sales strategy, as it enables achievement of what is ultimately the most important target: the sales goal (Fig. 7.2).

7.4 Sales Operations Sales operations refer to the unit, role, activities, and processes within a sales organization that support, enable, and drive frontline sales teams to sell better, faster, and more efficiently. Sales operations include the four elements sales organization, sales technology, sales rewards (incentives), and sales performance. Through strategically implemented training, software tools, and engagement techniques, sales operations leaders enable sales reps to focus more on selling in order to drive business results.

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Where are we? Analysis Mission

Vision

Sales Management

How do we do? Implementation

Sales Strategy

Where do go? Options

Fig. 7.2  Sales strategy. (Source: Author’s source)

7.5 Sales Organization Sales organization is the social and hierarchical structure of the sales activities. Sales organization defines the duties, roles, and rights and responsibilities of salespeople engaged in selling activities meant for the effective execution of the sales function. This demands a coherent and unified effort of individuals in the organization for achieving a common goal. A sales organization is designed to execute functions which go beyond just achieving sales through the department. It is used to attain the qualitative and quantitative objectives of personal selling. These objectives are related to sales volume, profitability, and market share. Sales organization is used not only to achieve the present objectives, but also to attain a particular future position.

7.6 Sales Technology The sales operations department aims to support sales managers not only to achieve targets but also to optimize the talent pool (i.e. the sales floor) under their care. To do this, a sales operations manager assumes many of the administrative and operational loads required to run a sales organization. This frees up the sales manager to focus on leading sellers in meeting their quotas and making tactical decisions and strategic plans for long-term growth. Depending on the organizational maturity,

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113

sales operations managers can assume leadership over the following processes/ areas: generate data-driven insight and forecasts for strategy planning; recruit, on board, and train sales staff; content and knowledge base management; customer contract life cycle management; implement compensation and incentives programme; enforce processes, methodologies, and performance matrices; and administer, synchronize, and optimize technology stack including CRM. The sales teams harness the power of big data analytics, artificial intelligence, and machine learning to improve performance and future proof profitability. But because tool complexity can distract sellers, sales operations should own the stack. Here is what sales operations leaders should own regarding the tech stack: defragmentation and integration of technology tools like customer relationship management (CRM) platform; business intelligence services; data analytics software; communication and conferencing tools; content sharing and management; contract life cycle management; email automation; and performance management software.

7.7 Sales Incentives The sales incentive programme is a formal scheme used to promote or encourage specific actions or behaviour by salespeople during a defined period of time. These programmes are primarily used to drive sales, reduce sales costs, increase profitability, develop new territory, and enhance margins. Sales incentive programmes have the most direct relationship to outcomes. A sales incentive plan (SIP) is a business tool used to motivate and compensate a sales professional or sales agent to meet goals or metrics over a specific period of time, usually broken into a plan for a fiscal quarter or fiscal year. An SIP is very similar to a commission plan; however, an SIP can incorporate sales metrics other than goods sold (or value of goods sold), which is traditionally how a commission plan is derived. Sales metrics used in an SIP are typically in the form of sales quotas (sometimes referred to as point of sale or POS shipments), new business opportunities and/or management by objectives (MBOs), and independent action of the sales professional and are usually used in conjunction with a base salary. SIPs are used to incentivize sales professionals where total sales are not a precise measure of sales productivity. This is usually due to the complexity or length of the sales process or where a sale is completed not by an individual but by a team of people, each contributing unique skills to the sales process. SIPs are used to encourage and compensate each member of the sales team as they contribute to the team’s ability to sell. It is not uncommon for the members of such teams to be located in different physical locations and for the product introduction to happen in one location and the purchase of such a product to occur in another location. To achieve growth in this changing and challenging selling environment, many companies have made important changes, like the creation of new digital channels, the addition of specialized roles, and the adoption of team-based selling. There is another crucial shift, however, that tends to be overlooked. Fully addressing today’s complexities necessitates the development of new, thoughtful compensation models that provide clear motivation for how a salesforce can

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continue to sell effectively. Salespeople should not be told what to do; they should feel persuaded towards behaviours that will support a company’s go-to-market strategy. Adjusting the mix of commissions, quotas, salaries, and bonuses for the salesforce can be a driver of growth. Smart revisions of compensation models have been found to have a 50% higher impact on sales than changes in advertising investments.

7.8 Sales Performance Sales management emerged to improve the sales performance. To achieve that, sales operations people help streamline processes to speed up the sales cycle and enable sellers to close more deals. Preferred metrics vary across teams and organizations. For sales operations, these key metrics provide insight not only on how to improve win rates but also on how the entire process can still be optimized. The following are just a subset of all metrics commonly used by many sales operations units to evaluate past performance and to consistently improve organizational results in the long term: salesforce quota achievement rate is the percentage of the sales team that have achieved 100% of quota during a given period. Average win rate is the ratio of closed-won deals over the total number of won and lost deals. Average sales cycle length is the average length of time it takes to close deals. Average deal size is the average value of deal sizes sellers are managing at any given point in the process. Time spent selling is the actual time sellers spend selling as compared to other tasks such as internal meetings, training, and administrative work. Lead response time is the time it takes before leads respond positively to a pitch or call to action. Weighted pipeline value is the estimated value of the pipeline at a given time in the process, used to make profit/loss forecasts. Pipeline efficiency measures how effective sellers are at managing their pipelines. Forecast accuracy computes the rate of error of prior forecasts vs. actual results or performance. Number of prospect meetings per period is a measure of prospecting activity that compares the number of meetings individual sellers were able to set in a given period (Fig. 7.3).

Sales Operations

Sales Organisation

Sales Technology

Fig. 7.3  Sales operations. (Source: Author’s source)

Sales Performance

Sales Incentives

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7.9 Benefits of Structured Sales Management Sales management in practice positively affects everyone involved in the sales cycle. The more mature your sales process is and the more the sales manager adapts and improves it over time, the more likely your team will achieve top performance. In the same way that we have outlined the three aspects of sales management, there are three key stakeholders involved with the sales management process: the sales manager, salesperson, and customer.

7.10 Sales Funnel 7.10.1 Purpose of the Sales Funnel The marketing funnel is a visualization for understanding the process of turning leads into customers, as understood from a marketing (and sales) perspective. The idea is that, like a funnel, marketers cast a broad net to capture as many leads as possible, and then slowly nurture prospective customers through the purchasing decision, narrowing down these candidates in each stage of the funnel. Ideally, this marketing funnel would actually be a marketing cylinder, and all of your leads would turn into customers. Though this is not a reality for businesses, it is part of a marketer’s job to turn as many leads into customers as possible, thus making the funnel more cylindrical. It is important to note that there is not a single agreed-upon version of the funnel; some have many “stages” while others have few, with different names and actions taken by the business and consumer for each. In the diagram below, we have done our best to pull out the most common and relevant funnel stages, terms, and actions so this information is useful to as many marketers as possible. The sales funnel (also known as a revenue funnel or sales process) refers to the buying process that companies lead customers through when purchasing products. The definition also refers to the process through which a company finds, qualifies, and sells its products to customers. A sales funnel provides a clear view of the opportunities available to a sales team, accurately showing the revenue the team is going to make in the months ahead. What is the purpose of a sales funnel? A sales funnel is a model for visualizing every stage in the customer journey, from the time prospective customers learn about a brand to the moment they make a purchase as shown in Fig. 7.4.

7.10.2 Awareness People and customers have to be aware about the products and services a company is providing. The customers should know about the product features, specifics, quality, and price of the product or service. At this step, enterprises should invest time into content marketing, email outreach, social media campaigns, SEO, and online advertisement to achieve brand awareness.

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Awareness Interest Consideration Intent Evaluation

Purchase

Fig. 7.4  Sales funnel. (Source: Author’s source)

7.10.3 Interest This step takes awareness to the next level. Once someone has heard of the brand, one needs to capture their interest. Companies need to make them realize what they can provide something they need, even if they did not know they needed it. Drip campaigns, social media campaigns, and useful content such as e-books and videos are key. Many potential customers bail at this step, so it is important to really present your product as a solution to their problems.

7.10.4 Consideration At this point, the prospect is collecting as much information about a company’s solution and its competitors to decide whether the considered company is the best choice and whether they want to buy from this company. Again, providing videos, how-tos, testimonials, reviews, trials, and even webinars will boost the chances of them making it to the next step.

7.10.5 Intent To get to the intent stage, prospects must demonstrate that they are interested in buying a brand’s product. This can happen in a survey, after a product demo, or when a product is placed in the shopping cart on an e-commerce website. This is an opportunity for marketers to make a strong case for why their product is the best choice for a buyer.

7.11  Case Study: Marketing and Sales Strategy in Porsche

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7.10.6 Evaluation In the evaluation stage, buyers are making a final decision about whether or not to buy a brand’s product or services. Typically, marketing and sales work together closely to nurture the decision-making process and convince the buyer that their brand’s product is the best choice.

7.10.7 Purchase Purchase—You did it! Now give your customer personalized attention, providing helpful emails, good customer service, and regular newsletters (aka nurture them) so that they do not feel abandoned after the sale and continue buying from you. Good customer onboarding will help you not just reduce the churn rate, but also improve your customers’ CLV by acquiring loyal brand fans.

7.11 Case Study: Marketing and Sales Strategy in Porsche 7.11.1 Introduction of Porsche Porsche is a prestigious automobile brand that specializes in high-performance sports cars, SUVs, and sedans and has a strong social media presence (Porsche, 2021). Do you want to know how Porsche became so successful in the automotive industry? The reason for this is due to the company’s marketing strategy. Marketing is one of the most important functions of a business that engages in promotion and marketing activities such as market research and advertising for products or services, especially in today’s context where marketing innovation has accelerated exponentially and adoption of these techniques can be a make or break factor for the companies. Porsche is a German automotive manufacturer known for producing high-performance sports cars, SUVs, and sedans. In 1931, Ferdinand Porsche founded the company. The company’s headquarters is in Zuffenhausen, a district of Stuttgart, Germany. Volkswagen AG owns the company, with Porsche Automobil Holding SE owning a controlling stake. Porsche is best known for its powerful, agile sports cars, most notably the iconic 911. Porsche AG owns 29% of Bertrandt AG, a German engineering and design consultancy, and 81.8% of Mieschke Hofmann und Partner. It is still cutting-edge in terms of performance and technology. Its primary goal is to achieve value-generating growth. Every car fan’s subconscious is imprinted with the Porsche slogan “there is no substitute”. We have all heard that if you say something often enough, people will believe it, and this is exactly what is happening.

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7.11.2 Porsche Marketing Mix The marketing mix refers to the various areas of emphasis through which a company promotes its brand or product in the market and they are product, price, promotion, and place. 1. Product Strategy Porsche is a well-known company that sells luxury automobiles all over the world. The best luxury cars have technology that is advanced enough to make the passengers feel as if they are in a high-tech hotel suite rather than a car. The 718 Boxster/Cayman, 911, Panamera, Macan, Cayenne, and Taycan are currently available from Porsche. The company has expanded its product line-up with vehicles such as an SUV and sedan, as well as the introduction of new sports cars. Porsche luxury cars are appealing because of their touchscreen, Bluetooth connection, and 3D sound system. When customers purchase a Porsche, they meet their expectations. 2. Price Strategy Pricing of Porsche ranges from approximately INR.6,998,000 to INR.30,783,000. The prices of these automobiles begin at Rs. 69.98 lakhs for the most affordable model, the Macan, and Rs. 1.64 crores for the most expensive model, the 911. When the Porsche Panamera S first hit the market, it was priced around $133,000. However, in order to increase sales, the price was reduced to $120,000 over time. Porsche has been using this technique for quite some time. This is known as price skimming, where you introduce your product at a high price. However, as time passes, the company lowers the prices of its products in order to increase sales. Price skimming is a pricing strategy in which the producer sets a high introductory price to attract buyers who have a strong desire for the product and the resources to purchase it, and then gradually lowers the price to attract buyers in the subsequent layers of the market. They also used a psychological pricing strategy. The best part is that if Porsche swaps the prices, there will be little or no change in demand because they have exclusive cars that not everyone can afford. As a result, we can conclude that Porsche does not follow competitor-based pricing. 3. Place Strategy Porsche has a very simple distribution channel, which gives it a competitive advantage. Zuffenhausen is Porsche’s heart, the place where it all started. Porsche’s second home is in Leipzig, where the customer centre welcomes 40,000 visitors per year. Although Porsche’s origins are in Germany, the fascination with sports cars can be found all over the world. It sells its products all over the world, with the top three countries being China (88,968), the United States (57,294), and Germany (26,152). China is the biggest market for Cayenne and

7.11  Case Study: Marketing and Sales Strategy in Porsche

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Panamera models. Porsche was also able to maintain its growth in all of the major markets. 4 . Promotion Strategy During the 2011 earthquake in Japan, Porsche donated $2.5 million in aid. This improved the brand’s image while also allowing it to promote its business by having a better reputation. It advertises on television and other forms of media. They also do offline promotion through magazines, billboards, and other means. As a result, they employ both above-the-line and below-the-line marketing strategies.

7.11.3 Porsche Marketing Strategy Through its marketing strategies, Porsche has set the difficult goal of attracting a younger and more female audience. It aided the company in repositioning its brand without alienating its core customers. Porsche is a successful example of how to effectively segment their target market area and achieve the best marketing results.

7.11.3.1 Targeting Strategy of Porsche Porsche caters to privileged and upscale clients. College graduates with a household income of more than $100,000 are among the target audience, with 85% being males and 15% being females. Its targeted marketing efforts are aimed at increasing the number of female Porsche owners and decreasing the average age of Porsche owners. Porsche hired tennis player Maria Sharapova as a brand ambassador in 2013 in order to reach out to young female audience. As a result, the percentage of female buyers who purchased the Cayenne SUV and Panamera increased from 8% to 15%. 7.11.3.2 Porsche Digital Marketing Strategy Social media is the foundation of the company’s digital strategy. It is incorporating social media thinking into its digital marketing to create a strategy that will benefit the company while also interacting socially with customers. 7.11.3.3 Porsche Advertising Campaign An advertising strategy is a strategy incorporated for reaching out to and persuading customers to purchase a product or service. It includes campaigns that result in the potential success of the brand. Cramer-Krasselt was the creator of a new multimedia campaign for Porsche’s new model, the 911. It created the 30-s spot “Pop Star”, which is fast-paced and whimsical. It is part of the larger “Timeless Machine” campaign, which honours the model’s impact on pop culture over the last 55  years.

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Inspired by those fan creations and the culture surrounding Porsche, “Pop Star” depicted the 911 travelling across the screen, transforming into the various objects it has appeared on or as over the years, including a lamp, puzzle, paper clip, Legos, and more.

7.11.3.4 “The Power of Balance” Campaign To promote the launch of its Cayman model, the brand created a digital campaign “a series of computer games” called “The Power of Balance”. “Advanced engineering. Driving ambition. A perfect fusion of man and machine brought together in true Porsche spirit. This is what makes the new Cayman unique. This is the Power of Balance”. This strong model statement and campaign are exactly what enticed the target audience to interact with the brand and play the game. Figure 7.5 shows the Power of Balance advertising campaign.

Fig. 7.5  Porsche advertising campaign

References

References Kotler, P., & Armstrong, G. (2018). Principles of marketing (17th ed.). Pearson. Porsche (2021). Dr. Ing. h.c. F. Porsche AG - Porsche Deutschland. ww.porsche.de.

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Economic Pricing, 3C Pricing, and Cost Estimation Concepts

It’s quite fun to do the impossible. Walt Disney

8.1 Economic Pricing Model 8.1.1 Introduction: Supply and Demand In microeconomics, supply and demand are an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded items such as labour or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted. It forms the theoretical basis of modern economics. In macroeconomics, as well, the aggregate demand-­ aggregate supply model has been used to depict how the quantity of total output and the aggregate price level may be determined in equilibrium. The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. The theory defines the relationship between the price of a given good or product and the willingness of people to either buy or sell it. Generally, as price increases, people are willing to supply more and demand less and vice versa when the price falls. The theory is based on two separate “laws”, the law of demand and the law of supply. The two laws interact to determine the actual market price and volume of goods on the market. The key takeaways are the following: • The law of demand says that at higher prices, buyers will demand less of an economic goods and products. • The law of supply says that at higher prices, sellers will supply more of an economic goods and products. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_8

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• These two laws interact to determine the actual market prices and volume of goods that are traded on a market. • Several independent factors can affect the shape of market supply and demand, influencing both the prices and quantities that we observe in markets. Figure 8.1 depicts the economic pricing model with supply, demand, and equilibrium price.

8.1.2 Understanding Supply and Demand The law of supply and demand is one of the most basic economic laws, and ties into almost all economic principles somehow. In practice, people’s willingness to supply and demand a good determines the market equilibrium price or the price where the quantity of the good that people are willing to supply equals the quantity that people demand.

8.1.3 Demand The law of demand states that if all other factors remain equal, the higher the price of a good, the fewer people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. Figure 8.1 shows that the curve is a downward slope.

Price

Supply and Demand Curve

Equilibrium Price

Equilibrium

Quantity

Fig. 8.1  Economic pricing model

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8.1.4 Supply Like the law of demand, the law of supply demonstrates the quantities sold at a specific price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. From the seller’s perspective, each additional unit’s opportunity cost tends to be higher and higher. Producers supply more at a higher price because the higher selling price justifies the higher opportunity cost of each additional unit sold. It is important for both supply and demand to understand that time is always a dimension on these charts. The quantity demanded or supplied, found along the horizontal axis, is always measured in units of the good over a given time interval. Longer or shorter time intervals can influence the shapes of both the supply and demand curves.

8.1.5 Supply and Demand Curves At any given point in time, the supply of a good brought to the market is fixed. In other words, the supply curve, in this case, is a vertical line, while the demand curve is always downward sloping due to the law of diminishing marginal utility. Sellers can charge no more than the market will bear based on consumer demand at that point in time. Over longer intervals of time, however, suppliers can increase or decrease the quantity they supply to the market based on the price they expect to charge. So over time, the supply curve slopes upward; the more suppliers expect to charge, the more they will be willing to produce and bring to the market. For all periods, the demand curve slopes downward because of the law of diminishing marginal utility. The first unit of a good that any buyer demands will always be put to that buyer’s highest valued use. For each additional unit, the buyer will use it (or plan to use it) for a successively lower valued use.

8.1.6 Shifts Versus Movements For economics, the “movements” and “shifts” in relation to the supply and demand curves represent very different market phenomena. A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes per the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price and vice versa. Like a movement along the demand curve, the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes by the original supply relationship. In other words, a movement

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occurs when a change in quantity supplied is caused only by a change in price and vice versa. Meanwhile, a shift in a demand or supply curve occurs when a good’s quantity demanded or supplied changes even though the price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A change in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption. Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is impacted by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

8.1.7 Equilibrium Price Also called a market-clearing price, the equilibrium price is the price at which the producer can sell all the units he/she wants to produce, and the buyer can buy all the units he/she wants. With an upward-sloping supply curve and a downward-sloping demand curve, it is easy to visualize that the two will intersect at some point. At this point, the market price is sufficient to induce suppliers to bring to market the same quantity of goods that consumers will be willing to pay for at that price. Supply and demand are balanced or in equilibrium. The exact price and amount where this occurs depend on the shape and position of the respective supply and demand curves, each of which can be influenced by several factors.

8.1.8 Impacts on Supply and Demand Supply is largely a function of production costs, including: • Labour and materials (which reflect their opportunity costs of alternative uses to supply consumers with other goods) • The physical technology available to combine inputs • The number of sellers and their total productive capacity over the given time frame • Taxes, regulations, or additional institutional costs of production Consumer preferences among different goods are the most important determinant of demand. The existence and prices of other consumer goods that are substitutes or complementary products can modify demand. Changes in conditions that influence consumer preferences can also be significant, such as seasonal changes or

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effects of advertising. Changes in incomes can also be important in either increasing or decreasing the quantity demanded at any given price.

8.2 3C Pricing Model 8.2.1 Introduction to the 3C Pricing Model The 3C pricing model in Fig. 8.2 is a strategic pricing framework that fundamentally emphasizes the importance of understanding the internal and external business environments. It is based on three factors: customers, competitors, and costs. The model aims to encourage companies to bring more value than their competitors at a lower cost to develop and maintain a competitive advantage. It also highlights the trap of being stuck in the middle between companies emphasizing cost and those emphasizing differentiation. This positioning of not pursuing a clear strategy is often hard to sustain (Helmold, 2020). • Customers: Comprehensive research providing insight into consumers’ wants and needs as well as their perceptions of the value of your brand and products and your competitors’ brands and products • Competitors: Comprehensive and up-to-date analysis of your competitors’ products, brand, and prices as well as where your brand is positioned relative to those competitors

3C-Pricing Model

Customers

Competitors

Costs

Perception of Value and Value Drivers for Products and Services. No Demand above this Value or Price.

Nature of Market and Industry. Prices of Compeitors are important to create a Price Logic.

Amount of Direct and Indirect Cost =Total Cost. Cost of Ownership or Prime Cost. No Profits below this Price.

Fig. 8.2  3C pricing model. (Source: Author’s source)

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• Costs: Comprehensive understanding of all costs related to offering the product, including development, creative, production, distribution, storage, advertising, manpower, and so on Price signalling is a way for businesses to communicate their pricing strategy to customers and show them that the product offers excellent value for money. High price does not necessarily mean high value and vice versa—manufacturers must hit the sweet spot between profit-making and maximum perceived value to ensure that they get the best from their pricing strategy. That is why pricing strategy has to be a well-defined, clear, and transparent part of a business’s overall marketing strategy, with the three elements customers, competitors, and costs.

8.2.2 Customer The customer part of the 3C pricing model focuses on comprehensive research providing insight into consumers’ wants and needs as well as their perceptions of the value of your brand and products and your competitors’ brands and products (Homburg et al., 2012). How can the perception of customer be used to set price? Customers build internal reference prices in time through exposure to different prices. When they see a new price tag, they compare it to the reference price and form an opinion (Helmold, 2020).

8.2.3 Competitors The element of competitors deals with the comprehensive and up-to-date analysis of your competitors’ products, brand, and prices as well as where your brand is positioned relative to those competitors. It evaluates the customer’s reaction to new prices based on research and historical data, helping retailers and manufacturers map their positions against competitors. Mapping and presenting this data give a comprehensive picture to businesses regarding their competition—it also helps them plan their pricing and promotions accordingly as they take upstream and downstream suppliers into account. This allows them to price their products optimally to attract buyers who would otherwise pick the competitors. A successful competitor pricing strategy can help businesses increase sales, enhance understanding and cooperation with suppliers, and grow revenues. Businesses also undertake competitor pricing strategy analysis because it helps them: • Highlight their strengths and weaknesses as well as the competitors’ capabilities • Uncover potential opportunities for the company • Inform the value proposition that differentiates them from the competition

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8.2.4 Costs The element cost in the 3C pricing model refers to the costs incurred to design, create, and deliver a product. These costs include direct labour, direct materials, consumable production supplies, and factory overhead. Product cost can also be considered the cost of the labour required to deliver a service to a customer. In the latter case, product cost should include all costs related to a service, such as compensation, payroll taxes, and employee benefits.

8.3 Cost-Plus Pricing Cost-plus pricing, also called markup pricing, is the practice by a company of determining the cost of the product to the company and then adding a percentage on top of that price to determine the selling price to the customer. Cost-plus pricing is a very simple cost-based pricing strategy for setting the prices of goods and services. With cost-plus pricing you first add the direct material cost, the direct labour cost, and overhead to determine what it costs the company to offer the product or service. A markup percentage is added to the total cost to determine the selling price. This markup percentage is profit. Thus, you need to start out with a solid and accurate understanding of all the business’ costs and where those costs are coming from. Figure 8.3 depicts an example calculation of the cost-plus calculation method. There are three steps involved in computing cost-plus pricing for a product:

Fig. 8.3  Cost-plus pricing with direct and indirect costs

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The cost-plus method starts with adding up total material costs (120 Euro), total labour costs (250 Euro), and sales administration and general costs (50.00 Euro, SGA). The total production cost for one unit amount in this example is 420 Euro. By adding the profit margin and potential discounts we come to a result and sales price of 554.40 Euro. Figure 8.3 shows the cost-plus pricing methodology. Figure 8.4 shows an alternative method of cost-plus pricing. The steps can be described as follows: • Step 1: Determine the total cost of the product or service, which is the sum of fixed and variable cost (fixed costs do not vary by the number of units, while variable costs do). • Step 2: Divide the total cost by the number of units to determine the unit cost. • Step 3: Multiply the unit cost by the markup percentage to arrive at the selling cost and the profit margin of the product. In the first step, the variable costs per unit are multiplied with the estimated sales volume (6.50 Euro × 100,000 units = 650,000 Euro as total variable costs). As the next step, the fixed costs must be determined. In the example the total fixed costs amount to 160,000 Euro. The total production cost amounts to 810,000 Euro, adding variable and fixed cost. A target profit margin with 20% equals 162,000 Euro. Total production cost and profit sum up the target revenue. By dividing the sales volume by the target revenue, we come to a sales price of 9.72 Euro. The sales price per unit is 9.72 Euro. Figure 8.5 shows the calculation of hourly rates. In the first step it is necessary to define the contractual agreed days, the presence days, and the annual total work

Fig. 8.4  Cost-plus pricing with fixed and variable costs

8.4  Cost Estimation

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Fig. 8.5  Hourly rate calculation

hours. The total work hours is the time one worker spends on his/her job per annum. After deduction of training (40 h/year, 5 days) and general work projects (120 h), we come to the annual productive time in hours. If we multiply this by the number of employees we achieve the productive annual time in hours (in our example 7640 h). If we calculate now the calculation basis for hourly rate with labour costs (250,000 Euro), labour overheads (40,000 Euro), and a calculatory risk surcharge (25,000 Euro), we come to a total value of 315,000 Euro. If we divide the 315,000 Euro by the productive annual time (7640  h), we come to the hourly rate of 41.23 Euro. Figure 8.6 shows the calculation of the machine hourly rate. The method adds all costs (per month) and divides the amounts by the operating time of 150 h/month. The hourly rate for this machine is 55.67 Euro.

8.4 Cost Estimation A cost estimate is the approximation of the cost of a programme, project, or operation. The cost estimate is the product of the cost-estimating process. The cost estimate has a single total value and may have identifiable component values. A problem

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Fig. 8.6  Machine hourly rate calculation

with a cost overrun can be avoided with a credible, reliable, and accurate cost estimate. A cost estimator is the professional who prepares cost estimates. There are different types of cost estimators, whose title may be preceded by a modifier, such as building estimator, or electrical estimator, or chief estimator.

8.5 Case Study: Product Strategy and Premium Pricing of Mercedes 8.5.1 Mercedes as Luxury Car Maker Mercedes Benz is one of the leading premium car brands in the world. One of the strongest points of Mercedes is its products. Mercedes Benz has a wide range of passenger cars and light commercial and heavy-equipment vehicles as a part of its marketing mix product strategy. However, the strongest in its product portfolio will be the luxury car segment which consists of sedans, SUVs, and sports cars as well. In the new-generation segment, it has A-class, B-class, and the CLA. In the sedan, it boasts of the E-class, C-class, and S-class. Mercedes Benz also has a wide range of cabriolets and roadsters in its product portfolio while it has the GLA, GLE, GLC, and GLS in the SUV sector. Also the Mercedes Maybach S-class is a true essence of luxury in its own. The Mercedes can boast about its products as it has not only the best of design and luxury but also the best of technology. The 4matic and BlueTEC

References

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are one of the best technologies till date. Also apart from dealing with new cars, Mercedes also deals with pre-owned Mercedes through its Mercedes Benz certified portfolio. By 2022, the company is focusing on investing $11  billion for having electric and hybrid cars in the market.

8.5.2 Premium Pricing of Mercedes Being in the luxury segment, it caters to a niche segment which values quality more than the price and so the price is always on the higher end. In the overseas market where Mercedes Benz has a huge product variety available, the prices range from $30,000 to $100,000 and above. Primarily it caters only to the luxury car market, and hence it invests a lot on high-cost materials. Thus, the Mercedes Benz marketing mix pricing strategy is that of premium pricing, based on its features and competition.

References Helmold, M. (2020). Total revenue management (TRM). Case studies, best practices and industry insights. Springer. Homburg, C., Schäfer, H., & Schneider, J. (2012). Sales excellence. Systematic sales management. Springer.

9

Audits and Quality Management Systems (QMS)

There are two kinds of people, those who do the work and those who take the credit. Try to be in the first group; there is less competition there. Indira Gandhi

9.1 Quality Management System (QMS) A quality management system (QMS) is the combination of business processes focusing on customer satisfaction. A QMS aims to meet customer requirements. The QMS has a set of guidelines that are defined by a collection of policies, processes, documented procedures, and records. This system defines how a company will achieve the creation and delivery of the product or service they provide to their customers. When implemented in your company, the QMS needs to be specific to the product or service you provide, so it is important to tailor it to your needs. However, in order to help ensure that you do not miss elements of a good system, some general guidelines exist in the form of ISO 9001 (Quality Management System—Requirements), which is intended to help standardize how a QMS is designed. ISO 9001 is the international standard for Quality Management Systems (QMS), published by the ISO (the International Organization for Standardization). The standard was most recently updated in 2015, and is referred to as DIN EN ISO 9001:2015. In order to be released and updated, ISO 9001 had to be agreed upon by a majority of member countries so that it would become an internationally recognized standard, which means it is accepted by a majority of countries worldwide. ISO has a range of standards for quality management systems that are based on ISO 9001 and adapted to specific sectors and industries. These include: ISO 13485—Medical devices ISO 17582—Electoral organizations at all levels of government ISO 18091—Local government ISO/TS 22163—Business management system requirements for rail organizations

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_9

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ISO/TS 29001—Petroleum, petrochemical, and natural gas industries ISO/IEC 90003—Software engineering ISO 9001 contains eight key principles of quality management which are not auditable but do form the fundamental characteristics of quality management: 1 . Customer focus and customer satisfaction 2. Leadership 3. Involvement of people 4. Process approach 5. A systematic approach to management 6. Continual improvement 7. Factual approach to decision-making 8. Mutually beneficial supplier relationship QMs are accredited by globally applied standards. The advantages of a QMS can be outlined as follows: • Increasing customer satisfaction by using a globally applied standard and improvement system • Becoming more cost efficient, increasing credibility, and securing competitiveness • Optimizing costs and creating shorter cycle times through effective use of resources • Enhanced customer satisfaction and improved customer loyalty leading to repeat business • Increased revenue and market share obtained through flexible and fast responses to market opportunities • Integration and alignment of internal processes which will lead to increased productivity and results • Ensuring a consistent and streamlined delivery of the products or services requested by customers • Improved communication, planning, and administration processes throughout the organization

9.2 Audits 9.2.1 Audit Types Audits can be described as a systematic and structured performance evaluation and assessment of a system, process, or product or any other area by internal or external auditors. The aim of an audit is to evaluate and approve or disapprove the assessed

9.2 Audits

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Table 9.1  Audit types

Source: Author’s source

area by standardized criteria and questions, to define areas for actions, and to ensure the sustainable implementation of the actions and improvement areas. Assessment criteria in audits are based on customer and stakeholder expectations. Audits can be clustered in systems, process, product, control, and special audits as shown in Table 9.1. Lean audits are conducted to determine if the business is properly implementing and lean management methodologies are implemented into the company and value chain (Helmold & Terry, 2016). This is achieved by a detailed 360° analysis of lean processes with a goal towards recognizing opportunities to improve processes and to eliminate waste.

9.2.2 Quality Management Systems (QMS) A quality management system (QMS) describes in enterprises and organizations the management function and all organizational activities, which serve the improvement of the process quality, the work quality, and thus the product and service quality  (Helmold & Samara, 2019). QMS are using lean features for process improvements. Table 9.2 outlines the most common standards of QMS in certain industries.

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Table 9.2  Quality management systems

Source: Author’s source

9.3 Case Study: 5S Audits in Berliner-­Kindl-Schultheiss Brewery With 5S Audits, the Berliner-Kindl-Schultheiss brewery (Radeberger Group) makes sure that all processes (purchasing, operations, logistics, production control, and planning) are evaluated along the seven most important levers for their optimization. On the basis of these results, further measures can be derived on the way to a lean and smart production (Helmold & Terry, 2021). With the audit, the management receives an objective assessment of lean. It includes two days of on-site operation and is conducted in the form of a walk-through with short interviews with the people in charge. At the end of the second day the results will be presented. Measured is, among others, lean maturity relative to the seven key levers of production optimization. These include, for example, the plant structure, the use of process-­oriented technologies, the time-to-market, and employee motivation. The evaluation of the respective dimensions is based on a SWOT analysis. The lean audit provides a solid basis for planning further project steps. Thus, the identified potentials can be used for a Nordstern workshop to develop appropriate target states and measures. Finally, in order to achieve this, there is an extensive set of methods in the context of the Schneider co-developed lean-factory design concept. This interdisciplinary optimization concept, developed at Landshut University of Applied Sciences, is based on

References

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Fig. 9.1  5S Audit in Berliner-Kindl-Schultheiss brewery. (Source: Author’s source)

many years of research and numerous best practice projects (Helmold, 2021). The audit can be repeated annually to measure project progress and to set and prioritize the following steps. The Berliner-Kindl-Schultheiss brewery conducts the 5S Audits on a monthly basis as shown in Fig. 9.1. It can be seen that the five categories (sort, set in order, shine, standardize, sustain) are analysed. The Audit is linked to a dynamic action plan and progress control.

References Helmold, M. (2021). Kaizen, Lean Management und Digitalisierung. Mit den japanischen Konzepten Wettbewerbsvorteile für das Unternehmen erzielen. Springer. Helmold, M., & Samara, W. (2019). Progress in performance management. Industry insights and case studies on principles, application tools, and practice. Springer. Helmold, M., & Terry, B. (2016). Global sourcing and supply management excellence in China. Procurement guide for supply experts. Springer. Helmold, M., & Terry, B. (2021). Operations and supply management 4.0. Industry insights, case studies and best practices. Springer.

Business Transformation and Project Management

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The quality of a person’s life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor. Vince Lombardi

10.1 Transformation and Adaptability of Strategies and Tools Fierce competition, globalization, and the present COVID-19 pandemic are leading to significant challenges for enterprises and organizations. As a consequence, it is necessary to have appropriate countermeasures, corrective actions, and tools to overcome the crises. On the contrary, those enterprises and organizations that have not the right strategies and management tools will not survive. In this context, challenges in management are characterized by high complexity, unpredictability, and uncertainty. Managers must have therefore effective, quick, and pragmatic concepts for structuring and resolving problems. The classic management literature is often too theoretical or too detailed for this. A short, concise introduction to a tool is sufficient to give modern managers the food they need for thought (Kieviet, 2019). This is where this book starts. It clearly presents effective strategies and management tools as well as most important concepts. It describes possible applications and makes it easier to interpret the results. The book offers the manager a pragmatic and effective help to gain transparency about existing concepts and tools, to find the right tool for the respective situation, and ultimately to use it effectively to obtain a long-term sustainable competitive advantage (Helmold & Samara, 2019). As a rule, the need for corporate transformation and change is associated with changing market conditions or economic, technological, or social changes, as a result of which the company suffers from a decline in sales, rising operating costs, and decreasing customer relevance or customer loyalty. Often it is the big trends and developments, such as digitization or the trend towards sustainability. The example of the publishing house or the music industry makes it clear how such existentially © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_10

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threatening changes can affect a company. These examples also make it clear that business transformation is not just a question of the need for change, but also a question of the ability to change. While economic, technical, and social change represents an existential threat for one company, it is a guarantee of success for adaptable and agile companies and offers a wide range of business opportunities. E-commerce, cloud computing, and green economy are intended to illustrate this symbolically at this point. Entire new industries and business fields are emerging here that would never have emerged without technological change and social and political pressure. Even if some companies suffer from constant, increasingly accelerating change, as a rule every change brings improvement with it— improvement for consumers, the environment, and society. So change means evolution. The art of making use of change for one’s own company therefore lies in continuously helping consumers, the environment, and society to improve their quality of life. This creates new ideas, new business areas, new revenue models, new industries … and ultimately lasting success, supported by more sales and more emotional and loyal customer relationships. With this in mind: Whenever possible, contribute to improving the quality of life of your customers, the environment, and society—and always remain adaptable.

10.2 Business Transformation Strategies Business transformation describes an optimizing change in business activity and/or working methods emanating from the company management, which can only include partial areas as well as the company as a whole. The need for business transformation is usually based on external factors. These can be, for example, tougher competitive conditions, fundamental changes in the law, or general social and technological change, such as that brought about by digitization or the trend towards sustainability (Fig. 10.1). The aim of the business transformation is always to strategically secure business operations over the long term and thus create the basis for lasting and sustainable success (Klasen, 2019). It is not an approach to the realization of short-term one-off effects. It does not concentrate on individual fields of action, but rather captures the change process as a whole. In addition, the focus of the business transformation is not on individual persons or groups of people, but rather integrates the entire economic, social, and societal environment of the company. Business transformation strategies aim at this: • To secure and increase sales sustainably • To reduce operating and other costs • To intensify customer satisfaction and customer loyalty The term was first put into circulation by the management consultancy Gemini Consulting in the early 1990s. Their consultants Francis J.  Guillart and James N.  Kelly published a book in which they processed the experiences from their

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Restructuring

Transformation

Renewing

Revitalisation

Fig. 10.1  Business transformation elements. (Source: Author’s source)

everyday work and at the same time detailed business transformation as a formula for the long-term success of companies in a constantly changing market economy. The basis of their considerations was the view of companies as living organisms. This should enable them to react flexibly to fluctuations and changes in the market in order to insist on it permanently, economically, and profitably. Business transformation projects are usually very complex and lengthy. There are several reasons for this. On the one hand, business transformation projects tend to be used in larger companies. This is less due to the size of the company itself or the financial possibilities, but rather because the management of a stock corporation or group has to answer to shareholders, partners, investors, and supervisory boards, whose own financial future depends heavily on the success of the company. Owner-run companies, on the other hand, often suffer from sticking to the once tried and tested rituals for too long. The emotional relationship to the past is significantly higher and often proves to be the greatest brake on change in management and workforce. In addition, many business transformation projects are initiated far too late by those responsible. Often the course of the crisis or the process of economic, technological, or social change is already very far advanced. And companies can often no longer make up for the lost time. One industry that has had to experience this in a painful way is the photography industry. Former industry giants such as Kodak, Agfa, or Polaroid, despite great efforts, were never able to build on the great successes of bygone days. The principle of hope seems omnipresent, and statements such as “this trend will definitely pass” or “we’ll get in when the others have made their mistakes” are not uncommon. This may sound ironic to some. It has always been one of the outstanding virtues of German entrepreneurship to develop and occupy markets through innovations, inventiveness, and engineering skills. Since business transformation strategies are essential for the future and sustainable success of the company, these projects are always the responsibility of the management. In addition to a large number of internal and external experts, and

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industry and company experts, business transformation projects are usually accompanied by a specialized management consultancy that guides the company through the four relevant project sections of business transformation in a targeted and efficient manner (Womack et al., 1990). The reframing goal setting and goal definitions are: • Restructuring—structural reorientation of the company • Revitalizing—product development and innovation • Renewing—consistent internal and external implementation As a rule, business transformation is a project that encompasses the company as a whole. In the context of product and innovation development, however, it can also happen that only an encapsulated area of a company is subject to business transformation. As a rule, however, these projects are also the harbingers of a long-­ term business transformation process. Either way—the impetus for business transformation always comes from outside. Companies that embark on such management projects are usually market-oriented (rather than resource-oriented), and the structure of these companies usually follows strategy (and not the other way around). Business transformation strategies are not a short-term affair. They are subject to consistent, self-critical analysis, vigilance, and the highest level of empathy and demand discipline and consistent action from management and staff. The changes are often carried out over several years according to a fixed plan and gradually realign the company (evolution instead of revolution).

10.3 Project Management Strategies A project is a purposeful and mostly unique project, which is subject to constraints on time, resources, costs, and other elements, e.g. the use of personnel, financial means, or operating resources (PM, 2018). Within projects, there are client-­ determined begin and completion dates inside which the task must be handled. Complex projects and task management are not the same as would be expected, as ordinarily several capacities are included. The functions often comprise project management, design, production, procurement, quality management, logistics, human resources, finance, and other departments. The term project is derived from the Latin language (Latin: proiectum, thrown forward). In the seventeenth century, the meaning of “construction project” as a project definition prevailed in Germany (PM, 2018). Due to the multifaceted nature of projects and goals, projects often differ in terms of scope, duration, resources, goals and organisational layout. Frequently there are a few included groups or offices in complex tasks. Because of their unpredictability, ventures involve huge arrangements with clients, providers, banks, or different stakeholders. Examples of projects include: • Construction of a railway station in one of the major cities such as Stuttgart, e.g. Stuttgart 21st

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• Construction of an airport, e.g. construction and completion of Wiliy Brandt Airport BER • Renovation of a museum, e.g. Neues Museum in Berlin • Construction of a high-speed train, e.g. construction of the ICE by Siemens and Alstom (formerly Bombardier) • Construction and completion of an opera house, e.g. the Elbphilharmonie in Hamburg According to the project management manual, projects have certain criteria (PM, 2018). Key criteria for projects are defined in Table 10.1. If these project criteria are not met, there is usually no real project. This does not mean that methods of project management cannot be put to good use beyond project work. However, one should not speak of project work in order not to confuse. Projects always include an organizational structure and a process organization. The organizational structure forms the hierarchical framework of the project organization and defines the organizational framework, i.e. which tasks are to be managed by which functional units and sub-departments. By contrast, the process organization regulates the processes that take place within this framework (process and information processes within the project phases). Companies usually have a line organization or a project matrix organization, whereby in many cases there is a combination or a hybrid of both forms of organization. Projects usually take place under the pressure of costs, production, and performance, so that projects involve numerous negotiations. For the realization of projects project teams are formed, which consist of different functions (PM, 2018). These then take over control and steering tasks as part of project management (PM, 2018). Projects go through four phases as shown in Fig. 10.2. Projects start with a feasibility check. If the feasibility is given, project planning will begin in the next phase. In this context, a project Table 10.1  Project criteria

Source: Author’s source

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Projectstart

Strategic Project pre-planning

Projectfeasibility

Projectplanning

Projectapplication

Projectexecution

Projectfinalisation

Projectexecution

Projectorder

Projectvalidation

Projectapproval

Projectconfirmation

Fig. 10.2  Project phases. (Source: Author’s own figure)

Fig. 10.3  Project organization. (Source: Author’s own figure)

assignment is recommended in which important key figures such as quality, costs, time, or resources are clearly defined (PM, 2018). After confirmation of all features, the project can be started in phase three. After successful completion of the project, the project validation takes place with a target/actual comparison. In particular, deviations must be negotiated via the supplementary management (Helmold, 2021). Complex projects are usually carried out in cross-functional and interdisciplinary project groups, which contain experts from departments like project management, procurement, production, marketing and sales, quality management, finance and controlling, or other departments as shown in Fig. 10.3 (Helmold et al., 2019; Helmold, 2021). Advantages of a project management organization are the following: • Short decision-making through co-allocation • Representation of all functions

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• Operational alignment leads to quick decisions to implement measures • Project-specific material budgets create transparency about the real purchasing costs for all products • Group dynamic advantages through cooperation of all areas (no “silencing” or autonomous thinking of departments or functions, but joint project thinking)

10.4 Project Management Criteria 10.4.1 Project Management Success Factors The project management manual defines key criteria and success factors for controlling and steering projects (PM, 2018). These criteria comprise a total of nine categories that must be taken into account for the successful completion of the project.

10.4.2 Integration Management Integration management in project management describes the processes that are required for good coordination and integration of the different activities of a project. It includes project plan development, project plan implementation, and change management (PM, 2018).

10.4.3 Performance Management The project scope management deals with the ongoing planning and control of the progress of the project. As part of the scope management, it is checked at regular intervals whether the project is within the objectives defined in the project order or whether there are deviations. Project scope management includes project initiation, content and scope planning, performance definition, performance verification, and performance review (PM, 2018).

10.4.4 Time Management Time management in projects has to ensure that a project is completed on schedule from project start until the final validation (PM, 2018). Time management in projects contains processes like scheduling, progress control, scheduling and sequence of operations, and estimated time for the operation (PM, 2018).

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10.4.5 Cost Management Cost management includes the cost and expenses for the approved project (PM, 2018). Objective of this category is that the project is monitored and closed within the anticipated budgets. Subcategories of the cost management are resource planning, cost estimations, budgeting, and cost control (PM, 2018).

10.4.6 Quality Management Quality management in projects should ensure that the quality requirements defined by the client are met or even exceeded. These include quality planning, quality assurance, and quality control (PM, 2018).

10.4.7 People and Human Management The main task of HR management is to make sure that the people involved in the project work as efficiently as possible. The following functions and tasks can be assigned to personnel management: project organization, personnel acquisition, and team development (PM, 2018).

10.4.8 Communication Management The aim of communication management in the project is to create, collect, disseminate, store, and define all project information in a timely and appropriate manner. These include the development of an information and reporting system, distribution of information, determination of progress, and administrative completion (PM, 2018).

10.4.9 Risk Prevention Management Risk management describes all the iterative processes necessary to identify, analyse, and respond to project risks. These include risk identification, risk assessment, risk mitigating, and risk tracking (PM, 2018).

10.4.10 Procurement Management The knowledge field procurement management includes the procurement of goods and services outside the organization as well as the associated contract design. This area includes procurement preparation, quotation preparation, bid solicitation, supplier selection, contract drafting, and contract (PM, 2018).

10.6  Case Study: CRRC Project Management in the United States

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10.5 Recommendations for Executing Project Management Projects with complex objectives need a competent project leader or manager. This requires both hard (e.g. project management skills) and soft skills (e.g. emotional intelligence) to convince both internally and externally. In addition to a good and sustainable relationship with the management, one of the key components of project managers is to lead a team successfully. Project managers must choose their employees to have a healthy mix of expertise and social skills. Projects should be projected by a robust project job in which performance parameters are clearly defined and scheduled (PM, 2018). Goals must have specific attributes and be specific, measurable, acceptable, realistic, and timed (SMART methodology: English, specific, measurable, achievable, realistic, and timely) (Helmold, 2021). Sustainability as well as a permanent and regular success control completes the SMART goals. Here an incentive system is recommended, so that employees are sufficiently motivated by material or immaterial advantages for project success (Helmold & Terry, 2021). Internationality and diversity strengthen project teams and help to successfully implement projects in an international context. The use of digital media supports networking, especially across country borders and time zones. Finally, organizations should allow project members to return to the line function. Table 10.2 summarizes the main recommendations (PM, 2018).

10.6 Case Study: CRRC Project Management in the United States The North American Chicago Transit Authority (CTA) announced that it had awarded the order to build 846 7000-series railcars to CRRC subsidiary CSR Sifang America, which had submitted the most competitive bid in terms of cost, quality, delivery time, design, and other project elements. It did not name the other bidders. The company, formed from the merger of former rivals CNR Corp and China CSR, won its first US contract in 2014 when CNR was awarded a $567 million deal to supply subway trains to Boston. Chicago will first place a base order of 400 cars, Table 10.2  Negotiations in project management

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with options to buy the remainder in the coming years, as the CTA said. CSR will build a new $40 million factory in the city, with the aim of seeing the first cars going into service in 2020. CRRC undertakes design, manufacture, testing, commissioning, and maintenance of locomotives and rolling stock, including electric locomotives, diesel-electric and diesel-hydraulic locomotives, suburban and regional transport, trams and light rail vehicles, metro cars and passenger coaches, as well as full line of rolling stock cars. This Chinese state-owned rail company’s assembly plant will produce up to 846 new railcars for the Chicago Transit Authority. The project will return CTA railcar manufacturing to Chicago after a 50-year absence, according to the city. CRRC Sifang will invest $100 million in building a 380,944-square-foot manufacturing facility on 45 acres in Chicago’s Hegewisch neighbourhood on the Southeast Side. Production was expected to begin in early 2019. The facility would begin testing the new car prototype later that year and the cars would hit the rails by 2020.

References Helmold, M. (2021). Kaizen, Lean Management und Digitalisierung. Mit den japanischen Konzepten Wettbewerbsvorteile für das Unternehmen erzielen. Springer. Helmold, M., Dathe, T., & Hummel, F. (2019). Erfolgreiche Verhandlungen. Best-in-Class Empfehlungen für den Verhandlungsdurchbruch. Springer Gabler. Helmold, M., & Samara, W. (2019). Progress in performance management. Industry insights and case studies on principles, application tools, and practice. Springer. Helmold, M., & Terry, B. (2021). Operations and supply management 4.0. Industry insights, case studies and best practices. Springer. Kieviet, A. (2019). Lean Digital Transformation. Geschäftsmodelle transformieren, Kundenmehrwerte steigern und Effizienz erhöhen. Springer. Klasen, J. (2019). Praxisorientierter Leitfaden zur erfolgreichen Neuausrichtung von Unternehmen und Geschäftsfeldern. Springer. PM. (2018). Abgerufen am July 7, 2018, from http://www.pm-­handbuch.com/begriffe/ Womack, J. P., Jones, D. T., & Ross, D. (1990). The machine that changed the world: The story of lean production. National Bestseller.

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Performance in Finance Management

Persistence is the twin sister of excellence. One is a matter of quality; the other, a matter of time. Marabel Morgan

11.1 Financial Crisis Prevention and Crisis Symptoms Financial distress or related financial emergency is a term in finance, a situation in which an organization faces extreme budgetary issues and battles in satisfying money-related commitments, for example obligations and credit instalments (Gabler-Wirtschaftslexikon, 2018). The term is utilized to show a condition when guarantees to loan bosses of a company are broken or respected with trouble. In the event that money-related misery cannot be relieved, it will ultimately prompt indebtedness. Financial distress is typically associated with certain expenses to the organization. These are known as expenses of financial distress. Financial distress refers to a condition in which a company cannot meet, or has difficulty paying off, its financial obligations to its creditors, typically due to high fixed costs, illiquid assets, or revenues sensitive to economic downturns. Recent examples like the company Jack Wolfskin show that companies must anticipate and prevent a situation, which puts the company under stress (Handelsblatt, 2017). A financial crisis can be prevented and involves immediate actions and related negotiations with stakeholders like banks, employees, suppliers, or investors. A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects, and less productive employees. Employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of insolvency, which threatens them to be forced out of their jobs. There are often alarm signals indicating the upcoming crisis as outlined by various authors. Alarm signals like decreasing revenues, high operating cost, and low profits usually indicate that a company is not in a good financial health situation. Struggling to reach profitability targets over a longer period indicates that a business cannot sustain itself from internal funds and needs to raise capital externally. This raises the company’s business risk and significantly lowers its credit rating with banks, lenders, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_11

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g

Phase 2

Long-term

Medium-term

Strategic crisis

Profitability crisis

Phase 3

Phase 4

Short-term

Liquidity Crisis

Insolvency

n

point

Phase 1

Space fo

Neeed for actions

suppliers, or investors. Limiting access to funds typically leads to liquidity issues and results often in a company failing as shown in Fig. 11.1 (Four phases model of Müller; Müller, 1995). Poor sales growth or decline indicates that the market is not positively receiving a company’s products or services based on its business model. When extreme marketing activities result in no growth, the market may not be satisfied with the offerings, and the company may close down. Likewise, if a company offers poor quality in its products or services, consumers start buying from competitors, eventually forcing a business to close its doors. When debtors take too much time paying their debts to the company, cash flow may be severely stretched. The business may be unable to pay its own liabilities. The risk is especially enhanced when a company has one or two major customers. Müller describes four phases of a financial crisis (see Fig. 11.1) from a strategic crisis, the profitability crisis, and the liquidity crisis to the insolvency. Müller describes the strategic crisis as threat to the potential and substance of a company, which occurs due to inadequate strategies in terms of differentiation, knowledge, innovation, or cost advantages. In this strategic phase, market needs and elements are not fully considered, so that the foundation of the company is gradually weakening. In this situation, the symptoms are weak, the corrective actions are long-term, and the need for actions is rather low compared to the following phases. The strategic phase is followed by the profitability crisis, which is characterized by signs of a weak financial performance in terms of revenues, cost, cash, and profitability. Signs in this phase are stronger, often resulting in a loss, struggling to achieve targeted financial ratios or non-achievement of profit targets. The third phase is the liquidity crisis, in which a company is not capable of meeting its financial obligations anymore. This situation is severe as the cash situation and balance are not sufficient to pay the debts. As the credit rating decreases in this phase, companies tend to borrow money with higher interest rates or to prolong payments to suppliers, employees, or banks where possible. The last

weak

medium

Crisis symptoms

strong

Fig. 11.1  Phases to financial insolvency. Source: Helmold et al. (2019), adapted from Müller’s four-phase model

11.2  Restructuring and Financial Restructuring

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phase of the model by Müller is the insolvency. Insolvency is the state of being unable to pay the money owed, by a person or company, on time. Those companies in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency. Cash-flow insolvency is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment. For example, a person may own a large house and a valuable car, but not have enough liquid assets to pay a debt when it falls due. Cash-flow insolvency can usually be resolved by negotiation. For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty. Balance-sheet insolvency is when a company does not have enough assets to pay all of their debts. The person or company might enter bankruptcy, but not necessarily. Once a loss is accepted by all parties, negotiation is often able to resolve the situation without bankruptcy. A company that is balance-sheet insolvent may still have enough cash to pay its next bill on time. However, most laws will not let the company pay that bill unless it will directly help all their creditors. For example, an insolvent farmer may be allowed to hire people to help harvest the crop, because not harvesting and selling the crop would be even worse for his/her creditors. In some jurisdictions, it is illegal under the insolvency laws for a company to continue in business while insolvent. In others (like the United States with its insolvency law and Chapter 11 provisions), the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out. Increasingly, legislatures have favoured alternatives to winding up companies for good. The major focus of modern insolvency legislation in many countries and business debt restructuring practices no longer rests on the liquidation and elimination of insolvent entities but on the remodelling of the financial and organizational structure of debtors experiencing a financial crisis so as to permit the rehabilitation and continuation of their business. This is known as restructuring, business turnaround, financial crisis mitigation, or business recovery. Implementing a business restructuring plan includes various measures and can be described.

11.2 Restructuring and Financial Restructuring 11.2.1 Definition of Restructuring Restructuring or financial turnaround actions (mitigations) are sets of corporate activities taken when significantly modifying the debt, operations, or structure of a company as a means of potentially eliminating financial harm and improving the business. These mitigations require communication and negotiations with all affected stakeholders as outlined by Helmold et al. (2019). When a company is having trouble making payments on its debt and financial commitments, it will often restructure to pay its debts and to improve financial and operational performance. A company restructures its operations or structure by cutting costs, such as payroll, operations, and supplier’s cost, or reducing its size through the sale of assets.

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Restructuring is often linked to external experts who help the company to restructure its operations, performance, and financials. Restructuring means to have the appropriate actions and leads to many discussions and negotiations with stakeholders like employees, suppliers, or customers to fundamentally improve the financial situation of a company. Due to the vital significance, restructuring plans must be designed, executed, and controlled by top management. Restructuring involves top management and negotiations with stakeholders (source adapted from Helmold et al., 2019). The four types of restructuring can be outlined as shown in Fig. 11.2: • • • •

Strategic restructuring Structural restructuring Restructuring for profit improvements Financial restructuring

11.2.2 Strategic Restructuring Strategic restructuring is the fundamental change of the structure, business model, and basis of the company. It involves the questioning and reformulation of mission, vision, and long-term strategic objectives. Actions of strategic restructuring often involve the assessment of existing business models and the redefinition of the strategic pyramid including mission, vision, and strategic objectives. The aim is to gain and secure a sustainable position at existing or new markets. Actions in this strategic restructure can be the shift into new business models and expansion into new business regions or entry into new markets. Actions in restructuring necessitate also the deletion of unfavourable cost structures and production lines. Moreover, it can include the relocation of existing manufacturing location to overseas countries. Finally, the concentration on core competencies, the cancellation of unimportant

Strategic restructuring

Restructuring for profit improvement Financial turnaround

Structural restructuring

Financial restructuring

Fig. 11.2  Restructuring ways for financial turnaround. (Source: Author’s own figure)

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customer niches, and the stoppage of costly product lines are effective actions in strategic restructuring. For example Mannesmann AG, a former engineering and steel trading company, had diversified into wireless communication in the 1990s and fixed-line phone service, redesigning its strategic portfolio and strategy. Mannesmann could hence increase its value significantly and was later merged with Vodafone. Another example is supermarket chains like REWE in Germany, which entered the other business areas (discount, specialist, and deliver service area or tourism and travel, thus increasing business and wealth).

11.2.3 Structural of Restructuring Structural restructuring targets the structure of a company and has an impact on organization and the existing structure. Aligning the organization and realign operations lead to more efficient and effective processes (often central, decentral, or a hybrid form) with smoother roles and responsibilities. Structural restructuring is often pursued from a polycentric management towards a matrix organization and requires systematic and suitable information systems and controlling structures. For example Volvo Trucks realigned its organization to a brand-centric organization, thus improving efficiency and effectiveness. Restructuring for profit improvements targets the revenues and expenses. Actions comprise anything that will increase revenues like a special sales programme, increased focus on cash cows in sales, or deletion of unprofitable products or services. In addition, the company will take drastic actions in order to minimize expenses and cost. This is normally all areas of expenses as shown in Fig. 13.4. Companies are often tackling cost drivers like material, personnel, or operating cost by global sourcing, outsourcing to shared service centres, or implementation of lean principles. A trend shows that MNC and SME are concentrating on core competencies and outsourcing products, services, and activities to foreign companies. For example the Deutsche Bahn (DB) announced a cost reduction programme by cutting operational cost by 300 million euros from 800 million euros to 500 million euros to drastically improve financial performance. Financial restructuring includes the fundamental improvement of the financial performance and financial ratios. Activities include asset improvements, which can be seen in the balance sheet (see Fig. 13.3); review of elements in the profit and loss sheet; and cash initiatives. Cash improvements can be realized through pulling ahead customer payments, advanced revenue income, and as late as possible outflows of payments to employees, suppliers, banks, or other stakeholders (Olfert, 2013, 2015). Late payments to suppliers and other stakeholders can be negotiated through the agreement of extended payment terms (normally from 30 days to 60 or 90 days). For example the company Zalando introduced an initiative to extend payment terms to suppliers to minimum 90 days in order to improve the cash situation.

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11.3 Financial Stability Assessment Tools 11.3.1 Creditreform Creditreform is a large credit agency that collects creditworthiness data from companies of all legal forms as well as from private individuals. The information file has a total of more than 158,000 members. The basic structure of Creditreform has hardly changed since 1879. A company is not a customer of Creditreform, but a member of one of the local Creditreform associations. The business of these registered associations is run by limited partnerships. All Creditreform associations are under the umbrella of the Verband der Vereine Creditreform e. V. with headquarters in Neuss. In 2018 there were 129 regional Creditreform associations in Germany, which have 127,000 companies as members. Today Creditreform is one of the largest credit agencies with 167 branches and 158,000 members in Europe (Creditreform, 2020).

11.3.2 Creditsafe The credit agency Creditsafe enables you to check in a few minutes whether your business partners can keep their credit commitments. You receive information about the creditworthiness of the business partner at a glance and can thus identify risks at an early stage. In the case of low creditworthiness and therefore risky business, it is recommended to reduce the payment method of customers to prepayment or to replace suppliers with a high risk of default. The underlying scoring system looks at company key figures, which are proven indicators of the financial stability of companies. By using the most advanced statistical methods, the scoring model is able to predict 70% of all bankruptcies as early as 12 months before the onset of insolvency.

11.3.3 VDA Rating In 2004, the Association of the German Automotive Industry (VDA), together with Prof. Dr. Schneck Rating GmbH, has developed a rating standard that not only bears the name Standard, but is also now generally accepted in the evaluation of suppliers. This standard is a rating software that was specially developed for the VDA on the basis of the market-leading rating tool R-CockpitTM and allows both a pure financial rating based on balance-sheet data and a full rating with qualitative criteria. In March 2006 the second edition of this standard tool, in which technical updates of the rating software were made, was delivered to all members of the VDA.

11.4  Case Study: Insolvency of SolarWorld AG

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11.3.4 Dun & Bradstreet (D&B) D&B Supplier Risk Manager provides the information and tools you need to monitor supplier relationships and avoid costly disruptions. Based on the data and analysis from Dun & Bradstreet, this is the only SaaS solution that provides critical risk indicators for more than 365 million global companies.

11.3.5 RapidRatings RapidRatings International Inc. is a company that provides financial health information to public and private companies around the world. The company’s analytics system supposedly provides insights into partners, suppliers, and third-party customers. The company’s platform offers financial health ratings and detailed reports to help companies mitigate financial risk. In addition, RapidRatings offers a service for retrieving financial statements from third parties of private companies in order to increase transparency and improve visibility (RapidRatings, 2020).

11.4 Case Study: Insolvency of SolarWorld AG SolarWorld AG was an international solar power technology group that had previously made high profits and made significant losses in 2011 in the wake of the solar industry crisis. The turnover of SolarWorld AG collapsed in the 2012 financial year from 1.05 billion euros to 606 million euros, which corresponds to a decline in turnover of 40%. The operating loss in 2012 was EUR 492.4 million and the available liquid funds fell from EUR 553.5 million to EUR 224 million. From 2011 to 2012 the situation of SolarWorld AG deteriorated significantly. The previously high profits and high sales increases were interrupted by the crisis in the solar industry in 2011. Due to the sharp drop in sales and the high operating loss, SolarWorld AG is already in the middle of the crisis of success at this point in time. The lower liquid funds point to a possible liquidity crisis. In January 2013, the company announced that it was experiencing severe financial problems due to increasing price wars and purchase commitments for silicon. At this point in time, the company is in a liquidity crisis as the financial situation is very tight. On April 17, 2013, SolarWorld AG announced that in the individual financial statements in accordance with the German Commercial Code (HGB) the equity had been used up and had fallen to a negative value. As explained in the previous part, in this case an application for bankruptcy must be filed. This example shows how a corporate crisis and insolvency can be divided into different phases.

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References Creditreform. (2020). www.creditreform.de Gabler-Wirtschaftslexikon. (2018). Unternehmenskrise. Abgerufen am May 26, 2018, from https:// wirtschaftslexikon.gabler.de/definition/unternehmungskrise-­49331 Handelsblatt. (2017). Finanzielle Zukunft Gläubiger verschaffen Jack Wolfskin Luft für Lieferantenmanagement. Die Lieferantenmanagement über die Zukunft Jack Wolfskin haben begonnen. Um die zu vereinfachen, verzichten die Banken vorerst auf die Rückzahlung von Krediten. Finanzinvestor Blackstone bangt um die Kontrolle des Unternehmens. In Handelsblatt. Abgerufen am May 26, 2018, from http://www.handelsblatt.com/unternehmen/ handel-­konsumgueter/finanzielle-­zukunft-­glaeubiger-­verschaffen-­jack-­wolfskin-­luft-­fuer-­ Lieferantenmanagement/19247752.html?ticket=ST-­874329-­5m5EZ42jWMfXaeA6SVbH-­ap2 Helmold, M. et al. (2019). Erfolgreiche Verhandlungen Bestin-Class Empfehlungen für den Verhandlungsdurchbruch. Springer Wiesbaden Olfert, K. (2013). Investition (13. Auflage ed.). NWB. Olfert, K. (2015). Finanzierung (15. Auflage ed.). NWB. RapidRatings. (2020). www.rapidratings.com

Performance Through Kaizen

12

Logic will get you from A to B. Imagination will take you everywhere. Albert Einstein

12.1 Definition of Kaizen Kaizen is a Japanese management concept and targets improvements in small steps. Kaizen means all personnel are expected to stop their work when they encounter any abnormality and, along with their supervisor, suggests an improvement to resolve the abnormality. Kaizen aims at the quality of daily life, not only during working hours. The improvement should be gradual and infinite. It should pursue the perfection. The employees should be continuously engaged in company’s life and improvement of every aspect of the company (processes, products, infrastructure, etc.). This improvement throughout all aspects of life is related to the great attention that is paid to the needs and requirements of customer (Helmold, Dathe & Büsch, 2017). Kaizen focuses on teams (quality circles) and promotes teamwork and team spirit; however it also recognizes the individual contribution (Helmold & Samara, 2019). It emphasizes the engagement of each worker to the concept and vision of the company, so that employees will identify themselves with the enterprise, its culture, and objectives. The important aspects of Kaizen are the following: • What is wrong? Not who is wrong? • How to eliminate waste (muda)? • How to decrease quality costs?

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_12

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The term Kaizen is Japanese and can be translated to “change for the better”. The main goal of Kaizen is to continuously improve working areas, processes, and products by integrating the people of the affected areas. Usually Kaizen is realized through workshops. Their typical duration can vary from 3 to 5 days. The aim of a Kaizen workshop is to implement the improvements during the time of the workshop. Kaizen is a framework combining the change of the company culture together with the daily implementation of the principles (Liker, 2004). The ten principles of Kaizen can be described as follows: 1. Say no to status quo. 2. If something is wrong, correct it. 3. Accept no excuses and make things happen. 4. Improve everything continuously. 5. Abolish old, traditional concepts. 6. Be economical. 7. Empower everyone to take part in problems’ solving. 8. Before making decisions, ask “why” five times to get to the root cause. 9. Get information and opinions from multiple people. 10. Remember that improvement has no limit, never stop trying to improve. A useful tool in the context of Kaizen is the PDCA cycle (see Fig. 12.1). PDCA is an iterative four-step management method used in business for the control and continuous improvement of processes and products. It is also known as the Deming circle/cycle/wheel, the Shewhart cycle. Since the 1950s, the PDCA cycle is recognized as a simplified illustration of the elementary steps of a continuous improvement process: Plan: Analyse the current situation and define improvement plan Do: Implement the defined solutions

Kaizen - Continuous Improvement

A

P

C

D

A

P

C

D

Standard

Fig. 12.1  Kaizen cycle (PDCA). (Source: Author’s source)

Standard

A

P

C

D

12.2  Kaizen Versus Innovation

161

Check: Evaluation of improvement results Act: Definition of counteractions in case of deviation from objective, standardize the best solution After improvement it is important to standardize and implement the action, so that the process or activity cannot return to the old state. If this is secured, one can aim for the next improvement.

12.2 Kaizen Versus Innovation Kaizen (改善) is the concept of small improvements in small steps as shown in Fig. 12.2 (Ohno, 1990). In contrast to an innovation, which is a top-down approach, Kaizen involves all team members. It means improvement and continuing improvement in personal life, home life, social life, and working life. When applied to the workplace this philosophy means continuing improvement involving everyone, i.e. managers and workers alike (Kaizen Institut, 2019). The principles of Kaizen are customer knowledge and transparency. Thus, it is possible to improve a process without major investments. Kaizen in any organization is fundamentally important for a successful continuous improvement culture and to mark a turning point in the progression of quality, productivity, and labour-management relations (Kaizen Institut, 2019).

INNOVATION

Innovation

• • • • • •

Small steps Low investment No risk Involvement of people Short term Team decision approved by management Improvements

Major change High investment Entrepreneurial risk Specialized team Long term Management decision

Improvements

• • • • • •

KAIZEN

Time

Fig. 12.2  Innovation versus Kaizen. (Source: Author’s source)

KAIZEN

Time

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Information can be received through all 5 senses How much do we remember from each of those senses? 83%

Via the sight sense

11%

Via the hearing sense

3,5%

Via the smell sense

1,5%

Via the touch sense

1%

Via the taste sense

Fig. 12.3  Visualization senses. (Source: Author’s source)

12.3 Visualization Management Visualization management is a significant part of Kaizen. Figure 12.3 displays that 83% of the issues are perceived with the eye sense, so that visualization is a crucial part for implementing Kaizen. Figure 12.4 shows the war room in the Alstom (formerly Bombardier) Transportation IPO in China.

12.4 Case Study: Mercedes’ Lean Management System “The best or nothing”—Gottlieb Daimler’s claim characterizes the Mercedes-Benz brand and is anything but easy to live up to. What originally referred primarily to the ideas and ingenuity of the company’s founder has since become more pragmatic (Follmann et al., 2013). Daimler is now a global organization with over 260,000 staff members and requires a clear vision, experienced and competent managers and employees, stable processes, and a strong corporate culture. The success of the automotive company hinges on the efforts of each individual. One of the important success factors to this end is a far-reaching production system. Production systems have a long tradition and clear principles. Back in 1831, for example, General Carl von Clausewitz recognized the importance of robust processes, avoiding waste, and

12.4  Case Study: Mercedes’ Lean Management System

163

Fig. 12.4  Visualization in a War Room

ensuring continuous improvement as necessary to achieve goals. The best-known production system currently used is that of Toyota. The production system used by Mercedes-Benz cars (MBC) also has a long tradition and has become one of the driving factors behind the success of the premium Mercedes-Benz brand—with a pronounced focus on technology, innovation, quality, safety, and sustainability. In 2000, this system was bundled as a closed system for the first time—the Mercedes-­ Benz Production System (MPS)—by leveraging different developments in the company. This laid the foundation for lean management principles in production and, somewhat later on, in administration. From a critical perspective, initial success was confronted by the challenges of early lean initiatives. Improvements in the individual business units, for example, could not be made at the expense of other business units (e.g. the historical conflict of assembly processes being compromised in the name of logistics and vice versa, or assuming that active involvement of managers in optimization measures is all that is required to safeguard changes and prevent relapses from occurring). To meet these challenges and facilitate implementation of the MPS, all resources were bundled at MBC in 2008. The organization was restructured and four new consulting fields were defined: strategic and tactical target definition, methods and tools, qualification, and Mercedes-Benz culture. Today, almost 4 years after the go-ahead, an initial conclusion can be drawn. The introduction of centralized MPS was done in 2008. The framework provides all employees a standardized basis for the decentralized lean support organization at Mercedes-Benz

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cars and anchors it in the “Strategische Planung und Mercedes-Benz Produktionssystem” (Strategic Planning and Mercedes-Benz Production System) centre. This centre is, among others, responsible for assisting business units in implementing the MPS throughout Mercedes-Benz cars. Activities have started in the production area and have since been carried over to administrative areas such as human resources and IT.

References Follmann, J., Laack, S., Schütt, H., & Uhl, A. (2013). Lean transformation at Mercedes-Benz. Retrieved November 24, 2019, from https://www.researchgate.net/publication/272484962_ Lean_Transformation_at_Mercedes-­Benz_Identifying_the_Transformational_Opportunities_ for_the_Retail_Value_Chain Helmold, M., Dathe, T., & Büsch, M. (2017). Praxisbericht aus der Bahnindustrie—Alstom (formerly Bombardier) Transportation. Veränderte Anforderungen durch Global Sourcing. Beschaffung aktuell. Retrieved May 17, 2018, from https://beschaffung-­aktuell.industrie.de/ einkauf/veraenderte-­anforderungen-­durch-­global-­sourcing/ Helmold, M., & Samara, W. (2019). Progress in performance management. Industry insights and case studies on principles, application tools, and practice. Management for professionals. Springer. Kaizen Institut. (2019). https://de.kaizen.com/ Liker, J. K. (2004). The Toyota way. McGraw-Hill. Ohno, T. (1990). Toyota production system. Beyond large scale production. Productivity Press.

Performance Management to Focus on Value-Added Activities

13

Most Business Processes Are 90percent Waste and 10percent Value-Added Work. Jeffrey Liker

13.1 Value-Added and Waste Added value can be defined as products, services, processes, and activities, which generate a certain value to the organization and enterprise. Value-added must be regarded from the customer viewpoint and is everything for which the customer is willing to pay for. It is important that value-added is recognized and perceived as value by the client. Many studies have shown that we only add value to a product for less than 5–15% of the time, and the rest of the time is wasted (Helmold & Terry, 2016a, b). The opposite is non-adding value or waste as shown in Fig. 13.1. Waste (Japanese: muda, 無駄) is anything which adds cost or time without adding any value or any activity which does not satisfy any of the above conditions of value-­ added or a non-value-adding activity in a process. The focus of operations management must therefore be on eliminating such activities like waiting time or rework (Liker, 2004). Enterprise must target value-added process and eliminate or reduce waste, whereby waste can be visible (obvious) or invisible (hidden) as shown in Fig. 13.2.

13.2 Waste Identification Through Ishikawa Diagram Ishikawa diagrams (also called fishbone diagrams, herringbone diagrams, cause-­ and-­effect diagrams, or Fishikawa) are causal diagrams created by Kaoru Ishikawa (Japanese: 石川 馨 Ishikawa Kaoru, 1915–1989) that show the cause-effect situation of a specific event. Common uses of the Ishikawa diagram are areas of design, supply, production, and quality defect prevention to identify potential factors causing an overall effect. Each cause or reason for imperfection is a source of variation. Causes are usually grouped into major categories to identify and classify these sources of © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_13

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Hidden Waste

Value-added Activities

(reduce)

(increase)

Obvious Waste (eliminate) Fig. 13.1  Value-added and waste. (Source: Marc Helmold)

variation. The target of value-add and quality is shown as the fish’s head, facing to the right, with the causes extending to the left as fishbones; the ribs branch off the backbone for major causes, with sub-branches for root causes, to as many levels as required. Figures 13.3 and 13.4 show two examples of the Ishikawa diagram.

13.3 Advantages and Disadvantages The advantages and disadvantages are shown in the following paragraph. Advantages • Highly visual brainstorming tool which can spark further examples of root causes • Quickly identify if the root cause is found multiple times in the same or different causal tree • Allows one to see all causes simultaneously • Good visualization for presenting issues to stakeholders Disadvantages • Complex defects might yield a lot of causes which might become visually cluttering • Interrelationships between causes are not easily identifiable

167

13.4  5S Management Concept

Category

Description

Value-added Processes

Task

Hidden waste

Task

Obvious waste

Task

Objective

• • •

Added value for product Customer pays for it Customer recognizes this a value-added elements

•

No added value for product or service Task is not necessary for production

Minimize Eliminate

• No added value for product or service • Task is not necessary for production

Minimize Eliminate

•

Increase

Fig. 13.2  Actions for value-added and waste. (Source: Marc Helmold)

Man

Material

Machine

Value add (Quality)

Method (Process)

Milieu (Environment)

Money

Fig. 13.3  Ishikawa diagram. (Source: Author’s source)

13.4 5S Management Concept 5S (Fig. 13.5) is the name of a workplace organization method that uses a list of five Japanese words: seiri, seiton, seiso, seiketsu, and shitsuke. Transliterated into Roman script, they all start with the letter “S”. 5S is used to stabilize, maintain, and improve the safest, best working environment, thus supporting sustainable QCDplus

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Man

Material

Machine X insufficient maintenance √ capacity of machine

X defects from suppliers

X missing qualification X insufficient training

√ engagement operators

Value add (Quality) X Sequence not logical √ Process description X Process intransparent

Method (Process)

X Insufficient flow X Distance too long X Layout deficiencies

Milieu (Environment)

X material cost X Work in progress X Loss

Money

Fig. 13.4  Ishikawa diagram with waste and value-added. (Source: Author’s source)

1

1

Seiri

–

Sort

2

Seiton

–

Set in order

3

Seiso

–

Shine

4

Seiketsu

–

Standardize

5

Shitsuke

–

Sustain

2

3

4

Fig. 13.5  5S system. (Source: Author’s source)

alpha. 5S is a systematic and structured workplace optimization, originally developed and used by Toyota. The objective is the identification and elimination of waste. In simple terms, the 5S methodology helps a workplace remove items that are no longer needed (sort), organize the items to optimize efficiency and flow (straighten), clean the area in order to more easily identify problems (shine), implement colour coding and labels to stay consistent with other areas (standardize), and develop behaviours that keep the workplace organized over the long term (sustain). 5S is a workplace organization method that uses a list of five Japanese words:

13.4  5S Management Concept

1. 2. 3. 4. 5.

169

Seiri (整理) Seiton (整頓) Seisō (清掃) Seiketsu (清潔) Shitsuke (躾)

These five words can be translated as “sort”, “set in order”, “shine”, “standardize”, and “sustain”. The 5S methodology describes how to organize a workspace for efficiency and effectiveness by identifying and storing the items used, maintaining the area and items, and sustaining the new order. The decision-making process usually comes from a dialogue about standardization, which builds understanding among employees of how they should do the work. In some books, 5S has become 6S, the sixth element being safety or self-discipline. The advantages of the 5S system are the following • Creation of transparent layout and processes • Makes waste transparent • Eliminates unnecessary activities • Improves efficiency • Increases safety • Increases employee motivation • Simplification of the work environment • Ensuring that all materials are instantly available • Ensuring the tools (screwdriver, devices) • Ensuring that required (work procedures, work sequence, etc.) information is instantly available by visualization • Reduction of waste The first element in the 5S concept is the sorting (seiri). In this step it is important to distinguish between necessary and unnecessary things. Things in this context are materials, components, tools, gauges, information, things, and people. Unnecessary things must disappear. Removing these items which are not used in the working area may take a reasonable amount of time. Classification of all equipment and materials by frequency will help to decide if these items can be removed or not. The second step is the setting in order (seiton). The practice of orderly storage helps the right item to be picked efficiently at the right time, with easy access for the operators. Identification and allocation of materials, information, tools, and necessary things at fixed and visualized locations are important in this step. In the next and third step (seiso), it is mandatory to create a clean worksite without garbage, dirt, and dust, so problems can be more easily identified (leaks, spills, excess, damage, etc). In the fourth step (seiketsu) standards for a neat, clean, workplace and operations will be set up through visual management. In the fifth and last stage (shitsuke) it is important to create the environment, patterns, management style, and behaviours which ensure that established standards are executed over the long-term, and make the workplace organization the key to managing the process for success (Helmold & Terry, 2016a, b).

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13.5 Seven Types of Waste in Manufacturing: TIMWOOD 13.5.1 Transportation Excess transportation is a significant waste because the time, manpower, energy, efforts, and resources required to move items are something the customer does not care and does not want to pay. Examples of wastes of transport are the transport of product from one functional area such as pressing to another area such as welding or the use of material-handling devices to move batches of material from one machine to another within a work cell. It wastes time because operators are dedicating the available time of the work day to moving items from one place to another. It wastes energy and resources in that employee time could be better utilized and because some tools used for transportation (forklifts, trucks, pallet jacks) consume energy like electricity or propane. Also, by dedicating machines and operators’ time to waste activities they are no longer free and available to take on value-­added activities. Figure 13.6 shows transportation waste. Reasons can be insufficient layouts and long distances between individual operations. The consequences of this waste are the increased time requirements and the decreased productivity. Decreased productivity will result in higher operating cost and can harm the profitability of the enterprise (Liker, 2004).

1. Transportation Definition • Unnecessary transport of material • Transport is a necessary type of waste however it should be reduced to a minimum

Possible reasons • Insufficient arrangement of needed material and devices • Physical distance between material delivery and usage

• Interim storage of material (buffer)

Consequences • Additional space for transport • Blocking of capacity due to additional logistic effort • Possible damage of products

Examples • Long or additional transport of: • Raw material • Finished goods • Tools and devices

Fig. 13.6 Transportation

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13.5  Seven Types of Waste in Manufacturing: TIMWOOD

13.5.2 Inventory Inventory consists of excessive material of finished goods, semi-finished goods, or raw material. Finished goods inventory is generally the most expensive inventory as it has labour and other overhead attached to it along with the cost of material consumed during production. In order to reduce this inventory, process improvements as well as a higher accuracy in forecasting customer requirements are required. Inventory waste refers to the waste produced by unprocessed inventory. This includes the waste of storage, the waste of capital tied up in unprocessed inventory, the waste of transporting the inventory, the containers used to hold inventory, the lighting of the storage space, etc. Moreover, having excess inventory can hide the original wastes of producing said inventory. The environmental impacts of inventory waste are packaging, deterioration or damage to work-in-process, additional materials to replace damaged or obsolete inventory, and energy to light, as well as either heat or cool, inventory space. Figure  13.7 displays the definition, reasons, consequences, and examples for inventory. Inventory will have a negative impact on the working capital and on cash flow, so that sophisticated production planning must focus on the optimum levels of inventory throughout the value chain and operations (Helmold & Terry, 2016a, b).

13.5.3 Motion Motion waste is the excessive movement of man, material, or machines within the workspace. Motion waste will lead to higher cost as the productivity decreases.

2. Inventory Definition • More material than needed according to planning in terms of: • Raw material • Semi-finished parts • Work in progress (WIP) • Finished goods

Possible reasons • Problems regarding planning and logistic processes • Bad supplier delivery performance and quality • High product variety

Consequences • Capital costs • Double handling, possible damages based on double handling, rework • Genuine problems won’t be discovered and therefore not solved • Search effort • Scrap

Fig. 13.7 Inventory

Examples • • • • •

Overfilled warehouses Overfilled place in production areas Buffer stocks in producton Crammed corridors Crammed desks

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Another problem of motion is the necessity for more time and capacity in operations than actually required. A proper workflow analysis and value stream mapping help to minimize this waste. Figure 13.8 outlines the definition, possible reasons, consequences, and examples of this waste.

13.5.4 Waiting Idle time of operators or other employees in operations and waiting for work to arrive or to be told what-to-do is a significant waste. Waiting or standstill times must be avoided as waiting results into reduced efficiency and productivity. Other outcomes are longer lead times and decreasing engagement and motivation of employees as illustrated in Fig. 13.9.

13.5.5 Overproduction Overproduction waste is defined as producing too many products too early and in advance. That means that parts in a big quantity are existing inside operations management, even though these parts are not needed. Figure  13.10 displays possible reasons such as demand non-transparency or inadequate batch sizes. A consequence of this waste is that inventory increases drastically and that work-in-progress cost rises significantly.

3. Motion Definition • Every type of movement that doesn‘t directly serve value creation

Possible reasons • Inaccurate analysis of all workflows Inappropriate layout • Insufficient delivery of material and arrangement of tools

Consequences • Decrease of productivity • Increase of lead time and capacity • Insufficient ergonomics

Fig. 13.8 Motion

Examples • Long ways between tools, material and product or machine • Missing material or tools

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13.5  Seven Types of Waste in Manufacturing: TIMWOOD

4. Waiting Definition • A period in which no activities take place. • The employee is forced to wait and can‘t fulfil any value added activities. During the holding period the product is waiting for processing

Possible reasons • Insufficiently synchronised material and information flows • Insufficient line balancing of all processes • Missing material or tools

• Lack of documentation • Waiting for quality approval

Consequences • Reduced productivity

Examples • Waiting for material or tools e.g. crane

• Decreasing efficiency

• Quality employees are not available

• Increased lead time

• Stopped processes due to missing resources (employees, defective machines, IT,...)

• Increase of capacity • Decreased of employee motivation

Fig. 13.9 Waiting

5. Overproduction Definition Definition

• If more is produced than the internal or external customer needs

Possible reasons Possible reasons

• Insufficient transparency of real demand • Production according to supposed optimal batch sizes • Instable processes

• Early use of available capacity

Consequences Consequences

• Generation of inventory (warehouse, WIP) • Additional use of space • Blocking of capacities (machines, employees)

Examples • A lot of material in front of machines or assembly lines • Crowded warehouses

• Double handling, decrease of product quality

Fig. 13.10 Overproduction

13.5.6 Overprocessing Overprocessing is related to all activities and processes in operations, which are more than the customer really needs. Figure 13.11 highlights possible reasons such as insufficient technology, bad design, inefficiencies, or unawareness of customer-­ specific requirements. Overprocessing refers to any component of the process of

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13  Performance Management to Focus on Value-Added Activities

6. Overprocessing Definition Definition

• Process weakness in terms of sequence, content, technologies and resources

Consequences Consequences

Possible reasons Possible reasons

• Insufficient technology • Not the most efficient procedure for the process • Insufficient analysis and design of processes • Due to process problems the product requirements in the specification are higher than required by the customer

Examples

• High production costs

• High tolerances

• Waste of material

• Wrong, faulty and not needed process steps

• Low efficiency

• Not optimal utilisation of resources

• High need for resources (employee, machine, material)

• Duplication of efforts

Fig. 13.11 Overprocessing

manufacture that is unnecessary. Painting an area that will never be seen and adding features that will not be used are examples of overprocessing. Essentially, it refers to adding more value than the customer requires. The environmental impact involves the excess of parts, labour, and raw materials consumed in production. Time, energy, and emissions are wasted when they are used to produce something that is unnecessary in a product; simplification and efficiency reduce these wastes and benefit the company and the environment.

13.5.7 Defects Defects as shown in Fig. 13.12 refer to a product deviating from the standards of its design or from the customer’s expectation. Defective products must be replaced; they require paperwork and human labour to process it; they might potentially lose customers; the resources put into the defective product are wasted because the product is not used. Moreover, a defective product implies waste at other levels that may have led to the defect to begin with; making a more efficient production system reduces defects and increases the resources needed to address them in the first place. Environmental costs of defects are the raw materials consumed, the defective parts of the product requiring disposal or recycling (which wastes other resources involved in repurposing it), and the extra space required and increased energy use involved in dealing with the defects. The checklist in Fig. 13.13 is the ideal tool to assess operations in terms of the seven wastes. It is a proven method for identifying waste in process and activities (Helmold & Terry, 2016a, b).

175

13.5  Seven Types of Waste in Manufacturing: TIMWOOD

7. Defects Definition Definition

• If right first time is not achieved

Possible reasons Possible reasons

• Lack of machine and tool maintenance • Insufficiently trained employees • Product not according to customer requirements

• Unstable or not standardized processes • No problem solving process established

Consequences

Examples

• Additional need for material, tools and capacity

• Increase of non-conformities

• Additional space for rework

• Increased quantity of scrap

• Increase of quality employees and checks • Increase of lead time

• Retrofitting and repairing defect parts • Supply issues due to bad quality

Fig. 13.12 Defects

T

Transport

How many times? Which routes? Empty containers?

i

Inventory

How much material is in front of a line/machine? What is the material range?

m

Motion

W

Waiting

o

Overproduction

Compliance with quality? Batch size?

o

Overprocessing

Proper tools? Proper settings? Proper instructions? Proper tolerances?

d

Defects

Motions of employee within the workstation: Destination? How many times? Routes? Duration? ? Waiting for material, devices or supervisor? All information available? Missing documents?

Which mistakes? How often does it happen? Problem solving system?

Fig. 13.13  TIMWOOD checklist

13.5.8 Case Study: Alstom in China Alstom (formerly Bombardier) is recognized as a successful foreign enterprise in the Chinese rail industry. Alstom (formerly Bombardier) is also a specially qualified Western enterprise which supplies railway passenger trains (high-speed trains and intercity passenger trains), metro vehicles, monorail trains, APM systems, and metro vehicle maintenance/services. Alstom (formerly Bombardier) Transportation in China has 6 joint ventures, 7 wholly foreign-owned enterprises, and around 7000 employees.

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13  Performance Management to Focus on Value-Added Activities

A wide range of its rail transportation and aerospace products are currently in service in the Chinese market. In total, more than 30,000 rail vehicles, locomotives, bogies, and propulsion systems are in operation or on order in China, including more than 3500 high-speed train and intercity passenger train cars, 580 electric locomotives, over 2000 metro cars, and maintenance for 1600 metro cars as part of China’s growing urban mass transit market. Alstom (formerly Bombardier) is also supplying, or has already supplied, APM systems to China’s five largest cities: Beijing, Guangzhou, Shanghai, Shenzhen, and Hong Kong. In addition, Alstom (formerly Bombardier) has supplied 104 tram cars for two other Chinese megacities (Nanjing/Suzhou) and in 2017 won its first monorail contract in China, for 240 cars. A total of over 14,000 Alstom (formerly Bombardier) bogies are currently in use in China’s mainline and urban mass transit vehicles while Alstom (formerly Bombardier)’s propulsion and signalling equipment, largely supplied to third-party metro car builders, are in operation in more than 30 Chinese cities. Figure 13.14 displays the assembly and testing line of high-speed trains in Alstom (formerly Bombardier) Sifang Transportation. Figure 13.15 shows the visualization room of the International Procurement Office (IPO) in Shanghai. International purchasing offices or supplier management centres are part of the internationalization and change of corporate model in supplier management (Helmold 2014a, b). Multinational corporations such as Volkswagen, Daimler, Siemens, Bosch, or Alstom (formerly Bombardier) have purchasing offices in regions such as China, India, or Eastern Europe, which offer savings potential or are geographically far removed from the parent company. Medium-sized partners expand through smaller offices or through collaboration with partners, purchasing

Fig. 13.14  Alstom (formerly Bombardier) Sifang Transportation China—Final Testing. (Source: Author’s source)

13.5  Seven Types of Waste in Manufacturing: TIMWOOD

177

Fig. 13.15  Visualization at Alstom. International Procurement Office. (Source: Author’s source)

offices, or institutions such as the German centres in the metropolitan areas of China (Helmold & Terry, 2016a, b). In addition to offices, the German centres also offer contacts to government representatives or Chinese suppliers in order to make purchases from China (Helmold & Terry, 2016a, b). In 2015, Deutsche Bahn opened an international purchasing office. Previously, the logistics division, DB Schenker, had successfully established itself in many locations over the years. In 2005, companies such as Alstom (formerly Bombardier) Transportation or IBM opened an international purchasing office in Shanghai, China. In 2015, Deutsche Bahn decided to open a point-of-sale office in the same location. Developments show that it is advisable to establish an international purchasing office in China. Advantages can be outlined as follows: • Proximity to markets with a high degree of product and know-how maturity, e.g. automotive industry or railway industry • Establish relationships with Chinese manufacturers and ensure compliance with quality requirements • Transfer of customer and production requirements to the suppliers • Early involvement of suppliers in the product development process as well as joint development • Exploitation of savings through direct purchasing as well as through the use of local pre- and semi-finished products in the production process of the suppliers • Acquisition of own end products in domestic markets • Proximity to other high-maturity Asian markets, e.g. Japan or South Korea Figure 13.14 shows the final assembly of trains in Bombardier Sifang Transportation in China. The company applies the 5S concept. Figure 13.15 illustrates the organisational layout of the International Procurement Office in Shanghai. Figure 13.16

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13  Performance Management to Focus on Value-Added Activities

Fig. 13.16  8S example in China. (Source: Author)

depicts an example of the 5S concept in China at Zhongwang in Shenyang. The company changed in a very creative way the 5S philosophy into eight categories (8S; Fig. 13.16).

References Alstom (formerly Bombardier). (2020). Retrieved February 1, 2020, from https://rail.Alstom (formerly Bombardier).com/en/about-­us/worldwide-­presence/china/en.html Helmold, M. (2014a). Erfahrungen aus der Bahnindustrie. Lieferantenmanagement in China. Beschaffung aktuell, 03(2014), 22–25. Helmold, M. (2014b). Establishing a best-practice model of supplier relationship management (SRM) in multinational companies in the European transportation industry. Wissenschaftlicher. Helmold, M., & Terry, B. (2016a). Lieferantenmanagement 2030. Sicherung der Wettbewerbsfähigkeit durch wertfokussierte Lieferantenbeziehungen. Springer. Helmold, M., & Terry, B. (2016b). Global sourcing and supply management excellence in China. Springer. Liker, J. K. (2004). The Toyota way. McGraw-Hill.

Performance Management Excellence Through Change

14

The measure of intelligence is the ability to change. Albert Einstein

14.1 Definition of Change Management The permanent change and transformation of organizations are an important element in order to adapt to the environment. Change management can be defined as the sum of tasks, measures, and activities that are intended to bring about a comprehensive, cross-departmental, and far-reaching change in an enterprise or organization. Change management includes the implementation of new mission, vision, strategies, structures, systems, processes, and behaviours in an organization. The ultimate goal of change is to obtain a long-term favourable position in the market and to gain a sustainable competitive advantage (Helmold, 2020). Synonyms for change management found in literature are business process reengineering, turnaround management, transformation management, lean management, innovation management, or total quality management (Vahs, 2019). Change is increasingly determining the everyday businesses and activities of companies. In order to manage change in the most optimal way, special change management techniques are required, which can be summarized under the term change management (Lauer, 2019, 2020). The human factor is at the forefront of all considerations, because the implementation of change depends on the active support of employees. Since everyone has their own needs, ideas, and experiences, some of which do not conform to the official company organization, there can be no simple recipe for how to successfully manage change. Rather, it is a complex process that has to start at three points: the organization and individuals concerned, the corporate structures, and the corporate culture (Lauer, 2019). Another important element in the context is the technological factor including systems, routines, methods, and instruments (Helmold, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_14

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2021). Figure 14.1 summarizes the elements of change management (Helmold & Terry, 2020).

14.2 External and Internal Reasons for Change The need for corporate change can be caused both externally and internally. Externally, companies face an increasingly dynamic environment that requires constant adjustment of their own structures if they want to be successful in sales and also in the preceding procurement markets. The external change is caused by the market environment, politics, technology, ecology, overall economy, or institutions, as well as in the markets themselves, for example by increasing competition. To explain internal change, the metaphor of human development is used, which—like corporate development—is characterized by a succession of growth, crisis, and higher maturity. There are so-called life cycle models for entrepreneurial change that exemplify the typical development phases. Change is often necessary, however, because companies are successful in exaggerating the offensive spirit of their efforts. Here too, the connection to the human psyche is established and this phenomenon is analogously referred to as “burn-out”. Figure 14.2 outlines triggers for change from outside (exogeneous triggers) and inside of the organization (endogenous triggers). Exogeneous triggers can be described as governmental requirements, new laws, regulations, economic impacts, competitive reasons, market developments, innovations, or advice from consultants. Endogenous triggers are caused by internal stakeholders, such as managers, employees, shareholders, banks, investors, or customers.

Strategy

Culture

Mission, Vision, Corporate and Divisional Objectives

Values, Behaviour, Communication, Collaboration

Change Management Triggers Organisation Leadership, Structures, Processes

Technology Systems, Methods, Routines, Instruments

Fig. 14.1  Elements of change management. (Source: Author’s source)

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Exogeneous Triggers for Change • • • • • • • •

Governmental Reasons Laws and Regulations Economic Impacts Competition Market Developments Innovations Trends Consultants

Endogeneous Triggers for Change • • • • • • •

Management Employees Banks and Investors Suppliers Customers Other Stakeholders Production and Service Requirements

Fig. 14.2  Triggers for change. (Source: Author’s source)

Unfreezing

Changing

Freezing

Fig. 14.3  Elements of Kurt Lewin’s change management model. (Source: Author’s source)

14.3 Change Management Concepts 14.3.1 Change Management Concept of Kurt Lewin The Kurt Lewin’s model (unfreezing, changing, and refreezing) is widely accepted in psychology for implementing change. The implementation of change involves the current state of organization to be changed into a desired state, but this will not occur quickly but simultaneously. Kurt Lewin’s three-stage model or the planned approach to organizational change is one of the cornerstone models which are still relevant in the present scenario. Lewin, a social scientist and a physicist, during early 1950s propounded a simple framework for understanding the process of organizational change known as the three-stage theory which he referred to as unfreeze, change (transition), and freeze (refreeze). According to Lewin, change for any individual or an organization is a complicated journey which may not be very simple and mostly involves several stages of transitions or misunderstandings before attaining the stage of equilibrium or stability. For explaining the process of organizational change, he used the analogy of how an ice block changes its shape to transform into a cone of ice through the process of unfreezing. Lewin’s model is shown in Fig. 14.3. Stage 1—Unfreezing: This is the first stage of transition and one of the most critical stages in the entire process of change management. It involves improving the readiness as well as the willingness of people to change by fostering a realization

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for moving from the existing comfort zone to a transformed situation. It involves making people aware of the need for change and improving their motivation for accepting the new ways of working for better results. During this stage, effective communication plays a vital role in getting the desired support and involvement of the people in the change process. Stage 2—Changing: This stage can also be regarded as the stage of transition or the stage of actual implementation of change. It involves the acceptance of the new ways of doing things. This is the stage in which the people are unfrozen, and the actual change is implemented. During this stage, careful planning, effective communication, and encouraging the involvement of individuals for endorsing the change are necessary. It is believed that this stage of transition is not that easy due to the uncertainties or people are fearful of the consequences of adopting a change process. Stage 3—Freezing: During this stage, the people move from the stage of transition (change) to a much more stable state which we can regard as the state of equilibrium. The stage of refreezing is the ultimate stage in which people accept or internalize the new ways of working or change, accept it as a part of their life, and establish new relationships. For strengthening and reinforcing the new behaviour or changes in the way of working, the employees should be rewarded, recognized, and provided positive reinforcements, supporting policies, or structures that can help in reinforcing the transformed ways of working.

14.3.2 Change Management Curve of Elisabeth Kübler-Ross In 1969 Kübler-Ross described five stages of grief in her book “On Death and Dying”. These stages represent the normal range of feelings people experience when dealing with change in their lives or in the workplace. All change involves loss at some level. The “five-stage” model is used to understand how people react to change at different times (Kübler-Ross & Kessler, 2005). The stages were first observed as a human response to learning about terminal illness. They have also been used to understand our individual responses to all kinds of change. The five stages of grief Kübler-Ross observed and wrote about are denial, anger, confusion, crisis, and acceptance. The model has been extended by several scientists and change management experts with reorientation and integration (Helmold, 2020) as shown in Fig.  14.4. The change curve is a popular and powerful model used to understand the stages of personal transition and organizational change. It helps you predict how people will react to change, so that you can help them make their own personal transitions, and make sure that they have the help and support they need. Step 1—Denial and Shock  It is said that every change at the beginning is difficult. Change is a shock to people, as they have to get rid of standard and beloved habits and behaviours. Transformation and changes scare many employees, who ask questions like:

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Performance and Motivation

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Open and d hidden n Resistance

6. Re-Orientation

Rejection

Shock

1. Denial

7. Integration

2. Anger Frustration

5. Acceptance

3. Confusion

Valley y off the e Tears

4. Crisis

Time Fig. 14.4  Change management curve. (Source: Author’s source, adopted from Kübler-Ross)

• • • • • • • • • •

What’s new for me? Where is my path going? Will I keep my job? Why do we need a change at all? Are there alternatives? What is the goal of the change? What does this change bring to me (the person concerned)? What does this change mean for me and my career? What do I need for this change? How and where will I be supported in this change and get help? Many questions come to mind of those affected. It is particularly important here for the company, undergoing a transition and transformation process, to have a clear and appropriate communication strategy. Fears and shock not only block productivity and creativity, but in the worst case they can also paralyse an entire company. Open, honest, and transparent communication via various channels can minimize anxiety and shock. Communication here is in no way limited to the intranet. Managers also have to pick up their employees and colleagues; in groups and one-­ on-­ one discussions, barriers can be reduced or prevented immediately before they arise. Step 2—Anger  If there was good communication, and open and transparent reporting right at the start of the change, the anger and rejection factor will be

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o­ ptimally lower. However, the shock transitions to anger. In this phase change managers hear repeatedly: • • • • •

We have never done this before I do not want this I do not need it It does not make sense It is not good for me In this phase companies often have a strong wind of rejection and resistance. According to change management experts, resistance can take place actively as well as passively, verbally, or non-verbally. Resistance refers to the activities and the action of individuals or groups who oppose something that should be agreed as an objective in the negotiation. Resistance can be shown in a visible and open way (open resistance) or in a more subtle and disclosed way (hidden resistance). Resistance in negotiations normally comes from the negotiation opponents, but can also come from individuals or groups of the same negotiation side (Helmold et al., 2020). Resistance is a type of opposition and can be broken through analytically applying emotions or warning tactics. The most difficult problem is to identify signals of resistance, when the employees or people do not openly, formally, or informally convey their concerns and resistance. In such cases, non-verbal analytical techniques help to identify signals of opposition (Helmold et al., 2019). Resistance occurs verbally or non-verbally in negotiations in various forms, which in most cases is unaware of the persons involved. Negotiations through language (verbal) or gestures or facial expressions (non-verbal, i.e. behaviour or facial expression) must be negotiated (Hilsenbeck, 2004).

14.3.2.1 Open Resistance Open resistance is characterized by the fact that it is deliberately exercised by opponents and thus also connects a goal. Recognizing open resistance is relatively simple, as expressions and behaviours are openly visible: • Open contradiction (for example: “I disagree … ”) • Open rejection (for example: “I cannot agree with your proposal … ”) • Open intervention (for example: “I cannot accept your proposal, so I suggest that … ”) • Rejection by obvious shaking of the head • Rejection by gestures with the poor or index fingers Normally, the reasons for open resistance have a rational cause, which can be discussed with those affected and whose overcoming all-interested parties have an interest (Hilsenbeck, 2004). This form of resistance is usually constructive, so that dealing with open resistance is possible. To break resistance or to refute and mitigate it with a fact-based argumentation can be a suitable strategy here. In this way,

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the energy which the resisting persons have invested in their resistance can be channelled in the sense of reaching the goals of the transformation, or in simple terms.

14.3.2.2 Hidden Resistance Much more difficult is dealing with covert or hidden resistance. In this context, people, who are resisting, usually have no interest in being recognized (Hilsenbeck, 2004). For personal or tactical reasons, they act out of the hidden or the second row. Their interests are mostly destructive, that is, they want to prevent something without being recognized as the causer. Paradoxically, in many cases, resisting parties are not even aware of their resistance. This makes the handling of this form of resistance even more difficult (Volk, 2018). If the covert resistance is not recognized in time, the entire outcome of the transformation and change may be at stake. Signals for hidden resistance in transformation processes can be: • Comments and statements with limitations (for example: “I understand your point of view, but … ”) • The absence of important decision makers (alpha types) or influencing persons (beta types) • The late appearance in change management meetings of important decision makers (alpha types) or influencing persons (beta types) • The permanent postponement of meeting and delay of tasks due to alleged scheduling difficulties • Non-verbal signals of resistance such as mental absence or disinterest. The demand for perfect solutions • The demand that we move as a negotiator first • The extensive and long consideration and discussion of relatively unimportant special cases • The general agreement with simultaneous registration of reservations, which should be clarified later

14.3.2.3 Handling Resistance Resistance must be recognized in transformational processes and it is important that managers determine and identify the motives of the resistance. With open and rational resistance, counterarguments and reformulation of one’s own goals can lead to the refutation of the resistance and the achievement of a result. For questions that do not play a key role in the transition, managers can also ignore the resistance and respond to the employee’s demands or tackle them later. If the ram state is not resolvable, and this is at the core of the transition, there will probably be no bargaining success. Unconscious or hidden resistance is more difficult to recognize as the examples demonstrate: detect resistance, understand the resistance, weigh the resistance, and finally break resistance. It is advisable to listen to the resistance of the other side and to understand the motives (Volk, 2018). A change agent can help by listening to the fear and concerns of the employees. For those employees, who are

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eventually not willing to follow the change, it is important to break resistance. Breaking resistance can be done via certain patterns like warning, making concessions, rationality, conviction by arguments, rational emotions, or appeal to mutual benefits. Warning means to have a facts-based signal (verbally or non-verbally) that the change and transformation will be pursued for the sake of the company. Without that change, the company may not succeed in the long-term. A warning is factual and objective and should be phrased with good argumentation and clear message. In ultimate cases it can be the dismissal of employees. Another way could be the granting of small and individual minor concessions to the negotiation opponent. When understanding the motives of employees, it could be possible to identify areas to give in that area of importance for employees. Deflection might also be a way to break such resistance (Helmold et al., 2019). Table 14.1 gives recommendations on how to handle resistance successfully. Step 3—Confusion and Frustration  The change curve is now going down dramatically steeply. After the rejection, those affected experience severe frustration and confusion. It descends rapidly downhill towards a state of a crisis, the valley of tears. At this point, many employees come to the point of rational acceptance. Employees resign to the situation, but still argue against it. Regardless of the change, a corresponding position from the management should be available in this stage. This should openly allow problems, fears, or simply frustration to be unloaded. A change agent can help employees to cope with the fears. In this way, the confusion and frustration can be bundled and quick solutions offered. It should be a trained change manager at least or a change expert or systemic consultant. The insight that the change also creates new opportunities and opportunities does not exist here yet. Step 4—Crisis: Valley of the Tears  From a purely rational perspective, employees already know and understand at this stage that there is no way of return. The path the enterprise has taken is irreversible. At this stage, affected employees reach an Table 14.1 Breaking resistance Source: Author’s source

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187

emotional low. They gave everything, climbed the inner walls, were annoyed, and fought so hard against the change, but they did not succeed. We all know the feeling when the knot opens and the light at the end of the tunnel becomes visible. Employees can now finally and emotionally accept the change in order to proceed with the transformation. Step 5—Acceptance and Try-it-Out  After the valley of tears, those employees affected are fresh and free. The mind is cleansed, and the mindset opens for something new. The person concerned actively wants to see how and what is possible, what happens, and where the journey is going. The first hesitant statements can be: • • • • •

Maybe there is something good My everyday life could improve It is not as difficult as I thought! It does not look as bad as I thought I understand now the need for change In this stage, management should offer support to those affected in this phase through change agents and frequent meetings. It is now important to keep the employees encouraged in trying out, testing, and playing with the new tools or systems. The more the help offered through all phases, the better, smoother, and faster the transition will proceed. Step 6—Reorientation  After many test runs, trying out and reviewing the documents, those affected increasingly come to realize that it is time for a new start. Added value is actively recognized, and the light at the end of the tunnel shows the first outline of the landscape. In this stage managers can now go to the full integration. Step 7—Integration  In the last stage, the change has been integrated into the company. New tools, methodologies, or processes are a matter of course in everyday life. The question of “why” no longer arises. Those affected live and communicate added value openly. Formerly affected people become ambassadors and helpers for colleagues who are still in the midst of the change curve. These positive influences support the process and the working atmosphere.

14.3.3 Change Management Phase Model of Kotter Kotter analysed that 70% of all change projects fail, most of them in the initial phase. This is the research result of John P. Kotter, an expert in the field of change management. Two factors are responsible for the low success rate: Not the technology, but the human being is the greatest obstacle to change. Based on this knowledge, Kotter developed the eight-step model in 1996. The theory shows eight phases of change management and gives managers tips on how to successfully drive

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change. The focus of the model is communication—from person to person. The eight-step model by John P. Kotter is a further development of the popular three-­ phase model by Kurt Lewin. According to the theory, changes in companies can only be successful if they go through all eight stages of change and are intensively accompanied by managers (Kotter, 2012). The eight steps are outlined in Fig. 14.5. 1. Show Urgency Raise awareness of the urgency of change among both managers and employees. For example, develop scenarios that could occur if there is no change. Discuss with your managers and employees and make strong arguments. 2. Build Leadership Coalition Build a good leadership team by getting trendsetting people for your idea and bringing them together under the flag of change. Make sure that you have a good mix of people from different departments and with different skills. 3. Develop Mission, Vision, and Strategy Wrap up a strong vision and concrete strategies with which you want to achieve the goal. Communicate this in a well-prepared and strong speech. An overarching goal for the company helps to implement change. 4. Communicate the Mission, Vision, and Strategies Constant drip hollows the stone: Do not be afraid to communicate the vision to the managers and employees again and again. This creates trust and increases motivation. 5. Clear Obstacles

1. Feeling and Situation of Urgency 2. Transformational Leadership Coalition 22. Mission, Vision and Strategic Objectives 4. Communication of Mission, Vision and Goals

5. Clearing of Obstacles and Roadblocks 6. Establishment of short-term Objectives and Success 7. Consolidation of short- & long-term Objectives 8. Integration of Change into Corporate Culture Fig. 14.5  Change management model by Kotter. (Source: Author’s source)

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189

Are there structures in your company that slow down change? Take a close look at the status quo and get rid of unfavourable organizational structures, work processes, and routines. 6. Make Short-Term Successes Visible Do not set goals that are too time-consuming and costly to begin with, but also define intermediate goals that can be reached quickly. Employees who achieve these goals should be rewarded. 7. Continue Driving Change After each goal is achieved, analyse what went well and what could have gone better. Always develop new ideas and goals and bring new employees to your management team. 8. Anchoring Changes in the Corporate Culture Anchor the achieved goals firmly in your corporate culture. Only after this has been achieved can Kotter speak of a successful change management process. Since Kotter’s eight-phase model gives specific instructions for successful change management, it can serve you well in practice. Critics complain that Kotter’s model does not explain how to act in the event of setbacks and that initiatives by employees or so-called bottom-up perspectives are ignored. However, like no other change management model, it shows the importance of good communication for sustainable change (Kotter, 2012).

14.3.4 ADKAR Change Management Model The ADKAR change management model was created by Jeffery Hiatt in 1996. The change management concept is a bottom-up method which focuses on the individuals behind the change (Hiatt, 2006). It is less of a sequential method and more of a set of goals to reach, with each goal making up a letter of the acronym (Helmold & Samara, 2019). By focusing on achieving the following five goals, the ADKAR model can be used to effectively plan out change on both an individual and organizational level: • Awareness (of the need to change) • Desire (to participate and support the change) • Knowledge (on how to change) • Ability (to implement required skills and behaviours) • Reinforcement (to sustain the change) Hiatt sees the change of the individual as the basis for sustainable corporate success. The transformation of an entire company can only succeed through individual changes. Thus, the transformation can be understood as the sum of many small changes. A change is only successful when employees adopt new tools, techniques, and processes; fully implement them; and maintain them in the long-term. Then the ROI, the “return on investment”, can also be clearly displayed. When enterprises and its managers drive individual changes, the organization will also master organizational changes (Hiatt, 2006).

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There is no need for complex, time-consuming methods, which are actually a science in themselves! As a change manager and change agent, companies need an easy-to-understand, simple, and comprehensive tool or method with which they can quickly identify gaps and barriers in the change process of the respective employee. Only then management will be able to lead and guide the employees through the change in a targeted manner (Hiatt, 2006).

14.3.5 McKinsey 7S Model McKinsey 7S model is a tool (Fig. 14.6) that analyses a firm’s organizational design by looking at seven key internal elements, strategy, structure, systems, shared values, style, staff, and skills, in order to identify if they are effectively aligned and allow the organization to achieve its objectives (McKinsey, 2020). McKinsey 7S model was developed in 1980s by McKinsey consultants Tom Peters, Robert

Strategy

Skills

Structure

Subordinate Goals Shared Values Style

Systems

Staff

Fig. 14.6 Change management communication. (Source: Author’s source, adopted from McKinsey)

References

191

Waterman, and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since the introduction, the model has been widely used by academics and practitioners and remains one of the most popular strategic planning tools. It sought to present an emphasis on human resources (Soft S), rather than the traditional mass production tangibles of capital, infrastructure, and equipment, as a key to higher organizational performance. The goal of the model was to show how the seven elements of a company, structure, strategy, skills, staff, style, systems, and shared values, can be aligned together to achieve effectiveness in the company. The key point of the model is that all the seven areas are interconnected and a change in one area requires change in the rest of a firm for it to function effectively. Figure 14.6 outlines the seven categories in the McKinsey model, which represents the connections between seven areas and divides them into “Soft Ss” and “Hard Ss”. The shape of the model emphasizes interconnectedness of the elements (Helmold, 2020).

14.4 Case Study: Change Management in Nissan The three stages of change management of Kurt Lewin can be aptly explained through the aid of an example of Nissan Motor Company which was on the stage of bankruptcy due to the issues of high debts and dipping market share. During that period, Carlos Ghosn took charge as the head of the Japanese automaker who was faced with the challenge of implementing a radical change and turning around the operations of Nissan, yet by keeping the resistance to change under control which was inevitable under such circumstances by forming cross-functional teams to recommend a robust plan of change in different functional areas. For facing the business challenges, he developed a change management strategy and involved the employees in the process of change management through effective communication and reinforcement of desired behaviours. For refreezing the behavioural change of the employees, he introduced performance-based pay and implemented an open system of feedback for guiding and facilitating the employees in accepting the new behaviour patterns at work.

References Helmold, M. (2020). Lean management and kaizen. Fundamentals from cases and examples in operations and supply chain management. Springer. Helmold, M. (2021). Innovatives Lieferantenmanagement Wertschöpfung in globalen Lieferketten. Springer Wiesbaden. Helmold, M., Dathe, T., & Hummel, F. (2019). Erfolgreiche Verhandlungen. Best-in-Class Empfehlungen für den Verhandlungsdurchbruch. Springer. Helmold, M., Dathe, T., & Hummel, F. (2020). Successful international negotiations. A practical guide for managing transactions and deals. Springer. Helmold, M., & Samara, W. (2019). Progress in performance management. Industry insights and case studies on principles, application tools, and practice. Springer. Helmold, M., & Terry, T. (2020). Operations and supply management 4.0. Industry insights, case studies and best practices. Springer.

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Hiatt, J. (2006). DKAR: A model for change in business, government and our community. Prosci Learning Center Publications. Hilsenbeck, T. (2004). Verhandeln. Handbuch von Dr. Thomas Hilsenbeck. Retrieved May 30, 2018, from http://www.thomas-­hilsenbeck.de/wp-­content/uploads/Dr-­Th-­Hilsenbeck-­ Handbuch-­Verhandeln-­Vers-­5_0.pdf Kotter, J. P. (2012). Leading change. Harvard Business Press. Kübler-Ross, E., & Kessler, D. (2005). On grief and grieving: Finding the meaning of grief through the five stages of loss. Scribner. Lauer, T. (2019). Change management. Der Weg zum Ziel. Springer. Lauer, T. (2020). Change management. Fundamentals and success factors. Springer. McKinsey. (2020). 7-S-framework. Retrieved August 21, 2020, from https://www. mckinsey.com/business-­f unctions/strategy-­a nd-­c orporate-­f inance/our-­i nsights/ enduring-­ideas-­the-­7-­s-­framework Vahs, D. (2019). Organisation: Ein Lehr- und Managementbuch. Schäfer Poeschel. Volk, H. (2018). Emotionale Dynamik eines Gespräches verstehen. Was den alltäglichen Wortwechsel entgleiten lässt. Beschaffung aktuell, 06(2018), S. 70–S. 71.

15

Innovations as Part of Performance Management

Innovation distinguishes between a leader and a follower. Steve Jobs

15.1 Introduction to Innovation Management “Innovation” comes from the Latin word “innovare” and stands for renewal or reformation. From an economic point of view, innovation is something complex and new that brings economic benefits for an organization and/or for the company. Innovation management includes elements such as ideas, inventions, and diffusions (Müller-Prothmann & Dörr, 2019). Innovations include the generation of ideas and the constant validation and review of these ideas as part of a structured innovation process (Nelke, 2016). Innovation management comprises three levels, as shown in Fig. 15.1. In addition to the operational level, the working level, there are the strategic and normative levels (Stibbe, 2019). Innovations are decided on the normative and strategic level and put into practice on the operative level (Helmold & Samara, 2019). Terms that are often used in connection with innovation are ideas, collections of ideas, and inventions. An invention must be differentiated to the extent that it has not yet been exploited and used as a creative achievement of a new problem solution compared to innovation. It is the same with the idea, which is a creative thought of something new. In all cases, “new” can always be seen relatively. It can be new for this situation, the company, or the world. In particular new developments such as New Work, Industry 4.0, or increasing globalization have an important impact on innovations and innovation management (Granig et  al., 2018). Of central importance are the collection of ideas, the selection, and the decision on which ideas are to be implemented. This process must be managed by the higher management (Helmold & Samara, 2019). Management is a term that is used constantly in companies. It stands for the management of a task and for the coordination of activities in order to achieve a defined purpose and goals. Accordingly, innovation management is the structured promotion of innovations in companies and includes tasks in the planning, organization, management, and control of these innovations. Innovation management deals © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Helmold, Strategic Performance Management, Management for Professionals, https://doi.org/10.1007/978-3-030-98725-1_15

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Higher Management Normative Level Strategic Level

Operational Level

Fig. 15.1  Innovation management levels. (Source. Author’s source)

with all measures to favour innovations in organizations and to generate benefits, for example: • • • • • •

New products and services to conquer new markets Improved products and services to stand out from the competition Improvement of internal processes in order to strengthen the company Innovations from the inside or to save costs Development of new business models to use new sources of income New work styles that enable employees to achieve a better performance

15.2 Technical Relevance and Attractivity Innovations are usually complex undertakings with a high expenditure of technology and use of resources and therefore usually cause very high costs and investments. It is therefore imperative that the company management sustainably evaluate every innovation with regard to its prospect of success, and this with regard to strategic relevance, technology expenditure, benefits, and resource intensity. Ideas and possible innovations always require a strategic and resource-based review (Pfeiffer & Weiß, 1995; Pfeiffer et al., 1991). Figure 15.2 shows the relationship between strategy and resource use.

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15.4 Resource Intensity

Strategic Relevance and Attractivity

high

Experiment

Investment

Optimisation Identification Elimination

low low

Resource Intensity

high

Fig. 15.2  Relationship between strategy and resources. (Source: Author’s source)

15.3 Strategic Relevance of Innovation Management The strategic relevance and attractiveness of the innovation are the sum of all technical and economic advantages that can be gained by exploiting the strategic development opportunities in a technology area. The technology attractiveness depends on the one hand on the technology properties (potential side) and on the other hand on the requirements of (future) users (demand side). The two sizes of the technology portfolio, technology attractiveness and resource strength, each represent a (highly) aggregated evaluation result in relation to deeper individual factors. Experts envisage the following things to check and determine technology attractiveness (Helmold & Samara, 2019): • Further development potential: To what extent are further technical development and thus performance increases and/or cost reductions possible? • Range of application: How can the number of possible areas of application of the technology and the quantities per area of application be assessed? • Compatibility: What negative or positive effects can be expected in user and surrounding systems (innovation obstacles, drivers)?

15.4 Resource Intensity The strength of the resources expresses the extent to which the assessed company has the prerequisites in comparison to its potential competitors to make the considered technological alternative successful, i.e. H. in a timely manner and in the form

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of marketable products. In other words, it is a measure of a company’s technical and economic strength or weakness in relation to a technology relative to its competitors. Experts in tourism propose the following three indicators to determine the strength of resources (Helmold & Samara, 2019): • Technical-qualitative degree of mastery: How is our technology-specific know-­ how to be assessed in relation to the competition? Is there a lead or lag in development? • Potentials: To what extent are financial, human, and material resources available to exploit the existing further development potential of the technology? • (Re) action speed: How quickly can the evaluating company exploit the further development potential of the technology compared to the competition?

15.5 Future Potential of Innovations In addition to the studies described above with regard to strategic relevance and use of resources, innovations must be subjected to a future prognosis in which the future prospects of success are evaluated. Scenario analyses can be used to forecast the development of the user side (Pfeiffer et al., 1991). Pfeiffer and his co-authors also emphasize the great importance of a higher level system and environment perspective that extends beyond individual technologies. On the one hand, this means that technical peripheral systems are included in the analysis (e.g. the establishment of a methanol or hydrogen supply infrastructure required for the implementation of fuel cell drives for cars). On the other hand, non-technical framework conditions are also decisive for the technology assessment (e.g. the possible tightening of exhaust gas legislation). In the context of the identification of innovations, the necessary resources and strategic relevance are still relatively low. In this phase, ideas are collected, evaluated, and selected. In the next step, the strategically relevant ideas must be tested. This testing usually takes place through experiments. However, observations, workshops, panels, or analysis groups can also be used. With the selection of strategically important innovations, the use of resources in companies automatically increases. Primary materials have to be bought, the products have to be mass-­ produced, and marketing towards customers requires to be proactive. This phase of the investment involves a very high expenditure of resources and thus financial resources (equity or debt). After the investment phase, optimization begins so that fewer resources are required. The optimization takes place through standardization, unification, volume effects, or technical innovations. In the last step, if it turns out that the innovation no longer has any strategic relevance, all activities are eliminated and shut down (Helmold & Samara, 2019).

15.7 Case Study: Digital Innovation in a Bakery in Tokyo

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15.6 Fields and Tasks of Innovation Management Innovation management forms two key pillars. On the one hand, innovation management includes the creation of suitable and structured framework conditions so that ideas arise everywhere in the company and are implemented into successful innovations. It is very much about organizational development activities (Helmold, 2021). And secondly, the actual innovation, active search, development, and implementation of ideas: This requires creativity and appropriate project management, for example. Innovation management is very versatile and multifaceted. The fields of action of innovation management include the following elements: • Future management: Identification of trends and future opportunities and risks • Development of the innovation strategy and planning of the innovation activities, for example with an innovation road map • Organization and distribution of roles in innovation management, such as decision-­making structures and process ownership • Idea management for finding, developing, and evaluating ideas • Innovation process for transforming an idea into a successful innovation: concept development, business plan, solution development, prototypes, implementation, and marketing • Creating an innovation culture that promotes innovation • Portfolio management and innovation controlling (e.g. innovation indicators) to control innovation activities • Dealing with patents and property rights • Open innovation and innovation networks to use external innovation sources and resources • Management of change (change management) in the course of innovation projects Figure 15.3 depicts innovations in several areas like products, networks, services, processes, communication systems, routines, concepts, or activities (Helmold & Terry, 2021).

15.7 Case Study: Digital Innovation in a Bakery in Tokyo Figure 15.4 shows an example of New Work in a bakery store in Tokyo. The device helps customers and employees to focus on relevant activities, rather than non-­value-­ adding processes. The customer can place the selected goods on the scanning device. A camera identifies the goods purchased and shows the price. The customers can pay easily with cash or credit card. The device helps employees to focus their activities on giving advice to customers rather than payment execution. Additionally, the process improves the transaction time significantly. There is no waiting time anymore for customers. Thus, an innovation has helped to create more added value to customers.

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15  Innovations as Part of Performance Management

New Processes

New Digital Communication Systems

New Services

New Routines

New Networks

New Products

New Concepts

Innovation Management

New Activities

Fig. 15.3  Innovation elements. (Source. Author’s source) Fig. 15.4  New Work innovation in a bakery in Tokyo. (Source. Author’s source)

References Granig, P., Hartlieb, E., & Heiden, B. (2018). Mit Innovationsmanagement zu Industrie 4.0: Grundlagen, Strategien, Erfolgsfaktoren und Praxisbeispiele. Springer. Helmold, M. (2021). Kaizen, Lean Management und Digitalisierung. Mit den japanischen Konzepten Wettbewerbsvorteile für das Unternehmen erzielen. Springer. Helmold, M., & Samara, W. (2019). Progress in performance management. Industry insights and case studies on principles, application tools, and practice. Springer.

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Helmold, M., & Terry, B. (2021). Operations and supply management 4.0. Industry insights, case studies and best practices. Springer. Müller-Prothmann, T., & Dörr, N. (2019). Innovationsmanagement: Strategien, Methoden und Werkzeuge für systematische Innovationsprozesse. Hanser. Nelke, A. (2016). Kommunikation und Nachhaltigkeit im Innovationsmanagement von Unternehmen: Grundlagen für die Praxis (Wirtschaftsförderung in Lehre und Praxis). Springer. Pfeiffer, W., Metze, G., Schneider, W., & Amler, R. (1991). Technologie-Portfolio zum Management strategischer Zukunftsgeschäftsfelder (6. Auflage ed.). Vandenhoeck & Ruprecht. Pfeiffer, W., & Weiß, E. (1995). Methoden zur Analyse und Bewertung technologischer Alternativen. In E.  Zahn (Ed.), Handbuch Technologiemanagement (pp. S. 663–S. 679). Schäffer-Poeschel. Stibbe, R. (2019). CSR-Erfolgssteuerung. Den Reformprozess verstehen, Reporting und Risikomanagement effizient gestalten. Springer.