In Supply Chains we behave how we are measured

Roger OakdenGlobal Logistics, Logistics Management, Procurement, Supply Chains & Supply Networks

Japan map

A perfect system goes wrong.

Keeping your job, passing a performance review or gaining a promotion all require that you have at least met corporate performance requirements and adhered to the rules regarding how processes should be done. Problems occur when the performance requirements do not match the process; do you achieve the performance requirements or adhere to the process?

In the past few weeks, this situation has been illustrated by the failure of quality assurance processes at two Japanese corporations; highlighting other recent operational failures at a number of Japanese businesses. These include automotive assembly and components, steel, medical equipment, electrical equipment, nuclear, electronics, electricity, industrial equipment and beverage industries. This gives the appearance of a collective failure in Japanese supply networks. While the actual reasons for the problems will hopefully emerge from investigations, the situation provides some lessons for your organisation to reflect on linkages between business objectives, performance measurement and process flows and rules.

Companies in any country can have problems, the difference is how senior management fix the problem and ensure no recurrence. This is dependent on national culture (including how decisions are made and implemented), corporate structure and responsibilities, plus operational processes and rules.

Decision making in Japan

The early 1980’s began a period where businesses outside Japan were trying to understand the processes of total quality management (TQM), flexible manufacturing, continuous improvement (kaizen) and just in time (JIT). These techniques were part of an overall philosophy, developed over the previous thirty years to provide a competitive edge for Japanese manufacturing.

The approach in Japan to co-operative decision making developed over centuries and is part of the culture. In business, time is taken to make decisions through evaluating many options. Having made an initial decision, the evaluation process is repeated a number of times, to ensure success. Only then is the final decision made. Additional discussions are undertaken to identify the new set of rules for all to follow and the implementation process. Then it is action, with all trained to follow the new rules. Once agreed, employees are likely to only do what has been collectively agreed and decided, regardless of its effectiveness. Organisations discourage criticism and examination of agreed processes by employees and outsiders. At an automotive assembler, the falsifying of quality records were identified during an on-site inspection by staff from the transport ministry – not through internal reviews.

This method of decision making is effective when markets are in a steady state or major suppliers own, control or influence their channels of distribution. In this situation, the board of directors sets financial objectives, which the CEO and senior managers convert to operational performance objectives. However, when international competitors take market share and higher cost companies have reduced profitability, change is required. But in Japan, this can be difficult to achieve:

  • Only recently did companies accept proposals to appoint independent directors who should take corporate governance and compliance seriously. Without shareholder pressure, management tend to avoid major decisions, instead are intent on managing a ‘stable’ organisation
  • Corporate objective continues to be improved profitability; performance targets for middle management and staff are therefore based on achieving higher profits. If these targets are very difficult to achieve, people will find a way to meet the performance measures (and so keep their job), such as falsifying quality tests to reduce defects and corrections and therefore increase output and profits – ‘we behave how we are measured’. At an automotive assembler, unqualified employees used the personal seals of certified inspectors, so it was an intentional misconduct that indicates approval (at least tacit) by factory management. The practice even continued a week after the CEO had apologised on national TV! At a steel company, data manipulation had become institutionalised over ten years, even as new managers were employed. The practice was known to each factory and quality manager, which could mean the tacit approval of the division manager and higher
  • Many Japanese companies own shares in their suppliers and customers. Companies with extensive cross shareholding have been found to do less corporate restructuring (to improve efficiency) and spend less on capital investment and R&D (to develop new markets and growth). The current problems could also provide doubts about trust between buyers and Tier 1 suppliers, in which the buying organisation owns shares
  • The CEO bows before the cameras, apologising and asking for forgiveness; calling the situation ‘unacceptable’ and vowing to unearth the root cause of the problem through forming a committee. But, as decisions are collective, the CEO does not take responsibility, so they and senior executives rarely lose their job. Business continues without substantive change

Changing culture

A performance culture that emphasises agility and speed requires a different process to making decision – think, do, learn, fix and re-think. Building this approach within a business starts with senior management. Richard Goyder, CEO of Wesfarmers Ltd, Australia’s largest conglomerate business, has stated that “To change culture, you have to change behaviour. If you can’t change behaviour, you change the management”.

Gaining acceptance from the workforce to implement change will differ according to the predominant culture of each country. For example, in Australia a change program will not be automatically embraced by staff. If a culture of performance and continuous improvement has not been built within the organisation, responses from line managers and employees can be:

  • ‘Improvement’ is an excuse or cover for future downsizing and retrenchments
  • A proposed change is management’s ‘flavour of the month’ that will disappear with the next ‘initiative’ of the CEO
  • Managers are offloading their tasks onto staff and not paying employees for responsibilities that are added to the workload

The recent challenges in Japanese business illustrates that an organisation which is ‘fat, happy and lazy’ can experience a sudden shock for which it is not prepared. For your organisation, do the performance measures align with the corporate objectives, are the performance measures achievable and are the processes under continual challenge for elimination or improvement?

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...