Executive Briefings

Revving Up for Recovery

The first two words of the theme to Microsoft's latest Global High-Tech Summit were Empowering Excellence - the usual buzzword blather. But the last four - Accelerating Through the Turn - stimulate thought. They give rise to a soul-searching question, as voiced at the Santa Clara, Calif., event by Microsoft vice president and strategist Dan'L Lewin: "How are we going to come out of this?"

Lewin stretched the race car metaphor to talk about the best way to negotiate a curve. The answer, as any skilled driver will tell you: slow in, fast out. But this invaluable bit of advice only leads to another question. Easy enough to locate the apex when it's a literal curve in the road, but what if we're talking about that moment when a lousy economy is about to improve? How do we know when we're at that precise point? And how should we be preparing for recovery?

All right, so maybe Danica Patrick wasn't at the Microsoft summit, but they had the next best thing: some far-thinking strategists who have made bold moves in their own organizations, at a time when many businesses are puttering along in low gear.

Consider Teradyne Inc. (http://www.teradyne.com/), the $1.2bn maker of automated test equipment. Even in the best of times, it's subject to extreme cyclicality in its markets. The company might see swings of 30 percent to 50 percent in revenues as it goes from peak to bottom, said chief information officer Chuck Ciali. And last year, "the bottom fell out."

What to do then? The trick lies in properly managing high-value inventories in the face of uncertainty. Too much of the stuff means huge write-offs; too little means missed sales. Cost is also put under the microscope in a downturn. At Teradyne, one solution was to outsource most of its manufacturing and switch to a variable cost model. It took the breakeven point for operating costs down from $250m to $200m - a painful exercise, Ciali admitted. The company also invested in better supply-chain and inventory-management systems.

But that's Business 101. What distinguishes Teradyne was its refusal to respect the status quo, even in perilous times. While continuing the serve the customers it had, the company was training its sights on product development outside its core market. The strategy led to two major product introductions - a test platform for high-speed DDR (double data rate) memory, and another to test hard disk drives at the rate of 4,000 at a time. The latter was a unit that took up much less floor space than older models, and ended up generating $100m in revenues for Teradyne within a single year. In both cases, the company identified an opportunity in the market, and pursued it.

Teradyne also took a hard look at how it was handling engineering change orders, which it processes at the rate of around 150 a week. Standard procedure involved an ECO cycle time of 55 days with a 70-percent rejection rate. Thank goodness for hard times, apparently, because Teradyne was motivated to improve this abysmal performance by around 80 percent, slashing cycle time to just 14 days. The move allowed it to hit market windows much more quickly. At the same time, it went for CMMI (capability maturity model integration) certification, a means of driving process improvement throughout the business (http://www.sei.cmu.edu/cmmi/). The result, according to Ciali: "We delivered across engineering projects ahead of schedule."

The same kind of thinking can be found at Emerson (http://www.emerson.com), the global manufacturer of everything from tools and appliances to systems for industrial automation and climate control. One thing the company did at the outset was hang on to its research and development staff, a favorite target of cost-cutting in many organizations. Then it pursued a policy of diversification, so that it wasn't focused on a single market. The worst scenario is to "get caught with only one product, which disappears," said Peter Gosbee, co-leader of Emerson's Product Lifecycle Management Center of Excellence.

Emerson changes with the times. One division makes cooling systems for data centers. That was a big market when the technology involved mainframes that generated large amounts of heat; it became less vibrant as users shifted to client-server models and powerful desktops. Now, with the growing popularity of hosted systems in the "cloud," big data centers are coming back, this time in smaller buildings. And they require a whole new generation of cooling technology, said Gosbee.

On the supply-chain side, Emerson is looking to remove some complexity. The $20.9bn company realized that it wielded a certain amount of clout in its dealings with suppliers. So it turned to centralized procurement to get better deals.

Emerson's PLM Center of Excellence focuses on product innovation, but Gosbee said the proper execution of a concept is just as important as getting a bright idea. The aim is to "make the right product at the right time, with judgments based on fact rather than feeling." One way the company hopes to bolster its "ideation" efforts is through social networking, which will tie it to customers and deliver a better sense of their needs.

Both companies are aiming for improved communications throughout their supply chains. By using "crowd-sourcing" technologies, Teradyne can put tools and technologies into the hands of those people who need them the most, Ciali says. At Emerson, the idea is to "bring information down to the non-technical person," said Gosbee, adding that the company plans to use the Microsoft Office SharePoint server to distribute technical data to new-product planners and developers.

Information technology can only shrink the world to a certain point. Ciali said Teradyne has been careful not to outsource new-product development or place it in Asia, despite the promise of cost savings. Instead, it has moved pilot projects to Costa Rica, where it can take advantage of low-cost labor, yet be in the same time zone as U.S.-based engineers.

The big push, according to Lewin, is toward inter-interoperability of information systems, so that global companies can easily communicate both within and without their organizations. He cited the work of U.C. Berkeley professor Henry Chesbrough, who has pioneered work on "open innovation" of IT technology (http://www.openinnovation.net/).

So where's the apex of the curve? Judging from the approaches of Teradyne and Emerson, we're at it.

- Robert J. Bowman, SupplyChainBrain

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The first two words of the theme to Microsoft's latest Global High-Tech Summit were Empowering Excellence - the usual buzzword blather. But the last four - Accelerating Through the Turn - stimulate thought. They give rise to a soul-searching question, as voiced at the Santa Clara, Calif., event by Microsoft vice president and strategist Dan'L Lewin: "How are we going to come out of this?"

Lewin stretched the race car metaphor to talk about the best way to negotiate a curve. The answer, as any skilled driver will tell you: slow in, fast out. But this invaluable bit of advice only leads to another question. Easy enough to locate the apex when it's a literal curve in the road, but what if we're talking about that moment when a lousy economy is about to improve? How do we know when we're at that precise point? And how should we be preparing for recovery?

All right, so maybe Danica Patrick wasn't at the Microsoft summit, but they had the next best thing: some far-thinking strategists who have made bold moves in their own organizations, at a time when many businesses are puttering along in low gear.

Consider Teradyne Inc. (http://www.teradyne.com/), the $1.2bn maker of automated test equipment. Even in the best of times, it's subject to extreme cyclicality in its markets. The company might see swings of 30 percent to 50 percent in revenues as it goes from peak to bottom, said chief information officer Chuck Ciali. And last year, "the bottom fell out."

What to do then? The trick lies in properly managing high-value inventories in the face of uncertainty. Too much of the stuff means huge write-offs; too little means missed sales. Cost is also put under the microscope in a downturn. At Teradyne, one solution was to outsource most of its manufacturing and switch to a variable cost model. It took the breakeven point for operating costs down from $250m to $200m - a painful exercise, Ciali admitted. The company also invested in better supply-chain and inventory-management systems.

But that's Business 101. What distinguishes Teradyne was its refusal to respect the status quo, even in perilous times. While continuing the serve the customers it had, the company was training its sights on product development outside its core market. The strategy led to two major product introductions - a test platform for high-speed DDR (double data rate) memory, and another to test hard disk drives at the rate of 4,000 at a time. The latter was a unit that took up much less floor space than older models, and ended up generating $100m in revenues for Teradyne within a single year. In both cases, the company identified an opportunity in the market, and pursued it.

Teradyne also took a hard look at how it was handling engineering change orders, which it processes at the rate of around 150 a week. Standard procedure involved an ECO cycle time of 55 days with a 70-percent rejection rate. Thank goodness for hard times, apparently, because Teradyne was motivated to improve this abysmal performance by around 80 percent, slashing cycle time to just 14 days. The move allowed it to hit market windows much more quickly. At the same time, it went for CMMI (capability maturity model integration) certification, a means of driving process improvement throughout the business (http://www.sei.cmu.edu/cmmi/). The result, according to Ciali: "We delivered across engineering projects ahead of schedule."

The same kind of thinking can be found at Emerson (http://www.emerson.com), the global manufacturer of everything from tools and appliances to systems for industrial automation and climate control. One thing the company did at the outset was hang on to its research and development staff, a favorite target of cost-cutting in many organizations. Then it pursued a policy of diversification, so that it wasn't focused on a single market. The worst scenario is to "get caught with only one product, which disappears," said Peter Gosbee, co-leader of Emerson's Product Lifecycle Management Center of Excellence.

Emerson changes with the times. One division makes cooling systems for data centers. That was a big market when the technology involved mainframes that generated large amounts of heat; it became less vibrant as users shifted to client-server models and powerful desktops. Now, with the growing popularity of hosted systems in the "cloud," big data centers are coming back, this time in smaller buildings. And they require a whole new generation of cooling technology, said Gosbee.

On the supply-chain side, Emerson is looking to remove some complexity. The $20.9bn company realized that it wielded a certain amount of clout in its dealings with suppliers. So it turned to centralized procurement to get better deals.

Emerson's PLM Center of Excellence focuses on product innovation, but Gosbee said the proper execution of a concept is just as important as getting a bright idea. The aim is to "make the right product at the right time, with judgments based on fact rather than feeling." One way the company hopes to bolster its "ideation" efforts is through social networking, which will tie it to customers and deliver a better sense of their needs.

Both companies are aiming for improved communications throughout their supply chains. By using "crowd-sourcing" technologies, Teradyne can put tools and technologies into the hands of those people who need them the most, Ciali says. At Emerson, the idea is to "bring information down to the non-technical person," said Gosbee, adding that the company plans to use the Microsoft Office SharePoint server to distribute technical data to new-product planners and developers.

Information technology can only shrink the world to a certain point. Ciali said Teradyne has been careful not to outsource new-product development or place it in Asia, despite the promise of cost savings. Instead, it has moved pilot projects to Costa Rica, where it can take advantage of low-cost labor, yet be in the same time zone as U.S.-based engineers.

The big push, according to Lewin, is toward inter-interoperability of information systems, so that global companies can easily communicate both within and without their organizations. He cited the work of U.C. Berkeley professor Henry Chesbrough, who has pioneered work on "open innovation" of IT technology (http://www.openinnovation.net/).

So where's the apex of the curve? Judging from the approaches of Teradyne and Emerson, we're at it.

- Robert J. Bowman, SupplyChainBrain

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