CASE STUDIES IN OPERATIONS

"The ultimate objective of assaulting costs in the supply chain is not just to effect one-off reductions

in the price of components. It is, instead, to set off a chain of continuously falling costs-by mutually

discovering ways to do things better without a proportional increase in the rupees poured into the

process."

- Business Today, January 7, 1999.

Revamping the Supply Chain: The Ashok Leyland

Way:Introduction
V Ramachandran, (Ramachandran) deputy general
manager, Corporate Buying Cell, Ashok Leyland (AL),
the Chennai based manufacturer of medium and
heavy commercial vehicles was surfing the Internet at
midday in his office. A closer look at the screen
showed that he had logged on to an auction site. But
this auction site was different. Ramachandran was
looking for suppliers of some specific tyres in the
global market. At a price of $350, five suppliers were
interested. He then lowered the price by $5. Now
three of them were willing. Ramachandran kept
lowering the price, each time by $5. At $325, there
was only one response- the seller asked for an hour's
time to confirm. Within one hour, the Czechoslovakian
company confirmed it could supply the tyres. Both
parties then signed up by e-mail and the deal was
struck at $325, saving Ashok Leyland Rs 14,700 per
set. Known as reverse auction, this was one of the
many ways AL was reducing materials cost, which
accounted for nearly 70 per cent of its product cost.
In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore 1 on sales of Rs. 2,014.3
crore. A look at the previous financial year's PAT showed that the profits for 1997-98 had
gone for a severe beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2,
482.5 crore. With the manufacturing Industry reeling under recession, the freight
generating sectors (manufacturing, mining and quarrying) saw a steep decline resulting in a
severe downturn of freight volumes. For AL, whose business was directly dependent on
moving material, goods and people across distances, this had come as a severe blow. AL's
supply chain2 had gone haywire under the recession which had eaten away 17.62 per cent
of its revenues in one year forcing the company to helplessly allow inventories to build up.
The results were showing on working capital. It had climbed from 33.34% of sales in 1993-
94 to 58.81% in 1997-98.

'Together We Can' - Beat the Recession

AL did not seem to succumb to the 'uncertainty gloom' that was playing havoc to its
business environment. It decided to meet the challenge by re-gearing its systems, be it
material order, procurement, material handling, inventory control or production. AL
conducted brainstorming sessions inviting ideas on cost cutting. Quality Circle3 teams were
formed for this purpose. Said Thomas T. Abraham, deputy general manager, Corporate
Communications, "Our Quality Circle teams were very helpful at this juncture and the
worker involvement made it easier to address cost cutting." AL took every employee's ideas
into account and figured out a way to keep things going and reduce production without
inflicting pain.

The recession saw AL waging a war on wastage and inefficiency. AL took many initiatives
ranging from tiering its vendor network to reducing the number of vendors, and
consequently, moving to a just-in-time (J-I-T)4 ordering system, to joint-improvement
programmes (JIP), which were essentially exercises in value-engineering undertaken in
association with key vendors. It set up different tier-levels to improve the quality of the
suppliers. Tiering formed the basis of the vendor-consolidation drive. Till 1998, Ashok
Leyland used to source the 62 components that went into its front-end structure of its
trucks and buses, from 16 suppliers. In 2000, one tier-I vendor sourced the products from
the other vendors and supplied the assembly to the company. This saved cost and time
provided the vendor network was well coordinated with AL's own manufacturing operations.
At AL, Vendor Development and Strategic Sourcing
were handled by Corporate Materials Department
(CMD). CMD identified the vendors, rated the vendors
based on feedback received from Supplier Quality
Assurance Cell, send drawings/specifications, called
for quotes with detailed breakup of operation-wise
costs, and negotiated the price at which the parts
would be supplied. In addition to CMD, there were
Materials Management Departments (MMDs) for
scheduling based on unit production plan. 

AL's purchasing philosophy was to maximize bought-

out parts. Over 90% of the parts were bought-out. AL
believed in global sourcing. Consistent with its
operational needs, AL considered both domestic
(Indian) as well as international vendors. Global
sourcing was normally resorted to overcome local
constraints in the form of technology, quality, capacity
or cost effectiveness. AL considered new suppliers for
required components, based on Vendors' ability to
meet its specification, price and delivery schedules.
Vendors were required to have a strong
manufacturing base with adequate engineering
support for their own product development activities,
as needed by the category of product.
AL's policy was to develop a vendor base committed to continuous improvement to meet
quality, cost and delivery standards. AL considered its vendors as partners in progress and
believed in establishing mutually beneficial relationships. It provided necessary technical
assistance in the form of project and production engineering, to maintain quality levels. In
addition, where required, it also helped vendors financially. AL's Vendors were expected to
have a good quality system. Vendors' quality system had to encompass the following: cost
effective process, assured process capability, continuous improvements based on customer
feedback, compliance of all statutory/legal/commercial requirements of AL, a stage of
development where the Vendor could come under AL's self-certification system, and,
traceability - first-in first-out.
AL also placed emphasis on optimizing the inventory and vendors were required to
progressively meet "Just-in-Time" requirements. Delivery mode as well as packaging were
required to minimize the handling/loading and unloading time. AL preferred a
manufacturing/assembly/ support base at close proximity to the production units. 

Commenting on the relationship AL shared with its vendors, J.N. Amrolia, executive
director, human resources, said, "The close working relationship with the vendors for vendor
development program have benefitted us a lot in cost cutting and making the vendors
understand the complexities of material handling." This resulted in low inventories all
through the chain. He further added, "We stabilised both the inward material flows as well
as the outbound material and that saved us a lot on the inventory." In the late 2000, AL's
systems were closer to J-I-T with inventories averaging just seven days, down from three
weeks in the late 1990s.

NOTE:

1] 1 Crore =10 million

2] A basic supply chain consists of a company, an immediate supplier, and an immediate
customer directly linked by one or more of the upstream and downstream flows of products,
services, finances and information. An extended supply chain includes suppliers of the
immediate supplier and customers of the immediate customer and an ultimate supply chain
includes all the companies involved and flows of products, services, finances and
information from the initial supplier to the ultimate customer.
3] Work group that meets to discuss ways to improve quality and solve production
problems.
4] Inventory system in which production quantities are ideally equal to delivery quantities,
with materials purchased and finished goods delivered just in time to be used. Also known
as Kanban

"Toyota's focus on JIT is a continual problem-solving process (not an inventory reduction plan)

illustrates why the automaker is a JIT leader not only in its industry but all of industry."

- www.academic.emporia.edu (1998).

Toyota's JIT Revolution: A Legendary

Production System
In the mid-1990s, more than fifty executives and
engineers from major automobile companies
worldwide visited Toyota Motor Company's
(Toyota)1 manufacturing complex at Georgetown, US,
to study the Toyota Production System (TPS). The
visit also included an intensive question and answer
session. Even though the visitors were from
competing automakers, including Ford and Chrysler,
Toyota did not deny them access to the plant.
 The TPS aimed to produce world-class, quality
automobiles at competitive prices. It was built on two
main principles, Just-in-Time (JIT) production and
Jidoka.2 JIT was used not only in manufacturing but
also in product development, supplier relations and
distribution. Analysts remarked that despite imitating
Toyota's JIT for many years, no other automaker in
the world had been able to make their production
systems and processes as efficient as Toyota had
done. Analysts felt that though other leading
automakers like Mercedes-Benz, Honda and
DaimlerChrysler excelled in advanced engineering
techniques, engine technology and styling, they did
not match Toyota in efficiency, productivity and
quality.
Executives of rival companies also appreciated Toyota's manufacturing and product
development systems. Officials at GM commented, "Toyota is the benchmark in
manufacturing and product development." A top executive at Ford said, "Toyota is far ahead
in developing markets that the real race is for the second place." Some executives at BMW
also considered Toyota the best car company in the world. 

The early adoption of JIT principles by Toyota seemed to have helped the company achieve
significant success. It helped the company respond quickly to changing customer needs and
offer high quality products at low costs, thus increasing customer satisfaction.
Toyota's history goes back to 1897, when Sakichi
Toyoda (Sakichi) diversified into the handloom
machinery business from his family traditional
business of carpentry. He founded Toyoda Automatic
Loom Works (TALW) in 1926 for manufacturing
automatic looms. Sakichi invented a loom that
stopped automatically when any of the threads
snapped. This concept of designing equipment to stop
so that defects could be fixed immediately formed the
basis of the Toyota Production System (TPS) that
went on to become a major factor in the company's
success. 

In 1933, Sakichi established an automobile

department within TALW and the first passenger car
prototype was developed in 1935. Sakichi's son
Kiichiro Toyoda (Kiichiro) convinced him to enter the
automobile business. After this the production of
Model AA began and Toyota Motor Corporation was
established in 1937. Kiichiro visited the Ford Motor
Company in Detroit to study the US automotive
industry. He saw that an average US worker's
production was nine times that of a Japanese worker.
He realized that the productivity of the Japanese
automobile industry had to be increased if it were to
compete globally.
Back in Japan, he customized the Ford production system to suit Japanese market. He also
devised a system wherein each process in the assembly line of production would produce
only the number of parts needed at the next step on the production line, which made
logistics management easier as material was procured according to consumption. This
system was referred to as Just-in-Time (JIT) within the Toyota Group. 

The JIT production was defined as 'producing only necessary units in a necessary quantity
at a necessary time resulting in decreased excess inventories and excess workforce, thereby
increasing productivity.' Kiichiro realized that by relying solely on the central planning
approach, it would be very difficult to implement JIT in all the processes for an automobile.
Hence, TPS followed the production flow conversely. People working in one process went to
the preceding one to withdraw the necessary units in the necessary quantities at the
necessary time. This resulted in the preceding process producing only quantities of units to
replace those that had been withdrawn. 

Toyota flourished during the Second World War by selling trucks and buses to the army and
the company launched its first small car (SA Model) in 1947. After the war, the company
faced a series of financial problems. A financial support package from a consortium of banks
(after the intervention of the Bank of Japan) helped Toyota tide over its problems. The
package consisted of a series of steps that included downsizing and restructuring the
company into separate manufacturing and sales divisions. As per the revival package, The
Toyota Motor Sales Company Ltd. was formed in 1950. In the same year, Kiichiro resigned.
By 1952, Toyota made a turnaround and in 1953, the
company appointed distributors in El Salvador and
Saudi Arabia and started exports. Meanwhile, Taiichi
Ohno (Ohno) took charge of the company. In 1957,
Toyota entered the US market through its subsidiary,
Toyota Motor Sales, USA. In 1959, the company
began its first overseas production in Brazil and over
the next few years, developed a vast network of
overseas plants. Besides manufacturing, Toyota
started a global network of design and Research and
Development facilities covering the three major car
markets of Japan, North America and Europe. 

By the early 1970s, Toyota's sales exceeded that of

Chrysler and Volkswagen and its production was
behind that of only General Motors (GM) and Ford.
Toyota continued its efforts to make its production
system more efficient and also developed flexible
manufacturing systems. It also began to tap the
markets in the Middle East and by 1974 the Toyota
Corolla, (launched in 1965) became the largest selling
car in the world. In 1984, Toyota entered into a joint
venture with GM and established the New United
Motor Manufacturing Inc. (NUMMI).
By the early 1990s, as Toyota expanded its overseas operations, the excessive capital
spending affected its profit margins. Tatsuro Toyoda (Tatsuro), who took over as the
company President in 1992, began to control costs by eliminating all unnecessary
expenditure. In 1995, after Tatsuro resigned due to health reasons, Hiroshi Okuda (Okuda)
became Toyota president. In 1996, Toyota consolidated its production in North American
production units into the Cincinnati based Toyota Motor Manufacturing (North America). 

In 1999, Okuda replaced chairman Shoichiro Toyoda and Fujio Cho (Cho) became the
president. In the same year, Toyota listed its shares on both the New York and London
stock exchanges. By the end of 2001, the company's net income had reached $5,447 million
and net revenue reached $106,030 million (Refer Exhibit I for the company's financial
performance over the years). 

According to analysts, Toyota's success in both the local and global markets was mainly
because of its state-of-the-art and well-planned operational strategies. The company had
continuously focused on gaining a competitive advantage through implementation of
innovative and path-breaking ideas on its production floors. TPS worked on the basic idea of
maintaining a continuous flow of products in factories in order to flexibly adapt to demand
changes. The most important feature of TPS was the way it linked all production activities to
real dealer demand through implementation of Kanban, JIT and other quality measures that
enabled Toyota to manufacture in low quantities.
Developed by the Japanese, the JIT production system
was one of the most significant production
management approaches of the post World War II
era. The system comprised a set of activities aimed at
increasing production volume through the optimum
use of inventories of raw materials, work-in-process,
and finished goods. In a JIT production system, a
workstation gets a part just in time, completes its
work and the part is moved through the system
quickly. 

JIT was based on the principle of producing only what

is needed and nothing more than needed. The
Japanese believed that anything produced over the
quantity required was a waste. Cho defined waste as,
"Anything other than the minimum amount of
equipment, materials, parts and workers (working
time) which are absolutely essential to production."
JIT did not allow any surplus as it believed that "effort
and material expended for something not needed now
cannot be utilized now." (Refer Table I for
requirements and assumptions of JIT).
Table I
Just-In-Time Production System
What it does
• Attacks waste (time,
What it is
inventory, scrap)
• Management philosophy
• Exposes problems and
• 'Pull' System through the
bottlenecks
plant
• Achieves streamlined
production
What it requires
• Employee participation
• Industrial
What it assumes
engineering/basics
• Stable environment
• Continuing improvement
• Total quality control
• Small lot sizes
 Source: Production and Operations Mgmt.: Manufacturing and Services, Chase, Acquilano &
Jacobs.
JIT could be applied to any manufacturing environment including job shop, batch production
or repetitive production. The ideal lot size as per JIT was one. A worker had to complete one
task and pass it on to the next workstation for further processing. If workstations were
geographically far away, efforts were made to reduce the transit time. 

The advantages of JIT included price flexibility, reduction in product variation, quick
response to customers' demands, high quality products at low cost for consumers, and
above all, customer satisfaction. The system also offered the advantages of low inventory
investment, shortened lead times, and early detection of quality problems.
In the early 1930s, the technology used by American automobile companies was superior to
that used by Japanese companies. Kiichiro therefore decided to learn new automobile
production techniques from American manufacturers. He soon realized that to catch up with
the Americans, he had to master basic production techniques. He then reorganized the
production system in Toyota in a unique way. This reorganization eventually led to the
development of JIT concept. 

In the early 1970s, Taiichi Ohno (Ohno)3 implemented JIT in Toyota's manufacturing plants.
The JIT system was aimed at avoiding waste, reducing inventories and increasing
production efficiency in order to maintain Toyota's competitive edge. Ohno also believed
that customers should receive high quality products in the shortest time. Initially, JIT was
used as a method for reducing inventories in Toyota's shipyards, but later it evolved into a
management philosophy including a set of techniques (Refer Exhibit II for a comparison
between JIT and non-JIT systems).

Kanban4 was an essential component of Toyota's JIT concept. The Japanese referred to

Kanban as a simple parts-movement system that depended on cards and boxes/containers
to take parts from one workstation to another on a production line. Ohno had developed the
idea in 1956 from the super markets in the US, which had devised an effective system for
replenishment of store shelves based on the quantities picked by the customers. Initially,
Ohno used pieces of paper contained in rectangular vinyl envelopes to convey information
(called Kanban). In a period spanning three decades, Kanban developed into a sophisticated
information system that ensured production in required quantities at the right time in all
manufacturing processes within the factory. 

The essence of the Kanban concept was that a supplier delivered components to the
production line only when required, thus eliminating storage in the production area.
Suppliers delivered desired components when they received a card and an empty container,
indicating that more parts were needed for production. In case of line interruption, each
supplier produced only enough components to fill the container and then stopped. Since
Kanban was a chain process in which orders flowed from one process to another, the
production or delivery of components was 'pulled' to the production line (Refer Box).

In a pull system, the production of a certain product starts only when a demand or request
is made by the buyer. The consumer of the product 'pulls' from the last link of the
production chain. This last link pulls its preceding link and so on. In western companies, the
push system was considered to be more cost-effective. Push systems were schedule-based
projections of what demand was expected to be. Based on historical information (updated
on a weekly or monthly basis), a computer program processed the information giving a
detailed sub-schedule for buying materials and producing goods. This schedule pushed the
production in order to comply with the expected demand. The disadvantage of the push
system was that predictions did not always coincide with facts. This resulted in either excess
or inadequate inventories.

n the traditional forecast oriented method, parts were 'pushed' to the line (Refer Exhibit III
for a comparison of the Kanban philosophy with the western philosophy). 

At Toyota, two types of Kanban cards were used: one, to move parts from one place to
another, known as the Conveyance Kanban card, and the other, to authorize the production
of parts, known as the Production Kanban card. (Refer Figure I). A standard size container
was used to store parts and each card was treated like a coupon. (Refer Box).
Suppose a container of item X is required in work centre A. As a first step, a production
Kanban card is issued to work centre A. The work centre withdraws a container of raw
materials from its inventory. The container of raw materials also included a conveyance
Kanban card. Work centre A removes the conveyance Kanban card from the container and
sends it to the proceeding work centre where it serves as an authorization to pick up a
container of raw materials.

Three types of information were exchanged using Kanban. Pick up information guided the
earlier stages regarding parts to be produced for the succeeding stages. Transfer
information indicated when the parts had to be produced for the succeeding stages.
Production information was transmitted from the earlier stages to the later stages to inform
the workers about the product mix and other operational matters. 

To make the Kanban system effective and reap maximum benefits (Refer Table II) from it,
Ohno framed six rules: 
• Later process went to the earlier process to pick up products.
• The earlier process produced only the amount withdrawn by the later process.
• Should not pick or produce goods without a Kanban.
• A Kanban should be attached to the goods.
• 100% defect free parts were required.
• Reduce the number of Kanbans.
Table II
Advantages of Kanban
1. A simple and understandable process
2. Provides quick and precise information
3. Low costs associated with the transfer
of information
4. Provides quick response to changes
5. Limit of over-capacity in process
6. Avoids overproduction
7. Minimizes waste
8. Control can be maintained
9. Delegates' responsibility to workers
Source: ICMR
The Kanban cards were re-circulated and the number of cards controlled work-in-progress
(WIP) in the system. In this way, the activities of final assembly were linked to previous
operations by a chain system of card ordering that 'pulled' production through the factory. 

Another important component of JIT was Heijunka (production smoothing). JIT's principle of
building only the required number of items helped keep the production costs low. Heijunka
helped in the accomplishment of this principle by creating a consistent production volume.
Heijunka averaged the highest and lowest variations of the orders. The variations were then
removed from the production schedule. This ensured that the right quantity of parts was
produced with minimum workforce. Heijunka took care not only of the total volume of items
but also the type of items produced and the other options.
Although many automobile companies around the
world adopted JIT, the system was far from perfect
and difficult to implement. It was based on the key
assumption that sources and channels of supply were
reliable and dependable at all times. Analysts felt that
it did not take into account the possibility of labor
strikes at automotive plants. Moreover, JIT involved
high set up costs and Special training and
reorganization of policies and procedures in the
company were necessary to implement JIT. The
supplier relations of the company also needed to be
improved to ensure timely delivery. In the absence of
good supplier relations, JIT increased the risk of
inventory shortage. Organizational culture also
seemed to play a crucial role in the implementation of
JIT. Many companies outside Japan reported
difficulties in the implementation of the concept. 

Another problem seemed to be the difficulty of

removing the 'human element' from the systems that
generate requirements.
An analyst commented, "Computer algorithms, they say, go only so far. Good people, with
lengthy experience at reading the ups and downs of the industry are still a must." Most
companies felt that people should be actively involved in the system. 

Moreover, there could be many barriers to the successful implementation of JIT. For JIT to
be successful, companies had to ensure that they did not make frequent changes in
production planning and that their forecasting procedures were reliable and did not result in
under or over forecasting of demand. Other barriers could be equipment failure and
employee absenteeism. 

Analysts felt that Toyota's JIT was a complicated process and that its success inside a plant
depended mainly on highly experienced, highly motivated managers. Outside the plant,
JIT's success depended on a network of capable suppliers that operated in sync with
Toyota's production processes. In fact, according to some analysts, Toyota was not able to
replicate the JIT production system in an efficient way in any of its operations outside
Japan. John Paul MacDuffie5 said, "Toyota hasn't developed a single facility that is as
efficient as the ones it has in Japan." 

Although Toyota's JIT had some drawbacks, it offered several advantages over other
manufacturing processes. Because of the early adoption of JIT, Toyota benefited more from
the system than other automobile companies (Refer Exhibits IV & V). 

By 2000, JIT was adopted by many Japanese companies, as well as some US car
companies. Analysts felt that JIT was not only a process that could be applied to
manufacturing, but also a philosophy that governed the attitude of a successful business.
According to one analyst,6 "Using JIT, Taiichi Ohno had revolutionized production. The
market clearly reflects the success of JIT. The concept has made Japanese products
affordable and reliable in quality. Quality is no longer a privilege - it is a standard
accompanied by low cost."

NOTE:

] Toyota was the world's third largest automobile manufacturer in 2000, after General Motors and Ford.
2] A defect detection system that automatically/manually stops the production operation and/or equipment whenever an
abnormal or defective condition occurs. Any necessary improvements are made by directing attention to the stopped
equipment and the worker who stops the operation. The Jidoka system puts faith in the worker as a thinker and allows all
workers the right to stop the line on which they are working.

TISCO - The World's Most Cost-Effective Steel

Plant

"With cost-cutting measures and good management, a company like TISCO may be the last one

standing."

- Rajeev Das, Analyst, Paribas Asia Equity.

"It is our endeavor to reduce the cost of saleable steel by 2.5 - 3 per cent every year."
 
"We realize that however efficient we become, the steel industry is not likely to return the cost of

capital. This is no fault of ours, but due to the structure of the global and Indian steel industry."

- B. Muthuraman, Managing Director, TISCO.

Background Note
Tata Iron and Steel Company (TISCO) was established
in 1907 by J N Tata1 at Jamshedpur in Bihar, India.
TISCO offered a wide range of products (See Exhibit
I) and services including Hot rolled/Cold rolled
(HR/CR) coils2 and sheets, tubes, construction bars,
forging quality steel, rods, structurals, strips and
bearings. It also manufactured material handling
equipment, ferro alloys and other minerals, software
for process controls, and offered cargo-handling
services. 

In the early 1980s, TISCO initiated a modernization

 program of its steel plant (See Exhibit II). Explaining
the need of modernization, J J Irani, the then
managing director of TISCO said, "We would have
been finished otherwise.... you cannot fight a modern-
day war with weapons of the Mahabharata. We would
have been annihilated had we not modernized. We
realized this and embarked on the four phases of
modernization. We addressed our drawbacks like the
steel making process, our weakest link."
By mid-1990s, TISCO had become India's most cost-effective steel plant. It also became
Asia's first and India's largest, integrated steel producer (ISP)3 in the private sector. By
2000, eight divisions of Tata Steel were ISO-140014 certified, including Noamundi Iron
Operations, West Bokaro Collieries, Ferro Alloy Plant, Joda, Sukinda Chromite Mines, Joda
East Iron Mines, Tubes Division, and Growth Shop & Steel Works.
By early 2000, TISCO had completed four phases of the modernization programme with an
investment of about Rs 60 billion5. The company had invested Rs 4 billion on consultancy
fees during 1990 to 2000. The fifth phase of the program had commenced in April 2000

By April 2001, TISCO had emerged as the world's

lowest cost producer of steel. TISCO's operating cost
at the 'hot metal' (liquid) stage was $75 per tonne.
The company's cost per tonne of finished steel stood
at $152 for the financial year ending March 2001. 

The World Steel Dynamics (WSD)6, in a report stated,

"Tata Steel is a 'world class' steel maker - the only in
India - and one of the few companies in the world
with such a standing. This view point is based on a
variety of reasons such as low operating costs, special
company culture, good profitability, etc." WSD
identified 12 companies as World Class Steel Makers,
and ranked them based on certain factors7 (Refer
Table I). Analysts felt that TISCO's achievement of
becoming the lowest cost producer of steel was
mostly attributed to its implementation of TOP (Total
Operational Performance), a program that focused on
improving TISCO's operational practices and
rationalizing procurement costs.

TABLE I
WSD's RANKING
Compan  Rankin  Scor
y g e
TISCO  1  131
Usinor
 2  129
(Russia)
 Posco
 3  127
(Korea)
CSN
 4  123
(Brazil)
Baosteel
 5  121
(China)
China
Steel  6  119
(China)
Gerdau
 7  118
(Brazil)
Nucor
 8  116
(US)
Car-Tech  9  112
Nippon
Steel  10  111
(Japan)
Severstal
 10  111
(Russia)
Dofasco
 11  109
(US)
Source: www.tatasteel.com

The 'Top' Program

In the early 1990s, TISCO appointed McKinsey and
Booz-Allen & Hamilton to study its operations and
suggest ways to cut costs. Irani explained the
rationale, "Cost-cutting measures are more important
in the present situation where one can no longer
control steel prices which are dictated by international
markets." The consultants suggested TISCO to focus
on various components affecting the cost of steel,
which included cost of raw materials, cost of
conversion, fuel rate in the blast furnace and mining
of coal. TISCO was advised to use the most modern
technologies to cut costs further. 

In the second half of 1998, in association with

McKinsey, TISCO implemented TOP program at its G
blast furnace8. TOP was widely regarded, as a
program, which would have a maximum positive
impact to the bottomline, with minimum investment,
required in minimum time (See Exhibit IV). It aimed
achieving large improvements in throughput, quality
and cost in the short term. In the long run, TOP was
expected to enable the TISCO to achieve high rates of
performance improvement (See Exhibit V).
Since TISCO's scale of operations was quite large, the whole organization was divided into
manageable 'units' to facilitate the implementation of TOP. A unit team was formed
comprising a unit leader and two facilitators. Initially, McKinsey provided the facilitators.
The unit leader was responsible for the performance of that particular unit. The team
worked full time on the TOP program for a period of 12 weeks. Around eight units were
addressed simultaneously during the 12 weeks, and this was also known as 'Wave.' The
entire Wave was divided into five phases (See Exhibit VI).
The unit team's objective was to explore ideas to reduce the cost or delays made by the unit
by about 40%. In the process, the team was expected to identify and understand how each
cost element could be reduced. The team had to establish relationships between key
performance indicators and the elements that had an impact on them. Each team was asked
to set itself a target based on the TOP norms; develop ideas to improve from the present
level of performance to the target level; and implement those ideas.

The Phase I of a Wave was two weeks long. During

this phase, the cost base was examined and the items
that had a maximum impact on the bottomline were
identified. Individual components of the larger cost
elements were identified by drawing cost trees9. The
cost elements, which could be reduced were
highlighted and the reduction targets were set. In the
Phase II of the Wave, ideas were explored to reach
the set targets. At the G blast furnace,
throughput10 and fuel costs were identified as the key
performance indicators in the Phase II. Among the
different individual components of fuel costs, coke and
coal were the largest cost elements. They accounted
for about 50% of the total costs. A reduction target
was set to bring costs down to 570 kgs per thm11 from
610 kgs per thm. In the Phase III of the Wave, ideas
were generated to achieve the target output of 3800
tons per day. Considering the techno-economic
feasibility, 36 ideas were short-listed. The ideas were
then grouped based on the capital expenditure
required for implementing each idea. The Phase IV of
the Wave started with the implementation of these
ideas. Simultaneously, the G blast furnace also
implemented 185 ideas, which did not require any
capital investment.
By March 1999, the G blast furnace achieved a savings of Rs 87 million against the targeted
savings of Rs 40 million. TISCO set up a potential savings target for its G blast furnace at
about Rs 300 million per annum, accounting for more than 10% of its profits in the fiscal
1999. By late 1999, TOP was in Phase V of the Wave
In 2000, similar Waves were also adopted in TISCO's shop floors. The TOP program had
helped TISCO to shift its focus from just producing volumes to costs and quality. Moreover,
TOP enabled TISCO to improve customer satisfaction and loyalty.

mplementing Best Practices

In 1999-2001, TISCO took measures to reduce costs
further by adopting innovative strategies and other
cost-cutting exercises. For example, TISCO stopped
using manganese, an expensive metal used to
increase the strength and flexibility of steel. The
company made efforts to reduce its product delivery
time from 3-4 weeks in 1998 to 2 weeks in 2000. The
company aimed to further reduce the time to one
week. 

TISCO also took steps to reduce its manpower costs.

Between 1996 and 2000, TISCO reduced its workforce
from 78,000 to 40,000 employees. Analysts opined
that cutting its workforce by 38,000 employees was
not an easy job and the company was able to do it
with a lot of communication with employees. 

TISCO had adopted Performance Ethic Programme

(PEP), under which, it planned to promote
hardworking young people to higher positions
depending on their performance, rather than following
the convention of seniority. This exercise was
expected to cut the management staff from 4000 to
3000.
PEP had two core elements. Firstly, it proposed a new organizational structure, which was
expected to foster growth businesses, introduce more decision-making flexibility, clear
accountability, and encourage teamwork among the managers and the workforce. Secondly,
PEP proposed to introduce a Performance Management System (PMS). It would identify and
reward strong performers, and also offer development opportunities for each employee.
PMS would also ensure that every employee's job profile was clearly defined. By introducing
PMS, TISCO wanted to make performance appraisals transparent and fair and reward the
good performers.

The company also planned to introduce a new compensation package based on performance
from November 2001. Muthuraman explained the benefits of PEP, "Youngsters are getting
higher salary than some of the seniors, and after the restructuring, the average age of the
managers has fallen by 10 years. Through PEP, TISCO also reduced the hierarchical levels
from 13 to 5."
In a bid to reduce costs further, TISCO used IT as a
strategic tool. In 1999, the company formed a small
cross-functional in-house team consisting of
consultants from Arthur D Little and IBM Global
Services. The team was responsible for re-designing
two core business processes - order generation and
fulfillment and marketing development. The program
began with a study on cost-competitiveness. The aim
of the program was to enhance customer focus
enabling better credit control and reduction of stocks,
thereby reducing the costs. After considering several
packages, the team decided to use SAP R/3. TISCO
wanted the team - also known as ASSET (Achieve
Success through SAP Enabled Transformation) - to
integrate SAP into the existing information system
and make it compatible with future SAP
implementations. After SAP solutions were introduced
in TISCO, the business processes became more
efficient. It also improved customer service and
productivity, and reduced costs. The introduction of
SAP also decreased manpower cost from more than
US $ 200 per ton in 1998 to about US $ 140 per ton in
2000. There was a significant reduction in inventory
the carrying cost, from Rs 190 per ton in 1999 to Rs
155 per ton by 2000. There were also significant cost
savings through efficient management of resources.

The Future
Analysts felt that TISCO's modernization program was very successful. The Steel Authority
of India Ltd. (SAIL) adopted a similar program with an investment of Rs 70 billion. However,
the program was not successful. In contrast, in spite of the depressed market and lower
margins, the decrease in the production costs enabled TISCO to achieve a profit after tax of
Rs 5.53 billion in 2000-2001, and Rs 4.22 billion in 1999-2000 compared to Rs 2.82 billion
during 1998-99 (Refer Exhibit VII).
TISCO planned to enter new areas including setting up of a 0.1 million-ton ferro chrome
export oriented project. The project was planned in Australia because of the lower power
costs. TISCO was to get power at a tariff of 1.8 cents for about 15 years that is about one-
fifth of the tariffs in India. Power accounted for 60% of the cost of ferro chrome
manufacturing.

The Future
TISCO was also planning to enter titanium mining
through alliances with major global companies. To
provide employment to the employees opting for VRS
at over-manned units, TISCO planned to enter the call
center business in Jamshedpur. To develop this
business, TISCO entered into a marketing alliance
with Tata International, the trading arm of Tata
Group. TISCO also planned to exit from some of its
non-core activities. 

Critics felt that TISCO might face problems due to the

decrease in demand for steel in the global and local
markets and increasing competition from cheap
imports, and anti-dumping duties imposed on the
domestic steel manufacturers by the US. They felt
that it was doubtful whether steel, even at the lowest
cost, would deliver returns higher than the cost of
capital in India. However, some analysts remarked
that in the long run, TISCO's strategy to export to
Jordan, Iraq and the Southeast Asian countries might
reduce dependence on the US markets thus helping
the company. They said that its entry into value-
added products was expected to safeguard the
company from the fluctuations in the steel prices.

Questions for Discussion

1. TOP was described as "maximum impact to the bottomline, with minimum investment, in
the minimum time. What was the rationale behind the implementation of TOP? Briefly
analyze the process and explain the advantages of TOP. 
2. The cost-cutting measures seemed to have helped TISCO to a large extent. Apart from
TOP, what are the other steps taken by TISCO for reducing costs? 
3. The lowered production costs enabled TISCO to record a profit during 1999-2000, despite
a depressed market and low margins. Do you think the low costs would help the company in
the long run? Justify your answer.

NOTE:

1] Jamshedji Nusserwanji Tata (J N Tata) was the founder of the Tata Group of companies. 
2] Hot rolled coil is a coil of steel rolled on a hot-strip mill (hot-rolled steel). It can be sold in this
form to customers or be processed further into other finished products. Cold rolling is a process
where the shape and structure of the steel can be changed by rolling, hammering, or stretching it
at a low temperature (often room temperature). 
3] The Integrated steel producers have manufacturing facilities right from the iron ore stage to
the finished steel stage.
4] The International Organization for Standardization (ISO) develops voluntary technical
standards. The ISO 14000 standards are on environmental management.
5] In September 2002, Rs 48 equaled 1 US $.
6] A renowned industry analyst firm based in the US. 
7] Operating costs; ownership of low-cost ore and coal; favorable location for procuring raw
materials; skilled and productive workforce; price paid for electricity; high quality and niche
products; degree of 'pricing power' with large steel buyers; dominant in region; balance sheet;
borrowed funds and equity on a favorable basis; management is experienced, aggressive,
proactive; low legacy (retired worker) costs; ongoing cost cutting efforts; cost position of nearby
competitors; owns downstream steel-using businesses; domestic market growth rate; proportion
of domestic sales.

8] A blast furnace is a towering cylinder lined with heat-resistant (refractory) bricks, used by
integrated steel mills to smelt iron from its ore. Its name comes from the 'blast' of hot air and
gases forced up through the iron ore, coke and limestone that are loaded into the furnace.
9] Cost tree is a display of the organization of the costs of a template which contains all the
major cost elements for an asset or a worksheet. Visually, it resembles the file arrangement that
Microsoft Explorer provides. The cost tree of a master template allows to check or un-check pre-
engineered cost elements of the master template. 
10] Output or production over a period of time.
11] Kilograms per ton of heavy metal.

XEROX - The Benchmarking Story

The case examines the benchmarking initiatives taken by Xerox, one of the world's leading copier

companies, as a part of its 'Leadership through Quality' program during the early 1980s. The case

discusses in detail the benchmarking concept and its implementation in various processes at Xerox.

It also explores the positive impact of benchmarking practices on Xerox

- Warren Jeffries, a Customer Services Benchmarking Manager, Xerox, in 1999.

Background Note
The history of Xerox goes back to 1938, when Chester
Carlson, a patent attorney and part-time inventor,
made the first xerographic image in the US. Carlson
struggled for over five years to sell the invention, as
many companies did not believe there was a market
for it. Finally, in 1944, the Battelle Memorial Institute
in Columbus, Ohio, contracted with Carlson to refine
his new process, which Carlson called
'electrophotography.' Three years later, The Haloid
Company, maker of photographic paper, approached
Battelle and obtained a license to develop and market
a copying machine based on Carlson's technology. 

Haloid later obtained all rights to Carlson's invention

and registered the 'Xerox' trademark in 1948. Buoyed
by the success of Xerox copiers, Haloid changed its
name to Haloid Xerox Inc in 1958, and to The Xerox
Corporation in 1961. Xerox was listed on the New
York Stock Exchange in 1961 and on the Chicago
Stock Exchange in 1990. It is also traded on the
Boston, Cincinnati, Pacific Coast, Philadelphia, London
and Switzerland exchanges. The strong demand for
Xerox's products led the company from strength to
strength and revenues soared from $37 million in
1960 to $268 million in 1965.
Throughout the 1960s, Xerox grew by acquiring many companies, including University
Microfilms, Micro-Systems, Electro-Optical Systems, Basic Systems and Ginn and Company.
In 1962, Fuji Xerox Co. Ltd. was launched as a joint venture of Xerox and Fuji Photo Film.
Xerox acquired a majority stake (51.2%) in Rank Xerox in 1969. During the late 1960s and
the early 1970s, Xerox diversified into the information technology business by acquiring
Scientific Data Systems (makers of time-sharing and scientific computers), Daconics (which
made shared logic and word processing systems using minicomputers), and Vesetec
(producers of electrostatic printers and plotters).
In 1969, it set up a corporate R&D facility, the Palo Alto Research Center (PARC), to develop
technology in-house. In the 1970s, Xerox focused on introducing new and more efficient
models to retain its share of the reprographic market and cope with competition from the
US and Japanese companies. While the company's revenues increased from $ 698 million in
1966 to $ 4.4 billion in 1976, profits increased five-fold from $ 83 million in 1966 to $ 407
million in 1977. As Xerox grew rapidly, a variety of controls and procedures were instituted
and the number of management layers was increased during the 1970s. This, however,
slowed down decision-making and resulted in major delays in product development.
In the early 1980s, Xerox found itself increasingly
vulnerable to intense competition from both the US
and Japanese competitors. According to analysts,
Xerox's management failed to give the company
strategic direction. It ignored new entrants (Ricoh,
Canon, and Sevin) who were consolidating their
positions in the lower-end market and in niche
segments. The company's operating cost (and
therefore, the prices of its products) was high and its
products were of relatively inferior quality in
comparison to its competitors. Xerox also suffered
from its highly centralized decision-making processes.
As a result of this, return on assets fell to less than
8% and marketshare in copiers came down sharply
from 86% in 1974 to just 17% in 1984. Between 1980
and 1984, Xerox's profits decreased from $ 1.15
billion to $ 290 million (Refer Exhibit I). 

In 1982, David T. Kearns (Kearns) took over as the

CEO. He discovered that the average manufacturing
cost of copiers in Japanese companies was 40-50% of
that of Xerox. As a result, Japanese companies were
able to undercut Xerox's prices effortlessly. Kearns
quickly began emphasizing reduction of manufacturing
costs and gave new thrust to quality control by
launching a program that was popularly referred to as
'Leadership Through Quality.' As part of this quality
program, Xerox implemented the benchmarking
program. These initiatives played a major role in
pulling Xerox out of trouble in the years to come. The
company even went on to become one of the best
examples of the successful implementation of
benchmarking.

About Benchmarking
Benchmarking can be defined as a process for improving performance by constantly
identifying, understanding and adapting best practices and processes followed inside and
outside the company and implementing the results. The main emphasis of benchmarking is
on improving a given business operation or a process by exploiting 'best practices,' not on
'best performance.'
Simply put, benchmarking means comparing one's organization or a part of it with that of
the other companies. Companies can adopt one or more of the following types of
benchmarking -

• Strategic Benchmarking: Aimed at improving a company's overall performance by

studying the long-term strategies and approaches that helped the 'best practice' companies
to succeed. It involves examining the core competencies, product/service development and
innovation strategies of such companies.
Competitive Benchmarking or Performance
Benchmarking: Used by companies to compare their
 positions with respect to the performance
characteristics of their key products and services.
Competitive benchmarking involves companies from
the same sector.
• Process Benchmarking: Used by companies to
improve specific key processes and operations with
the help of best practice organizations involved in
performing similar work or offering similar services.
• Functional Benchmarking or Generic Benchmarking:
Used by companies to improve their processes or
activities by benchmarking with other companies from
different business sectors or areas of activity but
involved in similar functions or work processes.
• Internal Benchmarking: This involves benchmarking
against its own units or branches for instance,
business units of the company situated at different
locations. This allows easy access to information, even
sensitive data, and also takes less time and resources
than other types of benchmarking. 
• External Benchmarking: Used by companies to seek
the help of organizations that succeeded on account of
their practices. This kind of benchmarking provides an
opportunity to learn from high-end performers. 
• International Benchmarking: Involves benchmarking
against companies outside the country, as there are
very few suitable benchmarking partners within the
country.
A typical benchmarking exercise is a four-stage process involving planning, data collection,
data analysis and reporting and adaptation. The planning stage includes identifying,
establishing and documenting specific study focus areas, key events and definitions. The
best-practice companies are identified and appropriate data collection tools are selected and
updated for use. The purpose of the data collection is to accumulate qualitative data and
learn from the best practices of different organizations. Information is mainly collected
through questionnaires administered to all best practice companies. This stage also includes
site visits to organizations that follow best practices.
The data analysis and reporting stage involves the critical evaluation of practices followed at
high performing companies, and the identification of practices that help and deter superior
performance. A detailed final report is presented, which contains key findings. When these
findings are discussed, best practice companies also take part through systematic
networking activities and presentations. The adaptation stage includes developing an initial
action plan to adapt and implement the practices followed by high performance companies.
Of the total time spent on the above stages, planning
takes up 30%, data collection 50%, and data analysis
and reporting take up the remaining 20%. The time
taken for the last stage, adaptation, depends on the
scope of the exercise being undertaken by the
company. The above stages comprise a series of steps
that collectively complete the benchmarking process
(Refer Exhibit II for steps in a typical benchmarking
process). Organizations usually customize this model
or develop their own benchmarking model to meet
their specific organizational needs. 
By the early 1990s, many Fortune 500 companies and
other major companies were implementing
benchmarking to reap the benefits it promised.
Benchmarking also became a key criterion for winning
the Malcolm Balridge National Quality
Award.1 According to research conducted by the
International Benchmarking Clearinghouse, a division
of American Productivity & Quality Center (APQC2), in
1995, over 30 companies reported a $76 million
payback approximately in the very first year of their
benchmarking implementation. Some of the
companies that derived the benefits of benchmarking
included Ford, AT&T, IBM, GE, Motorola and Citicorp.
However, the pioneering efforts of Xerox in the field of
benchmarking have undoubtedly been the most talked
about and successful of such initiatives.

Benchmarking at Xerox
The 'Leadership through Quality' program introduced by Kearns revitalized the company.
The program encouraged Xerox to find ways to reduce their manufacturing costs.
Benchmarking against Japanese competitors, Xerox found out that it took twice as long as
its Japanese competitors to bring a product to market, five times the number of engineers,
four times the number of design changes, and three times the design costs.
The company also found that the Japanese could produce, ship, and sell units for about the
same amount that it cost Xerox just to manufacture them. In addition, Xerox's products had
over 30,000 defective parts per million - about 30 times more than its competitors.
Benchmarking also revealed that Xerox would need an 18% annual productivity growth rate
for five consecutive years to catch up with the Japanese. After an initial period of denial,
Xerox managers accepted the reality.
Following this, Xerox defined benchmarking as 'the
process of measuring its products, Services, and
practices against its toughest competitors, identifying
the gaps and establishing goals. Our goal is always to
achieve superiority in quality, product reliability and
cost.' Gradually, Xerox developed its own
benchmarking model. This model involved tens steps
categorized under five stages - planning, analysis,
integration, action and maturity (Refer Figure I for the
Xerox benchmarking model). 

The five-stage process involved the following

activities:

• Planning: Determine the subject to be

benchmarked, identify the relevant best practice
organizations and select/develop the most appropriate
data collection technique.

• Analysis: Assess the strengths of competitors (best

practice companies) and compare Xerox's
performance with that of its competitors. This stage
determines the current competitive gap and the
projected competitive gap.
• Integration: Establish necessary goals, on the basis of the data collected, to attain best
performance; integrate these goals into the company's formal planning processes. This
stage determines the new goals or targets of the company and the way in which these will
be communicated across the organization.
• Action: Implement action plans established and assess them periodically to determine
whether the company is achieving its objectives. Deviations from the plan are also tackled
at this stage.
• Maturity: Determine whether the company has attained a superior performance level.
This stage also helps the company determine whether benchmarking process has become
an integral part of the organization's formal management process. 

Xerox collected data on key processes of best practice companies. These critical processes
were then analyzed to identify and define improvement opportunities. For instance, Xerox
identified ten key factors that were related to marketing. These were customer marketing,
customer engagement, order fulfillment, product maintenance, billing and collection,
financial management, asset management, business management, human resource
management and information technology.
These ten key factors were further divided into 67
sub-processes. Each of these sub-processes then
became a target for improvement. For the purpose of
acquiring data from the related benchmarking
companies, Xerox subscribed to the management and
technical databases, referred to magazines and trade
journals, and also consulted professional associations
and consulting firms. 

Having worked out the model it wanted to use, Xerox

began by implementing competitive benchmarking.
However, the company found this type of
benchmarking to be inadequate as the very best
practices, in some processes or operations were not
being practiced by copier companies. The company
then adopted functional benchmarking, which involved
a study of the best practices followed by a variety of
companies regardless of the industry they belonged
to. Xerox initiated functional benchmarking with the
study of the warehousing and inventory management
system of L.L. Bean (Bean), a mail-order supplier of
sporting goods and outdoor clothing.
Bean had developed a computer program that made order filling very efficient. The program
arranged orders in a specific sequence that allowed stock pickers to travel the shortest
possible distance in collecting goods at the warehouse. This considerably reduced the
inconvenience of filling an individual order that involved gathering relatively less number of
goods from the warehouse. The increased speed and accuracy of order filling achieved by
Bean attracted Xerox. The company was convinced it could achieve similar benefits by
developing and implementing such a program.
Similarly, Xerox zeroed in on various other best practice companies to benchmark its other
processes. These included American Express (for billing and collection), Cummins Engines
and Ford (for factory floor layout), Florida Power and Light (for quality improvement),
Honda (for supplier development), Toyota (for quality management), Hewlett-Packard (for
research and product development), Saturn (a division of General Motors) and Fuji Xerox
(for manufacturing operations) and DuPont (for manufacturing safety). Benchmarking was
implemented at Xerox in the following manner:

Supplier Management System

Xerox found that all the Japanese copier companies
put together had only 1,000 suppliers, while Xerox
alone had 5,000. To keep the number of suppliers
low, Japanese companies standardized many parts.
Often, half the components of similar machines were
identical. To ensure part standardization, Japanese
companies worked closely with their suppliers. They
frequently trained vendor's employees in quality
control, manufacturing automation and other key
areas. Cooperation between the company and the
vendor extended to just-in-time production
scheduling, i.e. delivery in small quantities, as per the
customer's production schedule. 

In line with the best practices, Xerox reduced the

number of vendors for the copier business from 5,000
to just 400. Xerox also created a vendor certification
process in which suppliers were either offered training
or explicitly told where they needed to improve in
order to continue as a Xerox vendor. Vendors were
consulted for ideas on better designs and improved
customer service also.

Inventory Management
Xerox's efforts to improve inventory management practices drew inspiration from the
innovative spare parts management practices of its European operations. Traditionally,
technical representatives decided the level of spare parts inventory to be carried; little
information was available on the actual usage pattern of the spare parts. Xerox's European
operations developed a sophisticated information system to get around this problem. Actual
usage, rather than mere withdrawal from the stocking point, was used to determine
inventory levels. In the late 1980s, Xerox replicated the system in the US and saved tens of
millions of dollars in the process.
The stocking policy followed by Xerox branch managers was to hold fully finished, fully
configured products near to the customer. Because of this policy, they carried vast amounts
of inventory, some of which was not even sold during a given period. The company changed
the above setup by asking branch managers to match the stocking policy to the customer's
installation orders, which considerably reduced the inventory holding time. As a result,
working capital cycle time was cut by 70% leading to savings of about $200 million.
The process of benchmarking helped Xerox revamp its
manufacturing techniques. Each 'family unit' (a
manager and his direct subordinates) was encouraged
to identify its internal as well as external customers
and to meet their needs. For instance, the group that
built paper trays identified its external customer as
the end user who would load the paper. Its internal
customers were the assembly-line workers, who
would combine the paper tray with hundreds of other
components to assemble the copiers. This process
significantly improved the operational efficiency of the
work groups. 

Marketing
Xerox introduced a Customer Satisfaction
Measurement System that integrated customer
research and benchmarking activities. The company
sent out over 55,000 questionnaires monthly to its
customers to measure customer satisfaction and
record competitors' performance. It then
benchmarked against those competitors that had
scored high marks on specific measures of customer
satisfaction. Xerox also used the vast amount of
information gathered by the system to develop
business plans for improving quality and meeting
customer needs.
Quality
As a part of its "Leadership Through Quality" program, Xerox reformulated its quality policy.
The new policy supplemented the company's benchmarking efforts. Xerox's new quality
policy stated, "Xerox is a quality company. Quality is the basic principle for Xerox. Quality
means providing our external and internal customers with the innovative products and
services that duly satisfy their requirements. Quality improvement is the job of every Xerox
employee" (Refer Exhibit III for a comparison between new and old quality policies).
Following this, the company embarked on a complete organizational restructuring exercise
that focused on research and development, employee involvement and customer
orientation.
Xerox also formed a transition team consisting of 24 senior managers and consultants from
McKinsey & Co to help make Total Quality Management (TQM) a part of its organizational
culture. The transition team took action at two levels. Firstly, it conveyed the message
clearly to the world that Xerox was pursuing more widespread use of TQM, and secondly, it
identified and addressed the obstacles that were likely to slow down the spread of TQM.
These ranged from the corporation's function-dominated matrix structure to the need for
new training programs. Consequently, the transition team also replaced the existing
complex matrix by three Strategic Business Units (SBUs) - Enterprise Service Business,
Office Copiers and Home Copiers. Each of these SBUs was given considerable autonomy in
engineering, marketing and pricing.
By the late 1980s, benchmarking had become a day-
to-day activity in every division of the company.
According to company sources, Xerox's guiding
principle was, 'anything anyone can do better, we
should aim to do at least equally well." In 1991, Xerox
developed Business Excellence Certification (BEC) to
integrate benchmarking with the company's overall
strategies. This was also done to ensure continuous
self-appraisal of the overall quality performance of the
company. The key performance factors measured by
BEC were management leadership, human resource
management, customer focus, quality support and
tools, process management and business
priorities/results. 
 These factors, which were further divided into forty
sub-factors, had their specific measuring targets. Each
unit's self-appraisal was validated by representatives
from sister divisions. BEC helped Xerox determine the
causes for the success or failure of a specific quality
process and identify the key success factors or
obstacles for achieving a specific quality goal. It also
helped the company establish key functions for
removing obstacles that prevented it from reaching
the set quality goals.
By the mid-1990s, benchmarking was extended to over 240 key areas of product, service
and business performance at Xerox. The initiatives were also adopted, at varying levels, at
Xerox units across the world. The benchmarking process encouraged Xerox's employees to
learn from every situation. This new philosophy was dubbed 'steal shamelessly,' though the
company used only those ideas that the best practice companies willingly gave away. The
salient rule at Xerox for benchmarking was to 'ask no question of another firm that you
would be unwilling to answer about your own.' This change in attitude was just the
beginning of the payoffs of the benchmarking moves.

Reaping the Benefits

The first major payoff of Xerox's focus on benchmarking and customer satisfaction was the
increase in the number of satisfied customers. Highly satisfied customers for its
copier/duplicator and printing systems increased by 38% and 39% respectively. Customer
complaints to the president's office declined by more than 60%. Customer satisfaction with
Xerox's sales processes improved by 40%, service processes by 18% and administrative
processes by 21%. The financial performance of the company also improved considerably
through the mid and late 1980s 
Overall customer satisfaction was rated at more than
90% in 1991. Some of the other benefits Xerox
derived were: 

• Number of defects reduced by 78 per 100 machines.

• Service response time reduced by 27%.
• Inspection of incoming components reduced to
below 5%.
• Defects in incoming parts reduced to 150ppm.
• Inventory costs reduced by two-thirds.
• Marketing productivity increased by one-third.
• Distribution productivity increased by 8-10 %.
• Increased product reliability on account of 40%
reduction in unscheduled maintenance.
• Notable decrease in labour costs.
• Errors in billing reduced from 8.3 % to 3.5%
percent.
• Became the leader in the high-volume copier-
duplicator market segment.
• Country units improved sales from 152% to 328%.
Xerox went on to become the only company worldwide to win all the three prestigious
quality awards: the Deming Award (Japan) in 1980, the Malcolm Baldridge National Quality
Award in 1989, and the European Quality Award in 1992. Xerox Business Services, the
company's document outsourcing division, also won the Baldridge Award in the service
category in 1997. In addition, over the years, Xerox won quality awards in Argentina,
Australia, Belgium, Brazil, Canada, China, Colombia, France, Germany, Hong Kong, India,
Ireland, Mexico, the Netherlands, Norway, Portugal, the UK, and Uruguay. Analysts
attributed this success to the 'Leadership Through Quality' initiative, and, more significantly,
to the adoption of benchmarking practices.
The success of benchmarking at Xerox motivated many companies to adopt benchmarking.
By the mid-1990, hundreds of companies implemented benchmarking practices at their
divisions across the world. These included leading companies like Ford, AT&T, IBM, GE,
Motorola and Citicorp. During the 1990s, Xerox, along with companies such as Ford, AT&T,
Motorola and IBM, created the International Benchmarking Clearinghouse (IBC) to promote
benchmarking and guide companies across the world in benchmarking efforts.
The institute offers information on various companies
and best practices through its electronic bulletin
board. Soon after its establishment, more than 100
companies joined IBC to gain access to extensive
database. By 2001, benchmarking had become a
common phenomenon in many companies across the
world. Analysts remarked that continuous
benchmarking helped companies deliver best quality
products and services and survive competition in all
businesses (Refer Exhibit V for successful
benchmarking guidelines).

Questions for Discussion

1. Explain the circumstances that led Kearns to adopt
the 'Leadership Through Quality' program. In the
backdrop of his initiatives to retain Xerox's global
competitiveness, comment on the rationale behind the
decision to implement benchmarking practices at the
company.
2. Define benchmarking and discuss the various types
of benchmarking. Explain the steps involved in the
implementation of a typical benchmarking process.
3. Describe Xerox's benchmarking model. How did Xerox go about implementing
benchmarking practices in the company? 

4. What benefits did Xerox derive from the implementation of benchmarking practices? Why
do you think benchmarking initiatives sometimes fail to give companies the expected
benefits? Explain how you would go about ensuring the success of the benchmarking
initiatives undertaken by the company.

NOTE:

1] A highly revered award given for excellence in quality in the US to

businesses. It is based on seven parameters - leadership, strategic planning,
customer and market focus, information and analysis, human resource
focus, process management, and business results.
2] APQC is a US-based nonprofit organization supported by nearly 500
companies, government organizations, and educational institutions. It
provides the tools, information, expertise, and support needed by companies
to discover and implement best practices in areas such as benchmarking and
knowledge management.