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Boston Bombing, Earthquake in China and Cost of Quality (COQ)

April 23, 2013 Leave a comment

The Powerful Power Law

 

What does last week’s devastating events of Boston bombing and earthquake hitting Sichuan of China have in common with the nature of COQ at a manufacturing company? In fact they all are observed to follow a simple statistical rule called the power law. Simply put, plotting the logarithm of the magnitude of the events against the logarithm of the probability of occurrence will result in a straight line with a negative slope relationship. In the case of a terrorist event, the magnitude can be measured by the number of casualty. A number of research has shown that this obeys the power law. In case of an earthquake, the relationship between magnitude and the probability of occurrence at a given time and region is described by the Gutenberg-Richter law as a type of power law distribution.

How are these related to COQ? This figure is an analysis of the warranty claim data of an automotive tier 1 supplier within a period of 1 year.

This data set indicates that the larger claims (above $10,000) follow the power law very well. The circled area are smaller claims that most likely indicates many smaller size defects have skipped the system and hence have lower occurrence than predicted by the power law. Typically, empirical earthquake data also demonstrates similar behavior known as “roll-off”. Assuming these data are representative patterns, they are showing that the power constant is approximately equal to -1. This means that the occurrence of above $100K claim is about 100 cases in a year, that of above $1M claim is about 10 cases/year and that of above $10M claim is about once every year.

Studies on terror events all over the world have found that very similar relationship exists between casualty and the probability of occurrence. In fact the power constant for terrorism is found to be about -2.5. In other words, the occurrence of a 200 casualty event such as the Boston bombing is approximately 10^2.5= 316 times more likely than a casualty 2000 and above event such as Sept 11.

Why do important quality events exhibit Power Law behavior?

 

There are 2 main reasons, both are results of the network nature of the manufacturing supply chain.

  1. Interdependency – Supply chain elements are highly interdependent. An example is that during my early career as a storage media quality engineer, there was an incidence that one day a small crack was discovered at the glass furnace at a remote factory in Japan. This turned out to be a devastating event because this glass furnace was the only one that made glass substrate for storage media in multiple brands of magnetic disk drives. These drives were supplied to make servers and PCs. That small crack hence stalled the entire server and PC supply chain for days costing millions of dollars.
  2. Positive feedback – An example of how positive feedback works is Toyota ‘s “unintended acceleration” case that ended up costing Toyota over billion dollars. At first those were considered isolated cases but as more cases were suspected to be connected, Toyota identified potential root cause as the floor mats from certain suppliers. Number of reports increased as the publicity of the case increased which in turn lead to the suspicion of Toyota hiding something increased. Toyota was drawn by Congress for hearing and later being fined for about $1.1B even there had been no proof that could relate the unintended acceleration cases to any electronic or software defects. Each cycle of litigation and probes reinforced the public’s suspicion of something was wrong with Toyota till the point of avalanche even when no major defects were identified by those investigations.

Six Sigma and the Power law

 

This power law behavior of COQ offers important insights on how quality executives should deal with important quality events. This is particular counter-intuitive to many quality professionals who have gone through six sigma training or are themselves six sigma professionals. The foundation of six-sigma builds on the normal distribution or the Bell curve. COQ, however, observes the power distribution, not the normal distribution. Here are some major differences.

  • There is no average – In other words, it is meaningless to talk about the average size of a warranty claim. The Power distribution has no average value like the Normal distribution.
  • The most important data points are the outliners – In our data set, the top 10 claims among the total of 412 claims contributed to more than 50% of the total warranty cost. These large claims are the outliners that are typically ignored by six-sigma methodology.
  • Black swan events occur – The theory was developed by Nassim Nicholas Taleb to describe highly unlikely events that determines the course of human history. According to the above data set and the underlying power law, a warranty claim that costs over billion dollars occurs in about every century. Such event though rare can easily lead to termination of responsible executives or even bankruptcy of the business.

The Power law Strategy

 

Just like security gates alone cannot eliminate terrorist events, government bodies run drills and set early warning systems to reduce the risk of terrorist events. Similar method can be applied to catch quality defects.

In order to tackle the Power Law phenomenon, a strategy is needed to tackle its fundamental elements. This involves 3 major steps. The first step is to enable track and trace of the interdependency of the supply chain. Once interdependency tracking is established, the second step is to conduct further analysis that enables early warning (such as using Big data technology) based on the interdependency. Warning signals detected need to tie to a series of actions that involves PDCA cycles. The third step is a containment strategy to quickly respond to quality events before their effects were amplified by positive feedback. These measures will significantly lower the probability of isolated events escalating into catastrophic events through self-reinforcing cycles of positive feedback. It is worth noting that traditional ROI analysis based on average annual return rarely can be used to justify investment on implementing such strategies and solutions. When dealing with the potential catastrophic effect of the Power law, executive decision is required to set organizational direction. Seeking average annual return of such investment just does not make sense in the world of Black Swan events.

 

 

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The Future of Lean Manufacturing through the World of Warcraft

October 5, 2011 3 comments

Any seasoned Lean manufacturing expert will tell you that implementing lean is not about JIT, Heijunka or any sort of tools. It is about implementing a lean culture of continuous improvement. In fact in Toyota, they consider their ultimate competitive advantage is the “intoxication of improvement” by every employee from shopfloor to top floor. Thousands of improvement ideas are created every day even for the smallest mundane tasks. This is in big contrast to “don’t fix what is not broken” mindset prevails in most other organizations. Well, what they believe is one thing. Have any of these been scientifically proven? Can we simulate this kind of organizational behavior and measure its output? And if we can, what can we learn from such about managing thousands of ideas and distill them to actions every day?

In this video, Dr. John Seely Brown, one of my favorite business writer talks about the innovation dynamics within the World of Warcraft (WoW), which also happens to be my favorite on-line video game. At the end, Brown said “This may be for the first time that we are able to prove exponential learning … and figure out how you can radically accelerate on what you’re learning”. Indeed, I have found this game could interestingly cast light on the social dynamics of lean culture and how it will evolve in the future.
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Guild structure and QC circles

“There is too much information changing too fast…The only way to get anything done seriously is to join a guild” said Brown. These guilds in WoW are groups of 20-200 people helping each other to process ideas. This greatly resembles the Quality Circle movement, in which employees are not just hired to perform a task but rather to form part of small groups that constantly seeking ways to self-improve. The differences of QC circles to these guilds could be the technology that they are using as indicated below.

Everything is measured; everyone is critiqued by everyone else

In the WoW, it is easy to record every action and measure performance. There are after-action reviews on every high-end raid and everyone is critiqued by everyone. This resembles the typical PDCA (Plan-Do-Check-Act) process used by QC circles. The challenges however in the manufacturing world are that too much information is still recorded on paper or if recorded electronically, on multiple segregated systems. This inhibits the sharing, retrieval and analysis of information that enabled the rapid group self-improvement dynamics of WoW.

Personal dashboard are not pre-made, they are mashups

Another key learning from the WoW is that you need to craft your own dashboard to measure your own performance. Brown even said that the Obama administration is stealing the idea from WoW and trying to do the same. So much for the software companies who are trying to sell pre-packaged KPIs to measure corporate performance.  Imagine a new manufacturing world that every operator and supervisor has real-time feedback on his/her own performance. Seeing how minute by minute idle time or over-production is affecting bottom-line and return on capital. The future of performance measurement technology is detail, real-time and personalized.

Exponential learning

The last slide in the video shows learning speed exponentially increases as one goes up the level in WoW. The high performance guilds need to distill what they have learnt from their own guild and share with other guilds throughout the network. Those who can do that effectively tend to move up level faster. In the manufacturing world, there are many companies trying to share best-practices across and within organizations. However, manufacturing executives may not realize that effective continuous improvement and best-practice sharing can lead to a state of exponential learning that constitutes an ultimate competitive advantage.

In a sense, the computer world of WoW is able to simulate the social dynamics of how individuals could form groups to process and create ideas, how groups could measure and improve within themselves and how groups could interact with each other in order to accelerate learning that results in high performance. Such social dynamic also resembles that of the lean culture, long promoted within companies like Toyota. Looking forward, the promises of manufacturing 2.0 are technologies to enable almost everything to be measured, allow information from individuals to interact freely as groups and also empower groups to effectively share best-practices. Such multi-tier collaboration from shopfloor to topfloor will bring about a new form of highly competitive organization that harnesses the power of exponential learning. On that note, the future evolution of lean culture may not be that much different from the present World of Warcraft.

Are they at war? Silicon Valley vs Detroit

August 29, 2010 Leave a comment

Declaring War?

Earlier last year there was a provocative posting at The Washington Post literally indicating that top executives at HP believe that Detroit should be left out to die. The article argues that instead of bailing out inefficient industries, US government would be better off funding Hi-tech industries who know how to stand up on their own feet.

A few months earlier, Tesla’s CEO Musk Elon who founded other high profile companies including PayPal, Zip2, Solar City and SpaceX, has decided to put his manufacturing base at California in order to tap the portfolio of Hi-tech talents in the vicinity. The EVs are powered by electrical powertrains that only have a single speed gearbox, which eliminates the need for complicated clutch and shift mechanism. The underlying development and production processes for such calls for very different domain of knowledge than traditional automobiles. Building on the supply of Hi-Tech professionals as well as the dynamic, open, and competitive culture of the Valley, Tesla has made some marks at not only product innovations, but also leveraging outsource manufacturing and building a store-based retail chain. Tesla turned profit the first time in July 2010 and has just raised $260M from its June IPO, which is the first car company went public since Ford in 1956. “I’m against having a two-class system where you’ve got the workers and then the managers, sort of like nobles and peasants…” Elon remarked on the working culture of Detroit in an interview and claimed “I’d like to have a conversation with whoever’s in charge at the time — the car czar or whoever — and say ‘I’d like to run your plants“.

While the Valley has a history of successful companies growing out of garage operations, Detroit executives may well shrug off such attempts as unrealistically ambitious with good reasons. People have tended to underestimate the complexity of doing a car. This has been true for the ages” said a Michigan automotive insider. In fact, despite the aggressive claims made by Silicon Valley executives, EVs are still only sold at small volume in a niche market that has so far confined their competition with Detroit more to the media than at major marketplaces.

Already Making Peace?

A closer look at these Silicon Valley start-ups, one may find that their fates are not so independent of the big blues. Tesla for example will supply Daimler with their electric powertrains. In turn Daimler has invested and owned 10% of Tesla which has acquired Nummi facility that was run by GM and Toyota to build Model S. Tesla’s peer / competitor Fisker is sourcing its engine from GM, who is planning to follow the path of Tesla to go IPO in Oct. Such interweaving relationships between start-ups and old timers represent an industrial dynamics that one may find to be quite characteristically American. In fact it is hard to imagine how these young companies can grow further without leveraging the supply chain, the sales channels and the wisdom that has took the big blues decades to build.

Having the privilege to work with both ends of the spectrum, I would suggest that such genetic crossover has been propagating at many levels.

For example, we included full containment / traceability capability to even the initial phase of a project at a start-up EV assembly operation, which was supposed to focus on ramping up of product volume. The containment capability though hard to be justified by superficial ROI analysis, is a wisdom borrowed from the big blues that an insurance policy of your brand is always worthy. After all it only took 1 instance of a highly unlikely event to bring down billions of dollar and decades of effort in building up say, BP brand. On the other hand, we provided a manufacturing IT platform for a hybrid battery plant built by one of the big blues. Flexibility and scalability is not only essential for start-ups to grow but also for new technologies to be fostered under a mature corporate environment.

Apple or Webvan?

It is way too soon to speculate on whether the Silicon Valley car ventures are going to achieve what Apple did to IBM, Digital and Wang, or to end up like many other soon-to-be-forgotten “New, new things” such as Healtheon or Webvan.

If Silicon Valley appears to be at war with Detroit, it would be more a manifestation of the healthy tension that is essential to strike the balance between risk-taker and cautious venturer, revolution and evolution as well as innovation and management maturity. This intriguing dynamics between start-ups and big blues may well be one of the ultimate strengths of the US economy.

The Hidden Secret of Manufacturing behind Ancient Castle Walls

October 24, 2009 Leave a comment

The hidden secret behind ancient castle walls

Staring at walls has been the way buddhist monks meditate about the ultimate truth but hardly seems like a way to inspire making of national industrial policy. Though for the prepared mind, the subtle architectural differences in these ancient castle walls could be telling a hidden secret for the modern industrial world.

Typical Japanese castles are built on irregular stone walls called Ishigaki. At first glance, these ancient irregular structures may seem to be some primitive work of an underdeveloped society. The fact that these seemingly random combination of rocks has sustained more than 400 years of wears and tears by wars, floods and earthquakes, may come only as an afterthought. A closer look would discover that mortar is not used in binding but rather small rocks are used to lock large rocks into their positions. This technique allows for water passage that prevents water pressure from building up inside during the rainy season. The uneven distribution of mounting forces as a result of the irregularity constitutes the strength against attack from both human and natural disasters. One can also deduced that building these walls required close communication of the workforce and a distributive chain of command. Decisions were made at the frontline to deal with irregularity at each step without losing sight of the overall goal.

In contrast, castle walls outside of Japan are typically built with standardized rectangular blocks. The regularity reduced the need for communication among the frontline workers. In fact the workforce were frequently composed of members from different tribes who spoke different languages. Such standardization allowed any missing piece to be easily replaced and so as working members of the team. Minimum decision-making is delegated to the front line in the building process.

Many of the characteristics of the workforce behind those walls have served to establish competitive advantages in the modern industrial economy.

 

 

 

Product Architecture Reflects Social Structure

According to the framework developed by Professor Fujimoto of Tokyo University, there are modular and integral types of industrial products. The architecture of Ishigaki is one of integral whereas that of western castle wall is one of modular. In the former case, any components have complicated interface relationship with the rest of the system whereas the later has relatively simple and standardized interface. Types of interfaces can be categorized to open and close, depending on whether the interface standard is open to the industry or proprietary to a single company.

Examples of industrial product according to architectural categories:

  Close Open
Modular
  • Camera and lens
  • Lego
  • Castle wall
  • PC
  • bicycle
  • Packaged software
Integral
  • Ishigaki
  • Disk drive
  • Automobile
 

This framework of architectural classifications reveals a type of national competitive advantages rooted from cultural and historical characteristics of the underlying society. Japan has been typically strong at integral types of product which requires an integrated quality control as well as close communication of the workforce and supplier network. Such strengths could be attributed to the cultural environment developed in an island country with a rather homogeneous population. Examples of successful industries are electronics, Hi-tech and automobile. US has been quite successful in formulating industrial standard and globalizing operation at a large-scale as seen in the success of computer and software industries. A strength that could be traced to the social environment of diversed immigrants.

A Business Strategy that Reflects Product Architecture

I used to work in the disk drive industry and this framework has given me insight to the kind of industrial dynamics that I had experienced during the mid-90s. I was in charge of the quality of magnetic media (disk) manufactured by Japanese suppliers to Seagate, the world’s largest HDD manufacturer. During the year 93-96, magnetic head and aluminium disk technology has approached maturity. Seagate had successfully standardized the head-disk interface and outsourced disk production to several suppliers in order to take advantage of cost and supply flexibility advantage to meet market demand. Seagate was beating up competitors such as Western Digital, IBM and most Japanese manufacturers in the game of commoditizing disk drive and its components. The company was the first one in the industry in expanding production to Singapore, Malaysia, Thailand, China and Ireland. The key in such expansion is to simplify and standardize interface between components in order to reduce communication cost that come with expanding supplier network and globalization.

During the late 90s, new technologies such as Giant MR head and ceramic disk had become important in further reducing size of HDD and increasing memory density. The head-disk interface had become more complex and many previous unknown issues related to applying new technology to mass production environment such as thermal asperity were causing serious drop in production yield. In this sense, product architecture had shifted from modular to Integral. In order to stay in the game, Seagate took prompt actions in taking over Corner (the world’s 3 rd largest HDD manufacturer at the time) in order to secure supply of disk and vertically integrated the head and disk divisions. The newly integrated organization was much more efficient in dealing with the complex quality issues that came with new technologies than the former structure of multiple suppliers.

I cannot confirm whether Seagate executives derived their business strategy by staring at the castle walls. However, I have come to realize that business strategy as well as supply chain and organizational management need to reflect product architecture.

Why policy makers and corporate Executives should pay attention to these walls?

During this economic downturn, corporations are being blamed by politicians for outsourcing jobs to China and low-cost countries. Policy makers are inclined to promote protectionism. Such policies are more outcomes of emotional reactions than careful plans for  sustainable competitiveness. A lesson to learn from how Japanese government had deal with its recession in the 90s would be giving more considerations to product architecture when formulating industrial policy and strategy. US government could help to foster and maintain stronghold on open modular industrial product and fund information technology and development of structure that improve integral products. Social policy should be adopted to tackle unemployment instead of industrial policy.

As a suggestion, politicians and policy makers should spend some time meditating in front of the Japanese castle walls because the lessons learnt from looking deeper into the root of the nation’s core competitiveness could help navigating through crisis and prevent them from being carried away by mere emotional responses of lobbists.

meditation

How Japan’s enterprise IT has failed to learn from its most competitive industry–manufacturing

August 28, 2009 Leave a comment

How the Japanese IT Industry Destroys Talents?

August 28, 2009 Leave a comment