Reengineering the Corporation: A Manifesto for Business Revolution

Chapter One

The Crisis That
Will Not Go Away

Not a company in the country exists whose management doesn't say, at least for public consumption, that it wants an organization flexible enough to adjust quickly to changing market conditions, lean enough to beat any competitor's price, innovative enough to keep its products and services technologically fresh, and dedicated enough to deliver maximum quality and customer service.

So, if managements want companies that are lean, nimble, flexible, responsive, competitive, innovative, efficient, customerfocused, and profitable, why are so many American companies bloated, clumsy, rigid, sluggish, noncompetitive, uncreative, inefficient, disdainful of customer needs, and losing money? The answers lie in how these companies do their work and why they do it that way. A few examples illustrate the point that the results companies achieve are often very different from the results that their managements desire.

• A manufacturer we visited has, like many other companies, set a goal of filling customer orders quickly, but this goal is proving elusive. Like most companies in its industry, this company uses a multi-tiered distribution system. That is, factories send finished goods to a central warehouse, the Central Distribution Center (CDC). The CDC in turn ships the products to Regional Distribution Centers (RDCs), smaller warehouses that receive and fill customer orders. One of the RDCs covers the geographical area in which the CDC is located. In fact, the two occupy the same building. Often and inevitably RDCs do not have the goods they need to fillcustomers' orders. This particular RDC, however, should be able to get missing products quickly from the CDC located across the hall, but it doesn't work out that way. That's because even on a rush/ expedite order, the process takes eleven days: one day for the RDC to notify the CDC it needs parts; five days for the CDC to check, pick, and dispatch the order; and five days for the RDC to officially receive and shelve the goods, and then pick and pack the customer's order. One reason the process takes so long is that RDCs are rated by the amount of time they take to respond to customer orders, but CDCs are not. Their performance is judged on other factors: inventory costs, inventory turns, and labor costs. Hurrying to fill an RDC's rush order will hurt the CDC's own performance rating. Consequently, the RDC does not even attempt to obtain rush goods from the CDC located across the hall. Instead, it has them air shipped overnight from another RDC. The costs? Air freight bills alone run into the millions of dollars annually; each RDC has a unit that does nothing but work with other RDCs looking for goods; and the same goods are moved and handled more times than good sense would dictate. The RDCs and the CDC are all doing their jobs, but the overall system just doesn't work.

  Often the efficiency of a company's parts comes at the expense of the efficiency of its whole. A plane belonging to a major American airline was grounded one afternoon for repairs at Airport A, but the nearest mechanic qualified to perform the repairs worked at Airport B. The manager at Airport B refused to send the mechanic to Airport A that afternoon, because after completing the repairs the mechanic would have had to stay overnight at a hotel, and the hotel bill would come out of B's budget. So, the mechanic was dispatched to Airport A early the following morning, which enabled him to fix the plane and return home the same day. A multi-million dollar aircraft sat idle, and the airline lost hundreds of thousands of dollars in revenue, but Manager B's budget wasn't hit for a $100 hotel bill. Manager B was neither foolish nor careless. He was doing exactly what he was supposed to be doing: controlling and minimizing his expenses.

  Work that requires the cooperation and coordination of several different departments within a company is often a source of trouble. When retailers return unsold goods for credit to a consumer products manufacturer we know, thirteen separate departments are involved. Receiving accepts the goods, the warehouse returns them to stock, inventory management updates records to reflect their return, promotions determines at what price the goods were actually sold, sales accounting adjusts commissions, general accounting updates the financial records, and so on. Yet no single department or individual is in charge of handling returns. For each of the departments involved, returns are a low-priority distraction. Not surprisingly, mistakes often occur. Returned goods end up "lost" in the warehouse. The company pays sales commissions on unsold goods. Worse, retailers do not get the credit that they expect, and they become angry, which effectively undoes all of sales and marketing's efforts. Unhappy retailers are less likely to promote the manufacturer's new products. They also delay paying their bills, and often pay only what they think they owe after deducting the value of the returns. This throws the manufacturer's accounts receivable department into turmoil, since the customer's check doesn't match the manufacturer's invoice. Eventually, the manufacturer simply gives up, unable to trace what really happened. Its own estimate of the annual costs and lost revenues from returns and related problems runs to nine figures. From time to time, the company's management has attempted to tighten up the disjointed returns process, but it no sooner gets some departments working well than new problems crop up in others.

• Even when the work involved could have a major impact on the bottom line, companies often have no one in charge. As part of the government's approval process for a major new drug, for instance, a pharmaceutical company needed field study results on just one week's dosing of thirty different patients. Obtaining this information took the company two years. A company scientist spent four months developing the study and specifying the kind of data to be collected. Actually designing the study took only two weeks, but getting other scientists to review the design took fourteen. Next, a physician spent two months scheduling and conducting interviews in order to recruit other doctors who would identify appropriate patients and actually administer the trial drug. Securing permission from all the hospitals involved took a month, most of which was spent waiting for replies...