Improving Outsourcing Delivery by Lean Management

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Lean production and the philosophy about it originate from advanced modern management approaches of the manufacturing industry, which mainly focus on Toyota Production System that brings enormous benefits to the manufacturing industry. Toyota Production System features waste reduction, higher efficiency and higher speed. In order to improve clients’ satisfaction, the emerging service industry develops from inheriting and utilizing lean production to developing and creating lean services, exploring, expressing and realizing clients’ demands through constant interactions with them. The industry optimizes and improves processes to create values for their clients so as to achieve win-win outcomes. It is urgent for outsourcing companies to implement lean management because of the inherent characteristics of outsourcing companies, such as cost pressure and process optimization, delivery speed and corporate culture. The attempt of Indian outsourcing companies in conducting lean outsourcing sets a good example for outsourcing enterprises in China to resist risks and become larger and more competitive.
The outsourcing company is an inevitable organization form resulting from the extensive application of computer and Internet technologies, rapid development of the globalized economy, and specialization of work. As the third party in economic activities, outsourcing companies shoulder the great mission of utilizing the latest technologies as pioneers, disseminating diverse cultures and practicing corporate management. What’s more, these companies have to bear the huge pressure brought by the cost transfer from developed countries, accept the stringent requirement on advanced corporate management of developed countries, and take up unprecedented challenges brought by the gap in technology,[link widoczny dla zalogowanych], knowledge, experience and culture. Chinese outsourcing companies, which have stood up to the global financial crisis, are redoubling their efforts to review their strategic positioning and medium & long-term planning carefully. Enhancing internal strength and competitiveness is the fundamental measure for them to become larger and more globalized. Lean service has achieved great progress by referring to the philosophy and approaches of lean production in the manufacturing industry. However, lean management cannot be imported. In practice, foreign experiences cannot be copied as the lean production of Toyota was not a copy of the American mode, but the management innovation based on its own actual situation in combination with America’s essence of management engineering. Secondly, to learn and popularize management engineering systematically, outsourcing companies should begin with improving services continuously, eliminate waste and improve their basic management levels. Companies should implement management innovation and take scientific management as the core technology to achieve lean production. As a result, the company is able to create the very management mode suitable for its own corporate environment. When creating the management mode, the company should consider operating environment, market, service, resource and other conditions. In particular, special efforts should be made by the company to build its own corporate culture to enhance cohesion, improve the ability of resisting risks and create its own management mode, which is the key to lean service.
Origin of the Lean Production Philosophy
The concept of lean production originates from Toyota Production System (hereinafter referred to as TPS). TPS began in the 1950s when the Japanese economy had not fully recovered from the aftermath of war and Toyota was on the verge of bankruptcy. Kiichiro Toyoda, the founder of Toyota, put forward the concepts of “Zero Inventory” and “Just-In-Time” on the basis of the Ford production mode. Promoted by Taiichi Ohno and other people, TPS gradually became more and more mature after 20 years’ transformation, innovation and development by learning from American industrial engineering and modern management philosophy.
In the 1970s, an opportunity was opened up by the global oil crisis for Toyota to show its TPS to the world. It took American auto manufacturers by surprise that, the formerly unattractive Toyota vehicles, now featuring low price and low oil consumption, occupied the superiority market share of the American auto market. TPS extraordinarily impacted the Ford production mode built by Americans. Taiichi Ohno, the founder of TPS, said that Henry Ford I would certainly have adopted a management mode similar to TPS if he were still alive. Shocked by TPS, American people began to reflect on themselves and learn from Toyota. Professor Yasuhiro Monden first introduced TPS to American people in English systematically. In 1990, Professor Womak from Massachusetts Institute of Technology wrote a book with other people entitled Lean Production Mode — the Machine to Change the World, which summarized the successful experiences of Japanese enterprises and put forward the concept of “Lean Production”. The book was published by International Auto Plan Group from Massachusetts Institute of Technology against the background that frictions between Japan and Europe & America on auto trade escalated, and Europe & America imposed restrictions on the import of vehicles from Japan. In this book, a conclusion was drawn after lots of surveys and comparisons that, the production mode of Toyota, which was referred to as lean production, was the most suitable production organization and management mode for the modern manufacturing industry.
Lean production, exemplified by Toyota, has become the methodology attracting operators all around the world. The implantation of lean philosophy into the manufacturing and management system of auto production enables Toyota to be continuously competitive.
Lean production would exert a profound effect on the society, which would change the world. In 1996, the sixth year after the publication of the book Lean Production Mode — the Machine to Change the World, James Womack and Daniel Jones jointly wrote a book entitled Lean Thinking, which summarized principles to follow when shifting from mass production to lean production, and further expatiated on the connotation of “lean production”: establishing the lean philosophy against waste, defining value precisely, identifying value flow and formulating value flow chart, enabling value flow fluently without waste, making value flow driven by users and pursuing perfectness. With continuous scarcity of resources in the world, the philosophy of lean management attracts more and more attention from countries and the whole society. Undoubtedly, it is extremely important for China as its economy is growing fast while it lacks resources.
From Lean Production to Lean Service
“Lean” is being promoted as a new generation industrial revolution in auto, aviation, electronics and other hi-tech industries. Lean philosophy also transcended its birthplace — the manufacturing industry, and has been disseminated and applied in all industries as a universal management philosophy. For example, it has been successfully applied in domestic and foreign building design and construction, the service industry, civil aviation and the transportation industry, medical care, telecommunications, postal management, military logistics and supplies, software development and programming, “lean government” and other fields. Lean mode is impacting the deep-rooted batch processing and the hierarchical management concept, which has been adopted for nearly 100 years. It has also become the philosophy guiding the new round of management revolution. It changes the work style of people, raises the efficiency of various social activities, reduces resource consumptions, and improves the quality and efficiency of production and life.
In the 21st century, methods and experiences of people for realizing lean management become increasingly rich and mature. Moreover,[link widoczny dla zalogowanych], digitalized manufacturing provides another powerful tool for lean philosophy, expanding its application from manufacturing to the service industry. The pioneers of lean philosophy began to systematically improve the theory and the practice of lean philosophy, and unavoidably amended those traditional or vulgar concepts. The shift from lean production to lean service not only means inheritance but also development and innovation of traditional lean philosophy. The following is a simple comparison between lean production and lean service.
The fast food industry in America has employed lean philosophy before the concept of lean production took shape. McDonald’s and Kentucky are the pioneers on lean service philosophy. Without the philosophy, they aren’t able to become tycoons of the global fast food industry. As typical cases of service companies adopting lean mode after traditional industries were informationzed, McDonald’s and Kentucky adopt the basic principles of lean philosophy in the operational process. For example, the production process design, flexible personnel allocation and the production mode driven by the philosophy, all together create the “fastness” of McDonald’s and Kentucky. “Fastness” has also become the second core competitiveness for McDonald’s and Kentucky apart from delicious taste. Kentucky has publicized its “fastness” in the form of “delivering food to customers within 60 seconds”. The service industry has unprecedentedly raised its productivity by applying progressive information technologies. That is to say, the production technologies in the service industry are also being “informationized” and become “knowledge-based”. At present, successful multinational retail companies, such as Wal-Mart, achieve the fine operation of service products with “zero inventory” in the world by relying on the Internet and information technologies.
Jefferson Pilot Financial (hereinafter referred to as JPF) was a typical service enterprise in America in late 1990s, which engaged in all-round life insurances and annuity businesses. At that time, the competition in the insurance industry became increasingly fierce. The reasons were: on the one hand, insurance companies had to try to meet customers’ growingly high expectations by providing more novel products, so products became more complex and correspondingly the cost increased; on the other hand, the rivals in the niche market introduced insurance business to customers with lower premium and higher speed for handling insurance policies, which forced large insurance companies providing all-round services to consolidate their positions by improving services and reducing cost. JPF benefited a lot from adopting lean production, because it handled an approximately substantial “service product” in business processes. Like the vehicles on the assembly line, each insurance policy had to go through a series of procedures from application, underwriting or risk evaluation to insurance policy distribution. The value of the product (referring to the insurance policy being processed here) increases after it goes through each procedure like a vehicle installing with a door or painted with a layer of paint step by step.
In the latter half of 2000, JPF, advised by a consulting firm, dispatched a “lean team” composed of five members to transform the operational process of the new business department guided by the principles of lean production. The team members included the assistant vice president of the new business department who was in charge of administration and a dispatched project manager who directly reported to the senior vice president of the company who is in charge of the new business department. The rest three were lean production experts from the consulting firm. So the project team was composed of both insiders familiar with the business processes of JPF and professionals proficient at lean production principles. Certainly, the new department achieved sound effect. The whole processing cycle from receiving the insurance application from the chief partner to distributing insurance policy was shortened by half on average, the labor cost reduced by 26% and the ratio of policy re-distribution due to mistaken operations reduced by 40%. Within just two years, these changes enabled the revenue from annual fees of new insurance policies of personal life insurance — the core business of JPF, to increase significantly by 60%. The promotion of the new system inside the whole company also helped other departments achieve similar effects.
Practice of Lean Outsourcing
Outsourcing providers are the third party providing professional services between service providers and end customers. Outsourcing, both in the manufacturing industry and in the information service industry, initially aimed at reducing cost. Multinational corporations employ offshore outsourcing to utilize global human resources to reduce cost and enhance their core competitiveness. Developing countries undertake a lot of information service business relying on their rich human resources. The information service outsourcing, born on the basis of the extensive application of the Internet technology, is in fact the efforts of professionals in developing countries to complete the mature and consummate business processes of developed countries with relatively low technical application abilities and low corporate management level. The first challenge is cost, as outsourcers from developed countries can select contractors worldwide, so the labor cost of contractors is the most important factor when undertaking outsourcing business. In addition, the reliability and continuity of services are also the prerequisite for signing an outsourcing contract.
Six years ago, Indian outsourcing provider Wipro expected to enhance its presence in the European and American software outsourcing markets by improving its outsourcing qualities. Service providers have to solve business challenges for clients, therefore professionals in Wipro proposed the application of TPS principles into its outsourcing business. Before 2004, no one had tried to apply TPS in the IT service industry. These professionals turned to Assistant Professor Bradley R. Staats of Kenan-Flagler Business School, University of North Carolina, who specializes in operation, technology and management innovation, to research on the interaction and mutual promotion between technology and operation. Professor Staats summarized three challenges the outsourcing industry has to face:
1. Uncertainty of tasks: buyers often change demands for software, which poses a great challenge to service providers. How to adapt standard process to the rapidly changing demand? The challenge lies in how to minimize variants in software framework design to raise efficiency.
2. Invisibility of process: employees usually use the knowledge in their own minds when working, but lean philosophy requires all knowledge and experiences to be public. The challenge lies in how to make knowledge management completely public.
3. Unclearness of framework: software engineers can know whether the software is feasible or not only after the development of the software is finished. It is impossible to know the effectiveness of the framework from the very beginning of the development.
In light of the particularities of outsourcing, Professor Staats advised to adopt lean approach in the four steps of offshore delivery to respond to the challenges above. He pointed out that one of the most important principles in adopting TPS was to launch a backward work flow. Service providers should first detect the challenges and difficulties encountered by clients and then focus on clients’ demands to put forward the solutions for urgent problems. Finally, a delivery plan of software development that can realize value increment should be worked out. The four steps are as follows:
1. Determining tasks: to completely and precisely understand the details of software development outsourcing.
2. Efficient and smooth communications: to carry out direct communications among all the people in concern, avoid delivering one working report to more than one persom and waiting for reply passively,[link widoczny dla zalogowanych], but to deliver the working report directly to only one person and seek for the fastest reply.
3. Simplifying the process: to work out a simple flow chart diagram easy to understand, indicating each step of a task so as to enable each participant to be aware of the interactive relations among all processes to reduce waste.
4. Adopting supposition-driven solutions: to organize the team regularly to discuss how to improve the work, put forward various suppositions for solutions, test and compare them with real problems to see whether the solutions need further optimization.
Wipro constantly follows lean development principles in software outsourcing, which include
1. To reduce the waste in the development process (human resources, time and resources);
2. To ensure the zero-defect software development;
3. To guide clients rather than publicize itself;
4. To establish a team with multiple functions to adapt to clients’ complex and changing demands;
5. To distribute responsibilities by authorizing each step of the software development process respectively;
6. To establish a vertical information transmission system featuring a 7/24 information transmission in the whole development team;
7. To improve continuously and persistently.
Wipro innovatively worked out the lean development approach suitable for the service industry following the principle of lean production.
1. To continuously communicate with clients for establishing relationship with them in business, technology and culture required by software development
2. To focus on exploring and expressing clients’ demands
3. To work out the design blueprint of software services
4. To design the software service development process that clients have confirmed
5. To revise the development process and optimize it consistently to reduce waste
6. To continuously improve the process by applying the Kaizen approach — team, discipline, moral, quality and suggestions
7. To show team members goals and processes in documents and diagrams and avoid solitary acts of team members
The barriers encountered during the implementation of lean software development approach include employees’ failure to precisely express and understand clients’ demands and consider themselves to be always right; the inconsistency between software development process and actual implementation steps that needs to be recognized and corrected at any time,[link widoczny dla zalogowanych], inevitable errors in transmitting clients’ demands among different departments due to the disparity between market and operation, different understandings and disciplines among team members, and weak executive force of team members. All of these problems need correcting in time.
Wipro analyzed the effect exerted by technical abilities and the behavior mode on implementation of lean approach in outsourcing. It was found out that, the technical factor only contributed 20% to lean quality control whereas the behavior mode contributed 80%. As a result, the implementation of lean philosophy in outsourcing depended more on concept, ideology, attitude and other corporate culture factors than on technical abilities. This requires outsourcing companies to form a voluntary and spontaneous cultural atmosphere. Because of the special dynamic changes of outsourcing clients’ demands, any employee in an outsourcing company has to conform to the changes unconditionally. Without self-consciousness and actions of each employee, clients’ satisfaction can hardly be ensured. What’s more, the unprecedented globalization, as well as the multisystem, multiple regions and multicultures of the outsourcing industry, requires each employee to make efforts to create values for clients.
Wipro has insisted on lean development of software outsourcing for six years, which is rewarded by reduced waste, higher efficiency, faster delivery and value creation for clients. They summarize the advantages as (1) saving cost by 50% to 75%; (2) shortening the software development time by one to three times; (3) speeding up the delivery by two to four times; (4) meeting clients’ software demands to the greatest extent, which significantly increases its market share in the global outsourcing market.
Practice of Lean Management in Outsourcing
Case one: the main principle of TPS is to reduce stock, which is impossible to be directly applied in software services. However, the philosophy is valuable. For example, if any problem occurs to the production line, workers may pull the rod installed at the assembly line to call managers to solve the problem on site. Beyondsoft does not install the pulling rod but installs a hint key in the development tool of software, which can call manager to solve problems on the Internet, even on the spot or at conferences at any time (including video devices). In the operation, development managers mainly utilize tools to detect problems as early as possible so that the employees committing mistakes can correct them on site. It has the following advantages: firstly, knowledge can be obtained during correction; secondly, employees will be instructed on what to follow to avoid committing the same mistake in the future.
Case two: offshore outsourcing faces another challenge — how to understand the details of software development of the clients at the other side of the Pacific Ocean (American clients). Once,[link widoczny dla zalogowanych], Chinese developers could hardly realize the recurrence of the Bug while testing the software in the head office in Beijing. Finally, they employed WebEx technology to observe the detailed operation of American colleagues to reproduce the Bug in testing. After watching the video, the staff in Beijing finished the testing smoothly guided by the demonstration in the video.
Case three: to learn from the visible controlling blackboard of TPS to trace the production progress of workshops. We list the names of developers vertically. In the horizontal direction of each name, the manager fills in the task to be finished by the very developer in one of the two blanks and correspondingly the developer fills in the other blank with the actual progress so that the progress of the whole team is clear. The purpose is not to urge progresses only. But more importantly, it is applied to help all the staff make concerted efforts to solve problems by writing the problems on the blackboard rather than solving them separately. At the same time, it enables employees to know each other’s working progress which helps to promote communications among them.