Preparing for Conversations with Tom Stewart
Bursting Bubbles

Editor's Note: Tom Stewart, member of the board of editors at Fortune magazine and knowledging's foremost media advocate, starts his new book The Wealth of Knowledge by making the case against Knowledge Management and ends it with some reflections about blowing bubbles. Conversations with Tom Stewart March 18-29, 2002 will be thought provoking once again, if enough people come prepared and participate.

You can catch up with Tom's latest observations by reading the first chapter of his new book online.

Or buy the book: The Wealth of Knowledge:Intellectual Capital and the Twenty-first Century Organization.

It will also be worth your time to read material below submitted by Tom last year when he discussed "Managing in Real Time."

Managing in Real Time

The following columns by Tom Stewart were provided to focus the opening discussions of "Conversations With Tom Stewart" April 16-27, 2001 on a new theme: Managing in Real Time. These articles were published in the April - June, 2000 issues of Fortune and are presented here with permission.

• It's 10 p.m. Do You Know Where Your Business Is?
• Three Rules for Managing In The Real-Time Economy
• How Cisco and Alcoa Make Real Time Work
  

It's 10 p.m. Do You Know Where Your Business Is?
By Thomas A. Stewart

"We fly an airplane that can't ever land," says Phillip Harris. West Pointer Harris is the CEO of PJM Interconnection, a little known company with a big job - managing the electrical grid for the Middle Atlantic states. From a bomb-hardened underground control room in Valley Forge, Pa., PJM dispatches electricity over 8,000 miles of high voltage lines, "balancing the grid" through heat waves, lightning strikes, blizzards, and other events. PJM coordinates 540 generating units (owned by utilities and other power producers), with a capacity of 58,000 megawatts - the third-biggest operation of its kind in the world, after Electricite de France and Tokyo Electric. PJM also conducts the markets in which this power is sold; they include a monthly market for transmission rights (a hedging market) and daily and hourly markets in which PJM chooses among producers according to the prices they ask. Prices swing radically, typically in summer from as low as $5 per megawatt hour at 3 a.m. to $45 at 3 p.m. Negative prices have been recorded, where a generator pays someone to take its power rather than shut down; and in the Midwest prices have spiked as high as $7,000 per megawatt hour.

PJM Interconnection is a splendid example of a phenomenon that will change management utterly: a company that does business in real time. Operating in real time means more than keeping the cash register open 24 hours a day, seven days a week - anyone can do that. Real time means being actively engaged with customers and suppliers - dealing, deciding, learning - at whatever level is necessary, at any time. It means operating according to the here-and-now of the market, not according to a forecast, budget, or plan; building to order, not to stock; making decisions in the fray, not in the staff meeting; never stopping, even if something goes wrong.

There have always been a few real-time organizations, like air traffic
controllers and big-city police forces. And all organizationsoperate partly in real time: pouring molten steel, buying and selling stock, or producing live television. But large businesses in real time, all the time - that's new, and it's spreading faster than red wine spilled on a white shirt. Says Gerhard Schulmeyer, CEO of U.S. operations for Siemens Corp.: "Our biggest pitfall is that we go offline and make plans. The customer is online, and he doesn't care about your plan. He wants what he wants now, and is always one click away from your competitor."

Real time is the consequence of four trends. First is the appearance of truly global corporations - not just companies with globe-girdling branch offices but companies that make important decisions and serious money around the world, which means around the clock. Second, "regular business hours" have steadily lengthened. Not long ago New Yorkers relied on the corner liquor store to cash checks after 3 p.m. and on Saturdays, and on Wednesday afternoons German shops shut like frightened oysters. Now I'm cranky if I call an 800 number at midnight and am told to call back after breakfast.

The rise of the World Wide Web, a third trend, enriches and transforms the 24/7 experience. On the Web I can interact as well as transact. I can slap the racks and comparison shop; I can give and get feedback; I can be inside your company, not just talking to a sales clerk.

Trend four: The increasing speed of computers speeds up everything they are used for, including business processes. Call that the Basic Law of Business Acceleration. Batch processes become work flows. Compare today's e-mail with yesterday's outbox full of memos, which the mailroom collected, sorted, and delivered - a 24-hour process, even if the recipient was next door. It takes less time to get credit approved than to get your shoes shined. Says Richard Schroate, head of Executive Insights, which advises CEOs and chairmen on business and technology strategy: "Companies aren't just choosing to operate in real time. Physics forces them to."

When these trends intersect, you are closing in on real time. Many functions - purchasing, distribution, working-capital management - are nearly there.

The whole business is there when it can pass three tests. First, you produce in response to actual demand. Electricity is an almost mystical example of a "derived demand" product: The power that makes a light bulb glow literally doesn't exist till you flip the switch, and vanishes when you turn it off. Says PJM's Harris: "There is never any inventory; electricity is instantaneously produced and consumed; you don't buy it to put on a shelf." Dell's business model is based on derived demand; your new Dell computer comes into being only after (usually just two hours after) you buy it. Carmakers are moving this way. Commercial fishermen have asked PJM for advice on setting up a real-time market so that they can sell their product as it's caught, while still at sea. It can't be catch-to-order - the International Brotherhood of Fishes is ornery that way - but it's possible to imagine a crew changing course, changing equipment, staying out longer or coming home sooner in response to market signals, instead of catch-as catch-can.

Second, a real-time business depends absolutely on absolute reliability. "If we make a mistake, we shut down the East Coast," says Harris. "If we have a problem, we can't stand down - we have to fix it on the fly." There's no inventory buffer: The downside of lean manufacturing -where materials arrive just in time - is increased vulnerability to interruptions, for example, from work stoppages. There's no time buffer either: Decisions must be right, because you make them with the customer, not when you get back to the office.

Last, a real real-time business connects that way to the outside world, not just intramurally. Says Saj-nicole Joni, CEO of business advisers Cambridge International Group and a member of several dot-com boards: "You need real-time audit and feedback structures - financial, customer satisfaction, news about what's happening." It also means responding to the world with both decisions and resources in an effortlessly opportunistic way.Says Joni: "If you need 24 hours to link and think, you're not real time."

A real-time business isn't your father's Oldsmobile - and you drive it differently too.

© Time Inc.
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Three Rules for Managing in The Real-Time Economy

In the beginning is the plan: That's how most businesses run. We make budgets, forecasts, schedules. We draw a value chain that goes from left to right in what looks like chronological order: First buy stuff, then do stuff, then sell stuff. Time, in a business like this, is something we manage.

To operate a business in real time is completely different, both logically and chronologically. For a real-time business, in the beginning is the signal: Out in the market a cricket rubs its legs together, and the company jumps. Stephan Haeckel, a strategist at IBM, describes the> difference between managed-time and real-time businesses (which he calls "sense-and-respond organizations") this way: Traditional organizations run like buses, with routes to follow and schedules to meet; real-time organizations are taxis, responding to a waving arm or a voice crackling on a two-way radio.

Like it or not, more and more businesses must operate in real time, whipped that way by globalization, the relentlessly increasing speed of technology, and an economy of knowledge-intensive services, created and consumed on the spot. Customers expect you at their convenience, not yours. If you're not ready, someone else is.

Drop by Onvia.com, a newly public company based in Seattle that operates an online marketplace with more than 31,500 registered sellers. Here small businesses can purchase everything from computers and furniture to debt collection and Web-page design. Put in a "request for quote" on, say, a $2 million property-insurance policy, fill in some details about what's to be insured, specify whether you want ten or 15 bids, and click "submit." Odds are you'll have your quotes within the hour; for a Web page design, you'll have quotes in just 20 minutes. If some companies can't respond that fast, tough noogies. Says Onvia.com's founder and president, Glenn Ballman, 28: "The marketplace of the future will be like this- minute-to-minute, second-to-second transactions."

This new game has new rules, and the new rules will change how you manage. What are they? Here are three, courtesy of Phillip Harris, CEO of PJM Interconnection, which manages the electric grid for the Middle Atlantic States.

• Decisions that used to be made internally are made with and by outsiders--customers or the market as a whole. Real-time interaction is more than a 24-hour switchboard: It means sharing information and decision-making in ways you've never done before.

Customers track their packages through the FedEx and UPS systems. GE Power Systems goes further: Buyers of its turbines not only help write the specs but can, from their Web browsers, actually watch their machines being built. Customers decided how Onvia.com stocks its virtual shelves. Says Ballman: "Most companies start with a product, and the customer is a byproduct. We started with a customer base--accounts with small businesses--and surrounded them with products and services they asked for." And why not? Says Chris Locke, co-author of The Cluetrain Manifesto: "Real-time, emergent markets literally don't exist until some voice, like the Magic Flute, pipes them out of the ether. In real time, the question becomes what it always should have been--not how do we package what we've made, but what should we make?"

• The more choices people get, the more choices they want. You can't - must not - be all things to all customers. But when buyers get choices, they will start choosing - and sometimes choose to change. That's called volatility, and it's built into a real-time marketplace.

Consequently, exchanging information is a fundamental transaction, more valuable even than exchanging cash. Empowered customers insist on knowing what's going on. PJM used to post the price and demand for electricity (which vary dramatically) every 15 minutes. Now buyers and sellers want the dope - and get it - every three seconds. Onvia.com tells participants about prices and liquidity in its markets - the Northwest, for example, is currently a sellers' market for public relations services - and displays live information on a "wall of data" suspended above the room where employees work. Says Ballman: "Our philosophy is to feed real-time information back to participants: how many requests-for-quote are waiting, whether prices are up or down, how the last seven days compare to the average." Some of that is on the wall of data now; more is on its way.

Why open the kimono on information companies usually keep under wraps? There is a cost - information is power, and you're giving some up - but in return you get higher, more valuable knowledge: You can watch the market from the catbird seat, knowing what's hot and not. Remember: The volatility is baked in. Advantage comes from seeing first and moving fastest. That requires unprecedented openness. On Feb. 3, when Ford gave free computers and bargain Internet access to all its employees, CEO Jacques Nasser said one reason was "to make sure our employees - every one of us - are connected to what's going on in the marketplace so that we know where consumers are heading."

• Time is present time, and distance is zero. Whatever the customer wants, he wants it here now. Says Harris: "Present time is what I have to deliver. Real time is what I have to manage." What he means: A customer might not want your service all the time, but he might want it at any time; therefore you have to be ready all the time. Eyes and ears are a start; authority is next and harder.

A friend e-mailed me on a recent holiday weekend: "AmEx just pissed me off. I need some computers immediately, so I used my AmEx platinum. It didn't get approved because it was outside my normal spending habits. I called them up and yelled at them. They can only approve it when they can confirm I have the funds in my bank. While I was talking I checked my account on the Web, and I could see that I have the funds, but AmEx can only confirm stuff over the phone and Union Bank is closed until Tuesday. AmEx also won't let me talk to anyone in charge until at least Tuesday."

The last sentence is the key one: Everyone in authority was out. A real time business needs real, radical empowerment - empowerment that puts both intelligence and power wherever the organization touches the marketplace. Usually companies link authority to position: The higher up you are, the bigger the sum you can sign off for. Wrong idea, Harvard Business School professor Quinn Mills told me once. The question is, "How fast does the customer need an answer?"

© Time Inc.
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How Cisco and Alcoa Make Real Time Work

In 1999, Alcoa reduced inventories by more than a quarter of a billion dollars while increasing sales by just under $1 billion. Credit goes to the Alcoa Business System, an adaptation of Toyota's production methods that will take more than $1.1 billion out of the aluminum maker's cost base. A big piece of it: getting Alcoa, as much as possible, to operate in real time.

Most of a continent away from this paragon of the old economy is the new economy's premier company, Cisco Systems. Cisco shipped its first products in 1986, 100 years after Charles Martin Hall invented a way to make aluminum and went looking for the backers who founded Alcoa. Cisco's management of working capital has been as exemplary as Alcoa's - its ratio of sales to working capital jumped from three to one in 1997 to seven to one in 1999 - and in part for the same reason: a commitment to manage the company on a real-time basis.

Managing in real time - making decisions now, on the basis of accurate, live information; eliminating filters and emptying catch basins for information and resources; producing to actual demand rather than to forecast or budget - is changing how business works. Alcoa and Cisco - whose stocks last year rose 126% and 131%, respectively - show the awesome results. Says Richard Schroate, head of Executive Insights, a strategy advisor to top management: "You can put all your assets to their highest and best use" as real-time information lets you get more out of everything the information touches. (Real-time companies also make decisions differently. We'll look at that next time.)

Alcoa, already the aluminum industry's cost leader, began rolling out its new manufacturing methods in 1998, aiming to cut costs and improve responsiveness. "We were ill prepared to meet customers' needs," says executive vice president P. Keith Turnbull, who leads the effort. "We'd ship out of a pile of dead stuff" - inventory - "and if we didn't have what the customer wanted, we'd make the pile bigger." Inventories are a hedge against inefficiency, your own or that of your supplier or customer. Alcoa CEO Alain Belda calls them "monuments to incompetence."

Managing in real time is central to Alcoa's process. First, it's how Alcoa fixes plants: As at Toyota, any worker who has any problem a machine out of kilter, a product defect or has an idea pulls a cord summoning a leader, with the aim of fixing the problem or implementing the idea then and there. One problem, one cause, one time, at once that's how the plant gets better, rather than by batching tasks off to engineers. Second, inside the plants, real demand dictates production as much as possible; that is, a worker upstream responds to live "pull" signals from workers downstream deally workers he can actually see. Says Turnbull: "Workers need to have the authority to buy and sell. Joe says to Marie, 'I need three extrusions by such and such a time'; Marie says yes or no; then she in turn buys what she needs."

The results show up all over the company. A plant in Sorocaba, Brazil, turns its inventory 60 times a year. A Hernando, Miss., extrusion plant, a money loser when it was acquired in 1998, delivers custom orders in two days (vs. three weeks previously) and makes money. In Portland, Australia, producing molten metal to real-time demand from an adjacent ingot mill raised asset utilization so much that the plant eliminated ten of 24 vacuum crucibles, saving about $60 million a year. All this $832 million so far, toward the $1.1 billion target has taken just over two years. Real time flies.

Cisco's manufacturing couldn't be more different or more similar. Alcoa is asset-intensive; Cisco isn't. Alcoa owns 228 plants; Cisco uses 36, of which it owns but two. One of them is downstairs from the San Jose office of Randy Pond, senior vice president for operations. The rest belong to top contract manufacturers like Jabil Circuit and Solectron. It's "virtual manufacturing," Pond says, made possible by "a suite of tools and processes that lets me manage an extended enterprise I don't own as if I do own it."

The key, says Pond, is "real-time data on a real-time basis so my partners know what goes on in my business every single day." As much as possible, Cisco and a partner work with the same stream of information doubling its value. Every day Cisco compiles its inventory, forecast for each model, order backlog, and 13 weeks of daily data about parts and subassemblies; every day its partner compiles data on in-process inventory, cycle time by process step, optimal lot size, and yield; every night computers combine the data streams, like the Rio Negro and the Rio Solimoes, into an Amazon of information; every morning everyone knows what to build that day.

Cisco works the other end of the process selling the same way. Eighty-seven percent of Cisco's sales are entered directly from the Net and available instantaneously. Except for commodity parts, Cisco's supply chain is as visible and as live as bombs over Baghdad.

Validation and testing are also online and real-time. Autotest, a home-made tool, tests machines as they are built and won't print a packing label for a machine unless every test has been done and passed. Another tool checks a customer's order as he enters it, to make sure that he hasn't asked for incompatible gear the high-tech equivalent of ordering queen-sized sheets for a king-sized bed.

The benefits add up to about $400 million a year, by Pond's reckoning, plus up to a $1 billion saving in capital costs from equipment Cisco doesn't carry on its books, improved utilization by suppliers, minimal inventory. Says Pond: "With true demand signals we remove the whipsaws, and suppliers schedule better."

Every time you increase the number of real-time processes, you add difficulty but multiply benefit. The biggest pains and gains come from connecting to markets in real time. Says Alcoa's Belda: "We are saving $1.1 billion internally. We will get a multiple of that when we integrate our customers." It's a huge challenge. It means integrating systems; it requires deep trust; it demands near-perfect reliability from both buyer and seller. Says Belda: "Now we will work with Ford and Boeing and other customers to take our system all the way from ingot casting to the hood of a car or the skin of an airplane. We want to watch a plane coming down Boeing's line and be there just ahead of it."

© Time Inc.
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