Economic Crisis in Real sector and Quality Approaches

1. Economic Crisis in Real sector and Quality Approaches Bahadır Akın 28th March 2014 Eastern Mediterranean University Famagusta, North Cyprus

2. Definitions of Crisis • Unstable situation which may create risky consequences. • Critical case or decision point which may yield a disastrous situation if not attacked timely and appropriately. • Unstable situation in political, social or economic affairs which portrays abrupt or definite risks.

3. Main Features of Economic Crisis Decreasing funding opportunities and credits Deadlocks in commodity markets due to excess demand Increasing unemployment Falling prices of shares Reduced production, decreasing productivity, excess capacity

4. Impacts of Crisis Financial and Economic Impacts Short term Impacts – Immediately felt Mid/Long term Impacts – Felt in the long term Impacts on Real sector

5. Impacts on the Firm Economics Shrinking Market  Reducing Demand  Excess Supply Surplus of manpower Excess Capacity Payback difficulties Difficulties in collecting the receivables

6. Financial, Economic and other Measures • Layoffs • Reduction of working durations and shifts • Unpaid leaves • Reduction of expenses • Increasing financial and budgetary controls • …

7. Why Quality Approaches are necessary in Crisis? • Are financial, economic and other measures sufficient? • Does economic crisis cause “quality problems” ? Let us think...

8. Kriz ve Çözüm Yaklaşımları Financial and economic measures Financial and Economic impacts Measures to increase productivity – Quality Approaches Impacts on Real sector

9. Two News • Quality approaches do not solve your problems immediately. • Why? ! BAD News • Quality approaches cannot solve your problems immediately.

10. Why? • There is already excess capacity in the economy; and when productivity increases, the capacity surplus will increase further. • Where is the dilemma?

11. Two News GOOD News Quality approaches are useful in the long term. …and… It is better to start NOW..! Because the later, the worse...!

12. Quality Approaches They must be • Continuous, sustainable • Long term (They are not for short-term thinkers and goals).

13. Deming’s Chain Reaction Return on Investment Source: W. E. Deming, Out of the Crisis, 1982

14. How Big is the Room for Improvement ? • Six Sigma methodology • Analysis of Quality Costs Can suggest some good opportunities..!

15. Six Sigma and Poor Quality Costs • Sigma Level and the corresponding magnitude of Poor Quality Costs: 3 Sigma 66,807 ppm 25% of Sales turnover  4 Sigma 6,210 ppm 15% of Sales turnover 5 Sigma 233 ppm 10% of Sales turnover 6 Sigma 3.4 ppm 5% of Sales turnover

16. Firms from Six Sigma Perspective • Where are the firms with respect to Six Sigma? • 2013 Sales turnover of Firm X: abcMTL If a firm is at 4 Sigma level, the poor quality cost is: 0.15xabc Million TL

17. Some Questions? Is there a need for additional • Investment • New capacity • Credits ? When there is such an improvement potential

18. What is Needed? a. Layoffs b. Reduced costs c. Increased productivity d. All e. None

19. What is Needed? • Answer can be “all” as well as “none” • Layoffs • Which functions, how many? • Cost Reduction • Where, how much? In order to find the “right” answers, we need Analysis

20. Why “Analysis” is required? • For “Correct” diagnosis “analysis” is required. Because, • Manpower must be distributed in a fair and balanced way (not necessarily blind layoffs..!) • There must be a sound cost structure; cost adjustments (not necessarily a reduction..!) must be made in the right places in the right amounts.

21. Sales Revenue Total Revenue PROFIT Total Cost Fixed Cost LOSS Sales Quantity Q1 Q2 Breakeven Analysis Desired: Lower Breakeven point

22. Sales Revenue Total Revenue Total Cost (2) PROFIT Toplam maliyet LOSS Q1 Q2 Sales Quantity Breakeven Analysis:Changes in Fixed Costs Total Cost Increase in Fixed Costs  Breakeven point shifts forward Decrease in Fixed Costs Breakeven point shifts backward

23. Total Revenue (2) Sales Revenue Total Revenue PROFIT Total Cost LOSS Q1 Q2 Sales Quantity Breakeven Analysis:Changes in Sales Price Increase in unit sales price  Breakeven point shifts backward Decrease in unit sales price  Breakeven point shifts forward

24. Sales Revenue Total Revenue Total Cost (2) Total Cost PROFIT LOSS Q1 Sales Quantity Q2 Breakeven Analysis:Changes in Variable Costs Increase in Variable Costs  Breakeven point shifts forward Decrease in Variable Costs Breakeven point shifts backward

25. Sales Revenue Total Revenue PROFIT Total Cost Fixed Cost LOSS Sales Quantity Q1 Q2 Breakeven Analysis • Summary • For a lower Breakeven Point • We must achieve at least one of them: • Decreasing Fixed Costs • Decreasing Variable Costs • Increase in unit sales price Which alternative is possible in Crisis?

26. What Management thinks In Reality Desired Best Possible n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n Some remarks regarding “Process” • Eliminate non value-added work & processes… • Do the right things right…

27. Yol Haritası Process Improvement and Productivity Enhancing Program • Determination of Business Model • Identification of Program • Determining Scope and Focusing • Establishing Project Team • Setting up Action Plan and time schedule • Communicating the Program • Executing the Program and following up

28. Determination of Business Model Main Inputs Main Product/Service Suppliers Mission Vision Main Outputs Main Customers External Environment Main Shareholders/Stakeholders

29. Why Business Model is important? • To identify and design process structure • To assess the performance of processes • To identify the inter-process relationships

30. Identification of Program • Assessing business results and inputs • Financial results • Market intelligence • Determination of cost structure • Focusing and Identification • Prioritise areas for improvement • Prioritise processes to be improved • Determination of program scope, goals and indicators

31. Communicating the Program • Communicate the Process Improvement and Productivity Enhancing Program • Senior management must be involved and visible in the communication of the program • Program communication must be • Attractive • Agile • Inspiring • Simple and clear

32. Program Execution and Following up • Continuous monitoring • Evaluation • Corrective actions

33. Some macroeconomic remarks

34. A Glance from Six Sigma Perspective • Where is Turkey standing at Six Sigma Level? • Turkish Gross Domestic Product in 2013 823 billion USD • If Turkey is at 3 Sigma Level • 823 x 25% = 205.8 billion USD

35. Some Questions? Do we need • New investments • Additional capacities • Foreign credits, loans? • …. Where there is such an improvement potential

36. Thank you The information and slides can be quoted and used partially, if the consent of the author is obtained.