Korean writing practice through “Picture Story Writing”

Koen speaks...

A great method of learning and remember new vocabulary words and grammar structures for people with terrible memory

For the past couple of months I have been concentrating my time and efforts towards some Korean writing practice. Of course I am still continuing my listening exercises and word memorization (through dramas and others) on my free time. But I have been making conscious efforts to do some free writing practice in Korean as well. So this week, I have started a great new method of practising Korean writing, which is “Picture story writing”. This was actually one of my Korean friends :시지원, Jiwon Shin’s idea (another good friend I met on the language exchange app HelloTalk). I am really grateful for her for her simple yet fantastic idea. It is perhaps the simplest exercise that has always been there. But it is really effective, especially for a…

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12 things that language learners do or feel

Koen speaks...

(Language learners who are completely into the language they are learning)


  1. You try to translate everything you read, hear or even think into your target language.(Street signs, book titles, article titles you see in newspapers, magazines, song lyrics you hear, daily exclamations, greetings and brief thoughts like “Oh my god!”, “Damn it!, “Thank you”, “Sorry”, etc. Just the short ones because longer sentences need too much work and you either don’t have enough time and energy to translate them or you are just too lazy to do it right now.

  • You get super aware of the foreigners in your neighbourhood or any place you go. It’s like you grow this new receiver antenna that scans your surrounding and picks up the language you are learning. If you’re learning an Asian language, you get super alert of any Asian tourist (And Man! It is not easy telling Asians apart…
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    Risk Analysis Chapter 13 Presentation

    Risk Analysis Chapter 13 Presentation

    This is a presentation of Chapter 13 Risk Analysis based on the textbook written by Allen, Doherty, Mansfield and Weigelt.

    The contents are:

    Risk and Probability
    Probability Distributions and Expected Value
    Comparisons of Expected Profit
    Road Map to Decision
    The Expected Value of Perfect Information
    Measuring Attitudes towards risk
    The Standard Deviation and Coefficient of Variation Measures of Risk
    Certainty Equivalence
     

    CASE REVIEW “ENRON: The Smartest Guys in the Room”

     INTRODUCTION and BRIEF HISTORY

                This study guide presents the case of Enron Corporation, a major American energy trading company that went bankrupt in December 2, 2001 owing to the breaking out of its huge financial and accounting fraud scandal. It is one of the most notorious examples of willful corporate fraud and wrong corporate governance. Popularly known as the “Enron Scandal”, this scandal is recorded as one of the largest business scandals and bankruptcy in American history. The entire story of how Enron Corporation, one of the world’s major energy giant, collapsed is beautifully portrayed in the 2005 documentary film called “The Smartest Guys in the Room” which is based on the best-selling 2003 book of the same name, written by Fortune reporters Bethany Mclean and Peter Elkind. This film shows how the top management, especially the Founder and Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andrew Fastow, through their blind power of greed and faulty organizational culture led to the unfortunate downfall of Enron and resulted in the criminal trials for many executives including themselves. It also played a significant role for the enactment of a revolutionary legislation called Sarbanes-Oxley Act of 2002(SOX) especially designed to prevent similar corporate failures and accounting scandals.

                Enron Corporation was founded and established by Kenneth Lay (or Ken Lay) in 1985. Prior to its downfall, Enron was known as one of the top gas/energy companies of America. In fact it was named by Fortune as “America’s Most Innovative Company” for six consecutive years. It was considered as a chief blue chip stock investment company as it enjoyed high stock positions and market capitalizations for years till its ruin in the late 2001. The first time that anyone raised a question to the accuracy of its financial condition was a Fortune article entitled “Is Enron Overpriced?” written by Bethany Mclean. It was since then that the downfall of Enron started to take shape.

    CAUSES OF DOWNFALL

                The main cause for Enron’s failure is the wrongful and fraudulent intent of the top management to deceive its shareholders, employees and other stakeholders and look out for their personal well-being. But in addition to this, from the analysis of this case and the events preceding the declaration of bankruptcy by Enron in December 2001, we can conclude that the following were the principal reasons for downfall of such a successful corporate giant:

    •   Deceptive Accounting and Finance Strategies and Faulty Financial Reporting
    •   Defective Corporate Governance
    •                Organizational Culture
    •                Employee Appraisal and Compensation System
    •                Organizational System
    •                Leadership Style
    •  Role of Audit: Arthur Anderson(AA)

     

      Deceptive Accounting and Finance Strategies and Faulty Financial Reporting

                The main cause for Enron’s downfall were its deceptive financial statements that were deliberately designed to show it profitable even when it had millions of dollars in debt and losses. They were presented in such a way that they deceive and bewilder their readers and hide the actual cash flow, profit and financial position of the company. The masterminds behind this were Jeffrey Skilling and Andrew Fastow, who used such accounting vehicles which would misinform and mislead anyone who tries to read Enron’s financial statements. TWO such primary accounting vehicles used by Enron were:

    • Mark-to-market Accounting: Enron used the Mark-to-market Accounting system for account-keeping and reporting with the help of which its financial statements were deliberately made very complex and not easily understandable. This is an accounting system which allows its expected future earnings, unrealized earnings to be included in the current earnings whether such future projects would be successful or unsuccessful in the future. But Enron exploited this opportunity and projected illusive large profits in its statements by including such unrealized gains as its current earnings. A lot of manipulation was done in this regard under the Mark-to-market accounting model to deceive the stakeholders.
    • Special Purpose Entities (SPEs): Another accounting vehicle and this time the genius work of CFO Fastow, was the use of Special Purpose Entities (SPEs) to hide Enron’s debt and improve its debt-to-equity ratio. Fastow received about $30 million payments for managing these SPEs.

       Defective Corporate Governance

    Another major reason why Enron managed to enjoy years of successful deceiving and cheating was its practice of defective corporate governance. Basically, Corporate Governance entails the system of rules, regulations, practices and processes by which a company is directed and controlled by the means of internal control and external cross-examination(audit) to ensure balance, fairness, accountability for the protection of interests of all the concerned stakeholders. But the corporate governance practiced in Enron was very far from the very definition of Corporate Governance.

     Enron was infected with dysfunctional organizational culture, highly competitive, unhealthy compensation and appraisal system, defective organizational system wrapped around the stock-position as its key goal and cult-like leadership style. These factors are explained in detail as follows:

    • Organizational Culture: Anyone who has studied about Enron’s history, practices and particularly this case can say for sure that one key contributing factor to its demise was its macho, aggressive and “superior-complex”-oriented organizational culture that developed in Enron over the years. With Jeffrey Skilling the aggressive genius as the leader figure, Enron followed a culture wherein all its employees were groomed to feel that they were smarter and better than others and that they could do anything they wanted without any sense of accountability and responsibility to the shareholders or investors. They were selfish, highly concentrated on short-term earnings and were supposed to hush about or even help hide whatever wrongdoings by the top management that they noticed.
    • Employee Compensation and Appraisal System: One very interesting fact that the readers of this case would notice, is the unique Employee Compensation and Appraisal System Enron followed, which inherently, was supposed to design and retain its most valuable employees but which turned out to make employees obsessed with short-term earnings and personal growth in the company at the expense of company’s losses. Enron followed an “up or out” appraisal system where every year the bottom 10% performers were fired automatically; and those who performed well were showered with unprecedented financial rewards seen nowhere in the industry. The rewards were so extravagant that it lured all employees towards following its dysfunctional culture.
    • Organizational System: Another cause for Enron’s ruin can be attributed to its organizational system which revolved around the company’s stock price. The stock price was the key metric and all its decisions were made on the basis of the stock price and it did work momentarily as Enron became the “darling” of Wall Street as this case refers to it, but all to fail in the end.
    • Leadership Style: Skilling followed a cult-like leadership style and was almost viewed with cult-like status. He was a macho, aggressive and exceptionally smart and he liked and hired people like himself. It was under his leadership that the devastating culture developed in Enron.

       Role of Arthur Anderson(AA)

    Enron was the biggest loser in this entire scandal but one another party suffering similar if not the same fate was Arthur Anderson (AA) which was Enron’s key audit firm. After the Enron scandal broke out, it let to immediate dissolution of Arthur Anderson as well which until then was one of the five largest audit and accountancy partnerships in the world. Arthur Anderson signed off on the misleading financial statements of Enron thus being an accomplice in the crime. It is believed to be blindsided by Enron’s immense audit fees amounting to $1 million per week and promises of future lucrative consulting business. Moreover, the fact that AA tried to cover up and destroyed almost all documents related to Enron clearly indicated that it was at great fault, hence leading to its ruin as well. It presents a classic example of corporate lobbying too.

    THE PARTIES TO BLAME

                “Who is to blame? Who allowed this to happen?” is the first question that comes to our mind when we read this case? Well the answer to this question is as follows:

      Primary Players: The first party at blame here is the top management including the infamous three (Lay, Skilling and Fastow), its board of directors and audit committee (which included some very well-respected accounting experts). The role of the audit committee is that it met only few times a year and often lacked the technical expertise to question the auditors and also huge amount of salary, attendance fees, stock options and dividends they received puts a question mark on their intent as well.

      Secondary Players: The secondary players at blame Enron’s external auditors Arthur Anderson, its lawyers Vincent & Elkins, the federal government especially the Federal Energy Regulatory Commission(FERC)( which was chaired by Pat Wood,  who is believed to be a close associate of Lay) and several key middle level managers.

      Tertiary Players: The tertiary players at blame include several other employees at Enron who knew about the wrongdoings but who opted to keep quiet and do nothing about it perhaps due to greed, compliance, fear of losing their jobs or simply due to their arrogance. We should also note the role of Wall Street, the investment banks and the market. It was later found that several investment banks were involved in Enron’s SPEs.

    CONSEQUENCES AND AFTERMATH

                The consequence of the Enron Scandal is well-known- the bankruptcy of Enron, dissolution of AA, Criminal trials and charging of the key players, loss of millions of dollars to the shareholders and employees, and the enactment of Sarbanes-Oxley Act of 2002(SOX).

      Enron: Enron was declared bankrupt on December 2, 2001.

      Enron Employees and Shareholders: The shareholders and employees lost billions of dollars due to the fraud. The shareholders lost due to huge decline in stock prices and employees due to their pension plans. But the shareholders got a $7.2 million settlement collected from settlements with various other parties.

      Kenneth Lay, Jeffrey Skilling and Andrew Fastow: Ken Lay resigned on January 23, 2002. He was charged and found guilty on 10 counts. He was supposed to serve 5 to 10 years for each count but he died on July 5, 2006 awaiting sentence. Jeffrey Skilling resigned on august 14, 2001. He was charged and found guilty on 28 counts, fined $45 million and sentenced to 24 years behind bars. He is serving his term now and is scheduled for release on February 2028. Andrew Fastow, although indicted on 78 counts on fraud, money laundering and conspiracy, pled guilty to only 2 counts and agreed to a 10-year sentence. Later on September 2006, he was sentenced to 6 years plus 2-years probation in a low-security prison.

      Arthur Anderson: AA was convicted of obstruction of justice for destroying documents to its audit to Enron on June 15, 2002. On August 31, 2002 it surrendered its licenses and rights to practice.

      Sarbanes-Oxley Act of 2002(SOX): Because of the Enron Bankruptcy scandal and later WorldCom Scandal, a new US legislation was enacted called Sarbanes-Oxley Act of 2002(SOX) on July 30, 2002 to provide better means, standards and regulatory practices to prevent similar accounting frauds and misconduct.

    Multi-Attribute Model-Pumpo Pump Company- Brown Gibson Model

    The Brown-Gibson Model at Pumpo Pump

    The Pumpo Pump Company is currently located in the industrial district of a large city, and several problems have led to the decision to relocate. First and most important, the present site is old and inefficient, and there is no room left for easy expansion. A contributing factor is high labor rates, which translate almost directly into high labor costs in the product.

    The company has been able to operate with an independent union and the president feels that relationships have been excellent. Recently, there has been a great deal of pressure for the union to affiliate with the Teamsters. Although this is not the main reason for moving, the president hopes that a carefully planned move may avoid future labor problems, which he feels would have an adverse effect on the company. As the search for a new site continues, the president seems to place more and more emphasis on this labor relations factor.

    The search has finally narrowed to four cities, and comparative data are shown in Table 18-14. Objective factor costs that can be measured and that seem to be affected by alternative locations are shown in Table 18-14a. The president is surprised by the range of these costs, city D having costs 1.9 times those of city A.

    Seven subjective factors have been isolated as having importance, and the search has made a preliminary rating of each factor (see Table 14-14b). The first six factors were rated on a scale of “excellent, plentiful, V.Good, good, adequate, or fair.” The seventh factor, union activity, was rated “active, significant, moderate and negligible.”

    When the summary data were presented to the president, he was impressed, but he expressed concern about how to equate the various objective and subjective factors and requested further study. The search staff has decided to use the multi-attribute location model.

    Table 18-14 (a) Objective Factor Costs, Millions of dollars per year

    Objective Factors

    Labor Transportation Real Estate Taxes Fuel State Taxes Electric Power Water Total Objective Factor Costs
    City A

    1.50

    0.60

    0.03

    0.04

    0.02

    0.04

    0.02

    2.25

    City B

    1.60

    0.70

    0.05

    0.06

    0.04

    0.07

    0.03

    2.55

    City C

    1.65

    0.60

    0.60

    0.06

    0.05

    0.05

    0.03

    2.70

    City D

    3.45

    0.50

    0.50

    0.06

    0.08

    0.06

    0.05

    4.30

    Table 18-14 (b) Subjective Factors for four sites for the Pumpo Pump Company

    Subjective Factors

    Labor Supply Type of Labor Attitude Appearance Transportation Recreation Union Activity
    City A

    Adequate

    Good

    Good

    Fair

    Good

    Good

    Significant

    City B

    Plentiful

    Excellent

    V.Good

    Good

    V.Good

    V.Good

    Negligible

    City C

    Plentiful

    Excellent

    V.Good

    Good

    Good

    V.Good

    Negligible

    City D

    Plentiful

    Excellent

    Good

    Good

    V.Good

    V.Good

    Active

     

    1. a.      Compute the objective factor measure (OFM).

    We know that, Objective Factor Measure (OFM) is calculated using the formula:

    OFM=Maximum OFC-OFC/Maximum OFC-Minimum OFC

    Now, for each location (city), the OFM is calculated as follows:

    OFMA=4.30-2.25/4.30-2.25 = 1

    OFMB=4.30-2.55/4.30-2.25 = 0.85

    OFMC=4.30-2.70/4.30-2.25 = 0.78

    OFMD=4.30-4.30/4.30-2.25 = 0

    1. b.     Compute the subjective factor decision weights (SFWk), the relative weights to be assigned to each subjective factor. In order to do this, allocate 100 chips among the subjective factors. The number of chips assigned to a factor reflects the relative importance. The subjective factor decision weight is simply number of chips allocated to the factor divided by 100.

    As we can see that there are seven major subjective factors that affect Pumpo’s decision on the correct location for its factory. These factors include: Labor Supply availability in the location, the type of Labor available there, the attitude of the community living in that location, the overall appearance of the location, the transportation facilities and infrastructure existing there, the recreation facilities  and  finally the level of Union Activity in the location.

    Based on my judgment of the factors, I have allocated the 100 chips as follows:

    S.N

    Subjective Factors

    No of Chips

    Percentage in decimal

    1

    Labor Supply

    20

    0.20

    2

    Type of Labor

    20

    0.20

    3

    Attitude

    15

    0.15

    4

    Appearance

    2

    0.20

    5

    Transportation

    15

    0.15

    6

    Recreation

    3

    0.02

    7

    Union Activity

    25

    0.25

    Total

    100

    1.00

    The explanation for these subjective factor weights is given as follows:

    Here, we can see that one of the most important factors for the president at the moment is Labor relations and avoidance of future labor problems. Hence, while evaluating the subjective factors, the level of union activity, the labor supply, and the quality of the labor i.e. Type of Labor are the three factors that most affect his decision of the location. Therefore, based on my judgment, I have allocated 25, 20 and 20 chips to Level of Union Activity, Labor supply and Type of labor respectively.

    Similarly, since Pumpo is a pump company, the availability and the nature of the transportation infrastructure is also an essential factor for a prospective location. So I have allocated 15. Also, the level of community support and their attitude towards the company is also equally important because the labor (which is the most significant factor) comes from the community itself. Likewise, the community can play a crucial role in many other aspects of the company, for e.g., they are the prospective customers, and many others. So I have allocated 15 chips to the Attitude factor.

    Finally, in my opinion, the appearance of the location and its existing recreational amenities assume the least importance in the decision. Besides, the recreational facilities can even be developed after the site has been set up for the company’s factory. So I have allocated the least chips 2 and 3 for Appearance and Recreation.

    1. c.      Determine site evaluations (SW) for each factor. The determination of site evaluations for each factor requires a rating procedure. Ratings of each site for each subjective factor must be made, one factor at a time. The data rating each factor for each site given in Table 18-14 (b) serve as a guide for the weighting process. The result of this step is a table that gives the site evaluations for each subjective factor; that is a 7 by 4 table of 28 site evaluations.

    The Table 18-14(b) gives us the subjective ratings for each factor. But now we convert these subjective ratings into numerical weights.  I have done this by given the following six weights for the first six factors and four weights for the seventh factor-Union Activity:

    Subjective Ratings

    Weights

    Subjective Ratings

    Weights

    Excellent

    1.00

    Significant

    0.00

    Plentiful

    0-80

    Active

    0.10

    Very Good/V. Good

    0.60

    Moderate

    0.50

    Good

    0.40

    Negligible

    0.95

    Adequate

    0.20

    Fair

    0.00

    The converted Subjective Weight (SW) table or site evaluations are shown as follows:

    Subjective Factors

      Labor Supply Type of Labor Attitude Appearance Transportation Recreation Union Activity
    City A

    0.2

    0.4

    0.4

    0.00

    0.4

    0.4

    0.00

    City B

    0.8

    1.0

    0.6

    0.4

    0.6

    0.6

    0.95

    City C

    0.8

    1.0

    0.6

    0.4

    0.4

    0.6

    0.95

    City D

    0.8

    1.0

    0.4

    0.4

    0.6

    0.6

    0.10

    1. d.     Compute the subjective factor measure (SFM) for each of the four sites using Equation 3. For each site, SFM is the sum of the successive multiplication of the factor weights determined previously by the site evaluations for each factor. For each site, there are seven such multiplications that produce the SFM for that site.
    Labor Supply Type of Labor Attitude Appearance Transportation Recreation Union Activity SFMk= 
    SFW

    0.2

    0.2

    0.15

    0.02

    0.15

    0.03

    0.25

    City A

    0.2

    0.4

    0.4

    0

    0.4

    0.4

    0

    0.252

    City B

    0.8

    1

    0.6

    0.4

    0.6

    0.6

    0.95

    0.8035

    City C

    0.8

    1

    0.6

    0.4

    0.4

    0.6

    0.95

    0.7735

    City D

    0.8

    1

    0.4

    0.4

    0.6

    0.6

    0.1

    0.561

     

    1. e.      Compute the final location measure (LM) for each site. In order to do this, you must decide on the proportion of the decision weight that you wish to place on objective factors. This is a judgmental process, but you should be able to justify why you have chosen a given objective factor decision weight X. Given the selection of a value of X, the final location measures are calculated using Equation 1.   

    Here, Critical Factor Measure (CFM) =1

    Since, the increasing Labor rates and Costs is the main reason for relocating the current plant for the company, the Objective factors (which represent the various costs associated with the location site) is more important than the subjective factors. However, the gap between the weights of subjective and objective factors should not be more because, the management is also looking at the subjective factors. The president is almost equally concerned about subjective matters such as labor relations. Hence, I have given 60% weight to the Objective factors and 40% weight to the Subjective Factors:

    Objective Factor Decision Weight       (X) =60% i.e. 0.60

    Subjective Factor Decision Weight (1-X) =40% i.e. 0.40

    Now, the final Location Measure (LM) is calculated using the following formula:

    LM=CFMi ´ [X ´ OFMi + (1 – X) SFMi]

    Site

    OFM

    SFM

    LM=CFMi ´ [ X ´ OFMi + (1 – X) SFMi]

    City A

    1

    0.252

    0.7008

    City B

    0.85

    0.7835

    0.8314

    City C

    0.78

    0.7435

    0.7774

    City D

    0

    0.541

    0.2244

     

     

    1. f.      How sensitive is the final decision as indicated by the LMs to variation to the objective factor decision weight, X? If the value you have selected for X were to change slightly, would the location selected by the model change?

    The final decision as indicated by the LMs, seems to be insensitive to the variation to the Objective factor decision weight, X. The current Objective factor decision weight (X) of 60% and Subjective factor decision weight (1-X) of 40% gives City B as the most suitable location. But even if we make change the weights slightly, the location selected by the model would not change.

    Now if we change the weights from 60/40 to 65/35, we can see that the decision will remain same, as City B still gives the highest LM (0.8133) as shown in column (iv) of the table given below. Similarly, if we again slightly change the weights from 60/40 to 50/50, the decision remains the same, as again the highest LM is 0.8278 given by City B.

    Even if we make larger change such as 80/20 ratio, the decision will still remain unchanged.

    This clearly shows that the decision is insensitive to the variation in the decision weights. These are shown as:

    Table 1:

    Site

    OFM

    SFM

    X=65%,1-X=35%

    % Change in LM

    % Change in X=(65-60)/60=8.33%Y=(35-40)/40

    =-12.5%

    City A

    1

    0.252

    0.4091

    -41.63

    City B

    0.85

    0.7835

    0.8133

    -2.18

    City C

    0.78

    0.7435

    0.7749

    -0.33

    City D

    0

    0.541

    0.4432

    97.50

    Table 2:

    Site

    OFM

    SFM

    X=50%, 1-X=50%

    % Change in LM

    % Change in X=(50-60)/60=-16.67%Y=(50-40)/40

    =25%

    City A

    1

    0.252

    0.5258

    -24.98

    City B

    0.85

    0.7835

    0.8205

    -1.31

    City C

    0.78

    0.7435

    0.7759

    -0.20

    City D

    0

    0.541

    0.3557

    58.50

    Table 3:

    Site

    OFM

    SFM

    X=80%, 1-X=20%

    % Change in LM

    % Change in X=(80-60)/60=33.33%Y=(20-40)/40

    =-50%

    City A

    1

    0.252

    0.6425

    -8.33

    City B

    0.85

    0.7835

    0.8278

    -0.44

    City C

    0.78

    0.7435

    0.7769

    -0.07

    City D

    0

    0.541

    0.2682

    19.50

    Also, we may note that the reason behind this insensitivity or indifference is the values of OFM and SFM. Because of the various values of OFM and SFM, the LM of City B (and also C) seem to change by only a small percentage (-2.18/5, -1.31% and -0.07% for 65/35, 50/50 an 80/20 ratios respectively, when X is changed by 8.33%, 16.67% and 33.33% respectively. But City A and City D seems to be highly sensitive to these changes.

    Hence the decision remains the same.

    1. g.     Given the results of the multi-attribute model for the Pumpo Pump Company, what decision do you think should be made? Are you satisfied that the model has allowed you to make the necessary trade-offs among objective and subjective factors and that your values (the decision maker’s) have been properly and effectively represented in the trade-off process?

    In the previous sections, we calculated the Location Measure (LM) by using the Brown-Gibson Model or Multi-Attribute Model. Here, we can see that second location i.e. City B has the highest Location Measure (LM) of 0.8314. Therefore, theoretically, City B is the best location for the relocation.

    But, we can see that the LMs of City A and C are closer to that of City B. In such case, we should use the Sensitivity Analysis by changing the weights, as shown in part (f), which reveals that City B is the best location whatever be the weights. So, we now are confirmed that Pumpo Pump Company should choose City B, as its site for the planned relocation.

    Yes, I am satisfied that the model has allowed me to make the necessary trade-offs between the objective and subjective factors. In fact, this is the biggest advantage of this model that it considers both the objective as well as subjective factors. It is a systematic method where it first allows taking into account all subjective and objective factors, and then it allows Subjective Factoring Weighting to evaluate the role of each subjective factor.

    Not only this, while calculating the final location measure, it allows us to allocate our own decision weights to the overall subjective and objective factors (X and 1-X). There can be decisions where the objective factors like the costs may assume more importance than the subjective factors and there may also be cases where subjective factors may be more important. So this method gives us (the decision makers) the freedom to assign proper weights based upon the type of the decision and on our own judgment. For example, in the case of Pumpo Pump Company, the labor costs (i.e. the Objective factor) are the most important aspect. Hence I allocated 60% weight to the Objective factor and 40% to Subjective.  But if I find it fit I can give any weights 50/50, 90/10, 80/20, 30/70, etc that “I find appropriate”. So, this method definitely represents our (decision maker’s) values properly in the evaluation process.

    In addition to this, we are also allowed to give weights to the subjective factors individually by using our judgment, understanding, expertise and experience. So, our values have been properly and effectively represented in the trade off process.

     

    E-Cab Case Solution

    Case Study: E-Cab

    Synopsis

    This case entitled “E-Cab” written by Stuart Chambers presents the scenario of E-Cab, one of the leading manufacturers of customized metal cabinets, which is facing many quality problems in its Operations department at the Lille factory, northern France, and is therefore, attempting to address those issues with the help of two young graduate production engineers-Jean Brasfort and Sara Montenay. E-Cab is a French company that is famous for its “cabs”, the highly tailored metal cabinets and for its wide range of designs and sizes. Of late, E-Cab has successfully managed to grab a huge clientele base with the Cellular Communications Networks, Railway companies and Cable/Satellite Television companies and is consequently, experiencing a rapid growth in its sales and profits. The main reasons for this exponential growth include favourable and rapid growth in the fore-mentioned industries, excellent design, technical support, value adding products and quick response capability of the company.

    However, the company is facing some critical challenges in its in-house manufacturing factory such as the duplication of tasks, scrapped materials, shortages, wasted efforts, large overheads, and failed MRP systems etc, which have raised a huge question mark on the continued success of the company. These issues derive from E-cab’s failure to quality conformance. Hence, the two engineers Brasfort and Montenay were especially appointed by the management to improve the situation. What they did is they carried out extensive studies on the factory, implemented some improvement measures, and presented the key issues facing the company.

    Issues

    The case seems to raise two key issues. These are discussed as follows:

    • The basic issue raised by this case is that the Quality in any manufacturing unit is affected by two major aspects-(1) the physical aspects of the factory like the work specifications, material handling practices, machines and equipments, etc and (2) the human aspects such as the employee attitude towards quality, the level of training and development of employees for achieving quality, etc.
    • The second issue addressed by the case is that Quality is a pervasive function i.e., it is not specific to any particular department or person but rather it should be evident and practised in each and every unit, section, division and by every single person. The failure to do so can cause quality problems like the one described in the case.
    • The third issue is about Management’s role in the overall quality management. The role that the Senior Management ought to play for managing quality is also highlighted in the case, especially from the accounts given by the employees themselves.

    Analysis

     Importance of Quality to E-Cab, given its current growth situation

    E-Cab is currently experiencing a great run of growth with its operating profit increasing by more than 400%, from FFr.14 million in 1992 to FFr.71 million in 1995. In this growth situation, one of the most critical success factors for the company is Quality.

    This is true because one of the three main reasons behind its growth is its current level of value added products that have been accredited to quality standards like ISO 9002 and conformance to all external quality audits. Hence, if the company is to fail behind in its quality level, then this would be a serious blow to its continued success.

    In fact, the Quality concern had never assumed this much importance for the company before, because now it has a huge responsibility to consistently meet and try to exceed its customers’ quality and excellence expectations levels. And the company has realized this. This is evident from CEO Philippe Legrand’s statement addressed to the board “…customers will start to pay more detailed attention to schedule adherence and the quality of what they are getting, so there is will be no room for complacency. We must start raising our productivity throughout the business if we are to survive and prosper.” Not only this, the employees also realize the importance of quality at this particular time of growth. That is why, a whooping 86% of the employees responded that great importance should be placed on quality in the Employee Survey conducted by Brasfort and Montenay.

    In addition to this, quality is of paramount importance particularly now due to following reasons:

    • Quality is one of the key differentiator for E-cab that has contributed to its current growth in the industry.
    • It gives the company competitive advantage against its competitors.
    • Failure to conform to quality can add costs for the company in the forms of defects, scraps, repeated builds, etc, which can drive down its sales and profits. For example, the two month survey done in 1995 reveal that there were a total of 1538 scraps due to scratches(517) and operation omissions(1021) for posts and X Member, which resulted in the Total Scrap Cost of FFr.185080 for the company in just two months.
    • Failure to conform to quality standards and expectations can lead to massive rejection by the customers.
    • Quality is one sure shot way towards continuous growth of the company as customers now want not only quality products but quality service as well.

     Underlying Causes of the Quality Problems

    E-cab is suffering from many quality problems in its Operations Department such as defective cabs, reworks, scraps due to scratching, dents, damaged paints, un-fitting doors, missing holes, holes punched out of place or too long or short, etc.

    The major underlying causes for these quality problems are explained as follows:

    • Faulty Components and Bad Suppliers: The root cause of all quality problems in E-cab is the poor quality parts and components and bad choice of suppliers by the management. From the comments of various employees, we can see that each department blames the immediately previous department for poor quality but the starting point of all these departments is definitely the Suppliers. The management has chosen the cheapest but poor supplier who provides not only damaged parts but also cause frequent delays in delivery. This is the main reason for all subsequent scraps and problems in the cabinet production.
    • Bad Subcontractors: Similarly, the Alocrom subcontractors are a big problem too. They often supply bad Alocrom finish with certain untreated parts of the extrusions which leads to quality problems like paints falling off. Not only this they also have a very careless attitude.
    • Attitude of Management: The chief culprits for the quality problems are the Senior Management and their aggressive style of management. The management’s attitude and efforts towards quality have been poor. Although in theory they say quality is important but they haven’t provided the necessary infrastructures for high quality performance. For e.g. they are saving money by appointing bad suppliers at the expense of poor parts and components. Not only this they do not handle employee complaints. For e.g. they have not repaired the worn out tools like torque wrench. They also do not acknowledge the employees.
    • Lack of Statistical Process Control (SPC): E-cab lacks the basic quality control tool i.e. the SPC as rightly pointed out by Quentin Latour from Mechanical Assembly.
    • Lack of Proper Quality Standards and Miscommunication of the same: Another major reason why even bad cabs are passed onto customers is that there is no proper quality standards and tolerance levels for defects or design dimensions to guide inspectors as well as employees to make decisions regarding whether to accept or reject a cab. Moreover, there aren’t clear build instructions and the ones that exist are very ambiguous. So employees didn’t understand the level of quality such as the position, depth and length of scratches that were acceptable and that were unacceptable.
    • Lack of proper tools and machines: E-cab also lacks efficiently operating tools and machines. It has worn out machines which cannot provide the stipulated dimensional tolerances on new designs. So this has led to poorly designed cabs. In addition the worn out tools are not repaired or replaced when requested.
    • Lack of proper Training: 73% of the respondents of the Employee Survey said that their training was below average and poor. This shows that the majority of the employees lack the necessary knowledge to perform their task without making mistakes. Often employees were given simple demonstration of their work by more experienced workers, which is not a training actually. So these untrained employees as well as many new and temporary staff, who don’t even know which spanners and screwdrivers to use cause quality problems.
    • Productivity Vs Quality: Output pressure: With the rapid growth, the company is putting a lot a pressure on the employees to increase their output (by 25%). So there is a lot of output pressure and rush in the factory. This has made all employees productivity-oriented rather than quality-oriented. They “don’t have the time” to be concerned about quality of their work.

     

     Management Actions to the Problems

    It is not that the Management does not see the multiple problems that have been sprouting up in the Lille factory. The management does realize these problems. That is why the new VP of Operations-Pierre Dumas, has appointed a new and experienced Materials Manager and Jean and Sara to come up with improvement strategies. Thus, with the help of this team, the management has undertaken the following actions to counter the quality and other problems:

    • Firstly, In order to solve the problems caused by lack of proper quality standards, Jean prepared a Quality Standard Board for the Mechanical Assembly Area, which used physical components and photographs to show the assemblers what were the acceptable standards of finish. These standards served as guides to isolate the posts and cross members that were below these standards for further testing.
    • Secondly, he also conducted Analysis of cross members faults through random sampling and testing at four check points (four components every hour): Saw, Pierce, Drill and Mechanical Assembly, to identify the chief problem areas for scratches.
    • Next, they took preventive measures for avoiding scratches such as:
      • Designing of Jigs to prevent extrusion-metal taule contact
      • Removal of Swarf to avoid scratching
      • Designing of special tubular plastic carriers for protection of components

    (All these significantly reduced the scratches).

    • The management also improved the MRP system which is expected to be used soon.
    • Sara conducted Employee studies to reveal the various key issues regarding the company. She then implemented the first Improvement team starting at the Nokia Cell, with members from different departments to identify and solve problems.
    • She also devised and ran training programme with the Improvement team and trained the employees regarding the basic quality concepts as well as taught them some problem solving techniques such as: brainstorming, cause and effect analysis, SPC charting and preparation of simple graphs.
    • In addition to these, the management has made outline project plans for a many activities such as capacity planning, de-bottlenecking, the introduction of kanban control, inventory planning and facilities layout.

    In our opinion, the actions that are being taken by the management to overcome these problems are not sufficient to create lasting improvements, but we do acknowledge that it’s a good start. E-cab still has a long way to go. The company should first eliminate the root cause-i.e. supplier. It should choose a better supplier, which we believe will solve half of the problem in itself. In addition to this, the management should implement the project plans that it has outlined efficiently. Then only, this may have a lasting impact. But still we restate that it has a long way to go.

     Inspectors: Recruiting and/or Training?

    Most of the departments identified Inspection as the as the main problem area. With the rapid growth in the industry and increment in the production levels of the factory, the current quality inspectors have been overburdened. As per the final inspectors, they don’t have enough time to properly inspect the piles of cabinets and they are taking shortcuts due to too rush to get the products out of the gate to the customers. This illustrates the need for either recruiting more inspectors, two more (as proposed by Charlotte Lorcy, final inspector) and/or training them, because faulty cabs are going to the customers even after inspection. Not only this, as indicated by Francoise Alon from Electronic sub-assemblies who has 15-years experience in the field, “there just aren’t enough qualified inspectors” in E-cab. Hence we think that it is a good idea to recruit one or two inspectors and train the existing four too. This may take the pressure off from the existing inspectors. However, we believe that “taking shortcuts” due to output pressure should not be acceptable. Finally, we think that, if this decision is coupled by decentralization of the product accept/reject decision by management to the final inspectors, then this will really improve the speed and efficiency of the Inspection.

     Other Actions for Quality Improvement

    In addition to the actions that the management has undertaken (explained in earlier section) to improve the quality, the following other actions can taken by the company too:

    • Design and develop a pervasive corporate culture based on Quality at all levels of the organization. Make all employees understand that not only the Quality Department, but each and everyone are responsible for quality, and make them accountable.
    • Develop the culture of “doing things correctly the first time” instead of “redoing it or rebuilding it” because one of the biggest problems in E-cab is rebuilding or rework of the cabs because they are done properly the first time. This has led to unnecessary and wasted effort and costs for all departments.
    • Develop quality standards and proper build instructions for each and every task, job and department just like the Mechanical Assembly and communicate them well to the employees
    • Get good quality parts and components and Alocrom from better suppliers and subcontractors.
    • Train all employees, new and old. Train employees when new designs or new processes are to be used. Bring in external experts if necessary
    • Decentralize product “accept/reject” decision to the Final Quality Inspectors so that they don’t have to wait for long meetings of top management for the same
    • Use control tools like Statistical Process Control completely
    • Repair worn out machines and tools and replace by new ones
    • Change the attitude of management towards employees, i.e. acknowledge the work done by employees. Improve relations with shop floor workers, handle complaints well.
    • Develop a Quality-centred culture instead of productivity-centred culture. Add capacity if needed to meet demand pressures and

    Conclusion

    In conclusion we can say that, E-cab is right now standing at a point of inflection (turning point) from where it can either continue to grow or drop down owing to its quality problems that are threatening to bring it down. So far, the efforts taken by Sara, Jean and the management have made a very little contribution to solving the many problems ingrained at E-Cab’s operations. But few favorable changes have been seen. The management has taken a proactive effort by recognizing the importance of quality but still they have a long way to go. The management still faces some herculean challenges like poor relationship with the shop floor employees who have developed a dangerous “don’t care” attitude. Hence E-cab needs to take some momentous measures as described in the earlier section to permanently overcome these problems and continue with its exponential growth in the industry.