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The directors of a company engaged in the execution of technical projects worldwide were in for a shock. ‘Devil takes the hindmost,' exclaimed the head of the commissioning team assigned to the customer site. It was always the team that performed the last act at the customer site that had to face all the ‘music.' The cumulative effect of all the omissions and commissions made by the managers ‘upstream' culminated in the team at the ‘tail end' to suffer.
Somewhat perplexed, by the terminologies of ‘upstream and tail end,' the board members wished to be educated on the new vocabulary being tried on them.
To illustrate the subject, the project team shared the data on the progressive erosion of profits at every one of the eight stages each of the projects pass through (Graph).
How the data connect
Order acceptance: The policy of the company is to accept order only when there is a clear profit margin of 35 per cent. Yet under pressures of various kinds, sales team would never be able to negotiate anything more than 25 per cent.
Estimation errors of 2 per cent are allowed whereas they may consume 4 per cent, eroding the margins by an other 200 basis points.
Contracting: A provision of 3 per cent is made for accommodating extra works that may need to be given away for free as a good will gesture.
Deployment: Another 3 per cent margin is lost when the designs are tailored to fit the ‘ground realities' at the project site.
Project management: Cost overruns by the project team vary between two and three per cent.
Customer order acceptance: While in theory there should be no surprises, customers always tend to shave off about 7 per cent for causing delays and rework for them that the company would be in no position to contest.
Guarantee & warranty: Additionally about 3 per cent is withheld for meeting warranties.
Recovery, recycle & disposal: Finally the project team is advised to clear the site at its cost and dispose off all the excess material lying at site by auction at throwaway prices.
The directors now understood the meaning of ‘Upstream management.' Unless the company tightened up its practices to obviate the deviations at each of the stages, it will be left forever to keep the dog from shaking by holding on to the tail.
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