The New EA Paradigm (1) Expenses and Assets
I'd like to put some thoughts together about what I think "The New Paradigm" for Enterprise Architecture is. I will break this up into a series of columns that deal with this in terms of such Enterprise Architecture topics as expenses vs. assets, cost justification of Enterprise Architecture, provide-from-stock vs. assemble-to-order strategies, mass-customization of EA, and some cultural implications of this new paradigm.
That said, I first need to set some context for you. I usually use the Toyota illustration to make the New Paradigm point.
The Toyota Illustration
A few years ago, Toyota announced in North America that if you give Toyota the specifications for the automobile you want to take delivery on, they will deliver your automobile, custom to your specifications, in 5 days! Five days is not zero, but it is pretty close to zero as those automobiles these days are pretty complex. When I grew up, I worked on my own car … but when you opened the hood, all that was in there was a four-cylinder block and a carburetor. Today, I will buy a car and drive it until either it or I die … and never open the hood! There is so much stuff in there that I can't even find the dip stick anymore! I can't even change my own oil!
How do you think Toyota is delivering custom cars in five days?
- Do you think they wait until they get your order before they start engineering and manufacturing your car? … Impossible.
- Do you think they have already manufactured every possible car that anyone will ever order and already have them all in inventory and it takes them five days to find the one you want? … Impossible.
They MUST have something in inventory before they get your order … but it is NOT finished goods. It IS parts. But, those parts have to be engineered such that they can be assembled into more than one finished good. How do you engineer parts that can be assembled into more than one finished good? You have to know the total set of finished goods you have to produce at any given point in time. Then, engineer the parts Toyota-wide (Enterprise-wide) so the parts can be assembled into more than one Toyota. Then, they can pre-fabricate the parts and have them in inventory before they get your order. It takes them five days to connect up the parts in your order with the parts in inventory, pick the parts off the shelf, and assemble them into your custom automobile.
Toyota changed the Automobile Manufacturing Industry strategy to an "assemble-to-order" strategy. In fact, they changed the Manufacturing Industry strategy in general to an "assemble-to-order" strategy … because in the Information Age, the customer (every customer) wants a "custom product, mass-produced in quantities of one for immediate delivery." Mass-customization is a pre-requisite for staying in business in the Information Age!
I was in Stockholm at Scania. They manufacture big semi-trailer trucks. They say, "Oohhhh, yeah, we invented all of this stuff!"
I was in Munich at Volkswagen. They also say, "Oohhhh, yeah, we invented all this stuff."
Actually, I think it was the Japanese that changed the concepts of Manufacturing to an assemble-to-order concept. They decided about 35 or 40 years ago that they wanted to own Manufacturing. It took them 35 or 40 years but they own it! If you want to know how to do it, they will tell you. If you want them to build and run your plant, they will do it. They changed the face of Manufacturing. If you want to get into Manufacturing in the Information Age, you are going to embrace "Mass-Customization" because the customer wants what they want when they want it … that is, custom products, mass-produced in quantities of one for immediate delivery!
There is a lot of room for creativity … and I am sure no one Manufacturer knows everything, and therefore I am sure Scania and Volkswagen and every other Manufacturer have invented a lot of stuff … but I think the basic strategy was developed by the Japanese.
Back to the Toyota illustration … now that Toyota has all these parts engineered to be assembled into any Toyota and have pre-fabricated them and have them in inventory before they get any orders … how does Toyota 'cost-justify' those parts? They don't have any orders so there is no revenue. They are not making any money … they are not saving any money in the current accounting period.
In fact, the parts can't be 'cost-justified'. Cost-justification is an expense-based concept. They have created an inventory of assets that can be used, re-used in many implementations in many future accounting periods.
Expenses and Assets
What is the difference between expenses and assets? … how many times you use them. If you use them once, they are expenses. If you use them more than once, they are assets.
Why do you need assets? Assets enable you to do something you otherwise are unable to do. If you want to get into the hotel business … you need an asset, a hotel. If you want to produce custom automobiles on demand, you have to have parts already in inventory that have been engineered to be assembled into many automobiles.
The basic problem is, it is very difficult to put values on assets. The accountants have difficulty putting values on assets. How much is this building worth? Hmmmmm. Has anyone bought a building zoned for the same purpose with the same square footage in a 10-mile radius in the last 15 years? How much was the market willing to pay for it? Or, how many rooms can you rent? Can you rent them out for the same price per square foot as in any building in downtown wherever it is? Can you expect 60% occupancy? 62.1%? 51.5% Do you have to borrow the money? What is the interest rate? What is the prime rate? What is the inflation rate? What is your Internal Rate of Return? This is really complicated!
How much is your house worth? How much was it worth yesterday? How much did you pay for it? What will the market pay tomorrow?
I have a good friend who is a CPA and he told me that the accounting rules prevent the accountants from valuing assets … probably because of these complications and arbitrary assumptions.
All of the illustrations I have used are for tangible assets … what about intangible assets … like intellectual property … or Enterprise Architecture?! (I will develop some more thoughts about the value of Enterprise Architecture for you later.)
I was in Tokyo for a week, and during that time I visited with two CEOs … one at a Telephone Company and one at a company called JMAC. Both visits were scheduled for 20 or 30 minutes … courtesy visits for the visitor from out-of-town. In both cases they turned into 2- or 3-hour visits because, in both cases, I told the CEOs that the problems they were trying to solve were not IT problems — they were THEIR problems.
At JMAC, the CEO was giving me and a friend who was with me a presentation. He was identifying his customers like Toyota, Honda, Mitsubishi, Kawasaki, General Motors, Ford, Chrysler, General Dynamics, Lockheed, Boeing, McDonnell Douglas, Volkswagen, Daimler Benz, you name it! Major Manufacturers around the world … and he was associating the revenues that JMAC was deriving from them. I turned to my friend and said, "What is going on here?! This guy is giving us a presentation to try to develop some credibility for him in our eyes … WE ought to be giving a presentation to HIM to develop some credibility for US in HIS eyes!"
My friend underlined an acronym on the hard copy in front of us … MITI. (I think I have the acronym spelled correctly.) It was the Japanese consortium of Government, Banking, and Manufacturing that decided they wanted to own Manufacturing 35 or 40 years ago! They have now changed their name … the Japanese Management something or other (JMAC). What might they want to own next? Hmmmmmm.
All of the presentations and conversations in Japan were being translated by interpreters, typically, young women. I don't know how they do it! In answer to a question, I did about 20 minutes in my own inimitable style … the young lady wrote down three kanji characters. Then she did about 20 minutes on the interpretation!! Good night!! How did she do that?!
Anyway, when Mr. Yamamoto (forgive me for not remembering his actual name!) left the room, he mumbled something and the interpreter said, "Mr. Yamamoto said you made his head hurt." Yes, I said that his IT team (who was in the room) could not solve his problem because it was not an IT problem — it was HIS problem.
Next time I will develop a pattern, the Strategy Pattern 'Make-to-Order', for you.
This article can also be viewed on John's blog — presented here, with permission.
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