How Lean is your Cloud? Part 2

In the first part we discussed lessons that IT can learn from a hundred years of manufacturing best practices and the possible role of cloud computing in that endeavor. We now continue with what may very well be the area that IT can learn most from manufacturing: Costing.

Costing. Many feel that the billions that the industry invested in ERP systems can be justified by the improved planning capabilities that such a global perspective gives. Reality however is that the benefits of ERP – if any – come more from improved financial visibility. By being able to compare costs, prices and efficiencies per country, the overall portfolio could be optimized. And although most ERP systems have added a supply chain planning solution over the past years, their cost analysis and financial functionality is often both more advanced and more widely implemented.

Full, loaded, integral products cost. In manufacturing understanding the cost of a product is both an art and a science. Using a variety of tools and methods direct and indirect cost elements are allocated to cost carriers (products). In fact, most manufacturing innovations are first screened against their impact on product cost, before their implementation is even considered. The two main allocation methods are a roll up based on the Bill of Materials (BOM) and an activity based allocation using intermediate pools of costs. IT cost and especially infrastructure cost traditionally were fixed and allocated in an overhead way. With CMDB’s (configuration management databases) becoming more widely implemented , organizations can start to allocate specific technical cost directly to the business service they support. And also the pay as you go model of cloud computing makes that easier. As a result many an IT department is starting their own financial and cost analysis function or department. Something which is also required as cloud computing renders make or buy decisions more granular and more frequent.

Global sourcing and spot markets. It will be clear that under the above market conditions, smart sourcing becomes a key competitive differentiator. Static long term contracts and multi-year commitments are replaced by spot markets, hedging and pricing based on average daily price. Also in Cloud computing we already see the first examples of this, again with Amazon leading the pack by introducing spot pricing for its EC2 elastic cloud offering.

Just in Time. At first sight Just in Time manufacturing seems to be at odds with a focus on product cost. Making large quantities to stock (just in case) seems more efficient than producing each item when and only when required (just in time). The revolutionary idea of lean manufacturing was that if it is more efficient to make hundred of the same in a row, the conclusion should not be to make batches of a hundred, but to change and tweak the system until a batch size of one could be produced as efficient as a batch of hundred.

Single Minute Exchange of Die. SMED, sometimes jokingly referred to as “single minute exchange or die”, is the practice where the whole factory team works together to change over the manufacturing process from one type of product to another, within a minute. Imagine a formula one team getting ready to exchange tires, including a guy with a whistle and endless rehearsals and you get an idea how serious this practice is taken in lean factories. To most of us this may feel outrages and expensive. But in fact this singular focus on achieving together what everyone agreed is important (in this case make to order and meeting real and not forecasted customer demand) and makes SMED relevant in a cloud context. In the past, each IT department or discipline (network, databases, applications, development, etc.) – could focus on meeting their own SLA’s, but all together they often were delivering an overall customer experience that was less than desirable. Case in point, also with cloud computing is that improvements cannot come from only technology (cloud in this case), it has to be grounded in mentality and processes.

Total Quality. Before lean manufacturing introduced the concept of zero defects, the consensus of the industry was that there was something like “optimal quality”. The idea behind that was that if one in X-thousand products failed, it was cheaper to repair those few then to improve manufacturing quality even further. It will be clear that Just in Time and zero inventories had no tolerance for that idea. If even a single component fails, the whole delivery to the end customer will get delayed severely. As a result manufacturing started measuring defects in PPM (Parts per million) instead of percentages or promille’s. Basically the idea was that manufacturing something first time right in the end always is cheaper than having to repair it later on, as all these unplanned repair activities are essentially waste that adds no value. Also in IT the idea of “first time right” is gaining traction and cloud computing, with its large scale, is accelerating this even further. With a million users the impact of an error or (security) flaw is much higher and does warrants a larger focus on quality. Interestingly this focus on zero defects also further another lean concept, namely excluding any functions that the user sees no value in , as these do increase complexity and the chances of errors, but not the value.

Maximize Value, Minimize Waste. Even if the above analogies between Lean manufacturing and IT may seem far fetched to you, one thing you may find useful regardless is using the Lean IT mantra of “Maximizing Value” (only do what adds value to the end customer) and “Minimizing Waste” (eliminating steps that do not add value) to guide your decisions. Just take any idea or proposal and evaluate it against these two simple criteria: does the service in question add significant value in the eyes of your end customer? Or, does it minimize waste by eliminating steps that do not add value relevant to your customers. These two very simple criteria can also prove very useful in streamlining your cloud computing efforts.

Now is the time for organizations to start evaluating how cloud computing can help them transform their traditional IT factories into a modern IT Supply Chain. With the Cloud Academy initiative we are trying to support these efforts. On the one hand by furthering knowledge about basic cloud building blocks and cloud security, but also by discussing possible management approaches to cloud computing in the Cloud Academy discussion group on Linked-In. Regardless of whether you are looking to start your journey to cloud computing with Software as a Service, Platform as a Service or Infrastructure as a Service. May your cloud be a lean one!

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