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Building a Chain of Customers

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About The Book

Richard Schonberger, in his fourth and most important book yet, introduces a powerful new concept: that the many links between and within the four main business functions -- design, operations, accounting, and marketing -- form a continuous "chain of customers" that extends to those who buy the product or service. Everyone has a customer -- the next department, office, shop, or person -- at the hundreds of pioneering companies Schonberger has studied throughout the world.

Schonberger demonstrates the universality of customer wants: Both the next and final customers want ever better quality, quicker response, greater flexibility, and lower cost. This condition provides a common strategy and calls for common methods to be used across the organization. Every employee is a data gatherer and analyst, unearthing more and better ways to provide for these customers' wants -- before the competition does so.

As the new thinking and methods permeate every comer of the firm, they topple departmental walls and adjust gang-like mind-sets and "them-versus-us" attitudes. Performance is no longer measured by internal costs but by improvement as seen by the next customer; direct control of causes generally replaces after-the-fact control of costs. Design is brought out of isolation. Finally, with the rest of the firm reoriented toward customer service, marketing escapes from a "negative" mode -- covering up for failures -- to a positive one -- crowing about the firm's competence and ability to improve.

With the close attention to detail for which he has become famous, Schonberger constructs a blueprint for unifying corporate functions, brilliantly describing the new microcosms that will make up the company of the 1990s -- focused teams of multi-skilled, involved employees arranged according to the way the work flows or the service is provided -- that compose the chain of customers. Aetna, for example, is organizing customer-focused teams that cut across underwriting and the administrative functions. At Hewlett-Packard, teams of marketing, manufacturing, and R&D people have already gone through several iterations of "activity-based costing", which provides product designers with previously unavailable data for shaving costs throughout product life cycles. And at Du Pont, even production people on the factory floor are involved in assessing competitors' product quality and probable costs and methods. Through these and hundreds of other real company examples, Schonberger shows how the customer-driven chain of action leads directly to the kinds of bottom-line performance that have been so elusive to executives who manage at a distance "by the numbers" -- namely, higher profits, greater security, and gains in market share at the expense of the laggard competion.


Chapter 1

The Great Awakening: Earthquakes in the Business Functions

We have learned more about the right way to run a business in the 1980s than in the preceding half century. In a nutshell, we've learned this: that world-class performance is dedicated to serving the customer.

By that I don't mean tender loving care, service with a smile, all returns accepted -- no questions asked, ten-year warranties, consumer telephone hotlines, and customer satisfaction polls. While all those are good practices, they generally apply to just the final customer.

How much good can it do to try to make it right for the final customer when much of the organization that provides the goods or services is delay- and error-prone and self-serving? That is the sad truth about business and industry. It has taken a series of earthquakes, tremors, and aftershocks to wake us up. The wide awake now see the final customer as just the end point in a chain of customers. Everybody has a customer -- at the next process (where your work goes next). Making the connections along the chain is our common task.

I'll not dwell on the consequences of staying asleep. That is, we won't go into the recent history of lost jobs, pay cuts, shut-down plants, bankruptcies, and whole industries migrating across oceans. Those might sound like quakes and tremors, but let's not repeat well-known tales of woe.

Instead, it is time to look at the bright side. I'll label as earthquakes momentous new ideas that are reshaping the way we think about and run business enterprise. The quakes and tremors are toppling and rending asunder old concepts and practices that resulted in poor performance and failure.

Figure 1-1 indicates the major and secondary shocks and, roughly, when they occurred. I'm not including quakes that affected just a single country (such as Japan's head start in quality) or a single company (such as the ability of McDonald's to provide a uniform product in spick-and-span restaurants all over the world). Rather, Figure 1-1 suggests when the shocks woke up whole industries around the world.


In the late 1970s a few Western companies that were suddenly faced with withering competition from the Far East saw through the fog. They cleared away the excuses (unlevel playing fields and so forth) and looked at clear measurable evidence: both the defects and yields in Western semiconductor products were far below world standards. It was the same for cars and power tools, air conditioners and steel, TV's and dozens of other electronic products.

Most of the great Western manufacturers eventually got around to estimating their costs of bad quality. Even in proud companies like IBM, Kodak, Philips, and Rolls Royce, bad quality was costing over 10 percent of sales. Defect rates themselves weren't that high, but the costs of rework, returns, warranties, lost customers, rescheduling, and so on, were.

Briefly, what happened was that hundreds -- no, thousands -- of companies were frightened enough to take the quality pledge. Literally, CEOs and presidents issued quality declarations and put them into corporate mission statements. Top executives who earn in excess of a million dollars a year sat through courses in statistical process control. A few followed the Texas Instruments model: Top exec trains next-level execs, who train their subordinate managers, who train theirs -- and so on down to machine operator, assembler, office clerk, and stockkeeper.

What superlative shall I use in describing the outcome? Awesome comes to mind. I certainly am awed. Who could have believed that, for many items, defect and nonconformity rates could fall from percentages to negligible in companies all over the globe. Yet they did in just a few years. Here are just four examples:

* At Kodak's copier division the defect rate had averaged around 50,000 parts per million (PPM) in 1985. That means 50,000 bad ones (bad components, bad welds, bad-fitting assemblies) out of each million. Less than a year later, detects were down near the world benchmark of 950 PPM. At the same time the number of internal quality inspectors dropped from twenty-five to zero, because the assemblers, well-schooled in statistical process control (SPC), had assumed responsibility for quality.

* TRW's steering and suspension system division has been reorganizing its four factories into work cells and teams that take over the job of quality. In 1987 one work cell shipped 500,000 pieces with only two rejected by the customer. Larry Kipp, plant manager, says it hurt the technicians' pride that those two got out of the plant. Kipp observes that "This is the most exciting thing I've done in my twenty years" in manufacturing.

* The U.S. Internal Revenue Service trained 10,000 managers in quality management (Juran approach). Organization of quality teams throughout the agency followed. One result: In 1986, out of 1.2 million tax accounts received, weekly processing errors averaged 30,000 to 40,000. In 1987 the error rate was down to 3,000 to 4,000, while volume increased to 1.5 million per week.

* Last rites had been said for Big Steel in the United States, the causes of its impending death being high costs and bad quality. For example, in 1983 the Ford Motor Company was rejecting as much as 8 percent of steel from domestic plants. By 1988 the reject rate was down to 0.7 percent, on a par with the Japanese.

Those examples come from a bulging file folder of similar ones from other companies and industries. The dramatic quality improvement stories do not come from just the wealthy industrialized nations. Managers and operators know about and use SPC in good companies in Mexico, Thailand, Brazil, and the countries that surround them. And why not? It's easy to learn, training materials are available in every language, and educated managers all over the globe are looking for low-cost solutions that work.

The quality turn-arounds are no longer limited to the major companies that have training budgets. Big industry has been inviting people from key supplier companies to training courses in quality concepts. Now, with public and private training in SPC widely available, that is becoming unnecessary.


The quality earthquake softened everything up for tremors to come in all else. The second big quake, which began in manufacturing, was called just-in-time (JIT) production. Some saw it as inventory reduction (many still do). Those in the know see it as quick response to the customer, plus another jolt for quality improvement.

Quick Response in the Chain of Customers

The payoff for the JIT leaders has been much like the quality payoff': five-, ten-, and twentyfold reductions in waste -- in JIT's case, waste of time waiting for work to start at each step in the chain.

Long queues all over the world signify why-improvements of that magnitude should be possible. Human waiting-line problems are obvious. Delays in offices are much worse, except that what waits is a document buried in an in-basket, not a impatient person standing in line. In manufacturing, piles of parts sit idle between every stage of production; often the quantities are so large that they serve their sentence in plant stockrooms. They are waiting to be summoned into action on a work bench or a machine. Sometimes they wait for months.

Documents and parts forced to wait can't, in a huff, take their business elsewhere. The final customer can! Thus, quick response and the JIT techniques are keys to competitive gain in any business.

For example, supermarkets in some highly competitive cities have turned to promoting shortest checkout lines, not just lowest prices or freshest produce. Quick response has spawned several whole new industries, such as overnight mail and facsimile copying. Some say that the rapid spread of one-hour photo film processors is the cause of the plunge in sales of instant cameras.

Some of the best examples of achieving quick response are in manufacturing, where just-in-time concepts have penetrated deepest. Consider, for example, CalComp, Inc. (a self-contained subsidiary of the Lockheed Corporation), which produces graphics peripherals for the computer industry. In 1982 a rival, Hewlett-Packard, came out with a cheaper and faster model of plotter. That sent CalComp reeling. Profits nose-dived, and unsold machines piled up.

Today CalComp has fully recovered -- a fast-reacting, tough competitor. For example, throughput time to build an average plotter was cut from a high of nine weeks to about five working days -- through all stages of manufacture. Prices on its 5800 series electrostatic plotter were slashed 38 percent, which doubled sales volume within six months. Market share climbed as well.

A tenfold reduction in flow time sounds like a classic JIT story. At CalComp basic quality improvement plays an equal role. All operators use quality techniques collectively known as statistical process control. SPC requires them to record all process problems on visual control charts and tally boards.

Operations Support

Tightly tied to the slashing of delays and defects in operations are sharp reductions in operations support: scheduling, material handling, stockkeeping, counting, checking, inspecting, accounting, troubleshooting, expediting, entering data, and setting up for new models. These types of support, once thought to be necessary aids and controls, are now seen as non-value-adding waste. So find a way to get rid of them. They are costly, they are havens of delay, and their existence blocks operations from taking full responsibility for results.

When work zips through ali the processes lickety-split, the apparatus for tracking the work flow and accounting for it falls by the wayside. In CalComp's case, computer use tor monitoring production was cut by 76 percent. When operations takes over responsibility for quality, the number of inspectors plunges. Sometimes, as was cited earlier for Kodak copiers, the number of inspectors goes to zero.

The list goes on. But one of the conditions for making these deep cuts in operations support is employee involvement, which has had its own earthquake.


The term employee involvement (EI) doesn't tell us much. Employee involvement in what? The El earthquake could not occur until we had an answer. And the answer is: involvement in everything that is important to the customer -- the one at the neat progress as well as the final one. Tops on the customer's list are low costs, high quality, and flexible, quick response -- without fail!

It is an ambitious list -- in fact an impossible one without El. You can hire large numbers of inspectors to assure quality, but what do you get? You get high costs -- for inspection and for redoing or throwing out the rejects. You get delay, which might include waiting for inspectors to arrive and then inspect, waiting for rejects to be fixed, waiting for transportation, and waiting for a suitable lot size from which to take a sample. What you probably will not get is world-class quality, because inspection itself admits errors and often is intermittent, not continuous control.


Employee involvement can offer (1) continuous control of factors shown to cause bad quality and (2) continual improvement in correcting the causes. The foundation of El is for all employees to record everything that goes wrong, to join others in finding ways to fix chronic problems, and to continuously monitor and control what is not yet fixed.

Stress and Frustration

Some say that the demanding environment of employee involvement is stressful to the employee. Maybe so. On the other hand, the opportunity to finally see something done about chronic frustrations in the workplace -- and to be involved in the changes -- surely relieves a good deal of stress.

In machine-intensive operations, the equipment itself contains many of the problems: the bad quality, the delays, and the failures. El offers a potent solution: Machine operators take over preventive maintenance, simple repairs, area housekeeping, machine setup, control charting, machine history, process instructions, and sometimes control of spare parts, tools, and manuals. They also participate in machine selection and installation, machine modifications, and area layout (floor plans).

The descriptive term is ownership: In the world-class company employees assume ownership of the processes. Operating-level people come to feel they own the machines, tools, area, instructions, quality, controls, and all else in their sphere: no longer are supervisors, professionals, technicians, engineers, advisers, and others from staff support departments the owners by default.

Of course, so profound a change does not happen overnight. It takes years and is in small steps. In the process, the former owners become teachers, helpers, team partners on improvement projects, and monitors of the overall effort.

Suggestions: World-Class Numbers

What kinds of results may we expect when all employees become involved owners? Since Japanese companies are the leaders in employee involvement, we must look to the world-class companies in Japan for an answer. The numbers are mind-boggling. According to one report, the number of suggestions per employee per year in selected firms are as follows: Nissan, 19; Canon, 50; Hitachi, 81; Citizen Watch, Tanashi, 201. There are reports of numbers much higher even than that.

Those are in contrast to the number zero for most employees in most companies throughout the world. Formal suggestion programs usually have brought in only a trickle of suggestions made by only a small percentage of the work force.

Measuring EI based on a suggestion count can, of course, become a numbers game. A company with excellent EI could have a low count simply because the counting is not formalized, or because only suggestions of a certain significance are counted. Still, it is clear that world-class standards of employee involvement are exceedingly high.

Focused Teams, Cells, and Flow Lines

Individual employee ownership of a process is a good start. Team ownership of a segment of the chain of customers is even better. When there is team ownership, team problem-solving and team suggestions should follow. A correctly organized team, which owns a segment in the chain of customers, is called a cell or a flow line: people and their equipment arranged by the way the product flows or the service is provided.

In common usage, the word team can refer to about any collection of people. For our customer-serving purposes, team refers to a group of people connected by work flow, because, by definition, that comprises a chain of customers.

Consider the way people and their facilities are usually grouped: by common function. In offices, we may find order-entry people and terminals in the far corner, purchasing in the next room, invoicing downstairs, and so on. In factories, molding machines are all together in their little world, lathes have their own area elsewhere, and everything else is grouped similarly. Strive for teams and teamwork, and what happens? At best, you get gangs -- and ganglike behaviors. The customer is part of another gang, and they are the enemy! Or, if not the enemy, they are, at least, not part of your learn.

Putting it differently, cells and flow lines are natural teams, which are focused on a narrow family of subproducts, services, or customers. What remains is to cross-train team members, assign them ownership of their segment of the total product, and then give them time for data analysis, problem diagnosis, brainstorming, and special projects. Those are the ingredients of the continual improvement effort.

Much of the improvement is in the direction of making things simpler. But teams of operators and clerks can only do so much. Total simplification and improvement requires total involvement. The rest of the business must be drawn in.


Bringing in the other main parts of the business -- design, accounting, and marketing -- starts with seeing the possibilities. After that comes creativity to shake out and replace old practices that won't do in the new age.

Possibilities of making an impact are greatest in design and development: Design it right and avoid problems heaped upon problems later in the chain of customers. In accounting, the big impacts are in providing information to guide and stimulate rapid, continual improvement. In marketing, the opportunities lie in an expanded view: Not just sales revenue, but locking into tight alliances with customers who prefer to deal with firms that are on a course of continual improvement.

The shakeout in these three business areas hit design and development first -- and hardest -- followed by accounting and then marketing. The changes to date are summarized below in that order.

Design -- Out of Isolation

The best efforts of product designers are below par when they are kept isolated from the rest of the enterprise. That is precisely what had happened to the design function (except in small firms). They were unconnected, a breed apart.

The potent formula for correction has three main thrusts: extended design teams, design simplification, and designing for loss minimization.

Design teams. The extended design team attacks the core problem of isolation. Delco-Remy, the multiplant electrical components arm of General Motors, fixed the problem by reorganizing into four business units: power systems, control systems, batteries, and heavy duty systems. The purpose was not the usual one of creating profit centers and profit-mindedness. According to Doug Barron, who heads one of Delco's newly created product and process development groups, "The driving reason...was to get the product and manufacturing guys physically located in proximity to each other." Another result of business units is that market research people get close to their immediate customers, who happen to be the product designers.

The design team extends further. It includes purchasing, because much of what is designed is bought. It includes quality assurance, because all designed goods and services are fraught with quality issues. It includes counterparts in supplier and customer companies. The idea is for their designers to work with yours -- the simultaneous design concept.

Design simplification. Getting designers latticed into the chain of customers is a good start. Design practices and customs also need an overhaul -- toward designing for simple, error-free operations. That means easy-to-produce goods and easy-to-provide services. Conventional design had no such concerns. Designs tended to require too many steps, too much coordination across too many far-flung departments, and too many supplier companies.

Design approaches that have emerged to cope with those problems have various names: design for assembly, design for manufacturability, design for serviceability, design for delivery, design for service. They focus on such things as standardization; modularity; and minimizing the number of parts, number of operations, and need for new resources. Numerous new books, consulting practices, and training programs offer guidance on those themes -- and leading companies have quickly absorbed the guidance and put it into practice.

The new design approaches require a strong follow-through: a set of new measures of design performance. One example is number of customer returns in the first six months. The thinking is that good design has much to do with results in the field. If designers are not measured on such outcomes, they'll not be much aware of or concerned about them.

Neat Products, Neat Processes

William Wiggenhorn, director of training and education at Motorola, says that designers think their job is "to design the neatest product available." To that, Wiggenhorn says, "No it isn't. Your job is to design a neat product that meets the customer specs [and] that somebody else can make." To get that message to sink in, Motorola sent nine thousand engineers through a course in design for manufacturability.

Setting forth customer-oriented design guidelines and performance measures amounts to managing the design function. The design problem was one of management neglect, not bad design.

Loss minimization. Good design is something that works, right? This is the common viewpoint. The uncommon world-class viewpoint goes a step further. Good design is one that minimizes all losses -- to the maker, the customer, and even to the greater society. Social losses are important, because they have their ways of coming back to haunt the maker.

Since losses occur at all stages in the life cycle of a product or service, it makes sense to nip those losses in the bud. Design and development is the bud.

One of the basics of loss minimization is robust design, It is a design that works not just in the laboratory but in the field, and not just under ideal conditions but under physical or social stress. Assuring robustness requires experimentation: Test each design alternative under a range of conditions. For a product, the conditions might be low, medium, and high humidity. For a service, they could be low, medium, and high customer arrival rate -- with a few outraged customers thrown in. The "Taguchi methods" (discussed in Chapters 4 and 10) provide today's designer with streamlined experimental methods.

Accounting, Control of Performance, and Costing

While loss minimization is new to design, it is old hat in accounting. But what do you do if the cost accounting system says your efforts are causing costs to rise when you know that costs are falling? Answer: You continue on the right course -- and fix the accounting system.

Cost accounting's modern name is management accounting. Its purpose is to serve management, not give orders or stifle progress. In view of the earthquakes in our beliefs about what constitutes progress, management accounting measures have to change too. And they are changing -- drastically, in one company after another.

Control. In the area of control, a new basic belief is emerging (or reemerging). It is that the best way of controlling cost and bad performance is by controlling causes. That belief arises for two reasons: One is the availability of many strong new approaches for simplification and for control of quality, delay, waste, and cost. The other is the utter failure of historical accounting data -- narrowly focused on cost variances and resource utilization -- to stimulate improvement.

Costing. Management accounting's other job is to find out what things cost. The traditional system can't do this accurately because direct costs have shrunk while hard-to-allocate overhead costs have skyrocketed. No small part of that explosive growth is in the apparatus for keeping track of all the costs.

When focused teams take charge of their own resources, quality, and problem-solving, overhead as a percentage of total cost plunges. Another result is sharp reductions in delays, wastes, customer returns, storages, and other hard-to-cost negative events -- which are responsible for much of the cost transactions and costing apparatus. These changes in operations open up new opportunities for simpler and more accurate costing of products and services.

Accurate costs are important, but not for the accountants or auditors. Their legal obligations are easily fulfilled by aggregated costs based on historical averages. Rather, accurate product and service costs are vital for good pricing, bidding, and product-line decisions.

Bad decisions on those sensitive issues can destroy a company. In fact, there is mounting evidence that industry has been undercosting and underpricing low-volume products and doing the opposite with high-volume ones. The same kind of evidence suggests that big industry has been sending profitable (but overcosted) products off-shore and retaining unprofitable (undercosted) products!

In leading companies, the management accounting changes generally lag behind the leaps forward in quality, design, purchasing, changing roles of people, and so forth. In other words, activists are not waiting for the accounting and control system to be fixed first. But there is no point in waiting long to fix accounting too.

The Marketing Challenge

There is no point in waiting to strengthen the marketing function either. Marketing's weapons for bringing in business greatly expand and change when the rest of the firm becomes customer-minded. A goal is loyal customers, sometimes fostered by exclusive long-term contracts, so that the company's costly capacity aims at filling real customer demands rather than just keeping busy.

That kind of customer commitment is only possible if the firm is on the path of continual improvement: quality improving, costs and prices contained or falling, and response time and flexibility good and getting better. Under those conditions, selling is a piece of cake -- and marketing's promotional focus shifts.

Ads, bids, catalogs, and personal selling efforts trumpet the firm's competencies and capabilities. To make this happen, promotion and sales staffs need full awareness of the firm's continual improvement practices. They must learn how the company improves quality, cuts delays and waste, responds to changes in model mix or sales volume, and synchronizes and coordinates with customers.

A logical starting point is to fuse marketing people into tight alliances with operations, design and development, and financial people. In other words, it is time to reconnect the functions for the good health of both the firm and its customers.


The Great Shakeup that has spread through the business functions one by one has a striking effect on the whole. All functions begin to see several common purposes and tasks, namely:

1. To serve the customer: the grand goal

2. To localize the grand goal, a new mindset for each individual and small group: that everyone has a customer -- the next process

3. To fuse combative organizational units into a well-connected business team, a parallel new mind-set for every department, office, or shop: that each has a customer -- the next department, office, or shop

4. Continual, rapid improvement as the single-minded, grand operating goal

A special word to people in very small firms: You already are okay on points 1, 2, and 3. In other words, small businesses don't have combative organizational units and next processes out of sight in another room or another building. Rather, the president will meet customers and take orders -- and when things get busy, pitch in tilling orders. The sales manager may help with hiring or fetch late materials. Line employees routinely do any and all line jobs. Everybody knows who the final customers are. Your people may be poorly trained and lacking in the skills of process control and continual improvement, but at least you're well connected.

Everyone Customer-Minded

According to one headhunter (executive employment agency), "The rules have changed. People skills, marketing skills, and customer-relations skills are now critical for manufacturing executives," because they spend a "great deal of time" in the external world outside manufacturing -- particularly with customers.

"Operations VPs now help start or close a deal, assure an edgy customer that the product will be delivered on time, and often handle product complaints."

Too bad the connective spirit is so easily lost when the business grows. A long-term plan for regaining it must include moving people around. In the lower ranks, that means cross-training and job rotation. In the professional areas, it calls for multiyear career-change assignments. The goal is for people's perspective to grow with experience, not narrow.


As presented so far, it all sounds too pat, too easy to be true. If it were so easy, you might ask, why aren't the results evident to all of us? Why doesn't everyone know about ideas so earth-shaking?

As it turns out, the path to world-class is straight enough, but many companies that get on the path stray off it too easily. As a result, they are leaping forward in some areas, quality perhaps, and not gaining much in others.

Companies get sidetracked by their own functions and factions. The functions problem refers to maintaining a functional work life well away from the customer: chefs staying in the kitchen and avoiding contact with patrons, buyers shut in the purchasing department and not visiting users or supplier companies, managers hiding out in their offices and not out looking for ways to help press shop supervisors who do not want to see a press pulled out and moved into a cell, and so forth.

The factions problem pertains to a fixation on their way to become excellent. Factions advocates tend to be well informed, progressive, modern, willing to change, and motivated toward rapid improvement. But they hold to a narrow agenda on what to do or how to do it. We have seen that the world-class company has a broad customer-serving agenda based on the full range of knowledge breakthroughs.

Functions and factions problems become serious when they preserve or cause growth of a staff empire. An example is building a large staff to promote quality or just in time. Quality and JIT are essential, but led by people in operations; staff efforts should be minimal -- mainly providing training materials.

Another example is growing a large computer staff and facilities to process work-flow transactions. Computers are efficient transaction processors, but many companies have shortened flow times to where tracking the flow by transactions is no longer useful.

The challenges are clear:

* Factions. The only factions to allow are those that unite resources in the common cause of continual improvement. That means ever-simpler ways of providing higher quality and quicker, more flexible response at less cost.

* Functions. The functions must be broken up and reconnected in a focused way in order to recapture the pitch-in, serve-the-customer way of life.

In the following chapters the themes introduced here are treated more fully. As you make your way through the remainder of the book, keep this in mind: The marketing message doesn't belong just to the marketing people; we all must assume part of the job of presenting our products, services, talents, and capacity to the customer. Likewise, the design chapter is not just for the designers, accounting materials are not just for the accountants, and so on. We are all in this together.

Copyright © 1990 by Richard J. Schonberger

About The Author

Richard J. Schonberger, PhD, is president of Schonberger & Associates of Seattle. He is the author of more than 170 articles and papers, a twelve-volume video set, and several books.

Product Details

  • Publisher: Free Press (May 11, 2010)
  • Length: 352 pages
  • ISBN13: 9781439138236

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