Robots or people?

By Gerard Cachon and Christian Terwiesch, The Wharton School at the University of Pennsylvania. Source: Matching Supply with Demand.

Christian Terwiesch

Gérard Cachon

Maybe the biggest challenge for e-commerce retailers is dealing with the huge surge in sales in the fourth quarter.  How can you build enough capacity cheaply enough to satisfy the rapid growth in demand during October, November and December, only to have most of that demand disappear by January? The traditional approach is to hire lots of seasonal workers. The trick with this is to be able to train them quickly enough for them to be productive in time for when they are actually needed. The Wall Street Journal reports that one company, Kiva Systems, has a different idea – instead of hiring workers, install robots (Dec 19, 2010).  To see these robots in action, check out the video (click here).

You might assume that these robots would “walk” around a warehouse picking products, putting them into a basket and bringing them to a place to be packaged. That is what humans do. Instead, these robots move shelves of inventory around. (See the photo – the robot is the orange contraption at the bottom of the shelf.) One advantage of this system is that you don’t need permanent aisles between the inventory – the shelves can be packed in tightly with the computer controlling the sequence (so that the one pink doll you need isn’t buried deep within a sea of shelves).

The next thing you may notice is that these robots are not particularly fast. It is not like the robots move product through the warehouse at twice the speed a human can walk. However, assuming these things are reliable (e.g., treads don’t need replacing every couple of days) they don’t need to take breaks, and they are instantly trained. One downside of this system is that the robot must move the entire shelf and not everything on the shelf may be needed at one time. Humans pushing a cart around a warehouse only put into their cart what is needed at the time.

But the point of the article is how to deal with the holiday surge in demand. While a robot might replace a human, it doesn’t eliminate the problem – the company simply needs a lot more capacity in the 4th quarter. If it buys these robots, then they are likely to be idle most of the rest of the year. Seasonal employees are just that – seasonal – that is, they go into the deal with the expectation that their work will be temporary.

The article ends with an idea for making the robots more cost effective for the retailer – Kiva Systems will rent the robots to the company for just the peak demand period. But I don’t see why this solves the problem – now Kiva Systems is sitting on expensive and idle capacity for most of the year (even in the Southern Hemisphere, Christmas falls in December).  Rental systems work well when potential customers need the product at different times. Given that the 4th quarter is the same for all retailers, I am not seeing this as an idea that works. Interestingly, the founders of Kiva Systems worked previously at Webvan. If there was ever a company that invested too much in replacing human workers with technology, it was Webvan – they may have survived if they didn’t blow all of their capital on hugely expensive warehouses. That said, I suspect there are surely applications of the Kiva Systems for some retailers. But as a solution to the 4th quarter demand surge, I am skeptical.

Starbucks Ad Influenced by Their Lean Education?

Mark Graban

By Mark Graban. Source: The Lean Blog.

Here’s some weekend fun leading into the holiday season… I received a marketing email today from Starbucks that included a phrase that would jump out at any Lean thinker.

Who knows how broadly the Starbucks Lean education efforts have gotten into the marketing department… or this is just a fun Lean coincidence… full ad appears below.

Here’s the portion of the ad that jumped out at me:

starbucks JIT1 500x178 Starbucks Ad Influenced by Their Lean Education? lean

You should be able to view the full ad online by clicking here. It’s reminding people that they can order online through December 20 and still have items shipped to you by Christmas… if you’re new to “Lean,” the phrase “Just-In-Time” refers to a production and materials management strategy that’s one of the core Lean methods – producing or delivering supplies just as they are needed, typically in smaller batches at a higher frequency. Lean or the Toyota Production System was, for a period, often just referred to as “JIT,” but that misses the larger Lean management system to only focus on the JIT piece.

Quality Control and Printing Money, or, why Having an Helicopter is not enough

By Gad Allon and Martin Lariviere, The Kellogg School of Management at Northwestern University. Source: The Operations Room.

Gad Allon

Martin Lariviere

CNBC had an interesting article on the problems in the production of the new $100 bills. (“The Fed Has a $110 Billion Problem with New Benjamins“, hat tip to Ian Farrington).

Several years ago in a speech that earned him the nickname “Helicopter Ben” – Federal Reserve Chairman Ben Bernanke said that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. Apparently, the government is not so good in printing money:

An official familiar with the situation told CNBC that 1.1 billion of the new bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face. A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.  The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in “cash packs” of four bundles of 4,000 each, with each pack containing 16,000 bills.

We tend to hear about quality problems when there is a recall (see Toyota, BMW, etc… ), but in this case, the product is still in the vault.  The interesting part though is that no one knows what’s causing the problem. And because they don’t know, they cannot figure out how many contain this issue, or even how to create a mechanism to sort the good bills from the flawed ones. Without a clear system, one needs to sort them by hand (which will take between 20- 30 years). Sorting them through an automated mechanism will take “only” a year. To get a sense for the loss in shredding the defective ones:

According to a person familiar with the matter, the bills are the most costly ever produced, with a per-note cost of about 12 cents—twice the cost of a conventional bill. That means the government spent about $120 million to produce bills it can’t use. On top of that, it is not yet clear how much more it will cost to sort the existing horde of hundred dollar bills.

Interestingly, the article says that more than a decade of research and development went into the new security features on the redesigned $100. Yet, as in many cases, we see that a lot of thought is given to the design of the product, but not so much time and attention are given to the production process.

The main question I have is why we have to print a whole batch of 1.1 billion bills before we subject these to rigorous testing.  I am sure that some (or maybe even extensive) testing has been done, but it seems that only inspection by people detected these issues. Unlike many products, allowing people to use a beta version of the product is not possible, but it is quite obvious that these issues had to be detected somehow before the large scale production and before the launch date. I am not familiar with the fixed costs associated with the production of these bills, but if this is not exorbitantly high, one may hope for a small run before full production begins.

For those worried about the prospects of our economy, the machines are still printing the old bills.