Supply chain lessons from Japan

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

Gérard Cachon

The devastating earthquake and tsunami in Japan have again raised the issue of supply chain robustness to disruption risk, and in particular, are they too fragile? (3/15/2011) asserts that  ”Strategies that look rational for individual manufacturing companies… can create big macro-level vulnerabilities…”

The reality is that it is too costly to source every component from multiple locations throughout the world just to hedge natural disaster risks. But that doesn’t mean that companies should turn their back to the problem. The best companies follow a few intuitive steps to make their supply chains more robust. I’ll offer two.

First, map your supply chain. If you know your Tier 1, Tier 2 and Tier 3 suppliers, then you won’t have to spend one week figuring out whether you will run out of a part. Most companies know their Tier 1 supply chain, but do they know the other tiers? Do they keep track of changes to the supply chain? This information is crucial because the company that is first to work the phone to find alternative  supplies is most likely to be able to secure those supplies.  This information also gives you information that you can use to make downstream adjustments to your production. For example, should you eliminate an overtime shift or not? Should you redirect scarce parts from one plant to another? Those are difficult decisions to make and are made much more complicated if you don’t even know if you have a problem – why shut down a plant for a potential part shortage that may not materialize?

Second, before disaster strikes, map out vulnerabilities. Some components can be sourced in many locations. Some components have several months of buffer inventory. You don’t need to worry about those. But if the amount of buffer inventory is limited and it is sourced in a few locations, especially a few locations that happen to be close to each other, then you need to consider finding alternative sources or alternative parts. Maybe the conclusion is that the company needs to bear the risk – there are no effective alternatives. But maybe the conclusion is that a substitution to a less risky part is actually feasible.  Finding this substitute is less costly before the disaster. There have been reports of companies that are scrambling to qualify additional suppliers, but that could have been done before disaster struck.

Finally, one risk that will hit many companies, even if they don’t have a shortage of parts, is the risk of exchange rate fluctuations – the Yen has just hit a post WWII high against the US dollar.


Selling restaurant reservations at a discount

Martin Lariviere

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

A few weeks ago I wrote about how Groupon promotions can create operational headaches for participating service providers. In short Groupon coupons drive traffic but service providers can be easily overwhelmed, making it hard for new and current customers to make appointments for service. Now the New York Times reports on VillageVines, an alternative site that provides local promotion support (Pay Full Price for a Meal? That’s So Yesterday, Sep 8).

Like Groupon, VillageVines makes deals available on-line for registered uders. However, there are important differences. First, VillageVines specializes in restaurants as opposed to covering the waterfront from apparel boutiques to salons. Second, they don’t sell coupons but reservations.

With VillageVines, registered users get a daily e-mail and pay $10 for a reservation, which they book through the site or through, thanks to a new partnership. They get a discount, usually 30 percent off their bill.

The distinction between coupons and reservations may seem trivial but it actually makes a real difference. For customers, there is no need to print and remember to carry the coupon. The discount is in the firm’s reservation system and should be taken automatically. Certainly, a classier way to handle getting a discount when on a first date.

The bigger issue is how this solves problems for the restaurant. Because customers are buying reservations they have to pick a date and time before they fork over their $10. Consequently, the firm can shape the demand they get by limiting the number of reservations they give out and specifying when the discounts can be used. If the existing customer base does not fill up the house on Tuesday evening, that’s when you offer reservations on VillageVines. Further, customers know what they are buying. This scheme eliminates customers buying a discount only to find they can’t get an appointment for two months.

So this is a very clever solution to the issues that have arisen with Groupon. Of course, from the member’s perspective it doesn’t replace Groupon. Here you only get restaurants so if you are more interested in apparel shops it doesn’t do much for you. The question is whether this format can be easily carried over to other settings. I am not sure that it can. This works for restaurants because on-line reservation systems exist on a common platform and are integrated with other restaurant systems. There is no such standard approach for other local services — even those that commonly use appointments. Part of that is because people don’t generally shop around for dentists and barbers the same way. People generally like variety in eating so there is a benefit to having one site that allows access to a variety of firms. On the other hand, most  customers are happy to deal with one dentist and one barber once they identify a good alternative.  I don’t see what a hair salon gains from putting its appointment book on a common platform with other salons. Without  that common platform, this becomes a difficult system to implement.

Do we need a Manufacturing Czar?

Gérard Cachon

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

President Obama has named Ron Bloom as a special advisor to tackle the problem of declining manufacturing in the United States (see NY Times 9/10/10):

The President said “We’ve got to get back to making things.” Do we?

Here are the arguments why the decline in manufacturing is a problem:

  • Without manufacturing we won’t be able to take advantage of emerging markets in green technology “I don’t want to see new solar panels or electric cars or advanced batteries manufactured in Europe or in Asia. I want to see them made right here in the U.S. of A. by American workers” says President Obama.
  • Without manufacturing there will not be research and development in the U.S. (which are presumably higher paying).  The argument is that R&D and manufacturing have to be co-located.
  • If R&D declines because of a lack of manufacturing, then innovation will decline and innovation is the engine of productivity growth.

And what are the causes of the problem:

  • Unfair trade practices by China and others.
  • Private equity only invest in firms that manufacturer in China because the U.S. is not “where you make things”.
  • Large U.S. companies don’t want to promote domestic production because they now produce everywhere.

So what do they plan to do about the decline? Here the specifics are thin. They have ruled out subsidies. They will focus on trade diplomacy and improved export-import financing.

Unfortunately, for Mr. Bloom, I strongly suspect he will not be able to reverse the trend, nor do we want him too. But if he wanted to reverse the trend, he is not pulling the right lever.

To fix a problem requires identifying the cause. There are two reasons why manufacturing has declined in the U.S. First, although not mentioned in the article, transportation costs have declined.  If it costs a lot to move parts and finished good around, you need to do things locally. When you can start shipping and training and trucking things for cheap, your options as to where to manufacture expand. Second, things are much more modular than they use to be. Henry Ford’s designers had to be very close to the manufacturing process because I suspect design was an iterative process – design something, try to make it, redesign it, try to make that, etc. Now, computers, telecommunications and precision machinery means that for many things the design and the production can be decoupled – an Apple engineer can dream up the next Iphone in her office and send the specs over to China without fear that what she created will be costly to make.

So if the causes are cheaper transportation and let’s call it decoupled R&D, then what could be done to reverse the trend? We wouldn’t want to ban computers to prevent the former. But maybe we should make transportation more expensive. At least that would have an environmental benefit. But if it is expensive to move stuff from China to the U.S., then it is expensive to move it from the U.S. to Europe, i.e., it cuts both ways. Which brings me back to an earlier point – should we care? Our decline in manufacturing has also occurred during a period of increased productivity and standard of living. Where is the evidence that we have been hurt by the decline in domestic manufacturing?

And let’s consider the geo-politics of trying to break manufacturing ties with other countries. If we purchase nothing from China and China purchases nothing from us, will they be more or less inclined to use their military? (For that matter, how about the U.S.’ inclination to use its military.) The answer seems clear – as long as countries are linked together via trade, the world will be a safer place.

America should promote innovation and we should make things in America that make sense to make here (like cars). But we have better things to worry about than manufacturing’s declining percentage of the economy.