The Lean Recession

The WSJ just posted (1/20/10) a small article about the semiconductor industry. Here is a line from the article:

 

Distributors controlled 36.9 days of inventory at the end of the third quarter, down 15% from a year earlier,according to iSuppli. In dollar terms, distributors held $4.8 billion worth of semiconductor inventory at the end of the third quarter, down 22%.

 

I couldn’t help but pull out Little’s Law to calculate the sales rate this year and last year. This year’s sales rate is R = I / T = 4.8 / (36.9 / 365) = 47.5$b.

This year’s days-of-supply is down 15% from last year, so last year’s days-of-supply was 36.9 / 0.85 = 43.41.  This year’s inventory is down 22% from last year, so last year’s inventory was 4.8 / 0.78 = 6.15.  Hence, last year’s sale rate was R = 6.15 / (43.41 / 365) = 51.7$b.  We can conclude that sales are down only 1- 47.5/51.7 = 8%

The bad news is that sales are down. The good news is that firms were able to reduce their days-of-supply even though their sales rate was declining. This is remarkable.

Imagine firms were producing at a certain rate and then demand softens. A natural reaction is to think this is a temporarily blip and to keep producing. Before you know it, inventories have ballooned and your days-of-supply has skyrocketed. That is not what happened in this industry and I suspect in many others. Firms “hit the brakes” very quickly and consequently, we are not in as big of a mess as we could otherwise be.

I suspect this happened because firms had very good information/production systems – they knew what was going on throughout the supply chain and so they could determine that they needed to slow down production rapidly. Second, they had the ability to slow down production – flexible workers, flexible suppliers.

When we go back and dissect this recession, I believe we will discover that it was quite different than earlier ones. The economy indeed operates differently now.

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Will Intel keep rolling?

Intel is on a roll. They just reported 2009 Q4 revenue of $10.6 billion with net income of $2.3 billion – not bad indeed! (See NY Times, 1/14/20).  The success is attributed to their recent investment in new plants ($7 billion), a resurgence in PC demand,  and their move to make chips for netbook and smartphones (their Atom chip targeted to those markets brought in $1.4 billion in revenue). Kudos to Intel, but will the fun last? How long can Intel succeed with its strategy to heavily invest in new manufacturing technology so that it can stay ahead of rivals?

There are reasons to believe that this strategy will work for at least another 5 years. This is based on the premise that the need for new, smaller, more energy efficient chips will continue. And in particular, the premise that the latest investment is necessary to make improvements in performance that generate real value for which people are willing to pay for.  As we continue to push towards the “Dick Tracy” era (everything can be done on something the size of a wristwatch), there is reason to believe that this will be the case.

The economics of chip manufacturing is well known. Invest a huge sum of money to build a clean plant with very advanced equipment. Then you start to make chips and most don’t work, so continuous refinements of the production process are necessary to increase the yield of good chips.  The faster the yield curve increases, the better the return on investment.  The more sophisticated the chip, the lower you start on the yield curve and the hard it is to increase your yield. 

There are plenty of companies that can make chips in the world. But these chips are not as complex as the ones Intel makes. Hence, they are satisfied to let Intel take the lead. Intel bears the risks and earns the reward. And it is important to recognize that the risk is significant. At some point Intel will follow this strategy and it will fall flat – the new chips they will make won’t be sufficiently better than existing, simpler chips, meaning that they won’t be able to charge a premium price and recover their investment.

It is interesting to compare Intel’s situation to two other companies, Microsoft and Dell.  Microsoft earned a huge amount because it had its hands around everybody’s neck (the operating system), not because they were particularly good at making software. (Or, maybe they were particularly efficient at writing code, but the technology has changed and they no longer appear to have that advantage. Plus, the fixed cost to write code is much lower than the cost to build a chip plant.) Dell’s advantage came from declining component prices. As long as they were dropping really fast (40% a year), Dell had a commanding lead over its rivals becuase it carried less inventory. Once the cost of components stopped declining at a torrid pace, Dell lost is advantage – having very little inventory buys you little if prices are not dropping.  Plus, its product design was not sufficient to command a premium price.

So Dell and Microsoft were victims of changing technology. At some point Intel will be too… just probably not in the immediate future.

Facebook and Google – Part II

Two follow ups to our previous post about customer service at Google and Facebook. The NY Times quoted Andy Rubin, Google vice president for engineering in charge of Android technology, from an on-stage interview Mr. Rubin conducted at the Consumer Electronics Show in Las Vegas:  “We have to get better at customer service,”.  I think I found video of that interview in the WSJ: click here.  You would think that his response would be “We have a fantastic product and we need to have equally fantastic support wrapped around it. We haven’t been where we want to be, but we are going to be there very soon.” But instead, his response is more like “There are a bunch of complaints out there, but have you ever tried to launch a new tech product? I think we have done really well.” This response is almost a case study in customer service on its own.

Next, Facebook. Last week the imposter Gerard P. Cachon was on facebook. I had tried for six months to remove it and/or to contact the company. Mike Trick, couldn’t find the account this morning … and neither could I! Go figure! I am glad the account has been removed. I would love to know why and how (given that I was never able to contact anyone at Facebook). Nevertheless, it is still an interesting customer service approach – provide a bunch of help pages and nary a phone number or an email address. Like I wrote, it may be the “optimal” approach.

Death to Facebook – a self service nightmare

 Before getting to Facebook, let’s start off with Google. The NY Times today reported on Google’s troubles with their customer service for their new phone, the Nexus One (see NY Times 1/12/10).  Apparently, if you have a problem with the phone, there is no one to call – no customer service representative to help you figure out why you can’t use your phone … nobody! This should not come as a surprise to those of us (all of us?) who use Google’s search page – nobody to call if you have problems with that either. But the big difference is that who needs to call about the search page? – it just works and is simple. A phone is entirely a different product.  A wonderful example of how a company can get into trouble when it becomes dogmatic about business practices – “we don’t do X for service A, so why should we do it for product B?”. 

Of course, Google doesn’t offer live help for their phone because (a) they think everyone has at least 1/2 the IQ of their engineers (we don’t) and (b) it costs too much.  They do offer email support – with a lightning fast 3 day turnaround (they hope to get it to 3 hours at some point soon)…. “we are thrilled that you chose to purchase a Nexus One, and in about three days we will respond to your e-mail so that you can be thrilled to use it”.

Before I start to rant and rave too much, let me get to a company that infuriates me more than any other – Facebook. I know, everyone loves Facebook. But I don’t. And here is why – there exists a Gerard P. Cachon on facebook and it isn’t me. The problem is not that there is another person out there with my name. The problem is that that account is using my old Wharton picture.  So if somebody wants to “friend” me, they search for me, see my picture so they think they have “found me”, offer to be my friend and then never hear from me… because it isn’t me!

No problem you say… report the account as fraudulent. I can’t. Although it is found in Facebook, the hacker is using an id that Facebook doesn’t recognize, so Facebook’s self-service “report a fraudulent account” service doesn’t work. OK, just contact somebody at Facebook to resolve the issue … you can’t! Not a phone number, not even an email – they won’t even let you send them an email… I’d even wait 3 weeks for a response.  They provide plenty of help files that keep pointing to the webpage that doesn’t work precisely because the account is fraudulent. (BTW, my anger boiled to a froth when the account started listing my relationship as “complicated” and I am “seeking a relationship with a woman”… neither of which are true.)

I understand that a growing company needs to avoid burning cash and customer service can look like a frivolous expense. But a complete lack of even basic customer support can burn good will. Still, maybe it actually is the optimal solution – sacrificing 1% of your customers so that you don’t have to incur costs to support 99% of them may actually make sense. Plus, it provides a self-inflicted motivation to design the product/service so that it doesn’t need customer support – no engineer can say in a meeting “if they don’t get it they can call customer service”.

My main advice – if you want to take the “Customer service is for wimps” approach, make sure your product is actually simple enough to not need any support.

Ford to build one Focus

Ford is trying to do it again. Do you remember the Escort? It was suppose to be the “world car”, but apparently there was only about one part that was common between the U.S. and the European versions.  But that was then and this is now. Ford is (and they are serious this time) committed to developing *one* Focus for the world (see NY Times, 1/9/2010)

The strategy is based on the premise that preferences are converging around the world and so the one world car strategy is feasible. Not only is this probably correct, it probably has been correct for quite some time – customers have always wanted a safe, inexpensive, fun to drive, fuel-efficient, stylish, reliable vehicle.  Car manufacturers like Toyota and Honda understood this (though Toyota has waivered from this strategy in recent years).  Mind you, the Focus is probably too much vehicle for the newly not-so-poor of India and China. But for the market that wants this size of a vehicle, it may indeed be possible to provide them with one vehicle around the world.

If the market will accept this approach, then there is a lot to be gained through operational efficiency. Ford could amortize the development and tooling costs over more vehicles. Multiple factories could produce the vehicle, thereby sharing production know how.  Procurement should be simpler and scale should give bargaining power. Finally, it may even be possible to share capacity across markets, assuming the car will be built in multiple markets as well.

And it is worth noting that they will not insist on “any color, as long as it is black”. The plan is to allow some market localization of interiors in such a way that it would not significantly alter the production process. Furthermore, there will not be a single marketing campaign, but more like 5-6 themes that are designed to the particular needs of the target market.

If this strategy will work, then it probably is due to a commitment by senior management, in particular, the CEO, Alan Mulally.  He came from Boeing and noted that Boeing used one door on all of their planes sold throughout the world. Why should Ford need to design doors, steering wheels, etc, for each market? Very good point. Let’s hope the strategy works for them this time.

China passes US in auto sales

I remember when Nixon resigned, where I was when I learned of the first Space Shuffle disaster, and my shock and disbelief when I saw the pictures of the Twin Tower burning (I turned on the TV only after the 1st one had already fallen) and now we have China passing the US in auto sales (NY Times 1/08/10).  OK, maybe this is not as important as some other events, but in the operations management world, it is a biggie…. or is it?

China sold 13.5 million vehicles (including 650,000 heavy trucks) whereas the US sold 10.4 million, the lowest level in 27 years. I suspect the US will be able to regain that title in the next year or two as our market rebounds to the old/normal levels, but that will only be a temporary “victory”. However, we probably will “own” the “number of autos per capita” stat for a long time, and I am sure that the total carbon emmission of our 10.4 vehicles swamps the carbon output of China’s 13.5 million. So there is hope for those who need to feel good via stats.

In the end, the most important part of this news item is that if you want to be a world player in the auto industry, then you better be a player in China.

Upper Mismanagement – and Who Should Be Blamed for the Economic Crisis

No matter which top business school you talk to, the number of students who enter b-school with the aim to make a career in operations is small, relative to the future investors, CFOs, and traders. At the same time, many schools are updating their core curriculum to make it more relevant to the needs of future managers. More often than not, this means cutting ops and expanding on leadership, communication, and ethics. Now, nothing wrong with these topics… But, if the US wants to recover from the ongoing economic crisis, it sooner or later might want to start producing things again (with things being something like computers or cars, not mortgage backed securities…). 

The link shown below makes an interesting link between the US inability to be competitive in many manufacturing sectors and what we teach at b-school. You might agree or not agree, but this is a timely topic.

http://www.tnr.com/article/economy/wagoner-henderson