Supply chain lessons from Japan

March 18, 2011

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 scare 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.


Taxi capacity in NYC – the 4 O’Clock Blip

January 12, 2011

Apparently it is hard to find a taxi between 4 and 5pm in Manhattan. Why? Because that is the time when many taxis switch drivers. This turns out to be a fascinating capacity management issue.

The first surprise is that a substantial number of taxis are used around the clock in two 12-hour shifts. I guess NYC really does never sleep.

So, given that you have two 12-hour shifts, and clearly one driver can do only one of those shifts, you need to decide a time and place to switch drivers. The place turns out to be, in all likelihood, a garage in Queens. (The use to do it in Manhattan, but real estate became too expensive, so they moved to Queens.) The time, you would think, would be chosen at a relatively light period. Or, it would be chosen so that earning potential of the two shifts are equated in some sense (accounting for the fact, I would assume, that the day shift is more pleasant than the night shift).  Take those factors into account and apparently 4 pm is a good time to swap drivers – one person gets the morning rush hour, one the evening rush hour. The result, according to NY Times 1/11/11 is a 4 O’Clock Blip of empty taxis:

What is really interesting about this is that the spike is so pronounced. If 20% of the taxis are taken out of service 4-5pm, then you would think that there would be a noticeable drop in competition. Wouldn’t more taxis want to make the switch at 3pm or 6pm to take advantage of this? In other words, why isn’t the blip smoother? Given that it is spiky, it must be that it is too costly to switch at the other times relative to the 4-5 pm slot.

One explanation has to do with coordination. If some cab drivers make the switch at 3, others at 4, others at 5 and yet others at 6, a cab driver needs to know when he will make his switch – when to drive the taxi back if he is doing the day shift and when to show up at the garage if he is doing the night shift. Keeping track of those times might lead to the inevitable late cabby, which will lead to idle taxis. Having everyone show up at 4-5 is a simple rule that is easy to remember – you show up at 4-5. When do you show up? 4-5.  But this seems like it could be fixable with technology. A computer keeps track of the schedule and sends reminders to cabbys as to when they will show up. Or, it could be fixed with some consistent scheduling – for a given month a given cabby will have the same drop off/pick up time but the times are staggered to smooth the spike.

An alternative explanation could be due to demand. Maybe demand drops significantly at 4-5, so being a taxi at that time is not as advantageous as the lower supply would make it seem. This strikes me as unlikely, but what do I know about taxi demand in Manhattan between 4 and 5pm?

The Bloomberg administration is looking into this issue, being a data-driven type of administration. To their credit, they don’t plan to do anything until they identify the root causes. And even then, they say they are hesitant to tell businesses how to do their business – maybe the taxis know something that we don’t know. “Fixing” this issue (if it should be fixed) will not change the world much, but it is a fun capacity management exercise.



Robots or people?

December 21, 2010

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.

Do we need a Manufacturing Czar?

September 9, 2010

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.

What to do when there is no snail mail?

June 16, 2010

What should a postal system do if people stop sending to each other letters (OK, they have already done that), junk mail, magazines, and other physical items? If you happen to be running a postal system, this question is probably on your mind. It is in New Zealand, as reported in the New Zealand Herald (June 9, 2010).  Some of options they are considering are: (1) deliver the mail every 2nd day; (2) drop Saturday delivery; (3) increase prices; and (4) develop a two-tier mail system where premium letters cost more and are delivered more quickly; and (5) use electronic mail to make mail delivery more efficient.

A reduction in total volume wouldn’t be a problem if the postal service was already well over the scale needed for maximum efficiency. Apparently, the New Zealand postal system is not at a sufficient scale and so any reduction in volume will decrease its efficiency further. Given that New Zealand has about 4 million people spread out over two large islands, this is not surprising.  But there is reason to believe this is an issue for even large countries with dense populations – delivering door to door is a labor intensive process, so if houses are not getting some mail on each delivery then that means the miles driven per unit of mail increases.

Let’s consider some of the suggested choices:

(1) Deliver every other day? What a mess for consumers! Say the rule is that the country gets mail on even days but not odd days and of course on holidays.  So you get the mail on some Tuesday but not other Tuesdays, depending on whether the Tuesday is an even day or not. Assuming consumers can keep track of that system, it doesn’t seem to be helpful for efficiency. It is possible to hire people to work Monday to Friday, but working every other day is odd.

(2) Dropping Saturday delivery seems like a good start to me. It isn’t a dramatic reduction in capacity and it is a natural day to drop. It will help with Monday and maybe Friday deliveries, but it probably won’t build scale on Tuesday – Thursday deliveries.

(3) Increase prices is an obvious solution but of course, it will lead to further reductions in volume. One could imagine a spiral effect that leads to the demise of the physical postal system.

(4) Two-tiered system? I can’t imagine that they don’t already have this. And it isn’t clear how this addresses the issue of lower volume enough to matter.

(5) Drop delivery to homes, keep mail in central locations and notify people via email when they have received a piece of mail. To some extent they have already done this. When I lived in New Zealand I had to walk 500 yards to the “town’s” general store which held everyone’s mailbox for the town. In other words, instead of delivering to each person’s house, deliver close to each person’s house. The potential savings may be significant without a substantial decrease in the quality of the service. Relative to increasing prices, this option requires serious consideration.

WalMart in India

April 12, 2010

Retailing, like politics, is said to be “local”.  WalMart clearly knows the U.S. market, but to expand it needs to learn other markets as well. For two years now it has been pushing into India (see NY Times 4/12/10) and WalMart isn’t in Kansas anymore.

First, India has a quant law that prevents foreign companies from selling directly to consumers – a potentially big problem for a retailer. So WalMart has a 50/50 joint venture with an Indian company to get around that problem.

Next, to WalMart’s credit (and retailing smarts), they are not trying to replicate their hyper-efficient big-box model in India. It simply won’t work. Instead, they are learning how to compete in a new market. In particular, transportation in India is slow and costly, so sourcing has to be done locally. In addition, there are no large suppliers, like P&G. Finally, it has to sell food because consumer durables cannot be the main product category (the Indian consumer has to allocate a large fraction of their budget to food). 

The one “habit” that WalMart is transporting to India is their propensity for proactive supplier management. They are not content to sit back and buy what is presented to them. They see inefficiencies in food production and distribution, so they are directly addressing those inefficiencies. They are giving farmers productivity advice and providing logistical support to ensure timely deliveries of quality produce. In short, they are using their scale to invest in their supply base. To make these investments profitable, it is important to make sure that their competitors cannot take advantage of their suppliers’ efficiency gains – the last thing WalMart wants is to improve a farmer’s yield only to have the farmer start selling his produce to another retailer. I suspect this doesn’t happen because (i) WalMart is willing to pay a good price, (ii) WalMart can buy up all of the farmer’s good produce and most importantly (iii) farmers develop a sense of loyalty to WalMart for helping them out. Economists have a real hard time with loyalty, but in the real world it is a powerful force. WalMart seems to understand this.

How local will we become? – fuel costs and international sourcing

August 4, 2008

The cost of oil seems to be influencing everthing these days.  A recent report by CIBC World Markets, as reported in the NY Times, finds that the cost of shipping a container from China to the U.S. is now about $8000, up from $3000 earlier in the decade. In fact, the cost of transportation is now larger than the cost of tariffs.

What does this mean for supply chains – it is intuitive that higher transportation costs should lead to more localized production.  Instead of producing something in one location in a far off place, companies will start to choose to produce in multiple locations, closer to consumers.

Will this trend continue? One reason for international sourcing is wage rate differentials. If they continue to decrease (because wages in countries like India and China increase) and energy costs continue to decrease, then we may be looking at a long term trend to reverse globalization.

NY Times, Aug 3, 2008 – Shipping costs start to crimp globalization