How to quake proof a supply chain

September 7, 2011

After a long hiatus, we return with a post. This one on Toyota’s plan to quake proof its supply chain over the next five years. (Baltimore Sun, 9/6/11).  They have three ideas:

a) standardize parts across suppliers

b) hold more inventory of critical parts

c) each region should become independent in its parts procurement.

All three will indeed make the supply chain more earthquake proof. The first allows the company to switch production to non-affected suppliers. The second allows them to draw down the reserve of parts. This does rely on the transportation network recovering relatively quickly. And hopefully the inventory is stored in a quake proof facility – imagine you produce a six month supply of microchips only to have the roof cave in and crush them all (or they melt in the subsequent fire). The third will help too (create independent regions) but it may be overkill. If a part is manufactured in a low-quake risk zone, and it is a specialized part that should most cost effectively be produced in a single facility, then why insist that it be made in 5-6 plants? This initiative may have more to do with managing exchange rate risk.

So, these are surely worthwhile initiatives and they apply beyond automobile production. The real challenge will be the implementation details – how will the company decide between part A that costs 5% more but is standard and can be produced in a number of facilities and part B that costs less but is specialized and made by only one supplier in an earthquake prone area? There could be some interesting research done on this challenge.

McDonald’s medicine

February 5, 2011

Americans want instant gratification – that is true for fast food as much as it is for healthcare. Consequently, the traditional model of general practitioner in which you make appointments and then (a week later – if you are lucky) see a doctor is getting increasingly challenged. Patients have found the McDonald’s of healthcare. It is called the ER. You go there when you want and they will get you what you want. One stop shopping for all your healthcare needs.
In the following article, two ER doctors describe their view of the problem – and make us think if we have to invent the way we deliver care:,8599,2044392,00.html

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.

Blockbuster – doomed by its own medicine

September 25, 2010

Blockbuster filed for bankruptcy protection this week, which was expected for quite some time (NY Times, 9/23/10).  Blockbuster surely had a good run, but ultimately was doomed by its own medicine.

Blockbuster grew to dominate the video tape/DVD rental business by providing convenience to its customers – many well-located stores and many copies of the movies/shows customers wanted to see. If you took the time to go to a Blockbuster, you knew you would find something worth watching.  This convenience was provided in large part by negotiating revenue sharing contracts with the movie studies, thereby allowing Blockbuster to stock a large inventory even when at item was first released.

Fast forward to today. I live two blocks/200 yards from a Blockbuster but I was surprised to discover a couple of weeks ago that it was gone.  My 15-year old son explained it to me – “why would I walk to Blockbuster to pay $5 for a movie when I can download the same movie to my PS3?” I had no idea that a PS3 could do that (isn’t it a game machine?) – clear evidence that the generation gap I swore I would avoid is right there in front of me. But I digress. The point is that Blockbuster is no longer as convenient as the alternatives – RedBox, Netflix, etc. It is no longer as important to have many copies of new releases in a store because customers don’t feel the need to leave their home. It is true that Blockbuster makes content available sooner to customers, but that doesn’t seem to have the value that it use to have – my kids troll around for movies of all ages and don’t  rush to see the latest thing.

It is unlikely that Blockbuster will ever regain the dominance it once had. Surely, it will not do it via its 3000 stores, a number that will have to decline. The fall of movie rentals has been predicted for at least a decade – the technology has finally advanced to the point to make it happen.

After Toyota, now Dell

July 1, 2010

Things calmed down for car maker Toyota over the last couple of months following the problem of unintended acceleration in some of its vehicles that we commented on previously in this blog. Now, computer giant Dell is under attack. While its computers are certainly not suffering from an unintended acceleration problem, quality has become a rapidly growing problem. As the below cited NYT article describes, Dell’s recent quality problems are driven largely by component problems (faulty capacitors). Remarkably though, Dell took a similar approach to dealing with its quality crisis as did Toyota. Instead of creating transparency, the company created confusion.
Both tales of defects and poor quality (Dell and Toyota) show that increased product complexity paired with growing cost pressure is an explosive cocktail. Since both of these forces are unlikely to go away in the coming years, the next quality crisis is only a matter of time.

Sayonara to “stack ’em high, watch ’em fly”

May 24, 2010

Inventory management has been changing at Polaris (WSJ 5/24/10) – they have been dropping their dealers’ inventories for the last four years.  With the old system dealers orders twice per year and were given generous incentives to stock up, in short, trade promotions. The article doesn’t mention some key details, like while dealers  ordered twice per year, dealers probably took deliveries throughout the year.  And, dealers probably ordered at the same time, rather than staggered throughout the year.

The new system has dealers ordering once every two weeks. The match between supply and demand with this new system should be much better. With the old system, each dealer had to guess what they would need over the next six months (assuming Polaris didn’t build in anticipation of the next set of dealer orders). Invariably, they would make some mistakes – ordering too much of some products, not enough of other products. To correct errors, dealers probably swapped inventory during the six month cycle, but that isn’t the most efficient way to move inventory around.

Enter the new system. Now dealers order every two weeks and so their orders will far better reflect what they actually need and what is actually selling. In short, the system should be able to reduce dealer inventories *and* better meet demand, unless demand is picking up across all dealers faster than Polaris can produce.

According to the article, this is a trend in the industry – all firms are moving to shorter order cycles. Why? It may reflect competition among suppliers – this is a great deal for the dealers and so to keep a dealer you need to be more attractive. It also may reflect a calculus that the sales incentive of the channel stuffing strategy is not worth the better supply-to-demand matching of the current system. One thing is for sure, Polaris has certainly made some big changes in how it trades with dealers: