I have been on a trip literally around the world, well, the Northern Hemisphere actually. My trip was originally to take me to Tokyo to meet some customers, Shanghai to speak at a conference, and, finally, London to speak at a conference and meet with Gartner. The terrible earthquake and tsunami, and the resultant issues at the Fukushima nuclear power station meant that I went to Hong Kong instead of going to Tokyo. The need to reroute to Hong Kong is a great example of the difference between planning and response, and the costs that are embedded in a design or plan. It turned out that for my original trip, given that I had three lay-overs of more than 24 hours, it made sense to buy a Star Alliance ‘Round the World’ ticket. It was considerably cheaper than buying each leg from a different carrier, and considerably easier to book and manage given that there is a single web site and service center for all legs. In addition, the flexibility of the ticket is great though there are moderate change fees. The catch is that the ticket is not refundable (in-built cost) and that you have to have at least three lay-overs of at least 24 hours (in-built inflexibility). With the Tokyo leg cancelled I still had to fly somewhere for at least 24 hours or forfeit the entire ticket. But I had to buy my ticket with sufficient lead time in order to get a good fare, meaning I had to buy it before the earthquake in Japan. However, had I bought a ticket at shorter notice to Shanghai and London only, it would have been quite a bit less if we include the costs associated with my stay in Hong Kong, not to mention the opportunity cost of me being away for longer. What I find interesting in this description is to contrast it with a theme emphasized by several speakers at the Manufacturing Supply Chain Officers conference in Shanghai, particularly John Gattorna, but by others too (Incidentally we received a copy of John’s book titled “Dynamic Supply Chains – Delivering Value through People” as part of the event.) The theme is that planning is good, responsiveness is expensive. The underlying assumption is that if we could only plan better we good run a very efficient (in other words low cost) supply chain. What we so often forget to evaluate is the in-built costs created by the plans we make. In my example above, I would have saved money by buying my ticket later. What cost me money was ‘planning’. Being ‘responsive’ would have saved me money. But my management, all the way up to the CEO through the CFO would have shot me for buying the ticket within the 14 day period. My trip wasn’t any more expensive than if I had gone to Tokyo ($125 for a change fee), but I had to spend more than 24 hours in Hong Kong doing ‘nothing’. Actually, I did some site seeing in the late afternoon and evening. Great for me; not necessarily the right thing for the company. OK, I agree, on average it would be cheaper to buy the ticket 14 days in advance. But that is not my point. My point is that we measure the cost of responsiveness, but we don’t measure the cost of inflexibility. Had John Gattorna brought up the built-in cost of inflexibility and the need to balance between the cost of inflexibility and the cost of responsiveness, I would have no issue with his statements. But I would go further than this and say that there are ways of providing profitable response to changing circumstances, provided you haven’t built in too much inflexibility into your supply chain through ‘better’ planning. I just don’t buy into the either/or assumption that is made about efficiency versus effectiveness in supply chain management. We have to look for the AND. To John Gattorna’s credit, he did bring up the issue of ‘brittleness’ of the supply chain, but only in the context of the last recession in which companies drew down inventories to unsustainably low levels. I did not hear him state that ‘brittleness’ is a side effect of not only the recession, but also of planning and systems that only focus on efficiency. And that there are costs associated with this brittleness that we do not measure. Instead, I heard John state more than once that we need to plan better because responsiveness is expensive. Na-uh! It is only expensive if you approach supply chains from the perspective of efficient OR effective, rather than efficient AND effective. To be fair to John, I have not finished his book yet, so I can only go by the statements he made during the conference. I was perhaps even more startled by a presentation given by a company whom I will keep nameless other than to say that they are a mobile handset manufacturer. The central theme of the talk was don’t be different, because being different is expensive. Wow. Needless to say, this company does not have a large share of the market. But to be fair, the focus of the presentation was on logistics, and there I agree. While there are opportunities to do Logistics ‘smartly’, it is a commodity and should really be outsourced to 3/4PL’s. It was during the Q&A session that I was really surprised. When asked (challenged?) about Apple’s success in this space, the speaker said that Apple doesn’t do anything different in there supply chain. What? Guess the speaker missed the part about Apple spending close to $4B earlier this year to buy up the majority of the flat panel displays used in mobile phones and tablets for the next umpteen years. Obviously I am not privy to the actual contracts, but my interpretation of what I have read is that Apple hasn’t given the suppliers a long term delivery schedule by part, but rather they have put money on the table to ensure that they secure a huge portion of the available production capacity. In other words, Apple made the decision that spending on flexibility is cheap. This is smart. So where do you think your next breakthrough in performance come from? From learning to plan better? Or from learning to respond profitably to real demand?
Observations from a trip around the world - Part 1: Response is cheap, by comparison.
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