Quality and Innovation

Yesterday was really a fantastic day for me. In addition to starting it off right with a total solar eclipse at 2:11am ET, January 15th will go down in history as the first time I placed an order using OrderTopia. It will definitely not be the last time!

OrderTopia is a social, cloud-based ordering system that integrates directly into the point-of-sale (POS) systems at local merchants (such as restaurants). You place an order online, or with your mobile device, and the OrderTopia system automatically processes your payment and contacts the right people at the right places in the kitchen to construct your meal order.

The process improvement benefits are evident on both the customer and the merchant sides. As a customer, I don’t have to wait in line any more or keep giving out my credit card information – OrderTopia already has it as part of my account. I just walk into the restaurant at the time I said I’d pick up my order, and it’s there, ready for me to go. On the merchant side, all data quality issues between the time you place your order and the time it’s fulfilled (for example, the cashier misinterpreting what you say, or typing it wrong into the POS system) are erased. By eliminating those steps from the process of fulfilling your order, the path through the system is also shortened.

I can also sense that OrderTopia will improve my quality of life in the future. I won’t be spending valuable minutes waiting in line for lunch — nor will I spend a lot of time trying to figure out what I should order – I’ll just be clicking on a “favorite lunch” option on my Droid, specifying the time I want to pick it up, and then showing up to get my lunch. It will be like having a personal assistant, only it will be OrderTopia. I’ll be able to see what lunches my friends have ordered around town, find out who likes what, and track what I’ve eaten too. In the future, I’ll never worry about how long the line is at one of my favorite lunch places… or whether I’m going to miss out on Eppie’s Wednesday tamales because I showed up too late… OrderTopia will take care of it!

From the July 6, 2009 issue of Business Week:

“A new world order is dawning – one in which the West is no longer dominant, capitalism (at least the American version) is out of favor, and protectionism is on the rise… the era of laissez-faire economics is over, and statism, once discredited, is making a comeback – even in the U.S…. global trade is set to fall this year, for the first time in more than two decades.”

We have been conditioned to think that the notion of space – geographic space – does not matter in the new economy. We have the Internet, and ideas can zing from one place to another with ease (and nearly instantaneously, for that matter). Add to this videoconferencing with Skype, and keeping up with your contacts on Twitter and Facebook in near-real time, and it’s no wonder that people have also become accustomed to assuming that materials can move from one place to another with similar relative ease.

Space does matter. We know this when we are designing facilities and plant layouts, for example, because one of our common considerations is to minimize traffic between areas and departments. More often than not, we do this to minimize the time spent moving people or equipment around a plant, so that time is not wasted. But the same concept could apply to our supply chains. Why aren’t we minimizing the time that components or goods spend traveling through the supply chain, when it could lead to reductions in energy costs? Furthermore, why aren’t we shortening our supply chains to strengthen local and regional businesses, and train the next generation of skilled workers (who can actually do something useful for the regional economy)?

The logic has been something like this: energy is cheap, therefore transportation is cheap, and transportation is easily available and accessible through third-party providers like FedEx and UPS. But I can’t shake the feeling that “supply chain status quo” is not good for quality in the long-term – because it encourages us to source the products and components that are most affordable, rather than the ones that might help us cultivate a quality consciousness in our local areas.

On my drive home tonight, a giant “Maersk Sealand” branded truck passed me on the highway. It got me thinking about the innovation of the shipping container, and how introducing a standard size and shape revolutionized the shipping industry and enabled a growing global economy. At least that’s the perspective presented by Mark Levinson in The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. A synopsis of the story and a sample chapter are available; Wikipedia’s entry on containerization also presents a narrative describing the development and its impacts.

Here’s how impactlab.com describes it:

Indeed, it is hard to imagine how world trade could have grown so fast—quintupling in the last two decades—without the “intermodal shipping container,” to use the technical term. The invention of a standard-size steel box that can be easily moved from a truck to a ship to a railroad car, without ever passing through human hands, cut down on the work and vastly increased the speed of shipping. It represented an entirely new system, not just a new product. The dark side is that these steel containers are by definition black boxes, invisible to casual inspection, and the more of them authorities open for inspection, the more they undermine the smooth functioning of the system.

Although some people like to debate whether the introduction of the shipping container represented an incremental improvement or a breakthrough innovation, I’d like to point out an entirely different aspect of this story: a process improvement step yielded a plethora of benefits because the inspection step was eliminated. Inspection happened naturally the old way, without planning it explicitly; workers had to unpack all the boxes and crates from one truck and load them onto another truck, or a ship. It would be difficult to overlook a nuclear warhead or a few tons of pot.

To make the system work, the concept of what was being transported was abstracted away from the problem, making the shipping container a black box. If all parties are trustworthy and not using the system for a purpose other than what was intended, this is no problem. But once people start using the system for unintended purposes, everything changes.

This reflects what happens in software development as well: you code an application, abstracting away the complex aspects of the problem and attaching unit tests to those nuggets. You don’t have to inspect the code within the nuggets because either you’ve already fully tested them, or you don’t care – and either way, you don’t expect what’s in the nugget to change. Similarly, the shipping industry did not plan that the containers would be used to ship illegal cargo – that wasn’t one of the expectations of what could be within the black box. The lesson (to me)? Degree of abstraction within a system, and the level of inspection of a system, are related. When your expectations of what constitutes your components changes, you need to revisit whether you need inspection (and how much).

Supply chains aren’t actually linear chains, but socio-technical systems that can be expressed as networks. In an October 2004 article in DM World, a data management magazine, Dennis Ladd expressed it well:

Today’s competitive, fast-moving business environment has irrevocably changed the supply chain and the management of its functions as we know it. The traditional “chain” of sourcing/production/distribution linked in a linear and simple fashion is no longer a reality given the complicated and global rate at which business is now conducted. Many industry pundits have even created new nomenclature: it is no longer a “supply chain” but rather a “supply network.”

For simplicity, we’ll refer to a supply chain and a supply network interchangeably. A supply chain is a process of transformation:

• A process starts with Inputs (which could be raw materials, components, or data),
• which are Transformed by adding value (through processing, assembly, or applying specialized knowledge) into
• Outputs (work-in-process material, physical products, knowledge products, services)

People and software are involving in all phases of the supply chain: getting inputs, adding value, and producing outputs. Together, they manage three types of flows through the system: 1) the flow of materials, 2) the flow of information, and 3) the flow of funds. Not surprisingly, supply chains can be challenging to manage! Here are three factors that can influence supply chains:

Environment. A supply chain defines the connection of a company’s operations with the outside world. When that world changes, the supply chain can be impacted – whether the changes are on a large scale (e.g. the current U.S. financial crisis) or a small scale (your most critical supplier just implemented a new ERP system and half their office staff quit).

Interactions. Coordinating the elements of a supply chain means that people must interact with people, software must interact with software, and people must interact with software. Sometimes the people and the systems are based in different companies, with different pressures, priorities, interests and levels of experience.

Complexity. Supply chains are only as strong and healthy as their component processes. And all too often, those processes are overly complex. This complexity works itself into the underlying supply chain management (SCM) software systems, sometimes making those systems unwieldy. The remedy is to strive for simple, understandable processes that are easy to explain – to yourself and to others.

[For network junkies: if you express your linear supply chain as a network, it will end up looking like a bow tie, with your company in the middle of the bow. If you add into this network the interactions between people and software, and how they interact with each other and with each stage of the supply chain itself, the result will be a complex socio-technical network that will have to be analyzed statistically.]

Just-In-Time (JIT) practices are a cornerstone of the fast-paced, 21st century globalized economy. But as the October 2008 financial meltdown has so starkly indicated, when just a few of the assumptions on which a critical system is based change, all hell can break loose. What effect could the economic crisis have on businesses that rely on JIT?

There are several scholars who have studied JIT in depth – the pros, the cons, and of course the implementation details. But one recent article stands out most, to me, as I try to gauge how the seismic shift might impact business. In 2006, Tony Polito (an Associate Professor in the Department of Marketing and Supply Chain Management at East Carolina University) published an article in the Journal of the American Academy of Business detailing the ubiquity and fragility of Just-In-Time practices. If you’re involved in a business that uses or depends on JIT, you should be aware of his conclusions – forewarned is forearmed! I’ll summarize them here to save you some time, so you can start thinking about the structural health and viability of your own business processes.

First of all, it’s important to recognize that JIT is indeed a cornerstone of business practice in the U.S. and abroad. Polito notes a 2001 survey in which 92% of manufacturers believed that JIT was critical, and a 1990 study showing that 98% of customers at that time expected “JIT treatment”. He remarks that “global corporations are mistakenly reliant on extensive supply chains that are disastrously under-buffered [by sufficient excess inventory].”

Polito calls out five “major constraints” on the JIT process:

• Customer-Driven and Economic Conditions: “JIT savings are based on the implicit assumption that additional inventory is always available for quick delivery at the same price as old inventories.” Effective JIT also depends on capital availability, and relative stability of customer demand. In a challenged economic environment, capital is not as readily available to companies and consumers alike, and customer demand wanes.
• Logistics: If transportation fails, so will your supply chain. This can happen not only as a result of economic turmoil, but also due to rising energy costs, labor disruptions like strikes, and catastrophic weather events like hurricanes and floods. The proposed solution is, again, to increase buffer stock.
• Organizational Culture & Conditions: Worker-based collective decision making, trust, and decentralized control are also noted as essential ingredients for JIT. If the people doing the work don’t have the freedom to improve their own processes, the health of the JIT-based supply chain will suffer. Trust across international boundaries is also critical; foreign suppliers or recipients of product may unexpectedly change their policies to reduce risk, especially if credit is an ingredient in the business relationship.
• Intractable Accounting & Finance Practices: After describing some specific roadblocks that disparate financial systems between supply chain partners can present, and calling out limitations based on financial accounting methods themselves, Polito recommends that improvement of processes prior to improvement of measures may help.
• Small Supplier Difficulties: One of the criticisms of JIT is that it silently offloads costs from larger companies onto the smaller partners, and many small suppliers have implemented “JIT premiums” to offset this effect. Relaxing JIT requirements could have a positive effect on these members of your supply chain, which could also reduce your costs, so examining the pressures on your smaller suppliers is warranted in an economic downturn. There might be hidden opportunities for both sides.

What does this mean for managers? Among other things, increase long lead-time inventories, compare the costs of stockouts with the benefits of not having stockouts, re-examine the risks that your upstream and downstream partners may perceive, and assess the resilience of your smaller suppliers within an economic crisis. You might also think about resetting expectations with your customers regarding how quickly you can deliver.

Polito’s article is available on his web site at http://www.tonypolito.com/wri_jit5.pdf – I strongly encourage everyone to give it a read as it provides far more detail, and illuminating examples that are not presented here in my summary.

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Polito, T. & Watson, K. (2006). Just-in-time under fire: the five major constraints upon JIT practices. Journal of the American Academy of Business, Cambridge. 9(1), March 2006, 8-13.