Efficiency not the only factor in successful supply chain/operations
As agricultural producers continue to face a challenging economic environment, agricultural retailers are having to adjust to the new market realities. Looking for efficiency gains and margin opportunities is the name of the game. Are we looking in all areas to find these opportunities? Ultimately, a large part of the retail business is about supply chain management and operations, or SCO. What opportunities do we have to improve costs or margin from an SCO perspective? Traditionally, SCO management has often been associated with efficiency, but that’s not necessarily an all-encompassing way to think about SCO strategy.
I recently had the opportunity to ask a few questions of Thomas Kull, an associate professor of supply chain management with Arizona State University’s W.P. Carey School of Business, to get some insights on the roles various factors play in supply chain and operations. Dr. Kull’s research has focused on behavioral issues in operations and supply chain management, as well as supply chain risk issues. He will offer his expertise at the 2018 ARA Management Academy, which is a partnership between Purdue’s Center for Food and Agricultural Business, the Agricultural Retailers Association, and ASU.
Supply chain/operations often focuses on analytical solutions to optimize performance. You have argued that the human and social considerations are also important. Can you explain what you mean by this human/social element?
Dr. Kull: SCO systems both affect and are affected by human and social elements. This dynamic ultimately influences outcomes. Just as an example, studies show that workers decide to work faster as supplies diminish. That could be good, that could be bad. Either way, SCO designers need to be aware of such influences if they want to best use their systems.
In retail agribusinesses, Mother Nature plays such a critical role in how the supply chain ultimately performs, particularly in crop agriculture where seasonality and timeliness are such critical factors. In your experience, in supply chains that face a great deal of disruptive risk, is the balance of technical and human/social elements different than in supply chains that are more controllable?
Dr. Kull: I don’t know if the balance between social and technical influences differ as disruption risk increases, but I would say that the effects change. From the human and social side, it is known that people react differently to uncertain situations—some accepting uncertainty when they shouldn’t, and others avoiding uncertainty when they shouldn’t. As well, high stability sometimes induces high complacency. SCO leaders just need to be aware of how the hazards change as risk varies.
SCO, I think, has historically been synonymous with efficiency, standardization and driving out cost. But there seems to be a growing focus on thinking about how supply chain and operations needs to be revamped to be more responsive and flexible to create and capture value. What is your perspective on efficiency versus flexibility or standardization versus customization?
Dr. Kull: I sometimes am surprised by the prevalence of the view that supply-chain operations are focused on efficiency only. My experience has been that it all depends on the situation. What is consistent is that people in SCO have always been expected to “get things done”—hit the production target, get the critical shipment out, fix the quality problem, drive down costs, etc. Flexibility and responsiveness are always valued. It is likely, however, that such qualities make a bigger difference in uncertain environments. Yet efficiency still matters. So it likely is not an either/or question. Find a way to do both.
Of course, it seems like a great idea to be as flexible as possible to create value for your customer. But that costs money. How do we think about capturing the value we might create?
Dr. Kull: Value capture and value creation have an interesting relationship. Each requires different skills. Some organizational members are great at one and not at the other. A lot has to do with one’s training. Capturing value without creating value is a missed opportunity. Creating value without capturing value is irresponsible. From the perspective of an agent for a firm, if I create value in the supply chain and do not capture any of that value for the firm, then that is irresponsible. As well, if I just try to capture value in a situation without trying to create any value, that is a missed opportunity because I could have explored the situation better and ultimately reaped higher benefits. SCO leaders would do well to hardwire systems so that both activities occur simultaneously. Set in the right goals, using the right procedures, and putting the right skillsets at the table are a great first step.
Often we think about continuous improvement as a key element of SCO. What does continuous improvement look like? Is this consistent with this perspective of revamping or shifting the focus from efficiency to value creation?
Dr. Kull: Continuous improvement, or CI, is really a counterbalance to continuous decay. Entropy. And it is not just the internal systems depreciating. SCO systems are designed for a purpose that is partly external to the system—e.g., a customer base. Because the external environment constantly changes, so should the SCO system. Such a change comes in the form of what is called continuous improvement. As such, CI is consistent with value creation, so long as it is finding better alignment between the SCO purpose and the environment.
Speaking of continuous improvement, it seems that to focus on improvement, you have to have measurement or metrics to focus on. In an industry where many things outside of your control can affect the outcome of SCO, how should we think about metrics that can be useful in improving performance?
Dr. Kull: Metrics have a multilevel structure. Some are very particular while others are more general. Take inventory. One can measure amount on-hand, say 100 liters, and set a target of keeping 80 liters average on-hand. But some products are more expensive. So one can, instead, measure value on-hand, and set a monetary goal. But some products move faster, so one can measure days-of-sales on hand. And so forth. As such, when external forces beyond one’s control impact metrics, uncertainties must be incorporated. Likelihoods and frequencies need higher awareness. Airlines do this with “near miss” reports that really mean flights passing within a certain distance. SCO metrics based on hazards versus observables are a first step toward accommodating uncertainties.
ARA Management Academy
Dr. Kull will facilitate a deep dive into Operations and Supply Chain in an Agricultural World at the ARA Management Academy, which runs January 29-February 1, 2018 on ASU’s Tempe, Ariz., campus. Other program facilitators are Purdue faculty members Scott Downey, Michael Gunderson and myself; ASU faculty members Suzanne Peterson and Carola Grebitus; an industry panel; and a grower panel. In addition to SCO, topics include marketplace trends and competitive positioning, thinking strategically, examining profitability, creating value for your customers, and implementing organizational leadership strategies. Learn more and register.