(iStockphoto/aydinmutlu)Logistics issues have taken on unexpected and possibly unwanted “glamour” among those who study business and economics, thanks to the COVID-19 pandemic and its global aftermath.
It’s a throwback to the days when railroad management was all the rage in the original Harvard Business School curriculum among those interested in studying business in 1908. I should know. I was invited to join the HBS faculty not to teach marketing, service management, or general management, among my later teaching assignments, but to help breathe life into efforts to teach logistics.
In those days, there was fascination with air freight and the trade-off of inventory and transportation costs—as in spending more for air transport in order to spend less on owning inventory, thereby optimizing what we called the “total cost curve.” (I can still draw those curves in my sleep.) A plentiful supply of “safety stock” was the order of the day for those using slower forms of transportation.
"The result, of course, was what came to be known as 'just-in-time' inventory management, as championed by firms such as Toyota."
One of my interests: The value of improved inventory information in a distribution channel on overall inventory levels and costs. One thing that may have helped generate the HBS offer was an experiment I performed using my own crude version of what would become known as the “beer game.”
In my approach, my Ohio State students managed inventory at various levels in a distribution channel. Fluctuating demand at the retail level would generate exaggerated fluctuations—a “whipsaw” effect—in expected demand and inventory planning at the back end, or manufacturing level, in an effort to meet possible future demand. In one simulation, students had little knowledge of inventory levels other than those for the company they were managing. In another, they had full information about inventory quantities at every level in the channel. I found significant value—expressed in lower inventories and fewer out-of-stock situations—in channel-wide inventory knowledge.
Over the years, information technology contributed to more complete knowledge about inventory status as well as more dependable transport. Both made a strategy with less safety stock more viable. The result, of course, was what came to be known as “just-in-time” inventory management, as championed by firms such as Toyota.
The approach worked. The amount of inventory needed to support a given sales level shrank. Logistics as a component of the total cost (transport plus inventory) of doing business came down. Customer service, as measured by stockouts, improved.
"What we had come to take for granted then exploded in our collective faces."
US auto manufacturers, following Toyota’s lead, were at times maintaining just half a day of inventory of some parts supplied domestically—until the pandemic. What we had come to take for granted then exploded in our collective faces.
When the smoke has finally cleared and flows of goods have become more plentiful and dependable, how will industry respond? Surely inventor-to-sales ratios will come back down, but to what extent?
Will we return to the halcyon days of pre-pandemic inventory management? Or will larger safety stocks, with determinants programmed into inventory management formulae, be the order of the day?
Have we seen the peak use of “just in time” inventory management? What do you think?
Share your thoughts in the comments below.
Editor's note: Heskett explores the leader's role in his book, Win From Within: Build Organizational Culture for Competitive Advantage.
Your feedback to last month’s column
Is Stakeholder Management Facing New Headwinds?
Thoughtful comments raise added questions. That was the case in the several responses to last month’s column. The general sense that they left in my mind was that stakeholder management is facing new challenges posed by the rise of what John referred to as the “tribal spectrum” and the polarization that accompanies it.
Perhaps the most significant question raised by respondents was that of balance. To what extent should a leader attempt to balance the interests and values of various stakeholders in making an important decision?
Meena Raghunathan said, “My concern is more for the stakeholders who have interest but no power or voice! … They are given the least attention and support, though they may need it most.”
On the other hand, Mark K., the CEO of a “publicly traded financial institution,” commented that, “it is my experience that a critical component of the leader’s job is to ensure that proper, meaningful consideration is given to the unique balance of the needs of each of the corporate stakeholders … Balance leads to performance whereas imbalance leads to M&A and becoming a statistic.”
The challenge of balancing interests is that a wide variety of interests may describe any one stakeholder. As John points out: “Sometimes you have to decide which employee values does the business need to foster in order to align to your customer demand.”
Clearly, stakeholder management is not getting any simpler or easier.