Daily Archives: August 1, 2011

Efficiency is Never Bad. It’s the Focus on Cost-Cutting that Kills You!

Glancing through my notes, I came across this piece in S&DC Executive from the early spring that asked if too much efficiency [can] be a bad thing. I bookmarked it because articles like this really grind my gears. We have enough problems without respected publications publishing idiotic articles, such as this, that try to answer difficult problems with findings from studies that identify correlation, not causation. (And as Pinky and the Brain explained in their brilliant lesson in statistics, correlation and causation are not the same thing. Simply put, correlation measures the relationship betwee effects, which have underlying causes.)

And while I fully believe the results from the in-depth study that asked what drives financial performance and analyzed the financial performance of publicly traded U.S. manufacturing firms from 1991 to 2006, as reported in Volume 29: Issue 3 of the Journal of Operations Management, I reject the editorial staff’s claim that the results present empirical evidence to support the view [that too much efficiency is a bad thing]. Efficiency is never a bad thing. It’s the principles guiding the application of the efficiency that is the problem.

As the article states, if there is no slack in the supply chain when a disruption occurs, then this will cause operational problems that will result in a negative financial impact. But the decision to go all-out with a Just-In-Time (JIT) philosophy is not an efficiency decision, it’s a cost-cutting decision. Less stock means less inventory and carrying costs. So some firms, in their effort to save every penny, go ultra-lean and then run into serious problem when a demand surge or supply disruption hits.

Efficiency corresponds to the production, inventory, and logistical processes used to manufacture, store, and ship the goods. It’s streamlining the process to eliminate time and resource waste, not cutting production quotas to dangerous levels. It’s minimizing packaging and storage space requirements by maximizing package integrity and space utilization, not eliminating safety stock. And it’s optimizing the distribution network for quick and affordable shipping, not altering lot sizes to fill an existing truck or lane to save a few pennies on shipping costs (when there are dollars to be saved from a network redesign).

Efficiency is never bad. Only ill-conceived supply chain design decisions and overly ambitious cost cutting is bad. And anyone who thinks otherwise doesn’t understand what efficiency means.

Why Finance Needs to Work With Supply Management

A recent survey by KPMG that was highlighted in a Supply & Demand Chain Executive article on how finance executives [are] at odds with dated, ineffective technology made it abundantly clear why finance needs to work with Supply Management. The global study found that the number one weakness in finance processes, as reported by almost one-third of respondents, was planning, budgeting, and forecasting.

It’s hard to plan without a budget, and its hard to budget without a forecast. To get a forecast, Finance could work with Marketing, but that’s not meaningful from a Finance perspective. What’s meaningful is how many units are actually bought and used / sold. And how much is actually paid. Who does the buying? Supply Management. And who is most likely to have a price locked in, or at least reasonably estimated? Supply Management. If Finance works with Supply Management, they can get meaningful acquisition/production forecasts (distilled from input from Marketing and Manufacturing), generate meaningful sales forecasts (using historical fill rates), calculate a realistic budget (once target sale prices are factored into account), and then construct an actionable plan. But if Finance doesn’t work with Supply Management, then everything is a crap-shoot estimate based on unrealistic interpolation curves.