Oct 10, 2016

The New Paradigm in Operations Management

R Jayaraman

There was a time when companies used to produce one or two products and sell them in a welcoming market. The Ford Model T comes to mind. Beginning there, we have come a long way. In companies like HUL, which has a string of brands – I hope the top management is aware of all of these, they multiply and get subtracted and morphed so fast – and under each brand, there are around 15 to 20 variants. The product mix can be mind boggling. Similarly take a company like Tata Steel. With a hot rolling mill, a cold rolling mill and several rod product mills, the number of products in the product mix could easily exceed a thousand.

To deal with these complexities, automation and computer advancements have aided a great deal. Let us look at some of the complexities. First, the number of customers has gone up geometrically, as also classified into layers – wholesalers, distributors, stockists, retailers, and finally, the end customers. Just imagine, your company had one product and 100 distributors. And each distributor placed an order once a month and was supplied once a month. This makes for 100 orders and supplies each month, respectively. Now consider, the product mix increases to 1,000. The tiered layer of distributors etc. is now a huge 1,000 plus end customers which the company serves directly through company-owned dedicated stores. If you include only the tiered layers, then we have 1,000. Let us assume each distributor orders for 50 products every month through 50 orders. Thus we have now 1,000*50*50 orders per month, or, 2.5 million orders per month! And you haven’t even begun to consider the company owned stores. You get the picture.

That’s talking from 100 orders to 2.5 million orders. What effect will this have on the manpower requirements? Let’s say that you employed one person to handle 100 orders, and that over time he could handle 1,000 orders per month, with the help of some automation, SAP etc. Poor SAP, he is still stretched! Now consider that the orders have gone up to 2.5 million per month. So how many people will you hire? I leave it to your imagination. You can now appreciate why CEO salaries have jumped by orders of magnitude; they have to deal with these magnitudinous problems.

Now, multiply by the amazing number that one sees on the television screen these days. Amazon is offering 2.5 crore items for sale through the EC. Let me tell you the zeroes – 25,000,000 (25 million). And then today I saw another shocker. EBay is offering 100 million items or 10 crore items on its platforms. Isn’t the world going nutty?

Let us look at the impact on logistics. If for the 100 orders, 10 trucks were needed every month, one might be tempted to say that for 2.5 million orders, one might need 250,000 trucks. Making allowance for a compression ratio of 1:100, the requirement will come down to 2,500. What’s going on? What has EC unleashed? Logistics will go loony, transport will go bonkers and roads will be soon flooded by CV traffic –commercial vehicles like trucks, pick-ups, trailers, containerised trucks etc.

But the figures of CV sales show that, in India, over the last few years, the demand has been going down. So what’s happening? With Amazon, Flipkart (let’s hope the cart won’t flip), Snapdeal and the lot, one would have looked forward to a big boost to CVs. But I guess another phenomenon is hitting the logistics scene – that of smaller vehicles likes the Tata Ace, Mahindra Maximo and the tempos. And then the UAVs (of the “surgical strikes” fame) and the drones. While overall the need for logistics has increased manifold, the log–mix is undergoing a change due to the advent of EC. Most of EC sales is retail and wholesale is perhaps on the decline. This can lead to a reduction in the need for large, tonnage trucks, but smaller trucklets, with shorter run spans.

And then the number of orders – this is the biggest paradigm changer. Whereas materials managers and procurement specialists dealt with “reasonable” numbers of items, the explosion of offers from the likes of Walmart, Safeway, Amazon, Flipkart, Snapdeal and their ilk is likely to cross “reasonable” limits by large margins. This will surely lead to changes in purchase practices, materials receipts, storage practices, warehousing and warehouse practices, monitoring of stocks systems (I think RFID will soon, if not already, have to make way for something else). This indicates that the future tasks, skill sets, competencies required of personnel in company employment will be quite different. Digital systems will have to be used in much larger areas and in a much more intensive manner. Linked, interactive, AI inbuilt systems will have to be the norm rather than the exception. Software will have to be everywhere.

Welcome to the brave new world of Operations Management – whose name itself will have to change to Value Stream Management. This is a world where systems are studied in a holistic and integrated manner, without the classical finance, HR, operations etc. Value Streams will deliver values to customers through a seamless network of linked and interactive series of systems, to drive which one needs multiple, cross functional knowledge and expertise. So the future world will be one of higher specialisation, but more broad-based knowledge coverage. That’s the brave new world of a Value Driven Society.

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