Archive for March 2011

Hoarding and Supply Chain

Yoda Accounting Office extends its deepest condolences to all those affected by earthquake, especially those who have lost loved ones.

After the quake, many people rushed to hoard up goods at stores even though they were not directly affected by the quake. They were afraid the goods would have disappeared due to the quake.

Mr. Furuya Bunta commented this issue referring to Supply Chain management in his Twitter (in Japanese). He was a former CFO at a central core company at Coca-Cola supply chain management project in Japan a few years ago.
Mr. Furuya kindly agreed to copy his tweets on our website.

Consumers have an ultimate power to control the supply chain. That is what I realized when I saw the hoarding issue and the saving power supply after the quake.
Consumers explicitly give stress on suppliers to increase production when they hoard stocks up, or they can save power supply enough to avoid the outage eventually.
Literally consumers are the king.

You may think the suppliers make amount of money when they increase their productions to fulfill the short stock after hoarding. However the reality is different.
They have to increase overtimes, run inefficient equipment, and transport materials far away, which increases their costs.

Such costs should be absorbed if the sales also increase. However, the hoarding does not increase the consumption at the end.
The hoarded goods are piled up as “stock” at consumers backyard. The consumers themselves may know soon.

They may save buying goods when they realize they piled up their stocks. By when?
Until the exceeded stocks = hoarded stocks will go out. Therefore, the production increase now is just a cannibalization of the future production. The total sales will be same at the end.

Total sales are same and costs increase more. This is the reason suppliers may fail after hoarding. Other headache is that the suppliers who increase productions for hoarding may have to dispose or discount their stock excess in the future.

Many suppliers calculate the necessary stock level and decide how many they have to produce or purchase. This is the cause of their headache, because they have to increase production or purchase more than they are requested when the demands hike.

When they catch up the demand increasing the production, the purchase decreases. Stocks at stores and warehouses slow down and the obsolete risk increases.
The suppliers may have to discount, or dispose after the UBD (used-before-dates) expire.

Hoarding is not the benefit for anyone else as a total social welfare. But the consumers are the king. It is not easy for suppliers to change their mind set.
We have one solution to change their mind.

Increase prices when the hoarding happens. It may be considered as preying consumers weakness, but it is more practical if you consider the total social cost.

Imagine you are in a long cue to wait for filling gas when the gas is short. At your turn, you may want to fill up full if the price is as usual. But what if the price is +30%? You may save and just fill as you need for the present.
This is how to control hoarding even though the gas station does not limit your maximum charge.

As discussed above, the hoarding may increase the total costs. To absorb the cost, the price increase is necessary.
The price increase is the way to show consumers how much the total social costs are and let them decide.
SCM is more than we see.

SCM and resource consumption

Yoda Accounting Office extends its deepest condolences to all those affected by earthquake, especially those who have lost loved ones.

Today, I went to a convenience store. Goods were filled on selves and their operations are now being recovered as usual.
I bought a pastry there.

The operations being recovered should required great efforts of many people.
The pastry was made after such complicated and various processes of SCM.

You can bake a piece of bread from flour, water and yeast. But they are not enough if you want to sell the bread as a retail product.
You may require clean plastic case to warp, crate to contain, and a smooth efficient logistic system to deliver the product to a retail store.
And a sticker on the wrap. It is just a sticker, but you cannot sell the product without the sticker, which is against Food Sanitation Act.

When the SCM runs smoothly, everything above flows without any troubles and you may not see even a piece of them.
Meanwhile the SCM is confused in such situations, and some of processes are not recovered yet. A product cannot be delivered if even one of rings is missed.

I imagine there should be amount of losses made when this little pastry was delivered to the store as usual.

Generally a company implements very strict quality standards like;
– No delivery if an outer carton has dirt
– No delivery if a label is not straight or with scuff.
– A material XX has to be controlled under XX degrees Celsius and input to a process within XX minutes after delivery
– Whole process has to be completed withing XX minutes after input
, etc.

Under such circumstances, the carton might have dirt, manufacturing equipment might be unstable, or the label might not be straight. Cream for the pastry might be disposed due to temperature increase after the power outage.
Also many defects out of standard might be disposed due to the outage after valuable materials were delivered with valuable gasoline and input.

For disaster recovery effort, we expect products to be supplied as much as possible with the supply capacity to be recovered as soon as possible.
Meanwhile, under such circumstances it is very difficult to produce products with low defect ratio as usual. It should be accepted that the valuable resource may be wasted, while the wasted resource may be used for another urgent product.

The standards can be eased not to waste such valuable resources. Dirt or scuff on outer cartons may not affect on the product quality itself. Usually such standards may have high margins and such ease may not always immediately cause accidents. However such departure from the strict standards may be accused by public that the company would cheat consumers under confusion.

The production may be deferred rather than wasting valuable resources for normal production, but supply responsibility will not be performed to save lives.

All options above have pros and cons and there is no absolute right answer. However, as a matter of fact, either of them has to be accepted to respond to the public demand.

I was thinking about the background of the SCM when I picked a little pastry at a store. May the SCM be recovered as soon as possible.

Entrance exam and production efficiency

A few days ago, Kyoto University announced that a candidate cheated the entrance exam using a mobile device.
In Japan, an entrance exam to a collage is generally performed on paper test, at a designated place at once.
The candidate hided his mobile device and submitted the question to an internet Q&A site to seek answers. Sooner, the answers were submitted and he just copied the answer to his paper.
Candidates were supposed to switch the devices off but he did not.

This incident suggests some insights of production efficiency if the exam is considered as a production process, to produce successful candidates (products) at a exam location (a plant).

The current exam system in Japan is a kind of ‘mass production’ with following aspects.
1. Input thousands candidates (raw material) into one place at a designated date.
2. To choose successful candidates through several processes at an exam location (plant)
3. To produce hundreds successful candidates (mass production)
4. Questions and evaluations are objective in a certain standard (standard process, quality standard)

The cheating incident has destroyed the assumption of mass production with new technology.
This cheating was brought to the process like as a defect beyond the assumption to detect by current observations (=check process before input).

The following solutions can be introduced.

1. Reinforce check process before input
I took a USCPA exam a year ago. It strictly prohibits to bring something to the location with some checking processes.
This may not input any defect materials into a production process.
The method may mitigate the cost of subsequent processes, but the check at the first process can be more and costly.

2. Reinforce check process after production
Statistically a defect cannot be zero no matter how many check processes are introduced. Therefore it is assumed that defects can be made in a certain rate to be accepted and to be removed at the final process.
In this incident, check processes at the location are not to be reinforced but the evaluation process may decline answers similar to such Q&A sites.
This method may mitigate the beginning processes, but the final process becomes costly.

3. Scale down the batch size and introduce high-mix low-volume production

The reason of amount of costs for 1. and 2. above is the assumption of mass production.
It is costly to check many candidates if they cheat at once.
If the batch sizes of each processes are scaled down, a cost of each batch can be reduced.
In this incident, the exams can be performed several times much earlier with fewer successful passes at an exam.
This method may increase production times in processes and may decrease efficiency. However this can be more flexible to many potential incidents.

For the assumption of mass production, resource problems can arise such as location, observers and evaluators. The solution 3. may increase exam processes but the resource can be less.
1. or 2. assumes process industry with mass production, while 3. assumes a cellular manufacturing system.