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The New Paradigm in Operations Management

R Jayaraman

Author: R Jayaraman

Date: Mon, 2016-10-10 12:00

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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Very informative article on shifts in operations management. Two decades back, Indian businesses were comparatively simple because disposable income of people was low, options for customers were very few and demands of customers were modest. As Indian economy started growing after liberalization, disposable income with people started growing. Demands for various products started growing and customers started becoming very particular towards product performance, brands and service support. Liberalization helped companies to bring upon new technologies in India which eased various business operations that were being carried out manually prior to liberalization. Logistics and transportation were the most evolved functions of the business due to technological advancements and infrastructure development. Road infrastructure was developed and various types of technically advanced vehicles became available. Earlier, Indian transporters were using same truck for intercity as well as intra city transportation which was mostly of 10-tons capacity. With road infrastructure development, it was possible for businesses to use bigger tractor trailers which could carry more load of the tune of 30-tons. Introduction of TATA Ace revolutionized the way intracity transportation was done. Big trailers carried huge truck load from one city to another and unloaded it at point outside the city. Vehicles like TATA Ace and 407 then carried this load into cities quickly irrespective of traffic congestions. This changed outskirts of many cities into warehouse hubs, Bhiwandi near Mumbai is one of the best examples. Development in computational power, internet and data management helped businesses to operate lean thereby improving efficiencies and reducing required working capital. Systems like SAP, CRM managed inventories and customers, requirements effectively by providing real time requirements. Technology helped production plants to operate lean and integrated lean production with effective logistics to bring required products to customers’ doorsteps which became competitive advantage for many companies.

With the advent of Industry 4.0, industries have been shifting their traditional supply chain into digitized supply chain, which includes integrated planning systems, autonomous logistics and advance analytics for warehouse management. The Logistics sector in India has been growing at the rate of 10% per annum. The major contributor to growth of logistics is increase in organized retail sector in India with advent of E commerce and huge super markets. However, the biggest challenge that logistics industry has is the lack of proper infrastructure in India. Road transport is the most preferred mode of transportation in India but the roads are not wide enough to accommodate such huge number of trucks whether small or big. It is hard to ignore that the condition of roads of the country has been deteriorating, enhancing the wear & tear cost of the vehicles. Hence the burden of the same has to be borne by the logistics industry. It’s an irony that we talk about autonomous logistics, GPS enabled trucks, but we lack in providing basic infrastructure to the growing technology. In the coming years, computer will become smart enough to take decisions on behalf of managers, leading to reduction in both cost & time. In addition to above, 3-D printing, which promises to produce and deliver the item at the users end itself will lead to major reduction in cost involved in both managing inventory and managing warehouses. Now, the companies would not be required to mass manufacture an item, instead demand can be met as and when it arises. It opens new avenues for digital warehousing, where CAD files can be stored to 3D print the items on demand. The companies which align themselves with digitized Operations Management have competitive advantage over other traditional firms.

In the more advanced and extremely competitive business environment it is extremely important for firms to provide extreme personalisation of products based on consumer demand. With the availability of varied range of products and substitutes any firm not able to cope up with the increasing customisation consumer requirement will become null and void. With the increasing product mix pressure on supply chain has been growing exponentially. The function which was perceived as cost reduction center is transforming into a profit creating domain. In today’s competitive business environment efficient supply chain is the game changer. With the increasing product mix and customization flexibility comes the risk of higher inventory carrying & logistics cost. The need of the hour is an extremely efficient Supply Chain which can optimize cost while maintaining service levels. Supply Chain managers are able to achieve the balance between cost and customer requirement by employing methods like Just In time, sequencing, market place concept, localisation & VMI. However, there is still huge gap to be abridged. In the following years technology, will play a key role in achieving the same. With the advent of technologies like 3-D printing firms will be able to maintain serviceability at cost of minimum inventory. Technologies like RFID and bar code scanning will enable enhance tracking at the same time increasing speed of processing and accuracy. GPS & telematics can be used to improve efficiency of delivery while enabling live tracking. Also, emerging use of social media provides a platform to interact with customers, respond to questions, report deviations which impacts delivery schedules & create auto updates on stocking levels.

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