Black Swans in our Supply Chain V

 

Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb

1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect. 
   
2. Black swans have shaped the history of technology, science, business and culture.
   
3. As the world gets more connected, black swans are becoming more consequential.
   
4. The human mind is subject to numerous blind spots, illusions and biases.
   
5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.
   
6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.
   
7. Expert advice is often useless.
   
8. Most forecasting is pseudoscience.
   
9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy. 
   
10. You can hedge against negative black swans while benefiting from positive ones.
    

Little’s Law (Cycle Time = WIP/Output (per unit of time))

Little’s Law should be well known in operations – but it seems to be ignored nevertheless. Two phenomena are active that cause many operations to perpetuate less than their best performance. The first is the  perceived need to keep all resources actively (hard) at work. If every resource is working hard, then costs factory seem to be lowest, but it will fill up with WIP. Double the WIP and production lead-time automatically doubles with it. Increasing lead-times is common practice in operations approaching capacity. As a factory reaches capacity promised lead-times become more and more difficult to meet so the solution is to contact customers to tell them lead-times have increased (a seemingly good tactic since we want to keep our promises reliably). The factory then has a longer lead-time to produce. However almost immediately the factory fills up with more WIP and even the new lead-times will be difficult to meet. It isn’t the lead-time; it’s the factory’s capability or capacity. (Increasing lead-times and consequentially also WIP heightens complexity in the factory – priorities become more and more unclear and schedules are changed more and more frequently.(

The new lead-time cannot be met because we have not actually increased capacity (by increasing lead-time and WIP we actually reduce capability) – so how can we produce more. The increased WIP in the system confirms the longer lead-time, adds to the confusion in the plant (priorities become less and less clear to personnel) and capacity is lost. The situation is aggravated by common practice in sales or marketing. What do you think is the better decision – cause sales to slow down their efforts in order to not overload the factory, maintain good lead-times and maintain delivery reliability; or maximize order intake no matter the situation in the factory? Somehow we will get through this seems to be the attitude; we must take advantage while we have demand from the market. (Won’t poor service eventually cause clients to go elsewhere?). What may not be recognised is that demand would still be high – clients have left only because of ‘crap’ service!

In most factories it is possible to simply stop placing work-orders for half the current lead-time and then release orders with half the original lead-time. This tactic has only beneficial effects – shorter lead-times, less stock, improved reliability, more satisfied clients. Lead-time is cut in half, WIP is cut in half, the production rate actually increases because of less confusion over priorities and less re-scheduling by management; due date performance improves. The result is a Black Swan – at least a significant improvement. All these benefits lead to better customer service and eventually to more business – especially if competitors don’t do the same. (Check how difficult it is to convince your people to implement this (next Monday) and you will see the difficulty competitors will have to copy your competitive move! It will take a while!

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Technorati Tags: 6-Sigma, Continual Improvement, Cost, Costing, Effectiveness, Efficiency, Goldratt, Little's Law, Risk Management, Theory of Constraints, TOC, TQM, Inventory, Reliability, Speed, WIP

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