The Design of Insight: How to Solve Any Business Problem by Mihnea Moldoveanu & Olivier Leclerc

Author:Mihnea Moldoveanu & Olivier Leclerc [Unknown]
Language: eng
Format: epub, mobi
Publisher: Stanford University Press
Published: 2015-05-06T06:00:00+00:00

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THE SYSTEM DYNAMICS FLEXON

As the president of a $70 billion consumer goods company with an overwhelming share of many household brands markets and a mandate to reduce the rising costs of research, development, distribution, and marketing by as much as 15 percent, C. Exekoff Isser had gone through several rounds of overhead cost estimates, analyzed the effects of overhead cost cuts, studied the human resources cost structure and head count of each of the business’s major divisions, and mandated analyses of the expected value of research and development activities across all of the firm’s product lines. These analyses revealed a mostly lean organization. Cuts and reductions were likely to have an impact on its ability to deliver its next-generation products to market on time or sustain its current commitments for existing products. There was limited appetite inside the executive team to engage in a redesign of the firm’s compensation system; a similar exercise two years before had produced no significant results in spite of the large cost of determining the optimal incentive structure for key employees and making changes in base pay and contingent compensation. The challenge he had been given by the board seemed intractable.

While pondering the difficulty, Isser remembered that one of his senior advisers had suggested he think of the business as one very large set of pipes and storage tanks through which product at different levels flowed to the distributors and end customers just like electricity across the grid of a major city. For a multi-billion-dollar annual revenue business selling on every continent, the smoothness of the product flow was crucial: unexpected delays in order fulfillment, sudden pile-ups of inventory—either internal or at the distribution centers—and uncertainty in the demand for various products on the shelves of the retail outlets had large cost consequences because inventory space had to be paid for and empty shelves meant business lost to competitors and potential foreclosure of the shelf space.

Following his intuition, Isser asked his operations team to design, build, and deploy a distributed information and communication system to smooth out the flow of products from conception, design, and prototyping through manufacturing to the end customer. The system was to provide real-time tracking measurements for each product, along with estimates of demand at the level of each store and region. Spikes in demand and supply would be singled out and addressed immediately by increasing or decreasing shipment flow rates, making precommitments aimed to safeguard shelf space, or liquidating inventory at prices that would allow the market to clear more quickly. The information system overlay, together with the small organization built to run it, ended up saving the business $700 million over six years, thus delivering on the mandate that Isser had received from his board.

What is special about the picture Isser used to think through his problem is that it focuses on the timing and sequence of events, both critically important in an operations-heavy business whose effectiveness depends on whether, when, and how reliably orders are fulfilled. This picture

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