42 IndustrialEngineer

THE HUMAN LINK

Departmental thought worlds can distort supply chain reality one bit at a time

BY TARIKERE T. NIRANJAN AND SHASHANK RAO

June2012 43

Supply chain management traditionally has grappled with the technical side of the problem, whereas supply chains are socio-technical systems. ERP after clever ERP has failed because it does not recognize the humanistic part of the problem.

Look at, for example, the typical enter-prise resource planning or supply chain management software. It takes informa-tion like cost parameters and service levels supplied by the managers, does sophis-ticated computation and churns out optimal values of decision variables such as how much to stock and when to order. The problem is, no one in the organization knows exactly what this “information” is. Our research demonstrates how this affects supply chain management in prac-tice and discusses some steps that can be taken to alleviate this problem.

Starting in prisonThe Stanford prison experiment in 1971 was conducted by a team of research-ers led by psychology professor Philip Zimbardo at Stanford University. Twelve students were selected out of 75 to play the prisoners and live in a mock prison in the basement of the Stanford psychology building. Another 12 of the same 75 were selected to play the guards. Roles were assigned randomly to the 24 men. The participants adapted to their roles well beyond what even Zimbardo expected, leading the officers to display authoritar-ian measures and ultimately subject some of the prisoners to torture. In turn, many of the prisoners developed passive atti-tudes and accepted physical abuse, and, at the request of the guards, readily inflicted punishment on other prisoners who attempted to stop it.

In the words of an observer: “At the beginning of the study, there were no differences between those randomly assigned to guard and prisoner roles. In less than a week, there were no similari-

ties among them; they had become totally different creatures.” The experiment even affected Zimbardo, who, in his capacity as prison superintendent, lost sight of his role as psychologist and permitted the abuse to continue as though it were a real prison. Five of the prisoners were upset enough by the process to quit the experi-ment early, and the entire experiment was stopped after only six days. The experi-mental process and the results remain controversial, but this experiment has since become a classic in organizational behavior literature. The entire experiment was filmed, with excerpts made publicly available.

In 1977, Benson P. Shapiro’s Harvard Business Review article asked “Can Market-ing and Manufacturing Coexist?” The piece brought to the fore the antagonism that typically exists between departments of an organization. Marketing personnel often complain about the attitudes of their manufacturing counterparts with laments such as: “Why can’t they become market-oriented or customer-oriented?” “Why are they so provincial?” The manufactur-ing people, on the other hand, lament by saying: “The marketing people have no understanding of costs, profits, plants or operations. They are just a bunch of dumb peddlers.” The marketing people ask, “Why don’t we ever have the right merchandise in inventory?” The manu-facturing people maintain that, “We can’t keep everything in inventory.”

What do these vignettes from seem-ingly unconnected situations have to do with supply chain management in prac-tice? Well, they bring out an important issue that seldom is considered in supply chain solutions: Human behavior is fickle. Organizational theorists long have argued that people behave in a semi-predict-able way, and an individual’s behavior is context-specific based on social position and other factors. Social scientists explain this from the perspective of “role theory”

and “departmental thought worlds” concepts. In many ways, this is akin to the six blind men of Indostan who perceived the elephant as different objects, such as a smooth rod, a snake, a tree trunk or a wall. One’s position in the organization shapes how each perceives reality, and any supply chain solution that does not factor in this human dimension explicitly is bound to fail.

Human behavioral issues are relevant to supply chain management, and organiza-tional roles shape individuals’ perceptions of reality.

The dominant assumptionsAs educators of operations manage-ment and supply chain management, we encounter student and working execu-tives who view supply chain management and quantitative models synonymously. This is a popular view made stronger by the dominant paradigm among research-ers and practitioners, in particular supply chain management software vendors who take a similar view implicitly or explicitly. This view is highly limiting.

Cost saving (or profit maximizing) by global optima versus local optima is at the heart of supply chain management theory. Consider the typical supply chain management model taught in a textbook. It typically involves multiple echelons, and cost structure (i.e., cost parameters such as holding costs, stock-out costs, lead-times) is known across all decision makers located in different departments or across different organizations in the supply chain. The model then computes and demonstrates how much the total supply chain cost would be when each echelon optimizes its own local objective function, vis-à-vis when all echelons are coordinated perfectly and strive toward total supply chain cost minimization.

Likewise, ERP or supply chain manage-ment software is designed under the premise that the organization is able to

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input the cost parameters and desired service levels or intermediate metrics, such as reorder point and buffer inventory, from which emerges the optimal values of the decision variables. Thus, the software tells you how much to order and how much to release as forecasts. However, as unsuccessful ERP implementation stories reveal, reality is quite different and more complex.

The origins of information distortion For example, take our case study recently published in the International Journal of Production Research. “Measuring Informa-tion Distortion in Real-World Supply Chains” examined an automotive steer-ing systems manufacturer in India – a Deming Award-winning company, a market leader in its business in India, a company often considered elite in management practices. The company had implemented an Oracle ERP system at the cost of more than $1 million to streamline its inventory management. The informa-tion coming from the customer was highly accurate and reliable. These long-term and midterm forecasts, tentative orders and company orders right down to hourly requirement information were processed by the ERP system to generate production schedules for the production plant and forecasts and company orders for parts. Purchase executives used the details to send out to suppliers.

However, the investigation revealed that information distortions were rife in the company at all levels. Each level in the chain, from production planners to purchase executives, inflated orders passed up the supply chain by overriding the ERP-generated figures and adding correction factors. Such was the perva-siveness of the issue that by the time this information trickled to the suppliers, it was grossly inflated. This is not an excep-tionally interesting insight; many forms of

information distortion occur routinely in organizations because of misalignment of incentives. Apparently, with some realign-ment of incentives or coordination of the supply chain, these issues can be resolved.

We were interested in a more subtle play in the minds of decision makers: What if decision makers at various points in the supply chain viewed the supply chain costs differently? This would be a valuable insight, for unless these differences were factored explicitly into the supply chain/ERP software, the software implementa-tion would be doomed to fail. Put another way, if people perceived the elephant as a tree trunk or a wall, they would be unwill-ing to agree completely with the view of the elephant as presented by the ERP. They would experience cognitive dissonance and game the system. While we could not expect much disconnect with regard to objective organizational facts such as employee count or revenues, the much harder-to-measure supply chain cost parameters provided the perfect setting for individual perceptual differences to emerge.

The research We set out to investigate how one’s posi-tion in the organization influences one’s perception of reality. Given that supply chain costs are an objective and important set of information relevant to supply chain management, we chose to operationalize managers’ “departmental thought worlds” by their supply chain cost perceptions. We carried out this research at Carmel, Iceland, a developer and manufacturer of food processing industry equipment, soft-ware and integrated systems and a leader in integrated systems for the fish and poultry industry segments. Figure 1 shows the focus area of the study.

The first phase was a consulting proj-ect with the following purpose. Carmel’s customer base was spread across the globe, and its supplier base mostly was in

the Netherlands, Denmark, Sweden and the United States. Located in the middle of the North Atlantic Ocean, Carmel’s only options for transportation were sea freight or air freight. While sea mode was cheap, it was also slow and resulted in several direct and indirect costs to the company, including wrong items going undetected for months and huge quantities of locked up capital in the in-transit shipments. Air freight was fast, but far more expensive, and it was being used only for expedited orders.

The trade-offs between these options were at the heart of the problem. Carmel had realized that the global business envi-ronment had changed over the years and the most important factor was respon-siveness, which had to be reflected in its procurement strategy as well. The recent financial crisis put pressure on its work-ing capital. Would switching to air freight prove to be a solution and outweigh the additional costs?

The scenario was positioned to serve our purpose excellently. Here was a ques-tion that was of utmost importance to the company, and just about everyone had some knowledge of the background of this problem and an opinion on what the solution ought to be. It would serve as an excellent proxy to capture the thought worlds of managers, or how they perceived their supply chain.

To answer the air freight switch ques-tion requires careful analysis of the total cost of ownership of items flowing through this supply chain. While some managers would have a sense of the rela-tive costs, arriving at anywhere close to the actual costs would require a careful inves-tigation from the ground up of all direct and indirect costs, which our research team was invited to carry out. Accord-ingly, we conducted a systematic study of all relevant costs, which are grouped as inventory management costs, transporta-tion costs and overhead costs.

the human link

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The inventory management costs were divided further into three types:

• Replenishment costs: Costs incurred each time a replenishment action is taken, computed as the sum of fixed/setup cost and variable costs

• Stock-out costs: Includes the expenses that result from changing over equipment to run emergency orders and the attendant costs of expediting, rescheduling, split lots and so forth. An Excel-VBA simulator was built to estimate stock-out costs at various ordering frequencies.

• System control costs: Those associ-ated with the operation of the Microsoft

Dynamic AX ERP software system and Microsoft Office as the basic manage-ment software. The software costs include the cost of data acquisition, data storage and maintenance, along with computation, training and employee time for interpretation of results. These costs were well-accounted for as a result of a recent study undertaken by the company.

For transportation costs, historical data were used to find the average cost/kilogram of items bought for both sea and air mode. Overhead costs included housing and utilities, salaries, communi-cation costs and system control costs that

covered essentially all overhead relating to transportation.

The sum of all the costs described above is the total cost of ownership, which is the primary metric to determine the mode of transport to be chosen. Total cost of ownership was computed for various components used in the company using the simulation-based analysis for various ordering rates, from which we arrived at values that are proxy to what we call the “real world.”

This detailed information was used to test the perceptions of various manag-ers spread across different roles in the organization. The tests used a carefully designed structured interview protocol that unravels the managerial perceptions of costs and thought processes underly-ing them in a step-by-step manner. The managers were chosen in such a way that they were all familiar with the aspects of the organization they were asked about. The questions ranged from asking them to name all components of cost that first occurred in their minds, then asking them to rank those costs, asking them to quantify the costs, subsequently point-ing out to them components they might have missed earlier and asking them to revise their initial responses. This gave the researchers a fairly good grasp of their “thought worlds” with regard to the costs.

The respondent pool comprised the managing director, sales director, manufac-turing director, finance director, strategic sourcing manager, inventory manager and logistics manager.

Our expectation was that manag-ers having a central overseeing position would have a relatively unbiased view, whereas those at the customer-facing end of the supply chain would tend to harbor notions of the cost that would reflect in better customer satisfaction and service levels. By contrast, we would expect the inventory management roles to have these related costs, like inventory management

perceptionsFigure 1. Researchers examined how different company sectors viewed supply chain management costs at Carmel, which develops and makes food processing industry equipment.

Project management/ design team

MAREL (OEM)

Sales

Procurement/ production management

Logistics (inbound)

Central warehouse

Manufacturing process

Logistics (outbound)

CustomersSuppliers

Material flow

Information flow

Focus area

Testing

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costs, weighing high in their minds, and the logistics manager would perceive transport costs as being much bigger than others.

From a layperson’s perspective, these are relatively day-to-day experiences in all walks of life. For instance, during case discussions in business classes, students with marketing backgrounds see the marketing side of the case as the most pressing, whereas those with a finance background focus on number crunch-ing with financials. From the theoretical perspective, this expectation is borne out of “role theory” at a general level and “departmental thought worlds” in partic-ular.

After giving due correction to the raw data based on the rich, qualitative under-standing of the manager’s minds, the findings were analyzed and collated. They largely were consistent with our predic-tions. Figure 2 encapsulates the results pertaining to perhaps the most telling cost parameter: the inventory holding

cost. It was almost a remarkable result in that the roles answerable to the customer indeed weighed the cost much less than did people at the supplier side who had to handle the inventory and find space for its storage. It thus appears that each level of the organization distorts reality just a little bit more than each earlier level.

Additionally, what was striking was that these managers had much different perceptions on such relatively objective matters as inventory holding cost. One can conjecture that the differences amplify when the problems become more strategic and hard to measure.

Where do we go?Indeed, point of location in the supply chain did affect managers’ estimates of cost parameters throughout the supply chain. What do these managerial thought worlds augur for supply chain prac-tice? Put another way, people see things through their colored lenses and in the organizational context due to their back-

ground and roles.Within the context of supply chain

management, the parameter values that managers put into supply chain manage-ment and ERP software reflect their biases, thereby “gaming” the software to match their mental models. If people over-ride what the ERP suggests, or knowingly input wrong data into the system, they can be corrected with suitable training or controls, but what can one do if people truly believe what they are feeding into the system is “the” reality?

There are no easy answers. The turf wars between marketing and operations managers are legendary. They genuinely see the world differently, and this is a much more insidious problem than of people intentionally inputting incorrect values. Thus enterprisewide systems will not achieve their full potential, largely because they usually assume an “ideal world” with no information distortion.

The cleverest ERP/supply chain management software is not going to

the human link

perspectiveFigure 2. This summary of cost perceptions across organizational roles shows that people had different estimates based on where they worked in the supply chain.

Inventory cost perception

Supplier facing Production Customer facing

Inventory manager

Strategic sourcing manager

Director, manufacturing

Director, finance

Managing director

Logistics manager

Director,sales

solve what is essentially a humanistic problem. In fact, the introduction of the software to replace what was hitherto done by humans may aggravate the problem by discouraging interpersonal dialogue and arguments, lulling the organization into a false sense of security. The problem is compounded by the fact that despite tell-tale signs that things are not work-ing nearly as well as they should, the top brass is compelled to continue using ERP to justify the huge investment made. This eventually would add the organization to the ranks of disastrous ERP implementa-tion case studies.

One solution approach is to sensitize managers to this unconscious bias. Once they are aware of it, they may improve their world view of their supply chain. Another approach is to encourage regular exer-cises that entail debates and fleshing out of mental models, which hopefully will

lead the organization to develop a collec-tive view that is closer to reality than what they would hold otherwise. Research has shown that job rotation is an excellent way to improve systems thinking and make managers less prone to departmental silo-thinking. d

Tarikere T. Niranjan is an assistant professor of supply chain management at IIT Bombay and a visiting researcher at ETH Zurich. He holds a B.S. in mechanical engineering from The National Institute of Engineering, Mysore, India, and a Ph.D. from the Manage-ment Development Institute, Gurgaon, India. His research focuses on behavioral issues in service management and supply chain management. He has published in academic and professional journals of repute such as Decision Sciences, the Journal of Opera-tions Management, the International Journal of Production Research, Indus-

trial Engineer, Industrial Management and others.

Shashank Rao is an assistant professor of supply chain management at Auburn University. He holds a B.S. in environmental engineering and an MBA in marketing from India and a Ph.D. in decision science from the University of Kentucky. Prior to entering academia, Rao was a manager in the bank-ing industry. He has served as a consultant to manufacturers, retailers and logistics service providers. Rao’s research interests focus on retailing, order fulfillment and customer service. He has published in academic and profes-sional journals of repute such as the Journal of Operations Management, the Journal of Business Logistics, the International Journal of Logistics Management, the International Journal of Physical Distri-bution and Logistics Management, Industrial Management and others.

June2012 47

if you supply it, they Will buyGlobalizationwillhelppushtheworldwidesupplychainman-agementmarketatacompoundannualgrowthrateofmorethan9percentoverthenextfiveyears,accordingtoareportfromtheARCAdvisoryGroup.

Capitalspendingoninformationtechnologyhasrebounded.Addedinvestmentcapitalandincreasedmarketconfidencehaveencourageddemand,spurringsalesinsupplychainman-agementsolutions.AnalystClintReiser,principalauthoroftheARCreport,saidmanufacturinggrowthincountrieslikeChina,IndiaandBrazilwilldriveincreasedsales.

“ARCexpectsstrongSCMsalesgrowthtooccurinemerg-ingmarketregionsduetolowercurrentmarketpenetration,highereconomicgrowthratesandtheincreasingadoptionofinformationtechnologywithintheseregions,”Reisersaid.

ITimprovementshavehelpeddemand-drivenmanufacturingreplaceproduction-drivenmanufacturing.Andorganizationsareincreasingtheirintegrationofprocessesthatpreviouslywereisolatedinsilos,givingthemamorecomprehensiveviewoftheiroveralloperations.IntegratedERP,supplychainmanagementandproductionmanagementsystemsaregivingcorporationsaholisticviewoftheentiresupplychain.

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