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Operations Experts: This Is Our Day

11/18/2009 --

Downturn presents new opportunities for operations experts as companies look inward to innovate, save.

ANN ARBOR, Mich. — The shock to the business world delivered by the economic recession is shaking up the world of operations.

Experts are under severe pressure to reduce costs, deal with intermittent demand, plan for an uncertain future, and innovate. But for all the headaches and problems, this is the ideal time for operations leaders to make a mark. The 2009 Global Operations Conference, recently hosted by the Tauber Institute for Global Operations at Ross, explored how companies are dealing with the current economic environment and exploiting some new opportunities.

"The good thing about the crisis we're in? It's unique in my lifetime and everyone is impacted, so there truly is a desire to work together to address this awful status quo," said Reuben Slone, executive VP of supply chain for OfficeMax. "You can get people motivated to change, which traditionally is hard to do. So, for operations, this is our day. This is our way to Carnegie Hall. The biggest challenge in driving innovation hasn't been finding the idea of what to do, it's been having the opportunity to get it done. And this is that opportunity. Right now."

OfficeMax, for example, worked with its trucking partner to pack loads more efficiently and re-work delivery schedules. That also included working with internal warehouse and store employees. The results: 2.4 million road miles have been eliminated from the system through the third quarter this year, it takes minutes instead of hours for a store to unload its shipment, and in-stock scores are the best in company history.

"I do not believe the rate and pace of change would have been possible without the recession we're in," Slone said. "There would not be the degree of cooperation we're seeing now."

Operations executives at the conference noted it's not just new ideas that are getting implemented these days. Some old concepts they've floated for years are finally gaining traction.

That's because when sales and profits start to plummet and cash becomes more valuable, high-level executives, employees, and suppliers "get religion."

"They need an economic reason to change or they won't make the changes because they're hard," said Darin Cooprider, VP/GM of retail at Ryder System Inc.

Even with that support, there are still difficult decisions to make. What do you invest in? What does a "normal" business cycle look like in your industry and how do you prepare the supply chain for it? For global companies, how do they develop a strategy in a world where some regions are in recession and some are growing, all while customer demands shift faster than ever?

Keynote speaker Hau L. Lee, director of the Stanford Global Supply Chain Management Forum, said companies have to build a supply chain with "multi-polar" strengths. Every region of the world has different strengths and weaknesses. Companies have to decide which regions are the best for manufacturing, assembly, and distribution.

And it's all subject to change in the future. The right strategy today might not be the right one a few years from now. For example, Hau helped Hewlett-Packard develop a strategy to resolve an issue regarding too much inventory in one market and not enough in another. Years later, he ran into someone from the company and asked how the system was working. To his surprise, they weren't using it anymore. Circumstances had changed and Hewlett-Packard had adopted an alternate plan.

"The lesson here is nothing is static," he said.

The automotive industry has learned that lesson the hard way. David Cole, chairman of the Center for Automotive Research in Ann Arbor, said what hit the automotive industry wasn't a recession, it was an all-out depression.

But though the bankruptcies of General Motors Corp., Chrysler, and several suppliers were painful, all is not doom and gloom. Suppliers have reduced their fixed costs 25 to 40 percent in this downturn, and about 70 percent of them can make a profit if U.S. consumers buy nine million new vehicles annually, said Kim Korth president of automotive consulting firm IRN Inc. That's a vast improvement from the previous break-even point of 15 million to 16 million vehicles per year.

Population growth, demographic trends, and scrappage rates point to an automotive sales rebound spread over the next few years. But the trick for operations professionals will be figuring out what the new market looks like, said Ed Martin, MBA '99, senior industry manager for automotive and transportation at Autodesk Inc.

Automakers are getting new products to market faster, but using similar architectures as a platform for several different models. That will require the kind of agility and innovation the industry has been slow to adopt, he said.

"You need a quick feedback loop to what customers want all through the manufacturing and supply chain," Martin said. "The automotive industry has been very traditional and slow to change in some ways. That has to change."

Besides the automotive industry, the energy industry is facing an uncertain future with Congress debating a climate change bill that would, in its current form, create a carbon cap-and-trade system. Utilities are working on a number of technologies to reduce carbon emissions. Everything from "smart grids" — which distribute power more efficiently — to capturing and storing carbon are in the works.

But none of them are ready for widespread use yet, said Russel Pogats, MBA '08, director of system engineering and equipment for DTE Energy.

New legislation will "force new technology to come on faster. The question is, who pays for that?" he said. "Customers cannot afford to pay the full frontage of all the environmental issues before them. They just can't."

Adding new technology and renewable generation sources — such as solar and wind — has to be done without disrupting the reliability of the current grid, he said.

The overall economic backdrop is improving, but the rise back to prosperity will have fits and starts, said Joel Tauber, BBA '56/JD '59/MBA '63, chairman of Tauber Enterprises and benefactor of the Tauber Institute at Ross.

Sales for many companies are coming up from the bottom, though they're nowhere near what they were before the recession. High unemployment remains a problem, though the pace of job losses is slowing. A bubble burst in commercial real estate might be the next shoe to drop.

But the recession has taught business leaders some valuable lessons, Tauber said. Right now, cash is king and that should be the focus. Companies are learning to embrace the relevance of a disaster strategy.

"What if sales go down 30 percent," Tauber said. "What do we do? You have to have a plan somewhere along the way."

All of that that should keep operations top-of-mind in just about any company. Executives should be reviewing operations all the time and finding ways to work new technology in.

"In every one of these downturns, there is tremendous opportunity to make money," Tauber said.

—Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu