December 12, 2012 2 Comments
Son – Papa! What are you doing the whole evening at your desk? Can you play with me and Lightning McQueen?
Dad – I’m studying, son! Like you I go to school and as you’ll know soon enough, there are exams …
Son – What are exams, papa?
Dad – That’s when your teacher ask you questions to see if you understood correctly.
Son – Oh, like when Madame Danielle is asking if we read our book?
Dad – Mmmmm, kind of …
Son – And what are you reading?
Dad – Operations Management and supply chain
Son – And what is Operation supply chain?
Dad – Well, son, you see …
Damn, how to explain what you are studying to your 4-years-old son? Operations management? That’s when one try to optimise the delivery of goods to the supermarket where the family goes shopping on Saturday? Huh? Well, I tried and it doesn’t work. However as Saint-Nicholas came on December 6th, it was a good opportunity to explain how the real world works …
Saint-Nicholas or Santa Claus are facing approximately the same issues in terms of operations, supply chains and logistics. However Saint-Nicholas chose to restrict his market focus to mainly the Benelux only. This made things easier for him. For instance he did not need to find a large warehouse (or at least not at large as Santa Claus’) as he only has to deliver to fewer children. This choice was very clever because such large warehouse would have immediately attracted attention in such crowded countries like Belgium. Another important difference is that nobody really knows who is working for Saint-Nicholas. For Santa Claus, it’s easy: elves are working for him. But maybe Saint-Nicholas choose to have a Triple A supply chain where he operates only the last segment (the warehouse) (or not even the warehouse!). There would then be nobody working for Saint-Nicholas – everything is outsourced! So let’s focus on Santa Claus (most of the discussion below also applies to Saint-Nicholas however).
There are two main features about Santa Claus: The Goal and inventory.
Santa Claus did indeed read Eliyahu Goldratt’s “The Goal” (you know, son: one of the thick books on papa’s desk). He must also have followed Prof. Boute‘s class as everybody can clearly see that his strategic position is on Time and Variety/Flexibility. He’s not really interested in price (neither his customers btw): he’s giving what children request to him (after all, he’s not the richest man on earth for nothing). And quality is not necessarily a major criteria for Father Christmas’ gifts: children (and people in general) are mostly happy because they receive something (it probably has something to do with the fact it prooves the world they were kind during the last 12 months). This allowed him to send gifts manufactured in China (althought I think now all toys are manufactured in China nowadays).
And despite this Santa Claus still has a major issue regarding operations. He indeed still have a myopic view on value creation. As we will see below, he is only focusing on resource utilisation while he most probably completely forgets about sales growth and margin. There we come back to an element already mentioned: no financial incentive. Hence no real financial measures possible. How can you improve then? (another question is: does Santa Claus really need to improve his operations as kids receive their gifts on time and usually / sometimes what they requested so why bother?)
But a major divergence from the course is about inventory! In Anupindi’s book, the first sentence of the summary on inventory is: “Inventory accumulates whenever there is a mismatch between supply and demand”. And the chapter goes on on how to reduce this mismatch (as part of Prof. Vereecke‘s classes). But actually Santa Claus needs this mismatch. Just because he only needs to deliver his goods during the overnight of December 24. Not before, not after (especially not for Easter!). In my opinion Santa Claus needs to accumulate this inventory during the year in order to be ready to distribute everything in one night. Then you can debate if he has a ultra-secret, ultra-large, ultra-modern warehouse next to the North Pole (which is nice because you can reach most US and European countries easily) or if he has a cloud of flexible warehouses dispatched around the world. Given the number of Santa Claus that we start to see at each corner of a street, I would favor this last option – these little Santa being responsible for a small subset of the delivery chain. I guess their performance is measured in terms of seconds being in advance / late for delivery or the number of children they delivered on time (again I guess no P&L responsibilities).
The content of this stock as well as the way it is built also depart from any classical business. Indeed although the product range is quite wide (and also varies from country to country), there are some broad categories that you can classify in the different types of inventories. For instance, you can classically think of perishable goods as obsolete stock (however why bother since Santa Claus would certainly not poison children with goods perished since last year). But you can fill Santa Claus’ safety stock with classical toys like Lego, Playmobil, Fisher-Price, puppets, cars, etc. And Santa Claus’ cycle stock would consist of toys like Buzz lightyear, Lightning McQueen (and other toys for girls that I’m not aware of). The build up of these different stocks could be schematically represented as the following:
If now we look at the little information we have about operations inside Santa Claus headquarters (see movie below), we see that he is indeed the jolly man we know.
Althought the first seconds show you a highly enthousiastic, qualified and kind of “clonable” workforce (the elves), the first step of the operation is a nightmare. Santa Claus is indeed reading each and every letter. This is a happy confirmation for all the kids. But from an operation perspective, this creates a huge bottleneck and this is clearly visible with the amount of letters on the floor! After this step, the work is fortunately segregated between several lines of production where the specialisation of each elf is well put forward. On top of that it seems elves worked very well to reduce waiting times to nearly nothing between each station. Did they apply the lean methodology? It is hard to say: it might as well be the result of years of refinements.
Then we realise there is again another bottleneck at QC/QA, done by Santa Claus himself. However, althought it seems the throughput of production of the different toys is quite fast, only a few of them arrive at QC per minute. What happened with the other toys? Are there other lines of QC but not managed by Santa Claus himself (so they did not dare to show them)? Of is the defect rate quite high that only a few reach the final QC?
The inventory management seems also to be quite disorganised. Fortunately every toy seems also to be aware of its role and its own destination. So they finally end up in Santa Claus’s big bag!
Finally given the lack of order in the bag but also given most children will apparently receive what they asked (talk about customer focus! – except for Billy Brown who will receive a cake of soap), DHL, UPS and other (fast) postal services might have some lessons to take from Santa Claus in terms of speed and reliability ;-) But how exactly Santa Claus does that is still highly debated amongst scientists in the world (others also tried to put numbers e.g.):
Anyway, have a Merry Christmas (a few days in advance) and enjoy the holidays break!
Photo credits: 5176 Guess Whooo’s coming to town! (My Number 1) All time as of 11/24/2012 – 2,419 Views by bsabarnowl, on Flickr (license CC-by) and walmart distribution center by Mr. Wright, on Flickr (licence CC-by-nc-sa)