Time for real-time, but …
By Arthur Goldstuck
The custodian of the American economy, Alan Greenspan, set the scene for a tough year in the world economy when he presented his outlook for the year in a January 11 speech in San Francisco.
Amid the complexities and commentaries that emerged from his speech (full text available at www.federalreserve.gov/boarddocs/speeches/2002/ ) , one concept was ignored but in fact was central to his prognosis: “real-time”.
“A possible significant contributor to (the) emergence of stability – if that is what it is – may be the very technologies that have fostered coincident global weakness: those that have substantially improved access of business decision makers to real-time information,” he said.
He explained real-time in his typical methodical style: “Thirty years ago, the timeliness of available information varied across companies and industries, often resulting in differences in the speed and magnitude of their responses to changing business conditions. In contrast to the situation that prevails today, businesses did not have real-time data systems that enabled decision makers in different enterprises to work from essentially the same set of information. In those earlier years, imbalances were inadvertently allowed to build to such an extent that their inevitable correction engendered significant economic stress. That process of correction and the accompanying economic and financial disruptions too often led to deep and prolonged recessions.
“Today, businesses have large quantities of data available virtually in real time. As a consequence, they address and resolve economic imbalances more rapidly than in the past. At the same time, firms are largely operating with the same information set, and thus resolution of imbalances induces parallel movements in activity. Contractions initially may be steeper, but because imbalances are more readily contained, cyclical episodes overall should be less severe than would be the case otherwise.”
In other words, inventory and cost control are critical to the financial health of corporations, and these need to be managed on a real-time basis. When inventory is not forecast accurately, and the warehouses are filled faster than sales can be closed and fulfilled, excess inventory becomes a dead-man’s-hand on a company’s short- and medium-term performance.
Sadly for Greenspan, for the corporate world and for the American and global economy, real-time is not all its cracked up to be. As Greenspan himself acknowledges. “In the current situation, inventories, especially among producers and purchasers of high-tech products, did run to excess over the past year, as sales forecasts went badly astray; alas, technology has not allowed us to see into the future any more clearly than we could previously.”
But, he says, technology did facilitate the quick recognition of the weakening in sales and backup of inventories.
“This enabled producers to respond forcefully, as evidenced by output adjustments that have resulted in the extraordinary rate of inventory liquidation currently under way. Inventories in many industries have been drawn down to levels at which firms will soon need to taper off their rate of liquidation, if they have not already done.”
But real-time was never meant to take months to elicit a forceful response. The case study everyone is watching is that of Cisco, which almost invented the use of hi-tech for this form of inventory control. As Business Week reports this week (see under Case Studies), Cisco was supposedly using the Internet to bind together its suppliers and contract manufacturers into a seamless whole. Yet, this “network organisation could not “save Cisco from the disastrous inventory build-up”.
The main problem was that the systems Cisco had created may have worked wonderfully well when sales were constantly on the up. But Cisco’s famed real-time data, it turned out, could not handle a sudden downturn. And, it turned out, many customers who had grown tired of waiting for shipments while everyone was buying, buying, buying, had been placing double and triple orders and then cancelling the backup orders when the primary shipments arrived. Before long, inventories were growing faster than sales. Suddenly, the orders stopped, and Cisco was stuck with the inventory. In April last year, they wrote off $2.2-billion of excess stock, and fired 8500 employees.
An expensive and damaging flaw.
And if Cisco can get supply chain management wrong, anyone can. No wonder Greenspan wants us to get to grips with real real-time. Not only must we be able to punch a button at any time and see how sales stack up against inventory, but also what it would mean to inventory if sales suddenly dried up. And what it would mean to the workforce.
Even more important, we must know how to react and how not to react to this information.
Here lies the greatest danger of real-time.
The temptation is great, when the front wheels of demand come off, to get rid of as many of the back wheels of supply as fast as possible. Typical real-time strategy would suggest that cancelling manufacturing orders and laying off workers would be the first response. it certainly looks good on the balance sheet. But long-term scenario-planning, on the other hand, would show that your ability to respond to improving market conditions would be severely handicapped by such actions.
This is hardly a new argument. Short-term responses should always be made in the context of long-term planning. But the danger exists that now, especially with the shadow of all that excess inventory falling over the economy, real-time will become a goal in its own right. The stock market, with its moment-by-moment responses to moment-by-moment developments and rumours, rewards that kind of thinking.
But in the long-term, as the economy improves and hiring again becomes the number one corporate priority, no one is going to look at the cost of firing, paying severance packages, and then, perhaps a year of two later, rehiring and retraining. Because of the immediate perceived benefits of real-time, these long-term costs tend to be overlooked. As a result, real-time in fact becomes a veil over long-term. Short-term cost control is embraced at the expense of long-term cost control. The corporate strategic roadmap becomes an optional extra instead of the blueprint for the organisation.
* Arthur Goldstuck is editor of The Big Change and author of more than a dozen books on the Internet and urban legends. He heads the independent consultancy and research house, World Wide Worx.