Winners and Loser in the New Material Handling Economics

The changes to today's controls and supply chain software are forcing change onto analysts, economists and investors.

The functions enabled by controls, systems and supply-chain management software have significantly changed material handling processes. So much so, that analysts, economists and investors must change their “processes.” Many of the rules they have used to evaluate a company for more than 30 years no longer apply.

For example: Which strategy do you think would “win” between competitors: carrying more on-hand inventory to meet your customers’ same-day demand, versus low inventory and making product as quickly as possible?

Low inventory and high productivity were good measures of a company’s performance until a short while ago. Now, because of all the automation changes in manufacturing, material handling and ordering, we can have higher levels of inventory and still have high productivity. But such a scenario goes against conventional thinking. And it’s just one example. There are many more scenarios that break traditional rules. Thus, we need new measures to determine whether and when a company is doing well. (And these measures don’t refer to the current accounting self-evaluation going on because of upper management fraud.)

Last month, I wrote that financial analysts were realizing that the simple decision to reduce on-hand inventory was causing major ripples through the U.S. economy. According to some of my colleagues, shock waves may be a more appropriate term.

Because our economy is a system, one factor affects more than one part. Working to reduce inventories has helped create faster, more flexible machines. The move to lower inventories has also forced material handlers and manufacturing engineers to take out extra steps, duplicate processes and manual operations. Thus, in addition to low inventories, we also have faster production processes.

One result is that now we have the ability to place orders in the morning and watch them arrive at our dock before 4 p.m. the same day. As noted in last month’s column, such response is affecting several areas throughout the supply chain. For example: How do you predict your operational requirements if orders aren’t placed until early that morning? How do you staff for unknown production levels? How do you calculate the cost of equipment if you don’t know whether it will run 24 hours a day or just five? How do you forecast for same-day operations and order the right amount of raw material? Is it possible to read your customers’ minds to predict what you will have to do that day?

Because the answer for several of these questions is “not yet,” we now have the question: Do you increase inventory levels in anticipation of meeting your customers’ instant orders? Which strategy is the right strategy in today’s economy?

Carrying inventory has a price. It will please your customers, but it may depress your investors. And that’s the other part of the system you will have to work with.

All the automation, all the computers, all the integration that has gone on over the years has altered the way businesses work with each other. We now have capabilities only dreamed of 30 years ago. So why should analysts continue to use criteria appropriate to the old way of doing business? They shouldn’t, because such measures won’t be accurate. (And haven’t we had enough of inaccurate measures lately?)

But it may take a while before they figure out new measures. That’s another part of the oscillation that occurs when systems change. If you believe in your strategy, get your numbers in order, because that will be the only data the analysts will believe.

Experimentation in material handling is moving to new areas, and there will be plenty of risk ahead. As the saying goes, “Hang on, it’s going to be a bumpy ride.”

Leslie Langnau, senior technical editor, [email protected]

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