information velocity and competitive advantage nile w. hatch, michael miles, ryan williams,...
TRANSCRIPT
Information Velocity and Competitive Advantage
Nile W. Hatch, Michael Miles, Ryan Williams, Alessandro Cavallini, Michael
George
INFORMS — San DiegoOctober 13, 2009
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Inventory Management
• Inventory management is nearly ubiquitous in manufacturing– Just-in-time–Kanban– Lean manufacturing–Agile manufacturing
• Inventories have fallen as a result
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Inventory Dynamics, 1980 - 2000
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Chen, Frank, and Wu (2005)
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Performance Effects of Inventory Management• “To not implement lean … put[s]
plants at a disadvantage” (Shah and Ward, 2003)
• Positive impact: Husan and Nanda (1995)
• No impact: Balakrishnan, Linsmeier, and Venkatachalam (1996), Demeter (2003), Vastag and Whybark (2005)
• Negative impact: Cannon (2008)
• Mixed impact (non-linear): Chen, Frank, and Wu (2005), Narasimhan, Swink, and Kim (2006)
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Why should financial performance effects be expected?• Strategy is performing different
activities than rivals or performing the same activity in different ways (Porter, 1996)
• “… many companies have been frustrated by their inability to translate [their gains in operational efficiency] into sustainable profitability.” (Porter, 1996)
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Why should financial performance effects be expected?
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Why should financial performance effects be expected?• “Every piece of business strategy
acquires its true significance … in its role in the perennial gale of creative destruction.” (Schumpeter, 1942)
• Companies do not sustain supernormal returns because they do not “create and destroy” investments at the “pace and scale” of capital markets. (Foster and Kaplan, 2001)
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Information Velocity and Lean Manufacturing
Lean manufacturing may “do Lean manufacturing may “do the same things in a different the same things in a different
way” when “information way” when “information velocity” is largevelocity” is large
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InformationVelocity
=
Variety and profit informationtransmitted by demandLead time to create (and destroy)offerings in response to demand
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““SupernormSupernormal Profits”al Profits”
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Information Velocity and Competitive Advantage
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Competitive Competitive AdvantageAdvantage
Information VelocityInformation Velocity
Variety and profit information Variety and profit information transmitted by demandtransmitted by demand
Lead time to create and Lead time to create and destroy offerings in response destroy offerings in response
to demandto demand
Lead TimeLead Time
Manufacturing Manufacturing (lean)(lean)
R&DR&D
EntropyEntropy
InstabilityInstability
UnpredictabilityUnpredictability
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Manufacturing Philosophies
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Economies of Scale Manufacturing:batch production schedule:
AAAAAAAAAAAABBBBBB
Lean Manufacturing: level-loaded production schedule:
AABAABAABAABAABAAB
Market Demand:Transmits 18 “bits”
AABABAABAAABABAABA
Agile Manufacturing: job-shop production schedule:
AABABAABAAABABAABA
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Lean Manufacturing
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(Schonberger, 2007; Shah and Ward, 2003)
Lean Lean ManufacturinManufacturin
gg
fast setup fast setup timestimes
self-directed self-directed work teamswork teams
total total productive productive
maintenancemaintenancepull systems/ pull systems/
kanbankanban
quality quality managemenmanagemen
tt
standardized standardized workwork
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Research Methods
• Large scale sample of all manufacturing firms (Computsat)
• Measures:– Competitive advantage: ROA, ROE– Entropy: instability, unpredictability,
instability*unpredictability– Lead time: inventory turns (Schonberger,
2007)
– Controls: Year, Quarter, Firm size (revenue)
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Empirical Model of Information Velocity
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ResultsTraditional Approach
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ROAROA ROSROS
InterceptIntercept -2.06-2.06 -18.56-18.56
TurnsTurns 0.0000.000--0.003**0.003****
InstabilityInstability
1-Predictability1-Predictability
Instability * Instability * (1-Predictability) * (1-Predictability) * Inventory TurnsInventory Turns
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ResultsVolatility Effects
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ROAROA ROSROS
InterceptIntercept -0.0216-0.0216 0.10740.1074
TurnsTurns 0.00020.0002 --0.003***0.003***
InstabilityInstability --2.856***2.856***
--34.442**34.442****
1-Predictability1-Predictability --0.021***0.021***
--0.092***0.092***
Instability * Instability * (1-Predictability) * (1-Predictability) * Inventory TurnsInventory Turns
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ResultsInformation Velocity
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ROAROA ROSROS
InterceptIntercept 0.01740.0174 0.07260.0726
TurnsTurns 0.0000.000 --0.004***0.004***
InstabilityInstability
1-Predictability1-Predictability
Instability * Instability * (1-Predictability) * (1-Predictability) * Inventory TurnsInventory Turns
0.45050.4505 6.998***6.998***
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Work to do
• Financial performance measures• Non-linearities• Controls for industry and firm• Frontier analysis — matched pairs
of lean and non-lean• Longer term focus on direct
measures of information velocity– Firm level data collection– R&D lead times in addition to manufacturing
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Conclusions
• Inventory management (lean) matters– pervasive adoption– operational performance– competitive advantage is hard to find
• Information velocity delivers fast response to customer needs/demand
• Lean pays in financial performance when the demand is volatile and unpredictable
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