May 20th, 2020
When you go to the bakery you have a reasonable idea of what you will find in the store. As a customer you have certain expectations of the assortment. The baker also has certain expectations of the type of customer who will visit the store and what this customer is looking for. Supply and demand can be matched fairly easily. It is up to the baker to estimate the demand for the various products and to adjust the supply accordingly.
This approach is used in many different environments. When an organization approaches a consultancy firm to hire a consultant, the organization has certain expectations of the offer. The consultancy firm has certain expectations of the type of organization that will approach the firm and what this organization is looking for. When an organization approaches a service provider to purchase a service, the organization has certain expectations of the offer. The service provider has certain expectations of the type of organization that will approach the provider and what this organization is looking for. In this case, it is up to the consultancy company, the service provider,… (enter your option here) to estimate the demand for the various products and to match the supply accordingly.
An elegant and practical approach. The better supply and demand match, the more money can be made and the better it is for the customer and the provider. Efficiency and minimizing variation are key to making this approach work. Is this simple model really as ideal as it seems?
One morning, we not bakers would call it night, baker Pete wakes up with a fantastic idea. He jumps out of bed with a smile from ear to ear. While stretching his body he realizes that he always has his most brilliant ideas at night. On his way to the bakery he whistles. Of course it’s a gamble but if this works it could be a hit, he thinks. He tells his staff that they run normal production today with one minor exception. Today, the part of the oven capacity that is normally used for the crispy whole-wheat roles will be used for Pete’s new creation. He has come up with a recipe for what he calls “dream aways.” After a few hours of hard work it is time to open the store. His dream aways look beautiful. And most importantly they taste great. Pete eagerly awaits the first customer of the day. He lets the customer taste his latest delicacy with great enthusiasm. The customer is enthusiastic. Before noon all dream aways are sold out. In the days that follow, more and more customers come asking for the dream aways. People are starting to spread the message over the internet. It is not long before the demand is so high that Pete not only needs the oven capacity of all other bread roles to bake the dream aways, but he also has to bake new batches several times a day. After a few months, John, the first employee Pete hired 10 years ago, requests an interview. John indicates that he has lost fun in his job. The variety has disappeared and he feels more like a factory worker than a baker. Pete is disappointed but they make agreements about John’s farewell. Pete also sees advantages in John’s departure. Now he can hire two new cheap workers instead of John. With the new streamlined working method, experience and craftsmanship are less important. As long as an experienced person supervises the work. Then two supermarket chains approach Pete. They want to start a partnership and sell dream aways in the local supermarkets. Pete is extremely proud and agrees. Sales of the dream aways are so good that they are included in the assortment of more and more supermarkets. Pete has his bakery renovated so that he is perfectly equipped for the efficient preparation of as many dream aways as possible. Other products are no longer being baked because this would come at the expense of the production and sales of the dream aways. With the growing sales, and the proposal to sell the dream aways nationwide, it soon becomes clear that the bakery is not big enough to handle the capacity. With the help of a few investors, Pete buys a large factory hall that is set up to produce the dream aways. During the negotiations Pete acquired a significant share in the company, but he is no longer the sole owner. Together with the new owners, it is decided that the store may continue to exist but will be renamed. Permanent employees of the bakery are offered a job in the factory. Temporary employees have to leave. The factory is incredible. The process of making the dream aways is almost fully automated. Pete is responsible for the production process. He ensures that the factory runs at full capacity and as many dream aways are produced as physically possible. After six months running at full capacity Pete finds a way to safe costs. He optimized the recipe of the dream aways. With cheaper resources, that can be purchased centrally, Pete can achieve the same taste. For an optimal production and maximal profit it is important that each dream away contains exactly the same ingredients, has the same taste and looks the same.
A year later, sales of the dream aways has stabilized but is not as high as expected and planned. The factory runs between 60% and 70% of full capacity. The first period after changing the recipe, production had continued to be sky high. But then sales dropped and eventually stabilized. After a negative internet post, stating that the dream aways contain mostly cheap and unnatural ingredients, sales of the dream aways dropped quickly. Production decreased to under 60% of maximum capacity. The marketing department had suggested to perform a customer review. From the study performed it became clear that those people that had stopped buying the dream aways, used to buy the dream aways because of the craftmanship, the uniqueness of the individual dream aways and the natural ingredients. The customers that currently buy the dream aways mention that they buy them because they are cheap or because they fit with their habits. Based on the outcomes of the customer review the company had tried to further optimize production. Moreover, they had launched a new advertising campaign to increase the new target group. This had resulted in a slight improvement. But because the factory hasn’t produced at full capacity for multiple months in a row the co-owners want to sell the factory. The investment is no longer interesting for them. A big food manufacturing company wants to buy the factory for the production of cookies. Pete is devastated. He has invested al his possessions in the factory. Of course the factory ran well the first period. But this was not enough to fully earn the investment back. Moreover, Pete had used his high salary to enjoy. When he started his bakery it also took several years before he had earned back his investment. And over the years he had made enough money from his bakery to both pay off his debts and enjoy a little. It never occurred to him that this would be over so quickly. If they sold the factory now, he would lose his job, his shop and have debts left. But he doesn’t have a choice. The co-owners are empowered to take decisions.
In my next blog I will discuss why efficiency, optimization and a lack of variation are so risky in a complex environment.
*Baker Pete is a fictional character and dream aways do not exist.