Tradeoffs in Operations

Insights

Strategic Tradeoffs in Operations Don’t Exist

In an important paper written in the Harvard Business Review, Skinner (1969) stated that in operations you must make tradeoffs between quality, delivery, flexibility and cost. In other words, you cannot have it all. Academic researchers jumped on this idea and conducted many surveys of companies around the world to find out if this was true. Rosensweig and Easton (2010) summarize all of these surveys and find, surprisingly, that these tradeoffs do not exist. Apparently companies can have it all… high quality,å fast delivery, flexibility and low cost. If these are tradeoffs, how can this be?

Theory of Performance Frontiers

A little bit of theory comes into play here… namely the Theory of Performance Frontiers. If a company is operating along the quality-deliver-flexibility-cost performance frontier then it is mathematically impossible to get better in one area, lets say cost, and at the same time become more flexible. Skinner’s theory of tradeoffs says that these four are negatively correlated; one goes down if the other goes up.

Theory of Cumulative Capability

Given that researchers were not seeing evidence of these tradeoffs, they had to come up with another theory, which I want to share… the Theory of Cumulative Capability. Initiatives, such as the ones that Supply Velocity works on (supply chain management, facility layout, inventory optimization, process streamlining, customer-analysis) allow companies to build capabilities that feed on each other and improve multiple metrics.

Theory of Continuous Improvement

My explanation is a little different… the Theory of Continuous Improvement. I, and many Lean Champions, believe you can always get better. If a company is operating on the performance frontier then the Theory of Performance Frontiers would say that you have to trade-off an increase in one metric (cost) for a decrease in another (flexibility). I am sure Taiichi Ohno, the father of the Toyota Production System, would suggest that if there is a performance frontier, it is always moving. Customers move it, competitors move it, and finally supply chain partners help you move it. This creates “slack” in one area which means that you can improve cost without negatively affecting flexibility.

So the good news is that there is scientific evidence that you don’t have to make tradeoffs in quality, delivery, flexibility or cost. As great operational companies such as Toyota, Intel and Emerson have shown, there is always room to improve.

If you want help operating at optimum performance, give me a call, 314-406-4962

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