An interesting Productivity Institute meeting today on supply chains.
One of the features discussed about the UK productivity puzzle is under the heading of “supply chain management”. Maybe British supply chain productivity is very low. Maybe British supply chain productivity is not resilient enough, see COVID and issues around Chinese involvement in 3G technology for example. so how should we think about supply chains? How should we answer questions about whether supply chain management is or is not adequate?
Let's start with an example. Suppose we have three types of law firms.
1. Law firm 1 employes a building, a receptionist, an operations manager, and a load of lawyers. The process within the law firm consists of the following. The client comes into the building and is greeted by the receptionist who then takes the client up to the lawyer. The lawyer gives the client an opinion , and the client pays and walks away. The operations manager designs the process by which the receptionist takes the client up to the lawyer (offering them tea, helping with directions to the next appointment etc.) Notice, the client never sees the operations manager, and although the client sees the receptionist, neither the receptionist nor the ops manager is a trained lawyer.
2. We then have some definitions as follows:
a. Industry. the law firm is in the law industry because its output is legal services.
b. Process. The visible processes which the law firm is involved in consists of the process carried out by the receptionist and the process carried out by the lawyer.
c. Activity. The law firm is in fact involved in three different activities:
i. the provision of reception services,
ii. of operations services ,
iii. and legal advice.
d. Lots of the lawyers in law firms moan endlessly about the fact that out of their fees comes the expenses of the receptionists and the operations managers, none of whom know anything about the law. Likewise academics who complain about administrators and admission staff who know nothing about academia, footballers who complain about groundstaff who can't play football etc.
3. now consider law firm 2. They have contracted out reception services to a separate firm, who has simply bolted a flat screen TV screen to the wall of the front office and provides receptionist services remotely.
4. Now consider law firm 3. They have also contracted at reception services, but they as well they have contracted out operations management to a management consultant. the management consultant as supplied them with the book setting out a set of routines to which, let us say, the receptionist adheres, when taking the client up to the lawyer.
What can we say about productivity and the adequacy or otherwise of supply chain management in these examples?
1. Let's start with the definition of a supply chain. Law firm one has an entirely internal supply chain, in this case the process by which the receptionist hands over the client to the lawyer. That supply chain is presided over by the operations manager. Law firm three has a supply chain, but it is external. That is to say, the services provided by the receptionist and by the operations manager in simply bought in externally.
2. Going back to the activities that are involved, in firm one the operations manager provides operations advice services, but this is done internally. If one had the management accounts for this firm, and one could figure out the wages and overhead costs of the operations manager, one could therefore figure out the costs involved in the provision of those advice services. In case 3 the matter is much easier; one just looks at how much the firm is paying to the management consultant.
3. What about measuring productivity? there would seem to be two methods:
4. method 1. Process.
a. In law firm one, break up the firm into the different processes that are involved. Try to measure the productivity of each process. So there will in practise be two output measures; first, the output of the reception process, and 2nd the output of offering legal advice after the client has been through the process of reception.
b. In this case, one would have to try as well to allocate costs such as the operations manager into each process. This of course it's much easier to do in the case of law firm 3 since every part of the process is transacted for. Thus there is going to be an observable price and quantity for the entire provision of legal advice.
5. Method 2. Activity.
a. For every law firm count the output as the provision of legal advice, so there is only one measure of output. However, account for the fact that different law firms undertake different activities, and these activities might potentially contribute to productivity. In each of the examples the activities are (a) reception activities, (b) giving-legal-advice-activities, and (c) operations activities.
b. Although measuring the activities is hard, by taking an activities rather than a process approach, one avoids the almost impossible problem of subdividing the output of legal advice into lots of different processes. Indeed, in many law firms , who keep time sheets of chargeable hours, it might very well be feasible to gather data on the activity, because it is the different activities that are documented on the charge sheets (for example many charge sheets might categorise the activities of being with clients, marketing and customer acquisition, personnel and administration).
c. This activity approach would, under certain circumstances, count the knowledge of the ops manager as an intangible asset. For more on intangibles, see here.
6. (Finally, an overall point on the economic modelling of all of this. As Milgrom, Roberts and others Have pointed out, economists have a very stripped down model of the firm. When economists write down what is called a production function, they assert, on the face of it quite sensibly, the output is produced by capital and Labour. What many supply chain managers and the academics who study them will tell you is that production requires as well coordination activities. Economists tend not to bother modelling these coordination activities separately. They are either included in labour, or viewed as being small enough for one to ignore.)