Marketers and investors have recently discovered the importance of “the tail” in distributions of opportunities, results and risks. Virtual organizations, micro-marketing and web-based access to tiny clusters of customers has allowed start-up firms to profitably sell products to in truly niche markets. Nassim Taleb’s book titled “The Black Swan” alerted investors to the rare events with large impacts which are not well-managed by modern portfolio theory and its attendant financial instruments. Wise investors now consider the impact of once in a generation or once every century type events.
As processes, product differentiation and product complexity grew following the mass market global recovery of the 1950’s and 1960’s, operations manager and engineers have increasingly faced greater challenges and opportunities “managing the tail”. Early information technology forced companies to document and standardize their core business processes. This automation helped companies to see their self-imposed administrative limits and explore computer assisted processes to handle all possibilities. Product differentiation was pursued for every customer group and product dimension, creating sales, production, quality and support issues. As customers received more options, higher quality, lower prices and shorter lead-times, they were NOT satisfied, but asked for MORE.
Managers and engineers found that working in the tail became increasingly more difficult, costly and sometimes just plain impossible. The number of combined options in production, assembly, catalogs, project steps, flowcharts and diagnostic guides approached infinity due to the potential combinations and permutations. The challenge of identifying and resolving opportunities increased as remaining failure rates in quality, repairs, out of stock position or on-time shipping fell from 1 in 50 to 1 in 100 to 1 in 500 to 1 in 1,000 to 1 in 5,000 towards the gloriously named six sigma level (2%, 1%, 0.2%, 0.1%, 0.05% …).
In general, an army of scientifically oriented quality, business, marketing, financial, IT and engineering analysts have addressed these opportunities as complexity has risen and customer demands have increased. Along the way, the quality paradigm was defined, setting zero defects, variability, travel, inventory, waiting and waste as eternal goals. The financial paradigm’s focus on limiting costly investments to obtain small benefits acted as a resistor throughout this period.
As organizations have moved deep into the tail for their IT and product development, operations and reverse logistics processes, conflict has become more common. Analysts and process owners understand the trend and know that eventually any error, combination or possibility will be required by an internal or external customer. They hate disorder and doing things twice. They enjoy describing processes, diagnosing problems, designing and implementing complex processes, at whatever cost. Their product development, IT and operations managers and directors, backed up by finance, tend to focus on the short-run, employ cost-benefit analysis and value compliance with project deadlines and budgets as higher goals. The conflicts can be gentle comments, indirect negotiations or all out wars.
All of the players agree that demands for systems to handle more complex options with near perfect results will continue to grow. They differ in how they value the short-run and the long-run. While the financial paradigm develops a payback period or ROI based upon “solid” financial estimates for 5-10 years, the quality paradigm employs an infinite time horizon where infinitesimal improvements have subjectively valued importance as customer satisfaction, market share or risk management benefits. As quality guru Dr. Deming said, the most important benefits are “unknown and unknowable”. Hence, the two approaches are fundamentally incompatible.
Managers should take a number of general and specific steps to manage these situations, especially since they involve highly skilled, compensated and critical resources. First, help the participants to understand the financial and quality paradigms. Help them to see that the finance paradigm has great short-term applicability and is no going to be subsumed by the quality paradigm. Teach staff members to deeply understand the quality paradigm, the transformation it has facilitated in global business and its contribution to long-run success in a consumer driven world.
Second, encourage functional and project team members to alternately apply both paradigms to specific situations. Either can help to trigger break-through solutions or to find an obvious next improvement level.
Third, reinforce with staff members the need to have functional hierarchical structures, process improvement resource plans and project management as tools to manage the improvement effort. Front line staff and analysts may have the best ideas, but they need to be administratively coordinated by managers. Even in the most dynamic, entrepreneurial environment, there is some need for structure. Managers and staff can debate the right overall level or need for exceptions, but they need to appreciate the need for limits and ultimate decision-makers when conflicts can not be resolved.
Fourth, help staff to see the long-run commitment to improvements. Cutting errors in half today, rather than pursuing a 90% reduction, is not a failure, it is a win. The organization will be back to this process in 3 or 5 or 7 years, with new tools and customer demands, again analyzing 50%, 90% and 99% improvement paths. Decisions to accept “good enough” are part of the long-run improvement process.
Fifth, employ the best practices of product development, diagnosis, problem solving and project management to reduce variability and meet goals in cost-effective ways. With 50 years of experience, professionals have found great approaches that can be broadly applied.
Managing the tail of operations processes is an increasingly important role for managers and analysts. Greater variety and consumer demand makes it ever more challenging to resolve issues or to know when to stop pursuing them. Teaching staff to understand the complementary roles of the financial and quality paradigms and providing them with best practices tools helps them to produce cost-effective results.
Good News 