The key issue my team and I faced this week was the disparity between demand and capacity, which resulted in extremely high holding costs. Although demand is an ongoing battle for most teams and difficult to forecast, our estimation for demand was highly unrealistic, which left us with a great amount of costs due to capacity not being used. This had a major effect on our organization’s performance, as we did not foresee it happening and the costs incurred could have been additional profit instead.
On the first day of meeting, we brainstormed and came up with various strategic decisions to overcome this problem we were facing. We needed to reduce the difference between demand and capacity, which left us with two obvious options; increase demand significantly or decrease capacity. Selling off capacity seemed to be the quick-fire way to solve the problem; however, we knew this would hurt us in the long-run. With only two more days to make decisions, we needed to think fast and ensure our verdict would be promising for future rollovers and our business as a whole. Mankins & Steele (2006) describe this issue as the timing problem faced by firms, whereby the firm acts quickly because a ‘need for action’ is required to safeguard the organization’s performance (p. 79). It was clear what we had to do, but how were we to successfully achieve this?
Our verdict was to increase demand, and so we came up with many decisions (which cannot be disclosed for strategy purposes) which contributed to improving demand and continued with aligning these towards our overarching goal. We had to think carefully about each and every decision, and how it would affect our organization’s strategy. Katz (1955) recognises this trait as ‘conceptual skill’, one of the three basic skills which an effective administrator should exhibit.
“Conceptual skill involves the ability to see the enterprise as a whole; it includes recognizing how the various functions of the organization depend on one another, and how changes in any one part affect all the others” (Katz, 1955, p. 93).
It was this very skill that we had to try tap into and evolve, as the decisions we made this week would have an effect on “the whole future direction and tone of our organization (Katz, 1955, p.93). This in itself became an inherent issue, as our ‘technical skill’ (another skill outlined by Katz) was lacking. Because we as a team are still constantly learning about how NetMike works, our understanding of, and proficiency in the simulation is still being developed. This created a loop of doom, because it meant we could only continue making assumptions; the very issue we began with.
With all this in mind, the first thing to do was change the way we made assumptions, specifically estimating demand. As Darl Kolb told us, “Turnover is vanity, profit is sanity". We learnt that whilst making sales is fun, it is important to focus on the level of profit derived from sales and creating efficiency. In future, I think it is important that we continue with subtle assumptions rather than being too optimistic and overestimating figures. This should allow us to continually make progress in the upcoming rollovers without too much trouble from the demand demon.
Katz, R. L. (1955). Skills of an effective administrator. Harvard Business Review, 33(1), 33-42.
Mankins, M. C. & Steele, R. (2006). Stop making plans start making decisions. Harvard Business Review, 84(1), 76-84.