February 1, 2017

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Using Variability and Volatility for Business Advantage

Managing any enterprise is often quite challenging as there is no predictability for any business aspect (hence called variables). This uncertainty manifests in two distinct dimensions which lend itself into a typical 2x2.

One is the volatility in terms of binary outcomes. Forecasting is a huge field which has developed due to our inability to accept volatility as a natural phenomenon. The other is the variability in terms of differences of needs, expectations, or requirements converting simple products into complex product lines with tons of variations.

There is a tremendous amount of literature that’s available to drive growth and profitability, complete with multi variate frameworks and analyses by the dozens. However, the complexity associated with the same often prevents adoption of these techniques.

Let us look at two classic yet different successes on the basic dimensions of demand and supply.

One is the ubiquitous global fast food chain - Mc Donald’s and the other is Aravind Eye Hospitals which performs Cataract operations with processes modelled around McDonald’s processes.

McDonald’s

  1. Demand Variability – Simplification

    In the case of McDonald’s, food processing is a process manufacturing industry. Unlike discrete manufacturing wherein there is a distinct bill of material with precise quantities of inputs, here, you are stuck with a “Recipe” which calls for vague inputs like “Salt – to taste”. So how do you address Demand Variability? Two grams of salt would be ideal for me yet too salty for you.

    Also, in the case of food processing, the techniques are many and varied. You can bake, sauté, fry etc. to prepare the food. Meat can be served rare, medium rare or well done.

    The easiest way to address Variability is to Simplify things. In terms of technique, McDonald’s stuck to only one technique - Frying (Pan frying or Deep frying). The other way to address Variability is to Standardize things. Here again, all of the complexity, which can result in variability like the sauces and the patty were preprocessed in a central plant where specialists ensure the consistency. This ensures that you experience the same taste for the Burger in terms of the patty and the sauce, anywhere in the globe.

  2. Demand Volatility – Throughput

    Now, coming to Volatility, the only way to ensure Demand for a Fast Food chain is to ensure that we focus on Throughput. We all know that as far as Retail is concerned, success primarily depends on getting the primary 3 ingredients right. Location, Location and Location.

    McDonald’s approach to identifying the right locations for their outlets has become so much of a science, that there are many articles mentioning that McDonald’s is actually in the real estate business. This has ensured that all their outlets get the right amount of foot fall.

    This coupled with their super-fast processes of fulfillment ensures that they are able to ensure more guests/serves per table per hour than most competitors. All of this guarantees that the Throughput per outlet is a quantum leap over similar outlets thereby creating sufficient capacity per outlet which can act as a buffer for Volatility.

    The other aspect of food is the perishable nature of food (it can spoil). Also, the preference of customers to have “Fresh” food. Here again, McDonald’s has fresh buns, lettuce, onions and tomatoes which are common across the various kinds of burgers. And, the complex items like Sauces and Patties are frozen to facilitate Postponement (supply chain parlance). Patties can be fried on order to provide a completely fresh experience for customers. And the frozen ingredients can be stored for a longer shelf life and used as and when required.

    Along similar lines, we can see how McDonald’s approached similar aspects of Supply.

  3. Supply Variability – Simplification

    McDonald’s Supply Chain Strategy and associated Vendor Management practices are legendary in terms of procurement of Quality ingredients. Similarly, their Hamburger University ensured extremely consistent restaurant operations, procedures, service, quality and cleanliness.

    By getting rid of complexity from the outlets and centralizing them across regions in their plants, McDonald’s has created a typical Hub and Spoke model where the simplicity of the Spokes ensures that there is a sufficiently large pool of labor and suppliers who can handle processes at the spokes, while the complex work at the Hubs can be handled by specialists.

  4. Supply Volatility – Throughput

    Given the scale of their operations, McDonalds can now run complex supply chains to procure fresh ingredients directly from farmers and thereby impact Throughput. (Farm to Fork)

    Similarly, their Food Processing Plants conduct significant R&D to tailor the menu to the tastes of the region and provide additional menu items which are local to the region in addition to the classic items.

    Aravind Eye Hospitals

    Here are some of the things Aravind Eye Hospitals has done to emulate McDonald’s processes. 

  5. Variability - Simplification

    First, they got rid of the complexity of a multi-specialty hospital which handles various departments such as cardiology, neurology, orthopedics etc. Instead, they limited their focus to only the Eye (one organ with issues at scale – resulting in millions of patients) [Demand & Supply ]

    They simplified the process for the patient and his/her family by ensuring that even a complex cataract operation can be done as an outpatient procedure, which does not necessitate an overnight bed. [Demand & Supply]

    They broke down time consuming processes which were handled typically by doctors (Refraction) and created competency specific roles like specialty nurses who could instead handle these processes. [Supply]

  6. Volatility - Throughput

    This is one area at which Aravind Eye Hospitals really excelled at. They conduct regular Eye Camps in nearby rural areas to identify patients in need of surgical procedures and ensure constant inflow of patients for improved utilization of capital intensive assets in the operation theatre.  [Demand]

    They set up a nursing college with every hospital to ensure that they could provide a nurse to doctor ratio of 10 to 1 and free up sufficient time for doctors to see 10x number of patients. [Supply]

    They tweaked the Operation procedures to ensure that Pre-op and Post-op activities are performed by nurses in facilities outside the Operation Theatre, thereby ensuring that Surgeons could also improve their throughput in terms of surgical procedures by 10X (60-70 procedures instead of 6-7 procedures). [Supply]

    This increase in capacity allowed them to handle many more free or subsidized patients at minimal extra cost. [Demand]

Conclusion

Simply put, our ability to accept variability and volatility will help us plan processes keeping these aspects in mind. By doing so, we also have a better chance to manage business risk and ensure growth and profitability.

There are plenty of examples that validate the importance of understanding variability and volatility in every industry, like the outlet specific mixers in the Paint Industry to help you obtain your own shade of blue [Demand] or the hiring practices of the IT industry in India w.r.t.  qualification of colleges instead of engineers followed by training in company universities [Supply] etc.

Go figure!!!