The Human Link

Picture source: http://renocpa.net
INDUSTRIAL ENGINEERING – VOLUME: 44 NUMBER: 6
by Tarikere T. Niranjanand Shashank Rao

ERP is a tool that most companies use to manage their supply chain. However, most ERP implementation resulted in failure. This may happen because it does not recognize the humanistic part of the problem. It has to be understood that supply chains are socio-technical systems. In typical ERP software, people (managers, directors, analysts, etc.) insert “information” like cost parameters and service levels, and the software will do the sophisticated calculation and churn out optimal values of decision variables such as how much to stock and when to order. The underlying problem here is: what kind of “information” should be inserted? Do all these people have the same definition of “information”? Can they input the right parameters value to the ERP?

A never-ending antagonism between marketing and manufacturing may be a good start to understand that every department, not to mention every person, has different view on what is important and what is not. Marketing tend to ask “Why can’t manufacturing department become market-oriented?” In return, manufacturing ask “Marketing people do not understand costs, profits, plants or operations.” Human behavioral issues are relevant to supply chain management, and organizational roles shape individuals’ perceptions of reality. In most cases, each department has their own perception of reality that will hinder the effectiveness of ERP, as evident by a research done at Carmel, Iceland, in a developer and manufacturer of food processing industry equipment, software and integrated systems and a leader in integrated systems for the fish and poultry industry segments.

Carmel is deciding whether to switch to air freight or keep using sea freight for merchandise transportation. A study of relevant costs was conducted. The costs were divided into inventory management costs, transportation costs and overhead costs. Each cost was calculated to get the values that are proxy to the real world. These values were used to test the perceptions of various managers spread across different roles in the organization.The respondent pool comprised the managing director, sales director, manufacturing director, finance director, strategic sourcing manager, inventory manager and logistics manager. They were asked to name all components of cost that first occurred in their minds, rank those costs, quantify the costs.

As expected, respondent from different department weigh the cost differently. Respondents in roles answerable to the customer indeed weighed the cost much less than did people at the supplier side who had to handle the inventory and find space for its storage.It thus appears that each level of the organization distorts reality just a little bit more than each earlier level. The differences will amplify when the problems become more strategic and hard to measure.

Now that we understand the problem and the grave possibilities, what do we do? One solution approach is to sensitize managers to this unconscious bias. Once they are aware of it, they may improve their world view of their supply chain. Another approach is to encourage regular exercises that entail debateswhich hopefully will lead the organization to develop a collective view that is closer to reality. Research has shown that job rotation is an excellent way to improve systems thinking and make managers less prone to departmental silo-thinking.