Engineer’s analysis helps shape decisions from government to business
Imagine you are the trade minister for a growing country with two choices to increase competitiveness: invest in new infrastructure or reduce red tape.
Or imagine being the CEO of a fashion retailer learning that you could improve profits 28 percent by changing your inventory practices so that you moved fresher merchandise.
Whether the challenge is planetwide or industry specific, Warren Hausman has models to help.
Hausman is a professor of Management Science and Engineering in the Stanford School of Engineering. An expert in supply chain management, he has been modeling the complexities of international trade and industry logistics for a decade.
“These models tease out valuable patterns that can help both public and private agencies understand and improve their logistics, and have a direct and significant impact on their nation’s or their company’s competitiveness,” Hausman said.
Separating winners from losers
As globalization continues it becomes increasingly clear that some nations will triumph and others will lag. Which policies and practices separate the winners from the losers, however, is open to debate.
Few would be surprised to learn that nations differ wildly when it comes to getting goods in and out; more striking is the chasm between the best and worst performers.
In Kazakhstan, for instance, it can take 81 days to export a 20-foot cargo container of textiles. In Sweden it would take just 8 days.
In terms of financial expense, the results are equally varied. In the Kyrgyz Republic, it costs more than $3,000 to import a 20-foot container from an ocean-faring vessel to a factory in the country’s interior. In Germany the cost is $937. In Sweden it is $700.
Working with some colleagues, Hausman has performed a sophisticated analysis of international trade patterns showing that streamlining rules and regulations can be a more effective way to improve competitiveness than making costly investments in infrastructure to speed the flow of goods.
“Surprisingly, poor infrastructure such as roads, rails and ports are only partially to blame for the added time and cost,” he said. “The most impactful opportunities are often at the policy level. The real impediments are in red tape, poor contractual enforcement, poor rulemaking and avoidable delays at customs, ports and border crossings.”
Devil in the details
Hausman’s recent collaborators include Hau Lee, Thoma Professor of Operations, Information and Technology in the Stanford Graduate School of Business, and Uma Subramanian, a product manager in trade logistics at the World Bank. Their analysis paints a clearer picture of how national and corporate decision makers can increase their competitiveness by improving their logistics.
For their effort, Hausman, Lee and Subramanian recently earned the Wickham Skinner Award for Best Paper Published in Production and Operations Management in 2013.
Hausman and his colleagues are not the first researchers to attempt to illuminate the inner workings of global trade through modeling. But their analysis uses more detailed and specific time and cost data than earlier efforts. That level of detail was made possible by Subramanian’s research surveys at the World Bank. They include data from more than 80 nations on the time and cost of moving a typical 20-foot container to or from a company in the heart of that nation to a port of exit – a scenario that plays out thousands of times a day across the world.
The analysis takes into account 11 different variables affecting logistics, including measures of processing time, cost and reliability. The idea is to calibrate the impact of specific improvements in logistics performance (time, cost and reliability) on increased trade.
Low hanging fruit
The analysis pinpoints several often overlooked opportunities to improve the supply chain, such as the rate of container inspection, how many agencies have rights to inspect containers and the criteria used to determine when to inspect.
In this regard, Sri Lanka and Nigeria serve as prime examples. Hausman’s data show that trade authorities inspect virtually 100 percent of imports coming into those two countries, while in Germany and Canada the inspection rates are just 1 percent to 2 percent. Inspecting every container is an onerous burden that slows the traffic of goods. A simple change in policy to inspect only a random sampling of the containers could dramatically improve both speed and cost.
Ultimately, the analysis points out ways that policy makers can have a direct impact on competitiveness. For emerging economies in particular, Hausman said it’s just as important to improve regulations, policies and practices as it is to train workers, make tax concessions and upgrade infrastructure.
“These findings can spur public and private policymakers to focus on variables within their control with the greatest likelihood of improving their country’s competitiveness by reengineering processes to reduce bottlenecks and eliminate waits to make processes more consistent,” Hausman said.
In the corner offices
Hausman also uses quantitative models to help corporate executives make better decisions. For instance, collaborating with John Thorbeck, chairman of Chainge Capital, he has refined an approach known as “Fast Fashion” to show CEOs how they can more precisely match inventory to demand to boost profits.
Many retail markets are ruled by fads, seasons and long lead times. So the tendency is to stock up early to meet anticipated demand. But merchandise that doesn’t move during periods of peak demand must often be sold at steep markdowns to clear the shelves.
“Undesirable markdowns and stockouts can be as much as 30 percent of retail sales,” Hausman said.
Hausman and Thorbeck show how postponement – delaying the commitment to specific styles, colors and quantities of merchandise – creates supply flexibility. In short they find that spending money to obtain shorter lead times for merchandise is often better than stocking up early to get lower prices and then hoping to sell out.
“Our models have been shown to significantly lower inventories subject to markdown and the amount of the markdowns necessary over retailers who don’t use supply flexibility,” Hausman said.
The key is to balance speed, cost and flexibility. Hausman’s approach to Fast Fashion demonstrates that selling a fresher assortment of goods may boost annual revenues by just 6 percent. But because those sales come during periods of peak demand – and high pricing – profits could increase as much as 28 percent. This is significant in the fashion industry, which conventionally favored buying merchandise at the lowest unit cost, irrespective of lead time.
Modeling then and now
Looking back at his career and asked how modeling has changed during his decades in academia, Hausman noted that much of what he does today wasn’t possible two or three decades ago because the data didn’t exist and the algorithms weren’t as sophisticated. But even now, as models gain traction, adoption takes time.
“Some of the things I wrote about 15 or 20 years ago are just now taking root,” he said.
From the grand sweep of global trade policy to the nitty-gritty of corporate decision-making, it is clear that supply chain modeling is becoming increasingly important in defining the economic playing fields of tomorrow.
At the forefront of that evolution, Hausman is redefining the possibilities of what modeling means to the world.
