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The Dark Side Of Operational Efficiency In Times Of Crisis

Efficiency-enabling practices can help generate greater profitability, but too much of a good thing can lower operational flexibility. But what risks do firms take when efficiency overshadows flexibility?

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Source: Saurabh Mishra

Efficiency-enabling practices can help generate greater profitability, but too much of a good thing can lower operational flexibility.

Few management practices have captured business attention more than the quest for operational efficiency. Indeed, over the years, businesses across a wide spectrum of industries have readily adopted practices such as Just-in-Time (JIT) and lean manufacturing, which drive efficiency across production and distribution processes. But is the zeal for efficiency really worth it? Do firms stand only to gain from efficiency or are there downsides as well? During times as uncertain as these—with the Covid-19 pandemic and threats of economic recession—it is important to carefully weigh the obvious pros and not-so-obvious cons of focusing solely on keeping operations lean.

Heavy reliance on efficient management processes is completely understandable. These practices greatly lower resource requirements and help reduce waste. Further, by streamlining the flow of materials across supply chains, ensuring availability of resources for just-in-time production, and optimizing manufacturing cycles, managers are able to derive greater returns on their investments. Moreover, recent availability of large datasets and advances in computing have made efficiency even more attainable, allowing managers to optimize their value chains.

But what risks do firms take when efficiency overshadows flexibility? How can they safeguard themselves during such unprecedented circumstances such as these?

Is Efficiency All Gold?

The answers to these questions are complex. To some extent, yes, by lowering costs, efficiency-enabling practices generate greater profitability for firms and deliver higher value to shareholders in the aggregate.

However, a singular focus on efficiency also has its drawbacks. Most importantly, too much of it can lower operational flexibility for organizations. For many years now, management scholars have alerted that efficiency often runs at odds with flexibility, with most businesses struggling to be both streamlined and nimble at the same time. This is because efficiency leads to a routinization of processes and necessitates a focus on constant, but incremental, improvements in operations. As a result, efficient organizations often have few resources left for managers to react to dynamic business conditions or to formulate innovations that build new markets.

In addition, efficient supply chains risk leaving little room to react to unexpected variations in consumer demand, resulting in stock-outs. Stock-outs are bad for businesses, as they not only hamper immediate revenue, but also endanger customer satisfaction, which lowers financial performance in the longer term.

The Need of the Hour is Agility

The prescription for managers, therefore, is to strive for a balance between efficiency and flexibility, or, in other words, to become more agile. Even though management scholars have cautioned that efficiency and flexibility are difficult to manage simultaneously, it is not impossible to do so. What it does require, though, is a novel mindset.

In particular, managers should see big data and advanced analytics as tools that can make them not only more efficient, but also more agile. Operations managers should work together with their marketing colleagues to leverage the granularity and variety of both structured and unstructured consumer data. This data, when integrated with advanced forecasting models, can allow management of supply capacity beyond immediate operations and suppliers to higher tiers of the organizational value chain. Managers can thereby construct agile supply chains that anticipate and react to demand changes early and promptly to drive business growth.

Further, in increasing efficiency, managers tend to focus on working with a few suppliers. Instead, it would be fruitful for them to develop relationships with a portfolio of suppliers, as this can lower supply-side risks. It is true that working with a portfolio generates redundancies that can be costly. Yet, in times of turbulence such as now, redundancies can be helpful. In addition, with a portfolio approach along with the use of analytics, organizations can model wider supply network risks to predict supply failures, as well as develop simulation models to understand the lead times needed to accommodate sudden and abrupt changes in consumer demand. This can help them navigate turbulent environments with more ease.

Finally, extra resources can relax constraints for managers to experiment with new ideas that can build organizational resilience for the future. However, resource availability does not necessitate that organizations abandon efficiency altogether. Instead, managers can place efforts in modelling optimal requirements for key resources in ways that balances costs with market-leading innovations.

The dynamic and hypercompetitive world of today dictates a path of balance. This is particularly pertinent in the current crisis created by Covid-19. It is true that no organization could have predicted the dramatic changes brought upon their business. However, it is key that managers realize that even low-probability events such as Covid-19 do occur and have very high impact. Guarding their operations from such risk by tempering their quest for efficiency with a mindset for agility would help managers place their organizations in a superior competitive position for the long run.

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