Welcome to Your Operations Solved, for Tuesday, March 30th, 2021

I'm your host, Channing Norton, of PC Solutions, and this is the Fourth episode of our show,
Listen to us Tuesday, Wednesday, Thursday, or on our Saturday compilations.

With that, let's get onto the headline for the day

Chip shortages driving up goods prices across the economy, worsened by fire.
Chipmaker Renesas electronics suffered a fire in their primary Japan production plant. This promises to further reduce semiconductor supply, which has already been hit by covid. Renesas' facility's capacity was roughly 2/3rds dedicated to serving the automotive industry, which had already been hit hard by the ongoing global semiconductor shortage caused by Covid related factory shutdowns. This also promises to cause further squeeze elsewhere in the economy. 

Basically, anything with a computer chip in it, which is most anything at this point, has been growing scarcer over the past year or two, as a combination of factors has hit the manufacturing sector for such components very hard. Front and center here is of course covid, but also relevant is the fact that all of these billions of chips sold each year are produced in only a few dozen facilities around the world. These "fabs," as they are called, cost billions of dollars and take years to set up, and are, for the most part, highly specialized. Retooling a fab to produce chips other than what it is already producing is a process taking months and tens to hundreds of millions of dollars, something that they have to do every few years to keep pace with new chip designs. The yield rate on these chips is also extremely low, especially in the few months following a retooling. As such, the semiconductor industry is, by its nature, very VERY slow to react to environmental factors. If something disrupts their supply chain, it usually falls to another plant to remedy the resulting shortage, possibly one or two hardware generations later. Which brings us to today.

Over the past few years, an alignment of factors, including cryptocurrency mining driving up demand, natural disasters shutting fabs down, engineering struggles reducing yields, delayed openings of new fabs, and a general inability of the industry to keep up with heightened demand, has combined with the economic changes wrought by covid to leave the entire world short of silicon. The Renesas fire is just the latest in this series of events. The end result is that we can expect a decline in the auto market paired with rising prices, as automakers struggle to get the chips they need to put new cars on the road, as well as even further squeezes in both computing markets and general consumer goods. Because our modern economy is so dependent on these components, we can expect this shortage to have knock on effects everywhere, driving up prices near universally for large enterprises. 

I cannot stress this enough, right now is a TERRIBLE time for new asset acquisition, be it technology assets, vehicles, or other equipment for your business. Wait 2 or 3 years for all the various supply chain problems caused by both semiconductors and covid to straighten themselves out if you possibly can. You'll get much more bang for your buck. Incidentally, this does put smaller businesses at a general advantage, as they are, generally speaking, on slower equipment refresh cycles in most areas of their business than their larger competitors, and as such can be a bit more selective about their acquisitions vs those bigger players. Take this time to invest in your people and business process improvements, and you'll find that your business is in a great position 3 years from now.

So, today's operations solution. Let's talk about your inventory. 
Depending on your industry, you almost certainly have some sort of inventory of goods that get sold to or used for your customers.
For those of us who manufacture or resell these goods, you know you don't want to pay the price keep more supplies on hand than you absolutely need, but also need to keep sufficient stock in place to serve your customers promptly. For those industries that mainly perform knowledge work, you have a separate inventory problem, namely your office assets, small and large. Tracking their use, ordering them promptly, preventing loss, damage, and theft, and just getting the right things to begin with. Both of these issues are important, and many businesses will be affected by both. We're going to talk about the office asset issue tomorrow, so be sure to tune into that, but let's get back to the issue of stocking for sale or consumption. For the solution we need look only as far as two of the biggest companies on the planet, Boeing, and FedEx. Both of these companies got to the behemoth size they are today by similar realizations. FedEx built the first high speed delivery network of anywhere near its size by realizing that the data ABOUT their operations and packages was MORE important than the packages themselves. Handle the data correctly, and the package practically delivers itself. This allows them to scale, and perform the magic that is getting a package from any point on the globe to almost any other, overnight, millions of times a day, with VERY few lost packages or late deliveries, proportionally. Boeing takes this predictive approach a step further with their "Just in time manufacturing" revolution. They don't stock parts until a matter of a few days before they are to be used, allowing them to cut down dramatically on overhead. This change is what lead them to industry dominance in the second half of the 20th century. How can we apply these critical principles to your business? Two words. Predictive Inventory. Storing large quantities of stock is expensive. You need a way of anticipating your demand, so that you always just have enough. There's software solutions to doing this that are generally specific to your industry. The other component, beyond the software, is the data that drives its decisions. You have the data, its in your sales history if you just look for it. You should be tracking your sales EXTREMELY granularly. I should be able to go into a database somewhere for your company, and pull up a customer or account's individual orders from a year ago as if it were a new order to be fulfilled today. Take a look at fedex. This sales data is arguably more valuable than the sale itself. Imagine a hardware store that was able to perfectly predict demand. Every day they get a single semi truck of all the stuff they would sell that day. They wouldn't need a massive big box space, its employees, or its rent. You could have a store like Lowes operating out of a 250 square foot retail pad. Obviously, magical, perfect predictions are impossible, you still need some stock, but if you are managing your data correctly, the amount dramatically declines, ESPECIALLY if you aren't in the business to consumer retail space. So, we collect this data, what can we do with it? Well, as mentioned, we can plug it into a predictive inventory system to start getting predictions of what to stock to reduce waste and dwell time, which is good. Ideally, these systems will get better over time as more data is input, so we can have a continual decline in stock on hand. We can also use this data to drive more sales. If its' organized in an accessible way for you to analyze it for business insights, you can drive remarketing based off this business intelligence. Let's take an example. Target stores are FULL of cameras, analyzing everything you do. What items you look at, how long you look at them, what you buy .etc. This system is so precise, that target accidentally outed a teen pregnancy to a woman's father back in 2012 by sending ads for cribs and pregnancy supplements to their mailbox. I cannot emphasize this enough, Just by analyzing sales patterns, target was able to figure out that somebody was pregnant before their father knew. This instance, while embarrassing for all involved. Imagine if the situation were a bit more normal, and you were able to predict a customers needs before THEY knew them, and market promotions targeted specifically towards their needs, right as they have them. You would have a massive leg up over your competition for getting that business. This can be done, you just need to give yourself the infrastructure to do it. Will a small business have access to all the data target does about its customers? No, probably not, but that doesn't mean you can't still make some darn accurate predictions, and drive business improvement both in terms of reducing overhead AND increasing sales.