information velocity and competitive advantage nile w. hatch, michael miles, ryan williams,...
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![Page 1: Information Velocity and Competitive Advantage Nile W. Hatch, Michael Miles, Ryan Williams, Alessandro Cavallini, Michael George INFORMS — San Diego October](https://reader036.vdocuments.net/reader036/viewer/2022070406/56649e0c5503460f94af4420/html5/thumbnails/1.jpg)
Information Velocity and Competitive Advantage
Nile W. Hatch, Michael Miles, Ryan Williams, Alessandro Cavallini, Michael
George
INFORMS — San DiegoOctober 13, 2009
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2informs 2009
Inventory Management
• Inventory management is nearly ubiquitous in manufacturing– Just-in-time–Kanban– Lean manufacturing–Agile manufacturing
• Inventories have fallen as a result
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3informs 2009
Inventory Dynamics, 1980 - 2000
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Chen, Frank, and Wu (2005)
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4informs 2009
Performance Effects of Inventory Management• “To not implement lean … put[s]
plants at a disadvantage” (Shah and Ward, 2003)
• Positive impact: Husan and Nanda (1995)
• No impact: Balakrishnan, Linsmeier, and Venkatachalam (1996), Demeter (2003), Vastag and Whybark (2005)
• Negative impact: Cannon (2008)
• Mixed impact (non-linear): Chen, Frank, and Wu (2005), Narasimhan, Swink, and Kim (2006)
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5informs 2009
Why should financial performance effects be expected?• Strategy is performing different
activities than rivals or performing the same activity in different ways (Porter, 1996)
• “… many companies have been frustrated by their inability to translate [their gains in operational efficiency] into sustainable profitability.” (Porter, 1996)
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6informs 2009
Why should financial performance effects be expected?
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7informs 2009
Why should financial performance effects be expected?• “Every piece of business strategy
acquires its true significance … in its role in the perennial gale of creative destruction.” (Schumpeter, 1942)
• Companies do not sustain supernormal returns because they do not “create and destroy” investments at the “pace and scale” of capital markets. (Foster and Kaplan, 2001)
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8informs 2009
Information Velocity and Lean Manufacturing
Lean manufacturing may “do Lean manufacturing may “do the same things in a different the same things in a different
way” when “information way” when “information velocity” is largevelocity” is large
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InformationVelocity
=
Variety and profit informationtransmitted by demandLead time to create (and destroy)offerings in response to demand
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““SupernormSupernormal Profits”al Profits”
informs 2009
Information Velocity and Competitive Advantage
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Competitive Competitive AdvantageAdvantage
Information VelocityInformation Velocity
Variety and profit information Variety and profit information transmitted by demandtransmitted by demand
Lead time to create and Lead time to create and destroy offerings in response destroy offerings in response
to demandto demand
Lead TimeLead Time
Manufacturing Manufacturing (lean)(lean)
R&DR&D
EntropyEntropy
InstabilityInstability
UnpredictabilityUnpredictability
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informs 2009
Manufacturing Philosophies
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Economies of Scale Manufacturing:batch production schedule:
AAAAAAAAAAAABBBBBB
Lean Manufacturing: level-loaded production schedule:
AABAABAABAABAABAAB
Market Demand:Transmits 18 “bits”
AABABAABAAABABAABA
Agile Manufacturing: job-shop production schedule:
AABABAABAAABABAABA
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informs 2009
Lean Manufacturing
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(Schonberger, 2007; Shah and Ward, 2003)
Lean Lean ManufacturinManufacturin
gg
fast setup fast setup timestimes
self-directed self-directed work teamswork teams
total total productive productive
maintenancemaintenancepull systems/ pull systems/
kanbankanban
quality quality managemenmanagemen
tt
standardized standardized workwork
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informs 2009
Research Methods
• Large scale sample of all manufacturing firms (Computsat)
• Measures:– Competitive advantage: ROA, ROE– Entropy: instability, unpredictability,
instability*unpredictability– Lead time: inventory turns (Schonberger,
2007)
– Controls: Year, Quarter, Firm size (revenue)
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informs 2009
Empirical Model of Information Velocity
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informs 2009
ResultsTraditional Approach
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ROAROA ROSROS
InterceptIntercept -2.06-2.06 -18.56-18.56
TurnsTurns 0.0000.000--0.003**0.003****
InstabilityInstability
1-Predictability1-Predictability
Instability * Instability * (1-Predictability) * (1-Predictability) * Inventory TurnsInventory Turns
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informs 2009
ResultsVolatility Effects
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ROAROA ROSROS
InterceptIntercept -0.0216-0.0216 0.10740.1074
TurnsTurns 0.00020.0002 --0.003***0.003***
InstabilityInstability --2.856***2.856***
--34.442**34.442****
1-Predictability1-Predictability --0.021***0.021***
--0.092***0.092***
Instability * Instability * (1-Predictability) * (1-Predictability) * Inventory TurnsInventory Turns
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informs 2009
ResultsInformation Velocity
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ROAROA ROSROS
InterceptIntercept 0.01740.0174 0.07260.0726
TurnsTurns 0.0000.000 --0.004***0.004***
InstabilityInstability
1-Predictability1-Predictability
Instability * Instability * (1-Predictability) * (1-Predictability) * Inventory TurnsInventory Turns
0.45050.4505 6.998***6.998***
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informs 2009
Work to do
• Financial performance measures• Non-linearities• Controls for industry and firm• Frontier analysis — matched pairs
of lean and non-lean• Longer term focus on direct
measures of information velocity– Firm level data collection– R&D lead times in addition to manufacturing
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informs 2009
Conclusions
• Inventory management (lean) matters– pervasive adoption– operational performance– competitive advantage is hard to find
• Information velocity delivers fast response to customer needs/demand
• Lean pays in financial performance when the demand is volatile and unpredictable
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