Wednesday, March 10, 2010

An Illustration of how the Extended Order Works

Many years ago, I was field service manager in a large metropolitan area for a major computer company. This was before PCs and their networks; a typical customer had a central computer and a dozen to several score terminals.

One day, a downtown building was hit by lightening, several times. The building contained several of my customers. The lightening destroyed the communications cards in a hundred or so terminals, making them inoperative, and thereby halting computer operations.

My local inventory held only a half-dozen or so of the necessary spares. Normally, this was enough.

When a spare was used in a repair, the defective board was sent to California to have the failed chip replaced and a replacement spare was sent to me, arriving about a week after the defective was sent in.

Fixing all the blown terminals would take months under normal operations. Something unplanned and out of the ordinary had to be done.

How a Wise Elites Might Deal with the Situation
How would this be dealt with under a system of central planning controlled by the most experienced and wisest people in the business?

I would have my engineers fix six of the terminals while I, going through channels, notified the central planning authority of the lightening damage and requested a re-allocation of inventory to my district.

Being a central planning organization, they would be evaluating requirements and changes of requirements, worldwide, for hundreds of computer parts in a hundred or so repair districts covering thousands of customers.

Terminal problems generally were a low priority. Unless I involved an executive (probably at great cost to my career, execs not appreciating 26-year-old junior manager bothering them) or screaming customers got in contact with an exec (ending my career) it might take several meetings for the planning authority to get around to my unusual requirements.

When the planners got to the problem, they might reallocate inventory to my district, notify other districts to send me their spares, tell central stores to purchase new boards for the repair pipeline, and order the terminal division to increase production of the interface cards to cover the demand. How long do you suppose this would take? Days? Weeks? Months, perhaps?

In the meantime, I’d get six new boards every week or so, to fix six more of the hundred busted terminals.

Decentralization and Individual Responsibility

However, ours was a system of decentralized planning and decision-making. I, and everyone else, operated under general and abstract rules within which we were at liberty to make our own decisions. We were to assess our individual situations, communicate among ourselves, and even make our own deals by trading favors. The general rules included conflicts: take care of customers and keep inventory low. This was intentional, to force local managers to make conscious trade-offs.

How did our little intra-company extended order handle this?

I immediately called all the other districts in my region (which included about one-fourth of the U.S.) and asked the people I knew, managers with whom I’d traded favors in the past, if they had any terminal boards they could send me. If so, please get them on the next commercial airplane going from their city to mine. I would pay the transportation costs which would easily exceed the cost of the boards themselves. Then I told my inventory manager to place an urgent hot-line next-day-delivery order for a hundred boards, ship-to-addresses to be provided by the end of the day. Also expensive for me.

Then I drove to the building. Service engineers with my pitiful six spares were already on site, fixing what they could. From several of the customer offices, I checked with my compatriots to find out how many boards they were sending and when they would arrive. Customers overheard that replacement boards were arriving on commercial flights within the next few hours and some of my engineers would meet the flights and bring the boards for the stricken terminals. By 8pm, roughly a third of the terminals were repaired. By the end of the following day, all the terminals were repaired and most of the field inventory had been replenished in the various districts.

As if by Magic
No executive was involved, not even any mid-level managers. After the fact, my boss had some questions and the situation was explained up the line, but no big deal. I’d done nothing heroic or out of the ordinary; my peers throughout the company, world wide, regularly did pretty much the same thing. I’d sent some of them parts from my inventory on various occasions.

No committees or heroes in mask-and-cape were involved. Just ordinary clerks and low-level managers.

The really interesting part is what happened behind the scenes as individuals with liberty to act within the guidelines (traditions) responded to each other.

The central parts depot shipped the hot-line order for spares. An inventory-control clerk saw the inventory of repair parts – terminal boards – depleted and immediately placed an order with the terminal factory for more boards, some for urgent delivery and some for normal delivery. I believe that clerk, seeing the sudden jump in demand, ordered more than the 100 replacement boards because he or she determined that inventory had been too low to respond to whatever had happened.

The clerk did not know about the lightening strike; he or she did not even know from what part or parts of the world the sudden demand came. She didn’t know if the drop in stores inventory was the result of some disaster or an ordinary statistical result of field inventory being too low.

Seeing the sudden, unexpected, and urgent demand from the spares depot, the production scheduler at the terminal factory immediately increased the planned production of that particular terminal board. Working with factory inventory control and the shipping scheduler, the production scheduler arranged to pull boards out of finished terminals to meet the urgent order from the spares depot. This delayed shipment of some terminals for a few days until new boards arrived.

Nobody at the terminal factory knew about the lightening strike. Nobody at the terminal factory knew anything but that demand for a certain board had gone up and somebody was willing to pay a “higher price” to get them. (Hot-line orders were expensive as the ordering entity paid for expedited shipping and rates of hot-line orders were monitored to see who might not be properly managing inventory. A certain level was expected, but too many could be costly (career-wise) for the manager. We all were cautious using hot-line orders, but unhappy customers were even more expensive.)

Within 2 days all the terminals were fixed and all the customers happy, within 2 weeks the entire situation with its jump in demand had smoothed out with inventory returning to the normal (but slightly higher) level. No planning commission, no executives involved, not even many people knowing exactly what had happened – just individuals signaling each other by increased demand and a temporary willingness to pay a higher price (the hot-line “premium”) for a particular spare part. People who didn’t know exactly what was going on, who didn’t even know each other (and certainly didn’t know me or my customers) responded to each other’s actions by exercising their individual judgment using the liberty they had within the abstract and conflicting guidelines they were given.

And they weren’t doing this just for my customers: this happened every so often as the world-wide business grew and the organization learned how to respond to emergencies.

No central planning group, with its limited access to information and its limited brainpower (the effective intelligence of human groups acting in lock-step (committees) tends to decline as membership increases) could possibly have accomplished as much as quickly. And this was within just one sector (customer service) of one company; it happens all the time in the thousands of companies in the free market. Companies that don’t respond to customers lose business and go bankrupt. Companies that do a better-than-average job thrive and gain market share.

That’s how the extended order computes requirements and meets customer needs, automatically and without central control.

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