Heskett Column - Fine Coupling: Can Human Resource Management Learn from Supply Chain Management?

Two seemingly unrelated items prompt this month's column. First is the growing number of layoff announcements by companies taking advantage of the U.S. economic slowdown to get rid of hiring mistakes, redundancies from previous mergers, stockpiled talent, and excess employees resulting from failed forecasts. The second is a book, Design Rules: The Power of Modularity, about a monumental computer-design process study by Carliss Baldwin and Kim Clark that underlines the importance of design rules and processes intended to produce compatible components in a finished product.

Modularity in the manufacturing and logistics world refers to the design of products around a limited number of modules that can be mixed and matched in many combinations, depending on customers' needs. For example, General Motors designs and produces several transmissions, engines, and chassis that can be used to produce nearly its entire line of autos of different makes. Modularity is one of several innovations developed over the past four decades that have transformed the nature of supply chains. These include "postponement" (delaying until the last possible moment the assembly of components or modules), computer-aided manufacture and robotics (allowing the old "economic lot size" to be reduced to one unit), rapid response (utilizing faster, more dependable methods of transportation and rapid-transfer "cross-docking"), and positive tracking (allowing customers to trace the progress of their orders, typically thanks to the power of barcode technologies). These developments are symbiotic with new information technologies and the impact of greater information transparency throughout the supply chain. Either without the other would have limited relevance.

In total, these concepts and technologies have resulted in a "fine coupling" of supply chains that has removed costly inventory buffers and produced a huge sucking sound — that of inventories being sucked out of our supply chains. They allow us, for example, to design our own Dell computer and order it directly from the manufacturer (or a consortium organized by the manufacturer) for rapid delivery. It's hard to believe how little of this was possible just ten years ago.

At the same time that we devote massive attention to the reduction of waste in materials, one organization after another is announcing once again that significant cuts in personnel are necessary. The calculated cost of these "human inventory" mistakes will include only severance payments and relocation costs, not lost productivity and knowledge, or damaged customer relationships and human lives. Because they will be regarded as "planned reductions," they probably won't even be included in employee turnover calculations. The ultimate irony is that the "fine coupling" of our supply chains, through the removal of inventory buffers, may have made it more difficult to "fine couple" human inventory management.

Are there lessons to be learned in supply chain management that can be applied to the management of human resources? If so, what are they? What do you think?

I think that we who live in less-automated countries have a different perception of time. We also hate waiting in lines, but we do not mind talking to a friendly individual who is taking good care of us while we wait.

We do prefer slow-but-human over fast-but-impersonal. Perhaps in the future we must find the right balance between the two worlds, maybe by having automated fast machines AND slower-but-human, well-trained attendants to choose from, according to one's priorities and available time.

Which would you select?

I don't see much applicability for the efficiency techniques listed in supply chain to human resource management. In particular, the concepts and attitudes surrounding modularization, just-in-time delivery, and continuous tracking should not be applied to people. To be efficient from a human-resource standpoint in this fast-moving era rather requires longer-term investment in skills and strategy adoption by longstanding employees, plus qualitative strategic goals rather than measured goals (in innovation-oriented projects, the territory hasn't been defined enough to allow for refined measurement against expectations). People, unlike components, should not be treated as assets to be rapidly acquired, released, and strictly tracked.

There is a parallel between supply chain planning and the failure of firms who are now downsizing, and that is in demand forecasting. Most of the downsizers massively failed to forecast the current market conditions, built to over-capacity in resources, and are correcting to stay afloat. If a manufacturer were to do the same with fixed assets, they would be nearing bankruptcy as well.

The preference will be decided by your own core values about life. Some will value human relationships and be willing to devote all their spare time to community and networking. Others are only keen on their own technical development and consider human interaction a waste.

I am more at the human side. No excuses of time can be forgiven for ignoring human interaction and relationships.

Even though engineers are those who perform engineering, they are difficult to component-ize. On the one hand, tech executives may love to take human components here and there. On the other hand, engineers intend to choose their favorite companies and positions. It's even funnier when employers have a lot of expectations for human components' innovation or inventions.

Inventory SKUs are more static. Human CKUs (Cube Keep Units) are more dynamic.

Inventory SKUs don't have any autonomy or intelligence. However, self-motivated, well-trained, and creative CKUs can make dramatic differences for an enterprise.

The idea of a relationship between logistics and recruitment is very interesting. Human resource professionals tend to adopt a Hobbsist materialist view of people, caused by wholesale adoption of scientific method suited to experimentation in the name of "objectivity." In many cases of behavioristic analysis, this gets useful results.

The problem arises when estimating people's ability to judge and compare, and their sense of humor. All are essential to the good management of people, especially in the labor-intensive world of logistics. Analysis cannot estimate these facets, just as a joke is ruined by explanation.

Even more interesting, however, is the application of the laws of logistics to the way information flows around organizations in the form of informal communication. This is particularly interesting in respect to the intuitive formula: information plus authority permits the exercise of corporate power. This has an intimate link to corporate politics and their proper control and use. Rather than deny their existence, the best way is to harness these forces and direct them toward positive activity.

When businessmen everywhere feel a slowdown in the economic trend, they try to play the "smart" role, with one main personal goal: being leader in their business and in their private career. They try to work with numbers in order to reduce expenses. Thus, the first thing they think about is human labor cost, sometimes by firing people directly. At other times, this step is preceded by assigning multiple tasks to the majority of employees in order to filter them, then cut the surplus. This is what happened recently with 3Com, Cisco, and other big companies. Said John T. Chambers, president and CEO of Cisco, "We're taking these steps because of the continuing slowdown in the U.S. economy and initial signs of a slowdown expanding to other parts of the world.''

Object-oriented philosophy is not foreign to our lifestyle. It's well known in computer technology at the hardware level (as mentioned in an HBSWK article from March 5) as well as at the software level where, over the past two decades, modularity talks.

This methodology can be applicable and some techniques can be learned from the supply chain. For example, take the chain stores where the mass of people is important in doing inventory, stocking, or inaugurating a new store or warehouse. Many industries, especially retail, can profit from the "power of modularity" at the human resource level. Managers can create a well-balanced position between manpower cost and productivity, and therefore between income and expenses. Productivity will improve as the alternation of job assignments eliminates the "indispensable" worker. But where technology goes more and more into specialization, experts and geniuses stand up behind every success or successful company. This "fine coupling" does not work here at all.

Unfortunately, businesses often forget that cutting and replacing people according to the economic situation must always be restricted, and can't be generalized over a wide range of jobs and employees. We cannot apply numbers to moralistic subjects. We cannot administer qualitative issues using quantitative materials. We cannot replace human resources, experience, knowledge, and relationships by thinking of them as "stock" of human bodies that can be replaced, at any time, as spare parts. Any mistake in losing motivated and experienced persons cannot be compensated.

Moreover, this is inhuman! But the main disaster is that we ignore humanity.

I have practiced "Just-In-Time" hiring for the past 15 years in the pharmaceutical industry. First, working on the development side of R&D, I outsourced all routine testing, reserving our precious employees for more "proprietary" work. Then, while working on the research side, I contracted masked exploratory studies seeking compound efficacy to academic labs and research institutions. Once a candidate compound showed promise, I would set up an internal research group to complete the discovery stage. For the past five years, working as a consultant, I have advised my client companies to outsource everything they can. I walk them through a decision matrix based on what the core competence of their business should be. The pharmaceutical industry is the most difficult industry in which to develop products because of the long cycle time (12-15 years) and capital required ($500m). Start-up companies developing medical products are under tremendous pressure to make efficient use of their scarce resources.

The very existence of small pharmaceutical companies and the migration of biotechnology companies into drug discovery are the results of consolidation in big pharma. Over the last 10 years, the mergers of large pharmaceutical companies have resulted in redundancy in R&D. These freshly released scientists with decades of industry experience have formed all manner of contract research organizations: compound synthesis, biomaterial production, formulation/stability testing, pharmacology/toxicology testing, clinical research, and biostatistics services.

You know, I think those are good points about how the use of supply chain management—and even the term "human capital" — can seem to be dehumanizing. However, I can tell you that I have a good deal of experience with six sigma, and I have applied this to the service industry. Many people are put off by the idea that such rigor can be applied to a relationship-management industry. However, with some minor adjustments, it is very effective. Just ask GE.

More to the point, I think that something like supplied chain management will be the next logical step. The e-recruiting market is ripe for it, and someone will figure out how to do it "just in time."

The hard question is not really "how can we modularize people?" (this can be done with testing and certification, which already is practiced in the IT world), but rather, "how do we get the organizations of the world to agree to standardized job types?"

I think it is win/win for employers and employees to move in this direction.

What does this theory imply about the employment contract? Both employee and employer have commitments to make and this theory implies that the only commitment that the employer will make is strictly based on the rules of demand and that each individual is totally replaceable. Great commitment—if you're an employer; pretty lousy if you're an employee.

I believe that many people join organizations to be part of something, to make a contribution, and to be a valued member of society. The very notion of looking at people in the same light as other resources implies that none of these things are important. People want to be treated as the individuals they are—not as cloned modules.

The question here is one of excess or unwanted need—be it inventory or human resources—and although people and products cannot be equated and subjected to the same exact metrics, their usefulness and value to companies can be measured and treated using similar scientific techniques or methodologies. The key is to keep the inventory and people who are still needed to run the companies effectively, efficiently, and profitably. If supply chain knowledge helps companies in meeting their goal of achieving an optimum headcount, then it is certainly the right process.

In fact, life is full of assembly-line activities. Many principles of the shop floor apply to all of us in our day-to-day life, not very surprisingly, as that of a widget in a manufacturing plant. For example, we all drive our cars pretty much in an orderly fashion on the highways, reach our workplaces at a certain time, do our designated work, etc. So why worry about a particular manufacturing concept, such as supply chain management process, if it can be effectively used to deal with excess manpower?

So the point is that in a world full of rules and norms, we can apply suitable common principles, albeit sensibly, to similar problems. In our case here, both unwanted manpower and inventories are not good for companies, so there may be merit in adopting a common concept in dealing with similar issues.