Deconstructing Deming IV – Supply chain

4. End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move towards a single supplier for any one item, on a long-term relationship of loyalty and trust.

W Edwards Deming Point 4 of Deming’s 14 Points. For me, this is where Deming’s thinking starts to mark itself out from mainstream thinking. Moreover, the departure is tough to follow.

The key phrase is “long-term relationship of loyalty and trust”. Deming believed that benefit was maximised when organisations co-operated to create customer value and eliminate waste, internally and at the interface.

He bemoaned the “adversarial” nature of western purchasing, criticising it as wasteful and operating counter to continual improvement. Continual improvement is synonymous with improving the alignment between the voice of the process and the voice of the customer.

Deming further raised the more technical statistical issue that inter-supplier variability would always be greater than intra-supplier variability. In that itself, he argued, lay a dominant source of variation, and inevitably cost. Choosing a single supplier eliminated such variation at a stroke.

Trust

I have blogged a lot about trust here. The fact is that the business world turns on trust. This is not an obscure or even novel insight. I have blogged elsewhere about Matt Ridley’s analysis of trust in the evolution of co-operation. In his book The Origins of Virtue he quotes Nobel Laureate economist Kenneth Arrow.

Virtually every commercial transaction has within itself an element of trust.

— and entrepreneur Nigel Vinson:

Trust everyone unless you have a reason not to.

But Deming wanted to go further and end the perpetual challenge as to price tag and the perilously provisional wedlock of business entities. Value was created through a chain, or even network, of activities. Organisational boundaries, and the consequential border skirmishes, were effectively internal disputes, irrelevant to the customer, other than in being antagonistic to his interests.

For Deming, the animus of continual improvement, motivated by the workforce’s “joy in work”, would replace the fear of being under priced, or the greed for tapping “blue ocean” profits, as the prime mover of enterprise. Businesses so driven would naturally co-operate rather than compete and liberate a cascade of escalating economic benefits inherent in common purpose.

Ease

However, I think that the difficulty of such relationships is that human beings soon become conservative and complacent. They will not face the big challenges. Without the fear and the greed, it would be unthinkable to marshal the sort of resources that are necessary to develop a new computer or a novel aero-engine. It would be unthinkable to gamble society’s accumulated wealth on developing a new drug, a technology predicated on the microscopic bases of life or an income stream dependent upon populating outer space.

The principle is akin to Daniel Kahneman’s concept of cognitive ease. Each of us is disinclined to think too hard. Only greed or fear will be the spur, to hard thinking or to risk taking. Businesses represent real risk for their investors. Risks that investors are only willing to take over a finite horizon.

Economics

In commercial law, we often talk about business people dealing at arm’s length. We use that term to emphasise that the relationship is one of calculation as to profit and loss, without an emotional or affective dimension. Ventures between enterprises are not marriages “in sickness and in health”. The extent to which any organisation can be prepared to accommodate the misfortune of another is strictly limited to the self interest of a short time scale. To go further is to mistake inter-organisational dynamics for inter-personal affection.

Organisations only form, express and develop their relationships through the individuals who work for them. Inevitable misalignments arise and create agency costs. People shift, though Deming wished they didn’t. It is very difficult to recognise the sort of co-habitation that Deming envisaged in law. And if not recognised in law, how can the trust operate long term over shifting agents? The English case of Baird Textile Holdings v M&S illustrates the difficulties of trying to found business expectations on past relationships.

What Deming seems to ignore is the wealth of economic scholarship that is relevant to supply chain decisions. He identifies limitations of the competitive environment and exhorts us to embrace the benefits of closer and longer lasting ties. However, nowhere does he treat the advantages of remorseless competition or the disadvantages of a too narrow supply base.

In Deming’s analysis there is no concept of an efficient breach, as the costs (to society) of the destruction of trust are deemed to be, at once, unknown and unknowable, but surely to outweigh the calculations of the profit and loss account.

Competition law

There seems little doubt that much of what Deming advocated as to co-operation between organisations, and in particular in sharing information, would run foul of modern competition law. Deming saw competition law as a barrier to his new philosophy. In Out of the Crisis he wrote (p26):

Obstacles to the competitive position of American industry created by government regulations and anti-trust activities must be revised to support the well-being of the American people, and not to depress it.

The history of economic development offers ample testimony as to what happens when business people combine against the public, free from supervision or sanction. Much as Deming believed his exhortations would benefit the public, those sort of economic-legal policies can only be assessed through data generation on a global scale, trenchant analysis and imaginative policy creation. Then more data generation …. A point that one would have hoped that Deming would appreciate.

Legacy

Nominating a single supplier, embraced in a long term relationship of tolerance, mutual understanding and (lawful) benefit sharing, without a lucid vision of how that relationship would be managed and a cogent analysis of the risks, mitigated with robust safeguards, would be folly indeed.

However, Deming does remind us of some fundamentals of doing business successfully.

Build trust.

Work together.

Continually seek to reduce variation.

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