The Power of One: Systems Thinking – P. II

“Most people already know about the interconnections that make moral and practical rules turn out to be the same rules. They just have to bring themselves to believe that which they know.” - Donella Meadows, Dancing with Systems

In business the acronym KISS (keep it simple stupid) reigns supreme, but is this really the most effective or desirable route to wherever it is we are trying to get to?

Think about it, which would you rather drink - a raspberry wine cooler or a vintage cabernet-syrah cuvee aged in French oak with hints of raspberry & dark chocolate? Which is more inviting – the neighborhood park with its newly planted trees, manicured lawn, brick pathways and jungle gyms? Or the meadow which opens up in the midst of the a wood, where local grasses mix with wild flowers, a different butterfly appears each week from April to November, the wind blows off the ridges of the nearby mountain range on the other side of the river, and on occasion, early in the morning, you can catch a fox sneaking along his favorite path?

In her article “Dancing with systems” Donnella Meadows urges us to celebrate complexity. “Let’s face it, the universe is messy. It is nonlinear, turbulent and chaotic. It is dynamic.” To understand systems it is important to see them as a series of “self-organizing, non-linear, feedback loops which are unpredictable. They are not controllable. They are understandable only in the most general way.” To this end a systems perspective in a sense helps us to simplify by seeing the big picture – by taking the complicated out of the complex.

Complicated is surely bad. Complicating things is often what we do when we attempt to fix a system without taking the time to understand it in the first place. A great example of this is US forests and forest fires. Read the news and every year forest fires get worse and worse. This is partly due the suburban sprawl and the depletion of natural systems’ ability to preserve themselves. But it is also a result of a syndrome described in systems thinking called “Fixes that Fail”. US forest policy – typified by Smokey the Bear - is to do everything possible to prevent forest fires - period.

This of course is completely unnatural. The landscape actually needs fire. For example many species of trees, including the famed sequoia, need fire to open their seeds and cones for new growth. Suppressing fire simultaneously chokes growth and diversity and creates a powder keg of dry timber. This means that when fires ultimately do catch they rage at much more dangerous levels destroying entire forests. Fires at regular intervals, on the other hand, clean the forest, open it up to new species so that new healthy growth can emerge, and are naturally contained. Sadly, George Bush has used some of these very arguments to support increased logging in US forests - a discouraging bit of subterfuge which just goes to show how society so easily fails to see the “forest from the trees”, as it were.

The concept of systems thinking was popularized several decades ago by author Peter Senge in his acclaimed bestseller, “The Fifth Discipline”. Prior to Senge, however, was a guy named Forester who founded a field of study called systems dynamics. A great example of this is found in a simulation called “the beer game” which he developed at MIT in the 1960s. It is a great game (if you take my supply chain management class you can play it – with real beer!), showing how a small effect at one end of a system can have a big effect at the other end. As these effects ripple through the system, slowly over time, they can be very difficult to identify.

In the field of supply chain management the beer game shows how small changes in demand ripple through the system exaggerating they way new supplies are ordered at each stage in the chain. This eventually causes retailers and wholesalers to manage their supply in large batches. This in turn causes high levels of inventory and simultaneously makes it difficult to get those products customers actually want at the right place at the right time. And this means they are losing the chance to make a sale.

Two companies who learned from this are Proctor and Gamble and Wal-mart. Once, about 20 years ago, the venerable Sam Walton called P&G to congratulate them for being vendor of the year. After being put on hold six times poor Sam gave up and gave the award to someone else. This was a wake up call to P&G. Realizing the value of the relationship while recognizing that many problems that existed, the two firms got together and completely reorganized the system. Instead of filtering information through a narrow channel - the P& G salesman and the Wal-Mart purchasing agent - they redesigned the system. They created a cross-functional team of Finance, Logistics, Marketing and IT people and created a way to let decision making and information flows start from the bottom-up, rather than the top-down.

This reorganization resulted in sustained revenue growth between the two companies of over 20% a year and a significant increase in profit margins. Successfully achieving this was difficult and required new ways of communicating - in effect, creating new feedback loops – that better balanced supply and demand. This was achieved by reinforcing the availability and frequency for products customers wanted, and eliminating products they didn’t want.

So what is the current state of Systems Thinking? While all the rage back in the 80s, it seems Peter Senge and “systems thinking” have somewhat been confined to the dustbin of Academia. While Toyota’s famed JIT and the customer collaboration systems created by P&G and Wal-Mart remain widely recognized and oft-copied they seem to be isolated phenomena. Companies want to get the benefits without taking the time to step back and examine what’s really going on. Unfortunately, understanding the system often requires moving at a different speed than our every day lives seem to be pushing us.

Nevertheless, systems thinking, systems dynamics and there cousin, chaos theory, all seem to be making their own headway. If there is irony in this I think it goes back to the philosophies and way of life for many native peoples all over the world. Many of these cultures have a sacred belief in the power of “oneness”. Oneness is simply the explicit recognition that all things are connected and a set of values and behavior that are true to this. When a so-called native takes something from the natural world he does so fully recognizing there is in impact on the system. If things are taken with care and thoughtfulness the system is going to be improved. If things are taken carelessly without concern for cause and effect over time and distance things are going to change and very possibly for the worse. In effect humans have always understood systems thinking. Now we just have a fancy name for it, but with only an inkling of the understanding we once had.

A great example of this is the Thanksgiving address performed by many Native American tribes. Many would call this a prayer but it is actually a survival tool. By constantly reminding themselves of the value of their natural endowment they developed a better appreciation and a systematic approach and set of behaviors for preserving it. It is said that those traditions that help people survive stand the test of time. The Thanksgiving address is one of these.

The irony of course is the modern day Thanksgiving celebration in the US. A once a year event rather than a daily remembrance – it seems to have little relevance to preserving the ecosystem. Turkey farming is not exactly a sustainable industry and I imagine all that driving and flying (Thanksgiving is the biggest annual travel day in the US) isn’t either. Well, as a big fan of Thanksgiving in the good ‘ol US of A, perhaps I should start looking for ways to have my Turkey and eat it too . . .

Final paper / presentation

Some tips and reminders:
1. Be creative, use your imagination, humor is your friend, etc. I always like to imagine what the world will be like when I'm 95 - that would be a good way to motivate your thinking. Whatever companies are doing in 50 years will determine what our world is like . . .
2. Don't reinvent the wheel - "borrow" and adopt concepts from the reading and the literature (especially natural capital and the strategy articles in the pack).
3. Remember the assignment is "strategic recommendations for achieving TBL" - it is not a CSR or Environmental report.
4. CSR reports are nonetheless a good source of ideas for the paper.
5. It is fiction but should be somehow reality- based. See the Dow Jones Sustainability index for some of the big industry players and how they got on the list . . .
6. Don't forget to include a brief - high level LCA or ecological footprint analysis.
7. Ideal number of recommendations is 3; short (3-5), medium (5-10) and long term (50 years out). Focus more on the longer-term.
8. Ask questions

Thanksgiving Day Blog: Systems Thinking P. I

This thanksgiving – like so many others over the past 10 years while I have been and expatriate in central Europe - was more or less like any Thursday. E-mails, phone calls, some attempts to do real work, punctuated with a comment from wife; “oh my gosh, Happy Thanksgiving! Are you sad you are not home? Do you miss Thanks giving? Are you sad that you have to be here working instead of eating, relaxing and watching football games and eating apple pie?” Well what could I say? Nothing. So I put my face in my hands and waited for her to leave the room. She didn’t. Finally she asked me if I wanted her to leave. “Yes”, I replied.

OK enough of my pity party – for now, at least. What I wanted to talk about among other things is Toyota. For those of you who have or will take my Ops. Mgmt. class you will know I’m a big fan. So what does it have to do with BSE, CSR and sustainability?

Well there is one concept we covered in class very briefly called Systems Thinking – an off-shoot of an earlier field known as Systems Dynamics. For all the academic literature on the subject there is probably no better real life example than Toyota Motor Corp.

What Toyota has so successfully done over 50 years is employ what Amory Lovins calls “optimizing whole systems” rather than isolated parts of the system. By doing this Toyota will not only become the largest car maker in the world next year, they will also have annual profits and a market capitalization bigger than their next five competitors combined. And they are also the leading automaker in terms of environmental performance.

How did Toyota become a “systems thinking” organization? Early on in the ‘50s, lead engineer Taichi Ohno realized that Japan could never build cars the way the Americans do. In the 1950s car manufacturing was characterized by long production runs, long set-up times for model change-overs, and a small selection of models (think: “ . . . in any color – so long as its black . . . ). This successfully achieved excellent economies of scale in labor and machines – two subsystems – but also required high inventories and lots of mistakes which nobody was willing to stop and fix, thus ensuring people and machines were always busy. General Motors and Ford made up for these suboptimal aspects of the system very simply - by passing the cost on to the customer. This worked when they had no competition but that hasn’t been the case since the 1970s - which is why GM and Ford are facing bankruptcy while Toyota is achieving record breaking growth and profitability every year.

Ohno’s insights are partly due to his realization that Japan could never afford the American way of car manufacturing. Besides, the Japanese markets would never except so few models – it was a smaller more fragmented market. But luckily Ohno had an idea. If Toyota could just reduce the changeover time on a model from the typical one or two days to say a few minutes, than they wouldn’t need so many machines. If they could economically switch over several times a day, they wouldn’t need so much inventory because they could react to demand instantly – on a daily basis. Finally - and perhaps most important – with such small batch sizes, quality would have to be almost perfect to keep the line going. At the same time, because there were no buffer stocks to hide or to cover mistakes, quality, or lack of it, would be instantly visible.

This phenomenon is what’s called a feedback loop. Without feedback a system cannot respond. In the Toyota system there is a feedback on quality and a feedback on demand and this enables the system to respond by fixing mistakes and giving the customers cars they want. In the case of GM and Ford, long runs and piles of inventory between work stations means there is no feedback on what customers are buying and whether mistakes are being made.

To achieve this optimized whole system – one that is so clearly dominant over its competitors - there is a price to pay. The workers need to be flexible, to become more generalists rather than specialists, to accept more responsibility and above all be good at team–work. None of this is easy as I’m sure all of you know from your own experiences – including MBA group work. Also, quite often workers and machines are allowed – and in fact encouraged - to be idle. This may not be good for unit labor and machine costs, but is more than made up for in reduced inventory, less scrap and rework costs, and fewer and smaller discounts needed to “move the metal”.

The punch line of this well documented example, however, is the power of a positive feedback loop. Toyota’s financial success, which is based on a completely new approach to business, enables Toyota two significant advantages that their American (and to a lesser degree) European competitors are so far unable to develop. One is the freedom to engage in long term thinking. Two is the cash to invest in the great ideas that came out of this process. Today the rest of the industry is carrying out a series of short-term restructurings which increasingly rely on very short sighted decisions. These include slashing R& D budgets and engaging in heavy discounting rather than killing off stagnant brands and models.

While possibly over-hyped and deserving of more critical scrutiny the Toyota Prius nonetheless stands as a wonderful example of how a reinforcing feedback loop can bring unexpected advantages. Development of the Prius came about in the 90s – when oil was very cheap – based on the notion that sooner or later the car industry would have to confront environmental issues. Toyota’s goal became nothing less than to own this space. Realizing the promising technology of Hydrogen fuel was decades away, Toyota invested heavily in Hybrids.

The initial plan for Hybrids was never forecasted to be nearly as successful as it has turned out to be, but then nobody new oil would be approaching $80 a barrel a time when oil was trading near $10. So while Detroit was dumping all of their limited cash into successful but gas guzzling SUVs Toyota was dumping its cash – a lot more of it - into new technologies for hybrids. At the same time they were also investing into SUVs, and in fact successfully spotted a subtle transition to a more economic version of SUVs – the cross over.

So when gas prices went through the roof Toyota just happened to be ready with a solution. At the same time Detroit was caught with its proverbial pants down. All of a sudden Toyota’s solid competitive advantage became a huge competitive advantage. Is Toyota just lucky, benefiting from a one-off instance of good timing or is there something more identifiable behind Toyota’s good fortune? Systems thinking may very well hold some clues.