Mumbai: The University of Chicago, US, wants to set up an India research centre. Sunil Kumar, dean of the university’s Booth School of Business, is touring the country, meeting alumni and government officials to explore the idea of offering an executive education in India. The professor of operations management said in an interview that productivity improvement measures taken by businesses during the 2008-09 financial crisis are likely to remain in place even after the crisis has passed. Edited excerpts:
How has the financial crisis changed businesses?
The tightening of the business environment, to put it broadly, pushes the need for increased efficiency of operations. So, basically, the discipline of operations management is increasing efficiency; how do you provide goods and service of high quality the market needs and in a way that is maximum efficient. So, it’s also that in a tighter business environment it provides a natural stimulus for people to streamline and look to improve efficiency of operations. And in many of the companies, the productivity improvements that are made during tight economic times remain in place even after the crisis has passed.
Improving productivity: Sunil Kumar says the tightening of the business environment pushes the need for increased efficiency of operations. Hemant Mishra/Mint
One example is how you manage your inventories. When cash flows are tighter, people manage their inventories in a more systematic way. So managing inventories is the classic case, where making the costs of making mistakes in one or the other side are not symmetric. If you order too much, it sits in the warehouse. There are no real out of pocket costs for doing that—some, but not a whole lot—and the downside is an opportunity cost. You could have delayed paying for that inventory, so you could have managed your costs better. In many industries, there is a surplus of inventory that sits around and those get streamlined when people start paying attention to that.
After the financial crisis, is there a greater focus on managing costs than on expansion?
No. Of course, always businesses have to balance short-term needs with long-term strategic vision. Managing costs and efficiencies can serve both ways. They are, of course, important for short-term but if they are done without sacrificing the strategic vision of the company, they can help in the long run as well. And so, successful organizations do both even in crisis, even though emphasis shifts depending on how constraining the environment is.
What are the new areas of interest emerging within operations management?
There are two areas of increasing interest. One is managing global supply chains, primarily because the supply chains have become quite complex. A typical manufacturer can be bringing raw material and components from one country, manufacturing it in another and retailing it in several countries. And also, each of these operations might be done by legally separate entities. Managing the relationships, the information and physical flow of goods, the logistics, and the contractual arrangements—that’s the area of increasing interest.
The other area is more nascent. It’s the availability of data, which has increased tremendously. So you have lot more access to real time, point of sale data for example. So another thing that’s increasing in my field is dynamic pricing, where you can adjust prices to make sure that you are serving the right market segments. An example of that is airline pricing. An increased availability of information and computing power has led to more complex, but more efficient solutions...
A typical major airline in the US on a given flight revises the fares several times a day over a horizon leading up to the flight, depending on what they expect the eventual demand will be. Why is pricing important? Because you cannot predict when you sell a ticket, how many people have asked for that seat. Trying to build a predictive model on how demand will evolve over time for something that cannot be redone—so that’s a very interesting challenge both theoretically and practically.