The Social Consequences of Operational Efficiency
Efficiency reduces costs, but at what price?
Think back to the last time you ordered something at a fast food restaurant. Maybe you were in line for a few minutes, but shortly after arriving you had food in your hands and you were on your way. And to offer that level of consistent service, someone had to design it that way.
How much do we really understand about the consequences of efficient systems? When studying operations, you’re likely to come across some words of wisdom like, “variability makes systems more difficult to manage,” or “look for ways to eliminate sources of complexity.” But what if that variability comes from the profile of customers that you serve? And that complexity comes from managing the payroll of your staff? The social consequence might be restricting access to services or outsourcing your labor.
In operations, good systems are efficient systems. And to be clear, I’m not advocating that we change this paradigm. But by understanding how operations managers make decisions — either by reducing variability or accommodating it — we start to see some profound effects for workers and customers alike.
The Choices Companies Make to Be Efficient
Uncertainty and variability have profound effects on our operational systems. The amazing thing is that we can model this mathematically! If you’re interested in the math, I’ve separated it out into a quick, fun, and graphic-filled overview of queuing theory.
Otherwise, just note one of the main takeaways from the general purpose queueing model: reducing variation and adding servers is good for operational efficiency. So we’ll look at 2 concepts — input control and flexible systems — that some organizations apply to optimize their efficiency. And we’ll connect those concepts to the social consequences on employment and access in industries like retail, manufacturing, and beyond.
Input Control and Restricted Access
Companies can reduce variation in service levels by being incredibly selective in what inputs are allowed into the system. By segmenting customers or products, and focusing on a few of high return, there are fewer variables that can throw off the system. And this can actually be a really good thing.
In MIT Sloan professor Zeynep Ton’s enlightening book The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits, she examines the outstanding results that companies can achieve by selling less. She demonstrates how companies that limit their product offerings, like Trader Joe’s or In-N-Out Burgers, can reduce the complexity of the operation, resulting in fewer errors, faster inventory turnover, higher quality of service, and a myriad of other benefits. Although these companies can reduce some variability in the system, they manage the rest through a cross-trained and highly motivated workforce.
But even in this idealistic system where customers and employees win, there is still a social consequence. To better understand this phenomenon, let’s take a discerning look at Shouldice Hospital, an oft cited case study for efficient systems. Shouldice is a hospital that only performs hernia surgery, and can outperform other clinics in speed, recovery time, cost, and customer satisfaction. Much of their clientele comes through word-of-mouth from other satisfied patients.
To ensure the production process is smooth and predictable, they limit variability in all aspects of the system:
- Service Offerings: strategically “selling less,” only offering hernia surgeries
- Patient Qualification: aptly put in a 1989 Harvard Business Review article, “most sick people couldn’t get admitted to Shouldice.” Patients at Shouldice go through a strict pre-screening process to ensure that they are in perfect health. If you’re overweight or have a heart condition, you will not qualify.
- Employee Profile: doctors, nurses, and staff at Shouldice have a very predictable job, which is rare in the medical profession. For many, this is desirable, which means that Shouldice has a waitlist for position openings, and can afford to be very choosy with who it hires.
By discriminating on system inputs, companies can reduce variability and perform efficiently. But the cost is a higher barrier to entry for those who want to participate in that system. And sometimes it’s the people who would benefit the most who get locked out.
In the case of Shouldice, it might be the man with a heart condition who ends up at a clinic with a bad reputation in order to get his surgery. At Trader Joe’s, it might explain their tendency to sell their beloved and reasonably priced goods in affluent neighborhoods, where the customer profile matches the expected demand for their product offerings.
Is this always a bad thing? I don’t think so. Having focused attention on your value proposition can create happy customers and happy workers. But we must recognize that we are restricting access to those positive outcomes.
Flexible Systems and Precarious Work
Instead of restricting inputs, some companies may choose to accommodate this variation by building systems that are flexible in response to changes in demand. Because the inputs can come in any shape and size and at any time, the ability to add workers (N from queuing theory, anyone?) at a moment’s notice becomes key in maintaining the flow of service.
If variation creates so much complexity, why do companies do it? Well, just think about mega-companies like Amazon, Wal-Mart, and other big-box retailers, who know that consumers are willing to sacrifice that specialized experience mentioned in the section above for the convenience of having everything in one place. On top of that, these companies can grow their reach and lower their production costs through economies of scale.
So if these companies accept variability and unpredictable demand in their system, they can only hope to meet demand by having enough workers to keep the process running smoothly. But instead of having an expensive full-time workforce that won’t be occupied for large periods of time, companies have sought alternatives through non-standard, part-time, flexible employment, and even decoupling employment entirely by classifying workers as independent contractors.
The growth of the gig economy and platform companies are powerful examples of the steps that companies will take to de-risk themselves while accommodating fluctuations in demand. We’ve all heard the adage by now that, the largest taxi company owns no vehicles. And the largest hotel chain owns no real estate. To achieve operational efficiency while accommodating variation, companies are decoupling their entire service from their system.
The gig economy is just the latest variation of this trend. Historically, companies have followed the same train of thought to justify outsourcing their operations to areas where they have to put less capital into infrastructure and payroll. For years, retailers like Wal-Mart and manufacturing companies like GM have treated much of their workforce as “flexible” — hiring more temporary workers and causing distress to workers from inconsistent scheduling practices.
And once again, is this always a bad thing? Maybe, maybe not. Flexible work can be great for those seeking supplementary income, or have domestic responsibilities that keep them from being available for a full time job. But our society is grappling right now with the exorbitant costs of this trend — namely the loss of security, benefits, a functional corporate ladder, the right to unionize, among others.
What Can We Do About It?
We don’t often sit down to critique our need for operational efficiency. It’s treated as one of the fundamental truths of business. I can’t say I can picture that changing any time soon, but that doesn’t mean we can’t address the negative social consequences of our drive to optimize.
Maybe machine learning will improve our ability to predict consumer behavior to the point that we can better plan for variability. Perhaps governments will step in to improve access to benefits and other forms of social programs to reduce the harsh effects of precarious work. Or it could be that companies will continue to remove the workforce from this equation through completely automated systems, and work will evolve into its next iteration.
As we evaluate our current system and our options moving forward, we must reflect on whether the efficiency gains are worth their costs. And if they are worth the cost, can we still find ways to mitigate their effects.
