Tensions were high at the Jan. 19 executive committee meeting. Brad Cvetovich, CEO of AquaTek Inc., had arrived at a tough decision and worried that Brian Heyamoto, vice president of the shipboard communications division, would not take it well.
For the past three years AquaTek, a leading manufacturer of passenger and freight water-taxi vehicles, had been hemorrhaging money from Heyamoto's division. Efforts to break the unit out of its niche-player status had failed, and as financial losses mounted, Cvetovich and his executives wrestled with whether to continue investing in it. With no significant improvement in the offing, Cvetovich finally determined that it was time to get out of the communications business.
He expected the announcement to be met with resistance and anger. But instead of voicing opposition, Heyamoto volunteered to shut down the unit. The entire management team agreed that it would be better to focus on expanding the manufacturing division, which was growing at a brisk 30 percent per year-actually, make that 30 percent per day.
In fact, AquaTek is an imaginary company, existing only in the minds of executives taking part in "Boeingsim," a business simulation game run by Boeing Co.'s leadership center in St. Louis. With the help of simulation software, AquaTek and three other make-believe water-taxi companies spring to life as Boeing executives converge at the center to squeeze seven years of fierce competition into just seven days. While this might seem like fun and games, Cvetovich-in real life, general manager of customer services and product support for Boeing's commercial airplane division-contends that the simulation technology is so realistic that the executives lose all sense of game play. "The program teaches you how you behave as a manager, how you deal with the world, your job and the customer," he says. Serious stuff indeed.
Once the province of statisticians and industrial engineers, simulation software has evolved into a more user-friendly desktop tool for modeling a business process or scenario. Increasingly, the target audience for many simulation packages is the CEO and his executive team. "Simulation is not only the best way to determine how to solve a problem or address an opportunity, but a great way for an executive to get unexpected insight into how his or her organization behaves," says Michael Schrage, author of Serious Play: How the World's Best Companies Simulate to Innovate (Harvard Business School Press, 1999). It can also help business leaders recognize and address issues they might otherwise have missed. "Most executives look at their business and realize that they are not as efficient as they could be, but they can't see the inefficiencies," says Brian James, chief methodologist with Proforma, a Southfield, Mich.-based business process modeling software vendor. "By viewing a business process across organizational boundaries, you can see where opportunities for improvement exist, where time is being wasted and where resources are being spent."
Business simulation technology spans industries and business functions and can be used to shed light on virtually any business process and its effect on the bottom line. The software allows surgeons to learn new procedures quickly without risking patients' lives. It's used by breweries to model and optimize their manufacturing processes. And pharmaceutical companies simulate their drug pipelines to help determine where to invest their R&D dollars. The technology can also illuminate the potential cascading effects of corporate-level decisions. If you're an executive at McDonald's, for example, you need to know that changing your menu could affect the entire U.S. produce supply. Simulation is especially useful for situations in which executives have only one shot to get it right. In the airline industry, for instance, it often takes several billion dollars to develop a new aircraft and years to realize a return; simulation software can help narrow the margin of error for development decisions.
Lack of data is seldom a problem in decision making. Too often, the sheer volume of information makes decisions complicated and difficult to resolve. Simulation software doesn't draw conclusions for the user, but it reduces the time an executive needs to glean valuable insights from reams of data. Using it maximizes both a computer's remarkable ability to crunch through thousands of figures and details as well as the human capacity for generating insights and making decisions. Here's a look at how some companies are using simulation software not only to improve decision making, but also to optimize processes and create a risk-free learning environment.
The Confidence To Act
Mike Seifert, a plant manager with Elkhart, Ind.-based Nibco Inc., a manufacturer of flow-control products such as fittings and valves, has found simulation to be a valuable tool for communicating the effects of process changes to the CEO and chairman. Rather than just telling board members about actual or proposed changes, Seifert can show them. "They can see the product moving through the simulation [of our manufacturing line] and the reduction in lead time, and it holds their attention much longer," he explains. "Instead of showing a bunch of static numbers, you're seeing something live within the presentation."
After coming up with a new distribution strategy in late 1998, Nibco modeled it with simulation software from Herndon, Va.-based Simul8 before putting it into practice in 1999. With the software, Seifert and his team created a simplified model of Nibco's supply chain with a single product line. They tested how holding inventory and releasing it at different points in the supply chain affected distribution. After plugging in historical customer service and inventory data, they could see which changes served the customer best and how they affected inventory percentages. Seifert says they were able to predict nine-month inventory levels with a margin of error of $100,000. When the new strategy went live, actual inventory numbers ended up within 1 percent of that prediction-and the company was able to decrease inventory by around 40 percent and cut total systems costs by 12 percent. "We came up with the strategy," says Seifert, "but the simulation gave us the confidence to move ahead." He maintains that being able to fine-tune the project through simulation allowed Nibco to implement its strategy sooner and with fewer problems. Seifert likens this use of simulation to buying additional insurance.
Ford Motor Co. has used simulation software from Reston, Va.-based Powersim to help ease its supply chain through the transition from mass production to manufacturing cars according to customer demand. Company executives realized from the outset that the ability to test possible improvements in the supplier-to-assembly-line process without incurring real-life problems would be invaluable. One model Ford built simulated the current state of order volatility to figure out why, for instance, an order for 50 left-side Ford Taurus mirrors might result in a shipment of 75 mirrors of the wrong color and style. Using the model, Ford was able to see what would happen if, say, all of the orders were stacked so that the same cars would always be produced at the same time, making life more predictable for suppliers. Through simulation, Ford found several ways to reduce order volatility at different points in the manufacturing cycle. According to Powersim executives, the resulting changes in the company's production and delivery cycles yielded $800,000 in savings at one plant in the first year.
Everyone's got a theory for how to improve business processes; the trick is figuring out which will produce the most significant results. At Kelly Services, a Troy, Mich.-based staffing company, Senior Director of Process Engineering Charlie Richards recently turned to simulation to evaluate ways to optimize business processes in the company's 1,400 branch and corporate offices. His group worked with Simul8 to build a model of a branch office with the everyday business processes that support the company's two distinct function areas: hiring (which involves interviewing and testing candidates) and order-taking (which entails taking client calls and matching their needs with appropriately skilled temp workers).
By testing different variables in the simulation, Richards confirmed his suspicion that branch offices were overburdened with administrative tasks like tracking accounts receivable. The simulation showed that when order fulfillment and hiring were given highest priority, the backlog of paperwork became overwhelming. Yet when administrative work was given precedence, the simulated branch wasn't able to invest the time to hire the right people. Clearly, the company was asking too much of its field staff.
"We found [in the simulation] that if we put additional resources into hiring a manager of operations [to oversee the administration and productivity of each group], we wound up with the same number of orders filled and the same revenue," says Richards. "But we've improved overall functions because we're getting 80 percent of the administrative work done rather than 20 percent." But another simulation pointed to an even more promising solution: moving much of the administrative work to the corporate headquarters to allow the branch offices to focus their energies on recruitment and order fulfillment, their specialties. Backed by simulation results, Richards was able to convince management to agree to do just that.
Risk-Free Leadership Training
For Boeing executives, every one of whom is required to go through the leadership center, Boeingsim serves as a practice field for honing their business skills. At each session, 60 Boeing executives from across the country are divided into three water-taxi companies, and each person assumes a job role outside his realm of expertise. The water-taxi companies compete against each other (and a fourth company run by the simulation) in real-time for market share by generating new business and expanding operations. Each company also has to deal with the everyday problems of running a business, such as employee relations and customer complaints, as well as handle unexpected challenges like strikes and press queries. Every evening the model runs through the day's events (which represent a year in the life of the company) and spits out each team's stock price, earnings and market share. The teams then strategize on how to improve performance the next day.
Dividing the executives into three teams turns out to be symbolic of one of the challenges Boeingsim is designed to help its participants overcome. Boeing is itself a triumvirate of three corporate cultures-Boeing, McDonnell Douglas and Rockwell Aerospace-that have merged in the past decade. The simulation exercise helps define a new, cohesive brand of Boeing leadership as it encourages executives to forge connections with peers from different divisions. "We send e-mails to each other, and they stop in to see me," says Cvetovich of his Boeingsim colleagues, who can now serve as resources when he needs help.
Perhaps most valuable is that executives like Cvetovich get a new perspective on what it means to be a good leader. "If you're not investing in your own company, in R&D, in your people, processes and community, you're going to fail," he says. "You have to look at those investments and then balance that with providing good shareholder value. It's a tricky thing to do."
But now that he's done it virtually, pulling it off in the real world should be easier to manage.