19 Jan 2023 SUPPLY CHAIN CHAOS IS THE RESULT OF OVER-OPTIMIZATION OF THE SUPPLY CHAIN
The Recent Melt Down of Southwest Airlines Is a Case Study of Over-Optimization of a System in Which Cost Has Been Driven Down and There Are No Redundancies or Buffers that Allow Recovery Since There Is Zero Unused Capacity
Southwest Airlines has historically been a leading low-cost airline, with its success attributed to its highly efficient business and operating model. A gate turnaround time of 20 minutes is often highlighted as the defining attribute of this model. Standardizing on the Boeing 737 aircraft also has benefits, or efficiency gains, of simplifying maintenance and standardizing seating with a single configuration.
Unfortunately, in December of 2022, they experienced an epic meltdown. 16,700 flights were canceled, with projected losses of $825 million. This resulted in over 1 million passengers being impacted during the Christmas holiday season and the destruction of a 55-year-old reputation. The long-term effects on customer loyalty are largely unknown at this point but will be significant.
Is The Recent Failure the Result of Yesterday’s Success?
The media have already identified several causes for the Melt Down, with the first and most popular being antiquated software for scheduling crews. Second, the airline pilots’ union has placed the blame on the culture that has changed since the founder left. There is no doubt great truth in both, and indeed, there will be many case studies written on the near collapse of the overall system.
This Southwest Airlines Melt Down offers a case study that illustrates a chronic issue in many supply chains. Simply put, those supply chains were designed for maximum profitability (performance). In achieving those results, any resource not required for that performance was systematically eliminated as those supply chains were optimized. Having participated in the pain of what happens when all excess is eliminated, let me offer my personal experience as to what happened during this Melt Down, as members of my family were returning from a winter vacation in Colorado.
Six of my family were scheduled to fly from Denver to Dallas on Thursday, December 22nd. Southwest contacted us on the morning of the 21st to inform us that our flight on the 22nd was canceled due to the storm moving across the country. We were able to book a flight around 8 pm on the 23rd– a very understandable and proactive decision by Southwest. We stayed in a local hotel in Denver. After we arrived at the airport on the 23rd and checked in, our flight showed a 20-minute delay. We tracked the aircraft online on its path from El Paso to San Diego to Colorado Springs to Denver.
It is worth noting that there were no weather issues in any of those cities as the storm had moved east. The flight posted longer delays as it neared Denver, but nothing alarming. Things began to deteriorate at Gate 27 (our departure gate) as the outbound flight had been boarded and was waiting for a pilot to arrive. The pilot was on an arrived aircraft waiting for its gate to become available. This caused a 90-minute delay. Gate 25 was open but waiting on a delayed plane from Lubbock that was not expected to arrive for over one hour. While there was an empty gate, no one in ground operations was given the authority to change the arrival gate and expedite the unloading of any aircraft.
After Gate 27 finally opened, the incoming flight off-loaded, and the passengers for our flight boarded. Once this was complete, the flight stayed at the gate for another 90-plus minutes. The pilot announced that he was waiting for the toilets to be drained and had called 8 times to have ground services complete the requirement. It is once again worth noting that there is no re-positioning of flight crews necessary as ground services are staffed with local employees from the Denver area. While one can speculate on the reason for the lack of staff, whether there was no provision for overtime, or maybe there was high absenteeism and no additional people available, there can be no doubt that it was clearly not a software scheduling issue.
The flight from Denver to Dallas was pleasant. However, when the aircraft landed in Dallas, the pilot announced that there was no arrival gate available and that there were 10 other aircraft waiting in a similar situation. Nearly 3 hours later, the plane pulled into a gate and unloaded promptly. Fortunately for us, there were no issues with our luggage, but this was not the case for thousands of other passengers. Again, this illustrates a larger problem for an airline that prides itself on a 20-minute turnaround. Arguably, it was not an out-of-position aircrew issue due to antiquated software, but an issue of the lack of empowerment of the ground staff to re-direct empty airplanes to free gates for incoming aircraft.
To Achieve Maximum Profitability, All Buffers (Excess Resources) Had Been Eliminated Over the Years
Many supply chains experience similar breakdowns to Southwest Airlines because they are optimized with little to no excess capacity when problems arise. A sports analogy would be that they have no bench strength; a skeleton crew is manning them, but… permanently. It seems that in the last 3 years, there has been disruption after disruption that has wreaked havoc on supply chains. In the case of Southwest, this disruption started with a massive storm that exhausted its capacity to deal with the issues created by the storm and its culture. Additionally, those who could possibly decide to deviate from planned events are prevented from doing so either by rules or by a culture that has eliminated the ability to make decisions based upon circumstances at the time. Under normal conditions, this probably makes excellent sense as any change will have a downstream effect on some other process. In the occurrence of an unfolding potential disaster, this prevents recovery from occurring sooner, evidenced in this case by the fact that Southwest canceled 70% of its flights for several days to reset its system. This begs the question of how a company can de-risk in case of an emergency situation?
De-Risking the Supply Chain
There is no shortage of advice out there about how to de-risk supply chains. First, some redundancy should be considered, and in the case of commodities it is not too difficult. However, moving production to more reliable countries or factories should be considered when a manufactured product has only one current source. Shortening a supply chain anchored in China to one in the US or a nearby country like Mexico would remove the time element in recovering from a major disruption. Reducing 40 days in transit from China to 3 or 4 days from Mexico would shorten recovery time. While building extensive inventories does protect against disruptions, it is at a substantial cost. Nearshoring or onshoring allows for de-risking, with much lower inventory levels.
Maximizing the Possibility of Successful Re-Sourcing
However, Re-Sourcing to the US (Re-Shoring) or Mexico (Near-Shoring) is somewhat difficult and resource-consuming during the transition period. To ensure success, the executive leadership should be diligent in selecting a consulting resource with a demonstrated track record of results and hands-on experience in the target country. Shoreview Management Advisors is such a company for Near-Shoring to Mexico. Contact us for more information on Near-Shoring.