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How We Can Apply Heuristics to Supply Chain Decision-Making
Δημοσιεύθηκε: 12/10/2014
Επιμέλεια: Thomas L. Tanel

Νέο άρθρο του συνεργάτη μας από την Αμερική Thomas L. Tanel της εταιρείας CATTAN.
"How We Can Apply Heuristics to Supply Chain Decision-Making" In the New Normal, it’s not whether you can see the same opportunities as others, or can even bring together the right judgment with the right decision-maker to make it happen; it is the rapidity of action that truly matters...
In the New Normal, it’s not whether you can see the same opportunities as others, or can even bring together the right judgment with the right decision-maker to make it happen; it is the rapidity of action that truly matters.
“In an uncertain world, statistical thinking and risk communication alone are not sufficient. Good rules of thumb are essential for good decisions.” according to Gerd Gigerenzer author ofReckoning with Risk: Learning to Live with Uncertainty. Quicker response times in reacting to logistics situational needs require faster supply chain heuristics-based decision-making when and where necessary.
What do you mean by heuristics? It pertains to the process of gaining knowledge or some desired result by intelligent guesswork rather than by following some pre-established formula. Heuristics enable us to make fast, highly (but not perfectly) accurate, decisions without taking too much time and searching for information. Heuristics allow us to focus on only a few pieces of information and ignore the rest and make a decision quickly and efficiently. As a good rule-of-thumb, heuristics shorten decision-making time and allow logisticians to function without constantly stopping to think about their next course of action.
Overcoming Biases and Judgment Heuristics
While heuristics are helpful in many supply chain situations, they can also lead to biases. Bias occurs in our upbringing; therefore, objectivity is sometimes agreed upon subjectivity. We interpret and shape the world in our own image and then pass it along as fact.
Cognitive biases are thinking patterns based on observations and generalizations that may lead to memory errors, inaccurate judgments, and faulty logic. Cognitive biases include, but are not limited to: (1) belief bias, the over dependence on prior knowledge in arriving at decisions; (2) hindsight bias, people tend to readily explain an event as inevitable, once it has happened; (3) omission bias, generally, people have a propensity to omit information perceived as risky; and (4) confirmation bias, in which people observe what they expect in observations.
Although useful in helping us to simplify complex situations, we must also remember that the subjective nature of heuristic decision-making does introduce elements of bias. This can be illustrated in the different types of judgment heuristics which can be employed. For example:
  • Representative heuristics: where judgments are made on the basis of things with which we are familiar, or inferred from “representative” characteristics;
  • Anchor heuristics: where decisions are based on an anchor like a “value” and then adjustments are made from that start point;
  • Availability heuristics: where judgments are built on the information that is readily available, or on easily recalled memory/experience
“Experts,” Gigerenzer writes, “often search for less information than novices do.” Heuristics are simple, efficient rules—mental shortcuts—which people often use to form judgments and make decisions. Just because something has worked in the past does not mean that it will work again, and relying on an existing heuristic can make it difficult to see alternative solutions or come up with new ideas. Judgment, intuition, experience and knowledge all come together when making decisions; and is a prime example of how the mind can discover simple solutions to very complex supply chain problems using heuristics.
It is in this context that many of our decisions which are based on judgments can be affected by a range of factors including our experiences, values, attitudes, and emotions. Heuristic decision-making uses simple rules and approximate short cuts to help us arrive at good supply chain decisions.
According to Jennifer V. Miller, a leadership development consultant, “When it comes to effective leadership decision-making, it’s both a quantity and a quality issue. As a leader, your ability to make sound decisions is imperative; knowing just how much time to invest in a decision can make or break your personal effectiveness and, by extension, that of your department and organization. To be sure, certain decisions require careful thought. But you’re probably over-thinking other issues that don’t require the attention you’re devoting.” By drawing on our experiences and attitudes, we can overcome this tendency through heuristic decision-making which can help us to cut through the information overload that sometimes delay supply chain decisions or taking action.
Intuitive Thinking and Decision-Making
It’s interesting to relate Gigerenzer’s book to the accomplishments of retired GE CEO Jack Welch, who describes his approach to decision-making in this quote: “Sometimes making a decision is hard not because it is unpopular, but because it comes from your gut and defies a ‘technical’ rationale. Much has been written about the mystery of gut, but it’s really just pattern recognition, isn’t it. You’ve seen something so many times you just know what’s going on this time. The facts may be incomplete or the data limited, but the situation feels very, very familiar to you.”
Usually intuitive decisions are less structured and involve feelings and perceptions rather than analysis and facts. By way of example, Welch captures the essence of intuitive thinking and its impact on decisions through (1) pattern recognition—where configurations and relationships are recognized in information and events; (2) similarity recognition—where similarities and differences, in past and present situations, are identified; and (3) a sense of salience—recognizing (or assuming) the importance of events and information, and the affect this has on judgments.
Though not useful in every supply chain situation wherever there is any ambiguity or doubt in our decision making, there may be a place for such intuitive thinking and heuristics. Organizational theorist Karl Weick’s work on sense-making relates that decisions are based as much on what we don’t know as on what we know! In such circumstances there is much to be said for decision-making informed by intuition or heuristics.
Weick suggests: “When people create maps of an unknowable, unpredictable world, they face strong temptations towards either over confident knowing or overly cautious doubt. Wisdom consists of an attitude towards one’s beliefs, values, knowledge, and information that resists these temptations through an on-going balance between knowing and doubt”. In order to understand the volatile, uncertain supply chain world that we work in; let’s postulate, based on Weick’s work, that we can describe and synthesize it; we can define relationships and constraints between its logistical functions, and we can apply judgment heuristics to relate the logistical functions according to the multiple criteria or factors that we have in mind.
Heuristics and SCM Decision-Making
So what is a heuristic? A heuristic is simply a fancy way of codifying business rules. Shorter term, detailed, operational logistics planning problems tend to use heuristics. Consequently, heuristics are best used when you have limited time and/or information to make a decision. And heuristic-based solutions lead you to a good decision most of the time. The advantages are that: they find a good answer which considers the constraints and they quickly solve problems because they don’t have to try every possible combination. Accordingly, constraints tend to make the problem non-linear, while heuristics make solutions real-world deployable.
The disadvantage of a heuristic for the logistician is that by following a decision or rule tree it may miss solutions that are better since it doesn’t attempt to try every possible combination. Supply chain decision-making involves setting priorities and most supply chain decision problems are both non-linear and multicriteria.
It is not the precision of measurement on a particular criterion or factor that determines the validity of a supply chain decision, but the importance we assign to those logistics criteria or factors involved. Albert Einstein wisely stated “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.” You don’t need to know everything to get to the answer. Sometimes knowing less, and understanding more leads to a synthesis of diverse logistics information which helps in making a timely supply chain decision.
Practically speaking, heuristics seeks a satisficer (satisfy and suffice type solution), not optimality and not feasibility. A satisficer occurs for those who make a supply chain decision, once their logistics criteria or factors involved are adequately met.
Application to SCM
In the supply chain, we make decisions all the time consciously and unconsciously; most are not subject to our best thinking efforts because we do not know enough at the time to work them out that fast. Decision-making uses intelligence, wisdom and creativity to help us transit from the past and present to project the future.
As Karl Weick advises “The essence of wisdom is in knowing that one does not know, in the appreciation that knowledge is fallible, in the balance between knowing and doubting.” Perhaps this is only highlighting what great logisticians know already.
In summary, we can safely conclude that heuristic decision-making for the supply chain is good when you have to make a spur-of-the-moment decision or you have limited information and cannot obtain more; the decision is not that important and considered the difficulties involved in obtaining the "best" solution; and you don’t need the desirability of obtaining the "best" solution.
Thomas L. Tanel, C.P.M., CTL, CCA, CISCM is President, CEO, and founding Principal of CATTAN Services Group, Inc., a supply chain advisory, counseling and training firm.
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