Supply Chain Frontiers issue #4. Read all articles in this issue.
Whether it is goods or outcomes that are being traded, markets capture the collective wisdom of many players and react quickly to demand changes. Companies are now beginning to bring these benefits in-house by creating internal markets in areas as wide-ranging as sales forecasting and managing plant capacity.
In the late nineties energy company BP decided to use an internal market to help it meet its corporate goal of reducing greenhouse gas emissions by 10% in 12 years. Instead of just assigning reduction targets to individual departments, the company established an internal market where business units could buy and sell "permits" for emissions among themselves. The results were impressive: BP met its original goal nine years ahead of schedule.
Thomas W. Malone, MIT professor, described BP's innovative pollution reduction program at the recent MIT Center for Transportation & Logistics symposium "Demand Management: Integrating Demand and Supply in Real Time". Malone has worked extensively on developing and studying internal markets, and details this work in his new book The Future of Work.
Advances in information technology have brought down the cost of running markets, making it possible to adapt the mechanism for internal corporate use. A number of companies are experimenting with the concept. Malone cited Hewlett Packard's "VC Cafe" where development projects are posted on an internal network and people interested in joining a team can contact the relevant manager. HP has also experimented with an "idea futures" market where participants buy and sell predictions of future product sales. This market produced predictions that were better than the company's official sales forecasts, noted Malone.
Intel is exploring an in-house market for manufacturing capacity, a crucial resource. Allocating this resource today requires substantial amounts of time, money and management talent, Malone said, and a market may offer a more efficient and flexible approach to the task. Plant managers would sell "futures" for products they could make at specific times in the future, he explained. Sales people would be able to buy "futures" for products they could sell to external customers.
Under the market mechanism, prices would fluctuate as collective knowledge of future supply and demand changes. Knowledge of prospective hikes in raw materials costs, for example, would usually raise prices. The prices would then determine which products actually get produced and who gets to sell them. "As you get closer to the time of actual production, the prices tell you which would be the most profitable products to produce at a given time and factory," Malone said.
There are a number of potential benefits. The market would present the whole picture, whereas individual managers tend to focus primarily on their own piece of the organization when it comes to allocating plant capacity. This holistic view also promotes decisions that support overall profitability.
For instance, a plant manager's goal may be to run his or her facility at full capacity, but this may not be the best option for the company as a whole. The market mechanism also exposes allocation decisions to an extensive body of knowledge and experience from different people throughout an organization, as opposed to the traditional approach that involves only a relatively small number of managers.
Much development work remains to be done before the market model can be widely applied within companies. How to identify and track every participant is just one area that needs more work. But such is the potential of internal markets that companies should seriously consider experimenting with the concept, Malone said.