W11 | Weekly Round-up
Giant raviolo; The Bullwhip Effect in general management & the panic run on SVB
I wrote a whole post last week on something very different - and then last Thursday’s run on Silicon Valley Bank happened! And disrupted a lot.
There’s been a lot written about the run on SVB (and the ensuing crisis across regional banks in the US and now some international contagion) - if you want to read more about the SVB crash, I recommend Matt Levine at Bloomberg’s breakdown from last Friday and from earlier this week on Tuesday.
Instead, this led me to my reflections below, applying an operations principle to decision-making chains and capital-allocation chains instead of supply chains.
Things I’m thinking about:
Applying the bullwhip effect to decision-making chains instead of supply chains
In business school, I took an operations class and learned about a concept called the “Bullwhip Effect” where small changes in demand at the front of the supply chain cause much larger effects downstream. (The reason behind the name is that a small flick of a wrist can produce a much bigger motion when a bullwhip is cracked). I was lucky to take the class from Professor Hau Lee, who in addition to being an utterly kind and genial person, also wrote the seminal 1997 paper that described this in detail and named 4 major factors in supply chain, which I will let you read on your own time. :D
First, what is the Bullwhip Effect: From TrueCommerce:
“The bullwhip effect is the distortion of demand and increased volatility that occurs as forecasts and orders move from the retailer up to the manufacturer.
When a spike in demand occurs, each party in the supply chain adds additional products to their orders to act as a buffer. When one party does this, it serves the necessary function of ensuring in-stock products. However, when everyone does it, the result is inaccurate forecasting, stock hoarding, overstock inefficiencies, and out-of-stock products later.”
I’ve realized the bullwhip effect can be applied to decision-making chains and capital allocation chains, not just supply chains!
The Bullwhip Effect in Management
CEOs (and most senior managers) should consider applying the Bullwhip Effect to themselves and their own companies. If they think of themselves as the front of the decision-making chain (of how resources get used) and their teams as the supply chain for making those decisions a reality: Small asks from the top (eg: “demands” not in the emotional sense, though some CEOs DO demand things) can cause a cascade effect of increased cost to the company as downstream employees attempt to fulfill the ask.
At relatively flat organizations, with only 1-2 layers, an ask from the CEO usually arrives at the doer of the task with 1) relative accuracy of the ask and 2) the context to determine the level of effort. “Oh, Jordan wanted to understand last month’s numbers - can you send them the latest version?”
But the more hierarchical and layered a company is, the more likely that an ask (which may have started out as a simple question!) balloons into a massive 8+ hr research project that some person 4+ levels from the CEO feverishly works on overnight on because “the CEO asked for it.” (and then someone has to review it, send it back for changes, review the revisions and that happens at every step back up the chain to the original asker.)
So what to do? If you’re a CEO (or senior leader or manager), understand that every “ask” that goes out of your mouth, no matter how insignificant, has a downstream cost unless you do three things, which I’ve learned to do as second nature: 1) Be specific in your ask and give both 2) a priority AND 3) a timeline. Here’s what that looks like.
“I’m interested in understanding why our forecast was wrong for last month’s report to the board. This is more important than yesterday’s question about data sources but most important is actually making sure that this month’s forecast is accurate. I’d like this by Thursday morning - is that doable?”
Does it take longer to say? Yes.
Does it require managers to do more work? Yes.
But that tiny bit of clarity upfront will pay dividends later in team goodwill AND more efficient utilization of resources.
What happens if you don’t specify a priority and timeline? Every request you send is treated as equal, which leads to downstream resource misprioritization. (and ultimately, employee fatigue from the misprioritization and excessive unnecessary work).
A final note here: Ask for something if it’s truly germane to the business’ success. Save your asks for things that matter.
The BullWhip effect and the run on SVB
My realization from seeing the run on SVB is that a small set of individuals (mostly VCs but other capital allocators like LPs) sit at the front of a decision-making chain of how venture capital is allocated (or how money moves). This is probably obvious for those who have been in the valley for a long time and can see the interconnectedness of the network, but it became very apparent to me as $42B streamed out of one bank in less than 24 hours.
First, let me note that “the bank may be failing” is a uniquely panic-inducing message. In the terminology of biology & viruses, this is a message that by itself has a R value of 5-10+. Every person who hears it, tells at least 5 people - in my experience, it’s more like 10+. And THEN you have social media which increases distribution reach: One Whatsapp message can be forwarded in an instant to hundreds of group chats and reach thousands. There were absolutely a few VCs who tried to stem the outflow, but the contagion within this small, interlinked population was widespread.
But putting aside the R value of this specific message, I realized that the VC community has probably ALWAYS been this interwoven, which Matt Levine describes as having a “herd mentality.” And that small changes in strategy (or demand) at the front of this capital allocation chain has wider swings as it moves downstream into what ideas and which CEOs get funded, which companies get built, etc.
Wherever (and whoever) you are, you are probably sitting somewhere in a supply chain, a decision-making chain or a resource-allocation chain (which doesn’t have to be capital).
Where are you? At the front, placing asks? In the middle, trying to pass on asks from the front of the chain? Or are you fulfilling asks and managing scope creep? Wherever you are, I think it’s fair to ask for (and give!) clarity & specifics like priority and what level of investment is appropriate for the ask:
“Can you help me prioritize this with the other asks I have on my plate? Should I be spending X hours on this or is speed more important?”
“Before I ask this person on my team to work on this, what level of precision and polish does this need?”
“How does this fit into our larger strategy?”
Wherever possible, shorten the chain of communication. Clarity is key. And, sometimes, reducing speed of transmission (and challenging the ask) can help prevent downstream waste.
Things I’m working on
Three talks I’m giving in the next 2 weeks!
Things I’ve launched in the last two weeks:
An email to my congressman, Ro Khanna, about immediate and long-term actions that I think the state and federal regulators ought to consider re: banking supervision for smaller and regional banks
An essay on how my personal brand has evolved (I’ll probably publish it here at some point!)
Giant raviolo (and lots of smaller ravioli).