Wade Armstrong

• Latest
• Archives
• Links
• About Me
• Projects
• Contact Me

Knowledge Supply Chain Management

Posted Wednesday May 30, 2007 in Business

My father, who writes about issues in education in his blog, recently suggested that universities are in the knowledge supply chain management business. That made me ask myself: if there is a knowledge supply chain, then there must somewhere be an inventory of knowledge, right? My father argues that inventory is held in the universities, which create and collect knowledge, but I’d say that knowledge inventory is much more held in the hands of university graduates, who store knowledge in case their employers ever need it. This just-in-time inventory system allows businesses to avoid investing in knowledge creation and management, but means that individuals — the player with the least ability to pay — are stuck holding the inventory and paying the purchase and holding cost thereof. As college educations become more expensive, we must shift knowledge inventory-holding from individuals and to universities; if universities help us do this, they can make more money doling out that knowledge to in a just-in-time manner than they do pushing that inventory into the personal inventory of hundreds of thousands of grads every year.

What’s just-in-time knowledge?

Just-in-time knowledge is just what it sounds like: knowing what you need to know, when you need to know it, and not before (or after). Just-in-time inventory management is common in most industries. In decades past, a big company — say, GM — would hold a lot of parts — say, radios — in inventory, in case consumers wanted more product (in this case, cars). GM would pay the cost of holding that inventory — building and staffing warehouses, and then having to either throw away those radios if consumers didn’t want enough cars or design future cars around old radios. Today, leading companies — especially Toyota, but also, for example, Boeing — get their parts just when they need them. Toyota will get a radio from a supplier only when a car order actually comes in, so they never have more radios than they can sell cars. The end effect is that the supplier has to either hold an inventory of radios and pay the warehouse costs themselves, or improve their manufacturing techniques so that they can build radios only when Toyota needs them. Either way, Toyota’s costs go down, and so do the consumer’s costs. Just-in-time inventory is a good thing, unless you work in a warehouse.

Right now, our businesses have just-in-time knowledge inventory management: their employees hold most of the knowledge businesses could need, with the exception of new knowledge created by research, and businesses can tap that knowledge at any time. For instance, I once took a college logic class. I didn’t use mathematical logic at all until I started building database-backed web applications years later. I could easily have put off taking that class until I knew I’d be building those Web sites, and shortened my education.

What are the costs of storing knowledge in individuals?

Most knowledge can work like this. Millions of people take foreign languages and never use them, even though the Foreign Service can teach you how to speak another language usefully in just a few weeks. And students do pay a cost: they stay in college longer, they take fewer practical classes, they pay for credits, they delay earning salaries.

In return, businesses avoid paying some training costs — but not all that much, frankly, because we’re bad at predicting what knowledge people need ahead of time. How many Poli Sci grads get jobs in government, compared to the number that get jobs in PR, management consulting, sales, and so forth? How many take 3/4 of a pre-med curriculum and then decide they want to be sculptors? Right now, we ask people to get the most knowledge, when they have the least ability to predict what they’ll do for a living. As a consequence, businesses need to send people out for training in basic things, like public speaking and conflict resolution.

How can universities make more money by providing just-in-time knowledge?

So it’s in business’s interests to have employees with smaller inventories of knowledge, who can be hired even cheaper just out of high school or junior college, so long as these employees have the right kind of knowledge. And it’s in people’s interests to have quicker, more-targeted education. So how can we make this in the universities’ interest?

Imagine a world in which people graduate from a two-year college with basic communications and critical thinking skills. These people can be hired sooner, for a lower cost, because they’ll need smaller salaries to break even on their smaller investment of time and money. Because basic knowledge is there, these employees will do as well on non-technical work as more-educated employees who have large inventories of not-yet-useful knowledge.

As these employees progress in their careers, more knowledge will become necessary. Maybe it’ll be technical skills, maybe more general skills such as presentation-giving, but it’ll be new and there will be a clear business need for it. Because of the clear business need, businesses will be prepared to pay for their employees to get this knowledge, just as they currently pay for employees to get advanced degrees like MBAs.

Businesses already pay a premium for knowledge, financing thousands-of-dollars-a-day training courses and $150,000 MBAs while many undergraduate institutions charge only a few dollars a credit-hour. There’s already the willingness to pay a premium out there, and universities can take advantage of it on a wider basis. Sure, you’re not going to get a lot of $150,000 MBAs, but how many middle managers can you get to take a six-week course, 8 hours a day, to learn a big chunk of financial and management accounting? How much can you charge to have research project managers learn the skills to move into the labs, a more knowledge-demanding environment?

Price discrimination is an economic concept in which a business is able to charge each customer the largest amount that customer is willing to pay for a product. Because each product — say, Coke — has a slightly different value to each individual, depending on each individual’s priorities, some people who currently buy Coke at a dollar and a quarter a can will pay more. That’s why you see beverage machines charging so much at gyms, because someone who’s thirsty and tired from their workout may pay a buck seventy-five. Coke would’ve sold that can at $1.25, but instead they sold it at $1.75 and made $0.50 more — a nice added profit.

Universities are bad at price discrimination. They can charge a lot more for a graduate degree, and do, but most people at most universities are undergrads, and a given school charges about the same for all undergraduate degrees. That’s reasonable, because we’re so bad at predicting how useful those degrees will be to grads. But, if we graduated everyone from the education for which we couldn’t price discriminate in two years, and then bring them back for two more years later in their education, teaching them knowledge that they have a specific and quantifiable need for, we can charge them much more for all of the rest of that knowledge — potentially as much per class as we did per semester before.¹

In a system like this, individuals can pay less out-of-pocket for education, and start working and earning sooner. Businesses can pay less for knowledge that they won’t use, and pay instead only for knowledge that will be immediately useful, decreasing the risk associated with the riskiest of all hires — the person in their first job. And universities can charge more money for classes than ever before. It’s time for a change — it’s time to move the location of the knowledge inventory in the just-in-time knowledge supply chain to the place it belongs, the university.

¹ There’s some argument to be made about the lifetime value of a student dropping if we push the time at which a university earns money from them too far into the future. I think it’s possible to charge a large enough premium for just-in-time knowledge to make up for the time value of money, especially given the low discount rate that we should be applying to cash flows for universities, which are pretty non-risky entities. In addition, it’s possible that, if we can get people used to learning things just in time, we can get them to come over and learn more often, or convince more people to come to a university to learn.