Failing Softly
Complex supply chains and streamlined operations are great for squeezing that last 0.5% of profit-margin. And asset-light operations free up capital for more gainful investments. But neither of these strategies are particularly resilient, and unpredictable markets can cause them to fail badly. What are some ways to trade streamlining for robustness, and perhaps do better in the long term?
Core operations and products
Let’s consider a basic operation with all production buildings linked to our warehouse, and with baking and sale of bread, made from our own grain, as the main cash-cow.
We have the following operations:
And the inventory of the warehouse looks like this:
Some operations and products are more important to us than others. Most of our revenue comes from sale of bread, so we want the bakery to run reliably. The bakery consumes grain from our farm, which in turn requires tools. Some of the tools are imported, and both bread and grain are exported (all on our trusty Wain).
All of these things require labour, some of which we supply ourselves and some bought on the market. That labour is also spent on our hunting side-business as well as entertaining our neighbours at our town residence.
Achieving robustness
Our top priority here is to keep the bakery going at all costs. We’re going to employ a set of strategies to achieve that goal. Some can already be seen above:
Operation ordering
Our operations are ordered such that a labour shortage will hit The Residence and our hunting lodge first, which can harm our prestige generation (directly at the townhouse and indirectly via cured meat used for sustenance) and side-business of selling excess cured meat.
After that a severe shortage will impact the grain farm operation, and given how labour intensive that is (84 labour / turn), this is likely to soak up the rest of the shortfall, protecting the top priority operations.
Commodity buffers
We keep a large buffer of especially tools and grain. Even a complete tools draught (locally and remotely, since we’re buying enough tools that either source can sustain us) will take 45 turns to impact grain production.
A severe labour shortage will impact grain production faster, but here as well we have 23 turns of consumption stored up.
Both holdings will emit a Critically low stock alert when they are half-empty, sending a notification and highlighting the holding in the inventory so we don’t overlook the shortage when glancing through our warehouse.
Tiered purchasing with split orders
To avoid all labour purchase orders getting outbid at the same time, we have split the purchasing across different price points:
For the main bulk of the labour we’re willing to pay 3.00d each, but for 15 labour we’re only offering 1.80d. Given the price history of labour, we expect a sudden rise in price to pass through the 1.80d bid, but not quickly reach 3.00d, thus securing most of our supply.
An added benefit of this strategy is that if there is a supply shortage or demand surge for labour, we will take some demand away once the price reaches 1.80d, lessening the upwards pressure. This means we’ll pay less for the remaining labour than we otherwise would (remember that we only pay the market price, not the max bid price of 3.00d). In this sense it also benefits our neighbours (none of whom are commoners!), and if they choose to employ the same strategy that will also be mutually beneficial.
The downside is that we can easily miss out on those 15 labour in turbulent markets, but this will only have mildly negative consequences for our business.
(Split orders are also covered in the Inventory Management post)
Protecting our revenue and cashflow
In addition to the split order technique to soften upwards labour price pressure (which obviously will cut into our margins), the other risk to our cashflow is that we’re producing excess grain. This adds to our tolerance for reduced farm operation, and helps rebuild the buffer if there was drawdown, but we shouldn’t let it grow uncontrolled. Too much stored grain ties up capital, and if the storage fills up, the farm operation will be forced to slow down, potentially causing labour expiration and waste.
To avoid this, we’re selling off the excess grain:
These sales are set up with high “low stock” settings, meaning they won’t activate until our buffer has reached a comfortable level. If production were to drop and the buffer shrink below 800, both these orders would pause. Incidentally this provides a nice revenue stream during normal operations, without reducing our robustness to market disruptions.
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