Monthly Archives: October 2006

There’s Such a Thing as Too Much Flexibility (in your Make-to-Order Supply Chain)

As you have hopefully figured out by now, there were a lot of good presentations at the Fourth Annual International Symposium on Supply Chain Management. Some were more insightful than others, some more interesting than others, and some more eye opening than others. A presentation that fit into this last category was Sascha Schoor‘s presentation titled Flexibility Cost Oriented Management of New Car Orders in the Automotive Industry.

German premium car manufacturers differ from other European manufacturers and American manufacturers in two distinct areas:

  1. build to order
    almost 100% of cars are configured by customers or dealers
    (as opposed to 48% in Europe and 6% in the US)
  2. individual configuration
    there are theoretically up to 1032 different configurations of a BMW5

This is because German manufacturers believe that consumers not only want a significant amount of customization capability in their cars, but that customers also want the flexibility to change their order up until a few days before production begins – the “5 day car” model. However, the study carried out by the presenter determined that despite marketing’s insistence that being able to change an order up until 5 days before production was very important to consumers, this is not the case.

The study, which analyzed responses from 803 participants, 508 of which planned to buy a new car in the next 12 months and 295 of whom had recently bought a new car, found that the majority of customers would not only be satisfied with a longer delivery time and, thus, a reduced capability to change an order once it is made, but that a substantial number would be willing to accept a significantly longer delivery time if an early booking rebate was offered (with 69% willing to lock in an order early if a 5% to 10% rebate was offered).

When you consider that

  • only 13% of customers change their orders after signing, and of these, the median number of changes is less than 2%
  • a total of 85% of these customers would accept a longer delivery time with an early booking rebate,
  • most of the changes revolve around easily configured electrical components (i.e. stereo/CD), interior choices (seats, color), and exterior choices (paint, optional accessories), and
  • having your orders locked down a few days in advance allows you to configure your production lines for optimal productivity, which can greatly lower your costs

it becomes clear that German manufacturers could save a lot of money and substantially increase profits by adopting a happy medium between the German car philosophy and the American car philosophy and providing rebates for those customers who lock in build orders early or choose a standard configuration. Then, for the 15% of customers who want flexibility, they can still provide that flexibility at a premium.

What do you think?

The Change Management Myth: Why e-Procurement Initiatives Fail

One of at the presentations that I really wanted to see at the Fourth Annual International Symposium on Supply Chain Management was Jon Hansen‘s presentation on The Change Management Myth: Why e-Procurement Initiatives Fail. Unfortunately, as happens from time to time, the author could not make it. However, Jon Hansen, of e-Procure Solutions Corp., did send in the paper his presentation was to be based on, which had some really good points that I am going to discuss herein.

Before I get to what may be the fundamental reason, I’d like to reiterate a statement by Dr. John K. Potter who stated in his eight step process for change (in Leading Change) that transformation within a company can take between 5 and 10 years while, conversely, employees will abandon the initiative if the do not see compelling evidence that the change is working within 12 to 24 months. In other words, major organizational changes typically take 2.5 to 10 times longer than an employee will wait – so the pace of change, and your change management, needs to be relatively rapid if you want to succeed.

Secondly, I’d like to point out that despite their potential to revolutionize your organization, e-Procurement failures, especially partial ones, are much more common than you might think. Studies (IDC) and publications (Fortune Magazine) have reported that 75% to 85% of all e-Procurement initiatives fail to achieve the expected results. In other words, according to these studies, your chances of complete success are at most 1/4! Those aren’t good odds.

As an example, I’d like to point out the results of INCO‘s eProcurement Transformation. At the conference INCO, one of the world’s largest nickel producers, presented the results of the initiative they started in 2001 (primarily through Quadrem, an eProcurement marketplace) as a success. However, given their reported results, I would only classify it as a partial success.

As of last year, INCO calculated that their eRFQ initiative has saved them $3M on 907 events worth $300M – a mere 1%! If, like me, you’ve been tracking the industry studies by Aberdeen and AMR over the years, you will find this quite low. Now, an eRFQ initiative is not going to save you double digits like an eAuction or decision optimization can, but, considering the size of their organization and their spend, I would have expected efficiency savings at least 2 or 3 times that amount.

Furthermore, they have only run 26 events to date for a savings of 17M! Now, I don’t know all the baselines for this statistic, but I expect that their savings could have been a lot higher with more events. After all, industry statistics would suggest that they could have run considerably more events than they did (since at least 30 to 50% of events should be suitable for their eAuction tool and they have been running 180+ events a year through their eRFQ), and doubling or tripling the events should significantly increase savings. After all, their public financials indicate capital expenditures of almost 1.2B a year, and given average first time auction savings typically in double digits, if they had run even a third of their spend last year through an eAuction, I would conservatively expect that they should have been able to achieve a savings two times what they actually did. I could be dead wrong, but I’ve seen some considerable successes first hand when projects are appropriately implemented, managed, and, most importantly, supported. (And I’m sure the change management and the slow pace of a large corporation was the issue for the long implementation and what I consider to be weak results, and not the technology or their procurement team, who struck me as very on-the-ball.)

Back to the topic at hand. Most initiatives fail to achieve the expected results. (And sometimes drastically so! Consider the State of California who entered into a 6 year, $95M contract with Oracle on the basis of an unverified vendor savings estimate of $163M, which was not backed up by the $111M estimate by Logicon, Oracle’s consulting partner. When the deal was audited by the State’s auditor, the forecasts were found to be wildly inaccurate and the conclusion was that instead of saving money, the 6 year, $95M contract would actually cost taxpayers $41M.

The major reason, as hinted at by the above example, is typically lack of technology alignment. I’m a technology guru by training (PhD in Computer Science specializing in Multi-Dimensional and Spatial Data Structures and Computational Geometry), and I know (from experience) that great technology, including technology with a multi-million dollar price tag, can produce an ROI many times what you invest – but the truth is that it only produces results if it is aligned with your needs and solves the problem you need to solve. More importantly, even though the right solution can often save you millions and millions of dollars, the wrong solution can cost even more!

So why is the wrong technology often selected? There are a number of reasons for this. One reason, as I inferred in the software panel at the conference, is that the decision is not always made by the right person, but the primary reason is probably due to a lack of strategy. If your strategy is to simply “select an eProcurement / eSourcing tool” and reap rewards, you are bound to fail.

As Hansen says, any e-procurement strategy should be built upon a solid foundation of process understanding and refinement before technology is introduced into the equation. This way, when you make the decision to investigate the available applications, you are doing so with a clear understanding of how technology can work to accelerate the process, not define it. In other words, you need to know what you need before you select a solution, so that you can properly evaluate the solutions on the marketplace and select the one that is best matched to your needs.

The Talent Series VI: The Impending Crunch

THESE are heady days for most companies. Profits are up. Capital is footloose and fancy-free. Trade unions are getting weaker. India and China are adding billions of new cheap workers and consumers to the world economy. This week the Dow Jones Industrial Average hit a new high.

But talk to bosses and you discover a gnawing worry—about the supply of talent. “Talent” is one of those irritating words that has been hijacked by management gurus. It used to mean innate ability, but in modern business it has become a synonym for brainpower (both natural and trained) and especially the ability to think creatively. That may sound waffly; but look around the business world and two things stand out: the modern economy places an enormous premium on brainpower; and there is not enough to go round.

So starts the well-written article The Search for Talent (subscription required) in a recent issue of the Economist. You know that talent acquisition is a real issue when even the economist starts harping about it!

According to the article, companies of all sorts are taking longer to fill jobs — and, according to a survey quoted therein, many companies say they are having to make do with sub-standard employees! In addition, they say there is evidence that the talent shortage is about to get worse! In addition, the proportion of American workers doing jobs that call for complex skills has grown three times as fast as employment in general. Moreover, as other economies move in the same direction, the global demand is rising quickly! For example, where are our best construction engineers? I’d bet some of them are in Dubai working on the Dubai Mega Islands project while tens of thousands more are probably scattered on engineering projects the world over! After all, the talent crunch is worse in some countries, with Mexico, Canada, and Japan leading the pack. And when you consider that by 2025, the number of people aged 15-64 is projected to fall by 7% in Germany, 9% in Italy and 14% in Japan, talent these days truly has global opportunity.

Not to say the talent crunch isn’t bad at home … with the baby-boomers preparing to retire, some estimates predict that half the top people at America’s 500 leading companies will go in the next five years! Ouch! And the Economist is not the only publication to point out this fact in recent times, an article in last month’s Inside Supply Management, entitled The Greying Supply Chain notes that 76 million baby boomers in the United States will soon be eligible for retirement!

And it’s going to be just as hard to replace our leaders as it is replacing everyone else. After all, with all of the downsizing, outsourcing, and rightsizing crazes of the eighties and nineties, employee loyalty is a distant memory for many employers who will continue to lose current and potential employees to the highest bidder. (There’s something to be said for putting your employees before your stock price!)

So what can you do? First of all, you can prepare to open your checkbook. Talent is not cheap … but when you consider the ROI on a talented employee vs. a sub-par employee, it’s not as expensive as you think … especially when a talented supply chain professional can save your firm millions upon millions of dollars with just one brilliant idea. How do you attract talent? Although my last post was a bit lengthy on the topic, the answer is simple. Really simple. Be a Great Place to Work!

The truth is … talent is attracted to talent, and great places to work attract talent. This starts with an innovative culture focused on success and the people who enable it. One where employees are empowered and encouraged to try new things, even if they fail once in a while. We often learn more from our mistakes than our successes, and a failure in a small controlled experience is often worth more than a major success. (Read my earlier posts on innovation here and on eSourcing Forum.)

What can you do to prepare for the impending crunch that will result from your retiring workforce? The ISM article provides some good tips.

  • Make sure you understand the demographics of your supply chain organization.
    Who’s nearing (early) retirement? What do they do? And, more importantly what do they know?
  • Put plans in place to preserve your most critical institutional knowledge before it walks out the door!
    Your employees, and the knowledge in their heads, is your most critical asset. Give them time to document it, buy systems to help them document it, and make sure those systems are accessible by all employees.
  • If you haven’t already, put alternative work arrangement programs in place.
    Can your employees work part time? Remotely? On a project basis? Not all employees may want to go from 60 to 0 right away – you need to be prepared to take advantage of those who want to phase into retirement slowly.
  • Work on an open organizational culture that accepts and respects everyone.
    You need the knowledge of the seasoned veterans, the education of the new graduates, and the raw skills of the experienced individuals in between. Everyone should feel wanted – and needed – and each individual should be able to contribute on her or his strengths.

In parting, the following quote from the Economist article sums up the situation nicely: Eventually, supply will rise to meet demand and the market will adjust. But, while you wait, your firm might go bust.

The Best Place to Do International Business in Canada (is Halifax, Nova Scotia)

It’s Saturday (my day off from sourcing), and since I don’t have any Flaming Laptops or Weasels to report on, I’m going to tell you about the best place to do international business in Canada, and why. If you want the short answer, it is Halifax, Nova Scotia, but since I know some of you may not take it on faith that I’m right, you can keep reading.

The September 25 – October 8, 2006 issue of Canadian Business ran an article entitled The Best Places to Do Business in Canada where they ranked prime locations for business in terms of annual operating costs (/M$), cost of living index (with Toronto as a baseline), building permit growth, unemployment rate change, and crime rate per 100,000. Based on the weighted rating they used, Quebec City came first, St. John’s Nfld came fifth, Edmonton came seventh, Halifax came ninth, Ottawa came twelfth, Winnipeg came thirteenth, Vancouver came thirty-first, Calgary came thirty-fourth, Toronto came thirty-seventh, and Montreal came thirty-eighth.

A snapshot of the statistics of these cities is as follows:

Rank City Yearly Operating Cost ($M) Cost of Living Index Building Permit Growth Unemployment Rate Change Crime Rate(/100,000)
1 Quebec City, Que. 30.44 73.10 89.31 -32.76 5,069
5 St. John’s, Nfld 28.55 63.80 1.66 -11.76 6,898
7 Edmonton, AB 31.55 73.70 27.82 -19.15 12,207
9 Halifax, NS 29.34 74.90 17.31 -16.39 12,723
12 Ottawa, Ont. 32.18 83.30 -0.15 -35.71 6,385
13 Winnipeg, MB 29.48 74 6.52 -12.5 11,975
31 Vancouver, B.C. 35.04 98.30 6.23 -31.67 12,804
34 Calgary, AB 33.33 82.8 -1.86 -3.13 7,347
37 Toronto, Ont. 34.20 100.00 -7.59 -16.00 7,630
38 Montreal, Que. 32.46 86.8 -4.13 -1.19 10,213

However, there are more factors that you need to consider than just annual operating costs, cost of living, building permit growth, unemployment rate change, and crime rate – especially if you are an international business looking to set up or expand an operation in Canada. First of all, you need easy access to the rest of the world – and there are not that many large international airports in Canada with regular flights around the world. When you get right down to it, if you are doing a lot of international traveling, you probably want to be in Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Montreal, or Halifax. Not only are these seven of the eight largest airports in Canada (by volume), but the only airports currently participating in the CANPASS program. However, we’ll include Quebec City since it did rank number one, St. John’s since it has the most eastern airport in Canada, and Ottawa since it is the nation’s capital.

Canada only has about 32M people, and with almost half its population clustered in and around the seven CANPASS cities (over 14.6M people in the greater metropolitan areas), it’s not surprising that it only has a handful of large airports with a large number of regular international destinations. Thus, with the exception of Ottawa, the nation’s capital, it makes sense that we should more or less restrict ourselves to these cities in our determination of the location that is truly optimal for an international company to open a (new) office in Canada.

Restricting our analysis to these cities, we see the following rankings:

City Yearly Operating Cost ($M) Cost of Living Index Building Permit Growth Unemployment Rate Change Crime Rate (/100,000) Airport (flts/day) Unweighted Sum
Quebec City, Que. 4 2 1 2 1 10 20
St. John’s, Nfld 1 1 6 8 3 9 28
Edmonton, AB 5 3 2 4 8 5 27
Halifax, NS 2 5 3 5 9 7 31
Ottawa, Ont. 6 7 7 1 2 6 29
Winnipeg, MB 3 4 4 7 7 8 33
Vancouver, BC 10 9 5 3 10 2 39
Calgary, AB 8 6 8 9 4 4 39
Toronto, Ont. 9 10 10 6 5 1 41
Montreal, Que. 7 8 9 10 6 3 43

At this point, it becomes abundantly clear that Vancouver, Toronto, Calgary, and Montreal are not your best choices (which is not unexpected since they scored so low on Canadian Business’ ranking). Furthermore, when you consider St. John’s lack of building permit growth and airport facilities (you need to house your organization), it’s probably not your best choice either.

This leaves Quebec City, Edmonton, Halifax, Ottawa, and Winnipeg. Considering that one of your primary decision drivers will (and should) always be cost of operations, that cost of living needs to be reasonable in order to maintain reasonable cost levels (since talented human resources are always a significant expense and will only stick around if they are afforded a comfortable lifestyle), and that commercial space is not increasing, this should strike Ottawa from your list as well.

So, Quebec City vs. Edmonton vs. Winnipeg vs. Halifax, which is truly the best location to set up a new location as part of your international business? Considering a primary driver is international accessibility, and that Quebec city is not one of Canada’s international airports (and that it only has only one fourth of the traffic of Halifax or Winnipeg), we should be tempted to drop Quebec City at this point. Furthermore, when you consider that communication is key, that English is the international language of business and that Quebec City, in the heart of Canada’s only province with French as the sole official provincial language, is not nearly as bilingual as Montreal, and despite it’s beauty and low cost of living, its time to chop it from our list.

So, we are down to Edmonton, Winnipeg, and Halifax. Let’s review our rankings:

City Yearly Operating Cost ($M) Cost of Living Index Building Permit Growth Unemployment Rate Change Crime Rate (/100,000) Airport (flts/day) Unweighted Sum
Edmonton, AB 5 3 2 4 8 5 27 (12)
Halifax, NS 2 5 3 5 9 7 31 (12)
Winnipeg, MB 3 4 4 7 7 8 33 (15)

With these rankings, it looks like Edmonton might be the best city, but when you limit it to your three most critical factors – international access, operating cost, and building permit growth (since you need space), Edmonton and Halifax tie and Winnipeg is still at the bottom. Thus, it should be clear that the race is really between Edmonton and Halifax. (We ignore crime rate and unemployment rate changes since they are all relatively close and since they are not really strong determining factors. Cost of Living does have an impact, as it indirectly impacts operating costs, but the costs of living are very similar.)

Halifax is 7% cheaper, Halifax International Airport (which is nearing the final stages of extensive renovations and improvements) processes 75% of the annual volume of Edmonton International Airport (with over 15 airlines serving it), and, unlike Edmonton (which is overshadowed in almost every way by Calgary), Halifax is the center of not only the province, but Canada’s Maritime Provinces. Furthermore, it’s the ideal location for a North American office that has to regularly work with locations across North America and Europe. Halifax is on Atlantic Standard Time, which means that it is four hours ahead of California (Pacific Standard Time) and four hours behind London (Greenwich Mean Time). So, you can work with Europe in the morning and California in the afternoon in a standard business day! Then there’s the issue of bandwidth – the majority of the big bit pipes to Europe run through the area (which also has the Telecom Application Research Alliance), so strong, fast connectivity is not a problem! (Furthermore, Nova Scotia’s two full-service telephone companies offer end-to-end redundant fiber networks.)

And, for those of you who need ocean transport, the Port of Halifax (the first inbound and last outbound port on the North American continent) is a full day closer to southeast Asia than any other North American port. Furthermore, Consolidated Fastfrate is currently building a new state-of-the-art transload, distribution, and warehouse facility at the Port.

Halifax may not be building as explosively as Edmonton, but it’s still an aggressive pace. Moreover, rapid fire expansions can often lead to rapid fire contractions, so Halifax might be the safer bet. Furthermore, when you get right down to it, once a city has made the cut, there are more than just hard numbers to think about.

The real strength of a company lies in its people – who need to be educated and cultured. Per Capita, Nova Scotia (and Halifax in particular) has one of the highest concentrations of universities and colleges in the country (which have exported their services to over 100 countries globally, enroll students from over 140 countries annually, and which graduate approximately 15,000 students yearly), and the highest concentration of graduates with a post-secondary education in Canada. Halifax is the largest city in the maritime provinces and a strong argument can be made that it is the cultural center. With annual events such as the Annual Atlantic Film Festival, Atlantic Jazz Festival, Atlantic Fringe Festival, Halifax International Busker Festival, and Shakespeare by the Sea that rival similar events in Canada’s largest cities, culture surrounds you.

Therefore, even though it only landed ninth on Canadian Business’ list of the best cities to do business in Canada, I would argue that Halifax is the number one location to do international business in Canada. After all, if you consider the following numbers from the article Get in Line from the same issue of Canadian Business, Halifax tops the list for the most cost effective city not only in Canada, but the U.S as well, to do business!

City Salaries ($mil) Benefits ($mil) Labour Costs ($mil) Rent ($thou) Power ($thou) Total ($mil)
Halifax 8.09 1.62 9.71 721 38 12.04
Edmonton 8.49 1.70 10.18 709 31 12.48
Montreal 8.74 1.75 10.48 743 36 12.83
Calgary 8.90 1.78 10.68 810 31 13.11
Ottawa 9.01 1.80 10.81 911 36 13.33
Toronto 9.41 1.88 11.29 893 40 13.84
Vancouver 9.52 1.90 11.42 1164 24 14.22
             
Salt Lake City 8.60 3.27 11.87 940 29 14.41
St. Louis 8.79 3.34 12.13 1152 30 14.89
Baltimore 9.05 3.44 12.49 1088 39 15.20
Phoenix 9.17 3.49 12.66 1164 50 15.46
Denver 9.63 3.66 13.29 1013 50 15.93
Boston 9.81 3.73 13.53 1266 60 16.49
San Francisco 9.96 3.79 13.75 1873 88 17.32

So, if you are looking to set up a new office in Canada, and you do not already have one in Halifax, set it up here. I’ve been convinced for the last few years that Halifax would eventually become not only one of the best places to do business in Canada, but the best place if you were, or wanted to be, an international company. And now it looks like I was right. So beat the rush – do it now. After all, it’s always the businesses that invest at the beginning of the curve that reap the greatest rewards – and, right now, the curve is just starting. Some really big companies are already starting to move into the region – you don’t want to be left behind, do you?

Furthermore, if you want to move into the region, there are people and organizations here to help you do it – at very, very low cost. Nova Scotia Business, Inc. (which has assisted in the creation of roughly 17,000 jobs in the last five years) is rooted in Halifax and one of their primary missions is to help companies successfully set up shop here in Nova Scotia. They can also assist you in identifying loans, tax credits, and grants that you can use to significantly reduce the initial costs of setting up a new operation in the area. Furthermore, their payroll rebate program, which any company with the intention of creating at least fifty new full time jobs in the region can apply for, can help you reduce your initial costs for up to six years! They also have an Export Development team which can assist you in penetrating additional markets. For more information, check out the NSBI site or contact Paul Doucet, Director of Communications and Strategic Initiatives, he’d love to hear from you! You can tell him The Doctor sent you.

If you think it was unfair of me to skip companies 2, 3, 4, 6, 8 and 10 on the Canadian Business list in my analysis, here’s why I think otherwise.

For the longest time Charlottetown, #2, qualified as a city only because it was the capital of Prince Edward Island, a province of approximately 130,000 people surrounded by water, and it’s airport is about as small as you can get. If you really want to operate off of a tiny island, I’d go with Hawaii.

With respect to #3, #4, and #10, Saguenay, Que., Laval, Que., and Sherbrooke, Que. they are also rather small and, to be blunt, I doubt that most Canadians even know where they are! (If two of these cities were not near the shortest driving route between New Brunswick and Ontario on your way to Ottawa or Toronto, I probably would not know where they were!)

New Brunswick, a province of only 0.75M people, has three cities vying for supremacy – Moncton, the traditional business hub, Saint John (#6), an emerging competitor thanks to IT and Irving, and Fredericton, the capital with the primary University campus. In addition, they have two vying airports – the Moncton airport and the Fredericton/St John airport. As a result, I would argue that neither city is the best place to do business in the Maritimes and that Saint John does not belong on our list.

Markham, Ont., #8, like the other cities in Ontario on the list, are going to be shadowed by Toronto and Ottawa, especially since most of these cities are small (in comparison), with limited airports and employable populations.

Aberdeen: Analysts Wanted!

At least, that’s my guess. As soon as the news hit the wire that Aberdeen was being bought by Harte-Hanks, I started hearing rumors of potential departure(s) at Aberdeen, possibly significant ones. Well, I checked the main analyst bios page on the Aberdeen site today, and, lo and behold, a very significant name WAS NOT there. It appeared that the rumors were true and that Sudy Bharadwaj had indeed left Aberdeen. With a little digging, I was able to confirm this. Where did he go? Good Question … I hope to have the answer for you soon. Who will replace him? My guess is that Vance Checketts will assume his position as Vice President, Global Supply Management. Not certain, but it is logical.