Monthly Archives: November 2007

Strengthen Your Supply Chain

In yesterday’s blogologue I told you that your brand was a terrible thing to waste – and that the strength of your company’s brand ultimately lay in its supply chain, and not the latest fad dreamt up by your company’s marketing mogul. This means that, unfortunately, it’s up to you to protect the brand, and not the apathetic advertisers who lounge around all day being “creative“.

So how do you do that? The Industry article “Strengthen Your Supply Chain” that I referenced yesterday has some good starting points. It tells you to focus on five key elements that cover most of the basis. It’s key elements were:

  • traceability
    you should be able to track all products, components, and raw materials backwards and forwards through the manufacturing process
  • measurement
    basically, testing; identify the components and risk points (start with the hand-off points) and then have internal quality assurance personnel or an independent auditor test each component and at each risk point
  • certification
    certification programs set guidelines and involve an additional process of checks and balances: these usually fall into regulatory, industry self-regulation, and third-party certification
  • efficiency
    be sure to adopt a traceability and testing program that works with day-to-day supply chain operations
  • organizational buy-in
    successful supply chain management depends on the cooperation of employees at each and every level

To this I’d also add, at a minimum:

  • Visibility
    It’s important to not only know what goes into your products, but where each raw material, component, and product is at all times. Could they have been tampered with? And, if you are dealing with consumables, how long did they sit on the truck? Could they have gone bad?
  • Modeling
    In order to be sure you have the right process, including the right checks and balances, you need to be able to model the supply chain as it is, as it should be, identify the differences, identify what could go wrong, and insure an appropriate test is included for each hand-off point, risk, and exception.
  • Supplier Management
    You ned to insure that your suppliers understand the importance of the process, are following the process, and are reporting any and all problems that arise, including those that they are able to detect internally. (If too many problems arise internally, even if they are corrected before defective or contaminated goods are shipped, then they need help with their process as the risk of something slipping through the cracks is too great.)

Finally, I’d like to point out that as important as certification is, checking out the certifications is even more important. In some parts of the world, it’s quite easy to buy a faked certification document. Just because a new supplier sends you a certification document, that doesn’t mean they are actually certified. Be sure to check with the organization that issues the certification that the supplier in question was actually certified AND that the certification is still in effect. But don’t stop there – if the certification is one that is actually done by third parties, check out the reputation of the third party conducting the audits. Are there any complaints against them? If so, how many and how recent. In some places, it’s even easier to buy a successful audit then it is to buy a fake certification.

the doctor Thinks Your Brand Is A Terrible Thing To Waste

I know that some of you, especially those of you that only read the intro and / or first chapter to books like Your Marketing Sucks, don’t really believe in the value of the brand – instead believing that what really matters is sales, and marketing efforts that directly impact sales. And if you work in a company where marketing does suck, I can understand why you might think this way. But, as hard to measure and intangible as brand is, it does have value – and for some companies, a lot of value. Do you think Coca Cola is the largest beverage company in the world because it has the best cola? Do you think Microsoft is the largest software company because it has the best operating system? Do you think GM is the largest auto company because they produce the best cars? If so, then I’ll have what you’re having!

A lot of people might prefer coca cola, but if you didn’t know what coca cola was and did a blind taste test with half a dozen no name colas, I doubt you’d get a 9 out of 10 cola consumers agree – or anywhere close to that. Microsoft hasn’t been able to solve basic multi-threading problems in its OS that mainframe systems, such as the Compatible Time Sharing System, solved as far back as 1962. And in terms of quality, I’m not alone in thinking Toyota and Honda have surpassed GM in quality. Lots of industry rankings agree.

But these companies are still #1 in their game – and all Fortune 100 (GM = 3, Microsoft = 49, Coca Cola*1 = 94). In each of these cases, it’s because of their brand. In Coca Cola’s case, it’s because it continues to have the best brand in the world, as per BusinessWeek’s Interbrand rankings. In Microsoft’s case, it’s because it continues to have the second best brand in the world. And in GM’s case, it’s because it was the best car brand for an entire generation – a generation that will likely be loyal to that car manufacturer until they die! That’s brand power.

Furthermore, there are ways to calculate the effect of “brand” value. It’s true that they all have disputable elements, but I think that any method that starts by deducting operating costs (including sales and marketing), taxes, and capital charges from projections based on five years of earnings and then uses standard methodologies (such as those employed by VC firms) to assess and subtract intangibles such as patent portfolio (and associated license revenues), such as what Interbrand does, is on the right track. If after all these deductions from revenue you still have a positive amount, it’s an extremely good bet that a large percentage of this is attributed to brand. In Coca Cola’s case – that’s 67B. In Microsoft’s, that’s 57B. And in Toyota’s and Honda’s case, the brands for the new car buying generation, that’s 28B and 17B, respectively. I don’t know about you, but I think that’s an awful lot of value – value which will dissipate, and quickly dissolve your current Fortune 500 status, if the value of your brand goes away.

And that’s precisely what will happen if you don’t properly manage your supply chain, as pointed out by a recent article in Industry Week that tells you to Strengthen Your Supply Chain, Protect Your Brand. Every recall that you’re associated with decreases the value of your brand at least a little in the eyes of a consumer*2. Every time your product is not on the shelf when someone wants to buy it, the value of your brand diminishes a little more. And every time you produce a product that is of poor quality your brand diminishes a little more still. Each of these issues negatively impacts your brand, and not one of them has anything to do with marketing. The sad reality is that even though marketing and advertising may still get most of the credit when it comes to brand building, it’s really supply chain that ultimately determines the value of the brand. Because if supply chain doesn’t deliver, any perceived value created by marketing evaporates like the morning dew on a hot summer day.

So no matter how good you think your supply chain is running, take another long, hard, look. Statistics say you can expect at least one major disruption in the next two years. And if you don’t figure out what that is now, it’s going to happen. And I wouldn’t want to be in your shoes when it does!

Remember, if it’s your brand, I don’t care what contracts you have in place with your suppliers – it’s still ultimately your problem! Passing the buck won’t save your brand – or your ass when the CEO has to take drastic action in an attempt to satisfy shareholders. That’s why I also talk about the larger context of visibility and supply chain management on this blog – so that you know where strategic sourcing fits in the larger picture of supply chain management and have the knowledge you need to do it right. So next time you think you don’t need to read one of my longer essays on the subject, think twice. There might come a day where You might just find that you’re glad you did.

*1 I know Pepsi is 63, but it’s not just a soft-drink company anymore – it’s a snack food company. This move, and associated acquisitions, which started back in 2003-2004 may have moved it up the Fortune 500 list relative to Coca Cola, but Coca Cola is still the largest from a pure soft drink perspective, as well as having the best brand in the world, as per the Business Week Top 100 Brands.
*2If you happen to be a food producer or provider and people became very ill and / or died because of a supply chain failure, your brand value will be impacted very significantly.

When Going Global – Don’t Forget the Context!

Even though it has, like many articles these days, a China-centric focus, the article Context and Complexity by Edward Tse over on Strategy + Business had some great advice for any multinational thinking that they can enter a new market and immediately see dramatic, exponential, expansion in their reach and consumer base.

The article points out that if you’re an executive of a multinational company looking to enter a new market in a new country as a means of achieving growth, then in addition to the classic “three Cs” of customers, company, and competition, you also need to consider “context”. Without a deep understanding of the “context” of the country in question – the nature of its social, regulatory, economic, and infrastructure environments; how they’re changing in a period of (explosive) dynamism; and how they affect one another, then you will not be able to tap the true potential of the market you plan to go after.

In a new market, you could be dealing with a heterogeneous consumer market that is changing fast, as you have in India and China, a regulatory environment under reform, as in China and parts of the EU, and a distinct culture that impacts what the consumer will, and will not, want and be attracted to. (This last comment is especially true in food service. Those who think the cow is sacred will not eat beef burgers just like those who only eat kosher will not eat pork.) Chances are you will not be able to run your business like you do in your home country, if you can even get in to run your business at all!

Furthermore, it might be necessary to extend beyond just the biggest demand centers of a country to achieve a sales volume that makes it all worth while. In other words, just opening a store or channel in the 50 biggest cities might not cut it if you have a niche, or expensive, product. In developing countries, expanding beyond the tier one markets can be difficult due to lack of infrastructure, channels, customer sophistication, consumer disposable income, and regulation. Just like developed countries often have requirements at the national, provincial, and municipal level, so do developing countries. In nations as large and complex as China and India, opening multiple retail channels in each of the major cities in each of the provinces can be quite daunting from a regulatory perspective. Plus, in a developing economy you’ll have stark cultural contrasts between a major city that is attempting to play in the global marketplace and the rural areas just a few miles beyond the municipal line.

In summary, expanding into a new market in a new country probably won’t be quick, easy, or at all what you might expect and will take a lot of work, research, and cooperation with those who have been there and done it before to pull off. It’s doable, but not overnight.

the doctor’s Predictions on the Winner of the Talent War

I recently came across an article over on Global Services Beta that said “Talent War 2012: U.S.A. Set to Win”. Needless to say I was stunned – especially since the first paragraph ended on the U.S. labor market is set to become less open and flexible over the next five years amid fears of terrorism.

The U.S. has been winning the talent war not because it has been churning out the most skilled talent pool, but because it has been attracting the most skilled talent pool from around the world! Let’s face it, the US only has an estimated 301M people of the 6.602B people on the planet, or 4.56% of the world’s population. If we assume raw intelligence and capability is normally distributed throughout the world, which is a very reasonable assumption, that says that for every 100 of the best and brightest, the US can only expect to have 5. Now, it’s true that a great education system is often required to unlock a person’s raw potential, but that can be found in most of Europe, South America, India, South-East Asia, and South Africa. Furthermore, China has 1.322B to the US’s 301M and India has 1.130B. This says that China and India are likely to have four times as many people in any best and brightest list you care to come up with for every person the US has on that list. India already has a decent education system, especially in its richer provinces, and China has the cash to throw at the problem.

Of course, it takes more than bodies and education to build a great talent pool – it also takes the right culture – based in a free and open democracy where anyone with the talent, education, and the will to work hard and succeed (and make the country he or she is living in just a little bit better) is welcome. However, right now, the U.S. is more intent on building fences, preventing people from flying, and delaying permanent resident application processing until long after the original visas have run out – and this just doesn’t fit the bill. That’s not the culture that made the US one of the most admired countries in the world or the culture that attracted the best and brightest from all over the world to start new research programs and enterprises that put the US on the global map for everything from Astrophysics to Zoology, including the technology that launched the information age.

So, who will be the big winner? Although I’d like to say it will be a country like Canada and Australia, since they have the right education system and the right culture, I have to go with India. The fact of the matter is that with only 33M and 20M people respectively, countries like Canada and Australia do not comprise a significant percentage of world population.

What about the EU, you ask? Well, they’re too busy buckling under their own Euro-centric regulations that make it exceedingly difficult not to do business within the EU, or working 35 hour work weeks and complaining that even that is too much, to take a leap forward. It’s not just the US that is having problems being competitive (in “One Explanation for the Expanding US Deficit”).

Now I’m sure most of you disagree with this controversial opinion, and if you do, I’d love to hear yours. Just be sure to follow the comment rules and also indicate why you think I wrote this after drinking one too many Pan Galactic Gargle Blasters and getting Yakko‘s anvil dropped on my head.

Take Lean to Your Customers

A while back, the Supply Chain Management Review ran an article entitled “Lean: The Antidote to Cost and Variation” that focussed on lean as a lever to do just that because it can reduce waste and improve customer service. The article identified eight enablers of lean distribution in global supply chains that tie into customer demand and reduce variability and costs. These are:

  • Formal Service Policies
    Establish formal policies that articulate customer needs and how service is enabled with internal capabilities throughout the entire supply chain. This will keep the organization on track.
  • Support for Pull
    This will reduce variation caused by hedging, planning, policies, and other factors.
  • Isolate Variability
    Strategically place and manage inventory and capacity buffers. This will reduce the amount of safety stock required.
  • Cost trade-offs
    Assess and decide cost trade-offs on a structural level as this will enable systematic cost elimination based on capabilities.
  • Linkage for Pull
    Pull is a the philosophy of replenishment, not forecasting. It prevents over-ordering and under-ordering.
  • Reduced lead times
    Reducing lead times will improve flexibility and increase responsiveness.
  • Reduced variability
    Quantify the current variation to enable the operation of distribution processes based on capability limits.
  • Reduced lot sizes
    Larger lot sizes may lower sourcing or production costs, but can increase distribution costs, decrease profits due to overstock clearance, and reduce services.

These enablers are important because a well designed supply chain should deliver product quickly to the end customer with minimum waste, as per “The Goal of the Lean Supply Chain”, an article that ran in Industry Week not that long ago.

The article over-viewed the seven steps to lean supply chains, and the number two step was understand customer value, second only to the development of a systems perspective, since everyone suffers in the long run if each element in the supply chain tries to optimize its own operations in isolation. The article points out that a successful organization will make an attempt to understand any volatility that exists in customer demand, rectify it, and, in effect, take lean to the customer.