Daily Archives: December 4, 2007

the doctor Exposes The Elephants In The Room

This is a continuation of the doctor wonders why the elephants in the room are often so hard to see where I expose the elephants hiding behind the couch, the lamp, and the projection screen. In my last post, I exposed you to the optimization elephants, the EIPP elephants, and the spend analysis elephants that were hiding behind the blinds. In this post I’m going to expose you to the supplier enablement elephants, the contract management elephants, and the hidden cost elephants.

The supplier enablement elephants are “catalog management”, (traditional) “supplier network”, “e-Document Management”, and “supplier portal”. Despite grandiose claims, not one of these solutions is the be-all end-all supplier enablement cure … and not one is even guaranteed to “enable” your supplier at all! One definition of “enable” is “to make able”. Another is “to make possible”. My favorite is “to make easy”.

Just because you’re giving your supplier a way to interact with you, doesn’t mean you’re “enabling” them. They already have a way to interact with you – it’s called old-fashioned telephone and old-fashioned fax machine. What they need is a better way to interact with you – that works for them. A catalog management solution isn’t enabling them if they have to send all their data to a third party and then double check that the third party actually entered all the data correctly. A supplier network isn’t enabling them if it isn’t compatible with their systems. e-Document management solutions aren’t worth a can of beans if they can only be used by a few individuals or if document location and access takes just as much work as it does to walk down the hall to the filing cabinet or get a clerk to get the document for you. And “portals” aren’t very helpful if it forces the supplier to re-key in a 100 line invoice. The fact of the matter is that most of the “supplier enablement” solutions out there today are not enabling your suppliers at all – they’re enabling you. That’s a big difference between what’s promised and what’s delivered. If that’s all you care about, then go buy whatever solution tickles your fancy. Just be clear on what you’re buying!

The big contract management elephants are called “repository” and “compliance”. Simply having all of your contracts in one place is not as great as it sounds. You can do that today without a contract management system at all – it’s called “central filing”. Simply enforce that every time a contract is signed the person responsible immediately sends a copy to central filing that files it, in duplicate, on-site and off-site and you have a contract management solution that requires zero investment in software. (How do you enforce this? It’s called the “three strikes and you’re fired” policy. After every contract is signed, you call central filing three days later. If they haven’t received a copy, the employee responsible for filing gets a strike. After the third strike, they get fired. It will be surprisingly effective after a senior employee gets fired.) Of course, you could have to wait a few days every time you need to reference a contract.

A “contract management” solution with a central contract repository will thus only be useful if its accessible by everyone (and you definitely don’t want to pay by the seat) and easily searchable (with indexes on meta-data and the contracts in their entirety) – otherwise, it’s not much better than “central filing”. Furthermore, contracts are only valuable if purchases are made against them at the negotiated rates. Thus, not only should it be easy to determine if a contract exists for a specific item, but it should be easy to determine the agreed upon rate for that item, extract it, and get it into your e-Procurement system.

The hidden cost elephants come in many varieties, such as “required upgrade”, “service fees”, and “implementation consulting”, but the most dreadful is “too-good-to-be-true discount”, as he’s always accompanied by a few, close friends. There’s no such thing as a 50% + discount in enterprise software, and any vendor that comes back and says they can give you a discount of 75% off of the original quote is making the old “we’ll gouge them later” play. They know that once you’ve spent many times your initial investment getting the software installed and configured, and your user base trained, it’ll be too late to turn back and that’s when you start getting hit with “service fees” and “maintenance fees” and “upgrade fees” because you bought the starter edition, but the features and functions you really need to be efficient are in the “regular edition”. It should be obvious that this is not a vendor you want to deal with, because if the vendor really could afford to sell at a 75% discount and remain profitable, then they were trying to screw you up front.

The reality is that traditional, installed, enterprise software shops have high overheads. There’s a reason their software costs hundreds of thousands, if not millions, of dollars. It’s because they literally can’t afford to sell it for much less and stay profitable because they need large teams of people to install, maintain, and support their customers as each instance has to be upgraded and patched separately. They also need large teams of enterprise sales people to continually pound the pavement to bring in enough software and service deals to keep these large implementation and support teams busy. Then they need lots of expensive office space to house all these people. And so on. (Now I’m not saying that enterprise software isn’t worth hundreds of thousands, or millions of dollars – as long as the ROI is there, some of it is. I’m specifically saying that, whether or not their software is worth that much, chances are the traditional enterprise software vendor cannot afford to sell for less than that and remain profitable – and if they claim they can, that should set off big warning bells!)

The Third Era of Supply Chain Transformation: The Everyday English Version

World Trade Magazine recently published an article by Dr. Sandor Boyson titled Supply Chain Globalization: The Era of Revitalized Command is Upon Us that wasn’t too bad, provided you could translate all of the academic-speak into everyday English. Since it’s slow reading for anyone not accustomed to such pretentious verbiage, and almost ten pages, I thought I’d summarize some of the more salient points.

It starts off by noting that the first era of supply chain globalization was the era of vertical integration, exemplified by the Ford Motor Company that organized its production and supply chain as a completely vertically integrated system in the 1920s. It owned the entire process: manufacturing and assembly plants, lumber camps, intermodal transportation assets, and even private airports. Its strategy was designed to ensure continuous availability and “the uninterrupted supply of raw materials of high quality free from market changes”.

The second era is defined as the era of virtualization that began in the late eighties and early nineties and consisted of a broad fabric of alliances for managing the entire value chain. Sun Microsystems exemplifies the virtual enterprise approach – it never touches 90% of the server computers it sells globally – rather, an outsourced Sun supply base receives Sun customer order signals directly and ships the orders to the global customer base via outsourced third-party logistic carriers. Information technology and pervasive outsourcing have enabled the pooling of assets and capabilities into multi-enterprise virtual networks well beyond the formal/traditional boundaries of any single enterprise.

However, according to the article: We are approaching the end of this headlong plunge into supply chain virtualization and dispersion. While this business model has driven cost efficiencies and operational flexibility across global enterprises, it has also led to a heightened perception of eroded strategic command and control and a loss of network coherence at the level of the corporate senior executive suite.

Furthermore, the emerging emphasis is on corporate risk management. Enterprises are re-calibrating their globalization strategies and strengthening the core of their organizations as the risks of the over-extended and over-outsourced enterprise have come into sharper focus.

Thus, according to the article, As we go forward into a third era of globalization – that of revitalized command – we are witnessing yet another metamorphosis in enterprise strategy and structure. The multinational enterprise is becoming more risk-averse and less likely to over-extend itself through alliances, and is showing an emerging bias toward more direct absorption and control over assets in its network.

Or, in plain English, companies have realized that the strategy of outsourcing every function but the function of outsourcing itself might not have been the best strategy. Although it’s true that end-to-end vertical integration is probably not the right strategy, because no company can do everything well, it’s also true that outsourcing too much is not a great idea either, because then you’re left with a shell that can’t do anything. Thus, companies are beginning to realize that the right approach is to find a balance somewhere in the middle – a balance that allows them to retain the functions that they are good at, and core to their, business and to outsource those functions that are not core, or that they are not very good at. Thus, the third era of supply chain will be the era of balance – where a nice equilibrium is found between the “vertical” do-it-all-yourself strategy of the past and the “horizontal” outsource-everything-under-the-sun strategy of the present.

The article then discusses what this might mean for the public sector, the varying impact by company size and scale, and the results of a survey designed to help determine the extent of supply chain management in the global marketplace. The study, which tried to assess a range of factors, found that the degree of supply chain collaboration between respondents and suppliers was moderate at best. Considering that failure to develop a supply chain management program that fully accomplishes integrated operations may result in poorly engineered products, product recalls, excess inventory costs, stockouts, and diminishing levels of customer satisfaction, I would hope that the sample size (of about 300 respondents) is not indicative of the vast majority of global multinationals, since this would indicate most companies still have a long way to go to get a grip on their supply chains and find the balance that is their key to success.