Monthly Archives: January 2008

Sustainability: Rounding the Bend

Eric Hiller gave us a granola definition in his first post on sustainability over on Cost Cents. Eric’s take on the debate is that a business should understand how to cost or value the profit of a sustainability initiative, since businesses have to be sustainable themselves before they can “go green” or “save the planet”. When attempting to evaluate whether a sustainability initiative is a good decision or not, Eric advises you to see how it impacts the cost statement – as it affects the cost statement the same way ANY cost does in terms of material cost, labor cost, direct overhead cost, amortized and capital investment costs, and period / indirect overhead costs. For example, the cost of material = cost of commodity + cost of disposal + cost of secondary effects. For example, if we are evaluating materials for a SUV, then we are interested in fuel economy as a secondary effect. It can be costed as the part mass times the cost per kilogram times the material strength to weight factor (since magnesium has better strength to weight than aluminum which has better strength to weight than steel, for example). In other words, just like analyzing the carbon footprint can tell you whether Britons should import roses from The Netherlands or Kenya, analyzing the cost can tell you whether or not the effort has value.

Over on Buyer Analytics, Dave M took a stab at defining sustainable procurement. Dave points us to the International Council for Local Environmental Initiatives (the ICLEI) for a definition of sustainable procurement. Sustainable procurement aims to integrate environmental considerations into all stages of the purchasing process with the goal of reducing the impact on human health and the environment. Then Dave tells us what he believes the cornerstone of sustainable procurement to be – ethical sourcing. Dave defines ethical sourcing as an organized social approach which promotes selling goods which adhere to standards for international labor, environmentalism, and social policy. He then gives us a few reasons for insisting on ethical sourcing which include the facts that there are 2.7B people in the world who have to exist on less than $2/day and the fact that rights groups estimate there are as many as 60 Million children working in violation of the Child Labor Act. (More reasons can be found in my summary of the John Lewis Partnership Responsible Sourcing Workbook.) He also points out that just because you don’t purchase from suppliers in developing countries that this does not mean ethical sourcing doesn’t apply to you – you still need to ask who your suppliers themselves purchase from and trace the chain.

Andy Monin on Vendor Compliance also tackled the sustainability issue in his latest point about the contradictory dual view of the average (North) American. In his post, he points out that we all want to sustain the forests, clean beaches, and good air. However, at the same time, the average (North) American wants to sustain two cars, a morning latte, and the drive-through fast-food life style. He might be a bit greener than he was in the 90’s, carrying reusable sacks to the grocery store, installing compact fluorescent lighting (CFL), and even driving a Pius … err-r-r … Prius … but this is all for naught if he continues to want a bigger house filled with more gadgets. A few CFLs isn’t going to significantly make up for the additional energy consumption of a 15% larger house with more electronics. Andy then tries to address where the true sustainability impact will come from.

According to Andy, achievable sustainability must not degrade quality of life, must create simultaneous ripples that compound the benefits and impact felt around the world, and must have champions (like Eric’s AlGorites) that can embrace the concept based on the inherent incentives and benefits. This means large institutions, like Wal-Mart, will likely be the drivers of the greatest impacts, at least in the short term. However, we must note that Wal-Mart is not really the biggest fish in the pond. It’s just one player in a large retail industry. Furthermore, from an industry perspective, US hospitals alone represent over 1 Trillion dollars (which is nearly 5% of US GDP) and could make a real difference. He then gives four good reasons why hospitals should attempt to be the catalyst of the movement and make the jump: it’s good common sense, it will make them more competitive and attractive, it will improve their ROI, and it is socially responsible. Furthermore, hospitals have to make difficult, ethical decisions every day – who better to lead the sustainability charge and truly do no harm?

Sustainability and The Economist: Part II

The latest issue of The Economist, not wanting to be outdone, just ran a number of articles on sustainability that are, at the very least, worth a mention. Today we tackle the last five.

In do it right, we are reminded that the industry has been more or less shaken into adopting CSR policy, that globalization is largely responsible for bringing the issue into the spotlight, but that an economic recession would be bad news for the CSR industry – as companies might then see it as a luxury that could be done without. It also tries to deduce, should corporate goodness continue to flourish, how CSR might evolve. Will it be a wave of disruptive innovation that features a new breed of “social entrepreneur” that takes over as the driving force, following Mr. Benioff’s example of committing 1% of equity, profits, and time to community good? In comparison to the state of affairs today, where the same few and familiar names pop up again and again, an entrepreneurial model of tackling social and environmental problems would stir up the CSR world.

In just good business, we are told that although CSR is now mainstream, few companies are doing it well. With such a broad focus that spans everything from volunteering in the local community to looking after employes, from helping the poor to saving the planet, many companies are finding it hard to know what to focus on. CSR today appears to be composed of three broad layers. The basic layer is corporate philanthropy where companies allocate about 1% of pre-tax profits to worthy causes. On top of that is risk management to prevent disasters and worker exploitation. On top of that is an opportunity layer, where they try to find value in CSR.

In the feel-good factor, we are told that many people like CSR because helping the environment and others makes them feel good. The WFP connection is partly why three out of four applications apply to TNT. KPMG employees now donate 40,000 hours a year. Volunteer programs at involve 85% of its workforce. The trend is catching on – and those companies that buy in are more likely to attract talent than those that do not.

In the next question, we’re told that, clearly, CSR has arrived. But is it working? First of all, sceptics still matter as they are found, disproportionately, in senior management. The reality is that the welfare a company creates in the form of jobs, products, or innovation still dwarfs anything they do, or are likely to do, in the name of CSR. Furthermore, a socially conscious and bankrupt business is no good to anyone. In addition, since the focus of business should be to return value to the shareholders, they are probably limited to focussing on the “sweet spot” where initiatives are good for profits and social welfare, which might, in actuality, and unfortunately, be quite limited for the average business. But interest in Socially Responsible Investment (SRI) is on the rise, along with a general surge in interest in anything climate-change related. So CSR will march, or at least stumble, forward.

In a stitch in time, we are told that business leaders embrace CSR for a number of reasons. When the CEO of Wal-Mart realized that it’s “not just our customers, but our communities, our countries, and even the world”, he converted. Yahoo! started to accept it in the aftershock of being blamed for the jailing of two Chinese dissidents. And some companies are lured by the glamour of joining organizations like the Clinton Global Initiative. The rhetoric might be about doing the right thing, but a large driver appears to be risk management – about limiting the damage to the brand and bottom line that can be inflicted by bad press, boycotts, and the burdens of legal action. Not the best reason, but maybe beggars can’t be choosers.

Strategies to Design For Supply

Even though it’s a topic the doctor mentions regularly (see AMR’s 7 Supply Chain Best Practices, and Procurement Lead Time Optimization, and The Benefits and Risks of Global Product Development, for example), it’s something that he rarely dedicates a post to. However, since, Supply and Demand Chain Executive recently published an article by Heather E. Domin, James Wisner, and Matthew Marks on nine strategies you an apply when you Design for Supply Chain, now seems like a good time to dedicate a post.

Design for Supply Chain, or, Design for Supply, is the process of optimizing the fit between supply chain capabilities, product designs, costs, and expected revenues. It is the application of supply chain management processes, techniques, and innovations that aim to simultaneously increase customer satisfaction, minimize total costs, mitigate risks, and maximize the flexibility to adapt to unexpected events.

The authors are right when they note that, “efficient product design is not just a way of squeezing out cost savings, but a competitive weapon to be leveraged for strategic advantage” (especially since good design for supply uses TRIZ). Furthermore, as the article notes, “applying a product life-cycle management mentality as early on as the conceptual design stage, a product can be developed from the ground up to be a truly supply-chain-efficient creation.

But what the doctor really liked about this article was that all of the the nine strategies outlined in the article were sound. They were:

  1. Optimize Levels of Product Integration
    Determine the optimal level of pre-assembly at upstream suppliers. Balance flexibility (the ability to configure parts in different ways, replace parts, or use parts in alternate products) with assembly time (as assembling all of the parts yourself can take time and add labor cost).
  2. Leverage Industry Standards
    Whenever possible, use industry standard parts unless the proprietary part creates a competitive advantage.
  3. Minimize Premium Freight
    Thanks to continuously rising fuel costs, increased regulatory requirements, and continuously shrinking free capacities, freight costs are no longer an insignificant part of the total cost of any buy. Sometimes, they are a majority cost – especially when you have to ship express. Be sure to design the chain with acceptable lead times and sufficient safety stock of common components or alternate components.
  4. Design for Life Cycle
    The product design should be amicable to potential component or configuration changes throughout its intended life-cycle.
  5. Configure the Selected Supply Chain
    Make sure the supply chains are designed in accordance with the company’s strategic network plans, at the category group level and not the individual product level.
  6. Design for Demand & Supply Planning
    Good designs include commonality, modular design, universal function, and final configuration postponement to allow for pooling of demand and labor.
  7. Minimize Inventory Costs
    Design your supply chain to maximize velocity and minimize lead times as much as possible to reduce the amount of stock and safety stock you have to keep on hand.
  8. Optimize Order Management
    Products should be designed to provide the maximum amount of flexibility to the customer with little or no additional internal cost.
  9. Minimize Warranty / Service Costs
    Create a reliable, high-quality product with easy to diagnose faults and customer replaceable parts that have a high warranty redemption value.

And this is a good start.

Where the Brain gives Pinky a Lesson in Statistics

Pinky and the Brain
They’re Pinky and the Brain
Yes, Pinky and the Brain
One is a genius, the other is insane
They’re advertising guys
Their mind is on the prize
They’re dinky
They’re Pinky and the Brain, Brain, Brain, Brain,
Brain, Brain, Brain, Brain, Brain

Before each night is done
Their plan will be unfurled
By the dawning of the sun
Take over the sourcing world

They’re Pinky and the Brain
Yes, Pinky and the Brain
Their twilight campaign
Is easy to explain
To prove their sourcing grace
They’ll overthrow the space
They’re dinky
They’re Pinky and the Brain, Brain, Brain, Brain,
Brain, Brain, Brain, Brain, NARF!

Pinky Gee Brain, what are we going to do tonight?
Brain Same thing we do every night Pinky – try to take over the Sourcing World!
Pinky How are we going to do that? Narf!
Brain I don’t know, Pinky. I don’t know. Give me some time to think!
Pinky Poit! Okay, Brain.
Pinky goes back to reading the paper he has in his hands.
Brain, this is really interesting.
Brain What is it this time, Pinky? 64% of net surfers searched for information about Hannah Montana’s concert series last month?
Pinky I don’t know … but I’d sure like to see her in concert. Narf! It’s this research report. Did you know that their research shows that international transportation processes are less likely to be automated than domestic transportation processes in 72% of firms? And that this is because there are more components to schedule, more trading partners to deal with, and more places where things can go wrong?
Brain You do know those reports are riddled with statistical errors and misleading representations, don’t you?
Pinky What do you mean, Brain?
Brain For starters – did they ask the firms surveyed why their international transportation processes were less automated, or did they just ask them if their transportation processes were automated domestically and/or internationally?
Pinky Uhm, I don’t know.
Brain Was the report full of questions?
Pinky Yes.
Brain After reading that entire report, did you see a single question that asked why the transportation processes were less automated, and, more specifically, were there any sets of potential answers with associated response counts?
Pinky Uhm, no.
Brain Then they’re making a common mistake found in many research reports. They’re fabricating reasons for outcomes without actually studying those reasons. You see, Pinky, statistics, by nature, isn’t definitive. You cannot prove anything with statistics, merely indicate correlation and statistically likely causation, if the right questions are asked and follow up studies are performed to test hypotheses.
Pinky So, their report suggests reasons, with the implication that that they’re correct, but there’s really no proof at all that their reasons have anything to do with the results?
Brain That’s right, Brain. And we pay them money for the privilege of reading the report!
Pinky But doesn’t everyone in the media jump to conclusions this way? And the analyst firm never really says that their results prove their hypotheses, so they’re not that bad, right?
Brain Yes, Pinky. For the most part, all media misleads people in the same way, and in that respect, they’re not that bad. But the reports are still riddled with statistical errors, false conclusions, and misleading representations.
Pinky What do you mean, Brain?
Brain Read me something else.
Pinky Did you know that best-in-class companies are 22% more likely to have the capability to divert goods in transit? As compared to average performers and laggards where only 17% and 18%, respectively, can divert goods in transit?
Brain The issue here is much more subtle. They’re breaking the statistics down into three groups almost arbitrarily, probably by a measurement of “spend under management.” But is this really the best way to break the groups down? Did they do an exhaustive study and determine this is the best way to categorize companies? Maybe, due to different spend categories in different industries, it’s better to leave certain types of spend to the local business units rather than centrally manage it. And what does “spend under management” mean, anyway? Is it rigidly defined? But I digress. This is potentially erroneous because they compare best-in-class to average and laggards and not to the overall set. Doing the math, this means that, according to their arbitrary class sizes, approximately 18.3% of companies overall can divert goods in transit. Thus, whereas they are 29.5% better than average, overall, they are only 20% better. Thus, they are artificially inflating the statistics for best-in-class.
Pinky Oh. Poink. But it’s still not wrong, right?
Brain No, the math is perfectly valid, as long as you accept their methodology of division and believe the division is significant. But still misleading.
Pinky So, this is everything wrong with the reports, right?
Brain Far from it. Read me something else.
Pinky 62% of best-in-class companies that use third party logistics providers use several of them as opposed to a single company, so companies would do well to forge relationships with several partners based on their services and areas of operation.
Brain That’s the one I was waiting for!
Pinky What do you mean, Brain? Zoit!
Brain They make that error at least once in every report I’ve ever read. It’s probably the most common statistical error in existence. They’re confusing correlation with causation. Just because the use of multiple logistics providers is correlated with better logistics performance, this doesn’t mean that the use of multiple logistics providers is the reason that these companies achieve better logistics performance.
Pinky But it sure sounds convincing. Narf!
Brain Remember last night when I talked about dropping a hammer on your foot?
Pinky Gulp! Yes …
Brain And remember how I said that you would yelp and hop on one foot?
Pinky Pinky cowers and covers his feet.
Gulp! Gulp! Yes …
Brain And I said …
Pinky That the dropping of the hammer, the yelp, and the hop were all correlated, but there were only two causal relationships. The dropping of the hammer caused the yelp and the hop, the reverse didn’t hold true, and the yelp didn’t cause the hop and the hop didn’t cause the yelp. Please don’t drop the hammer on my foot!
Brain As long as you remember your lessons Pinky, there’s no need.
Pinky So that’s everything wrong with the research reports, then?
Brain Not even close.
Pinky But what else could you possibly have a problem with?
Brain How were the respondents selected?
Pinky It says here they advertised the survey through e-mail and their web-site and used the results of those who responded.
Brain And is that representative of the population as a whole?
Pinky They’re studying companies, Brain. Not people.
Brain Pinky!!!!
Pinky But …
Brain The term population is used in statistics to refer to the universe of entities under study. In this case, corporations.
Pinky Oh.
Brain And the answer is a definitive no.
Pinky I don’t follow.
Brain Of course not. First of all, not all companies necessarily use the web, or pay attention to the research company’s web site even if they did. Secondly, not all companies have fluent English speaking representatives. Thirdly, not all companies are aware of the research company conducting the survey, and therefore may disregard their emails. And, most importantly, the respondents are self-selecting. There’s no guarantee that the self-selecting population is even representative of those companies, yet alone the population as a whole!
Pinky But the respondents respond randomly, and that’s the core requirement, right?
Brain Yes, but it does not mean that they constitute an appropriate random set of the entire population of companies that use logistics companies. At best it’s a random set of self-selecting companies that use the internet that have fluent English capabilities that are aware of the research company.
Pinky But they’re only reporting the significant results. That makes up for any variation in the set of respondents, right?
Brain Well, there’s two issues there. First of all, how do you judge what’s significant? Let’s say they found that the same number of best-in-class, average, and laggard companies used a commercial WMS but failed to report this. That would be very significant, since it suggests that there is no correlation between use of a WMS and being best-in-class. And when compared against the earlier statistic you quoted, it implies that if you are best in class, you are more likely to be using a TMS than a WMS.
Pinky But aren’t you then assuming causation and making the same mistake you’re accusing them of making?
Brain No, Pinky. I’m simply pointing out that there is a stronger correlation between TMS and best-in-class than WMS and best-in-class. This is important because it would tell us that best-in-class and TMS tend to go together while WMS and best-in-class do not. Although you don’t know if one causes the other, you do know that they are correlated and, thus, if you have a choice, the better choice is a TMS. It might not make you best-in-class, but you know that if you were, you’d likely be using it anyway.
Pinky But it doesn’t say anything about WMS, Brain.
Brain And that’s my point. What is it leaving out?
Pinky I don’t know.
Brain Precisely, Pinky. Precisely. And back to your second point where you said that their process makes up for any variation in the set of respondents. Now you’re making an error – and a big one. If your sample set isn’t an adequate representation of the entire population, there’s nothing you can do to make up for it. Your research is flawed from the start. There’s no way to cancel an error in statistics. All you can do is propagate the error and make it worse.
Pinky Oh. So that means …
Brain The point I was trying to make in response to your previous query holds. The results only apply to the population the sample represents, and that might not be the entire population.
Pinky And that means …
Brain The applicability and usefulness of the results might not be all that broad or what you hoped for.
Pinky But they got over 200 responses.
Brain This is another very common error. 100 responses is 100 responses …
Pinky 200 …
Brain A look of extreme impatience appears on Brain’s face.
Okay! Have it your way! 200 responses is 200 responses, but how many people did they attempt to survey? How many e-mails did they send out? How many people saw the advertisement for the survey on their web-page? I’m betting it was over 2,000. In fact, I’m betting it was over 20,000. Did they say?
Pinky Not that I can see.
Brain Let’s say, conservatively, that it was only 20,000. That would mean their response rate is 1%. That tells us something.
Pinky Like what?
Brain That only 1% of self-selecting companies who had previously expressed interest in the firm’s research cared enough about the topic to respond to the survey. I’ll let you draw your own conclusions from that.
Pinky Oh. But …
Brain What else are they leaving out? I don’t know. I’m betting they didn’t include the original survey. That’s important. Psychologists have found that how you ask the question can be more important than what you are asking. For example, let’s take research into risk aversion. If you ask someone how much risk they are willing to take, dollar-wise, versus giving them a set of questions with two alternatives, you’ll get two different answers that become clear when you translate them into economic utility functions. You can even give them the same expected returns or losses, but just phrasing one question positively and one question negatively can lead to different results. People are more likely to settle for a fixed gain and more likely to risk a variable loss. I bet they didn’t provide the entire data set either. Depending on what statistical distribution, or even what statistical separation technique – such as the one they used to define best-in-class, you applied to the data, I’m betting you could come up with noticeably different results.
Pinky But they usually have more respondents responding to their surveys than private companies or smaller firms do, so that must average out some of the error, right?
Brain No. Again, Pinky – you can’t “fix” or “average out” errors. Only propagate them. And a bigger sample is not always better. If a sample gets too big, then even trivial conclusions can become “statistically significant,” even if they have no practical value. It’s just the way the math works.
Pinky Oh. So statistically significant conclusions drawn from super-large samples can be totally meaningless?
Brain Yes. But …
An evil grin appears on Brain’s face.
Pinky, are you pondering what I’m pondering?
Pinky I think so, Brain. But last time we went ice skating I slipped and fell and bruised my tail-bone.
Brain No, Pinky. This is one misconception that everyone shares! Even though a few people may understand that there’s a difference between correlation and causation, almost no one realizes that super-large sample sizes can produce meaningless results.
Pinky And how does that help us?
Brain Remember last night?
Pinky Where you tried to steal the perfect survey? Narf!
Brain Where I tried to obtain the perfect survey. Well, I don’t need the perfect survey. I just need the survey on the world’s largest data set.
Pinky And how will that help you, Poit?
Brain Because the masses will believe that whatever the results suggest must not only be right, but indisputable!
Pinky And how does that help you take over the sourcing world?
Brain Because we’ll twist the results into suggesting that I must rule the sourcing world.
Pinky And how will we do that?
Brain We’ll rely on the fact that the majority of our readers don’t understand the difference between correlation and causation.
Pinky Wow! I get it! What a great plan! But how are we going to get enough responses to create the world’s largest data set?
Brain We’re not! And that’s the beauty of it!
Pinky Huh?
Brain We’re going to create the world’s largest meta-survey!
Pinky And how are we going to do that?
Brain We’re going to use that huge stack of reports you’ve been collecting for the past 20 years and, just like academics, construct a meta-survey that we will answer using the responses to all of those reports.
Pinky We’re going to aggregate the results?
Brain Sort of. The mathematics involved to do a proper statistical meta-survey require more than just simple aggregation, but I won’t trouble your feeble brain with the details. Suffice it to say that our report will be a definitive guide to choosing the new leader of the sourcing world.
Pinky Who is …
Brain Me, you imbecile!
Pinky Narf! That’s wonderful, Brain!
Brain Yes, it is.
Pinky And since you’re going to be doing approximately the same thing that the analyst firms will be doing in the creation of their State of the Market reports, there are plenty of precedents. I just know this plan will work!
Brain What?!?
Pinky The analyst firm that produced this paper. They’re doing their own meta-survey. It’s going to be the largest ever! I have the invite here somewhere…
Pinky dives into his pile of papers and emerges a few seconds later.Here it is, Brain!
Brain Brain takes the invite from Pinky. A look of extreme disappointment crosses his face.
Pinky What’s wrong, Brain? Narf!
Brain My plan. It’s useless.
Pinky What do you mean? I think it’s brilliant.
Brain We can’t do our own meta-survey now!
Pinky Why not? Zoit?
Brain We’ll be the laughing stock of the sourcing world! Not only will we look like lame copycats, but once the analyst firm releases their report and people scrutinize it and realize that it doesn’t contribute any significant new information, they’ll be turned off from the meta survey approach until they forget about it. Considering the length of time this analyst firm advertises their research, it will be close to a year before we can even think about trying this again.
Pinky But I thought you said they’d believe it?
Brain They’ll believe it. But since it won’t say anything new, they’ll judge it as a waste of effort.
Pinky Oh. Poit.
Brain Yes. Poit.
Well, I guess it’s time to retire back to the marketing cage.
Pinky Why, Brain?
Brain To prepare for tomorrow night.
Pinky What are we going to do tomorrow night? Narf?
Brain The same thing we do every night, Pinky. Try to take over the sourcing world!

Pinky and the Brain
They’re Pinky and the Brain
Yes, Pinky and the Brain
One is a genius, the other is insane
They’re advertising guys
Their mind is on the prize
They’re dinky
They’re Pinky and the Brain, Brain, Brain, Brain,
Brain, Brain, Brain, Brain, Brain

Before each night is done
Their plan will be unfurled
By the dawning of the sun
Take over the sourcing world

They’re Pinky and the Brain
Yes, Pinky and the Brain
Their twilight campaign
Is easy to explain
To prove their sourcing grace
They’ll overthrow the space
They’re dinky
They’re Pinky and the Brain, Brain, Brain, Brain,
Brain, Brain, Brain, Brain, NARF!

Sustainability: The Bridge, Part II

Over on Spend Matters, Jason Busch gave us a teaser when he asked how green / sustainable procurement will play in a recession. According to Jason, while it would be easy to dismiss green and sustainable procurement practices as a luxury for companies to invest in when times are good, I actually believe that they could help organizations to buoy their top lines and pull up from a spiraling downturn or period of contraction. Whether it’s better marketing the benefits of green supplier practices to customers to spur pent-up demand or making investments in supplier development initiatives which reduce unnecessary packaging, supplier-focused sustainability initiatives have the potential to drive sales and reduce costs.

Over on 2sustain, Tim Albinson recounted the good news and bad news he took back from his recent trip to Washington, D.C. where he spent a day on Capitol Hill. According to Tim, the good news is that people are engaged in the environmental discussion, understand that action must be taken, and are preparing for a significant coming change with the new administration, but the bad news is that while the leaders may “get it” on an individual level, the institutions themselves seem incapable of doing anything in an expedited fashion. It appears that many deem a slow, methodical approach to legislation as appropriate. However, as Tim says, given the crisis nature of the current situation we face – melting ice caps, species on the brink of extinction, brutally over-fished seas, rampant global industrialization, etc – now is not the time for multi-year legislative cycles. It looks like it is going to be left up to industry and NGOs to pick up the slack.

Over on Deal Architect, Vinnie Mirchandani reminds us that, unfortunately, despite the growing moral pressure for companies to adopt more environmentally friendly products, many companies are unfairly pricing green products at a premium, or greenwashing products that really aren’t all that green. Vinnie also says that even though we all want to do good by Mother Nature, it’s not fair to sucker the consumer into bearing all of the cost. Or, as in the example Vinnie gave, paying a markup that is well beyond the additional cost … to the point where it should be illegal (just like raising prices in a state of emergency is illegal in enlightened developed economies).