Monthly Archives: February 2008

‘Green’ Asbestos

While scanning Logistics Management, an article by Jeff Berman that said a new approach for sustainable supply chains is needed caught my eye. I’m a big believer in sustainability, but I’m also a strong believer that in their effort to jump on the bandwagon, some companies, governments, and individuals are doing – to be blunt – stupid things.

The article was based on a recent report by Adrian Gonzalez of ARC Advisory Group, in which the author notes that there are various tradeoffs when shippers and carriers strive towards sustainability. The tradeoffs exist because most products, manufacturing processes, and supply chains were not designed and built with sustainability in mind.

Gonzalez also noted that many people in the space are equating green with the reduction of their carbon footprint, as if the two concepts were interchangeable. Furthermore, even among those that realize that there is a spectrum to environmental friendliness, the author is finding that individuals are giving higher priority to initiatives perceived to reduce their carbon footprint – and, contrary to what you might expect, this may not be a good thing.

Let’s start with my favorite pet peeve – bio-fuels – and corn-based ethanol in particular. Although it’s true that the amount of contaminants, and carbon, produced by burning a barrel of corn-based ethanol is significantly less than the amount of contaminants, and carbon, produced by burning a barrel of crude oil, the fact of the matter is that, when you factor in how much oil you have to burn to create the bio-fuel, it actually increases your carbon footprint!

Using today’s technology, it can take up to 7 barrels of oil to create 8 equivalent barrels of corn-based ethanol. That’s a 12.5% return. 12.5%!!! That say’s that if you simply reduced your energy requirements by 12.5% you’d be a lot more environmentally efficient using oil! And you wouldn’t be harming the poor every time you drive your converted Honda. That’s right – by burning bio-fuel that’s inefficient to produce, you’re harming the poor every time you drive your Honda by driving up food prices! Last November, the American Farm Bureau (as chronicled over on Supply Excellence in Inflation at the Thanksgiving Table) reported that the cost of a traditional thanksgiving dinner rose 11%. Not only are corn prices rising due to ridiculous bio-fuel demands, but so are prices of wheat, grain, barley, and hops around the globe as farmers start planting corn for bio-fuel instead. These increases are in the double digits, and in some cases, triple digits as shortages are starting to become common. (Hops shortages are already threatening European brewers – who like their beer almost as much as us Canadians.) In other words, I guess what I’m saying is if you don’t mind increasing the lines at the food banks, then feel free to stay on your ethanol kick.

Now if this was the only example of stupidity from a sustainability perspective, it might not be so bad, but it’s only one example. Another example of ‘green‘ asbestos is the over-promises and unreasonable expectations associated with the use of fluorescent bulbs. Now, don’t get me wrong, I’m a believer in this technology (I use them myself) – but it’s not as green as you think it is. The average bulb contains mercury for crying out loud! And it’s not as efficient to produce them as an average light-bulb. They do require less energy, and they do, on average, last a lot longer, and I believe that this offsets the extra damage caused by the manufacturing process and inevitable recycling process, but it’s not a silver bullet. And it doesn’t mean that you don’t have to worry about leaving your lights on 24 hours a day – they still take energy! The only way you’re going to be green in using them is to be green with respect to their use – and turn them off when you don’t need them. This means you need to do more than just outfit your office building with them, like installing sensors that actually turn them off when there’s no one in the room!

I could go on (and might in another post), but the point is that it takes more than just “reducing your carbon footprint” to be green and sustainable. Furthermore, everything you do has a price or tradeoff associated with it. Ethanol is green, but its production is not. It’s still better to be energy efficient (better processes, new technology with lower energy requirements, conservative uses). However, it’s not the only green source of power – what about the stuff that occurs naturally around us – like wind, waves, and sun rays? So be smart – and then you’ll truly be sustainable and not just another product of ‘green‘ asbestos.

Putting McKinsey’s Business Technology Trends into Practice Part II

The McKinsey Quarterly recently published an article on eight business technology trends to watch that was not only quite good, but a good summary of the trends that you should be implementing, appropriately, in your supply chain. In this second part of this two part series, we are going to review the remaining trends and give you some examples of how you can apply them to improve your sourcing and supply chain practice.

Expanding the Frontiers of Automation

More and more systems are becoming interconnected through common standards for data interchange and more and more business processes are becoming automated at larger and larger scales. This information exchange can be used to automate even more activities, with a little thought and proper planning.

For example, you’re probably using multiple systems for sourcing and procurement, and in e-procurement in particular, there are probably considerable improvements you could make to not only increase efficiency with automation, but reduce overspending and maverick spending. Let’s consider the process – requisition creation, requisition approval, supplier acceptance, goods receipt, invoice generation, review, and payment. You’ve probably heard a few of the more progressive vendors say that you should have 2, or even 3, way match at the invoice review stage – but the reality is that you should have m (where m is equal to the number of data points you have) at each step of the process. When the user creates a requisition, items should be checked to see if they are under contract, and if not, if there are contract equivalents and prices should be compared against contract pricing. If an item is being bought under contract, but the price is wrong, it should be corrected (and the user notified), and if the item is not under contract, but there is an item that is, the user should be notified and if the user insists on requisitioning the off-contract item, the user should be forced to enter a reason as to why he or she is seeking permission for maverick spend. When a supervisor goes to approve a requisition, the prices should be re-verified and the supervisor should be immediately alerted as to whether or not the requisition contains any maverick spend requests. Before the invoice is approved, it should be matched to the purchase order that was generated from the requisition to make sure each item was ordered, the goods receipt to make sure everything was delivered, and the contract to make sure the prices are right. In this way, a supervisor can quickly spot requests for off-contract spend and focus attention where it is really needed, and invoices from approved suppliers where everything is verified can be automatically scheduled for payment, allowing users to focus their time only on those invoices that need to be manually investigated.

Unbundling Production from Delivery

Technology helps companies to utilize fixed assets more efficiently by disaggregating monolithic systems into smaller, loosely coupled, systems. It’s not one big production line, but a set of smaller lines that work on individual components, some specialized to a single task. Improvements in information and communication technology not only enable the new models, but enable the use of each resource to be monitored and metered separately. This allows companies with free capacity to lease their resources to other companies which need to gain access to assets quickly to scale up businesses but keep their balance sheets in check.

There are a number of ways you can implement this concept in your sourcing and procurement organization, and the best way to start is to simply unbundle product (production) quotes from delivery (shipping) quotes and then use a strategic sourcing decision optimization platform that can optimize your allocation to minimize total cost of ownership and total value delivered in ways that you will not achieve with e-Auctions alone. The next step is to contract for additional capacity as you start scaling up operations or need a new technology that you don’t have, and don’t take on any fixed assets until you have proven the market and demand. Then, you if you’re truly innovative, you’ll identify other organizations with similar supply chains whom you are not in (direct) competition with and take on management of their third party logistics requirements to increase the volume of your logistics requirements to negotiate even better deals with your 3PLs.

Putting more Science into Management

The article notes that technology is available to help managers exploit ever greater amounts of data to make smarter decisions and develop the insights that create competitive advantages and new business models. The article notes that from “ideagoras” (e-Bay like marketplaces for ideas) to predictive markets to performance-management approaches, ubiquitous standards-based technologies promote aggregation, processing, and decision making based on the use of growing pools of rich data. It also notes that leaders should get out ahead of this trend to ensure that information makes organizations more, rather than less, effective, and the doctor agrees with this wholeheartedly!

The best way to start is to acquire a real spend analytics platform (which is more than boxed reporting on a data warehouse, but you know that) and a real strategic sourcing decision optimization platform, if you don’t have them already. This will help you target the spend that has room for improvement and make optimal award allocations, keeping spend down. Then, acquire some collaborative PLM software to enable you to monitor NPD from the inception stages and insure that the best decision is made by the organization at each stage of the process.

Making a Business out of Information

The article points out that accumulated pools of data captured in a number of systems within large organizations or pulled together from many points of origin on the Web are the raw material for new information-based business opportunities, and while that may be true, the doctor thinks that the trend you should be focusing on is running a better business on timely information.

Not only do today’s organizations have access to more data than they have had access to in the past, but those with visibility enabled supply chains (that use RFID and XML or EDI interchange with partners) have access to this information faster than their peers. Those companies that are able to make use of this information quickly and appropriately will be able to outperform and outmaneuver their competitors, and respond much quicker to events that could cause supply chain disruptions and re-engineer around them. For example, a pizza chain that monitors expected tomato crop yields and any natural events that could significantly diminish those yields, after finding out that a hurricane wiped out a large crop, could move to quickly lock up future supply at today’s prices, putting it in a much better position than its competitor that will be forced to fight for a much smaller supply at higher prices. A 3PL that keeps on top of all news that relates to major ports as well as where its trucks are at all times through GPS could immediately divert all trucks, en-route, to a different port as soon as it discovers that a tsunami just wiped out a dock and shut the port down for a week. Let’s face it, supply chains are not in the information business, and shouldn’t be looking to create new businesses around information when they can instead use that information to execute their business much more efficiently then their competitors, giving their firm a strategic advantage that could enable it to grab more market share with less dollars, which is a contribution to the bottom line above and beyond the significant savings they are able to achieve.

As the article states, creative leaders can use a broad spectrum of new, technology-enabled options to craft their strategies. These trends are best seen as emerging patterns that can be applied in a wide variety of businesses. Leaders will reflect on which patterns may start to reshape their markets and industries next – and on whether they have opportunities to catalyze change and shape the outcome rather than merely react to it. As the doctor has demonstrated, each of these trends can be co-opted by your sourcing and supply chain organization to literally get more for less. the doctor hopes that you have enjoyed this two-part mini-series.

Putting McKinsey’s Business Technology Trends into Practice Part I

The McKinsey Quarterly recently published an article on eight business technology trends to watch that was not only quite good, but a good summary of the trends that you should be implementing, appropriately, in your supply chain. In this two part series, we are going to review each of the trends and give you some examples of how you can apply them to improve your sourcing and supply chain practice.

Distribution of Co-creation

In more innovative sectors of industry, companies routinely involve customers, suppliers, small specialist businesses, and independent contractors in the creation of new products. Today’s technology allows companies to delegate substantial control to outsiders by outsourcing innovation to business partners that work together in networks. By distributing innovation through the value chain, companies may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.

If you’re not already doing this, you can start by adopting one or more collaboration platforms that allow you to work with your supply chain partners. Not only can you enable engineering and production by helping them work with partners to design cost-out before you even have to source the goods, but you can work with your suppliers to identify optimal supply networks that keep transportation costs down and raw materials that you could procure on their behalf cheaper than they could procure them.

Using consumers as innovators

The more innovative companies are looking upon consumers as potential sources of innovation. Companies that go out of their way to engage with customers in design, testing, and marketing and to find out what they really want get better insight into customer needs and behavior and often reduce the cost of customer acquisition, retention, and development. As long as the company is careful to focus on the immediate needs of the majority of customers, as opposed to the long-range needs of a vocal minority of customers, it increases its chances of meeting the needs of its customers when compared to its competition.

In sourcing, your customers are the other groups in the organization – engineering and production that need the raw materials, marketing that has to market the finished product, finance who needs reporting and justification that the money you’re spending is on compliant goods, and sales that has to sell the finish product. A good sourcing and supply chain organization forms cross-functional teams that involve each group early in the sourcing effort to insure that the award that is finally made is appropriately balanced to meet the needs of each internal customer, but a great sourcing team asks each organization for ideas that could help them increase profitability, efficiency, and / or quality. Not all ideas will be winners, but you never know where the next gem of an idea is going to come from.

Tapping into the World of Talent

Thanks to recent advances in collaboration and communication tools, companies can outsource increasingly specialized aspects of their work and still maintain organizational coherence. Furthermore, top talent (like the doctor) can be found anywhere. The best person for the job might be a state, country, or even continent away. Innovative companies are building capabilities to engage best-of-breed talent or contracting with talent aggregators that specialize in providing such services. The competitive advantage will shift to companies that can master the art of breaking down and recomposing tasks in ways that can take maximum advantage of best-of-breed talent.

The best sourcing and procurement groups are those that assume that they don’t know how to be the best at everything and aren’t afraid to engage consultants and thought leaders to show them how to do things better. The great thing about this trend is that it’s easy to start with – you identify your largest gaps and weaknesses, or your most significant technology and process needs, and then bring in best-in-class talent to help you fill those gaps and needs and take you to the next level. Most importantly, you find the best-in-class talent that will help your people achieve this next level after the the foundation that is required to get you there is implemented. Helping you select and implement a new platform or process is good, but helping you learn the new platform or process and get the most out of it is better.

Extracting More Value from Interactions

As the article points out, the application of technology has reduced differences among the productivity of transformational and transactional employees, but huge inconsistencies persist in the productivity of high-value tacit interactions which involves negotiations, knowledge, judgement, and ad-hoc collaboration. Improvement is more about increasing their effectiveness by focusing on interactions in a context that create value than it is about increasing their efficiency.

The key to good interactions is high EQ and efficient access to the right knowledge at the right time. You can increase your team’s EQ by giving them access to the training they need, and, preferably training that will take them down the certification path (towards the CPSM or SPSM, for example). You can begin your effort to make sure that your team has the knowledge they need, when they need it, by developing a knowledge management intranet site that uses content management, wiki, and forum technology to capture all of the relevant information that flows through your organization – from your employees, contractors, and partners.

As the article states, creative leaders can use a broad spectrum of new, technology-enabled options to craft their strategies. These trends are best seen as emerging patterns that can be applied in a wide variety of businesses. Leaders will reflect on which patterns may start to reshape their markets and industries next – and on whether they have opportunities to catalyze change and shape the outcome rather than merely react to it. As the doctor has demonstrated, each of these trends can be co-opted by your sourcing and supply chain organization to literally get more for less. Check back tomorrow for the next four trends that you can use to improve your operations!

How Are the Five Forces That Shape Strategy Going To Shape Your Supply Chain This Year?

The Feature for the January Issue of the Harvard Business Review is The Five Competitive Forces That Shape Strategy by Michael E. Porter where he reaffirms and updates his classic 1979 paper that revolutionized the field of strategy.

The five Porter forces that shape Industry Competition are:

  • Threat of New Entrants
  • Bargaining Power of Buyers
  • Rivalry Among Existing Competitors
  • Threat of Substitute Products or Services
  • Bargaining Power of Suppliers

Given that the general prediction for this year tends to be recession, what does this mean for your supply chain this year. If a recession does happen, then, regardless of the industry you’re in, we’re likely looking at the following:

  • few new entrants (due to lack of $$’s)
  • more bargaining power of buyers, as they are buying less, due to less consumer demand
  • increased rivalry with less business to go around
  • a great threat of substitute products or services as competitors try to innovate lower cost products to win a dwindling share of business
  • less bargaining power of suppliers overall

So what is this likely to mean for your supply chain?

  • the players are going to be roughly the same
    there’ll still be players new to you, but not many new to the industry
  • with the exception of commodities based on raw materials in short supply, or that require a large amount of energy to make, you should have more bargaining power
  • with suppliers fighting for business, if they’re smart, they should be more open to collaboration and your performance management initiatives
  • this might finally be the year they are willing to work with you on innovation efforts
  • except for the energy marketplace and suppliers who supply raw materials in tight supply, you should hold the upper hand in negotiations

But does this mean that things are going to be better over all? According to Porter, if the forces are intense, then almost no company earns an attractive return on investment. If the forces are benign, then many companies are profitable. The industry structure sets the profitability in the medium and long run (but not necessarily the short run because a myriad of factors can affect industry profitability in the short run – including weather and the business cycle).

If you’re in an industry where forces are already intense, they are going to get a lot more intense due to lack of consumer demand. This means that even though you’re going to have a lot more bargaining power with many of your suppliers, you’re competition is going to be in the same position. Thus, even though your supply chain costs (with the noted exception of energy or raw materials in tight supply) are probably going to finally start going down a little, your revenues are going to drop too and profitability as a company may be even harder to achieve. If the forces are benign, they are going to be less so. This will increase competition, but the winners will have an opportunity to do very well both in their supply chain and in the marketplace as those with lower prices and innovative offerings will be much more attractive as consumers become even more cost, and value, conscious.

However, it’s likely that this is also the year where the short-term forces of sustainability, compliance, and sustained cost reduction come into serious play. This means that you’ll have to green-up and tech-up in your supply chain. You’ll need technology to insure compliance in product design and global trade, you’ll need technology to make sure you are complying with all of the voluntary security initiatives to prevent your products from getting trapped indefinitely in customs, and you’ll need technology to make sure you are making the decisions that squeeze the most value out of your supply chain.

Then there are the other possibilities I alluded to in my series on What Will Be The Top 10 Supply Chain Stories of 2008? (Part III).

So … innovative sourcing, procurement, and global trade vendors – start your engines!

The 10 Worst Innovation Mistakes In A Recession

Are we in a recession? Unknown. However, you do know whether or not you believe we are in one, and if you do believe we are in one, you’re likely to go overboard on belt-tightening and cost-cutting. That’s why I want to point out a great article that appeared on Business Week last month on the 10 Worst Innovation Mistakes In A Recession because, if you make these mistakes, you will be creating a self-fulfilling prophecy.

  1. Fire Talent
    Talent is the single most important variable in innovation. And innovation is the single largest lever you have to increase productivity and decrease costs.
  2. Cut Back on Technology
    The rise of social networking and consumer power means that companies have to be part of a larger conversation with their customers. This requires technology. Furthermore, the best way to insure you are getting the best price is to tackle the right categories, as identified by spend analysis, with strategic sourcing decision optimization to make sure you are making the award with the lowest total cost of ownership. It’s also important to make sure that all of your invoices are submitted in an electronic format that can be automatically matched against contracted rates to make sure you are being overcharged. This requires leading-edge technology.
  3. Reduce Risk
    Innovation requires taking chances and dealing with failure. Although it’s important to control risk, trying to eliminate it entirely will just end up eliminating any chance for innovation at your company.
  4. Stop New Product Development
    This hurts companies when growth returns and they have fewer offerings in the marketplace to attract consumers. And with today’s rapid pace of technological change, you could even lose customers in a recession to a competitor who keeps innovating while you stand still.
  5. Replace a Growth-Oriented CEO with a Cost-Cutting CEO
    Most recessions only last two or three quarters and, these days, are relatively shallow. Penny-pinching CEOs don’t have the skills to grow when growth returns. Plus, a penny-pinching CEO is the most likely individual to fire your top talent.
  6. Retreat from Globalization
    Emerging markets are sources of new revenue, business models, and talent. And, like it or not, emerging economies like India and China are soon going to have more buyers for your product than the countries you’re currently selling to.
  7. Replace Innovation as Key Strategy
    … With Systems Management and Cost-Cutting. Once focus shifts away from innovation, it can be very hard to get the focus shifted back.
  8. Change Performance Metrics
    Shifting employee evaluations away from rewarding riskier new projects toward sustaining safer, older goals. This leads to risk-averse behavior and stifles innovation.
  9. Re-inforce Hierarchy over Collaboration
    A return to command-and-control management. This alienates creative-class employees, young Gen Y and X-ers, and stops the evolution of the corporation. In today’s world, companies that don’t evolve die – and they do it quickly. The average life-span of a Fortune 500 company is shrinking every year.
  10. Retreat into Moated Castles
    Cutting back on outside consultancies is seen as a quick way to save money. Yet, one of the key ways of introducing change into business culture is to bring in outside innovation and design consultants.

Remember that winners always emerge out of recessions and they always win on the basis of something new. If you don’t always have something new in your pocket, you’re not going to win. And if it is a recession, and you don’t have something brand spanking new to pull out of your pocket when the recession is over, you could literally be toast. Furthermore, even a recession provides growth opportunities. People still spend money. They still need to eat, maintain their homes, and their life-styles. The difference is that they don’t spend as much money and look considerably harder for the best deal. This means that they’re much more likely to waver on brand loyalty if you can provide them a better product on a better price – and this means that you can still grow by taking market share away from your competition.

So don’t make the innovation mistakes. If it is a recession, then whether you come out of it a winner or a loser is up to you.

Furthermore, if it is a recession, and your company supplies sourcing and procurement technology and services, then this should be a major growth period for you! After all, how else is your average blind-in-one-eye company going to save money? This means that not only do you have to make sure that you don’t make any of the top 10 innovation mistakes, but that you invest for a growth period because, if you play your cards right, it will be. (And if you need a little help, remember what the doctor does.)