Monthly Archives: July 2008

Is Your Supply Chain Reversible?

The last few years have been very challenging for supply chains with the rapid rate of globalization, but I believe that the greatest challenges are yet to come. Specifically, I believe that the challenges of Centralized Purchasing, Low Cost Country Sourcing, and Risk and Disaster Management will look like child’s play compared to the supply chain challenges that you will face in the next five years.

When you consider the fact that the price of oil has skyrocketed over the past year, that skyrocketing demands in India and China have not only doubled and tripled the price of many raw materials but significantly restricted their supply as well, that the Euro has risen substantially while the US Dollar has fallen substantially, and that global food supplies are restricted and at a fifty year — if not a hundred year — low (thanks, in part, to the bio-fuel blunder), it should be fairly obvious that unprepared supply chains are in for a bit of a shock.

However, this is just the beginning of the changes that lie ahead. And companies that aren’t accurately predicting, and planning for, what comes next are going to be in for a bigger shock. Especially since the shift is already beginning. So far this shift has three main elements:

  • Global Shifting of Manufacturing Bases
    With respect to the European market, the US is now a Low Cost Country for Sourcing of sophisticated manufactured goods like construction or scientific research equipment.
  • Global Redistribution of Food Supply Chains
    With transportation costs skyrocketing, food distributors and supermarket chains are scrambling to source as close to the same marketplace as possible. For North America, this will mean more sourcing from South America than Africa or Asia whenever possible, as foreign producers are now no longer the lowest price.
  • Shifting Market Dynamics towards the Developing World
    In the next two decades, India is predicted to advance from the world’s 12th largest consumer market to the 5th while it’s middle class increases at least tenfold. In the same time, China will grow to the world’s third largest consumer market. Globally, the size of the middle class is expected to almost triple by 2030 — and where you buy your raw materials and components and products today is where you will need to sell them tomorrow.

In my view, this all points to one inescapable conclusion – that if you want to survive, your supply chain must be reversible. Raw materials, components, and products must be able to flow both ways and your supply chain needs to be capable of turning on a dime if supply becomes unavailable in one part of the world due to a natural disaster or inhospitable political or economic climate. An optimized inbound supply chain from China is useless if it now costs you more to bring a product to market than you can sell it for, and even more so if you can’t ship product that the emerging middle class in Asia wants from the US back to China, because that’s where a significant portion of your global revenues will be coming from in ten to twenty years, assuming you want to remain a global player.

So if you haven’t asked yourself this question yet, I think it’s time you should. And before you say I’m a crackpot, remember, I was among the first to not only predict that low cost country sourcing was going away and that best cost country sourcing was still not going to be good enough when I said the key to success was home cost country sourcing — and now that the US is a low cost country source for (Western) Europe, those manufacturers ready to take advantage of this situation are going to lead the turnaround in US manufacturing.

Secrets of Successful Strategy Execution

Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness — decision rights and information flow.
Gary Neilson, Karla Martin, Elizabeth Powers, The Secrets to Successful Strategy Execution, Harvard Business Review

The above referenced article (registration and/or subscription may be required) is a great read for any procurement organization trying to guide their company down the execution path, which is critical in a market where stagnation can kill a company. It describes the four fundamental building blocks for successful strategy execution as identified by booz & co. over the past five years. In brief, they are:

  • clarify decision rights
    how are decisions made, who has the right to make the final decision, and how are they accountable; if people don’t know what decisions they can and can’t make, they’ll sit around waiting for someone else to make a decision rather than taking action themselves
  • design information flows
    this is usually twice as effective in improving execution than any structural change an organization can make
  • align motivators
    there should be a strong link between performance and reward, not a weak one; and managers should get rewarded for doing, not spending half of their time justifying their jobs and reporting upward
  • make structural changes
    only after you’ve figured out who should be responsible for what decisions, how information should flow, and how your managers and employees should get rewarded should you redesign your organizational chart, because only then will you know what structure will truly be more appropriate to your current organization than your current one

The reason why many organizations fail to execute successfully, is they go straight to structural changes because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete. Although they might get lucky sometimes and reap short-term benefits, they’re only addressing the symptoms of their problems, and not the underlying root causes, and it won’t be long until they end up at the same place again — performing poorly with an inefficient organizational structure.

The short story is that people in your organization have to be empowered to do their jobs, and not spend all their time reporting upwards and managing downwards; they need to have the information they need (when they need it) to do their jobs effectively; and the rewards have to be structured in such a way that they are rewarded for making the best decisions for the company as a whole, not just their department or themselves.

This also implies to me that an appropriate center-led purchasing operation can be the most effective one for your organization. How so? In order to operate effectively, a center-led purchasing organization will have to spend a significant amount of time deciding what is purchased in a distributed manner and what is purchased off of central agreements and who gets to make the decision as to whether a new item or product is purchased locally, department-wide, or organization wide; they’ll have to design efficient information flows to make sure that not only do the details of the centrally negotiated contracts and best practices flow out to each team across the globe but that information on actual purchases and newly discovered best practices flows back into the center of excellence; they’ll have to help management align motivators to make sure each team acts in the best interests of the company overall; and they’ll have to lead the identification and implementation of appropriate structural changes across the organization shortly after being formed (and identifying the best structure for the company) and whenever market changes require a reaction on their part.

The Advantages of Decentralization

Many companies like to be centralized, even when center-led models tend to be much better. However, as a recent article in Knowledge @ Wharton, that contained a transcript of an interview with Johnson & Johnson CEO William Weldon pointed out, there can be many advantages to decentralization too, if done right.

Johnson & Johnson is a lot bigger than the band-aids and baby shampoo they are known for – much bigger. They are, in fact, a company with a market capitalization of $180 Billion to $200 Billion, with over $60 Billion in annual revenue, and over 200 operating companies which collectively have over 120,000 employees across the CPG, Pharmaceutical, and Medical Device Manufacturing sectors. Furthermore, unlike some multinationals, they are very decentralized with many of the operating companies operating more-or-less independently from the others. So, more than most, they’re in a position to understand what the advantages of decentralization can be.

The first benefit, which is often unspoken, is that you’re forced to seek out and hire people who are true leaders and capable of managing their businesses on their own. This makes sure that you have talent spread out across the organization, and not centered in one tiny division, which makes for a much more productive and robust company.

The second benefit, as pointed out by Weldon, is that you have local management running the company. This is very important in the CPG sector. Local management will know what sells, what consumers want, and how to grab the biggest share of the local market. In comparison, a remote manager, who doesn’t speak the language or understand the culture, might pick a name for a mp3 player that means “crappy sound” in the local language and then, like Chevy, wonder why the Spanish aren’t buying the Nova.

In addition, having a wide variety of local managers in different cultures gives you a large amount of diversity in your organization – and the more people who think different, the better off you are when it comes time to innovate.

The third benefit is that, because control is decentralized, the chance of one person’s mistake crippling the organization is extremely low. In centralized control, if the CEO, CFO, or COO makes a big snafu, like focussing the whole company on a single, poorly thought out, marketing campaign, it can topple the whole company. In a decentralized company, if the local manager makes a big snafu, that’s just one little unit with one little mess in the grand scheme of things, and its likely to be easily recoverable if a few senior managers from other units step in to help.

The fourth benefit is that it forces you to be innovative when it comes to innovating. With people all over the world, you have to be innovative to get them together. That means adopting, implementing, and developing innovation networks that allow people to come together across companies, geographies, and fields of expertise to work on new product development.

And once you have these innovation networks in place, you begin to see the value of open innovation, and realize, as Johnson and Johnson has, that you can extend the innovation network outside your four walls and instead of having 120,000 minds to draw on, you can include your partners, customers, suppliers, and third party innovators and have a network of over 2 Million minds to draw on – which is 20 times the number of minds you’d have at your disposal if you insisted on trying to keep innovation within your four walls.

It’s a great model, when done right, and lends further validation to my belief that center-led, or more appropriately, center-guided models are often the best models for operations across the board. Experts in a Center of Excellence (COE) support and guide the organization on common strategic issues while leaving the local issues to the local experts. I highly recommend the article.

Claro’s Crown Jewels

Last year, I blogged about how you could achieve Clarity with Claro in your sourcing projects. Since then, Claro has been named one of Seven Small Jewels for 2008 by Consulting Magazine. I was in Chicago recently, so I decided to catch up with Bart Richards, who is now a Managing Director of the Sourcing Group.

Over the past year, their sourcing practice has been growing by leaps and bounds as more and more companies are trying to find savings opportunities in an inflationary market where cost pressures on all sides are causing financial hardships across the board. The good news is that they have been successful as there are still savings to be found when the right categories are addressed, but the better news is that they understand that, in today’s market, cost avoidance is king as simply holding prices static can provide you a significant advantage over a competitor who sees their costs rise 10% to 30%.

The truth of the matter is that if your organization is still focussed on cost savings, and you are focussed only on strategically sourcing those categories you know you can save on, you’re actually losing money. How can this be? Let’s pretend that you source steel and services (or petroleum and travel, or energy and telecom, etc.). Let’s also say that you spend 10 Million on each category and that it is your expectation that you can only save on services. If put all of your effort into strategically sourcing services, you could probably save 20%. But steel prices have more than doubled over the past year. If you simply delegated steel to an e-Auction, you’re likely to find your steel prices increase 90%. Although that would be good compared to the market, that would be very bad if focussing all of your efforts on this category could have resulted in a price increase of only 60%. By focussing on savings, you saved 2M on savings only to lose 3M on steel — for a net result of a 1M loss. Not very smart. Today, it’s more important to focus on those categories that have substantially increased in price since your last sourcing event, or that are rapidly rising in price, than it is to focus on the few remaining categories that might yield savings. Because if you don’t, you find that you save a dime only to lose a dollar.

This is also why it’s critical that an organization’s sourcing performance metrics, as well as incentives and bonus plans, revolve around cost avoidance and not cost savings. After all, as I have said before, there’s no such thing as savings, because if you really can save money, it simply means that you shouldn’t have been paying that much in the first place, and that you are paying a price that should have been avoided! Now, I know it is more work to define avoidance metrics than it is to define savings metrics, but the payoff is worth more than the price. Furthermore, there are a number of on-line resources, such as the article archives and blog entries provided by Next Level Purchasing and the wiki paper on the e-Sourcing Wiki, that you can use to guide your efforts, standard pricing indexes that you can use to precisely define average raw material price increases since your last sourcing event, and a number of consultants (including the doctor) who can help you define the right metrics as well as the right sourcing sourcing program.

With this knowledge, Claro has been successful both at finding savings for their clients in categories such as services, travel, and benefit plans as well as controlling cost increases and keeping them to a level that is usually significantly less than market average by focussing on those categories that the client can buy in bulk, hedge against, or lock in longer-term preferential agreements. They’re still saving an average of 10%+ in a number of categories for their average client, but more importantly, they’re reducing expected cost increases in key categories by 10% to 20% or more, which provides for better overall cost containment across an organization than simply focusses on the low hanging fruit.

A number of examples of their success stories can be found in the numerous case studies on their web-site, and if you want to know whether or not they have sourced a particular category recently, and what sort of results you could expect, you can contact them for more information and additional case studies relevant to your situation at any time. They’re more than happy to take your call, or your e-mail, and Bart Richards can be reached at brichards <at> theclarogroup <dot> com.

Our next post on Claro will talk about the other services Claro offers as well as some of their particular areas of expertise.

Avery Dennison’s Supplier Selection Insights

With the recent recall fiascos (salmonella in our produce, lead in our toys, and diethylene glycol in our toothpaste), supplier management is more important than ever. However, even before we get to performance management, relationship management, and risk management, we first have to select a supplier. A good supplier selection can go a long way to minimizing the management that we need to do – as a good supplier will strive to perform, connect and collaborate with you on a regular basis, and give you the visibility you need to mitigate risks before they occur.

That’s why Avery Dennison, as discussed in this Industry Week article, has adapted it’s screening process to insure that any new suppliers it engages with can guarantee consistent, quality products. Considering that it has to source many of its materials from multiple global sources, quality and reliability of supply are key factors.

As part of its new process, it now includes a strict set of environmental and social compliance guidelines — including labor laws and health safety standards — that suppliers must demonstrate they adhere to before they can advance to face-to-face discussions. In these discussions, Avery makes an effort to discern the extent of the supplier’s business, what markets they are involved in, their profitability and long term business solvency, their historical quality and service metrics, and whether or not they have the potential to meet Avery’s supply requirements.

If the discussions go well, the next step will be a plant tour. During the plant tour, Avery attempts to discern if everything the supplier put forward in the initial screening and face-to-face discussions is true and if key factors, such as quality assurance, worker treatment, and appropriate equipment and processes, are readily visible. In addition, during the face-to-face discussions and plant tour, they also look at the supplier’s supply base to make sure that there is a consistent supply of quality raw materials and that the supply base conforms to their environmental and social compliance guidelines.

According to Avery, the process results in invaluable insights that go a long way to selecting the right supplier, which is not necessarily the supplier with the lowest unit cost, or even landed cost, because the right supplier is the one with the lowest total cost of ownership — which includes the costs to manage the supplier, the costs to process returns when quality isn’t acceptable, and the costs, and time, to recover from delays or disasters when risks become realities. A good supplier is easy to manage, ships you good quality product consistently, and insures that you have significant downstream visibility into any interruptions or delays that might trickle their way up to you — and a good supplier certainly doesn’t employ child labor in smoke-stack dirt-floor factories that will ruin your image if the media finds out!