Monthly Archives: July 2008

Negotiation Pitfalls

Negotiations. Some people love them. I don’t. My strategy is to go in more informed than the person I’m dealing with, with hard data to back me up, force a short circuit to the bottom line, and figure out if it’s worth talking for any more than 15 minutes. But still, it’s part of the job description, so it’s worth, at the very least, knowing what not to do, especially since one could always debate as to what one should do in a particular situation. (Don’t know where to start at all? You might consider checking out Powerful Negotiation for Successful Buying, a course from Next Level Purchasing. You might also consider boning up on your leverage points.)

Supply Chain Digest recently ran a brief summary of what not to do in their article on 15 Negotiation Pitfalls – and How to Avoid Them that serves as a good cheat sheet on what not do do. (For a longer guide, check out the guide to UK SuperMarket Negotiating Tactics.) Although all 15 are good tips, my favorite 5 were

  • Confusing Contention for Problem Solving
    If negotiations demand contention, because the other side won’t have a negotiation without it, have two parties represent each side, one party to bicker, and one party to actually solve problems.
  • Confusing Superior Force with a Better Bargaining Position
    “We are a $10 Billion company – we can buy and sell your sorry butt 20 times over …” is not a very useful threat if the other company is not for sale and has a specific piece of IP you need to take your product to the next level.
  • Confusing Negotiations with Psychological Warfare
    In addition to preventing problem solving, there’s always a chance the other party could be carrying a concealed weapon and just snap. (Its a fact that some negotiations have ended in physical violence.)
  • Going for broke when you’ve already won
    Once your pre-established conditions are met, especially if your targets were aggressive, pushing forward just in case you might have “left something on the table” or because you might be able to “squeeze more blood out of the stone” is not a good idea. The other party might think you’re totally unreasonable to work with, get up, walk away, and take their goods and services to your direct competitor instead.
  • Focussing on the other party, and not on what the other party is representing.
    It’s not personal, it’s business.

Also, if you want a larger, more detailed list of Negotiation No-Nos, you might consider the Next Level Purchasing course of the same name.

P.S. You might also be interested in the recent Spend Matters post on this topic, which went live after I originally drafted this post.

Equipment Breakdown Risk Management

At risk of sounding like a broken record (or a scratched CD, for you young twitterers), your supply chain is fraught with risk! However, the more risks you’re aware of, the more risks you can mitigate, especially if someone gives you some tips on how to identify and mitigate those risks. That’s why I enjoyed a recent article in Industry Week by Anthony J. Trivella of The Hartford Steam Boiler Inspection and Insurance Company on Mitigating Equipment Breakdown Risks.

In his article, Anthony notes that the most vulnerable part of many businesses is the equipment that keeps them up and running — and if the equipment, or the underlying infrastructure that supports it, breaks down, commerce usually comes to a stop and profits vanish as customers go elsewhere for their products and services. Furthermore, risks are being exacerbated as four trends are converging to drive risk to higher levels than ever before: infrastructure is aging; demand for equipment is increasing globally; energy demands, and costs, are rising rapidly; and technology is proliferating faster than Fibonacci’s rabbits.

The Aging Infrastructure and the Data Explosion

The U.S. infrastructure, and the power grid in particular, is being strained by the proliferation of power-hungry technology. (Data centers are now sucking up close to 20% of all energy produced in the US! [IT: The Biggest Threat to Our Energy Future]) Much of the current system was developed over half-a-century ago, and was not designed for today’s energy needs. In addition, many equipment owners neglect to install adequate surge protection, and place their business activities at increased, unnecessary, risk.

The Global Battleground for New Equipment

As the GDP of developing nations that we have been outsourcing to for most of the decade continues to grow, so do their middle class – who now want what Americans want. China and India account for 40% of the global population, and by some estimates, their middle class is now larger than the US population. However, worldwide production hasn’t increased at the same pace, so in addition to a fight for easily made DVD players, there’s also a fight for the modern equipment needed to build skyscrapers, road, bridges, and power grids.

Rising Energy Demands and Costs

Peak demand for electricity in the US is expected to increase by 18% in the next 10 years while committed power generation is projected to rise a mere 8.4%. Considering the total annual energy demand of the US, that’s a huge differential. Can you say “rolling blackouts”? I hope so, because that’s looking more and more likely every year! (So, start greening your roofs, using geothermal to cool your buildings, installing those solar panels and wind mills, and watching that fuel cell technology … because, if uninterrupted power is critical to your business, generating your own power is the only way you’re going to insure you have power when you need it.)

Technology Proliferation

Just look at your average worker who needs a utility belt to hold all of his iPhones, iPods, iFaxes, iBooks, etc. etc. etc. and you can see that we have become slaves to technology. (It’s a damn good thing we’re still not close to achieving artificial intelligence!) How many computer systems do you have? Really? Better count again … between desktops, laptops, servers, backup-servers, backup machines, machines in repair, etc. – I bet you have three times as many machines as you think you have. (And yes, that’s one of the reasons your energy bill is going through the roof!) Then there are all of the different enterprise software systems that you use to manage your business. And your mobile devices. Point of Sale devices. etc. etc. etc.

This widespread use of electrical and electronic equipment, which is highly vulnerable to power surges and other disturbances, is creating equipment and business risks for commercial operations whose owners may not understand their exposures. Moreover, technology is advancing so rapidly that much of it becomes obsolete quickly, making it difficult to repair or find replacement parts. In many cases, if key components are unavailable, it must be completely replaced.

Unprecedented Risks Require Unprecedented Mitigations

Equipment owners need to assess their risk exposure, improve maintenance and operation procedures accordingly, develop contingency plans, and insure they have appropriate insurance protection. Some specific things that can be done include:

  • the life-span of large transformers can be maximized via dissolved gas analysis and other tests that can identify defects and necessary repairs before the transformer breaks down
  • key data systems and servers can be backed up by redundant surge-protected uninterruptable power supplies
  • on-site power generation systems can be installed to not only provide emergency backup, but reduce the amount of power the business needs to draw from the grid at peak times

Energy Efficiency is the First Step in Energy Conservation (and Budget Savings)

If you’re a buyer of computers, electronics, machinery, automobiles, buildings, or anything else that requires power, the first thing that should be on your mind these days, with petroleum and oil prices going through the roof, is energy. It now costs more to power an average desktop workstation for its expected life-span than it does to buy it, just as it does to power and cool your average server. Getting 40% off MSRP on a pick-up truck that only gets 15 mpg isn’t a great deal anymore if it’s going to be driven 30,000 miles per year, because, at current fuel costs, you’ll be spending 45,000+ in fuel costs over 5 years … over two times what you’ll be paying for the truck!

That’s why it was great to see a recent article in Industry Week on Growing the Energy Efficiency Market that re-iterated the fact that energy-efficiency technologies can reduce energy consumption by 25% or more, echoing the results of a recent McKinsey study that also found that improved energy efficiency can cut energy requirements by 25% in many developed countries, as I noted in my post on Cutting Carbon Footprints on the Country Level.

The Industry Week article focussed on a recently released ACEEE (American Council for an Energy-Efficient Economy) report on The Size of the U.S. Energy Efficiency Market: Generating a More Complete Picture. The report, which was supported by the Civil Society Institute, the Kendall Foundation, and the North American Insulation Manufacturer’s Association, found that:

  • The U.S. has the potential to reduce energy consumption by an additional 25% to 30% through strategic use of energy efficient technologies
  • Energy-Efficiency has met about three-fourths of the demand of new energy related services since 1970, proving that it works
  • Investments in more energy-efficient technologies could result in an efficiency market worth more than 700 Billion by 2030

Furthermore, as Industry Week alone has pointed out over the last month or so, opportunities for energy efficiency improvements, as well as new sources of energy, are everywhere.

  • In Let Motor Efficiency Drive Competitiveness, Too, we find out that not only does energy account for 97%+ of the total life-cycle cost of an AC induction motor, but that adjustable speed drives can often reduce power consumption by as much as 50% in some implementations! Furthermore, high efficiency motors alone have the potential to reduce industrial power consumption by as much as 18% across the board!
  • In another article, Industry Week informs us that a new material benefits fuel cells and that MIT has developed direct methanol fuel cells (DMFCs) based on this material that improve power output by more than 50%. (Furthermore, this should also lead to the creation of even higher performance batteries for handheld electronics in the near future.)
  • And in power from seaweed?, they noted that the production of bioethanol from seaweed might soon be a possibility. If it was possible to produce this fuel in an energy efficient manner, it might make biofuel a viable alternative. Right now, as I’ve pointed out many times, the focus is on corn-based ethanol, which is extremely energy-inefficient to produce (over six barrels of oil are required to produce eight barrels of lower-efficiency ethanol) and reduces the global food supply. In contrast, seaweed is not a key food crop and certain species of seaweed have higher oil concentrations than most land-based crops. It would be fantastic if everything works out.

If you want to be more energy efficient, you might consider checking out the ninth edition of the Plant Engineers and Managers Guide to Energy Conservation. A review can also be found in Industry Week.

Getting Started with Supplier Relationship Management: A Checklist

In our last post, I alerted you to a recent SIG article and some posts on Robert Rudzki’s Transformation Leadership blog that had some tips on how to get started with an SRM program and recognize suppliers. In today’s post, I’m going to alert all of you checklist cherishers to an article that appeared in the Supply Chain Management Review last quarter that should also help you down the supplier relationship road.

In a 10-point Action Agenda for Strategic Supplier Relationship Management, Marc Day, Greg Magnan, and Jon Hughes put forward, as expected, a 10-point agenda for action. In brief, their action agenda is:

  1. Assess the Current Situation
  2. Build the Business Case and Compute Your ROI
  3. Establish a Budget and Commit Resources
  4. Establish Key Metrics
  5. Establish Your Processes
  6. Educate all Involved Parties
  7. Manage the Relationship
  8. Work Towards the Benefits
  9. Share the Rewards
  10. Keep on Top of Your Performance Metrics

This is a good starting point. The only big things to add are:

  • Put True Leaders in Charge
  • Enable Your Suppliers

It could take some serious leadership skills to pull a new program off successfully without alienating your current supply base and your suppliers are more likely to buy in if they see clear benefits to them from day one.

Giving Your “Ugly” Supply Chain a MakeOver

Is Your Supply Chain “Ugly”? asked a very important question – is your supply chain an “ugly baby” — which it is if your distribution is slow, if your products are unpopular due to quality issues, and, most importantly, if your warehouse and inventory management is in shambles. This is a very important question because a $100 million dollar company can lose $3 million to $6 million a year by the time storage costs, depreciation and disposition costs, and losses are factored in (because it can lose $1 million a year alone on an inaccuracy of just 5%!)

To that effect, as my last post pointed out, if your inventory is not in order, you need to get it in order — fast — because a warehouse in shambles could be your undoing in a down economy. But how do you get your inventory in order? Supply and Demand Chain Executive, who ran the article by Rene Jones of Total Logistics Solutions, Inc. that highlighted the problem, comes to the rescue with an article by Sumit Chandra, Mirko Martich, Shalin Shah, and Kumar Venkataraman of A. T. Kearney who provide insight on getting to the root of the problems, and fixing them.

Inventory management is an enormously complex job these days. Some retailers have to track hundreds of thousands of stock keeping units (SKUs) from thousands of suppliers across hundreds or even thousands of stores and distribution centers. They must also differentiate the products based on consumer demand in local, regional, national and global markets while dealing with inefficient processes and inappropriate systems that only serve to complicate the process. And good inventory decisions must balance five key business drivers: consumer demand, lead time variability, pack mix, merchandising presentation requirements, and visibility.

However, many inventory managers don’t have a clear understanding of what drives inventory levels, don’t have metric-based tools to track the key drivers, and don’t have anyone providing them with this information. Add to this the fact that there is a margin of error for each driver you try to account for, and that most companies don’t have a good forecasting process, and you can easily start to wonder how today’s supply chains can even function! The slightest error in a forecast can be very detrimental, resulting in too much inventory, which comes with unnecessary storage costs and disposition losses, or too little, which results in lost sales. So what can you do?

  • Better Forecasting
    Use good software that can take into account different demand patterns and distribution methods for various markets, as well as the seasonal, geographic and competitive position of each store. And focus on the process, and not just the software or final result. A tightly integrated S&OP process will produce better data, and better forecasting intervals, which will in turn produce better forecasts.
  • Lead Time Variability Reduction
    De-list suppliers with erratic lead times and distributors with low reliability. Track performance data against key metrics, provide regular feedback on performance and introduce supplier recognition programs.
  • Pack Mix Improvements
    When possible, optimize the pack mix size from the supplier. When not (due to complexity or cost), “break-pack” the item at local distribution centers to insure that only the needed level of inventory is shipped to a store.
  • Merchandising Presentation Management
    It might be case that extravagant visual presentations get a potential customer’s attention, but it’s also the case that such presentations can lead to excess inventory. Pack and presentation can increase inventory over a base level by 15% to 25% for an average retailer! In addition, specials on seasonal items can cause dramatic one-time boosts that can disrupt the normal inventory flow. The employment of advanced inventory flow-path techniques to determine cost and service-level tradeoffs can lead to significant savings.
  • Track Inventory Accurately
    Make sure that both outbound flows and inbound flows are carefully monitored by state-of-the-practice inventory management systems. If your system is not tracking and managing returns, you really don’t know how much inventory you have where, and whether or not it is resalable or able to be refurbished – both of which lower your overall inventory costs and losses.

Finally, make sure you have across-the-board visibility into what is where in your supply chain, and where the demands are.