Monthly Archives: July 2008

Packaging – The Total Solution

A recent Spend Matters perspective asked a very important question: Have You Got the Total Package? This is important not only because packaging costs money and adds to total product costs, but also costs money by adding to transportation costs – twice, and, even more importantly, can cost sales by limiting how many units of a popular product you can have on the shelf at any one time, especially if poorly designed.

More importantly, as the perspective pointed out, you can save significantly if you attack the packaging category strategically, even when prices are rising across the board. Up to 20% savings are possible through better sourcing and requirements definition, and up to 50% are possible with re-design. The key, as with any other strategic category, is to understand what you’re buying, with whom, in what volume, and what you really need. Not only are there spend leverage opportunities, but there are often significant substitution capabilities simply by changing the specifications from “‘B Flute’ Cardboard box, 12″ by 6″ by 8″, Form Factor 2” to “Box: minimum 11″ by 5″ by 7″; maximum 13″ by 8″ by 12″; minimum weight capacity 15 lbs; maximum weight capacity 25 lbs;” … because this allows the supplier to offer you the product that is the most effective for them to make if multiple boxes will do equally well. No redesign necessary.

It also allows you to bypass the “crawl” phase of the “crawl – walk – run” maturation process for sourcing organizations presented in the perspective, which is important as this will significantly increase your chances of achieving big savings quickly, without requiring any significant involvement from engineering. All you are asking for is a specification of the requirements in a product neutral manner, which engineering would have defined before they selected the current standard packaging.

This allows you to get to the “run” phase faster, which is where significant savings opportunities are to be found, especially if you’re willing to go beyond simple material substitution and engage in a full packaging design process that will minimize package size, minimize raw material requirements and associated costs, maximize the number of units that can fit onto a pallet, and minimize the shipping requirements for the packaging itself. For example, just like a box generally allows for tighter packing than an odd shaped container, a tetrahedron often allows for denser packing than a cube while reducing the amount of packaging material required to achieve the same volume. Thus, just like tetrahedron containers make sense for certain liquids, they might also make sense for odd-shaped products (like pyramid-shaped ornaments) that would leave too much free space in a box (and increase the filling material requirement as well as waste).

And the sooner you’re running off to do package design optimization, which will could also help you get greener faster, the sooner you’re saving money on categories that would otherwise have price increases through the roof. So, Get Packing and save money!

Innovate – It’s Death or Glory

A few months ago, Industry Week ran a great article by Blake Glenn of ?What If! that noted that US manufacturers must make a fundamental shift in the way that innovation is perceived and delivered if they are to regain the competitive edge that they need to keep from falling behind. Furthermore, it also noted that while innovation is seen as important in most organizations, the components to drive innovation are often lacking, in need of refinement, or misunderstood altogether. I’d have to agree. There’s not enough innovation out there today. We need more!

The article also listed some of the fundamental and damaging misconceptions that are all too common, and that need to be corrected. Beliefs that “innovation is about process”, “innovation requires significant investments of time and money”, and “innovation lies solely in the hands of R&D” are incorrect and will halt innovation before it has a chance to begin. The fact of the matter is that “innovation is about inspiration and perspiration”, “innovation requires significant investment in the willingness to innovate”, and “innovation lies in everyone’s hands” and that if you don’t accept this, you don’t have much of a chance of becoming an innovative leader. (And considering we’re in a recession, you definitely don’t want to make any innovation mistakes.)

And, most of all, as the article points out, it’s a deeply complex multivariate phenomenon and at its heart lies a single subject: people. People who must think differently, who must be encouraged, who must be empowered, and who must be rewarded for their ideas. They must be encouraged to change and take risks. And to constantly look for better ways to do business as a whole – be it accounting procedure improvement, logistics streamlining, or new product introduction.

Furthermore, new product innovation does not stop with the product – it goes beyond to include everything that has to do with the product and includes packaging, production processes, and distribution. It also covers the entire product life-cycle. It involves designing for efficient manufacturing, designing for minimal packaging requirements, and designing for disassembly and recycling.

It’s a behavioral shift … and possibly the only one that could save your company if times get tough. Winners persevere and evolve. Losers … well … when was the last time you saw a dodo?

The Physical and Financial Supply Chain Integration Struggle

If the two supply chains could be truly interwoven, there is the potential to shorten the procure-to-pay cycle, reduce the costs of goods sold, and free working capital. And this is just the beginning, as noted in a recent Global Logistics & Supply Chain Strategies article in Supply Chain Brain.

However, this is easier said than done because organizational barriers often prevent these two disciplines from working together harmoniously. And even if the walls come down, there’s still the issue of integrating the disparate and unconnected systems that run procurement and finance. As a result, billions of dollars are trapped in corporate supply chains, and opportunities to reduce costs through better financial management are unavailable.

As Jonathan Heuser, VP of Supply Chain at JP Morgan Chase astutely notes, while the purchasing discussion typically is around getting the lowest unit cost for goods and the supply chain discussion is around meeting delivery dates, these discussions don’t take into account the ramifications that associated payment terms and methods have on a company’s working capital. Similarly, financial managers don’t have the visibility they need into the physical supply chain, which only serves to magnify the inefficiencies.

Furthermore, as Kurt Cavano, CEO of TradeCard, notes, product cost savings can be offset by operational expenses associated with managing global transactions, financial risk and the requirement of additional, more expensive capital. In addition, late payments come with penalties when the company could have taken advantage of discount opportunities that many companies will offer for quick payment.

If the two systems are integrated, which makes sense since they both need to work off of the same fundamental information, procurement professionals could see the true costs of buying from a supplier in China, which would include all import and export tariffs, capitalization costs, and associated risks. In addition, finance professionals would see when capital was needed, where there are savings opportunities in the forms of discounts or favorable exchange rates, and when there is free capital to invest in short term opportunities for profit.

In addition, since there are a large number of redundancies between the information needed for purchase orders and invoices, the information needed for global trade documents, and the information needed for financing and payment, integrated systems can reduce the administrative overhead and associated costs. In addition, it would be much easier to apply real-time risk management since each group would understand where a project was in the process.

However, that’s not likely happen as the majority of buyers and suppliers still struggle with Supply Chain Finance (SCF) and the significant opportunities that it offers if done correctly. Most companies that are currently pursuing SCF are doing so not because they have a good grasp of what it can do for them, but because they are under substantial pressure to lower the costs of goods sold as raw material and energy prices continue to skyrocket and they are grasping at anything with the potential to save them money.

However, before companies can truly save money with SCF, they have to be ready for it. For a company to be ready for SCF, they first have to address automation, total cost modeling, and working capital management. If a company is not comfortable with e-payment, automated trade document creation and e-document exchange; is unable to use modern modeling and strategic sourcing decision optimization to make true total cost of ownership decisions; and doesn’t understand the different options it has available for capitalization, investment, and supplier payments, it will be unable to fully implement and take advantage of supply chain finance and all that it has to offer. So brush up on your e-Procurement, dust off your global trade, and master your strategic sourcing decision optimization and you will be ready to take the supply chain finance leap.

Ethanol != Gasoline

I have to applaud Industry Week for an article they ran a couple of months back on how Raising Ethanol Levels Could Hurt Consumers, Manufacturers — If Not Done Right and shedding even more light onto why ethanol, and corn-based ethanol in particular, is not the answer. Not only are we on the verge of a Global Food Crisis, with food supplies the lowest they’ve been in at least 50, if not 100, years, but, as the article so astutely points out, raising ethanol levels in blended gasoline can be harmful to many devices, as most devices in North America were designed to run on a 10% ethanol mix, if not a 0% ethanol mix.

Of course, this hasn’t stopped at least one state (namely, Minnesota) from ignoring this fact and passing ridiculous legislation that all gasoline sold in the state be E20 (the short name for 20% by volume ethanol blended gasoline). Now, it’s true that they have a study that concluded that E20 will not harm current automotive fuel systems, which I’m not sure I believe considering many vehicles on the road were designed for E0, and that E20 apparently provides similar power and performance to E10 (and if your factor of error is large enough, I might buy that), but they’re overlooking one very important fact – cars aren’t the only piece of technology that runs on gasoline! Americans love their ride-on lawnmowers and their gasoline powered chain-saws. Many people have back-up power generators that run on gasoline … and many hobby pilots have small planes that run on gasoline. Etc. Etc. Etc.

Did the study test every single product out there that runs on gasoline? All 400 Million of them? Not even close! North America is not Brazil. Flex-Flux Vehicles (FFVs) and other Flex-Flux Engine (FFEs) technologies might be common there, where a 20% blend is perfectly fine (and doubly fine when you can make highly-efficient ethanol from abundant and easily grown sugarcane and not inefficient to produce corn-based ethanol where the corn-for-ethanol production reduces food supplies when there are still a number of countries in Africa where people are still starving on a daily basis), but they are not common, if you can even get your hands on them at all (legally), in North America.

Furthermore, small engines react differently to ethanol mixes than large engines, and often do so in ways that are dangerous. As the article deftly points out boat engines may seize up and gas may leak, the RPM increases on chainsaws as the clutch and chain are constantly engaged, and rubber and other components in small engine products grow corroded and all of this can lead to engine and product failure, and potentially, safety hazards.

So next time someone starts preaching about how ethanol is our savior, point them to this article and AllSAFE. It’s not the answer.

What is the answer? In the short term, it’s actually a really simple one. Stop buying energy from power plants that burn oil and petroleum products. Remember – you’re purchasers and you have the power! Over 20% of energy production in the USA is from oil and petroleum burning plants. If we replaced these plants with solar, wind, and hydro plants, that would increase the oil available for transportation needs by 150%. In the short term, we’d be swimming in it! (The Transportation sector uses roughly 40% of the 7665+ million barrels of oil consumed by the US each year.)

Utilitarian Utah

I expected that eventually a thought-leading state or province would come to their senses and proclaim 4-day work weeks, but I wasn’t expecting Utah to be the first state to go to a 4-day work-week to save energy in the public sector. I just wish they had gone one step further and mandated 4-day work-weeks for all regular, full-time employees in the public and private sectors. That would have significantly reduced energy costs while making everyone a lot happier in the long one, once they adjusted.

Starting in August, about 17,000 of the 24,000 executive branch employees will shift to a four-day work week. Exempt will be police officers, prison guards, employees of the court, and employees of Utah’s public Universities. It’s a great start, since turning off the lights and AC in 1,000 of 3,000 government buildings will save $3M a year, plus up to 20% savings on gasoline expenses that are incurred by official vehicles. Moreover, employees of the Department of Environmental Quality alone will save more than $300,000 on commuter costs.

But I would have went two steps further. First of all, there’s no reason that University employees need to be exempt. Monday/Wednesday makes just as much sense as Tuesday/Thursday, and what student doesn’t want fewer classes? (Sure the classes are 25 minutes longer, but speaking as a former professor, having fewer classes sells!) Secondly, I would have made it mandatory across the board for regular employees of the public and private sector. Sure, many private sector business need to operate 7 days a week, if not 24/7, but why can’t regular full-time employees, who typically have office jobs, work four days instead of five? I know you need to keep the restaurant, drug store, and movie theatre open late, but your back office staff can still work four days a week, and I bet many of your employees, who are probably working odd shifts now, would prefer fewer, longer shifts and more consecutive days off. Your data center might need to be staffed 24/7, but do your accountants, procurement professionals, and janitorial staff really need to work five days a week? Think of the energy savings (and dollar savings) if the vast majority of the vast majority of buildings could be “powered down” for an extra day a week during the hottest (or coldest) hours of the day (when the most energy is expended)? Huge!

Plus, if North America went to a four-day workweek, the problems that are going to arise with only part of a state or country going to a four-day work week would be averted. If only part of the state, as in Utah’s case, goes to 4-day work weeks, then people who use child-care services are going to run into problems since most day-cares are set-up for people who work 8-hour days, and will only take children 10 hours a day, giving parents who work 8-hour days at most one hour to drop off and get to work and one hour to pick up. But if every one went to a 4-day work week, the day-cares would go to a 4-day work-week too, and then there’d be no issue with having to care for some children up to 10 hours a day, and some children up to 12 hours a day, which many daycares will not have the staff to do since more staff would be required for the same number of children.

So if you really want to help your company save money when costs are rising across the board, use your total cost of ownership skills to do a total cost of operations if your business were to switch to a 4-day workweek and sell the concept to upper management. Then, claim the savings generated as a Procurement initiative at bonus time. (And don’t forget to count the commuter savings generated for your employees. This reduces their cost of living, which reduces the size of the raise the company has to give them to actually give them a raise during a time of inflation. Effectively implemented 4-day work-weeks are savings across the board. Go for it!)