Monthly Archives: July 2008

Is Your Supply Chain “Ugly”?

A provocatively titled article in Supply & Demand Chain Executive that stated that “No One Wants to Hear They Have an ‘Ugly Baby'” recently caught my attention. Maybe it’s because, as the article points out, our economy is in trouble, your supply chain is crucial to your organization’s success or imminent failure, and, as the article deftly noted, your warehouse is about to make or break you! Or maybe it’s just because I liked the title. Either way, it was a good article.

It is a down-cycle, and that means, for those of you who aren’t innovating, and instead making the 10 Worst Innovation Mistakes that you can make during a recession, and who are unable to provide the customer what they want, when they want it, and at a price they can afford to pay, you may soon find yourselves out of business.

This means that if your supply chain is an “ugly baby”, that if your distribution is slow, that if your products are unpopular due to quality issues, and, most importantly, that if your warehouse is in shambles, you need to face facts, admit it, and do something about it.

How do you know if your distribution is slow? If it takes your competitor an average of 18 days to get product from Shanghai to their Chicago warehouse, and it takes you 27 days, your distribution is slow. If your closest competitor’s product sells out 3 days after it hits the shelves, and half of your product is still there 30 days later, your product is unpopular. And if received products take 2 days to be put away, if returns sit unattended for weeks, and if your personnel spend more time checking stock than they do processing it, your warehouse is in shambles.

When you consider that inventory can be as much as 20% of top-line sales, that many companies pay 20% to 35% of stock value to store inventory, and that certain types of products may decrease in value as much as 3% a month, it becomes easy to see that a $100 million company could be losing $3 million to $6 million a year with poor warehouse management that keeps too much stock on hand for too long by the time storage, depreciation, loss, and final disposition of remaining, unsalable, inventory is taken into account. (Heck, 5% inaccuracy on your inventory alone will cost you $1 million a year!)

Thus, if your warehouse is operating at anything less than 99% of optimal efficiency, you should do something about it sooner, rather than later, as the investments you make will quickly pay for themselves many times over in reduced inventory related costs. Not to mention the improvements it will generate in employee morale and customer satisfaction. As the author astutely points out, a warehouse laborer making $10 an hour can now spend as much as $100 a week for gas to travel to a job they likely hate. That’s one quarter of their take home income! If they’re not already looking for a job closer to home, unless your job is the best job in the world, they’re going to be very soon. In addition, every time a shipment is late, mixed up, or lost, your customers get a little more irate. They’ll only put up with so much, given all the other stresses they have to deal with in today’s economy, before they go elsewhere.

So if your supply chain’s ugly, admit it, and give it a makeover!

Getting Started with Supplier Relationship Management

We all know supplier management is important, especially the relationship aspect. We all know that if we don’t manage the relationship, then it could be hard to manage the performance and even harder to manage the risk. But what we don’t often know is where to start.

To that end, an article recently appeared on SIG‘s site that complemented an earlier series of posts on Robert Rudzki’s SCRM “Transformation Leadership” blog which, when taken together, give you a pretty good start.

In “Supplier Relationship Management – How to Get Started with the Program”, Pamela Schott noted that communicating and dealing with a large and diverse supplier community on a daily basis can be a challenge for any organization, and that, when implementing an SRM program, it is necessary to establish and gain executive buy-in on clear, concise objectives that align with the organization’s primary business goals.

She also noted that suppliers should be segmented according to risk and business impact, with the implication that high-risk and high business impact suppliers need to be carefully managed. A segmentation allows you to look at your supply base more pro-actively and identify opportunities to realign the management behaviors for suppliers based on the outcome.

In addition, you should scorecard your suppliers on a regular basis on key internal metrics, such as cost, delivery & support, administration & ease of doing business, quality & partnership, and technology. This will provide you with an understanding of high performing versus low performing suppliers and help you identify where additional effort needs to be extended.

In addition to managing your suppliers, you should also recognize them. As Robert Rudzki points out in “The Role of Supplier Recognition”, recognizing a supplier that does well often yields:

  • further performance improvements
  • improvements from suppliers who want to be recognized

… and this results in increased ROI across the board.

How should you recognize your suppliers? Robert Rudzki recommends an annual event where your “best of the best” suppliers are publicly acknowledged. Just be sure to note that, to pull this event off right, it will require leadership, effective program management, commitment from top management, a budget, and a long lead time. But considering the ROI potential, it could be worth it.

Strategic Service Knowledge Management a la Servigistics

Knowledge Management is the process of identifying, creating, representing, and distributing knowledge to those who need it. It’s a broad subject with definitions that focus on the technology, organizational, and sometimes even ecological aspects. As noted by Wikipedia, schools of thought include those that focus on intellectual capital, social planning, information theory, value networks, and even complexity while concepts tend to revolve around the dimensions of knowledge, the different stages of a knowledge-related activity where knowledge is required, and both structured and unstructured, planned and ad-hoc knowledge access.

The reality is that any definition of knowledge management will be contingent on the knowledge you need to manage and the definition that is right for you will be the one that not only addresses your issues but allows you to define and measure value. With respect to strategic service management, a knowledge management solution is one that allows your service personnel to access the knowledge they need, when they need it, and to contribute new knowledge quickly and easily to the knowledge base. It should also allow your customers to access the knowledge that is appropriate to them when they need it, in a format that makes sense to them. And it should be very easy to manage and maintain.

Specifically, it should make problems easy to diagnose and identify by a technician so that they can quickly get to a solution. To this end, it should support free search for advanced users, guided search for novice users, and direct solution access for expert users who know the system well. It should also support multimedia so that users can identify problems visually, and, if appropriate, audibly as well. The indexed solutions should be structured to not only allow information display at various levels of detail, but to allow a user to quickly jump to the portion of the solution they need.

Servigistics’ knowledge management solution allows for free-text search, guided search, and direct access by index values. It supports images, audio, and video that can be included in both problem descriptions and solutions and enables information to be be coded for display at different levels of detail depending on the user.

If the user has the right permissions, the user can update the knowledge store on the spot – which allows expert technicians to capture their knowledge as soon as they identify a new problem and a new solution. It also includes your standard “rate the usefulness of this solution” feature that not only allows users to give their feedback, but affects the order in which solutions are displayed, or queries asked, in the future as the system learns with each access. And it incorporates natural language processing which allows a solution to be found even if the search terms don’t appear in the solution as it is capable of identifying similar terms and concepts.

Now, if you’re an expert in KM, or someone who studied it ten (10) years ago, you’ll realize that there are no revolutionary features incorporated in Servigistics’ knowledge management product, as all of these features were being worked on ten (10) years ago, but you’ll also know that generic KM solutions not customized for a particular problem domain tend not to be very useful. The reality is that case-based reasoning, dynamic questioning, natural language search, and similar techniques aren’t perfect, and their accuracy degrades (rapidly) as the breadth of the solution decreases. Furthermore, people in different professions tend to work in different ways (as they are trained in different ways) and no generic solution is going to please everyone. This means that the right solution isn’t the most advanced solution, but a solution tailored to your problem domain that incorporates the most appropriate technologies.

To this end, I believe Servigistics’ offering, which is one of the first Knowledge Management solutions for the Strategic Service Management domain, is a good solution. It meets the basic requirements. It’s easy to configure and use. It’s accessible by support representatives, technicians, and customers and it can be configured to show each user the information at the right level of detail in a view tailored to them. And it integrates with their command center and the rest of their Strategic Service Management Suite, allowing each user to access it quickly and easily when they need to. It’s definitely the right approach.

The Tax Efficient Supply Chain

Supply and Demand Chain Executive recently ran a pair of articles on The Tax Efficient Supply Chian Parts 1 and 2) by Giles Sutton of Grant Thornton LLP that pointed out that most companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts.

When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact the income base), it has far reaching implications. Furthermore, as the author points out, tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that the author points out are the following:

  • Procurement
    Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.

    • in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
    • in many states, electronically downloaded software is not subject to sales tax
    • disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
    • appropriate planning can often reduce customs and duties
  • Brand Management
    Brand management also has tax implications.

    • the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
    • the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
    • the situs of where IP is held impacts the tax costs of dispositions
  • Merchandising and Marketing
    Critical in retail operations, they carry their own tax implications

    • site selection determines property tax
    • capitalization of store design costs have tax implications
  • Finance
    Finance structuring can have significant tax implications.

    • the capital structure of a legal entity can impact its franchise tax profile
    • internal leverage can reduce state income taxes in some jurisdictions
  • Customer Relationship Management
    There are tax implications in building an infrastructure to compile and store customer information

    • there are state income tax implications wherever such data is stored and maintained
    • an ability to license and protect IP impacts the jurisdiction of income taxation
    • capitalization of CRM software has property tax implications
  • Distribution of Asset Management
    Distribution management is more than just minimizing logistics costs.

    • an incorrect valuation of inventory can lead to higher taxes
    • some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
    • distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
  • Retail
    • the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
    • state income tax savings can often be found on international distribution assets
    • inefficiently designed gift-card programs can cause unnecessary escheatment of funds

Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. (I highly recommend you read both of the articles. They are highly informative on the issue.) Especially when you consider the numerous benefits of tax-efficient procurement, which include:

  • prevention of incorrect or duplicative taxation
  • matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
  • structuring the transaction to fit within a statutory or regulatory exemption
  • unbundling taxable items from non-taxable items

In addition, tax-efficient procurement will:

  • improve the sales tax audit trail and reduce the time required to respond to audits
  • allow for more efficient refund claims when errors have been made
  • provide greater certainty regarding tax requirements

So what can you do to create a competitive advantage? The author recommends that you start with inter-departmental coordination in a holistic approach. Tax planning is most effective when your tax planners know in advance what each of the operating functions are planning to do, and what options they are considering.

NineSigma’s Open Innovation Mission

A few weeks ago, I wrote about The Value of Non-Confidential Exchange in the Open Innovation process and briefly introduced you to NineSigma, a consultancy built on an Open Innovation process. I recently had a chance to talk with Frank Evan at NineSigma about their company and their processes, and I’m going to summarize some of the key points in this post.

The primary offering of NineSigma, who are focussed on accelerating the innovation cycle, is their Rapid OIsm program that they designed to help clients design and launch their own open innovation initiatives.

The Open Innovation (OI) process begins with the NineSigma team sitting down with the client in a two-way conversation designed to help the client understand what OI is and how they might have to change the way they do business to take full advantage of what OI has to offer. Then NineSigma reviews the client’s goals, processes, and projects; builds a RACI (responsible, accountable, consulted, and informed) diagram to make sure that all key parties are included in the process; identifies areas where processes need to be altered or improved to take advantage of OI; and outlines the changes that need to be made for the company to take full advantage of OI. The next step is to sit down with cross-functional teams to help the client implement the appropriate OI-friendly process changes.

Once the client is ready to take the first step down the open innovation path, NineSigma will work with the client to generate the right proposals and disseminate those proposals through their network (which is 1.7 Million strong and growing). They’ll also review all proposals that come back, to make sure they are appropriate and well-formed, and assist the customer in identifying those proposals that appear to be the most suitable. Once one or two proposals are accepted, they will help the client engage with the solution provider(s) and make sure the entire process goes smoothly.

As partly discussed in The Value of Non-Confidential Exchange, there are numerous advantages to both the buyer and the supplier in the open innovation process when a third party is used as an intermediary. The buyer gets to explore the market without exposing their identity, which is important if they are a big multi-national in an ultra-competitive industry, as this could tip of their competition about their future plans. Furthermore, NineSigma, who requires suppliers to sign off that they are not releasing confidential information in the absence of a formal agreement, insures that all proposals submitted are appropriately formed.

In addition, at NineSigma, all of the primary facilitators are PhD scientists and engineers with significant industry experience. Compare this to your average big consultancy who is just as likely to assign you a fresh MBA with no real world experience as it is to give you a senior partner. Furthermore, commitments are on a project-by-project basis and the client retains the right to all information generated during the process – which has worked for big name clients including Kellogg’s, P&G, and Hershey in sectors that include CPG, Food, Automotive, High Tech, Chemical, and Petroleum. That might be why NineSigma has been growing rapidly for the past three years, opening their first international office in Japan in 2006 and their second international office in Belgium this year.