Monthly Archives: September 2008

Baseline’s Seven Sins of Offshore Outsourcing

Having posted on the Seven Deadly Sales Suppressors, the Seven Deadly Supply Chain Sins, and the Seven Deadly Supply Chain Wastes, it should be obvious that I’d pick up on Baseline’s 7 Sins of Offshore Outsourcing.

When outsourcing, organizations that focus on short-term cost reductions often rush through projects without adequate planning, due diligence or consideration of the long-term implications of the inevitable changes in business requirements or offshore market conditions. This not only causes them to overlook most of their savings opportunities, but often leads to project failure. However, an organization that knows what to look out for can avoid the mistakes that others have made in the past, mistakes that can be understood in the context of the seven deadly sins: pride, sloth, avarice, lust/extravagance, envy, gluttony and anger.

  • Pride
    Many organizations succumb to the sin of false pride and plunge headlong into an offshoring initiative without performing due diligence. They assume that they (already) have the internal capabilities necessary to plan and manage an offshore operation, when this is often not the case. They also seriously underestimate the management resources required to successfully set-up and run such an operation.
  • Sloth/Laziness
    You can’t just move an inefficient operation offshore and hope that lower salaries will result in cost savings. “Lift and Shift” doesn’t work, and, when the process is inefficient it will, in fact, often increase the personnel resources required to do the job, wiping out the cost savings the organization expected to achieve.
  • Avarice/Greed
    Many organizations will not be concerned enough about the ultimate fate of the business, or, even worse, possess disdain towards the offshore operation. This makes it difficult for the offshore operation to retain knowledgeable and productive staff, leading to quality problems and cost overruns as greater numbers of inexperienced resources need to be thrown at the problem.
  • Lust/Extravagence
    The desire to solve a problem by taking on more, cheaper personnel is extravagant and wasteful and has serious implications for service quality. It’s important to remember that many offshore operations have lower productivity and excessively high turnover, reducing cost savings. Don’t give in to the impulse to compensate for low productivity with more bodies: It’s a false economy. Before you offshore the process, make sure it is efficient. If necessary, re-engineer and improve the process first. Furthermore, even after your processes are off-shored, it’s important to continuously apply performance improvement initiatives.
  • Envy
    Don’t assume that offshoring automatically comes with big savings and be envious of your peers who are already doing it. Most of the claims you’ll find by the promotors of the strategy don’t take into account the lower productivity that comes with offshore personnel, higher communication costs with an offshore team, and the additional overhead required to govern an offshore process. Actual savings are often only half of what is claimed.
  • Gluttony
    Don’t offshore as much as possible as quickly as possible, like a glutton, with the ill-formed belief that this will maximize savings. Don’t overlook the average organization’s capacity to digest change, and even smaller capacity to digest offshore change — because organizations that offshore too much too quick often spend the majority of their time firefighting. The key to success is selective offshore outsourcing, following a careful analysis of what processes are the most likely to lead to savings if outsourced.
  • Anger/Wrath
    Don’t blame the outsourcer when the savings don’t materialize, especially if you committed one or more of the sins above. Blame-wise, at least half will always rest with you, and if you committed multiple sins, all the blame rests with you.

A Sourcing Advisory Checklist

Sometimes a sourcing advisory firm can save you untold millions, and sometimes, as in the recent cock-up exposed by Jason Busch over on Spend Matters, the engagement will lead to a total disaster. So how do you make sure you’re the superstar who brokered the agreement that saved your firms millions of dollars and not the fall-guy who takes the blame for a multi-million dollar cock-up? You manage the process from end-to-end, and you start by making sure you have the right firm as an advisory partner. What should you look for when searching for the partner who will help you succedd when others have failed? Although the specifics will depend upon your needs and the sourcing projects in hand, the following checklist, first put forth by Phillip Fersht, blogmaster of Horses for Sources, in this Global Services article is a great start!

  • Internal Knowledge Management
    The firm should be taking advantage of the latest technology to share their intellectual property internally in a manner that will allow any of their employees to take advantage of the knowledge available to benefit their customer. You should be getting more than just the experience of the reps on your account — you should be getting the experience of the entire firm.
  • Depth of Experience
    Harvard MBAs look good on paper, but you want a significant amount of deep operational work conducted at real customers in industry, not theoretical research projects conducted in the safe confines of the ivory tower. In addition, make sure at least one of the reps on your project has deep experience in the categories you will be sourcing.
  • Mix of Experience
    A breadth of experience is important, especially when market conditions change and new sourcing strategies need to be derived. In addition, make sure the firm has employees who have crossed the breadth of operational roles, including sales and customer service.
  • Ability to ‘Advise’
    The ability to ‘consult’ is good, but you need specific advice that is going to allow you to succeed beyond what you could do in-house or with the lowest-bid consulting firm.
  • True Independence Where YOUR Outcome is Concerned
    They must be focused on YOUR best interests, and not theirs’. Make sure their interests don’t lie in relationships that force them to use, or compensate them to use, particular tools, processes, or staffing agencies. Just because something works for the majority of their current clients, it does not mean it will work for you. It might, and if it does, that’s great, but if it doesn’t, they should have the freedom to put together the best solution for YOU.
  • A deep focus on IP, Benchmarking, and Research
    No one knows everything … and, more importantly, if they don’t benchmark, they won’t know how good they should be able to do.
  • Operational Business Focus and Advisory Experience Beyond Simple Negotiation
    The best advisor can offer services that guide you through the sourcing lifecycle and beyond. In addition, sometimes just having an independent party available can help you build consensus and support in complex and sensitive situations.
  • A Sensible, Proven, and Flexible Methodology
    If their method of negotiation methodology selection starts with “eenie, meeniee, minie, moe … “, simply put, you’ve chosen the wrong advisor.
  • Respected in the Market
    You want an advisor that oursourcers and suppliers respect … because if they don’t bid, you don’t save.
  • Multiple Customer References You Can Talk Too Directly
    The ultimate proof of their capability will be in their success with their other clients.

Out in Front: Jon Miller, Strategic Sourceror

As per my last post, Bob Ferrari was first out of the gate with his initial contribution to the Seven Grand Challenges to Spend and Supply Management. Hot on his tail-pipe were Jon Miller of Gemba Panta Rei with his Seven Grand Challenges and the Strategic Sourceror of the Strategic Sourceror with his introductory post on the topic.

The Strategic Sourceror, who’s keeping his final list a secret for now, started off his post by noting that the shift has already left the harbor is the perfect metaphor for the globalization of a peak functioning supply chain. International supplier integration has gone from innovation to a competitive necessity in what seems like the blink of an eye in a global marketplace where overseas shipment costs are rising by as much as 170% and some carriers are slowing speed by 20% to conserve fuel. But the effect of petro-economics is only one component of the international sourcing equation. Other challenges are rising fast and furious, and, as noted by Strategic Sourceror, these include:

  • Currency
    Certain currencies, like the US Dollar, have been up-and-down faster than a yo-yo in the hands of a master.
  • Quality
    How many more PR disasters and deaths have to happen before people wake up as to how important this issue is?
  • Redress
    All you have to do is leave the state and the laws that your supplier are subject to might be different than the laws you are subject to. This only magnifies as you leave the country – and continent.
  • Trade Barriers
    It’s not even as simple as the import and export documentary requirements anymore … you have burgeoning denied party lists to deal with now.
  • Political Instability
    Political instability exists in numerous Asian and Euro-zone countries – not just in the Middle East and Venezuela.

Given these challenges, I’m anxious to see what the Strategic Sourceror’s seven grand challenges shape up to be!

Jon Miller decided to jump right in with his seven grand challenges, which, and this should come as no surprise given Gemba Panta Rei’s focus, had a distinctively lean orientation, with a smattering of green. Getting right to the point, Jon’s seven challenges were:

  • Putting Safety First
    It’s not just about price.
  • Getting Serious About Zeppelins
    Are they the 200 mph method of travel and transport of the future?
  • Waiting For It
    Do we really need new laptops and cell phones in 2-3 days from the day we make the decision?
  • Eating Fruits in Season
    Eat local when you can.
  • Paying to Waste
    Overpacking is costly as well as wasteful. Why do we do it?
  • Spacing Out
    Do we really need warehouses in space?
  • Beaming It Over
    The internet changes anything.

It’s quite an interesting list, and I highly recommend that you check out Jon’s post for the details, and rationale, behind his decisions.

Dimensions of Market Intelligence

Market Intelligence … is there any term commonly used in business more elusive than this? Generically defined by Wikipedia as the information relevant to a company’s markets, gathered and analyzed specifically for the purpose of accurate and confident decision-making in determining market opportunity, market penetration strategy, and market development metrics, it is often used as a catch-all phrase these days for conducting various types of market research, justifying various half-cocked go-to-market strategies, and ramrodding “best-practices” down the throats of an unsuspecting workforce.

Generating about 2.75M hits from a Google search, we see that it is supposed to lead to “insight”, “strategy”, “competitive domination”, “better business decisions”, and a “trip to Britain“. Some firms (predominantly dominated by stats wonks) seem to define it as metric-driven benchmarking while others (predominantly dominated by industrially-focussed behavioral psychologists) define it as customer-driven case-studies. Some benchmark using production data while others use sales data, some benchmark using forecast data while others follow the whim of the stock market. Which leads me to conclude that no one really has a good handle on what market intelligence is, yet alone how to go about it.

Thus, even though I defined it as the information you need to make the right buy from the right supplier at the right time, which I still maintain to be the best definition you’re going to find anywhere, and even though I gave you some great questions to ask when seeking out a firm to undertake market intelligence research on your behalf (in my X-emplification series), I think we need to step back and try to figure out what the informational components of market intelligence are, so that you will, upon completion of your project, be in position to make the right buy from the right supplier at the right time.

Although it’s hard to come up with a complete list, since the requirements seem to change by the day, the market, and the whim of the economists trying to steer the market (in utter futility, I may add), I really liked Robert Hanfield’s starting checklist, which, amaziningly enough, I found on the ISM Site. Robert Handfield is the Bank of America Distinguished University Professor of Supply Chain Management at NCSU and Director of the Supply Chain Resource Cooperative, which, if you undertake your own “market research”, you will discover to be one of the few academic-driven sites that actually has meaningful materials in its resource center from an industrial perspective.

Rob’s list is the following:

  • Forecasts and Price History
    You can’t negotiate a good deal without good insight into the size of the buy, the price history, and the relationship of the price to market conditions. For insight into good forecasting methodology, check out the posts in the Forecasting category.
  • Supply Base Market Share
    How much of the market does your supply base command. If they are power players, they are in a position to negotiate good prices on their raw materials and their costs may be less than market average. If they are minor players, their costs are probably higher and to get value from the buy you’ll likely have to focus on value-add.
  • Specific Supplier Analyses
    Focus on the suppliers you will be inviting to the bid and suppliers who dominate the market. What are they producing, where are their inputs coming from, where are they going (market-wise), and how are they doing financially?
  • Capacity
    Do they have excess capacity or are they almost at their capacity? Can they grow with you, or will you have to look elsewhere?
  • Buyers
    Who else is buying in your industry, and, more importantly, who’s buying outside of your industry? The appearance of a new market or player can often drain excess capacity rapidly, which could quickly shift the balance of power from the buyer to the supplier.
  • M&A Activity
    What’s happening, why, and will it affect your supply base?
  • Value Chain Analysis
    What are the key cost drivers in the lower tiers of the supply chain, and, just as important, what are the value adds that you can provide to increase the price you can ultimately charge?
  • Cost-Drivers and Should-Cost Driver Identification
    What’s driving your cost – and what should your cost be. Before you source a part, know if the starting point of the negotiation should be $5 or $1. For example, in a recent project for a large customer, Apriori determined that if a different fabrication process were used, the cost for a very simple part could be reduced 80%!
  • Emerging Technologies
    Are any new technologies on the horizon which could reshape the market and your potential place in it?
  • Porter’s Five Forces Analysis
    It’s important to understand the power balance, or inbalance, that exists between your company and its competitors, and this is what Porter’s Five Forces, done properly, will capture. (For my high-level analysis of what the forces were going to mean, in general, for Supply Chains in 2008, see this post.
  • Ultra-In-Depth Risk Analysis
    What could stop you dead in your tracks? If you don’t know, you haven’t even begun a thorough market intelligence research project. Identifying risks, and then the precautions you can take to prevent them, or at least minimize their impact, is a fundamental key to success.
  • Currency Projections
    What happens if the US Dollar sinks again? Or the Yen goes on the rise? Don’t know? Then you shouldn’t be negotiating that contract yet!
  • Government, Regulatory, & Socioeconomic forecasts
    Is the country you are thinking of doing business in run by a Hugh Chavez in training? If so, better think twice before investing hundreds of millions into setting up a new operation there (unless, of course, you like having your assets seized by the state).

First out of the Gate: Bob Ferrari

Everytime I launch a new cross-blog series, I always wonder who will be first out of the starting gate, trying to be the first to capture the readers’ minds and hearts. This time it was Bob Ferrari of Supply Chain Matters and The Ferrari Group who posted his Seven Grand Challenges for Supply Chain Management yesterday.

In his first post, he lays out his seven challenges and tackles the first three head on, promising us two more posts on the last two challenges before the week is up. Bob’s Seven Grand Challenges are:

  1. Ubiquity of Portable Computing Leading to Real Time Sensory Networks
  2. True Supply Chain Business Intelligence and Decision Making Tools
  3. Managing the Explosion of Data and Information Needs in Global Based Value Chains
  4. Managing Supply Chain Risk Management on a Global Basis
  5. Who Assumes Ownership for the Extended Supply Chain?
  6. Articulating the Value and Consequences of Supply Chain Directly to the C-Suite
  7. A Global Shortage of Talent and Skills in Supply Chain Management

I really like #2, because it meshes with my seventh challenge of Opportunity Analysis. Today’s supply chains are filled with untapped opportunities, and you’re going to need good business intelligence and decision making tools to find them. And we’re definitely on the same page with #4! Risk is everywhere, and supply chain disruptions are still rising rapidly, due, primarily, to poorly managed, if not unmanaged, risk.

I’m not convinced of #1, #3, and #5 though.

1. I can certainly see the value of Real-Time Sensory Networks and systems self-updating as soon as product is detected in area B when it was in area A, but I don’t think this is going to add that much efficiency, especially if we had integrated physical, financial, and information-based supply chains where all it took to accept a complete shipment was logging into the shared system and checking “received”. Plus, I don’t want to see us become over-dependent on technology. What happens on that fateful day, which always happens eventually, when it fails and no one knows how to do it manually?

3. I believe that managing the data explosion is an IT challenge, because it goes well beyond just supply chain and supply chain systems. Data explosion is everywhere, and it’s IT’s job to build the databases, marts, and warehouses we need to manage it. It’s Supply Chain’s job to select from the best systems out there. Bob makes some great points in his post, but I’m not sold.

5. I think this is a great question to ask, but it’s not really a challenge, because, in my view, it’s trivial to answer. The CEO. Today, your company is your supply chain. Sure you have a CSCO who’s job is to manage the chain on a daily basis, but the buck should ultimately stop with the CEO. Nonetheless, I’m waiting to see what Bob has to say on this one …

And #’s 6 and 7 certainly have me thinking!

If we go back to the Top Three challenge, David Bush of e-Sourcing Forum and Iasta proclaimed that the top-three challenges of supply chain today were Adoption, Adoption, Adoption. This is a cry I’m hearing from e-Sourcing and e-Procurement companies across the board. And even though this is the perfect economy for those providers, because e-Sourcing and e-Procurement software is about the only way to reign in your spending during the deflationary/slowdown/recession economy we’ve been in for a while now, the cry only seems to be getting louder. Maybe it is a longer term challenge than I give it credit for. I’m anxious to see what Bob offers up on this one!

I’m definitely on board with #7! If you check out the talent category here on SI, you’ll see that I’ve essentially been whining about this problem since day one! It’s a huge challenge right now, and it’s going to be for at least the next five years. However, history tells us that talent shortages tend to resolve themselves over a ten to fifteen year window. Once demand gets high enough, and stays high enough for a few years, students, anxious to have a job when they graduate college / university, see that as a good career choice and take educational paths that will prepare them for that careeer. Young professionals ready for a career change go “back to school” (through night courses, part time programs, private programs, etc.), prepare themselves for that industry, and move on in. Simultaneously, the industry, desperately short on talent and needing to get through the day, re-engineers its processes, automates as many tactical functions as it can, and learns to do more with less. After ten to fifteen years, the talent shortage drops to a manageable level. And I’m looking at a twenty to twenty-five year window with these challenges. It’s definitely a major challenge … but is it important enough to knock, say, GHG Tracking and Reduction off of my list? I don’t know. But I’m definitely anxious to see what Bob has to say on this one too!