Monthly Archives: July 2009

High Tech = High Value = High Performance

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A recent article in i2′s Supply Chain Leader by Kevin O’Marah of AMR on how [do] you design a supply chain organization to achieve maximum value did a great job recounting dozens of statistics that we already know about how great supply chains make great companies, but unlike many of the AMR write-ups, it included one key point that often gets overlooked.

Ownership of technology solutions really does empower the entire supply chain organization, taking it to the next level of performance.

While only 41% of overall participants saw technology enablement as a supply chain organization responsibility, 56% of the AMR Research Top 25 saw the importance of technological responsibility in the supply chain organization. Considering that this is a select group that, in 2007, delivered a total return of 17.89% compared to the Dow Jones Industrial Average of 6.43% and the Standford & Poor’s 500 Average of 3.53%, I’m glad to see that these leaders are stepping up and acknowledging the value of good supply chain technology.

What other technology can identify millions of dollars of savings? Streamline payment processing costs by 90% AND insure you are paying against contracted rates? Enable visibility across your organization? None. In your average organization, no other information technology can deliver returns that come close to the returns supply chain information technology can deliver. So if you don’t have an end-to-end supply chain information technology solution, go out and get one!

What is The New Supply Chain Normal?

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In A New Supply Chain Normal?, Dan Gilmore of the Supply Chain Digest asked if there will be a new supply chain normal coming out out of the recession as many of the financial experts are expecting a new financial normal. His answer was that there will be a new normal for quite a while because important changes in the consumer consumption, business, and government will inevitably drive new requirements and responses from the supply chain.

In an effort to identify what this new normal would be, he asked a number of leading experts to weigh in with their take. Some of the more important points were as follows:

  • A greater focus on network efficiency as fuel prices rise permanently.
    Dr. Tom Mentzer, University of Tennessee
  • There is no new norm because the pace of supply chain change is too rapid. Supply chain success will only be achieved if the supply chain has enough flexibility and modularity.
    Dr. Jim Tompkins, Tompkins Associates
  • Permanently increased volatility. Constant currency fluctuations, cautious customers, and rapid swings in the price and availability of key commodities are just a few areas where we may never see stability again.
    Bill Read, Accenture Supply Chain Practice
  • The acceleration of risk mitigation. Optimization, simulation, and plan auditability will be critical.
    Richard J. Sherman, Gold & Domas Research

And they all had a common thread. Constant, sometimes rapid, change. This means that the new normal is really the old normal, just sped up. Instead of worrying about fuel price increases, currency fluctuations, or raw material availability over years, you’re often going to be worrying about them over months. Shorter, more unpredictable, product life-cycles. An even greater need for spend analysis and optimization. And a greater need for risk visibility, management, and vigilance.

For more insights into what the experts had to say, check out The New Supply Chain Normal: Supply Chain Gurus Weigh In which dives into the views of Dr. Tom Mentzer and Dr. Jim Tompkins, and The New Supply Chain Normal: Supply Chain Gurus Weigh In, Part 2 which explores the insights of Bill Read and Richard J. Sherman.

Recession? What Recession? Here’s 91M for Inventory Software

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I couldn’t help but notice this recent article in Intelligent Enterprise that noted that SAP offered 91M for SAF. Now, good inventory management software is extremely valuable because it can significantly reduce the 30%+ overhead (on product cost) that many organizations lose in inventory each year, but SAF is a little company of about 100 employees that only had 19M in revenue last year. That’s a 4.8 multiplier … in a down economy!

Forget the current share price, which likely skyrocketed on the rumor alone. You invest based on the likelihood of getting your money back in a reasonable time-frame. Considering that most small company sales drop considerably when they’re swallowed by an 800 lb gorilla, SAP will be lucky to get their money back in five years.

But more importantly, if that 91M had been funneled into an R&D group with some freedom, imagine what that could have built! Maybe they could even realize their Vision of the Future. Instead, as far as I can tell, they’re just spending more of their customer’s money on empty calories by paying too much of a premium. Well, at least they ain’t spending 5 Billion for Business Intelligence.

Is it Time for the Mass Implementation of Knowledge-Based Sourcing?

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In Win-Win Sourcing by Bill Jackson and Michael Pfitzmann in Booze Allen’s Sourcing Reloaded, the authors define knowledge-based sourcing as an approach where manufacturers and suppliers share a long-term commitment to improving each other’s capabilities, starting by working together to eliminate wasted effort and other inefficiencies. They then highlight the Honda Motor Company approach to contract formation. The executives of each company come together in a room, put their concerns on the table, write their proposed actions on a whiteboard, discuss them, and when everything on the whiteboard is agreed upon, the meeting is over. The contracts are typed up, printed, signed, and the contract is executed.

It has many benefits. For example,

  • there is no wasted effort in months of back-and-forth point-counterpoint negotiation
  • openness and trust is established up front
  • action plans are defined day one
  • teams can focus on building value and sharing knowledge

Instead of being at odds, the two sides collaborate openly to lower costs and raise overall performance, with the expectation that this mutual effort will continue over many years and benefit both companies. The focus is on value creation, and not just the lowest price. Considering that the lowest price is rarely the lowest cost when you consider transportation, reliability, quality, and “value” that you can charge a premium for, the approach certainly makes sense. That’s why the knowledge-based sourcing model traditionally outperforms the traditional bid-based model and one of the reasons why Honda and Toyota are not in the same straits as their American counter-parts.

But we all know that there is no silver sourcing bullet or universal sourcing model that will always work. So when and where should you use it? I believe it really comes down to what are you buying and the faith you have in your supplier. Are you buying raw material or finished product? Commodity or Premium Product? Production or Value-Add Design? I also believe that it should be part of a multi-step sourcing process and not just the go to method. A deep relationship is only going to benefit both parties if it is a good match and your supplier is going to be around for the long term.

Basically, I think it’s just another method instead of “sealed-bid” or “e-auction” as part of a multi-round process. If the category you are sourcing could benefit from the approach (i.e. it is of sufficient complexity and there is an opportunity for joint value creation), then I would start with a two-step RFX process. First, I’d do an RFI to find out what suppliers have the potential to meet my needs and then an RFP to find out how, and in what expected price range. Then I’d take the best RFP and stat the knowledge-based sourcing negotiation. If it went well, there’s my supplier. If it didn’t, next supplier on the list. Thoughts?

Ensuring Responsible & Ethical Production: Can You Answer Walmart’s Five Questions?

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Walmart has made it’s 15 Question Sustainability Product Index public. Can you answer it’s five questions on people and community?

  • Do you know the location of 100% of the facilities that produce your product(s)?
    You should. You really, really should. Not just for ethical reasons, but for compliance and regulatory reasons.
  • Before beginning a business relationship with a manufacturing facility, do you evaluate the quality of, and capacity for, production?
    If you sell the product, and it’s defective, you’re on the hook.
  • Do you have a process for managing social compliance at the manufacturing level?
    If you don’t, how do you insure your social policies are being followed?
  • Do you work with your supply base to resolve issues found during social compliance evaluations and also document specific corrections and improvements?
    You need to lead the way.
  • Do you invest in community development activities in the markets you source from and/or operate within?
    While not critical from a compliance or regulatory viewpoint, it’s the right thing to do.