Monthly Archives: September 2010

Resource Allocation Processes Have to Change

The March edition of the Harvard Business Review had one of the best articles on strategy and restructuring (in response to the recent downturn) that I’ve read in a long time. In finding your strategy in the new landscape*1, the author notes that for much of the next decade, we can reasonably expect to see weak global growth, pressures from overcapacity, persistently high unemployment, volatility in the financial markets, costlier capital, a greatly expanded role for governments, a much larger burden of regulation and taxation for all, and maybe even increased protectionism. Essentially, a global marketplace that is pretty common when you consider not the last 5 years, but instead look back through the last 500 years (and the last 50-60 years in particular as there is lots of detailed economic data available post WWII).

Up until the invention of the standard shipping container in the 1950s, global trade, and global growth, was very slow. Up until the exuberance of the IT boom, and the virtual wealth it created, capacity was limited, as demand was, more or less, steady and predictable most of the time. Even in the developed world, unemployment has been traditionally much higher than it was between 1997 and 2000 and 2005 and 2009 for most of the last few centuries which saw a lot of poverty, war, and suppression of the rights of women (who were encouraged to stay home). There have been booms and busts in the markets for hundreds of years. After all, the IT bust wasn’t the first great bust — at the very least it was preceded by the crash in the Dutch Tulip Market in the late 1630’s where, at the peak of Tulip Mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman! Capital has traditionally been much costlier than it has been in recent years — as recently as 1981, the Bank of Canada interest rate exceeded 20% (and from 1976 to 1992, it averaged significantly more than 10%). Throughout most of history, it was the governments, and not the global corporations, that held most of the reigns, regulation was the reaction to every problem, and when cheap imports threatened an industry, tariffs were slapped down faster than a bell clapper in a goose’s ass*2.

The author, Pankaj Ghemawat, then goes on to state that managers cannot afford to ignore the risks of pursuing a global strategy in the uncertain years ahead and that they must change their strategic approach in several dimensions. In particular, companies whose strategies currently emphasize smoothing differences and achieving economies of scale across national boundaries may need to shift toward adapting to local conditions and their resource allocation processes will have to change, too. And the changes will have to take place on the sell side and the buy side. Not only will the one-product fits all strategy be unlikely to work, but so will the one location produces for all. When you consider steadily rising shipping costs, increasing labor costs in “low cost countries”, and the costs of a single factory having to regularly shut-down and retool a line for different products (or variants), outsourcing sometimes becomes more expensive than near-sourcing or even home-sourcing. That’s why a strategic shift will need to be made across the board.

Furthermore, in addition to rethinking the scope of off-shoring, companies also have to:

  • simplify supply chains,
  • import process innovations from emerging countries, and
  • move R&D to where the (best) researchers and market growth are.

Your supply chain is too complicated.

You have two many products that use too many different raw materials coming from too many suppliers and travelling down too many lanes in too many shipments because you’ve never optimized and consolidated your suppliers, SKUs, and lanes. While you need redundancy to avoid risk, there’s a difference between using 3 suppliers and using 13-30 suppliers, which is what the average company who hasn’t fully analyzed the category (and the end-to-end supply chain behind it) is doing. (And since less than 10% of the market is using SSDO regularly, opportunity abounds!)

When you have to do more with less, that’s when you innovate or die.

When you have no money, you tend to think different than when you have more than you can spend. This often leads to completely different kinds of innovation than what we produce in the western world. And that’s likely the kind of innovation you need to tap an emerging market where the middle class makes 1/10th to 1/8th of what the middle class makes in the USA.

The best researchers know the market.

If you’re trying to innovate a new product for a market, you need people who understand what the market will like. Those kind of people are native. Maybe they’re not your people, but maybe that’s a good thing. Not only will they innovate for their market, but they’ll bring you new ideas, and some of these ideas might improve your global operations.

In other words, the elastic that holds the global market together is trying to snap back, and you’re going to have to be agile and adapt if you’re going to hold on.

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*1 I was thrilled that, unlike just about every other publication out there, the author did not use the all-too-common, and all-too-stupid, “new normal” terminology which drives me nuts because anyone with half a brain that either (a) studied her history or (b) lived through it knows that it’s just the old normal coming back with a vengeance, and doing it on a global scale.

*2 Ask a Texan.

If You Think Black Swans Aren’t Deadly …

Consider these recent articles about Hannibal, the rogue killer swan who has, to date, brutally murdered 15 and injured at least 22 more swans in his attempts to drown any swan that gets too close.

Why does he do this this? Unknown, but the current theory is that the water, which is brackish, salty, and quite polluted, is the cause.

Moral of the story? Keep your supply chain clean!

Remember, Hannibal is only a white swan. Imagine what the black swan will do to you if he gets you in his sites!

A Quiet Summer for the Oompa-Loompas

Ever since I started following the plight of the Oompa-Loompas over three years ago, times have been tough. They’ve suffered layoffs at Hershey, Cadbury, and Kraft. They’ve had to deal with the repercussions of E. Coli, melamine contamination, chocolate covered crickets in the Ferrero Rocher, stowaways, seizures, chemical accidents that ended a few careers, fire, and price-fixing lawsuits. For the past three years, not a quarter went by without more bad news. However, ever since Hershey announced it was to trim 5% of its workforce in June, things have been rather quiet despite the flurry of chocolate related news articles over the last three months. Let’s hope things stay this way.

So what did the summer bring?

Other than metal pieces in the chocolate chunk cookies, a look into the benefits of FairTrade cocoa, an expansion of the luxury chocolate factor in Cambridgeshire, news of Hershey’s domination of the U.S. Market (and its lag behind its competitors in avoiding forced labor, human trafficking, and abusive child labor — profits come at a price), and a report from Packaged Facts on The Chocolate Market in the U.S., it’s been a quiet summer for the oompa-loompas. No more massive layoffs, and no new major scandals. Let’s hope it stays that way.

However, ran a great story on the 5 bitter truths about chocolate that you might want to check out. While we’d like to continue to believe that chocolate comes from a purple garbed man in a whimsical factory, the real chocolate world is far darker and far harder than we ever would have thought.

The Governator Has Your Supply Chain In His Sights!

Are you prepared?

As recently reported in Procurement Leaders, California Governor Arnold Schwarzenegger is being lobbied to sign a bill that, if enacted, would require retailers and manufacturers doing business in California to disclose their efforts to eradicate slavery and human trafficking from their direct supply chain. A letter, signed by 32 signatories representing organizations with assets of $40 Billion under management, which supports The California Transparency in Supply Chains Act of 2010 (SB 657) has been sent to the Governor, urging him to sign the bill, which will affect approximately 3,200 global companies with revenues of more than 100 Million each.

Beginning January 1, 2001, the bill requires companies (with more than 2 Million in annual sales) to publicly disclose the policies they have in place to ensure their supply chains are free of slavery and human trafficking, including the extent to which the company uses third party verification to evaluate and address human trafficking and slavery risks in their direct product supply chains. It also requires companies to conduct independent, unannounced audits of suppliers to ensure compliance. A company that does not comply will face action from the Attorney General for injunctive relief in addition to remedies that may be sought for violating other state and federal laws.

Giving the realities of the marketplace, the pressing need for companies to be sensitive to social and ethical issues, and the support of organizations that control over 40 Billion in assets, there’s a very good chance that the Governator will sign the bill into law. Are you prepared?

(The) Strategic Sourcing (Debate Part V): My 2 Cents

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

There is lots of debate in the blogsphere about what is strategic sourcing — whether or not it’s dead, alive, or a zombie. Over the past several months, discussions with consulting firms, large/small enterprises1, and technology vendors has revealed a few items:

“It’s called Strategic, but its not used Strategically”

Strategic sourcing, for the most part is seen as a procurement function, and typically, a transactional process leveraging tools such as RFx and Reverse Auctions in a tactical manner. Some large consulting firms who offer services, treat Strategic Sourcing services similarly and mainly are utilized as “staff-augmentation”. For manufacturing organizations, where materials can be 60%-80% of cost of goods, sourcing of direct materials needs to be approached as a Supply Chain challenge. Take the direct materials at the point of consumption and work backwards in the supply-chain several tiers, and understand costs. When the Supply Chain is worked cooperatively with suppliers, an organization can ask the question “How we reduce each others costs without adversely impacting each other’s margins”?

The Starting Point

One area missing in many Strategic Sourcing processes is a clear understanding of objectives of the process, the organization, or even a sourcing event. Is the focus on cost? A quick answer can be yes, but further details shows that enterprises are balancing cost with quality, supplier performance, and a host of other factors. A large consumer goods company recently awarded contracts which were 10% higher than the previous year to a different supply-base, due to very poor supplier performance the original supply base the prior year (late shipments). The objective of that sourcing event was shifting to more reliable suppliers while keeping the cost of the category within 15% of the previous year. Therefore, a 10% increase in costs actually exceeded expectations.

How are some enterprises leveraging Strategic Sourcing? They are leveraging strategic sourcing initiatives in other areas of their business.


Product Design Process Understanding cost structures, supplier capabilities and/or metrics when in the design process and adjusting as needed pays large dividends, since changes later on during the product lifecycle can results in much higher costs or longer innovation cycles. A consumer electronics manufacturer recently had to eliminate a product launch, due to the fact that a critical component, which was cost-effective at lower volumes, was more expensive at higher volumes, thus causing the product’s profitably to fall below acceptable levels.

Manufacturing Knowing which suppliers adversely affect production can be key in understanding qualitative factors (such as cost) vs. quantitative factors such as quality. If a specific supplier is 5% less expensive than others, but, due to inconsistent quality, causes lower yields, is that 5% in savings costing 10% in other costs such as product re-do’s, overtime, or waste?

Supply-Chain Strategy. By having extended supply chains, organizations now off-load much of development and manufacturing of their products to third parties. Should organizations take back some of this manufacturing, perhaps a final assembly step, in order to drive cost savings, perform better customer satisfaction (by offering custom final assembly), or achieve other objectives?

Is Strategic Sourcing Dead?

For some organizations, it may as well be, since top-performers leverage Strategic Sourcing in manners described above, or in other ways, thereby outperforming their industry peers. These top performers also take a multi-year view. For example, in year 1, develop an understanding of the cost structure of key materials or components. In year 2, leverage this knowledge and work with those suppliers who can attack the key parts of cost, lowering the overall cost of a product, thus increasing profitability, or maintaining profitability as the organization faces price-pressures. In year 3, the organization may start to drive out cost by (1) aggregating specific key components across it’s supply-base, (2) taking positions on these components in commodity markets, and (3) requiring the supply-base to purchase these components from the commodity positions.

Thanks, Sudy.

1 Primarily Manufacturing firms in a variety of industries: Hi-Tech, CPG, Process, Oil & Gas, Pharmaceuticals, Discrete Manufacturing, etc.

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