Monthly Archives: November 2010

Want to Kill Quality, Outsource!

It’s probably getting cliche by now, but it’s often true. And I enjoyed this recent article on how companies find outsourcing can backfire as quality, customer service suffer in the Journal Sentinel Online, especially when it said that outsourcing isn’t always the best solution and, in some cases, it’s laden with problems and disappointments.

According to the article, a new business survey from the ASQ (American Society for Quality), found that 55% of companies surveyed were substantially dissatisfied with their outsource provider in the areas of innovation and making process improvements. A mere 34% said outsourcing provided a good value and only 41% said outsourcing met performance metrics.

While outsourcing can be a quick fix to lower costs, in the long run it can backfire — sometimes badly. Communication problems, poor customer service, slow delivery times, and quality control are just some of the pitfalls. And the reality is that when quality, the cost of freight, delivery times and other factors are considered, sometimes it’s cost-neutral or cheaper to make products yourself, in U.S. factories, rather than outsource them overseas.

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Does Your Supply Chain [Still] Have [A] Manufacturing Myopia

Manufacturing Myopia can be defined as a narrow vision of future potential, [generally] leading to formulaic cost-cutting, layoffs, loss of competence, and decline. It’s a state of affairs that is becoming more and more common in North American manufacturers, but it doesn’t have to be in your future.

The fundamental problem, as pointed out in a now classic Strategy + Business article on Manufacturing Myopia is that manufacturing strategies — decisions related to siting, designing, and running factories — are often the same as they were 10 or 20 years ago. Despite all of the so-called program advancements — such as “TQM” (Total Quality Management), “lean production”, and “Six Sigma” — manufacturing, for the most part, has not kept up with the times. Strategies have been contained to the functional or plant level, disjoint from the enterprise-wide strategy and cut-off from the executive decision makers, and, as a result, the manufacturing focus has narrowed over time to the point where competence has atrophied with respect to the rest of the business. This has compelled many companies to focus on cost cutting to the point of irresponsibility instead of (fundamental) process innovation.

So how do you prevent manufacturing myopia? According to the authors, you start by building awareness as the only “cure” is 20/20 vision that ties together an understanding of manufacturing costs and means. Companies have to sharpen their own ability to see their operations more clearly and redesign them more flexibly as they need to acquire the ability to produce higher-quality goods at lower prices in a flexible manner as this is a key component of their long-term competitive strategy and a central, dependable part of their identify.

In order to build this awareness, a company needs to master the following four dimensions:

  • technological distinctiveness
    a company that relies on machine builders and other vendors to fill the gap is simply buying solutions that are available to the mass-market; this will not give them a distinctive advantage over their competition
  • network sophistication
    the company has to progress to a global, flexible supply chain network that can be reconfigured anywhere in the world as market conditions change; plants have to be designed with “flexible footprints” so that they can be enlarged, shrunk, or reconfigured based on the business landscape because it can take two years to close down a factory — and that’s typically after several years of wavering over the decision
  • in-plant transformation across-the-board
    in order for plant processes to truly be transformed, an initiative has to be initiated at the executive decision making level as part of an overall strategy; otherwise, adoption of new processes will be haphazard and results will be across the board (and even include a loss of efficiency in some cases)
  • labor modernization
    even the shop-floor technicians have to become modern knowledge-workers (using the best tools and techniques for the job) who take pride in their job and strive to produce the best product they can; hours of work and compensation must also be modernized so that people are not driven to overtime (where they work themselves sick and lose productivity instead of gaining it)

And, most importantly, as per the article, the company needs to have patience. While the benefits of a manufacturing transformation should start to materialize within eighteen (18) to twenty-four (24) months, as the article indicates, after production technology is replaced it could take two-to-three (2-3) years before the capital investment bears fruit in the the semiconductor sector, five (5) years in major manufacturing, and as much as twenty (20) years in process industries such as petrochemicals and electricity production. Additionally, to improve processes, companies have to train entire plant communities in dozens of different tools and techniques and completely different ways of working. All of that consumes time and resources.

It’s a tall order when you think back to the classic Ford production line that most plants still work on — one path, one job, and one product — but it’s what is needed if plants are to truly enter the 21st century. I highly recommend that you check out the Strategy + Business article [again] on Manufacturing Myopia. I bet your supply chain could use it.

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The Universal Key to Supply Chain Success

These days, there’s a lot of requirements for supply chain success. Even a supply chain that is carefully architected, supported by the best technology, and managed using the most modern (collaborative) process is not guaranteed to succeed. But whether the supply chain is in the public sector or the private sector, there is one fundamental requirement of success that does not change: talent.

I was reminded of this when reading a recent post over on the HBR blogs about the intelligence challenge where the authors, who were all Marine Corps Intelligence Officers in Iraq who now advise clients through the Mayflower Strategy Group, noted that the way ahead, for those who want success in the public sector and the military, is to emulate the lessons learned from the recent slim-downs in the private sector where the winning organizations were those that spent money on obtaining best-in-class collaboration tools and top talent to deploy them.

The reality is that there is no one (network) architecture, technology, or process that will guarantee success in today’s global supply chain that is wrought with risk from end to end. That means an organization’s best chance of success is having top talent in place who can quickly react to unpredictable occurrences and prevent minor hiccups from becoming major disruptions. A good supply chain runs on good people, so make sure you have some. And be sure to give them the best tools and training available, as they can never be over prepared.

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The Nature of Energy as a Purchased Item

Robert Rudzki, a regular contributor to Sourcing Innovation, recently edited a great two-part series on the nature of energy as a purchased item (Part I and Part II) by Ted Eichenlaub over on the Supply Chain Management Review that should be added to your reading list if energy is a reasonably significant cost of your operations, as the price of energy is only going to increase in years to come.

In these pieces, Ted, who is a senior advisor in the energy practice at Greybeard Advisors, elaborates on the increasing complexity of energy buys in today’s Procurement environment as the commodity cost of energy is only one part of the total cost of energy to the end-user.

Some important points to keep in mind are:

  • Price and Volume
    Energy is expensive and its price is volatile. In order to take advantage of price volatility, the buyer must know what price will achieve the desired cost ledger performance, the volume requirements, and and the nature of the volume.
  • Hedging
    Hedging can be used to reduce price volatility, but it can also increase price volatility if the hedges are not made by an expert.
  • Credit Worthiness
    A supplier may be unwilling to grant a major long-term contract with price that is very likely to below the price it could command in a month or two if it thinks there is a good chance that the buyer might not be around to utilize the full volume of energy that the buyer is committing to.
  • Standardized Contracts
    Most suppliers use standardized contracts and there is little room for negotiation beyond price and volume.
  • Worldwide Sources
    The energy might be produced locally, across state lines, or internationally (in Canada). Depending on where it is produced, and where it is purchased, there may be documentary requirements, energy credits, or other concerns that need to be taken into account.

In addition, there are concerns regarding transportation and delivery, regulation, and responsibility that also need to be understood. For more information, check out the two part series on the nature of energy as a purchased item (Part I and Part II).

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U.S. Small Package Courier Costs Skyrocketing on January 3, 2011

Small businesses and businesses that rely heavily on couriers (for document bundles and demo equipment transport) be warned! On January 3, 2011, both FedEx and UPS are decreasing the divisional factors used to calculate dimensional weight for Ground and Air packages that are 3 cubic feet (5,184 cubic inches) or larger. The factors will decrease from 194 to 166 for shipments within the US and from 166 to 139 for international ground shipments to Canada.

You’re probably thinking what’s the big deal? That’s only a 1.17% change for in-country packages and a 1.19% change for packages to Canada? Right? Well, yes and no. Mathematically, the change is small, but you have to remember that couriers charge based on dimensionalized weight and the price increases approximately linearly with weight. Thus, as per this article in MultiChannel Merchant (that deserves a hat-tip for being among the first to pick this up) if you have a large parcel with an actual weight of 6 lbs (with a list rate of $29.50) that used to dimensionalize to 14 lbs (with a list rate of $55.90), it would now dimensionalize to 16 lbs (with a list rate of $65.40), which increases your cost by 17%.

In other words, unless you can “grandfather” in the current dimensionalization factor into your renewal agreements, your shipping costs could easily go up by 15% to 20% across the board as a result of that 1.17% change in the dimensionalization factor.

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