Daily Archives: January 6, 2011

Remember: Cheap Gas Comes At The Expense of the Environment … And Your Supply Chain

I was pleased to see this recent article in Fortune on why gas costs more — and is more profitable — out West because it hammers home three points.

  1. Gas prices are not uniform across North America, and, thus, it’s not all about the price of oil.
  2. If gas is cheaper, it’s not just because transportation costs or taxes are less, it’s because it’s dirty.

And as badly as we may want cheap gas, we should want clean air more. We need agreement on a Kyoto protocol that will mandate consistent EPA requirements across North America. Not only will our lungs thank us, but so will our CFOs — because, then, for once, we’ll have consistent fuel prices across the board and planning will be easier, and cheaper. We will be able to locate DCs at a point that minimizes the total distance across all lanes, because we won’t have to account for fluctuations in fuel prices due to local EPA laws.

Right now, because of so many fuel price variations above and beyond carrier rate variations, an average company requires the most advanced and expensive optimization solution on the market to even attempt to optimize a distribution network. This advanced software is still well beyond the budgets of smaller mid-sized companies. But if the model simplifies, the software requirements for basic network analysis decrease, and lower-cost solutions become sufficient — solutions that are within the budget of the average mid-sized company. And now its clear why cheap gas not only damages the environment, but your supply chain.

VFS: Will Yet Another Acronym Solve Our Woes?

A recent publication of CAPS Research and A.T. Kearney, Inc. on Linking Supply to Competitive Business Strategies introduced us to yet another acronym for modern supply management: Value Focussed Supply (VFS). As per usual, there’s a lot of good advice that accompanies the acronym, but do we need it?

According to CAPS and A.T. Kearney, Value Focused Supply (VFS) strategies will provide the next breakthrough opportunity for companies to create and capture value from their most strategic purchases because they go beyond the typical price/cost focus of competitive sourcing. However, anyone who has been keeping track would know that a number of supply strategies have been developed over the last few years that were not (just) cost/price focussed, including AMR’s DDSN (Demand Driven Supply Network) and TVM (Total Value Management, an optimization-based approach).

According to the executive summary, leading companies are clearly demonstrating the power of this more comprehensive approach. This isn’t the first time we’ve heard these claims either. The MPower Group has been making the same claims for over a year now with their next practices approach, which they’ve described in a number of posts here on SI, including Strategic Sourcing is Dead and The Sourcing Emperor Has No Clothes. Plus, any organization that extends its focus beyond just cost is bound get better results after a while. And once a suitable strategy and focus is adopted, there will be opportunities to protect and create significant competitive advantages.

While I agree that the widespread use of [traditional] completive sourcing techniques and tools (and e-RFX and e-Auction in particular) has eroded the major advantage that it gave pioneers in the 1990s, we don’t need to resort to new acronyms. The average organization has yet to even try strategic sourcing decision optimization or embrace true spend analysis. Then, as mentioned above, there are next generation supply strategies based on decision optimization, such as TVM. The average organization just needs to keep up with the times.

Furthermore, it’s not necessarily an issue that the savings gap between “leader” and “follower” companies has shrunk in half since 2004. For example, if all of the organizations were employing some form of sourcing strategy, then you would expect the gap to close over time. Furthermore, the recent recession has caused many suppliers to slash prices in efforts to keep afloat. If suppliers slash prices on their own, there’s not much to cut in a competitive sourcing event.

And while companies must find and mine additional value from their supply relationships, current techniques will more than suffice — no new abbreviations required. As long as supply is linked to a competitive business strategy, value can be increased — for both parties.

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