Daily Archives: March 28, 2011

Productivity Truths

The McKinsey Quarterly recently ran a great article on five misconceptions about productivity (registration required) that is a must read for anyone thinking about not greenlighting an investment in new supply chain technology. As per the article:

  • Productivity IS a priority
    In order for the US to sustain its average historical GDP growth of 3.3% with the projected declines in labor-force growth, productivity growth needs to increase at an annual rate of 2.3% — a rate of growth not achieved since the 1960s. And since the supply chain is the dominant driver of productivity in most organizations, supply chain needs every productivity increase it can get.
  • Productivity IS a job saver
    With a continuing lack of credit and a slow sales rebound in most sectors, your average company can not afford to hire and still has a significant need to do more with less as it first has to grow with the resources it has. Productivity increases help a company keep costs under control, which reduces the chances it will need to layoff.
  • Productivity gains ALSO come from increasing value
    If a new technology will allow the company to identify value or increase value, it’s a must. For example, an analytics system that will help pinpoint key value addes across a product line, new sustainable warehouse technologies (such as hybrid vehicles), or investments in new technologies that reduce plant energy requirements, can increase profit, brand image, and/or sales.
  • Productivity IS AS important to leaders as losers
    How do you think leaders stay leaders? They continue to make gains year after year!
  • There is NO LIMIT to Productivity Gains
    McKinsey’s research estimates that three quarters of the productivity gains required by the US can be achieved simply by applying best practices across the private sector! Imagine what new technology and methodologies could do!

Hedge Your Bets

The consensus across the board seems to be that significant price volatility in the commodities and energies markets is here to stay, so you better get used to it. A recent article over on the CPO agenda on hedging your bets, which makes a great case for continued price swings of 25% or more, presented 10 strategies for managing the swings and rising prices that every buyer should be aware of. The following are particularly relevant:

  • Learn from Last Time
    Which was a mere three years ago when commodity prices reached unprecedented highs in 2008. Refresh yourself on the impact and mitigating solutions you came up with at the time. You’re going to need them again.
  • Hedge
    Get some expertise from the finance organization and hedge your bets with financial instruments. It might increase the overall cost of the buy a little, but what’s worse: adding 5% to the buy, or taking a 50% wash because you bet wrong? There is so much volatility now across so many categories it’s almost a statistical certainty that the organization is going to get burned. And if the loss could be significant, heeding is a small price to pay.
  • Acquire New Technology
    The supply management suite should contain tools that monitor current pricing trends and illustrate their effects on the company’s balance sheet. It should also contain some risk management or data analysis applications that can provide, in the hands of an expert user, guidance on strategies the organization can use to control and limit the effects of rising prices.
  • Substitute
    Are there other materials that could get the job done? Plastics and glass can be interchangeable in packaging, there are multiple choices for alloys in consumer electronics, and some food stuffs can be made with different recipes. (E.g. cow’s milk vs soy milk vs almond milk vs rice milk)
  • Seek Savings Elsewhere
    If there are no savings in direct, reconsider the organization’s needs for indirect and look for savings in the sacred cows. For example, instead of an hourly rate for legal, look at Alternate Fee Arrangements (AFAs) with fixed fees for well-defined, repeatable, cookie cutter tasks. (Leasing agreements, government filings, and discovery are well understood tasks that should only take a fixed allotment of time that could be negotiated on a fixed-cost basis.) And in marketing, maybe you take control of service spend and the agencies only get paid for creative. (Do you think an agency focussed on creative ad campaigns is negotiating the best rates on printing, production, and air-time?)

Even when prices are rising, there are still ways to reign in costs and reduce spending. You just have to get more creative.