Monthly Archives: December 2011

Risk, Risk, Risk: 2011 Did Not Improve Matters Any

The World Economic Forum recently released it’s 6th Global Risks report, 2011 edition, and it’s filled with economic, environmental, societal, geopolitical, and technological risks that are plaguing global supply chains across the globe. Some of these have not changed since SI first reviewed the 2nd edition back in 2007, and some are new. However, they all have the potential to bring your supply chain to a grinding halt. In this series, we will review each category of risk, focus on a few risks of immediate relevance and discuss how they could impact an average supply chain.

At a high level, the risks identified were:

      Environmental

  • Air Pollution
  • Biodiversity Loss
  • Climate Change
  • Earthquakes & Volcanic Eruptions
  • Flooding
  • Ocean Governance
  • Storms & Cyclones
Technological

  • Critical Information Infrastructure Breakdown
  • Online Data and Information Security
  • Threats from New Technology
Societal

  • Chronic Disease
  • Demographic Challenges
  • Economic Disparity
  • Food Security
  • Infectious Diseases
  • Migration
  • Water Security
     
      Economic

  • Asset Price Collapse
  • Extreme Commodity Price Volatility
  • Extreme Consumer Price Volatility
  • Extreme Energy Price Volatility
  • Fiscal Crisis
  • Global Imbalances & Currency Volatility
  • Infrastructure Fragility
  • Liquidity / Credit Crunch
  • Regulatory Failures
  • Retrenchment from Globalization
  • Slowing Chinese Economy (<6%)
Geopolitical

  • Corruption
  • Fragile States
  • Geopolitical Conflict
  • Global Governance Failures
  • Illicit Trade
  • Organized Crime
  • Space Security
  • Terrorism
  • Weapons of Mass Destruction
     

That’s a lot of risk to consider, spread across five categories and thirty-seven risk types, each of which could manifest in dozens, or hundreds, of ways across your global supply chain. In the next five posts we’ll discuss what SI thinks are the top risks in each category and why.

Public Sector Reverse Auctions: 8.9 Billion in Savings in US Federal Government Spending Alone!

As the astute reader may have guessed from our last post, the doctor is not a big fan of reverse auctions in the private sector. In many cases, he cringes at their mention — because the savings are typically one-time, short-lived, and come with a hefty virtual price tag that is sometimes greater than the initial savings (which doesn’t materialize for months or years to come).

But reverse auctions have their niche, and that niche is the public sector. The unique (and typically illogical) spending constraints often make reverse auctions a perfect fit, and where the public sector is concerned, anything that can reign in rampant government spending gets a go ahead in the doctor‘s book. As per our last post on reverse auctions where we noted that old is new, but one-time is still just one-time, while the relative lack of spending constraints in the private sector will result in the realization of most (if not all) of the benefits of reverse auctions in the initial use, the public sector will realize the most significant competition and price benefits again and again. (It’s sad that this is the case, but given how slow policy and process changes in government agencies, we must work with what we have.)

And in the public sector, where the utter lack of anything resembling best practice supply management process and technology is often the norm, these benefits, at least initially, can be almost as significant as the benefits decision optimization brings leading edge private companies. As per Wyld’s results, which were based on an in-depth examination of reverse auctioning at the Department of State:

  • there is a proven savings factor of 11.9%
    (at the Department of State, which reverse auctioned over 613 M of spend over 4 years)
  • which could be applied to 75 Billion of annual spending that is appropriate for auction-based procurements
  • and this yields an annual expected savings of 8.9 Billion

Furthermore, this savings potential is fairly consistent in the implementation of reverse auctions around the globe. South Korea expects to save about 10.5% annually. The UK Office of Government Commerce sees similar savings opportunities on their addressable spend. And a recent study from researchers affiliated with the United Nations that meta-analyzed reverse auctions across four different government entities in the US and Europe reported an average savings rate of 12.1%.

And these savings will materialize again and again. Public sector organizations will continue to see:

  • downward prices
    Not only is the public sector guaranteed demand, but it is demand that is typically guaranteed to increase over time in most categories and markets. As a result, supplier organizations will continually vie to profitably produce those products cheaper in an effort to win those lucrative government contracts which they know will be coming around again.
  • real-time market pricing
    Pricing will always be up to date each time the event is run.
  • time savings
    Since potential suppliers come and go more frequently, and since contracts continually change, the time savings are significant as much of the work required to implement the changes can be automated.
  • increased number of suppliers
    Every year, new suppliers will throw their hat into the ring for government contracts as they reach a size where they feel they can effectively compete.
  • sustainable cost savings
    Since government organizations must continually put categories out to bid, since past performance typically can’t be used to tip the scales one way or another, and since long term contracts can’t be cut on future offers, all savings must be measured against average market price. Since an auction will generate the best market price, the public sector government organization will save every time.

In short, if your organization is a public sector procurement organization, and it does not have an e-Auction platform, then your organization should get one today. The cost is minimal compared to the savings, accountability, and accolades that will materialize upon its proper utilization.

Reverse Auctions: Old Is New, But One-Time is Still Just One-Time!

The IBM Center for The Business of Government’s recent report by David C. Wyld (the Director of the Strategic e-Commerce/e-Government Initiative at Southeastern Louisiana University) on Reverse Auctioning: Saving Money and Increasing Transparency is a great read for government organizations and a good read for Supply Management organizations that are on the back-end of the supply management innovation curve, as long as these organizations don’t fall for some of the claims that are hyped beyond reality (with respect to the private sector). While a private sector organization will generally see all of the following benefits the first time they use reverse auctions:

  • downward prices
  • increased competition
  • real-time market pricing
  • process efficiencies
  • time savings
  • increased number of suppliers
  • sustainable cost savings

These are the benefits a private-sector organization will generally see the second time it runs a reverse auction:

  • real-time market pricing

That’s right. The only additional benefit an average private-sector organization will see continue to see the second time it runs a reverse auction on a category is real-time market pricing. Why? Let’s take the suggested benefits one-by-one.

  • downward prices
    Generally speaking, the first time suppliers are invited to take part in a transparent winner-takes-the-contract auction in a market that favours the buyer, the suppliers will compete so aggressively that they will even jeopardize profit margins. As a result, the prices they offer will generally be unsustainable in the long term. That is why auctions started to fall out of favour with market leaders in the mid-noughts. While the first auctions returned amazing results, the subsequent increase in raw material costs as demand rose resulted in their initial bids being unsustainable. Thus, the suppliers had to raise prices just to stay in business (and as soon as the power shifted back to them, the suppliers increased their prices substantially to make up for the loss).
  • increased competition
    Generally speaking, suppliers get so competitive the first time with their pricing that there is little, if any room, left to increase competitiveness the second time around.
  • process efficiencies
    Once you have shifted to the reverse auction model, you have already gained the process efficiencies you’re going to gain. Reverse auctions don’t get more efficient over time.
  • time savings
    Since reverse auctions don’t really get more efficient over time, once you have switched to the model, there are no more time savings to be gained.
  • Increased number of suppliers
    While electronic reverse auctions do allow more suppliers to be invited to the table without too much extra work, if the auction is opened up, all suppliers that want your business are going to jump in. And, when they fail to win your business, some of them will even back out the next time around.
  • Sustainable Cost Savings
    Simply ensuring that the organization gets real-time market pricing does not lead to savings. In fact, if raw material prices or demand is going up, it can lead to significant losses. The way to sustained savings in the private sector is through negotiating long term cost-reductions, process-improvements, and innovation commitments that will find additional ways to drive down costs once the fat is taken out of the supplier margin. This often requires a decision optimization, PLM, or SPM solution to find these new savings opportunities.

In short, properly used, auctions can be good for the private sector, but the greatness will only bee seen in the public sector where, on the other hand, organizations will generally continue to see the significant benefits each time a reverse auction is run on a category. Our next post will address why.

CBTM #6: An Annual Necessary Evil — The Performance Evaluation


Today’s guest post is from Dalip Raheja of The MPower Group, who declared that Strategic Sourcing is Dead last year and who has returned to give us one of his alternatives.

We all dread the annual performance evaluation process whether we are a Sourcing or Supply Chain employee or a manager. It seems like the same old process year in and year out, used simply to justify compensation increases or not. If the performance evaluation process is part of an integrated talent management program, it doesn’t feel that way. In most cases the measures are tactical in nature and measure activities as opposed to value added outcomes. The measures are seldom tied to the strategic objectives of the company and in many cases drive behavior that is detrimental to achieving those strategic objectives. Your development plan (if there is one) usually lists a variety of training classes you can take individually to improve your individual skill, often ignoring the required organizational competencies that help drive real value for the company. This process should be ongoing and not just annual, but at most companies it is not.

Performance evaluation can be one of the most powerful tools in Competency Based Talent Management (“CBTM”) but it must have a well-defined competency model at its core. It should also be integrated into the other four phases – recruiting, training / development, career management and succession planning. Here is how this should work:

  • Define the role of the Sourcing / Supply Chain organization and the individual job roles in a way that supports the strategic objectives of the company.
  • Determine the competencies (behaviors – both strategic and functional) necessary to be successful in the defined roles. This is your competency model.
  • Use the competency model to:
    • Determine the skills / competencies required when recruiting
    • Determine the skill / competency gaps to drive your training / development program AND the individual development plans as part of performance evaluation
    • Determine the metrics / measures that will be used to drive the performance evaluation process and career management
    • Drive your succession planning

When performance evaluation is supported by defined competencies the process takes on richness for the employees that helps them understand the behaviors (much broader than activities) that are required to be successful currently and those required to move forward in their careers. In addition, competency based performance evaluation helps managers / employees to identify gaps in strategic competencies (e.g. communication, collaboration, teamwork, change leadership) which are less “measureable” but are as, or more, important than functional competencies. If evaluating performance is focused solely on building functional expertise, as opposed to the critical business skills that make a successful business professional, then the organization will have a difficult time moving employees into future leadership roles (career management and succession planning).

Performance evaluation must also focus on demonstrated competency, since having competency that is not being utilized is of no value to the organization. As such, competency based performance evaluation should be structured such that employees are incented and rewarded (compensation $$) for acquiring and demonstrating new competencies and managers should be held accountable to ensure that employees do so. If you think about it, competency building clearly helps the employee build their individual skill set but also helps to build overall organizational competency. Competency based performance evaluation will make it easier to differentiate between high performers and everyone else since the evaluation process will be less about “what you know” and more about “what you do with what you know”.

Lastly, a critical outcome of performance evaluation must be an improvement plan. Here again, the focus should be on identifying gaps in demonstrated competencies and creating strategies to close those gaps. The improvement plan should be mutually agreed upon and managers should be measured on creating opportunities for their employees to acquire and demonstrate new skills.

In summary, a well-defined competency model is a powerful tool when used throughout the talent management lifecycle, particularly performance evaluation. If you don’t have one for your Sourcing / Supply Chain organization, it is a necessary investment in your most critical asset — your people.

If you are interested in getting involved or would like to follow this topic further, here are a series of critical activities coming up:

  • Release of the results of the Executive Forum we just facilitated at the IACCM Global Forum for Contracting & Commercial Excellence on Talent Management.
  • A major research project to not identify the problem one more time but to identify Next Practices to solve the problems.
  • A webinar with IACCM on CBTM.
  • A White Paper to focus on Next Practices in CBTM.

Please contact Crystal Jones at crystalj <at> thempowergroup <dot> com for more information.

Will 2012 Be The Year Manufacturing Returns to Mexico?

Alix Partners recently released their 2011 U.S. Manufacutring-Outsourcing Index and it had a few surprises. First of all, not only is Mexico now the country with the lowest-landed costs for U.S. customers (which SI has been predicting would be the case for some time now), but the four other major outsourcing destinations analyzed — Romania, Russia, India, and Vietnam — all had lower landed costs than China as well.

Alix Partner’s projected landed costs from China for the next four years based on the three assumptions of:

  • 30% annual increase in wage rates, consistent with Chinese wage inflation over the last several years,
  • 5% annual increase in the strength of the yuan, consistent with the widely accepted estimate of the undervaluation of the yuan by 20% to 25% relative to the US dollar, and
  • 5% annual increase in freight rates, consistent with increasing fuel prices.

If these assumptions hold true, then the landed cost of manufacturing in China will equal the cost of manufacturing in the U.S. by 2015! (And if only one of the predictions come true, the savings from outsourcing for an average organization will only be 10% in the best case!) In other words, at this point very little is needed to erode not only some, but all of China’s cost saving potential in manufacturing outsourcing.

It would seem that for companies looking to outsource manufacturing, the writing is already on the wall: unless you already have a Best-In-Class operation in China, the chances of realizing any value (given the initial start-up costs associated with outsourcing and streamlining such an operation) are quickly approaching zero as time goes on.