Monthly Archives: February 2012

How Long Before Your Company Has to Produce an Integrated Report?

Integrated Reporting, defined by the IIRC (International Integrated Reporting Council) as a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates, is on the rise as companies try to demonstrate their focus to sustainability, an increasingly important issue to many consumers.

Of course, producing one is only the first challenges. As noted in this recent ISM article on how Integrated Reports [are] on the Rise, there is no universally accepted framework for integrated reporting, and it remains largely a voluntary practice. Given that this report is supposed to show the relationship between financial and non-financial performance, and how strong performance in environmental and social areas contributes to good financial performance, and that this report may include facts regarding potential trade-offs that might occur across financial and non-financial performance, it’s difficult to select an appropriate structure.

But given that some countries are now requiring such reports for public companies, it likely won’t be long before we see such a requirement in North America. For example, South Africa now requires all companies listed on the Johannesburg Stock Exchange to provide integrated reports (or explain why they are not doing so). France passed a law in 2010 for companies with 500 or more employees to include a section in their annual reports that describe the environmental and social consequences of their actions. Denmark requires its largest companies to include similar non-financial information in annual reporting, and the UK is making a push for similar legislation.

Given that about 100 companies from different industries and countries plan to use the IIRC framework to produce their own integrated report, and then provide feedback for future revisions, it’s likely that the IIRC framework will involve into a standard, just like GAAP, but how long it will take will likely depend upon when additional legislation requiring integrated reporting comes into effect in the G-20.

So what does this have to do with Supply Management? As noted in the ISM article, that quoted Robert G. Eccles, Professor of Management Practice at Harvard Business School, Supply Management, by virtue of its function within an organization, is an ideal catalyst to spread integrated reporting. No one knows the impact of organizational activities better than Supply Management, so the requirement for integrated reporting will fall heavy on Supply Management.

The big issue though is how to make such a document a “living report”. As the supply chain evolves, so does the ramifications of the company’s activities on social and environmental ecosystems. Supply Management will need a solution that allows this information to be kept up to date. Will SIM (Supplier Information Management) systems step up to the challenge, or will an entirely new solution be needed?

Too Bad the US Post Office Did Not Follow Royal Mail’s Lead

The US Post Office is in dire straits. So dire that, as per the transcript of this Newsmaker Interview from December 5, 2011, on how the U.S. Postal Service Faces Big Changes Amid [its] Struggle to Deliver on Profitability, the post office is planning to shutter almost half of the nation’s mail processing centres next spring. Given that it is currently 15 Billion in debt and owes about 5 Billion for retiree health benefits, it needs to save 20 Billion fast and it’s solution is a significant restructuring that it hopes will allow it to save 2 Billion next year and 20 Billion by 2015.

This is pretty drastic, and we’ll talk more about it in a bit, but it’s also surprising given that it’s counterpart across the pond, Royal Mail, at the same time, was discussing the results of its first major Procurement Transformation in Special Delivery, which ended in 2009 and saved 300 Million pounds. This was followed by a cost management program that doubled the savings number about a year later, which led into a second major transformation project, currently underway, where Royal Mail expects to save significant dollars yet again. 600 Million pounds, or roughly 1 Billion dollars, is very significant when you consider that the Procurement organization only influences about 1.7 Billion pounds of spend out of the 2.3 Billion pounds spend by Royal Mail. That means that, in roughly a 4 year period, as the transformation initiative was only announced in 2006, the organization averaged about a 9% savings a year in the public sector where it is under tight public procurement law, compliance, and regulatory demands. When you think about it, this is an absolutely amazing result.

In contrast, the U.S. Postal service is projecting a 14 Billion loss this year if it does not get legislative relief. 14 Billion! (Note that last year’s budget gave them 11 Billion legislative relief! Source: Red Dog Report And that this year’s budget is recommending another 11 Billion in relief. Source: Washington Post) And this is the tip of the 238 Billion budget deficit it is predicting over the next decade if it doesn’t cut costs. (Source: United Liberty) Given that it’s annual budget is about 68 Billion, based on expected Revenue for 2011, this represents a 20% loss! While Royal Mail was saving 9%, the US Post office was losing 16%, on track to lose 20% this year (and, based upon the projection of a 238 Billion deficit if nothing is done in 10 years, probably 30% plus in a few years).

Now, it’s tough when you have to deal with a drop in regular first class mail that amounts to 27% when compared with volume levels 10 years ago, especially when that is your primary source of revenue, but this drop was visible years ago, and efforts to reduce costs could have been underway years ago. The network should have been optimized 6 years ago, re-evaluated, and then optimized again last year. And, like Royal Mail, which was also dealing with increased competition and revenues declining at 5% a year for similar reasons, it should have focussed on vehicles and operations, business services, facilities management and property, IT and telecoms, and sourcing and demand management to do what it could to keep costs in line as much as possible year over year. Since network reorganizations of the type that the U.S. Post office has to undertake can take years, some losses were unavoidable, but this blogger finds it hard to believe that 14 Billion in losses were unavoidable. And, like Royal Mail, it should be making a hugh effort in Supplier Performance Management to help suppliers keep their costs down.

However, the most fascinating fact that is overlooked in all the news reports is the lack of focus on Supply Management. Back in 2007, the U.S. Postal Service licensed CombineNet’s advanced sourcing platform. While for years this platform, in the doctor‘s view, had usability issues in that self-service just wasn’t an option for most organizations, as per SI’s extensive coverage on CombineNet back in 2006/2007, when they were undergoing their first major transformation of the decade, this was one of the most powerful strategic sourcing decision optimization platforms on the planet. If the U.S. Post Office was properly applying this platform, the doctor believes they should have been saving money hand-over fist. After all, Royal Mail used Iasta, which only introduced its advanced sourcing platform in the 2007 timeframe, about 7 years after CombineNet, and saved big-time. (Note that this is not a knock against Iasta, as the platform they introduced was rock solid, but an attempt to make a point that the platform CombineNet had was seasoned and powerful enough to do what the U.S. Post Office needed it to do, including re-optimizing the entire U.S. Post Office service network.)

Supply Management can save just about any organization, but the organization has to be willing to use Supply Management, and the tools and techniques Supply Management brings to the table, and used Supply Management aggressively if the organization is serious about staying above water.

Spend Visibility: An Implementation Guide – The Definitive Book on Next Level Performance

Don’t forget to take advantage of this great offer and Download Sourcing Innovation’s “Spend Visibility: An Implementation Guide” – The Definitive Book on Next Level Performance for FREE! No Registration Required!

But don’t take Sourcing Innovation’s Word For It! Listen to these reviews from leading bloggers in Supply Management:

A Rare Medium Well-Done

Vinnie Mirchandani, Deal Architect

This book gets to the science of spend analysis vs. treating it as an art.

Jason Busch, Spend Matters

The guide is well thought-out, practical, and well-written.

Stephen Guth, Vendor Management Office

This guide is very comprehensive and will provide valuable information to both procurement functional and IT implementation focused readers.

Bob Ferrari, Supply Chain Matters

It is, in fact, one of the most comprehensive step-by-step resource guides I have seen for this industry.

William Dorn, The Strategic Sourceror

It Starts By Remembering that an ARS is Used to Carry a LoAD, Not a Store. (HD Part V)

Last week we discussed the recent snafu made by Home Depot during a recent upgrade to its online website on February 1st that Left Home Depot Customers Running in Circles and chasing their tails due to incomplete planning and testing. We noted that, despite the fact that it was breaking news for some analysts and bloggers, it is not something Home Depot needs to be concerned about. However, as discussed in following posts, Home Depot does have some serious technology-related problems in the doctor‘s view — problems that it may not even be aware of which, if left unchecked, may only amplify as time goes on. However, as discussed in our last two posts, the problem has an easy solution, and it starts by rolling back SARS and retrenching to ARS at the Local Area Depots.

Done right, an Automated Replenishment System (ARS) is the foundation for next generation inventory management. Just ask any inventory management software vendor (including SYSPRO, that was reviewed here on SI in this post and this other post). However, done right requires that the implementation follow a few simple rules

  1. Forecasting at the item level is only done across a geography
    Trying to forecast item demand at the depot, and especially at the store, level is like trying to forecast the performance of an individual stock. It’s more or less impossible. For an item that moves erratically, a single purchase can shift the entire demand pattern. However, just like the performance of a broad mutual fund across an industry will be consistent over time, so will a forecast across aggregated demand across multiple Local Area Depots and the stores they serve.
  2. Forecasting at the depot level is only done across a short time span
    Again, while the demand for many depots will be predictable with reasonable accuracy, the demand at a single depot will not be predictable with reasonable accuracy over a long period of time. So, the more fine-grained the forecast, the shorter the term the forecast must be for.
  3. Forecasts can always be overridden and adjusted by the depot category manager

    No algorithm is intelligent. Not even close. An expert, who knows of a(n upcoming) promotion, change in local tastes or fashion, or trending feedback on product quality will always have the upper hand on certain items at the local level. Thus, the system should allow the local category expert to override each and every forecast and pull rule as circumstances dictate. As the rules get more fine-tuned, the need for this will decrease over time, but there will always be a special situation.
  4. Forecasts and Rules are reviewed and updated on a regular cycle
    As per our last few posts, the forecasts and rules assume at the minimum a predictable, if not a perfect, world — and the world is never predictable. The system will have to be adjusted as time goes on.

Furthermore, if the retailer insists on maximizing use of the system across each and every one of its locations, including retail stores, then the ARS must be restricted to suggest mode. In other words, there’s nothing wrong with using the rules engine and forecast models to suggest what inventory should be ordered, when, and in what quantity, but the order for any item must be presented for review by the appropriate category or department manager, and corrected if required. Thus, there should be human involvement at the end of each and every order cycle. If the category or department manager knows that only certain items have been presenting (potential) issues, the manager must be able to quickly review the suggested orders for those items, make any mods, and then accept the entire order for submission. In other words, if the system has been doing a good job on the widget category, the category manager shouldn’t be forced to review the widget category on every order, but should always have the option just in case she has an inkling. However, if there has been a continual stock-out of sprockets, the category manager should be able to up the order, and, if necessary, change the rule at the local level (subject to review of the depot manager or category manager if required).

And it must be extremely easy for anyone to report an error in inventory count or historical data at any location so that model, and forecast, is corrected as soon as possible. Without accurate data, the system will never work.

That’s the secret to a successful implementation of an Automated Replenishment System — don’t set it and forget it and don’t force it where it doesn’t fit. Monitor and adjust it continually, and as time goes on, it will get more and more accurate with less and less adjustment for any items with steady trends, leaving forecasters free to focus on fashionable or seasonal items in an effort to truly minimize stock-outs and maximize sales.

However, There Is Still Time To Turn Things Around. (HD Part IV)

In Part I, we began this series with a reference to a recent article in StoreFront BackTalk on how a recent snafu made by Home Depot during a recent upgrade to its online website on February 1st Left Home Depot Customers Running in Circles and chasing their tails due to incomplete planning and testing. While this was breaking news for some analysts and bloggers, given that it likely won’t even make a blip on Home Depot’s bottom line when all is said and done, for reasons discussed in the post, it isn’t something Home Depot needs to be concerned about. However, as discussed in the second post of the series, Home Depot does have serious technology-related problems in the doctor‘s view — problems that it may not even be aware of which are only going to amplify as time goes on. And these problems are very serious because, as discussed in the third post of the series, they are likely resulting in dissatisfied customers every day in every one of the 2,200 stores across North America. And when you consider that it would only take 3 dissatisfied customers per day per store (which seems entirely feasible in the doctor‘s view) to create 2,200,000 dissatisfied customers over the course of the year, the unnoticeable drops in the bucket become a rip current that could cause some serious damage.

So what’s the problem? As discussed in the last post, it is SARS, short for Storefront Automated Replenishment Systems, which, to the doctor‘s understanding, they have rolled out to the store level across each and every North American store over the past year or two. Advertised by vendors as the ultimate solution to stock-outs and lost sales, as the system is supposed to automatically place purchase orders and replenish inventory at just the right time to insure an item is never stocked out and that the optimum quantity is always on hand, it is sold as a retailer’s dream when, in fact, it is actually a nightmare in disguise. As explained in the last post, these systems only work in a perfect world, but there ain’t no perfect world, and they inevitably break down due to imperfections in the system, incompleteness in the knowledge, and inadequacies of the human operators (including programmers, administrators, and users).

You see, like traditional Automated Replenishment Systems (ARS), also known as Automatic Ordering Systems (AOS), SARS assumes:

  • Initial inventory counts are correct
    for each and every product in the store.
  • POS-based inventory updates are regular and correct
    preferably, on a regular, daily, basis.
  • Damaged merchandise is removed from inventory promptly
    and removed from the system just as promptly.
  • The replenishment model is accurate
    and takes into account weekly, monthly, and seasonal variations in demands
  • The world of tomorrow never comes
    because the model on which the inventory demand is modelled is supposed to repeat cyclicly with no change, ever.

But they are not Xanadu. And, in the doctor‘s view, the source of SARS is the same as that of the Kubla Khan because:

  • A significant number of inventory counts are always wrong … and this number only increases with time.
    There’s a reason retailers typically have all-night inventory counting marathons on a regular, often quarterly, basis. Damage, theft, loss, and human error results in a large number of products having an inventory count that is off.
  • Software is buggy and even the internet is not infallible.
    Errors in the POS system can result in the odd transaction not being included in the summary sent to the inventory system, the update file being cut off, or incomplete transmission. Plus, a poorly timed communication failure can result in the POS system thinking the transmission is complete when part of the file was lost.
  • Even if it is removed from inventory, it’s often not removed from the system!
    A junior associate may remove the item from the shelf, but forget to update the system. This will cause the inventory counts to get wildly out of whack over time.
  • The replenishment model is typically a randomly chosen best-fit model on available data.
    And depending on how much data is chosen, that model could change wildly.
  • The arrow of time dictates that tomorrow always comes.
    Next Monday will not be the same as this Monday. Next February will not be the same as this February. And as soon as an unplanned promotion occurs on an unexpected item, something wildly different will occur.

In other words, at the store level, SARS does not work — at least not in an automated fashion. Thus, if Home Depot wants to turn things around, or at least insure that things get pointed in the right direction before it needs to turn things around, in the doctor‘s view, it needs to (partially) abandon SARS at the store level and go back to ARS at the (local) distribution centre level where, when done properly, ARS can be tuned to work like a charm. How? That will be discussed in the next post.