Monthly Archives: July 2012

Sound, Conventional Financial Management is NOT Good for Supply Chains

And it’s not good from a cost of capital perspective either!

While skimming through Purchasing Insight’s recent white-paper on Supply Chain Finance: A Procurement Strategy (after stumbling upon their recent Supply Chain Leakage post that got them a Sourcing Innovation Thumbs Up, I stumbled on the following paragraph:

By extending payment terms to suppliers (paying them as late as possible) DPO is maximized and by being efficient at collecting from customers (getting the money in as soon as possible), DSO is minimized. This is sound, conventional financial management. It’s all about keeping hold of cash for as long as possible, minimizing the need to borrow and providing an opportunity to earn interest on cash deposits. Poor management of DPO and DSO increases the need to borrow and, in an economic environment where credit is scarcely available to some, borrowing can be very expensive indeed.

It may be sound conventional financial management, but, in reality, maximizing DPO is just another name for screwing your supplier, and all that does is increase your costs while decreasing the overall value you are able to extract from the relationship.

All I can say is that I’m glad the next section went on to say that:

For the procurement community, payment terms can be a double-edged sword. While it’s good to contribute to the reduced cost of working capital by extending payment terms, this doesn’t always support healthy supplier relationships and it can put an inordinate strain on the finances of the supplier, which is in the interests of neither party.

Finally, someone else who realizes that screwing suppliers is a bad thing! (I’ve lost count on how many times I’ve had to rant on this subject over the last six years.) Because, as the white paper goes on to state:

There is another, more compelling reason why the traditional approach to working capital management doesn’t make sense from a procurement point of view. It costs a fortune! The fact is that the traditional, siloed, adversarial approach adopted by most buying organizations toward their suppliers has a huge supply chain cost especially in the current economic climate.

Hear, hear! In order to extract a 0.1% return by holding on to your cash an extra 30 days, you’re risking a rise in costs of 1% to 3% as your supplier passes on their high cost of factoring to you!

However, when trying to improve your working capital practices in such a way that they benefit you and the supplier to take cost out of the entire supply chain, don’t limit yourself to early payment discounts as the sole tool at your disposal. It can be a great tool, as cash strapped suppliers get cash early and you get a better return, but it’s not the only tool. Another option could be to buy the raw materials or components on behalf of your supplier. You might have more leverage with a supplier that you are doing business with on another category and be able to get a better price. A third option, especially in this economy, could be to barter services for better prices. Maybe they need help with their back-office functions. Maybe you have a great relationship with a GPO that could help them and your weight could get them better pricing, or, your technical experts, who recently oversaw the implementation of good back-office accounting and P2P software in your firm could oversee the implementation of the same software in their firm in exchange for free value-added services from them. Be creative. There are many ways to win-win.

The (Board) Gamer’s Guide to Supply Management Part IV: Castle Panic

Some games are so fiendishly clever, so devilishly difficult, the players must join forces and fight against the very game itself
… because, in the end, we will either all win, or we will all be sitting on the couch of shame.

I’m euphoric to continue this one-of-a-kind summer series that will help you whether you are just interested in finding out about this new and exciting career opportunity, or ready to take your Supply Management career to the next level. Not only is it more fun than watching the defragmentation bar in Windows 95 on a 386 with 4 MB of RAM and an almost full 1 GB hard drive (which boots up in a day and a half), but when you can grasp a lot of the basic concepts by playing the right mix of strategic (and sometimes tactical) board games with your friends, it’s two blasts and a half!

While we still have to tackle the economic games (like Puerto Rico) at some point, we’re going to make use of the fact that, thanks to unprecedented generosity of Wil Wheaton (@wilw) and Geek & Sundry, we have another fantastic TableTop episode where Wil Wheaton introduces us to the game. Until we run out, we are going to take advantage of the priceless gifts that Mr. Wheaton has granted us with this series.

Wil Wheaton gives us a very succinct introduction to Castle Panic, a classic castle defence game (of which there are thousands on the internet and at least dozens for your iPhone) turned into an exceptionally well crafted team-based board game:

The board is divided into three areas called arcs. There’s a blue arc, a green arc, and a red arc. Each arc is further divided into three zones that are targetable by archers, knights, and swordsmen. … The bad guys are trolls, orcs, and goblins. They’re coming out of the forest, advancing towards our castle, trying to ruin our lives. Every turn, the active player will draw cards and then trade a card with another player so that they’re in a position to fight the bad guy most effectively. This is how we work together. We have to get useful cards to the active player so they can target one of the guys coming in to knock down one of our castle walls. After all that happens, the bad guys will advance towards the castle and then we will do the entire thing all over again. … If the bad guys come in and knock down all of our towers, we lose the game. If we manage to defeat all the bad guys, even if there is only one tower left standing, then we win the game.

In TableTop Episode 6, we learn that Castle Panic teaches cooperation, not co-opetition, in the face of almost insurmountable risks as a result of unexpected disasters. Think of goblins as environmental disasters, orcs as socio-technological failings, and trolls as geopolitical-economic crisis that could smash your supply chain into pieces if not properly addressed. And just like in reality, depending on what the risk is, and where it is, only a certain type of mitigation can be brought to bear. An environmental disaster that destroys a production plant and wipes out a source of supply can only be countered by finding a new source of supply, which, in supply chains, may often mean trading with your competition who has locked up excess supply but needs something else that you have more immediate access to. Similarly, in Castle Panic, staying alive often means trading archers, knights, swordsman, heroes, and even barbarians with other players to insure you have the resources you need to take out the immediate threats.

Just like each monster begins with a different number of hit points in castle panic, each disaster has a different degree of severity and requires and may require multiple actions to resolve. If a geopolitical uprising or economic sanction all of a sudden makes your suppliers in Vietnam inaccessible, whom you were depending on for raw materials and production, you will have to find a new source of raw material supply and a new manufacturing partner.

In Castle Panic, just like in your supply chain, the risks, and the disasters they represent, keep coming. At the end of very turn, players must draw 2 tokens from the monster pile (until all 49 are exhausted). These may be run of the mill goblins, trolls, and orcs or they may be special tokens that move monsters around the board; advance them closer to the castle you have to protect (such as the Orc warlord or Troll Mage); force you to draw additional monsters (including the Goblin King); kill your defenders (by way of plagues), or that unleash a giant boulder that, while having the benefit of squashing all monsters in its path, doesn’t stop until one of your walls or towers are destroyed. (The same way that a new piece of legislation, a trade barrier, or other unexpected turn of events can cut off a market for your organization.)

Furthermore, in Castle Panic, just like in your supply chain, your resources are limited. Players draw to replenish their 5-card hand at the beginning of their turn, and once those resources are spent, they are not replenished until the beginning of their next term (just like your budget is only replenished once a year). While most cards take the form of defenders (archers, knights, swordsmen, barbarians, and heroes), some are special cards that will allow a player to draw 2 extra cards, rebuild a wall (with brick and mortar), slow monsters down (with tar), drive monsters back (into the forest), or even scavenge the discard pile and reuse an already played card.

It’s a great team-building game, and one you should play internally with your cross-functional teams to get them thinking strategically and to help them understand that you stand together, or you fall together. Because, just like in real life supply chains,

we will live together, or die alone — in Castle Panic.

Sustainability Requires Shared Understanding

A recent article on Sustainable Success over on the CPO AGenda discussed three challenges that, when addressed, can lead to success in sustainability efforts. The challenge of tools and transition to better processes is well known, and straight-forward to address. The challenge of recognizing the achievements of supply management professionals is lesser known, but there are a number of techniques that can be used to address this challenge. However, the challenge of building a common understanding of just what sustainability means and why it is relevant to procurement is often overlooked and not as easy to address.

As the article notes, first among the difficulties in getting sustainability right is making sure everyone sees the same potential benefits. This means a common understanding that goes beyond what the term sustainability means on its own, but what it means for Supply Management and the organization as a whole. As the article notes, sustainable procurement aims for the same outcomes that any buyer would wish to see in their work, and delivers some additional benefits that can go beyond the buying organization. In particular, it means seeking benefits now that do not impact the ability to seek benefits in the future. The impact of activities must be considered not just with respect to the current sourcing event, but over the lifetime of the category and any affected supplier relationships.

So how do you come up with a common definition?

As the article notes, a good way to start is by determining how a potential decision stacks up with respect to some key factors, such as:

  • customer reputation
    does it increase your net worth in the eyes of a customer (who has also embarked on a sustainability agenda)
  • risk management
    does it decrease your overall risk exposure (in terms of supply availability, reputational damage, or media exposure)
  • medium / long term value
    does it decrease costs, increase quality, or insure available supply
  • supplier relationship(s)
    will the supplier partner in innovation to reduce production costs, reduce waste, and decrease environmental impact

And then by determining how the decision stacks up with respect to concrete sustainability factors such as:

  • raw materials
    are the materials you are using renewable and can they be extracted with minimal harm to the environment
  • energy requirements
    are the energy requirements associated with your purchase (for production, storage, and transportation) minimal and can they be met with renewable resources
  • waste products
    are waste products minimal and/or reusable and/or reclaimable? can the food waste be used to feed livestock? can the metal waste be melted down and reused?
  • worker treatment
    are all workers who take part in your supply chain treated ethically, responsibly, and fairly, using standard guidelines, such as those outlined by JLP

If a supply management decision would increase customer reputation, reduce risk, contribute to medium and long term value, enhance supplier relationships, use renewable (and non-environmentally harmful) raw materials, reduce energy requirements, minimize (or eliminate) waste in production, and do all this in the context of ethical worker treatment, then, regardless of what definition of sustainability each individual on a cross-functional sourcing team is partial to, it should be easy to agree that such a decision, at least in the mid-term, is sustainable.

I Write Alone

I write alone, yeah
with nobody else
I write alone, yeah
with nobody else
You know when I write alone
I prefer to be by myself

Every morning just before breakfast
I don’t want no bad company
Just me and good buddy lonesome
That’s all I ever need
‘Cause I write alone, yeah
with nobody else
You know when I write alone
I prefer to be by myself

The other night I laid sleeping
And I woke up with inspiration
So I fired up my trusty Macbook
And I turned off dication
And I wrote alone, yeah
with nobody else
You know when I write alone
I prefer to be by myself

The other day I got invited to a circle
But I stayed offline instead
Just me and my trusty text edit
Spinning up a brand new thread
And I wrote alone, yeah
with nobody else
You know when I write alone
I prefer to be by myself

My fellow bloggers done give up on me
But I don’t feel inadequate
That the only ones hanging out with me
Are my dear old LOLCats
And we write alone, yeah
with nobody else
You know when I write alone
I prefer to be by myself

Scott Adams captured it best in this Wednesday’s Dilbert Strip.