Monthly Archives: July 2012

Finally, Someone Else Who Gets A Key Point of Working Capital Management!

Regular readers will know that SI has been ranting about all the hype-talk about Working Capital Management for years, including this post where the doctor got sick of all this working capital management talk. The simple fact of the matter is that most companies don’t understand what working capital management really is and mistake screwing suppliers (whether or not it is intentional) for lowering supply chain costs. The reality is that lowering your cost today is not good working capital management if it only raises your cost of acquisition tomorrow.

That’s why it was great to see this recent post over on Purchasing Insight on “Supply Chain Leakage – Stemming the Flow of Costs”. As per the article, when you calculate the scale of costs that leak from the supply chain, it reveals astonishing waste and it’s time that businesses — suppliers and their customers — took a closer look at collaborative techniques to take out these pointless costs.

As the article says, 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. If your cost of capital is 1%, and your supplier’s cost of capital is 10% or 20%, you’re just increasing your costs by 10% to 20% by paying late to save a paltry 1% or 2% cost on a short-term loan. The numbers just don’t add up.

True savings propagate through the supply chain. They are not limited to your organization.

This is What Tar and Feathering is For

I get disgusted when I see articles like this recent article in The Economist on how Bogus degrees from non-existent colleges cause headaches for employers.

It’s bad enough when a job candidate, who is actually a con-person, lies about a degree — either by leaving off the field or specialization of the degree in the hopes that you’ll believe an accounting degree was actually a computer science degree (as a certain high-tech CEO did) or by claiming to have a degree from a college / private institution that is no longer in business or, better yet, just had a fire and lost all the records.

But when someone sells a fake degree from a fake institution, as the nine people who stood trial in China in April did, that calls for a public tar and feathering. It’s disgusting. A degree is not only something that should be earned (which is why I also get upset when a celebrity who went to a certain institution gets a degree in something they don’t really know anything about, or the catch all Doctor of Letters degree, just because they are famous*), but something that should be certified as granting the holder a certain degree of knowledge and capability. You should be able to go to a registered, and reasonably respected, body and ascertain that the institution or individual in question had the authority to grant the degree, which conveys that whomever awarded the degree had a reasonable understanding of the knowledge required to verify that the recipient met the minimum requirements for the degree and was worthy.

And if I wasn’t livid enough after reading this point, you can bet I was ranting like a madman after reading that, in China, the really shrewd conmen have gone beyond simply selling fake degrees from fake universities, to pretending to offer real degrees from real, accredited, institutions. In one situation, a group of 68 students had been paying to attend class at what they thought was a programme affiliated with the Shangdong Institute of Light Industry (SILI). After four years they found out that everything about the programme had been a scam, and that the man behind the scheme had vanished. If you buy a degree, and get ripped off, that’s your problem. But in this case, a very enterprising conman leased a building, found some equipment, hired an instructor (who was probably qualified enough to teach the classes), and, as far as I can tell, literally offered the SILI degree program. Yes, the fake institute was not affiliated with SILI, but if the students came out of the four-year fake program with the same skills and knowledge as the students who went through the real-program, they have earned the degree as much as their peers — but because they didn’t get accepted into, and pay, the real institute, they’re screwed. In this situation, they should be allowed equivalency examinations, and get the degree if they pass, but you know this is not going to happen unless they pay the full degree cost — all over again. In this case, we not only need tar and feathering, but the walk of shame through the capital — end to end. Then comes the jail time and mandatory repayments, with damages.

Short story — don’t ever, EVER, EVER offer a fake degree or certification, because if the doctor finds out, he will make sure that the entire world knows and report you to every certification body, law enforcement authority, and regulatory body he can find the phone number or e-mail for and make sure you, or your institution, is publicly humiliated. This goes double if you offer fake degrees or certifications in Supply Management, or make false claims about what a certified or degreed individual will be able to do after obtaining your certification or degree. You have been warned!


* My readers who, like the doctor, earned their Ph.D. (and paid for it in blood, sweat, hair, and mental health) will understand!

Supply Chain Difficulties in Latin America

Inbound Logistics recently ran a great article on Beating the Odds in Latin America that did a good job of summarizing the changing situation in Latin America and the challenges associated with your Latin American Supply Chain. Given that it might be true that Latin America “is all about growth”, it’s a market you want to understand.

The first challenge that the article pointed out is that of logistics costs that are high compared to other regions of the world-about 15 percent of the cost of goods sold. Ouch! Like parts of India and Northern China, transportation options are few, roads are not great, rail is (almost) non-existent in many places, and ports are congested. As more investment flows into the region, the situation will improve as it did in China and India. The situation in Brazil in particular is going to improve rapidly with the 2014 World Cup and 2016 Olympic Games on the radar. And this isn’t the only transportation issue. The transportation industry is fragmented in Latin America, with a lot of small players and this makes it more difficult to manage, especially when handling volume spikes.

The second challenge is that of lagging productivity. Average productivity in the region has increased only 1.4% per year for the past 20 years, which is much less than in Asian economies. This is partly due to restrictive labour rules and sector specific regulations but also due to taxes and lack of investment.

The third challenge is that of supply chain expertise — there is a relative lack thereof in Latin America. Universities aren’t even offering logistics degrees yet, yet alone supply chain management degrees. Without even basic Operations Research programs, people entering the logistics field have to learn everything from how to manage a distribution centre to how to interact with customers.

The fourth challenge is that of systems. Technology systems infrastructure generally lack sophistication, and in some cases, even availability. Plus, for an average logistics carrier in the region, a TMS (Transportation Management System) is too expensive for a single company to justify. As a result, many companies end up doing a lot of manual work that is time and cost intensive.

The fifth, and final challenge, that was noted is that of security. Crime is pervasive throughout Latin America, and takes a heavy toll. The homicide rate in some Latin American cities is extremely high. For example, the crime rate in Rio de Janeiro has eight (8) times as many homicides as New York on an annual basis and eleven (11) times as many as Toronto. Plus, surface transportation is the most difficult security risk area of the supply chain in Latin America. Sincethere usually aren’t multiple routes to destinations within a country. In many cases, criminals simply block the highway and start checking trucks to see what products they like and they get away with it because the police are understaffed so they cannot patrol every road.

It’s not an easy situation, but it does appear to be a navigable one for those willing to roll up their sleeves and get their hands dirty.

Walmart Changed the World 50 Years Ago, But Did It Change For The Better?

I certainly agree with this recent Time Business article on “10 Ways Walmart Changed the World” (July 2, 2012) since the first Walmart store was opened in Rogers, Arkansas on July 2, 1962 (four thousand, four hundred stores ago). But I’m not sure all of the changes created by the world’s largest private employer are for the best.

Let’s start with this nice and succinct quote from the article:

Walmart’s relentless drive for efficiency has bankrupted companies, put downward pressure on wages and upset a retail culture that some believe was less efficient but more personal and aesthetically pleasing.

It may be the story of American capitalism at its finest, but is that the story it wants to bring to the rest of the world as it continues its rapid (or is that rampant) international expansion?

Now, while everyday low prices, supplier partnership, data driven management, supply chain connectivity, focus on decentralized management, and sustainability are good things; and while better selection is neither good nor bad in and of itself; the suburban sprawl it generates is bad for the environment, the relentless drive for efficiency is an accelerating factor in the outsourcing of American jobs and stagnant wages for North American employees is making us poor, and the creation of an overconsumptive (& disposable) culture will make it almost impossible for true sustainability to creep into our culture.

From a simplistic perspective, 6 changes for the better compared to 3 for the worse would appear to be a balance in Walmart’s favour, but it’s not how many good deeds and how many bad deeds, it’s the extent of the damage of the bad deeds that matters. And the extent is pretty bad when we look at things from a modern perspective.

First of all, as the article notes:

The selection that Americans began to demand required bigger stores that could only be built on the outskirts of small towns or in the suburbs of large cities.

Thanks largely to Walmart, we began to sprawl so much that your average big American city is now sprawling into the next big American city. That’s why we have Mega-Regions where it’s hard to determine where one city ends and the next begins. This is about as un-green as you can get. There’s a reason that San Francisco, Vancouver, and New York are the greenest cities in North America. (See Metropolis.) Why? For starters, the bigger the city, the more gas we have to use to get around because public transportation covers less and less. Plus, we need more resources to distribute power, water, communications, and everything else we need to live.

In the last 10 years, the US economy has last over 4 million blue-collar jobs, mainly as a result of manufacturing job losses, which is largely due to outsourcing. Outsourcing accelerated by Walmart in its pursuit of the lowest possible cost.

But this doesn’t pale in comparison to the creation of the overconsumptive and disposable culture it has created. Thanks to Walmart, we not only want to buy more, because some products have become so cheap, relatively speaking, that we don’t even think about buying them. And, more importantly, because some products have become so cheap, we don’t even think about repairing them when they break, even if they repairable. As a result, we now generate more waste per capita then one would have ever thought possible even a few decades ago. Without Walmart, something else might have come along, but the reality is that Walmart came along and Walmart did the damage.

Any differing opinions?

The (Board) Gamer’s Guide to Supply Management Part II: The Settlers of Catan

I’m very excited to continue this brand new 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. Learning Supply Management doesn’t have to be as fun as watching paint dry — it can be much more fun! And when you can grasp some of the basic concepts playing a strategic board game with your friends, it’s a blast.

While Settlers of America Trails to Rails (also put out by Catan) might be a better choice to follow Ticket To Ride, that we introduced in last week’s post, The Settlers of Catan is also a great game to include in our series, and, more importantly, there is another great TableTop episode, again hosted by the one, and only, Wil Wheaton In Exile on Twitter. And since the best way to learn a new game is to see it in action until you are familiar with other board games in the same vein, we’re going to take advantage of the priceless gift that Mr. Wheaton has given us.

In TableTop Episode 2, Wil Wheaton uses Settlers of Catan, a modern day classic that has sold hundreds of millions of copies, to introduce us to the joys of trading wood for sheep. What could be better?

As with Ticket to Ride, the rules are fairly simple. As explained by Wil:

We are settlers on the legendary island of Catan. The first person to reach 10 victory points wins the game. You get victory points by collecting and managing resources. You get resources when one of the settlements you have built is adjacent to a tile that has spawned a resource. We find out which tiles spawn resources every turn by rolling dice. No one will have enough resources on their own to build the roads, settlements, and cities they need to win the game. So we will all have to barter and trade with each other. Just like in real life, there are nasty surprises waiting for you. Whenever we roll a seven, the robber gets activated. He steals from you. We hate the robber. The robber is a dick. But if you get robbed, it’s not the end of the world. There are other ways to get victory points — having the longest road, having the largest army, or you can also trade in resources to buy [these] development cards (which may also give us victory points).

Sounds easy, right? So where is the difficulty? Some resources are more likely to be spawned than others, as each of the 18 non-desert hexes have different numbers associated with them from 2 to 12 (excluding 7), and, according to probability, hexes with sixes or eights are more likely to be rolled and spawn their resources. Plus, there are five different resource types (brick, wood, wheat, sheep, and stone), and each type of building requires multiple resource types. A road requires wood and brick; a settlement (worth one victory point) requires wood, brick, wheat, and sheep; and a city (which is built on top of a settlement and worth two victory points) requires two wheat and three stone. As such, you need to strategically position your settlements to maximize the chances of getting the resources you need, but you can’t place settlements just anywhere. They can only be at hex boundaries and there must be a road of length at least two between any pair of settlements on the board. Or, if you don’t have good placement opportunities for your settlements that would allow you to maximize your chance of getting resources (by placing the settlement on a corner between three hexes with decent roll probabilities), you can try to build on a port that gives you better than average trading opportunities. (In the game, you can always trade four resources of the same type for a resource of any other type with “the bank”*, but some ports reduce this to three for one, and some ports allow you to trade specific resources two for one. This is very useful near the end of the game when your opponents are unwilling to trade with you if they see you nearing victory.)

The only other relevant rules are that if you build the longest road (of length five or more), or amass the largest army (of three or more knights, which are mixed in with the development cards), you gain two victory points and if you are lucky enough to draw a monopoly card when you purchase a development card, you can play it down and every other player has to give you all cards of the resource type you name.** And if you roll the robber, everyone (including you) with 7 or more resource cards has to lose half, but you get to move the robber to any hex and steal a (random) resource from a player with a neighbouring settlement (or city).

So what are the parallels with Supply Management? In Supply Management:

We are Supply Chain Professionals doing business in the global marketplace. The first of us to secure and deliver all of the products and services we need to meet all of the customer demands wins the game. We secure the products and services we need by managing suppliers and reserving limited production and distribution capacity. We find out which resources are limited by watching the market and taking note of tumultuous events. In today’s marketplace, no supplier will be able to meet all of our component or service needs on their own, so we will not only have to barter and trade with multiple suppliers, but also with our competitors and their suppliers in tight markets. And there will be nasty surprises waiting for us. A natural disaster may wipe out part of the raw material supply or Somali pirates may seize a precious shipment. We hate the pirates. They are dicks. But if our shipments get robbed, it’s not the end of the world. There are other ways to serve our customers. We can use the insurance money to buy from someone else, we can redesign our products to use alternate materials, or we can focus on a new or different substitute product or service to get us, and our customers, through the worst of times.

And just like in Catan, some resources will be more readily available than others. We will need different resources (from different suppliers) to assemble our complex product and service offerings, strategic reservation of production capacity and distribution capacity will give us a major competitive edge over our competition, and the more international trading capability we have at our disposal, the better trades we are going to be able to make (as some countries value wheat, lumber, or brick more than others, depending on whether they are short on building materials or food). The more trade lanes we have access to, the more markets the organization can serve; acquiring a monopoly on a certain product or service in a region, even for a limited time, gives us a significant edge in negotiations (as long as it’s not in violation of local laws), and keeping individual shipment value down can limit losses in the event of a robbery.

So what does The Settlers of Catan teach us?

  • if we are gamers new to the subject matter, it teaches us that successful Supply Management requires a lot of skill as we have to balance investments in (new) product development (settlements and cities) and logistics capacity (roads); we have to optimize local distribution (inner placement) hand-in-hand with global distribution (port placement); and we have to try and keep our competitors from locking up too much of available capacity in critical trade lanes (longest road) or production (largest army) and, most importantly, that we will have to do a lot of negotiating to succeed.
  • if we are new Supply Management professionals looking to improve our Supply Management game, it allows us to practice our negotiation skills and see how the negotiations change depending on the supply/demand imbalance for the raw materials and our relative strength in the marketplace (as your opponents will typically be very open to trading with you to mutual advantage if they are in the lead but very reserved if you are in the lead and the trade is perceived as advancing you [closer] to victory).
  • if we are seasoned Supply Management veterans, it helps us understand the strength and weaknesses of different Supply Management strategies. For example, if we focus on inland building to maximize the chances of resource spawning every turn, we are giving up any chance to guarantee low-cost trades later in the game (as we will not be building on ports). And if we focus on the ports, while we may be able to trade many resources cheap, we may never acquire enough resources to trade. If we focus on pure settlement and city building, an opponent may be able to sneak in and win the game with only two settlements (2 points) and one city (2 points) if they took a development strategy and secured the longest road (2 points), largest army (2 points), and two victory point development cards (2 points). It allows us to work on our strategic planning skills and notice that for every strength we achieve with a strategy, there is always a weakness that can be exploited by our competition with the right counter-strategy. And the better we understand the strengths and weaknesses of our strategies, the better we can adapt them and monitor them over time.

It’s a great game, and if you can’t wait to get started, I have great news if you own an iOS device. Catan for iOS is available in the App Store — although I must admit its a bit hard to play on the iPhone/iPod touch as you constantly have to zoom in and out. Now go forth and settle!

* which is a term you Monopoly (which we will not be including in this series) players are familiar with
** which has the opposite effect of the Mod card in Uno Mod for you Uno players