Monthly Archives: February 2013

Supply Management Economics Part I

One of the goals of SI is to continually educate its readers on topics that other blogs miss or ignore. One of those topics that continually gets brushed under the rug is that of Supply Management Economics. For a while the doctor has been trying to figure out why. Is it because economics is not that important? Is it because economics is assumed to be implicitly conveyed in the topics covered? Or is it because there is no firm grasp of economics where Supply Management is concerned?

The answer is still up in the air, but part of the problem is obviously due to a lack of understanding, which should not be surprised when one considers that where the economy is concerned in general, there is a lack of understanding. Consider this recent article from the economist on A Brief History of Macro: How We Got Here about macroeconomics and its poor reputation these days due to its continual failure to answer why America’s post-crisis recovery has been so slow and, more importantly, its inability to predict the biggest and most powerful downturn since the Great Depression. (Epic Fail!)

Basically, despite all of economists’ grandiose claims to the contrary, when it comes to large-scale national and international economics, modern macroeconomic theory just doesn’t have a good enough grip on reality, so how can you be sure standard Supply Management economics is right either, even if you understand it? You can’t. But that doesn’t mean that you should ignore it either. There are a number of principles that hold up well and provide insight into the market dynamics that impact your organization on a daily basis. And without a solid understanding of the basics, how will you judge market-based sourcing strategies presented to you by consultants and experts? Before you can judge a supply market strategy, you have to know how much confidence you can put it in, and that requires an understanding of economics, the solidity of the underlying principles that are being assumed, and the assumptions that are unsupported.

In this series we going to cover a bit of the basics, as well as a few recent advancements in Supply Management Economic theory that may advance your understanding of strategic supply (relationship) management and inject more value into your value chain. We don’t know all the answers, but those who do not seek never find.

So where do we begin? At the beginning, or at least close to it. Back in 1776, when America was declaring its independence, Adam Smith, a moral philosopher and Scottish economist published An Inquiry into the Nature and Causes of the Wealth of Nations which offers one of the world’s first collected descriptions of what builds nations’ wealth. (Source: Wikipedia) In this fundamental work of classical economics, Smith essentially states that real wealth is resources and the goods and services produced with them.

Based on this, we are led to the three basic questions of economics:

  1. What to Produce.
  2. For Whom to Produce it For? And
  3. How to Produce It?

Which brings us back to my question of why economics continually gets brushed under the rug when Supply Management IS Economics!

Could Strategic Sourcing Save the US Government?

It’s a hard question to answer, but when you consider the fact that Joe Jordan, administrator of the Office of Federal Procurement Policy just said that our government is the largest purchaser in the world, but it buys as if it were 130 mid-sized businesses. We’ve got to leverage our buying power, you’ve got to think about it. Especially when a recent report from the IBM Center for The Business of Government by David C. Wyld estimated there are 8.9 Billion in Savings to be had in US Federal Government Spending Alone just by using public sector reverse auctions on a mere 75 Billion of Federal Spend identified as appropriate for reverse auctions.

When you think about the fact the the U.S. Government Budget for 2012 consisted of 3.796 Trillion of Expenditures, with 716 Billion going to defence, 56 Billion to International Affairs, 31 Billion to Science, Space, and Technology, 23 Billion to Energy, 43 Billion to Natural Resources and Environment, 19 Billion to Agriculture, 103 Billion to Transportation, 32 Billion to Community and Regional Development, 361 Billion to Health, and 62 Billion to Administration of Justice (which adds up to 1.446 Trillion, where you know manpower costs are probably less than half, you have to believe there is at least 750 Billion of Federal Spend that is appropriate for strategic sourcing. At least. Slap on the expected 12% expected average savings if the Federal Government bought strategically using its buying power, and we would expect there are at least 90 Billion in what is likely low-hanging fruit savings opportunities just waiting to be plucked. At least. Now, it’s true that this wouldn’t even cut 10% off the deficit, but if the US returns to a balanced budget in the near future, and strategic sourcing saves the company 12% of sourceable spend, then even if sourceable spend is only 50% of the entire spend, the company will be saving 150 Billion a year, and that adds up quite fast!

According to Jordan, strategic sourcing could perhaps apply to $150 Billion of $500 Billion under his (direct) purview. It’s only a fraction of the total spend that eventually needs to be strategically sourced, but it’s a good start if addressed. That would likely give the government savings of 15 Billion to 18 Billion and an incentive to force strategic sourcing through all the agencies that receive and/or control government funds.

And the savings will be magnified if the office really does improve the government’s records on contract past performance and takes advantage of inspectors’ general work in exposing waste, fraud and then suspends and debars “bad actor” contractors from getting work. (While some governments don’t believe past performance should be used against bidders in future RFPs, those of us in the private sector know that is the among the stupidest ideas ever and you don’t give a non-performer more work.) It’s one thing to overspend on a contract by 10%. It’s another thing to overspend by 100% because you awarded the contract to an entity that could not deliver.

And if Jordan is convinced that the office needs good, timely and robust past performance information and uses this as an incentive to evaluate the use of data to drive fact-based analytics in the acquisition process and moves to spend analysis and decision optimization / support systems, the savings opportunities for the U.S. Federal Government are an order of magnitude above what even the biggest corporations can hope to save with advanced sourcing efforts. For the US Federal Government, strategic sourcing is definitely worth the effort it will require.

And, for sure, this is another arms race the UK doesn’t want to win.

Don’t Forget the Recovery When Designing For Recovery!

In our recent post on how supplier circles are just loopy, we noted that the only difference between what the McKinsey article on Manufacturing Resource Productivity is preaching and what the environmentalists have been preaching for years is that the reduce, reuse, and recycle mantra should pervade the supply chain end to end and influence new business models that improve recovery, create new sources of supply, optimize production, and increase revenues instead of being an afterthought. In essence, as we pointed out, McKinsey is jumping on the Design for Recycle bandwagon that SI and a few other (lonely) thought leaders have been pulling for years (and years and years), but changing the language to make it look like it’s their idea (as all good consultants do — but at least they are not stealing your watch to tell you the time).

Design for Recycle, which is also known as Design for Recovery, is very important as the supply of more and more rare earth minerals become scarcer and scarcer and the most abundant source is in products (going) in (to) the hands of the consumers, who will eventually finish with the product, and without an alternative, toss it in the trash — where it may end up wasted in a landfill! But this isn’t the only reason you want your products back. Even when the initial customer is done with them, most of your products, or at least components thereof, still possess value and can still be refurbished and resold at a profit, even if they are not working. The obvious example is the iPhone 4S still has value when the customer upgrades to the iPhone 5. A less obvious example is that the laptop still has value if only the memory needs to be replaced. If the laptop can be resold for $300 with only $20 for new memory chips and $30 of labour, then recovering it at a cost of $30 of shipping and a trade-in credit of $100 should be a no-brainer as that leaves you with 40% profit — which is probably a heck of a lot more than what you made initially when prices were slashed to be competitive with your most aggressive competitor! And then there’s the fact that many jurisdictions are enacting legislation regarding returns management and proper disposal. If you don’t have a valid recovery mechanism to ensure customers have an option for proper disposal, in some of these jurisdictions, you could be fined if your customer, lacking such an option, decides to throw the product in the trash.

But these aren’t the only reasons to plan for recovery. As pointed out in a recent article on reclaiming value through reverse logistics, a retailer’s returns policy is a critical decision making factor in a customer’s purchase. Specifically, 63% of online shoppers look at the policy before making a purchase, and 48% will shop more often with a retailer that offers a lenient, easy-to-understand return policy. And while this is a retailer, and not manufacturer, statistic, it does indicate the significance of returns. Furthermore, the reality is that if you have a good return management process that is headache-and-hassle free for the retailer, then the retailer is likely to offer the customer a headache-and-hassle free policy as it knows it doesn’t have to worry about getting stuck with unwanted or defective products. Putting your customer first helps your customer put the end consumer first, which, according to the UPS commissioned study quoted in the article, increases the chances that they will buy from the retailer who is your customer. Plus, 32% of customers have indicated that they will focus less on price and more on quality of service if given a lenient, easy-to-understand returns policy. That’s how you maximize revenue and profit!

2013: Another Year of the Same Old, Same Old? Part III

In Parts I and II we lamented the relative lack of new innovation in the space for the last few years, as most of the big announcements, and innovations, have centered around technologies that were in (initial) development of the first half of the noughts, and usability and applicability (to specific verticals) in particular before noting that we don’t see much new in the way of trends coming this year and that we’re not alone.

In the last two posts, we covered the global trends identified by ChainLink Research in their recently published Big Trends for Business 2013 as well as the business trends companies expect to the capitalize on this year as a result. In the first case, it almost looks like the Mayans were right, the world came to a stop, and then immediately reversed direction as it looks like we’re in for 2012 all over again and in the latter case, the trends are the same trends they should have been capitalizing on last year!

And if this isn’t bad enough, the big issues identified by ChainLink are the same issues we’ve been facing for years. The big issues identified were:

  • Working Capital Management
    There’s a squeeze up and down the chain — customers want to take longer to pay, suppliers want to be paid sooner. Plus, it’s getting harder to support the unprofitable product lines and the customers that cost more than they’re worth — but what, and who, are they?
  • Cost/Pricing
    Costs need to be kept down, more has to be done with less, and customers are continually demanding lower prices while inflation is coming back with a vengeance.
  • Channel Development
    More outlets are needed to sell more product to generate the revenue required for profitability.
  • Skilled Workforce
    Finding, and retaining, a skilled workforce is a critical issue to companies.
  • ChequeBook Under Lock and Key
    Because of the uncertainty, the chequebooks is under lock and key and the company is still hoarding cash instead of spending it.
  • Risk Management
    Seeing disruptions are on the rise, now more than ever, many companies are concerned about what could happen to them.

Add the really sad thing is the underlying reasons we are facing these problems haven’t changed for years either:

  • They still haven’t learned what working capital management is
    Most companies think extending DPO is good working capital management! In fact, a few think that 200 days is just fine! I’m anxious to see what company has this conversation first!
  • They still haven’t figured out that you can’t squeeze blood from a stone or that savings are a thing of the past

    • And that the only path left to success is to focus on value.

  • They’re still afraid of trusting someone to the extent required to truly hand over a sales channel they can’t manage in house.
    If you can’t handle Twitter, you shouldn’t even try.
  • They always cut the training budget first.
    It’s not someone else’s job to train your workforce, it’s yours! And stop putting the blame on the Universities – it’s not a University’s job to train your workforce, it’s a University’s job to introduce someone to higher learning, deeper thought, and intellectual pursuits — not the practical skills you need.
  • They still haven’t figured out uncertainty NEVER goes away.
    There’s always risk, but there’s always opportunity — and, moreover, the opportunity is typically created by someone with the guts to actually do something!
  • They still haven’t even given someone the responsibility of managing risk!
    If it’s not anyone’s responsibility, who’s going to do it? The shoemaker’s elves?

In short, most companies are standing still with the same problem set because they haven’t learned what they need to learn.