Monthly Archives: April 2013

Do Successful Supply Management Organizations Adapt to their Customers?

Or do successful Supply Management Organizations adapt their customers to them?

It’s a good question. For a few years now, thought leaders, including the doctor here on SI, have been saying that good Supply Management organizations become the go-to organization in the company. They do this by making sure that each time they are engaged, they identify what the customer organization thinks is valuable and ensuring that they deliver that in addition to, or, if need be, instead of cost savings. Supply Management also works hard to identify problems, including problems the customer organization may not even know it has, and solutions to those problems. Supply Management also goes out of its way to make sure that the customer organization gets its fair share of credit so that the customer will want to use the services of the Supply Management organization again. As the success stories spread, and its reputation grows, more organizations turn to Supply Management, which begins to be known as the go-to organization. Once Supply Management has most of the organizations of the company as internal customers, it hits the target of 80%+ spend under management, and begins to deliver not only significant savings, but to identify value opportunities.

For example, if Marketing is approaching Supply Management for the first time, Supply Management won’t focus on its cost savings strengths, because, honestly, Marketing doesn’t give a damn about savings. Marketing’s job is to create as much demand and value as it can within the budget it is given. As long as Marketing stays within budget, it’s happy. As a result, Supply Management will need to identify what Marketing really needs. Is it a better campaign management process (and Supply Management is the king of processes)? Is it better supplier identification and qualification? Is it a way to qualify the value it is getting (through a balanced scorecard, for example)? Supply Management will deliver what Marketing really needs, and also identify ways that cost can be reduced on the production side (be it print, media, etc.) and freed up for more value-creation activities such as campaign design or creative development (for web and print media). In addition, if Marketing said it needed help with supplier identification and qualification, Supply Management might also notice that Marketing’s supplier management and campaign management processes were weak, and devise appropriate processes, using its RFX and/or project management tools, to improve Marketing’s processes and then demonstrate to the Marketing department how it could do better (and, if need be, let Marketing take full credit). Marketing will see a department that wants to produce value (and not just reduce budgets), make Supply Management a core part of its spend-related processes, and spread the good word.

But is identifying, and doing, what the customer wants the right thing? If, as Michael Schrage implies in his book that asks what do you want your customers to become, you are what you consume, then you should be doing more than just servicing your customer desires. Specifically, instead of adapting to the (internal) customer, you should be adapting the (internal) customer to you.

Of course, this is easier said than done when you don’t have any internal customers, or any customers beyond the customers with spend that has been mandated to you by the CEO, CFO, or COO. If you don’t have internal customers, you have to adapt to their needs, or at least appear to adapt to their needs, in order to get them. That being said, it may be that the only way you’re going to ultimately succeed as a Supply Management organization, especially when you are continually given the ludicrous mandate of cost-reduction (without any consideration of whether or not it makes sense), is if you adapt your customers to appropriate processes and technologies. If the processes and technologies your internal customers are using don’t reduce cost, increase efficiency, or add value, then theose customer processes and technologies need to be adapted to processes and technologies that do — otherwise, you will be hindered as a Supply Management organization.

Remembering that, as Michael Schrage points out, the real purpose of business is to profitably transform a customer and that the real purpose of Supply Management is to align with, and serve the, organizational goals, at some point Supply Management has to go beyond just serving the internal customers — it has to adapt them to be cogs in the Supply Management wheel that keeps the business turning. Just like Apple trained its customers to be design connoisseurs, Supply Management needs to train its customers to be value connoisseurs — who know how to balance cost and expected return appropriately for all types of spend.

While, in the end, Supply Management might just be one stray vegetable in a very large pot of organizational stew, it has a choice. Supply Management can be the bland celery that absorbs the flavours all of the other vegetables until it has absolutely no individual flavour of its own, or it can be the pepper that defines the flavour of the organizational stew. It’s your choice, Supply Managers.

“China Defense” or “Chewbacca Defense”?

When it comes to reducing carbon emissions, we have the unfortunate situation in North America that many people, rather than tackle the problem head-on and doing something about it, are, instead, invoking the “China Defense”. The China defense goes something like this: There are other countries that are polluting the atmosphere much more than we are, like China, because they are still growing and emerging, especially from an industrial perspective. And they are not going to stop what they are doing.

The problem with this defense is that it makes about as much sense as the “Chewbacca Defense“. For those of you familiar with South Park, the creation of the mad minds of Trey Parker and Matt Stone, the “Chewbacca Defense” is a legal defense designed to deliberately confuse the jury by making use of the fallacy known as ignoratio elenchi (red herring). This defense, which (supposedly) satirizes Jonnie Cochran’s closing argument in the O.J. Simpson murder trial, starts off by stating that Chewbacca lives on the planet Endor, which isn’t true. Then it states that the statement does not make sense (which it doesn’t). Then it connects the senselessness of this statement to the actual legal case, to imply that the legal case is equally senseless.

Confused? Good. Because you’d have to be to fall for the “China Defense” when you consider, as pointed out in this great HBR blog post on ‘the fallacy of the “China Defense”‘, the following:

1. China is doing much more than we are to reduce carbon emissions.

  • China introduced a 10-year 5 Trillion Yuan alternative energy plan in 2010
  • In August 2012, it announced it would spend over 2.3 Trillion Yuan in the next 3.5 years to cut pollution
  • In August 2012, it announced it would reach 21 GW in solar power capacity by 2015
  • As of January 2013, Wind is the #3 source of energy in China
  • It just announced the implementation of a carbon tax

2. Science doesn’t care

We have to decarbonize at the rapid rate of 5% less carbon per dollar of GDP annually until 2050, or the catastrophic effects of global warming will make us long for the days when Hurricane Sandy and Hurricane Katrina were the worst we had to deal with (and the cost of catastrophes was under 100 Billion).

3. Not only is going green good, but it will put more green into your pockets than you can imagine.

The truth of the matter is that the clean economy will be a multi-trillion dollar market. Embracing the clean economy could go a long way to helping the U.S. manage it’s public debt!

So make sure to do your best to minimize carbon in your supply chain.

An Interesting Piece on Physical vs. Virtual Negotiation

Last summer, eSide ran an interesting article on “how (and where) you negotiate matters” that overviewed different types of negotiation techniques and which work best in person, over the phone, and through e-mail. Given the amount of time that one spends on the phone, and, particularly, online (using e-mail and instant message communication) using a modern strategic sourcing system, this is now basic information that every Supply Management professional needs to know.

The article starts off by noting that negotiations are generally most productive when conducted in person, which is obvious when you consider that behavioural researchers say we lose 75% of the (nonverbal) communication content when speaking on the phone. The take-away from this is that all critical / high-value negotiations that are expected to result in the signing of a contract should be conducted in person. This doesn’t mean that all aspects of the negotiations need to be conducted in person, as you could conduct the initial rounds of a multi-round negotiation by phone or e-mail as you are working your way through the process to select a vendor of choice, but that the final negotiation should generally be in person.

Then it notes that there is strength in numbers. A team will always have an advantage over a single opponent as different members can play key roles that make the approach highly effective. However, it does not that there is an optimal team-size, and that a team that is too big can hinder as much as it helps. (It also has to have an empowered leader whose final say is final.)

For a telephone negotiation to be effective, you have to be prepared. Good interrogatives/questions draw information out from the other party during the discovery phase of the negotiation process. Inversely, bad interrogatives/questions don’t.

E-mail negotiations give the impression that you want the relationship to be arm’s length. If this is not the case, then you probably shouldn’t use e-mail for anything more than to gather information as a precursor to a telephone and/or in-person negotiation.

If you do use e-mail, remember the following:

  • once you give your position in writing, it’s harder to change it,
  • email encourages prompt, direct response, leaving little wiggle room,
  • it could indicate that you aren’t comfortable negotiating in person, that you can’t make decisions without consulting with someone else, or that you don’t have the time for the recipient,
  • it can put you at a nonverbal disadvantage (depending on the situation), and
  • it can be used to bypass you!

The advantages and disadvantages of e-mail work both ways! Just like a supplier can be at a disadvantage if they commit their position to writing first, you can put yourself at a disadvantage if you commit your position first. Similarly, just like a supplier will be at a disadvantage if he’s not used to e-mail negotiations, you can be at the disadvantage if the supplier is an expert at e-mail based negotiations, phrasing, and legalese and you’re not. Finally, and most important, just like you can use it to bypass a low-level supplier sales rep and get right to the VP, you can be bypassed if the supplier get’s a hold of your stakeholder’s direct e-mail! So while the article might focus on the advantages of e-mail based negotiations, it’s more important to keep the disadvantages in mind as one-slip up and you’ve given the supplier the upper hand.

But the most important thing to remember when negotiating by e-mail:
you may, technically, put a legally binding contract in place by agreeing to something the other party offers in an e-mail! Certain bodies of law (including the most recent changes to Article 2 of the Uniform Commercial Code) now explicitly regard electronic correspondence as being “in writing”. (See 2-211 [3] in particular, for example.) Take heed!

Can We Harness the Wisdom of Crowds in Supply Chain Forecasting?

How Do We Harness the Wisdom of Crowds in Supply Chain Forecasting? A little over two years ago, I posed this question to you. I got a few responses, mostly private, who were thankful that I pointed out that you cannot just blindly follow the wisdom of just any old crowd, because expert judgements often demonstrate logically inconsistent results, but not a lot of advice on how we could successfully approach the task of integrating the wisdom that crowds could provide in our supply chain processes. The reason that we wanted to tackle this problem is because it is true that teams of forecasters often generate better results (and decisions) than individuals as long as the teams include a sufficient degree of diversity of information and perspectives.

But this is the caveat. The wisdom of crowds only holds if the crowd is large enough to contain the necessary diversity of information and perspectives in a statistically significant way. In other words, you will need a lot of people, and these people will need to be from diverse backgrounds and possess diverse skill-sets. But even this might not be enough in some situations.

As pointed out in this great blog post over on the World Future Society blogs by Thomas Frey from last August on The False Wisdom of Crowds, the decision between flying on a plane piloted by a single AI or the combined intelligence of 3,000 people is not as simple as you think. While it is true that the combined IQ and skill-set of 3,000 people is much greater than any AI on the planet, as you Next Generation Trekkies aware of the quick adaptability of the Borg will be quick to point out, it is also true that if all 3,000 of these people are farmers from the MidWest, it is likely the case that not one of them will know how to fly a plane! In contrast, the AI might be the best autopilot software in the industry, successfully used problem-free on tens of thousands of flights. The only way you’d beat that is if you had a collective of 3,000 of the best airline pilots in the industry. But the statistical likelihood of selecting that crowd from the global population is astronomical.

As Drew Curtis, founder of Fark.com, points out, “Crowds are dumb. The reality is that, while people are very good at knowing what they personally want, they are generally very bad at understanding the truths of the world around [them]. If you want proof, consider the examples given by Thomas and Drew, which include:

  • In the ’50’s, it was common knowledge that if a nuclear bomb went off in your city, you’d be safe if you simply learned to “duck and cover”.
  • Until 2007, it was a well-known fact that real-estate was a great investment where you would virtually never lose money.
  • Only once percent of Web comments have any value and the rest are just garbage.

In other words, diversity is not enough. You need expertise. And you need the right expertise. But as pointed out in SI’s post from 2010 and Thomas’ blog post, ‘social influence’ diminishes the range of opinions and tends to lead crowds in the direction chosen by the most respected and/or socially powerful individuals. So you have to gather data from a “blind crowd” that cannot see each other.

In other words, when you put it all together you need:

  • diversity, as addressed in our previous post,
  • privacy, as partially addressed in our previous post,
  • expertise, as demonstrated by Thomas’ blog, and
  • statistical significance, as not adequately addressed yet.

Taken together, these requirements pose a bit of a problem, which is made clear in Thomas’ post where he quotes a recent study by McKinsey and Company that calculated an immediate shortage in the US of almost 200,000 people with analytical expertise and 1.5 million managers and decision makers with the skills to understand and make decisions based on the analyses provided by the analytical experts. Overall, we’re starving for expertise in Supply Chain, as evidenced by the fact that less than 10% of companies truly employ advanced sourcing techniques! The average company just doesn’t have enough people to meet the diversity, expertise, and statistical significance required to guarantee that a crowd decision will be better than the decision of their “leading expert” in that area. And since most firms don’t want to share expertise, sourcing processes, or suppliers, especially where strategic or high-value categories are concerned, they’ve essentially cut-off external sources of expertise. The result: beyond non-strategic / low-value categories they would be willing to hand off to a GPO, their chances of truly harvesting the wisdom of crowds for many Supply Management processes are low, at best — and this leads us to wonder if we really can harness the wisdom of crowds in supply chain forecasting in practice.

New Thoughts? Comments? Criticisms?