Category Archives: Best Practices

There’s Such a Thing as Too Much Flexibility (in your Make-to-Order Supply Chain)

As you have hopefully figured out by now, there were a lot of good presentations at the Fourth Annual International Symposium on Supply Chain Management. Some were more insightful than others, some more interesting than others, and some more eye opening than others. A presentation that fit into this last category was Sascha Schoor’s presentation titled Flexibility Cost Oriented Management of New Car Orders in the Automotive Industry.

German premium car manufacturers differ from other European manufacturers and American manufacturers in two distinct areas:

  1. build to order
    almost 100% of cars are configured by customers or dealers
    (as opposed to 48% in Europe and 6% in the US)
  2. individual configuration
    there are theoretically up to 1032 different configurations of a BMW5

This is because German manufacturers believe that consumers not only want a significant amount of customization capability in their cars, but that customers also want the flexibility to change their order up until a few days before production begins – the “5 day car” model. However, the study carried out by the presenter determined that despite marketing’s insistence that being able to change an order up until 5 days before production was very important to consumers, this is not the case.

The study, which analyzed responses from 803 participants, 508 of which planned to buy a new car in the next 12 months and 295 of whom had recently bought a new car, found that the majority of customers would not only be satisfied with a longer delivery time and, thus, a reduced capability to change an order once it is made, but that a substantial number would be willing to accept a significantly longer delivery time if an early booking rebate was offered (with 69% willing to lock in an order early if a 5% to 10% rebate was offered).

When you consider that

  • only 13% of customers change their orders after signing, and of these, the median number of changes is less than 2%
  • a total of 85% of these customers would accept a longer delivery time with an early booking rebate,
  • most of the changes revolve around easily configured electrical components (i.e. stereo/CD), interior choices (seats, color), and exterior choices (paint, optional accessories), and
  • having your orders locked down a few days in advance allows you to configure your production lines for optimal productivity, which can greatly lower your costs

it becomes clear that German manufacturers could save a lot of money and substantially increase profits by adopting a happy medium between the German car philosophy and the American car philosophy and providing rebates for those customers who lock in build orders early or choose a standard configuration. Then, for the 15% of customers who want flexibility, they can still provide that flexibility at a premium.

What do you think?

The Talent Series VI: The Impending Crunch

THESE are heady days for most companies. Profits are up. Capital is footloose and fancy-free. Trade unions are getting weaker. India and China are adding billions of new cheap workers and consumers to the world economy. This week the Dow Jones Industrial Average hit a new high.

But talk to bosses and you discover a gnawing worry—about the supply of talent. “Talent” is one of those irritating words that has been hijacked by management gurus. It used to mean innate ability, but in modern business it has become a synonym for brainpower (both natural and trained) and especially the ability to think creatively. That may sound waffly; but look around the business world and two things stand out: the modern economy places an enormous premium on brainpower; and there is not enough to go round.

So starts the well-written article “The Search for Talent” (subscription required) in a recent issue of the Economist. You know that talent acquisition is a real issue when even the economist starts harping about it!

According to the article, companies of all sorts are taking longer to fill jobs — and, according to a survey quoted therein, many companies say they are having to make do with sub-standard employees! In addition, they say there is evidence that the talent shortage is about to get worse! In addition, the proportion of American workers doing jobs that call for complex skills has grown three times as fast as employment in general. Moreover, as other economies move in the same direction, the global demand is rising quickly! For example, where are our best construction engineers? I’d bet some of them are in Dubai working on the Dubai Mega Islands project while tens of thousands more are probably scattered on engineering projects the world over! After all, the talent crunch is worse in some countries, with Mexico, Canada, and Japan leading the pack. And when you consider that by 2025, the number of people aged 15-64 is projected to fall by 7% in Germany, 9% in Italy and 14% in Japan, talent these days truly has global opportunity.

Not to say the talent crunch isn’t bad at home … with the baby-boomers preparing to retire, some estimates predict that half the top people at America’s 500 leading companies will go in the next five years! Ouch! And the Economist is not the only publication to point out this fact in recent times, an article in last month’s Inside Supply Management, entitled “The Greying Supply Chain” notes that 76 million baby boomers in the United States will soon be eligible for retirement!

And it’s going to be just as hard to replace our leaders as it is replacing everyone else. After all, with all of the downsizing, outsourcing, and rightsizing crazes of the eighties and nineties, employee loyalty is a distant memory for many employers who will continue to lose current and potential employees to the highest bidder. (There’s something to be said for putting your employees before your stock price!)

So what can you do? First of all, you can prepare to open your checkbook. Talent is not cheap … but when you consider the ROI on a talented employee vs. a sub-par employee, it’s not as expensive as you think … especially when a talented supply chain professional can save your firm millions upon millions of dollars with just one brilliant idea. How do you attract talent? Although my last post was a bit lengthy on the topic, the answer is simple. Really simple. Be a Great Place to Work!

The truth is … talent is attracted to talent, and great places to work attract talent. This starts with an innovative culture focused on success and the people who enable it. One where employees are empowered and encouraged to try new things, even if they fail once in a while. We often learn more from our mistakes than our successes, and a failure in a small controlled experience is often worth more than a major success. (Read my earlier posts on innovation here and on eSourcing Forum.)

What can you do to prepare for the impending crunch that will result from your retiring workforce? The ISM article provides some good tips.

  • Make sure you understand the demographics of your supply chain organization.
    Who’s nearing (early) retirement? What do they do? And, more importantly what do they know?
  • Put plans in place to preserve your most critical institutional knowledge before it walks out the door!
    Your employees, and the knowledge in their heads, is your most critical asset. Give them time to document it, buy systems to help them document it, and make sure those systems are accessible by all employees.
  • If you haven’t already, put alternative work arrangement programs in place.
    Can your employees work part time? Remotely? On a project basis? Not all employees may want to go from 60 to 0 right away – you need to be prepared to take advantage of those who want to phase into retirement slowly.
  • Work on an open organizational culture that accepts and respects everyone.
    You need the knowledge of the seasoned veterans, the education of the new graduates, and the raw skills of the experienced individuals in between. Everyone should feel wanted – and needed – and each individual should be able to contribute on her or his strengths.

In parting, the following quote from the Economist article sums up the situation nicely: Eventually, supply will rise to meet demand and the market will adjust. But, while you wait, your firm might go bust.

The Internet and the Purchasing Knowledge Revolution

A great presentation at the Fourth Annual International Symposium on Supply Chain Management was Rod Sherkin’s presentation on The Internet & the Purchasing Knowledge Revolution.

Rod Sherkin, of propurchaser.com started off by reminding us that purchasers are very busy people and that shorter planning cycles (as a result of flexible manufacturing), smaller inventories, and unreliable information can make them busier by the day.

Then Sherkin reminded us that one of the best way to reduce your time as a purchaser is to manage one of the major time traps – price hassles. Do this by:

  1. Tracking suppliers’ input costs and
  2. Tying what you pay to their costs.

For example, if you are buying steel office chairs – find out what percentage of their cost is raw materials and tie your overall cost to their cost of steel. Every time steel rises or falls by a fixed percentage during the term of the contract, your price should go up or down according to a fixed amount, depending on the percentage that steel contributes to your supplier’s total cost. For example, if steel is 50% of your supplier’s cost, and you set a threshold of 3%, then every time steel goes up by 3% you should accept an increase of 1.5% in product cost but, more importantly, every time steel goes down by 3%, your supplier should concede you a cost reduction of close to 1.5%.

Furthermore, the best suppliers should see an advantage to linking your prices to their costs and prefer to compete in a transparent arena where they can win by keeping their costs down and their productivity up.

They should be more than willing to agree on a base market index and, furthermore, tie that to a neutral currency index. After all, if they are buying from China and a neutral China steel index shows steel going up by 4%, but you are buying in American dollars and the dollar has risen 13% in the same time period, then your costs should actually decrease since your buying power has increased by 8.65% (1.13/1.04).

And with the internet, you should have no problem keeping a watchful eye on your supplier’s relative cost increase or decrease on an agreed upon time period (every shipment, month, quarter, etc.). (After all, neither your accounts payable or their accounts receivable are going to be overly interested in calculating cost differentials on a daily basis.)

In addition, if you track your suppliers’ inputs, you can, in addition to negotiating automatic price reductions:

  • attract low cost producers (as they live to compete in open markets),
  • strengthen the supply chain,
  • reduce suspicion and acrimony, and
  • benefit sellers as well as purchasers.

Key Concepts for Major Procurements

In the humble opinion of the doctor, one of the best presentations at the Fourth Annual International Symposium on Supply Chain Management was Paul Emanuelli’s presentation on Key Concepts for Major Procurements.

Most of the time in procurement, you’re procuring orders of direct materials, indirect materials, MRO, or services – basic acquisitions which, with a few notable exceptions, will not break the bank if something goes wrong. However, sometimes your purchases are bigger – much, much bigger. For example, a new office building. A new fleet of aircraft. New heavy machinery. These procurements, if not handled properly, could, literally, break the bank, and the business, if not handled properly – possibly even before the law suits start flying.

The very nature of major procurements implies that legal counsel should be involved from day one – not brought in during final negotiations. When you consider Mr. Emanuelli’s checklist for empowering major procurements:

  • The Role of Lead Legal Counsel
    • Expanded in Major Procurements
    • Embedded in a Multidisciplinary Team
    • Multi-Faceted Legal Advice
  • Internal Governance
    • Awareness of Internal Governance Issues
    • Approvals Roadmap
    • Decision Making Framework
    • Roles and Responsibilities
    • Distinguishing Internal and External Audience
  • Plans and Strategies
    • Providing Strategic and Tactical Advice
    • Distinguishing Process from Purpose
    • Building a Business Plan
    • Developing a Procurement Strategy
  • Selecting the Appropriate Format
    • Critical Decision Point
    • UN Model Procurement Law
    • Three RFP Formats
    • Selection Depends on Circumstances
    • Impact of Pro Forma Agreement
    • No Negotiations Calls for Certainty of Terms
    • Criteria for No Negotiation Format
    • Major Projects Require Flexibility
  • Critical Project Details
    • Front-Line Considerations
    • Disclosure Duties
    • Reconciling Requirements
    • Coordinating Concurrent Drafting
    • Horizontal Integration
    • Tailoring a Legal Agreement
    • Developing a Negotiating Strategy

… it quickly becomes obvious that legal counsel is crucial from day one.

In order for a major procurement project to succeed, roles and responsibilities must be hammered out from day one. This is where good legal counsel can be of significant assistance. They can help you identify all internal stakeholders and create a solid decision-making framework and governance structure to provide direction to the cross organizational procurement team during all facets of the project.

Solid legal counsel can also help you distinguish process from purpose, separating the means from the ends, which assists you in drafting documentation that clearly differentiates between the procurement process rules that lead to the selection of a preferred service provider and the objectives that should be achieved under the contract once awarded. Unclear language alone has been the basis for a slew of lawsuits north and south of the border, especially in the public sector, and well drafted documentation up front effectively mitigates your risk.

Legal counsel can also assist in the creation of a solid business plan at the beginning of the project as well as the definition of a customized procurement strategy tailored to the project, including the selection of an RFP process and associated drafting. This will also help prevent problems down the road.

When it comes to RFPs, you essentially have three options, as recognized by the UN Model Procurement Law:

  • No-Negotiation RFP
    invitation to tender style commonly used in the public sector
  • Simultaneous Negotiation RFP
    allows the purchaser to negotiate with all bidders
  • Consecutive Negotiation RFP
    allows the bidder to negotiate with the highest ranked bidder and proceed down the ranking until an agreement is reached

The No-Negotiation RFP is one of the strictest formats and requires absolute certainty of terms in order to prevent problems down the road. Considering that it needs to:

  1. include all of the general governing terms and conditions;
  2. incorporate all of the purchaser’s business and technical requirements;
  3. enable bidding based on the same set of common assumptions regarding performance terms and conditions; and
  4. enable contract formation without recourse to any post-bidding negotiations that materially change the terms contained in the tender call;

I would submit that you should never embark on any significant no-negotiation tender without the advice of legal counsel from the beginning. In summary:

The complex and multi-faceted nature of major procurement projects requires legal counsel to play an intensive role in the project team. By integrating into that team and understanding the broader context within which these project operates, legal counsel can be a key contributor to the success of a project. To increase their chances of success, project organizers would be wise to retain this key player at the early stages of their major initiatives.

For those of you in the public sector, Paul Emanuelli has recently produced a textbook on Government Procurement and, even though it was written from a Canadian perspective, I would suggest that the advice is sound whether you are in Canada, the US, the UK, Australia, etc. Paul also produces a free quarterly National Tendering Law Update which can be electronically subscribed to on request to paul<dot>emanuelli<at>sympatico.ca.

A Competitive Advantage (in the Supply Chain)

The theme of this year’s Fourth Annual Symposium on Supply Chain Management was Optimizing the Supply Chain: Competitive Advantage through Information Technology, and a competitive advantage is what you would have taken away if you had attended.

Despite a relatively low attendance when compared with other eProcurement conferences, this is by far one of the better conferences you can attend. Even though attendance was around 95 this year (typical attendence is slightly over 100), you had participants from America to Australia, from academia and industry, and the practitioners in attendance cut across almost every industry. Thus, even though it’s sponsored primarily by PMAC (Purchasing Management Association of Canada, now the Supply Chain Canada Association), it’s truly an international event – and substantially different from PMAC’s annual meeting, which would be more of a Canadian event.

I know many of you are probably scared off by the dual academic/industrial nature of the event, noticing that it’s also sponsored by the McMaster eBusiness Research Centre, and worried that it will be overrun with academics in their ivory towers who have no clue about, and no interest in, real world problems, but this is not the case with this event. I understand where your concerns are coming from – I attended many academic conferences in my day and was consistently put off by not only the lack of application of much of the work, but the academic indifference toward the lack of application at many such conferences – but these concerns are unfounded. In fact, attending these types of events is even more beneficial then attending purely practitioner events as true innovation comes from the merging of great ideas, great technologies, and great best practices. Academics exist to come up with great ideas and foundations for best technologies and Practitioners exist to build great technologies tailored to best practices, using the best ideas they can find in the process. When the two come together with common goals in a common forum and work together, in my view, that’s when the best innovation occurs.

Furthermore, when you consider the broad range of topics that were covered in this year’s symposium, you quickly see that there’s something for everyone. In addition to papers on supply chain management, global supply chain management, risk management, supply chain design, supply chain integration, and e-Procurement, you also had papers on green initiatives, flexible manufacturing, talent sourcing, value networks, RFID, project management, and supplier management from the perspective of a range of industries including health care, pharmaceuticals, automotive, consulting, and software. In other words, the conference is just as informative as many two day crash courses in supply chain issues, at a fraction of the price.

I learned something in every presentation I went to, even the ones on the topics I knew very well. As a whole, the presentations were very well done. There’s so much to report that, as you probably guessed from my posts on New Technology Strategies and Managing Business Risk, I’m not even going to try to cover the conference in a post or two. Instead, I’m going to do a series of posts over the next few weeks on, or inspired by, the ten most informative or thought provoking presentations that I attended at the conference and apologize in advance to the speakers who get left out. (I could only attend a fixed number of presentations and even an overactive human brain can only process a finite amount of information in a short time period.)

In conclusion, I would strongly encourage you to join the academics who’ve stepped outside of their ivory tower and the innovation-focussed practitioners and attend next year’s event – especially if you reside in Canada or the United States and are only a short flight or two away – as I’m sure you will benefit from the experience. And who knows, maybe you’ll even get to meet a blogger!