Category Archives: Global Trade

Three Hundred and Forty Five Years Ago Today

One of North America’s oldest companies was founded when the Hudson’s Bay Company was granted a permanent charter to open up the fur trade in North America. At the time its charter was granted, it was the de facto government in parts of North America before other European states and, later, the United States laid claim to overlapping territories.

While it may not be a household Fortune 500 name anymore, and may not have participated in the fur trade since 1987, it was at one time the largest landowner in the world (with 15% of North American acreage). The trade routes that it opened up paved the way for settling, and eventually, administrating in North America, and it paved the way for the colonies. When it signed the Deed of Surrender (on November 19, 1869), its remaining territory became the largest component in the Dominion of Canada, in which the company was still the largest private landowner.

It’s primary business today is, of course, mercantile, as it owns multiple chains of retail stores throughout Canada and the US, and it is still doing fairly well, with Wikipedia listing its 2013 Total Assets at almost 8 Billion Canadian.

Global Process Ownership: The Other GPO

As organizations seek to become more efficient and effective, one proven strategy is the ability to manage cross-functional processes using a global process ownership (not “group purchasing organization”) model.
the maverick, “Exploring Procurement’s Other GPO”, Spend Matters

GPO is harder than it looks. As the maverick points out, it’s ultimately about having both accountability for an end-to-end process and the ability to control the strategies and resources used for the process execution. If Procurement is made accountable, but Finance and the Engineering organization controls the financial and physical resources, then Procurement cannot control the global process. And this is another reason why the full extent of negotiated savings and identified value is never realized and end results are never as expected. Because, without control to go with the accountability, Procurement cannot execute. Planning, which is just another word for Knowing, is only half the battle. And it’s a shame the CFO and the rest of the C-suite don’t remember this single lesson that they should have been paying attention to when watching G.I. Joe every Saturday morning. (It was supposed to be about more than just blowing stuff up, even though that is what is perceived as the American way.)

Of course, this assumes that Procurement even knows what to do. As the maverick goes on to explain in his next piece on “the 3 dimensions of global process ownership”, global process ownership is more than just process breadth / scope. It’s also, as some of the leaders recognize, organizational breadth / scope as most Procurement-based processes have repercussions and effects throughout the organization, and, more importantly, category management breadth / scope. The organizations that understand, and effectively execute against, this third dimension are the organizations that truly excel and make their way into the Hackett Group top 8%. Different categories have to be managed in different ways. There is no one-size-fits-all process or organizational framework.

And that’s one of the many reasons sourcing must be strategic.

Twenty Five Years Ago Today

The Big Mac Index went truly global when the first McDonald’s opened in the Soviet Union, only twenty-three years after the first international franchise was opened in BC, Canada, in 1967. By the time McDonald’s finally burst through the iron curtain, it was only two years away from reaching global restaurant domination, which it achieved in 1992 when it opened its first restaurant in Casablanca, Morocco and was able to claim a restaurant on all six continents.

When it comes to global supply management, few companies have the global breadth of McDonald’s and, except for a few global food companies, none are in the food and beverage business. But it shows what determination — and great supply chain management — can enable. (Especially if you’re not afraid of a little red.)

Influential Damnation #96: Consortiums

Consortiums, better known as Group Purchasing Organizations (GPOs), will be one of your biggest organizational conundrums of the year. Regardless of whether your organization is currently using a GPO or not, this will be the year that you can’t live with them, you can’t live without them.

Backing up, a Group Purchasing Organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain price reductions from vendors based on the collective buying power of the GPO members. The idea is that the GPO is able to leverage economies of scale, in the form of more volume and more efficiencies, then the members can individually achieve on their own.

For example, a supplier might offer price reductions at 1,000 units, 10,000 units, and 100,000 units and offer 2%, 3%, and 6% discounts at each price level. On its own, an organization that only buys 20,000 units would only be able to obtain the 3% discount but if it banded with five other organizations that required a similar amount of units, each organization could obtain the 6% discount. In addition, if only one contract needed to be negotiated and cut, each organization could reduce the amount of negotiation and administration overhead required to negotiate the contract and save even more.

From this perspective, given the rapidly rising costs and the increasing difficulty in negotiating discounts, GPOs look like a dream come true and a way to cut costs across the board.

But this comes at a costs. First of all, the GPO has to be funded — so, either the organization has to pay a fixed membership cost every year or a percentage of each transaction. Secondly, the GPO has to be managed just like every business processing outsourcing (BPO) provider. This isn’t always easy because not only does the organization have to manage the relationship and insure that the GPO is working on categories that are important to the organization, but it has to make sure that the GPO is taking the organization’s needs into account.

And now we get to the double edged sword. The best deals materialize when the combined volume allows a supplier to hit peak production (which allows them to produce the product at the lowest possible cost) and offer their customers the lowest possible cost. However, getting to peak production often requires combining the needs of a dozen or so different organizations, each of which has its own viewpoints and goals for each category. In other words, while you might prefer Supplier A’s products, because your Engineering department feels that they are of superior quality, the other GPO participants might prefer Supplier X — the least favoured supplier of your organization.

And this is why GPOs are quickly going to become the “you can’t live with them” (because you will always be fighting your coopetition to get your needs addressed first) but “you can’t live without them” (because, with costs skyrocketing, you won’t find any savings in your low-volume or indirect categories without them).

There’s a reason we call them “consortiums”, and that’s because “consortium” is derived from the word “consort” which is the action of habitually associating with someone or something that is done with the disapproval of others. And consortiums breed disapproval. But this is the year of damnation, so jump right in. You will regret it. But what choice do you have?

Infrastructure Damnation #13: Ports & Labour Strikes

Last year, in the fourth quarter during the critical Christmas shipping season, truckers, clerks, dockworkers, and other union workers went on strike and effectively closed the Ports of Los Angeles and Long Beach. The Port of LA typically receives over 330,000 TEUs (Twenty-Foot Equivalent Units) of loaded inbounded containers each month, which equates to roughly 4 Million or so TEUs a year. A single TEU container can hold up to 47,000 lbs of cargo and can accommodate 796 bushels of soybeans or approximately 6,192 shoeboxes. (That’s a lot of shoes! At the rate of 1 pair a day, it would take over 17 years to wear them all.) And while we haven’t yet been able to find a tally of the losses, as a benchmark, if the ILWU (International Longshore and Warehouse Union) went on strike and shut down all the west coast ports, estimates are that it would cost the US economy 2 Billion a day. A complete shutdown at the ports of Los Angeles and Long Beach would, thus, likely cost the US economy over 1 Billion a day since, of the roughly 116 M short tons of foreign imports that came into West Coast ports in 2012, 74 M (over 60%) of those short tons were through the ports of Los Angeles and Long Beach!

In 2013, a 40-day labour strike occurred at the Kwai Tsing Container Terminal in the Hong Kong Dock Strike. This strike cost Hongkong International Terminals almost HK $5 Million in daily losses as the loss of over one third of the workforce caused average delays of 2 to 4 days for all ships. That’s a loss of roughly HK $200 Million!

In 2012, the industry was almost paralyzed when the East Coast ports threatened to go on strike on October 1, as this strike was only narrowly averted at the last minute. This strike could also have cost the US Economy Billions.

In 2008, in protest of the Iraq War, the ILWU encouraged longshore workers to “shut down all West Coast ports” by walking off the job on May 1, 2008 to “Make May Day a ‘No Peace, No Work’ holiday”. On that day, more than 10,000 ILWU workers from all 29 West Coast ports voluntarily stopped work, effectively shutting down all west coast ports for a day.

In 2007, we saw the German National Rail strike of 2007. While it was only for 3 days, starting on November 14 and ending on November 17, it was the largest strike in history against Deutsche Bahn, shutting down freight service as well as passenger trains. Even though management brought in managers and other employers to keep trains running, more than 40% of freight trains — needed to carry cargo to and from docks — were halted. The strike cost over € 50 Million a day.

Strikes aren’t a new occurrence. We can keep going, all the way back to (at least) the 1792 Philadelphia River Pilot’s strike. More importantly, since unions aren’t going anywhere (and are, in fact, gaining ground in the emerging and newly emergent economies), strikes aren’t going anywhere either.

And they will bring your global trade to a halt if you are not prepared for them.

How do you prepare for them? Keep an eye on all of the ports, rail, and trucking companies you use to move your goods and when their union contracts expire. When expiration draws near, monitor the situation. If it looks like talks will break down, make sure you have alternate options at the ready. Have plans that use other ports, and other trucking companies, even if those ports are further and those trucking companies cost more, if the goods are critical to your bottom line — and if they are strategic, and small enough, consider air freight from a secondary airport to a secondary airport. (Solutions like FreightOS can often help you identify nearby ports and airports and relative costs.) While the hope is that you will never need to use less efficient and less cost-effective options, if the alternative is risking your goods trapped in a port for months, a less profitable sale is still much better than no sale. (Remember, No Sale, No Store.)