Category Archives: Strategy

Is the Downturn an Upturn for Offshoring?

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A recent press release from the Conference Board announced the results of the fifth annual survey on offshoring trends that was done in conjunction with the Duke Offshoring Research Network. The survey found that more than 50% of companies had a corporate offshoring strategy last year, up from just 22% in 2005 and that 60% of companies currently offshoring have aggressive plans to expand existing activities.

Wow! Twice as many companies are now planning to offshore, and almost two thirds of companies offshoring are planning to increase their offshore activity! Risk be damned. The threat of peak logistics costs rolling around again in ten years or less be damned. The threat of losing a shipment to the Somali pirates and being stocked out for three months be damned. The threat of IP theft be damned. We’re offshoring anyway!

Let’s be clear … I’m not against offshoring when it makes sense, but I think many companies have been overdoing it and I fear that, in efforts to cut costs quickly to “get through this recession” they are going to take overdoing it to the next level. It’s not about the lowest cost today … it’s about the highest value over the lifetime of the project. When you offshore when the economy is down, costs can only go one way — up! Wages will rise as the new “low-cost” locale gets used to a higher quality of life. Raw material costs will only increase as demand in the region skyrockets. Shipping costs will only increase as the ocean carriers approach capacity again. And unless you’re outsourcing to a mature region with mature plants and experienced people, quality will be an issue, IP theft will be an issue, and lack of innovation will be a big issue. Investing in the right innovative partner who can help you find ways to take costs out of design and production while improving quality will usually provide you more value in the long run than the lowest cost provider today will provide you (because their costs will go up while their contributions stay flat).

Now, I do agree that companies with a well-thought out corporate-wide offshoring strategy can achieve significantly better performance in cost savings while meeting target service levels and improving relations with providers and overcoming internal resistance if they do it right, but I also believe that many companies just aren’t there yet. If the offshoring craze heats up again and they jump in head-first without the experience and planning required for success they will fail before they succeed. Given the weakened financial state of many companies right now, I just don’t think many can afford even a single failure.

So if you must jump on the bandwagon that is looping around again, get some help before you do. Start with Dick’s seminar and course on International Sourcing through Next Level Purchasing (now the Certitrek NLPA) to get a grip on the basics and then bring in a professional consultancy that does this every day to help you. Because, as Arie Lewin, Professor of Strategy and International Business at Duke says, “simply offshoring more functions isn’t the solution … to achieve real savings, companies need to get the processes right“.

Four Tasks of the CPO

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In a recent edition of the Harvard Business Review, an article on “What Only the CEO Can Do” outlined the four tasks of the CEO who has to link the outside to the inside. They were:

  1. Defining the Meaningful Outside
    Which stakeholders matter most? What results are meaningful?
  2. Deciding What Business You Are In
    Where do you play to win? Only the CEO has the enterprise-wide perspective to make the tough choices involved.
  3. Balancing Present and Future
    The CEO needs to strike the right balance between the short and long term.
  4. Shaping Values and Standards
    Values establish a company’s identity and behaviors. If the company is out to win, the values must be connected to the meaningful outside and be relevant for the present and future.

This prompts the question, what are the four primary tasks of the CPO? Especially given the dozens, and dozens, of issues that the CPO has to manage on a daily basis? Well, they are very similar:

  1. Define the Meaningful Inside
    Most of the supply chain is outside … it’s the CPOs job to figure out what needs to be inside and how it’s going to be managed.
  2. Decide what Business You Are NOT In
    What products are not cost effective for you to make? What processes are you not first class in? What processes are not good candidates for outsourcing?
  3. Balance Present and Future
    It’s not about the lowest cost today, it’s about balancing value today versus value tomorrow.
  4. Focus on Sustainability
    It’s values, standards, ethics, compliance, social responsibility, and long term sustainability.

If you think about all of the things a CPO has to do, you see they fall under the above umbrella:

  • analysis : Business You Are NOT In
  • strategy : the Meaningful Inside
  • team recognition : the Meaningful Inside
  • innovation : Balance Present and Future
  • compliance : Focus on Sustainability
  • risk : Focus on Sustainability
  • technology : Balance Present and Future
  • sustainability : Focus on Sustainability
  • etc.

Strategy in a Structural Break

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Last December, the McKinsey Quarterly published an article on “Strategy in a ‘structural break'” that is even more appropriate now than it was then as the structural break, at least according to some, shows no sign of ending this year. The article, which started off noting that a structural break in the economy is an opportunity in disguise, made a good point … you need a strategy … a real strategy … a cohesive response to the challenge … to survive. This is especially true when the old ways no longer work and you have to change … and chances are, for the majority of companies out there, this is the case.

So what can you do? You definitely have to avoid the phenomenon by which process engenders further process, eventually becoming a self-sustaining buzz and reduce the complexity of corporate structures and transform your business models. You have to simplify and simplify again. Then provide lean central and support services that don’t require business units to spend time and energy coordinating their activities.

So what does this mean for your supply chain? What is your strategy for the structural break?

While it’s hard to say, as each company will need it’s own, unique, targeted strategy to survive, I can tell you this. You need to:

  • adopt a center-led strategy
    that allows you to use the best of center-led and distributed models and uses collaboration software to share best practices and knowledge throughout the organization in an easily searchable and retrievable anywhere, anytime model
  • adopt a dynamic real-time push-pull demand chain model
    it’s a volatile market, and old methods of forecasting, pull-only, and push-only don’t cut it anymore … you have to adapt in real time, pull when you sense a sharp uptake, and have your manufacturer push when they can predict uptakes ahead of you and create optimal production runs
  • organize around the “networked person”, not the organization man
    if you’re not on the move, you’re standing still and … in this economy … if you’re standing still, you’re being pushed off the cliff with the rest of the lemmings
  • implement SaaS or cloud e-sourcing and e-procurement technology
    make sure your entire team can use the applications anytime, anywhere to do their jobs and get what they need, when they need it, at the best value point
  • if you don’t have it, get optimization software …
    and if you have it, use it
    figure out where you’re spending the bulk of your money (by way of a good spend analysis if need be), and get the right optimization software for your needs: if it’s goods or services, get strategic sourcing decision optimization software; if it’s transportation get transportation and network optimization software; if it’s manufacturing and production, get production optimization software … applied against the right problem, you can expect a 10X return … or more … for your investment … if not more!
  • use more consultants
    but target them on near-term and mid-term ROI initiatives until you get your cash flow optimized, then go back to the long term planning

Recession-Resistant Demand Management Strategies and Tactics

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A recent article in i2’s Supply Chain Leader on how resilient companies can manage demand when the past is not a reliable indicator of the future had a great table that compared and contrasted demand tactics and strategies in stable vs. volatile economies that did a great job of summarizing the demand management strategies you need to weather the storm.

The following points from “Recession-Resistant Demand Management Strategies and Tactics” in particular are key:

  • level and seasonality in volatile economy are best determined from the last 2-3 months, not 2-3 years
  • constantly look for patterns that are different from expectations and make adjustments quickly
  • it’s not just about consensus forecasting — triangulate multiple scenarios across functions against leading and trailing indicators to come up with near real-time forecasts
  • combine and push-and-pull strategies to get the best results
  • monitor continuously … today’s patterns will not be tomorrow’s

Is Trouble Ahead for the Purchasing Profession?

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A recent report by Loudhouse, sponsored by BravoSolution and covered in Industry Week in their article on “Purchasing Officers: Confident Now, But is Trouble Ahead?”, found that 69% of the CPOs surveyed had not examined the impact of the last six months on their supply management strategy, which leaves them exposed to potential long-term problems.

This is problematic, especially since the research study found that many purchasing professionals are currently following short-term strategies that could lead to long term problems. As the article states, CPOs can deliver cost savings today by hard negotiation, however tomorrow’s efficiencies must be realized through evolving business strategies and addressing the top three procurement challenges of ‘cost saving,’ ‘speed,’ and ‘visibility’. But this hard negotiation can backfire. After all, as per a recent CPO Agenda study, which quantified the doom and gloom in the market today, half of the respondents have already experienced the bankruptcy of at least on key supplier since the year started, and over three quarters of CPO respondents are (very) concerned about the prospect of other key suppliers going out of business before the year is over.

So if you want to avoid trouble ahead, be sure to insure that you leave your suppliers some margin, that you pay on time, and that you monitor your suppliers health.