Category Archives: Supply Chain

Supply Chain Direction II: Collaboration is Key

… And a study underway by Craig Hill at Georgia State University may prove it. In his presentation Performance Aspects of Collaborative Planning Forecasting and Replenishment (CPFR) Technologies, Dr. Hill is studying the effects that the implementation of CPFR has had at over 110 compaies that have employed CPFR for over five years. The premises of CPFR is that it (1) decreases inventory, (2) increases customer satisfaction, (3) positively affects stock price, (4) improves performance, and (5) increases sales. Dr. Hill’s preliminary results seem to indicate that inventory turnaround is increased (by 16%), return on assets is increased (by 12%), and average sales are increased. Increased inventory turnaround decreases inventory levels which increases savings (and decreases overall costs), return on assets positively impacts company performance (which likely increases stock price), and increased sales are increased sales. In other words, Collaboration is Key.

On a related note, eyefortransport’s 2nd Supply Chain Directions Summit takes place three weeks from today. For more details, see my earlier post.

Lean Sourcing

Recently, Jason Busch essentially reprinted an article from the first edition of Azul Partners’ newsletter Sparks on “The Top Ten Myths of Analyst Relation”# over on Spend Matters. Although a very good article, I would have reprinted excerpts from regular contributor Lisa Reisman’s Aptium Global executive whitepaper on “Lean Sourcing: Creating Sustainable Purchasing Savings” since all reports indicate we are headed for a global economic slowdown, with U.S. growth expected to nearly halve in 2007 (from 3.3% to 1.8%), taking global growth with it (from 5.2% to 4.4%). *

Most of us realize that economic slowdowns result from reduced consumer spending and result in smaller coffers and lower profit margins as you trim prices in your attempt to maintain your market share. But what we may not realize is that from a sourcing perspective, this could actually drive our prices up, and not down as one might expect. Although historically downtowns may have been a great opportunity to extract concessions from your supply base desperate to maintain their volume when there is less market share to go around, the recent focus on strategic sourcing and, more importantly, e-Auctions in a transparent marketplace has not only trimmed all the fat there is to trim from many suppliers, but reduced the margins of some suppliers to the point where they can only maintain profitability under (very) high volumes. Therefore, if demand for their products drops significantly, they will have to raise prices to stay in business (unless the underlying commodities they require take a sharp downtown, which I would not hesitate to state is not likely in many markets with China and India still high on a global binge buying craze on pretty much everything they can get their hands on).

Therefore, as I have indicated before, e-Auctions and a myopic price focus is not going to cut it anymore, and you are going to have to start adopting a full-fledged sourcing cycle based on a TVM (Total Value Management) approach which includes sophisticated spend analysis, decision optimization, and compliance management and incorporates best-practice six-sigma processes, financing, trade management, inventory management, and lean sourcing.

Unlike stand-alone e-Auctions which caught on because of their quick-hit results (even though such results were not sustainable in the long term since three hits to the profit margin was usually the most your supply base could take and stay in business), Lean Sourcing is a long-term strategy that provides continued value to your organization over time. For many companies, it’s the next evolution of strategic sourcing where you take your TVM focus and augment it with best practice lean principles. And like any good process, it’s a journey – not a destination.

Lean Sourcing provides a number of benefits to organizations, but, as highlighted in the whitepaper, there are four key benefits that place it apart from most sourcing strategies:

  1. Greater buy-in from key functional areas
    operations and purchasing which care about both price and performance
  2. Greater likelihood of implementing identified sourcing savings
  3. Improved quality and reduced waste
  4. On-going additional cost reduction opportunities via collaboration with supply partners

Furthermore, it’s not a hard journey either. The following advice (from the whitepaper) is more than sufficient to get you on your way:

  • Create a Lean Sourcing processes that can be mapped and easily communicated to all team members
    open communication facilitates fairness and buy-in
  • Develop project milestones, deadlines, and target dates
    in reality, only one thing can drive results better than accountability
  • Create a team member incentive structure and compensation plan tied to process outcomes
    nothing drives results from motivated (star) performers better than an incentive plan that not only rewards them for results, but rewards them more for better results
  • Take a global perspective, albeit one that carefully analyzes supply risk
    smart-sourcing requires you consider all the options and take the best one (sometimes that will be China, but sometimes it will be the factory down the street)

* Source: Lost in America, Canadian Business Oct 23-Nov 5, 2006.
# All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

 

Your Supply Chain is NOT Secure! Part II.

Yesterday we discussed how the article Nine Cautionary Tales in the September (2006) issue of IEEE Spectrum makes it abundantly clear that no matter what you think, your supply chain is NOT secure – regardless of how safe you think your supply chain is or what voluntary security initiatives you might subscribe to.

Today we are going to discuss some ways to mitigate the risks that are, more-or-less, out of your control. What is more important is that many of these risks are not just terrorist risks (where you literally have no control), but natural disaster risks as well (where you may not be able to take any reasonable precaution).

We’ll discuss each scenario in turn.

Bomb in a Box

Scenario: A bomb is detonated in a shipping container somewhere in a major port city. Hundreds, if not thousands, of shipping containers (which now contain 90% of international cargo) are destroyed or damaged and the port is shut-down for weeks during investigation and recovery.

Mitigation: There’s nothing you can do to stop this, but you can insure it does not devastate your business. In addition to mitigating supply risk by using two suppliers, you should also mitigate delivery risk of key shipments (critical direct materials or high-demand, low supply consumer goods such as those Sony PS3’s that are going to fly off the shelves) by using two logistics carriers or insuring that your logistics carrier splits shipments across ports, containers, and trucks. Make sure you use multiple ports as part of your regular operations, and can re-route shipments quickly if one port gets considerably backed up (or temporarily shut down due to a natural disaster, terrorist attack, or strike).

ElectroShock

Scenario: Terrorists take out part of the power grid and a whole city, state, or even region goes dark – taking out your operation with it.

Mitigation: Critical operations, which for most companies today revolve around data-centers, should have their own back-up generators. Your communications network should also have its own back-up generators. Even if you can’t work, you should still be able to keep in constant communication with your supply chain so that you can recover quickly when the power comes back on. (And cell phone batteries only last so long!)

Toxic Train Wreck

Scenario: A terrorist blows a hole in the side of a tank car transporting toxic chemicals, such as chlorine gas. This scenario is more dangerous than you think – most railway lines go through major cities near densely populated areas. And this could also be caused by a de-railing, which could be caused by a downed tree (due to a lightening strike), also putting this risk in the natural disaster category.

Mitigation: Make sure you have evacuation plans for all of your offices and plants and the ability to hot-swap your operations to a remote location.

Crude Attack

Scenario: A highly trained commando squad blows up a refinery. A very expensive processing plant is destroyed, toxic smoke fills the air, oil supply drops, and energy prices skyrocket.

Mitigation: Have evacuation plans in place if your offices or plants are close to refineries, power-generation stations, or chemical manufacturing or processing plants that could cause a significant hazard if something goes wrong. Make sure your critical back-up power centers can run basic operations on alternate sources of energy – wind power, solar power, biofuels, etc. Consider geo-thermal heating and cooling. You might not be able to meet all of your power needs this way, but the less gas you need to keep going, the less an oil-based energy crisis will affect your business.

Agro-Armageddon

Scenario: A small group of terrorists infect small groups of cows with mad-cow disease in geographically remote parts of the country and in order to contain what appears to be a burgeoning epidemic, hundreds of million of cattle are slaughtered across the country. (The virus that causes this disease is harmless to humans.)

Mitigation: The real danger here is if your business relies on beef – distributor or steak-house. The mitigation is to make sure you are set-up to import beef from multiple countries at any one time.

Black Christmas

Scenario: Terrorists blanket shopping malls with open containers of mercaptan (the highly volatile and noxious-smelling chemical ordinarily used to signal the presence of propane gas) and postal offices with anthrax stimulants, scaring consumers away from shopping malls and shutting down the largest delivery service. Sales plummet.

Mitigation: First of all, don’t bet your business on a single holiday season. If you are in the business of seasonal novelties, diversity and attack all the holidays. Secondly, make sure you are set up to work with multiple delivery carriers, local and national. Standard courier rates are quite high, but some companies will give you great deals on volume, which will allow you to use them instead of the post-office at only a slightly higher cost. (This is critical especially if the bulk of your sales are low dollar goods. Most people will not want to pay a 50%+ shipping premium. For example, I’ve never ordered a single 11.99 CD at 7.99 next-day courier shipping.)

Star Struck

Scenario: A group of highly trained activists takes over a prestigious televised event with a number of important people present.

Mitigation: This sort of endeavor would take months and months of up-front planning and infiltration into all of the appropriate service organizations. There are two potential approaches here. The first is to move the event around and not select your service organizations too far in advance. However, if you are holding your event at a high profile venue in a city where resources need to be booked months (and months) in advance, this is not feasible. Make sure that all of the organizations you use are establish, trusted, and cognizant of best-practice security procedures. Make sure they do background checks on all new employees and that the security firm you hire does a complete, up-to-date, risk assessment, even if it’s worked the venue before.

A Farmer’s Fury

Scenario: A group of angry activists make truck-bombs using their unrestricted access to ammonium nitrate fertilizer, drive them up to a building, walk away, and detonate them using a remote detonator.

Mitigation: Restrict parking near critical facilities. If you feel this is a real threat, manually inspect all large vehicles entering your premises.

Too Much – Or Too Little

Scenario: In the future, airline security has lapsed to pre-9/11 levels as the urgency to protect the homeland has subsided with reduced terrorist attacks and a new government to the point where someone could walk on the plane with a shoe-bomb. (This also has an accidental equivalent, the plane crashes.)

Mitigation: The time-tested “don’t put all your executives on the same plane (, bus, or boat)”.

Your Supply Chain is NOT Secure!

The September (2006) issue of IEEE Spectrum ran an article entitled Nine Cautionary Tales designed to illustrate that we are not really prepared if terrorists decide to strike again, despite all of the spending on security initiatives and press statements.

However, what it does make abundantly clear is that no matter what you think, your supply chain is NOT secure – regardless of how safe you think your supply chain is or what voluntary security initiatives you might subscribe to. What does this mean? First of all, if security is critical, you need to take extra steps to insure that security is there. More importantly, it tells us that you should be prepared for disruption and have plans in place to deal with that disruption and mitigate the effects quickly and without serious incident.

So just how are they insecure? Let’s examine each of their scenarios.

Bomb in a Box

Scenario: A crazy dictator threatens to detonate a 2-kiloton atomic bomb hidden inside a shipping container somewhere in a major port city (which could do more damage then the 22-kiloton airburst that devastated Nagasaki at the end of World War II).

Danger: With 90% of international cargo now traveling in standard containers, and your average port only able to manually investigate a very small percentage, it would not be too difficult for a terrorist to hide a large bomb in random port container, detonate it, and damage hundreds, if not thousands, of neighboring containers.

ElectroShock

Scenario: Terrorists take out part of the power grid and a whole city, state, or even region goes dark – just as the US Northeast, Midwest, and southeastern Canada simultaneously failed in 2003.

Danger: There are about 1000 high-voltage transformers in the US that step voltage down from transmission levels (typically above 100 kilovolts) to distribution voltages (in the tens of kilovolts) across the US. Most are secured by nothing more than a chain link fence. Each one of these takes down a portion of the grid. The simultaneous knock-out of a handful of these could overload the grid and take out a very large portion of it. This could shut down significant parts of your operation – cold.

Toxic Train Wreck

Scenario: A terrorist blows a hole in the side of a tank car transporting toxic chemicals, such as chlorine gas.

Danger: The gas escapes and blankets the nearby area, making it uninhabitable and killing anyone who can’t escape quickly. Operations run on people – no people, no operations.

Crude Attack

Scenario: A highly trained commando squad blows up a refinery.

Danger: A very expensive processing plant is destroyed, toxic smoke fills the air, oil supply drops, and energy prices skyrocket.

Agro-Armageddon

Scenario: A small group of terrorists infect small groups of cows with mad-cow disease in geographically remote parts of the country. (The virus that causes this disease is harmless to humans.)

Danger: In order to contain what appears to be a burgeoning epidemic, hundreds of million of cattle are slaughtered across the country, significantly decreasing food supplies, driving up food costs, and making the terrorists, who invested in the futures market, rich in the process.

Black Christmas

Scenario: Terrorists blanket shopping malls with open containers of mercaptan, the highly volatile and noxious-smelling chemical ordinarily used to signal the presence of propane gas, and postal offices with anthrax stimulants.

Danger: Christmas sales plummet as consumers fear malls and deliveries can not be made. Furthermore, if the terrorists make threats to use real propane and anthrax next year if their messages go unheeded, Christmas sales, your primary revenue generators, are destined to be low for years to come.

Star Struck

Scenario: A group of highly trained activists take over the Academy Awards Ceremony.

Danger: This scenario applies to any function you hold with a number of important people.

A Farmer’s Fury

Scenario: A group of angry farmers make truck-bombs using their unrestricted access to ammonium nitrate fertilizer, drive them up to a building, walk away, and detonate them using a remote detonator.

Danger: This could be accomplished by any group with access to the right raw materials – farmers, distributor employees, manufacturer employees, etc.

Too Much – Or Too Little

Scenario: In the future, airline security has lapsed to pre-9/11 levels as the urgency to protect the homeland has subsided with reduced terrorist attacks and a new government.

Danger: Someone could walk on the plane with a shoe-bomb. More importantly, if security lapses across the board, it will be easier not only for terrorist attacks, but theft.

So what can you do? Tune in tomorrow!

Supplier Relationship Management

Another presentation at the Fourth Annual International Symposium on Supply Chain Management that tackled an important topic was a presentation on Vendor Relationship Management by Tom Hawkett of Connect4Growth.

Supplier Relationship Management is very important in a successful supply chain. When you consider the recent entrenchment of global / low cost country sourcing, the unreasonably high focus on spend management (a topic for another post), that many ERP investments are not delivering on promises (as most companies can only afford limited roll outs and most systems do not come with e-Procurement or e-Sourcing capabilities of any significance), and that the viewpoint prevalent in many organizations still seems to be “Procurement, What Have You Done For Me Lately?“, the need for excellence is paramount. This can only happen if you are able to consistently get the right products, of the right quality, at the right time, and at the right price. This is not likely to happen consistently and without incidence if you do not have good relationships with your suppliers.

So how does supplier relationship management help you?

  • Increased Productivity / Improved Performance
  • Improved Service Levels, Internally & Externally
  • Better collaboration with, and management of, providers
  • Reduced supplier selection risk
  • Utilization of best practices and governance structures
  • Reduced Decision Time
  • Cost Savings

No surprises here. So why do so many companies often have problems? Likely because they are faced with one or more of the following challenges:

  • Never enough time
  • Inundated by supplier contacts
  • Everyone is a supplier manager
  • Technology allows more stakeholders
  • Evaluation processes are longer today
  • Difficulty communicating vendor experience across the organization

So what’s the solution? A well designed, accessible, and easy to use Supplier Relationship Management (SRM) or Vendor Relationship Management (VRM) solution that supports and implements best practices appropriate to your organization. A good solution will provide the following capabilities to various degrees:

  • establish benchmarks and goals
  • ensure deliveries match payments
  • flag potential problems
  • expose maverick buying
  • encourage communication
  • track accountability
  • speed up information collection
  • enable apples-to-apples comparisons and reporting
  • provide a framework for partnerships
  • document experience in a knowledge store accessible by the organization
  • reduce decision times and ensure mistakes are captured and not repeated

Where can you find one? A number of vendors, including Connect4Growth, provide such solutions. Some examples are Vinimaya (rebranded Aquiire, acquired by Coupa), Apexon (acquired and merged with Infostretch), and SAP. In addition, some e-Sourcing suite vendors, such as Procuri (acquired by Ariba, acquired by SAP), VerticalNet (acquired by BravoSolution, acquired by Jaggaer), and Ariba provide these capabilities in their e-Sourcing suites. Now, it’s true that each of these solutions are different, and attack different aspects of SRM/VRM, but the best of breed solutions are still infinitely better than not having a solution. And since these systems are far from rocket science, even though they can rocket you to success, if you don’t have one, you should consider getting one. After all, you probably already have a CRM (Customer Relationship Management) system – are not your suppliers just as important as your customers?