Category Archives: Technology

Wharton Nuggets (on Market Share, Entrepreneurship, and Grocery Purchasing Patterns)

Over the last couple of months, Knowledge @ Wharton has published three articles that caught my eye. (Well, more than three, but I felt that these three were worth blogging about.)

The first article that I am going to draw attention to is “The ‘Myth of Market Share’: Can Focusing Too Much on the Competition Harm Profitability?”. The article starts off by noting that it is a common practice of many companies to focus their attention on grabbing market share from their competitors, but such efforts can actually be detrimental to the firm’s profitability.

The reality is that even fifty years ago research indicated that competitive choices are often low-profit. Back in 1996, a study by Armstrong and Collopy analyzed data amassed by scholars to measure the level of competitor orientation of 20 major corporations for five nine year periods beginning in 1938 and ending in 1982 and found that competitive-oriented objectives were negatively correlated with ROI for the data. In other words, the more managers tried to be the biggest in their market, the more they harmed their own profitability. In contrast, companies whose only goal was profit maximization posted stronger returns on investment than the other firms.

The article ends by quoting Wharton Marketing Professor J. Scott Armstrong who says We’re not saying companies shouldn’t pay attention to their competitors; they might be doing reasonable things that you may also want to do … What we’re saying is that the objective should not be to try to beat your competitor. The objective should be profitability. In view of all the damage that occurs by focusing on market share, companies would be better off not measuring it. ‘Nuff said.

The next article that caught my eye was “Dos and Don’ts for Entrepreneurs, from Those Who Have Actually Done It”. As someone who spent the early part of their career working in a lot of start-ups, I know from extensive experience that most entrepreneur’s don’t have a clue what they’re doing. When you fail when you (a) have the best technology, (b) have more than enough money to do what you promised, or (c) have great talent across the board, or (d) have all three … something’s wrong … and it’s not with the employees.

Therefore, whenever someone who has a clue offers to share their advice, I thoroughly believe you should heed it. Tidbits you will take away from the article is that not every business idea needs venture capital, successful businesses solve a real problem (not a hypothetical one), disruptive technologies enable a start up to jump into a large, lucrative market where established leaders have become complacent, good entrepreneurs manage risk, and the KISS rule is always in full-force: get the prototype out as soon as possible, get feedback, and improve only where needed. Remember, a camera, mp3 player, personal organizer, web browser, etc. may be great, but sometimes you just need a phone.

The final article is “The ‘Traveling Salesman’ Goes Shopping: The Efficiency of Purchasing Patterns in the Grocery Store” about the application of the “Traveling Salesman Problem” to the study of the behavior of grocery shoppers.

Wharton marketing professor Peter S. Fader insists that the Traveling Salesman Problem (TSP), which seeks the shortest route available to a traveling salesman who has to visit a number of cities and then return home, closely resembles the problem faced by a typical grocery shopper who plans to purchase a certain list of items in the grocery store. To achieve the same efficiency as the salesman who meticulously plots his route, a shopper would need to know where products are located, and have a game plan on how to go about gathering the items on his list while covering as little distance as possible. However, the average shopper is quite inefficient.

What’s the goal of the research? To understand in-store behavior and how stores should place items to ( a) increase customer efficiency and ( b) increase sales. Does it affect your supply chain? Not really – unless you are in grocery retail, because more efficiency and better sales increase demand, which increases revenue, which should increase profit. But it’s still a very interesting article.

Embracing Complexity

Recently, Supply and Demand Chain Executive ran an article on “Embracing Complexity” that pointed out that supply networks that are becoming increasingly extended and complex; integration between companies and their trading partners is becoming deeper at the systems and process levels; and emerging technologies like radio frequency identification are producing ever-growing mountains of supply chain data and that these and other factors threaten to overwhelm the systems that companies rely on to monitor and manage their flows of goods and 20th century systems may be inhibiting companies from moving toward a 21st century supply chain.

In addition, it presented Lawrence Davis’, a senior fellow at NuTech Solutions (acquired by Netezza Corp), insights into problems with current supply chain technologies. In short, he believes that contemporary solutions do not allow companies to optimize at the appropriate level of aggregation and that companies should be able to use solutions to optimize across their sourcing and procurement, production and distribution processes all at the same time; that software solutions that optimize based on deterministic assumptions about how long it will take for any given process to be completed produce “perfect” schedules that do not allow for breakdowns of machinery, traffic jams, defective parts, and other real-world assumptions; and that stochastic simulations which employ embedded agents that follow the company’s business rules are required.

They got the problems right, but I’m not sure I agree with the proposed solutions. Here’s a short list of reasons why.

  1. Optimizing at the appropriate level of aggregation has always been a discipline-independent problem and we’ve always managed. It’s as much a process problem as a technology problem. It all comes down to using appropriate levels of abstraction that allow us to connect larger and larger problems. And it works. You don’t need to simultaneously optimize all of your categories and all of your lanes – a problem you can’t solve. You can optimize all of your buys using high-order freight approximations, then collectively optimize your freight costs and distribution network.
  2. Deterministic models can be used on approximations and ranges as well as precise models. Yes, the results are still “perfect ranges”, but you can capture most of the likely outcomes. Moreover, none of the technologies proposed will capture every exception and you’ll still need exception management.
  3. Stochastic simulations are a good methodology for determining what could go wrong, but the key is identifying a set of collaborative systems that can embed the company’s business rules – because, as I just said, the processes are as important, if not more so, than the technology.
  4. The technologies proposed – “genetic algorithms”, “evolutionary computation”, and “deterministic simulation” are not silver bullets – just like the ERP was not the silver bullet you needed to manage your supply chain. They have their uses, but they are not that much better than today’s technologies, if they are better at all (as they all have their drawbacks).
  5. You’ll never be able to optimize everything. For that, you’d need a model that accounts for everything (and first of all, we can’t model the market), then you’d need an expensive High Performance Computing Cluster with hundreds (or thousands) of processors and a significant amount of memory, and finally you’d need an algorithm that can take advantage of the highly parallel machines – and you’ll quickly find that most of today’s optimization technologies, or at least the sound and complete ones, do not have efficient massively parallel implementations.

It’s true we still have a long way to go in supply chain, and that we do have to embrace technology, but we have to be careful of over-relying on new technologies, particularly those that have drawbacks as significant as the advantages they are being promoted for, to solve all of our problems. Although some things change, some things will stay the same – and the constant is that no matter what, we are going to need more brain power and good old fashioned human ingenuity to get to the 21st century supply chain.

One can wish it were otherwise, but as a technologist and former academic who could spend countless posts educating you not only on “genetic algorithms”, “evolutionary computation”, and “deterministic simulation” but also on “fractal geometry” (the basis for NuTech’s logo), “chaotic dynamical systems”, and “complexity theory”, it’s not the case. Technology is just a tool – the real solutions will come from the brains who can identify the problems, identify the process solutions, and then put the appropriate technology in place to back it up.

MFG: A Community in the Making

After completing my whirlwind tours of Boston and North Dallas (more to come), I started my virtual whirlwind tour of Atlanta (since I couldn’t find three consecutive dates that coincided with the availability of everyone I wanted to meet with), and the first call on that tour was Mitch Free of MFG.com. For you loyal SpendMatters readers, you’ll probably recognize the name from Jason’s post “Going Global With a Unique Leader”* back in September where Jason noted that even though he had some questions about whether MFG.com should serve as a stand-alone direct materials sourcing application for organizations, he had no doubt that the model is creating tremendous value and is resonating in the manufacturing world by taking supplier search capabilities to the next level, offering a true “parts marketplace” approach that is free to buyers.

Well, I have the same questions as Jason, but after diving in to understand what MFG.com really was about, I arrive at the same conclusions – it has tremendous value and should be part of the toolkit of every engineer and procurement professional at any company that needs custom manufactured parts and products. And it’s not just because of the large supplier base (after all, a number of marketplaces, such as Sorcity, have that), the free built-in sourcing tool (after all, why not WhyAbe from SourceOne [acquired by Corcentric]) the fact that you don’t just get suppliers who make that type of parts but vetted suppliers (located in real-time) who have made similar parts (in similar price brackets), or the fact that you can access ratings for each supplier with respect to their prior performance with other buyers … it’s because MFG.com is taking marketplaces to the next level – the Collaborative Community.

First of all, with MFG.com’s real-time supplier matching capability, based on detailed part specifications, you can find prospective suppliers during the design stages through an RFI. Once you’ve found the right supplier, you can collaborate with them on the design, and as Apriori has taught us, the best way to get an affordable part is to design it affordably. Secondly, you can use their platform as an on-line collaboration enabler and use it to communicate revisions as well as begin and end the sourcing process. Thirdly, MFG.com, even though it’s been around for a while and has a large global presence (especially in China), is just getting started. Although I can’t say much yet, expect MFG.com to start introducing some new community features over the next year or so that should provide the sourcing community with an offering that would finally give the B2B community the power that the B2C community has enjoyed for years with offerings like eBay and Craigslist (but these applications will be finely tuned to the needs of the manufacturing B2B community).

So instead of taking the sourcing interstate to your next destination, pull off onto good old Route 66, make a pit stop on MFG.com, and stay a while. You might find that the old model is new again and that the best value you can get for your time and money is right there waiting to be discovered. Don’t just drive by – take it for a test drive. Otherwise, you’ll miss a treasure just waiting to be discovered.

Vendormate: Great Fit, Less Fraud

Those of you following Spend Matters in recent months will remember a post on Vendormate (acquired by GHX, acquired by Thoma Bravo) on “Tackling the Compliance Side of Supplier Risk Management”*, a vendor registration, credentialing, and compliance monitoring solution provider with a large footprint in the healthcare sector.

Not long ago, I too spent some time talking with Andy Monin in an effort to understand the extent of their offering and how they differ from services provided by providers such as Austin Tetra (acquired by Equifax), Open Ratings (acquired by Dun & Bradstreet), Browz (merged with Avetta), and Connect4Growth. It was an illuminating discussion and I believe that they are truly fulfilling a need in the healthcare sector in particular and that the financial sector needs to take a long hard look at their offering.

Jason Busch highlighted some of the benefits of the Vendormate solution, including the capture of supplier information through an online registration portal, the capability to capture supplier credentials and certificates, the built in rating and scoring system that uses 126 data points, user defined thresholds and risk tolerance, and 3rd party data to assign each vendor a risk score, and the ability to manage compliance risk through exception and be alerted when a supplier may have fallen out of compliance.

What Jason did not highlight were the following facts:

  1. most mid-size and larger organizations have no clue how many vendors they are doing business with, even within a single commodity category (a point that the spend visibility vendors spend a lot of time trying to drive home)
  2. many companies go through peaks and troughs with respect to vendor cold-calls; after a major advertisement or in a public standing offer renewal period, a company will be bombarded with more calls than it can handle, while the rest of the year calls will be few and far between; furthermore, it can be difficult to differentiate between vendors that can provide positive productivity and savings opportunities and those that will do nothing more than waste your time and money – a systematic approach, such as that provided by Vendormate, for receiving, screening, and processing these vendors helps you differentiate the gold from the coal and insures that your business operations are never disrupted as a result of vendor cold calls
  3. regulatory compliance, terrorist screening, and fraud are huge problems that need to be addressed not only in your company, but in your supply base
  4. many companies have no means, or no time, to insure that vendors are aware of, sign off on, and agree to policies and procedures
  5. since Vendormate implements a paid subscription service, vendors have an incentive to keep the information current

Vendormate’s solution addresses these problems as follows:

  1. by providing a common registration system, and refusing to deal with any supplier not in the system and approved, you can know precisely how many vendors you are dealing with and precisely how many provide you with a certain category of goods; this can greatly improve the accuracy of your spend visibility and analysis efforts
  2. by providing a self-serve supplier portal, especially one that comes bundled with a registration fee (to offset processing costs and credential review), a buyer can streamline vendor registration, review, approval, and selection
  3. by integrating with third parties that provide terrorist watch lists and companies that have been identified as committing fraudulent activities in the past, companies can insure they remain in compliance with their vendors and mitigate some key risks
  4. by providing you with a centralized process, it can insure that a supplier accesses a policy, and signs off on acceptance before completing registration; this is key to mitigating risk and future litigation

All-in-all, it’s a great way to kick-start your vendor management and compliance initiatives, especially in the verticals they have considerable strength and experience in. In addition, I highly recommend you check out Vendormate’s blog, it is shaping up to be a good resource on vendor management.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

The New and Improved I2

During my whirlwind tour of North Dallas, I was lucky enough to be able to meet with both Sarinder Chhabra (Senior Vice President) and Manish Govil (Program Manager) of i2 Technologies to talk about what i2 has been up to lately and where they are going.

I’m sure many of you still consider i2 to be the gold-ring exclusive services provider to the top ten or top twenty aerospace, automotive, high tech, and chemical providers, with deep service offerings beyond your needs and capabilities, and price tags to match, but that’s the i2 of old. Having conquered best in class, they realized that they only had two options for growth: conquer new verticals or address a larger market-space. New verticals would be a great start, and their generic process solutions could be customized to the needs of just about any vertical, but the real market lies in the mid-market, where most companies reside. Therefore, they decided to entirely re-architect their software and solution offerings to address the needs of small and large alike! And it sounds like they got it right.

The following are seven key points that I took away from my discussions.

  • They’ve re-architected all of their modules and major sub-modules as Service-Oriented Architecture enabled components and developed a new AGILE business platform that allows them to integrate just the components you need.
  • They’ve enhanced their technology architecture to include best of breed third-party products, such as Endeca’s (acquired by Oracle) search technology and Denso’s OEM catalogue.
  • They have embraced Software as a Service principles and will offer hosted solutions or managed services as well as event-based offerings.
  • They have been working hard on a next generation supply management solution that integrates the software and services you need to be successful.
  • They have been actively creating and embracing partnerships, and will happily work with complimentary providers to provide you a full suite of connected and integrated products to give you an end-to-end solution for whatever part of the supply chain you are attacking.
  • They have been working hard to translate their broad in depth knowledge base of industry best practices into generic processes that can be built into your configured software solution.
  • They have been working hard to transform from a software provider to a solution provider – to offer you the services, be it generic software, custom software, consulting services, or managed services, in-house or through partnerships – you need to succeed.

I look forward to diving into some of their new offerings in the near future.