The (Board) Gamer’s Guide to Supply Management Part VII: Upon a Salty Ocean

SI is almost radiating rainbows now that it’s resurrected it’s one-of-a-kind blog series that will help you take your Supply Management career to the next level by giving you new and interesting ways to hone your supply management skills. Still more fun than reading about the latest study on the daily migration patterns of the three-toed sloth, but now that you can hone your skills while challenging your peers, it’s three blasts and a half.


It’s 1515, and you are a merchant of Rouen. You invest in ships and city buildings in an effort to not only get rich, but be the richest when Francis I comes to visit the city in an effort to win his favour. The city’s wealth is dependent on fishing and the trading of salted fish, herring and cod in particular. Every week, ships full of salt barrels leave Rouen for the fishing grounds of the Atlantic Ocean and, upon their return, sell their fish in the market.

Upon a Salty Ocean is a turn-based work-placement game that consists of 5 turns, where each turn consists of 3 phases: an event phase, an action phase, and a turn end phase. The event phase determines weather and market conditions which affect fishing and the cost of fish and salt. In the action phase, a player chooses to either take a city action (in which she can buy salt or buildings), a navigation action (in which she can take her ships to the open sea and fish or return to Rouen), a harbour action (in which she can move goods to or from her storage depot or build a ship), and a market action (in which she can buy to or sell from the market).

Sounds simple enough, right?

It would be except for the fact that:

  • the event that happens at the start of the phase can bring stormy seas, which will decrease the amount of fish that can be caught; pirates, which will damage the ships and decrease the amount of fish that can be held; market dips, which will lower the selling price of fish and/or salt; and/or market surges, which will increase the selling price of fish and/or salt
  • actions in the action phase are consecutive, each player can only take one action at a time, and every time an action is taken, it gets more costly for the next player — and all purchases and sales affect the market price
  • you begin the game with a small amount of money, have a limited credit line, and interest charges rack up quickly if you go into debt
  • if you prosper, you must invest in a bank to safeguard your money, or you will lose some of it at the end of the turn
  • each building investment provides different advantages
  • a strategy only works if there is limited competition in that strategy, or
    you luck into the right timing

Just like in the real world,

  • shipping is subject to stormy seas, pirates, and other calamities
  • no one can take two actions at the same time in the real world, w.r.t. the markets in particular, and every action taken increases or decreases the cost for everyone else
  • your resources are always limited, debt is costly, and too little cash flow can bankrupt you (and prevent you from taking any more actions for at least one turn)
  • the more you have, the bigger the target you become for thieves and the more you have to invest in security
  • different capabilities in Supply Management give you different advantages, some tactical, some strategic, some innovative, etc.
  • not everyone can corner a commodities market, a CPG segment, etc.

It’s a real supply management market conundrum. Do you try to conquer the seas and get the most fish? Conquer the market, buy low, sell high, and make your riches off of trade? Or do you acquire the most buildings and make money off ship building, banking, and building the church? Played properly, all strategies can win, including the fishing-free market strategy. Played wrong, and bankrupt you will go. Just like the real world.

Supply Management Has a Long Way To Go To Get to The Top!

The ISM and BravoSolution (who want to align Sourcing with the rest of the organization) recently released the 2013 ISM Survey of Procurement Executives on “Procurement & Sourcing: Moving from Tactical to Strategic” which summarized the responses from 545 Supply Management executives at the Director level and above to a detailed survey created by BravoSolution and administered by ISM last July and August.

These executives were given a list of 24 topics identified to be of recent concern to procurement and sourcing executives and asked to identify their top organizational priorities in 2013. The top priority of improving cost reduction and savings should not be a surprise to anyone since most companies have been laser-focussed on cost-reduction and savings since the major financial crisis in 2007-2008, to the detriment of just about every other important goal. However, what should be surprising is that cost reduction and savings is not only the top priority in 60% of companies but still twice as important as the second most common business priority of revenue growth and profit improvements despite the fact that most organizations expect their cost reduction efforts to yield less than 10%!

The time of near-zero inflation is at an end and with hyper-inflation a strong possibility in many commodity markets and a few countries, and, despite the opinion of some experts, we could be looking at a return of stagflation in some global economies. And even if we don’t see stagflation, the rapid rise in costs across a number of raw material and commodity categories should be enough to convince the average Supply Management professional that savings will not be possible in many categories and the best one can hope for is cost avoidance — unless other opportunities for savings are identified. Opportunities that revolve around process improvement, raw material substitution, value-add, and non-value add service removal. This means that more effort should be spent on supplier collaboration and innovation, supplier performance and sustainability management, and raw materials, but the first two of these options were only listed as priorities by 19% and 23% of the respondents, respectively, and the third option didn’t even make the list of the 9 topics that were selected by more than 10% of respondents.

It was nice to see that 30% of respondents recognized that a key capability of properly performed Procurement is the delivery of revenue growth and profit improvement, but this doesn’t happen without the proper focus on efforts that can lead to revenue growth and profit improvement, which include efforts like the Procurement Perfect Order (which will make your organization a more attractive supplier), improvement of working capital (which will allow Finance to reduce interest and penalty payments, take advantage of early payment discounts, and possibly even earn money on short term investments), improving customer loyalty (as it costs less to keep a customer than to acquire a new one), improving the strategic nature of trading partner relationships (as this can lead to joint efforts to take cost out of products and services and increase sales), and more spend under management (which permits better spend and opportunity analysis). However, from this set up of options, only two — getting more spend under management and improving working capital — were selected as priorities by more than 10% of respondents. Without appropriate priorities, profit and revenue goals are just pipe dreams.

There’s a fair amount of analysis in the 23 page report, but the bottom line is that Supply Management has a long way to go to become the strategic powerhouse it should be. It’s just like Angus, Malcolm, and Bon said back in 1975 — It’s a Long Way To the Top (If You Wanna Rock ‘n’ Roll). A long, long way …

If You Really Want to Make Stakeholders Hate You, Just …

Spend Matters UK recently published a 5-part series on how to make stakeholders hate you, which presented five actions you can take that, despite your intentions, will help you achieve your goal of helping stakeholders to hate you.

In order, they were:

  1. Drive them Mad with Technology
  2. Revel in Being the Gatekeeper
  3. Talk Your Own Language
  4. Insist Every Spend Category is the Same
  5. Focus Purely on Savings

From a Procurement point of view, pushing for new technology, focussing on savings, and speaking the language of good Procurement is typically a good thing (as technology helps you do your job better, savings pleases the C-suite, and the language of Procurement isn’t appreciated enough). But from a Legal point of view, technology is irrelevant; from a Marketing point of view, it’s about sales, not savings; and from an Engineering point of view, the language of Procurement is irrelevant — the product has to work, work well, and be something to be proud of (damn it). So, even if it’s delivered with the best of intentions, a push for new technology, a focus on savings, or explanations delivered in your language can turn stakeholders off.

However, insisting every category is the same or revelling in your role as the gatekeeper is definitely confrontational and will help achieve your goal of getting stakeholders to hate you, with time and effort of course. But if you really want your stakeholders to hate you, and hate you with an unrelenting passion, the best way to accomplish this, beyond a shadow of a doubt, is to:

     0.  Take all the Credit

Assuming that you can convince the stakeholders (or the C-Suite who will force them) to work with you, the best way to truly become the target of their ire is, once the project is a success, take all the credit. While it’s true that the root of the project success — be it cost savings, quality improvements, JIT delivery, value-add, etc. — will be the result of the technology, process, and supply management experience you bring to the table (which takes the good job they were doing and makes it great), you can’t take all the credit. Remember, (as far as the stakeholders are concerned), they worked just as hard as you; they brought the category expertise to the table; they have the experience with their preferred suppliers to, supposedly, determine which tactics and methodologies are likely to yield the most fruit, and they have a need to look good to the C-suite too. (Especially if their department is seen as a cost-center and not a value-creator.)

So if you stand up when the project is done, compare the greatly improved results that were achieved when the department worked with you for the first time (compared to the dismal results the department achieved on its own last year), and do your absolute best to take all the credit, the stakeholders will hate you so much that they will strive to open the gates of hell and unleash its fury upon you. It’s the only thing you have to do to gain their eternal animosity. No ifs, ands, or buts about it. No top five list needed.

Anticipatory Demand Planning is Good, but Anticipatory Shipping?

SI can believe that Amazon patented a Method and System for Anticipatory Package Shipping (US Patent 8615473) but can’t believe it would use this for more than a small number of items. Nor does it believe the system would be implemented as outlined in the patent as filed, at least in the short term.

It took Amazon 7 years to turn its first profit, and while Prime is currently very profitable to Amazon (which makes $78 more in profit per year per Prime customer, on average, than non-prime customer according to CIRP’s market research – Source: Wired), those margins would drop substantially if Amazon started shipping tens, or hundreds, of thousands of packages a year that no one wanted. Amazon does have an efficient distribution network and probably has the absolute best deals with postal and courier services that can be papered, but every shipment costs money and every unnecessary shipment eats into profit. Returns cut into profit margins enough, how much are returned shipments to nowhere going to cost?

Thanks to big data, predictive analytics is getting better by the day, but it’s still hit and miss at a granular level. While it’s pretty easy to use correlation data across a large customer base to predict that you are likely to desire an item, it’s harder to predict whether or not you’d actually buy it, and if you would, at what price point, assuming you don’t already own the product in question. (It’s always telling the doctor he wants books and media he already owns.)

As a result, any predictive analytics at the individual consumer level are going to be hit-and-miss at best. Predictive analytics work best across a large consumer base with a lot of data where one can predict that, on average, 5 in 100 people who match a profile will buy the product from Amazon.

And, from Amazon’s viewpoint, the best use of the predictive analytics is on new releases, as the bulk of sales in many of its categories, and books and media in particular, are in the weeks immediately following a new product release. With the right data and the right algorithms, it can not only predict how many units it is likely to sell against its current customer base, but if the demand is enough, how many in each region that is associated with each distribution center and how the orders will likely track over time on a daily basis.

In this, and only this situation, would anticipatory shipping, and in particular, anticipatory packaging, make sense in the short term. For example, if Scott Adams were to release a new Dilbert book and Amazon predicted 200,000 copies would be sold in the first 3 weeks, and expected that it would get 50,000 of those sales, pre-packaging 40,000 for shipment and then distributing those across it’s DCs such that each DC received a number of books proportionate to the expected sales in the serviced area would be a good idea. All Amazon would have to do to speed up shipment would be to slap the delivery address on the boxes as the orders came in and have them ready to go in the next pickup for local delivery.

In the future, once the system is fine-tuned and its delivery partners have the technology to replace a unique delivery address identifier with a specific delivery address on-the-fly, Amazon can pre-ship a set number of these pre-packaged items to the local post office or delivery company every day, which can, in turn, load those packages onto the appropriate courier truck each morning as the addresses in the system are updated with consumer delivery addresses sent over by Amazon upon each purchase.

But not everyone would get faster shipping service. In order to prevent too many unnecessary shipments and loss, Amazon would have to err on the side of caution and pre-package (and pre-ship) less unit of an item than it expected to sell, and restrict the anticipatory shipping and packaging to only those items expected to have a large sales volume. In most cases, the best Amazon will do is optimize the distribution of inventory across its warehouses. However, this can still take a day (or two) off of average delivery time, so this is still a good start.

Any differing opinions?

Top 12 Challenges Facing India in the Decades Ahead – 09 – Taxation

India has a lot of challenges ahead of it whose solution requires capital. Lots of capital. This capital is going to have to come from taxes. But in this regards, India also has a lot of challenges. The most significant of which are:

  • Poverty
    Despite rapid economic growth in recent years, India is still one of the poorest countries in the world as only 15 countries have a lower gross national income per capita. Officially, 30% of the population is below the poverty line as defined by the Tendulkar Committee Report (2009) which clarified the official poverty estimation methodology and set the poverty line at Rs 32 per person per day in urban areas and Rs 26 per person per day in rural areas at 2011 prices, which is approximately 52 US cents in Urban areas and 46 US cents in Rural areas at the end of 2013. This line is so low that it is actually a destitution line that does not ensure anything above bare subsistence. If we use the international poverty line of $1.25 US per day as defined by the World Bank, then almost 33% of the population is below the poverty line and if we define the poverty line at $2.00 US per day, which is barely above subsistence levels in many of the bigger urban areas, then almost 69% of the population is poor!
  • Unequal Wealth Distribution
    The top 1% own 16% of the country’s wealth, and the top 10% own 53%. India has three of the 100 richest men in the world, and the richest man in India is worth almost 22B, while the second and third richest men are worth about 17B and over 11B, respectively. This says the three richest men are worth about 50B in a country with only 1.8 Trillion in GDP and that they alone represent a net worth that is about 2.8% of the overall economy.
  • Import Duties
    India does not charge, or often forgives, import duties on certain types of materials and products that could provide a considerable contribution to the economy, even if the duties were kept low with respect to the rest of the world, and it does a poor job of collecting import duties on some categories that it has stated it will make an effort to collect import duties on. For example, the annual “Revenue Foregone” statement released by the Finance Ministry estimates that India lost RS 529,432 crore (97 Billion) in 2011-2012, or more than 5% of India’s GDP and nearly 67% of total tax collections in India in 2011-2012! (Source: IndiaSpend) This included almost Rs 66,000 crores of customs duties foregone on “diamonds and gold” alone. Any one, or any business, that can afford to buy diamonds and gold can certainly afford to pay a small import duty! And the duty is small — in India, the import duty on gold is a mere 2%! (In the US, the duty and taxes for gold jewelry can be up to 5.5%.)

In other words, India has the situation where:

  • Approximately 2/3rds of its population cannot afford to pay tax.
  • Almost 1/3rd of the remaining population that can afford to pay tax is extremely wealthy, influential, and able to influence the government that sets the tax rates.
  • The government, unwilling to deal with intense complaints or publicity when it tries to collect, or raise, import duties is giving up over 40% of its potential current tax base.

For a country that can’t even address the basic needs of its population, how is it ever going to address its infrastructure, energy, and global economic challenges if it doesn’t stand up and collect taxes where taxes are due?