Uh-oh! You’re in the S&OP Rabbit Hole!

Procurement Leaders recently released their CPO Guide for 2013. One of the key findings, related to the economic environment, was that most CPOs seem over-optimistic about their organization’s sales potential for 2013, but are less positive about the wider economy. To be blunt, if the economy is going to remain stagnant, then the majority of you are going to have stagnant sales. Mathematically speaking, the only way a majority of organizations could have an increase in sales in a stagnant economy is if one or more major market players in the majority of market segments went bankrupt, freeing up a considerable percentage of the market to be divided among everyone else. And even then, the market share gain most organizations would get would be miniscule. Let’s illustrate this with a table.

Company Current Market Share Economy Grows 2% Equally Economy Grows 2%; 3 Top Players Grow 4%   Market Share after A goes bankrupt
A 25% 25.5% 26%  
B 15% 15.3% 15.6%   26%
C 15% 15.3% 15.6%   24%
D 10% 10.2% 10%   15%
E 8% 8.16% 8%   12%
F 6% 6.12% 6%   5%
G 6% 6.12% 6%   5%
H 5% 5.1% 5%   5%
I 5% 5.1% 4.9%   4%
J 5% 5.1% 4.9%   4%

In other words, if the economy grew 2% and all things were equal, a company’s business would only grow 2%. No more. If some companies beat the market, and grew a combined total of 4%, as demonstrated in column 4, for three companies to beat the market, in a good scenario, we would expect four to five companies to hold steady while two to three companies drop in sales (and at least one company must have decreased sales). And the market leader going bankrupt will not help much either. What typically happens is the top two companies rush in to fill the void and get the lion’s share of the business, the next two companies, taking advantage of the marketing frenzy created by the new top two and their lower prices pick up the rest, and the companies at the lower end of the spectrum actually lose business to those making all the noise (with enough market share to get noticed by the big buyers). A likely scenario is given in column five. In other words, since the market is fixed, only a few companies are going to increase their sales more than average.

So don’t let sales and marketing lead you down the S&OP rabbit hole where you negotiate volume discounts that never materialize (as you never order the full volume) and get stuck with obsolete inventory (as you will front load to meet the massive increase in demand that sales and marketing are promising). You’re smarter than them and know that stagnant markets mean stagnant sales.

What’s the Biggest Supply Chain Risk?

Us!

The biggest supply chain risks are not bankruptcy and plant failure, they are not unusual and damaging weather patterns, and they are not natural disasters. As clearly pointed out in the Supply Chain Risk Leadership Council (SCRLC) in their 2013 Emerging Risks in the Supply Chain study, the biggest risk is us — the human race — as a collective whole.

To see this, let’s review the fourteen (14) risks that were identified and discussed.

  • Climate Change
    A key contributor to climate change is the amount of carbon emissions we are producing. We keep burning oil, coal, and natural gas, and we keep doing so without any significant attempt to trap and sequester the carbon back in the ground it came from, allowing it to creep back into the atmosphere and increase the carbon dioxide percentage.
  • Global Supply Chains
    We keep outsourcing and offshoring even though, in May 2012, the total industrial capacity utilization in the U.S. was a mere 76.3%. To put that in perspective, one in every four plants is sitting idle at any one time.
  • Increasing Social Inequity
    Less than 1% of households control 40% of the world’s total financial wealth, with inequality ranging from their 34.5% share in the U.S. to their 70% share in China. And we don’t seem to be doing much about it, especially given the number of tax shelters available to the extremely wealthy in much of the developed world.
  • Gender Imbalance
    The one-child policy in China and the cultural history of favouring boys over girls in India has led to the situation where, in the next decade, there will be significantly more men of working, and marrying, age than women. People, trying to fix one problem, created this problem instead.
  • Population Increase
    Statistically speaking, we are expecting a population increase of almost 30% by 2050 where we expect the earth’s population to be 9 Billion people! We’re all contributing to this.
  • Population Migration
    It was only six years ago that the urban population exceeded the rural population. By 2050, we will have 70% of people living in urban areas. We are creating the mega-cities which, instead of being a sustainability boon, are, in many cases, an environmental nightmare.
  • Global Democratization
    What is likely to happen is that instead of replacing years of corruption, political repression, and economic disparity with stable democracies we are going to end up with the chaos and disorganization that could arise from new political systems being established by individuals with little governing experience.
  • Dependence on Information Technology
    We have come to rely on information technology to the point that when the software fails, we are immobilized. We allowed ourselves to become too reliant on technology.
  • Government Financial Crises
    Governments, run by politicians that we elect and allow to stay in office, around the world have taken on too much debt.
  • Government Social Policies
    In many countries, the majority view is that social policies are not properly funded, not equitably applied, and not equitable with those of whatever nation is currently being looked upon as the best role model for social governance. But we elected the government that created and maintains them.
  • Global Economic System Disruptions
    We created the rules that govern the financial systems that are starting to break down.
  • Social Media Threats
    Social engineering, anti-brand campaigns, and other socially-based attacks are all people-driven, not technology driven.
  • Global Mega Cities
    All over the world, we keep building mega cities and keep moving into them, creating extreme levels of congestion and infrastructure problems.
  • Aging Population
    Thanks in part to the baby boomers, we are getting older as a population. The number of people over 60 is growing at a rate that is 2.5 times the population growth rate.

In other words, directly or indirectly, people are the cause of the majority of supply chain risks, and that’s why supply chain visibility and third party management, focussing on the management of people, is so important.

(And while we’re all to blame, as hinted at in the study, the 1% deserve at least 34.5% of the blame! Their unequal tax treatment is a big reason we’re so deeply in debt and can’t adequately support social programs. Statistical models have demonstrated that their campaign contributions play a significant part in who gets elected and forms the governments that control our social, economic, and trade policies. They are collectively the biggest social inequality. And they could do the most towards moving us to sustainable energy models.)

We Have Supply Management Problems. Where Will We Find Solutions?

Scandinavia.

That’s right, Scandinavia! Apparently.

According to the Global Creativity Index, put out by the Martin Prosperity Institute* and published in 2011, Sweden takes first place, Finland takes third place, Denmark takes fourth place, Norway takes eighth place, and the Netherlands takes tenth. The U.S., Canada, Australia, New Zealand, and Singapore round out the top 10, creating North American and Australasian pockets of creativity, but most of it is centered in Scandinavia. (And that’s likely why Spend Matters is expanding into The Netherlands [spendmatters.nl]. They’re hoping to tap into that creativity that huge pocket of creativity.)

The report, which takes the three main classes of economic inputs — Technology, Talent, and Tolerance — attempts to go beyond simply ranking the 82 nations considered in the study and shift the classical focus on competitiveness and growth (which resulted in the pursuit of short term profits to the point where some of the world’s most advanced and affluent economies reached the brink of collapse) to creativity, prosperity, and well-being. As a result, in addition to the classical measures of economic growth and competitiveness, the research also takes into account broader measures of economic equality, human development, and subjective well being.

Classical economists, who followed in the footsteps of Adam Smith, may have believed that economic development came down to land, labour, and capital, but physical factors alone no longer determine progress in today’s modern, advanced economies, where factors like technology, innovation, knowledge, and human capital play much greater roles. And creativity underlies all of these factors. Also, as the report points out, everyone is potentially creative. But not everyone produces creativity. A lot of this depends on the tolerance of the culture in which they live. New ideas are generated most efficiently in places where different cognitive styles are tolerated — and different cognitive styles are linked to demographic diversity. It’s important to remember that, in today’s world, technology and talent are mobile and tend to flow to areas with the most tolerance.

What’s interesting to note is that leadership in any two measure is not enough to guarantee leadership across the board. Finland is first in Technology and talent, but 19th in tolerance, and thus lag Sweden by 3% in the index, putting them in third place. Canada, which is first in tolerance, is in seventh place because it’s eleventh in technology and seventeenth in talent. The United States maintains it’s second place position because it manages to maintain a ranking in each category that is top ten, giving it a narrow margin over third place Finland. Sweden is number one because it maintains the best overall balance, second in talent, fifth in technology, and seventh in tolerance (and since it maintains the best balance, people and technology are unlikely to flow out of the country).

So what does Scandinavia have to offer us? That’s a very good question. While SI knows there is a lot of innovation and creativity coming out of Europe in Supply Management, it has to admit it wasn’t expecting the creativity to be centered in Scandinavia. But it does explain why if you are seeking spherical supply solutions that you will succeed in the EU.

The Martin Prosperity Institute, directed by Richard Florida, author of Who’s Your City (referenced in SI’s series on Where Should Your Supply Management Organization Be Located), is the leading think-tank on the role of sub-national factors in global economic prosperity.

Don’t Forget Strategic Category Management in Your Services Categories!

Even though there is no inventory, nothing physical to return, and very few recovery opportunities available, even if the supplier fails to perform, you still need to manage your services categories strategically. Why? As per the Hackett Group Spend/Savings Visibility Study (in 2010), 48% of indirect expenditures (composed of T&E, Marketing Spend, Logistics Spend, and Professional Services) are primarily services-related, and an additional 35% (composed of IT/Telecom) are largely-services related.

Furthermore, when you consider that, in some organizations, indirect spend can approach 50% of spend, and that the organization is often left with nothing tangible to show for the spend when all is said and done, strategic category management becomes even more critical on these categories. And extra attention should be focussed on the seven steps that come into play.

Phase 1: Rationalization

When it comes to services, you need to not only analyze your options from multiple perspectives, but consider different strategies. While it is often beneficial to dual-source from a product perspective, to insure continuity of supply, dual-sourcing from a services perspective is often detrimental. For example, hiring two agencies for a marketing campaign is a waste of money, and if, by chance, your cell phone carrier goes out of business, there are at least six more to pick up the business the next day. You will likely need to single source, so you need to do so with care.

Phase 2: Supplier Identification

Not only is it important to open up your search, but it is important to qualify your options more completely. For example, where Marketing is concerned, if the primary need of Marketing is brand building, then the focus should be on agencies with that specific specialty. If the primary need for management consulting is to help the company with international expansion, you need to find a consulting organization with expertise in the target market – and it may not be a Big 5.

Phase 3: Sourcing

Unless you have an in-house expert, you will likely need to call in an expert if you want to get the best deal. Services, and services firms, have their quirks that you will need to understand intimately to get the best deal. For example, in advertising, bundling creative and print is not likely to save you money, as savings in print come from consolidated volumes with a single print house, and volume comes from consolidating orders across campaigns. In Logistics, the best deals are often found on the spot-market, especially if you have a little leeway in delivery schedules. In Telecom, you’ll get a great deal on the most common base package for your mobile devices, but the outliers who go over or who need the high-end packages will be laden with 100% profit margins to help the carrier make back what it gives up on the base. And so on. You need to know the gotchas, and how to avoid them.

Phase 4: Contract Award

The contract is very important, and detailed delivery and performance requirements are a must, otherwise, you’ll have no recourse if the service provider fails to deliver. In agency spend, make sure you have fixed delivery dates, penalties for late delivery, and termination clauses for repeat offences. In print spend, make sure you have contracts that state you don’t pay for their mistakes. In telecom, make sure there are no-pay clauses that state you don’t have to pay after notice of termination is given, even if they forget to deactivate the device/account for 30 days, and that you can apply rebates immediately. In professional services, make sure you have the right to withhold final payment until the final deliverable has been completed and accepted.

Phase 5: Supplier Management

Supplier management needs to be more active than it does in product-based supply chains. In a product based supply chain, once the chain has been worked out, and the first batch of products has been accepted as meeting quality standards, visibility solutions, that inform you of a potential hiccup, can often minimize the need for day-to-day interaction with the supplier until a change is required. No news is often good news. Not so with services. No news is almost always bad news. It typically means things aren’t going to plan and the supplier is trying to avoid telling you. If you aren’t managing the supplier and monitoring the situation, it’s likely that you won’t find out until it’s too late.

Phase 6: Procurement

It’s very important to send a purchase order with a clear statement of work, approved amounts, a payment schedule, and specific instructions (and account codes) for the invoice. It’s critical to capture the correct data for reconciliation, reporting, and evaluation purposes. If you can’t compare approved budget to actuals, you really don’t have a good grip on what your services are costing you.

Phase 9: Recovery Management

If deadlines are not met, overpayments are (accidentally) made, discounts aren’t applied, or other terms and conditions are not met, you will need to recover monies from the supplier. If you have cut a proper contract, appropriately managed the supplier, and procured properly, recovery will be possible (although you may have to threaten / go through with arbitration and/or legal action with suppliers unwilling to cooperate — but be sure you’re ready to sever the relationship before progressing to legal action).