So, How do We Fix the Problems We Created? Part I

As per yesterday’s post, we are the biggest supply chain risk. So, how do we become the biggest supply chain solution? By fixing the problems we created. Then the risks will be minimized, and so will the disruptions. Fortunately, the solutions are easy. Unfortunately, the decisions to implement them aren’t always easy from a business, or should I say, capitalistic, point of view. In the short-term, they can be expensive even though, done right, they pay off considerably (and often in multiples) in the long-term.

Climate Change
We could build more wind farms, solar farms, and hydro power stations and greatly increase the amount of energy on the grid that come from renewable sources. And we could deal with the irregular energy production by using natural batteries such as pump storage, compressed air (in natural, deep, airtight caverns), and water (to trap heat energy). It’s a considerable amount of up-front investment, but there’s no need to be putting energy on the grid that comes from dirty coal, natural gas, or oil — especially when we still need the oil for planes, trains, freightliners, and automobiles (as battery technology is not there yet for long-distance travel).

Global Supply Chains
There’s no reason we can’t do more sourcing at home — and do it cost competitively. Given the rise in labour costs, transportation costs, and management costs associated with managing production half a world away, with the right investments in new technology and training, we could produce many of the goods just as competitively in North America. But again, this could require significant multi-million investments in new, automated, technology and training to increase the skill of the manufacturing workforce. (But if we’re as talented as we claim to be, this shouldn’t be a problem.)

Increasing Social Inequity
Rick Perry, following the sound advice of economists like Arther B. Laffer, is proposing a flat tax to be applied equally to all. While it wouldn’t fix the fact that we are allowing some people to be 1,000 times as rich (or more) than the average person, a flat 20% tax on all individuals and businesses in the U.S. would go a long way towards reducing the U.S. national debt. If this resulted in an additional 15% tax on the richest 1% who are currently keeping the majority of their wealth in tax shelters, this would allow the United States to reduce the national debt by almost 20% if all of that tax money was applied to the debt!

Gender Imbalance
Not only do we need to promote equality of women in some countries, but we need to promote equality of men in some countries — often the same countries! In some countries, like China and India, certain jobs are viewed as “women’s work” and given the gender imbalance, this is going to be a problem. Just like men can be nurses and airline stewards, they can also be garment makers and janitors.

Population Increase
We can be smart about this. And while we don’t have to go to the extreme “one child per couple” policy, there’s no reason we can’t educate people about the downsides of large families. While the planet can likely continue to support the current population for the foreseeable future, there is a tipping point, so we should do everything we can to prevent additional growth. But since the planet can likely continue to support the current population for the foreseeable future, we don’t need to panic and jump on the bandwagon that the population has to decrease. Note that, as simple math will illustrate, provided that we don’t considerably increase our expected lifespan in the near future, if, on average, we slowed population growth to an average of 1 offspring per person, or 2 kids instead of 2.5 kids in the average household in the U.S., around the globe, we could reach a steady state population very quickly and eliminate the issue of population increase.

Population Migration
Talent tends to migrate to where there is the most opportunity, and all things being equal, to where there is the most tolerance. If we focussed on increasing the acceptance of people in rural as well as urban areas, possibly through telecommuting and telepresence, we could slow down the migration from rural to urban areas and make populations more predictable.

Aging Population
When you dig in, this is another of the problems we’ve created that is hard to identify a solution for. People are getting older. That’s not going to stop. We’re going to have to accept, and prepare, for this reality.

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.