Remember: Cheap Gas Comes At The Expense of the Environment … And Your Supply Chain

I was pleased to see this recent article in Fortune on “why gas costs more — and is more profitable — out West” (CNN Money, January 3, 2011) because it hammers home three points.

  1. Gas prices are not uniform across North America, and, thus, it’s not all about the price of oil.
  2. If gas is cheaper, it’s not just because transportation costs or taxes are less, it’s because it’s dirty.

And as badly as we may want cheap gas, we should want clean air more. We need agreement on a Kyoto protocol that will mandate consistent EPA requirements across North America. Not only will our lungs thank us, but so will our CFOs — because, then, for once, we’ll have consistent fuel prices across the board and planning will be easier, and cheaper. We will be able to locate DCs at a point that minimizes the total distance across all lanes, because we won’t have to account for fluctuations in fuel prices due to local EPA laws.

Right now, because of so many fuel price variations above and beyond carrier rate variations, an average company requires the most advanced and expensive optimization solution on the market to even attempt to optimize a distribution network. This advanced software is still well beyond the budgets of smaller mid-sized companies. But if the model simplifies, the software requirements for basic network analysis decrease, and lower-cost solutions become sufficient — solutions that are within the budget of the average mid-sized company. And now its clear why cheap gas not only damages the environment, but your supply chain.

VFS: Will Yet Another Acronym Solve Our Woes?

A recent publication of CAPS Research and A.T. Kearney, Inc. on “Linking Supply to Competitive Business Strategies” introduced us to yet another acronym for modern supply management: Value Focussed Supply (VFS). As per usual, there’s a lot of good advice that accompanies the acronym, but do we need it?

According to CAPS and A.T. Kearney, Value Focused Supply (VFS) strategies will provide the next breakthrough opportunity for companies to create and capture value from their most strategic purchases because they go beyond the typical price/cost focus of competitive sourcing. However, anyone who has been keeping track would know that a number of supply strategies have been developed over the last few years that were not (just) cost/price focussed, including AMR’s DDSN (Demand Driven Supply Network) and TVM (Total Value Management,  (e-Sourcing Forum) an optimization-based approach).  [Also: Sourcing Innovation]

According to the executive summary, leading companies are clearly demonstrating the power of this more comprehensive approach. This isn’t the first time we’ve heard these claims either. The MPower Group has been making the same claims for over a year now with their next practices approach, which they’ve described in a number of posts here on SI, including Strategic Sourcing is Dead and The Sourcing Emperor Has No Clothes. Plus, any organization that extends its focus beyond just cost is bound get better results after a while. And once a suitable strategy and focus is adopted, there will be opportunities to protect and create significant competitive advantages.

While I agree that the widespread use of [traditional] completive sourcing techniques and tools (and e-RFX and e-Auction in particular) has eroded the major advantage that it gave pioneers in the 1990s, we don’t need to resort to new acronyms. The average organization has yet to even try strategic sourcing decision optimization or embrace true spend analysis. Then, as mentioned above, there are next generation supply strategies based on decision optimization, such as TVM. The average organization just needs to keep up with the times.

Furthermore, it’s not necessarily an issue that the savings gap between “leader” and “follower” companies has shrunk in half since 2004. For example, if all of the organizations were employing some form of sourcing strategy, then you would expect the gap to close over time. Furthermore, the recent recession has caused many suppliers to slash prices in efforts to keep afloat. If suppliers slash prices on their own, there’s not much to cut in a competitive sourcing event.

And while companies must find and mine additional value from their supply relationships, current techniques will more than suffice — no new abbreviations required. As long as supply is linked to a competitive business strategy, value can be increased — for both parties.

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What Effect Will The Proposed UK VAT Increase Have On Your Supply Chain?

A recent article over on BBC news discusses yesterday’s VAT increase from 17.5% to 20% and how it is going to cost the average UK family £7.50 a week, or about £389 and how it’s going to hit living standards, hinder economic growth, cost thousands of jobs, and make it even harder for families to make ends meet when they are already feeling squeezed. I have to agree with these points, especially when PayScale UK reports the average office administrator as making only £16,150 a year, the average retail store manager as making only £21,477 a year, and the average designer a mere £20,006 a year (which is not much more than the median income of £16,400 a year). For these people, that’s another 1.8% to 2.4% of their annual salary lost to taxes. These people already lose at least 36% of their income to taxes (as per howitends.co.uk) through Tax and Personal Insurance Contributions. When you also consider that the average property tax equals almost 7% of their income, and add this new tax, the average UK citizen is now losing about 45% of their income to taxes — quite a burden in these tough economic times.

But the story doesn’t stop here. In many sectors, such as logistics and (grocery) retail, profit margins in a good year now sit at 3% to 5%. What is a 2.5% tax increase going to do to these business? Especially if, after having one or two bad years of barely breaking even, the profit margin is currently sitting between 0% and 1%? At the very least, you’re going to see jobs disappear. In the worst case, this is going to force more closures, which is going to be very disruptive at home and across the globe for certain multi-nationals. I have to agree with Labour leader Ed Miliband on this one — it’s the wrong tax at the wrong time. In most countries, the private sector is the only chance they have of getting out of the recession. If the private sector is taxed out of business, then there’s no way the country is going to recover (especially in the UK which has a long history of the public sector moving at a snail’s pace).

Should Private Equity Firms Get Into Supply Chain Finance?

I was recently asked what role the banks have in Supply Chain Finance (SCF), which I found to be a bit of an odd question as the role the banks should play in SCF has been well known for a long time. Quite simply, they should be lending more money to the supply chain, doing more financing on receivables, and be supporting the business that make and ship the products we all use everyday. However, instead of playing the long term game (and investing into these business which are pretty much guaranteed to make a return as long as we need to eat, clothe ourselves, and be entertained), they chose to dump money into high-risk mortgages, facilitate the hedge fund madness, and encourage high-risk start-ups during the boom in pursuit of high rewards that are not sustainable in the long term [even if they materialize in the first place].

As a result, they banks are almost broke (and Basel III is probably going to initiate another wave of bank failures, to add to the 139 that had been shut down in the US in 2010 as of October 21 [source: Reuters], because it’s coming into effect too late — the banks have already dug the graves Basel III is trying to prevent) and have turned the taps off completely even if you’re profitable, sustainable, and have been in business for fifty years. Even though the “trade banks [could] strengthen customer relationships” (as per a white-paper published by CGI back in 2007), they have pretty much chosen to turn their backs on their customers when their customers need them most.

As a result, we’ve seen the emergence of trade finance companies, including The Receivables Exchange, which offers a business quick receivables financing from public and private lenders willing to offer receivables financing at the requested rates and/or willing to participate in a reverse auction for the business, and Orbian, which purchases receivables from suppliers in exchange for non-recourse cash for the full invoice value at rates based on the buyer’s credit, which have emerged in an attempt to fill the void. However, these solutions are few and far between and have limited cash reserves as they have not gained wide-spread adoption with either banks or investors. As a result, they cannot come close to serving the true global market demand for trade finance [even though they are being under-utilized by companies hoping to be saved by the banks that abandoned them].

However, private equity companies generally have lots of cash on hand, which they typically use to buy troubled companies with solid products or services that can meet a substantiated market demand and turn a profit. Then, when the companies turn a profit, they take dividends to add to their cash pool or take them public for a profit. What if instead of buying a company, they bought trade finance institutions and/or created new ones? Considering that private equity firms currently sit atop an estimated 500 Billion (as per an article from July 2010 in economy watch titled “economy business and finance news/what depression private equity firms have too much money 01 07”), they could make a significant impact on global trade as this could (if converted to liquid assets) theoretically finance 20% of global trade if net terms, and payback, was 60 days or less (assuming annual merchandise exports are still hovering around the 15 Trillion globally).

What do you think? Should Private Equity get into the SCF arena? While they may only control assets less than 1/10th of the assets collectively controlled by the US banks, most of their assets are not at risk and leveragable. And they are generally much better managed.

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S. 510 Is Days Away From Becoming Law – Is This The End Of The Farmers Market?

I must admit that I have been a little remiss where S510 is concerned. I thought it was just another bill designed to improve labelling and traceability through the supply chain and that its net effect, if passed, would be to simply increase costs for any growers and manufacturers who didn’t already have modern systems in place to document and track every step of the agriculture-based supply chain — from farmer’s field to store shelf.

(I know that most manufacturers don’t have these systems in place, but since the technology has existed for quite some time now, I don’t have a lot of sympathy for them. Given the US crackdown on everything import, export, and supply chain related over the last few years with the threats of terrorism and all the tainted food scandals, there’s no way a food and beverage manufacturer could not claim that they did not know it was coming eventually. Plus, there are quite a number of low-cost SaaS and open-source systems out there that can do the job for a fraction of what a good ERP/MRP would have cost ten years ago when the costs were truly prohibitive.)

However, after reading this recent piece by Sam Osborn over the VBS.TV blog, I’m a little worried. Sam is calling it “The Most Dangerous Bill In The History of America”, and if he’s right, he’s not far off.

According to the post, the basics of the bill grant the FDA supreme authority over every seed that will eventually grow into an American food-stuff and the supremacy of this power stretches to the inspection of growing, harvesting, sorting, and storage operations, minimum standards related to fertilizer use nutrients, hygiene, packaging, temperature controls, animal encroachment, etc. And the bill calls for the inspection of any purveyor of food, ranging from a farm corp beast like Perdue to your Aunt Maye who sells blackberry jam at the town fair. This would literally put farmer’s markets and most organic food producers out of business.

And it gets worse, according to Dr. Shiv Chopra, S.510 would preclude the public’s right to grow, own, trade, transport, share, feed and eat each and every food that nature makes. It will be unconstitutional and contrary to natural law. (Source: The World Prophecy)

And the bill, dubbed the Food Safety Act, passed the House of Representatives on December 21 with a 215-144 vote. All that’s left is for President Obama to sign it into law. Is this the end of the organic supply chain?