Is AMR Too Hard on China?

Now it’s well known that, unlike a fellow blogger, I’m not all that high on China (having questioned how innovative LCCS sourcing to China really is back in month one) because I believe that we could be a lot more sustainable, green, and logical and near-source much of what we’re needlessly outsourcing halfway around the globe, but sometimes I think AMR is even lower on China than I am, to the point of being unjustly hard. (Because, as Dick Locke will point out, sometimes they are the best choice. Not always, but sometimes.)

Basically, I found this recent article from AMR on “six reasons to worry about China in your supply chain” a little unfair. While all of the reasons were valid, most of them weren’t exclusive to China. In fact, only two of them were specific to China and most of the rest were pretty generic and applicable across the globe. While the rare earth chokehold — evidenced by the fact that they control 93% of the world wide production of terbium, dysprosium, and other highly specialized high-tech minerals, and the exchange rate by fiat — evidenced by the fact that the Yuan’s exchange rate is still pegged to the dollar, are specific to China, the following concerns are much more global:

  • Capricious Trade RulingsChina isn’t the only communist country that can impose prohibitive export taxes without warning that, in one case, quadrupled the price of yellow phosphorous overnight. Before Chavez started seizing oil companies, he was creating “extraction” taxes of at least 33%. And let’s not forget that protectionist democracies can hike taxes without warning too. For example, last year Obama imposed a huge, three-year tariff on tires imported from China that raised prices for consumers by 35%.
  • Indigenous InnovationSure China has a policy that favours companies using domestically developed IP, but there’s nothing to stop India, which is also focussing strongly on (frugal) innovation from adopting a similar policy. And even if they don’t, with 1.2 Billion people and a burgeoning middle class that will soon be larger than the population of North America, it probably won’t be long before they’re out-innovating us.
  • Rampant IP PiracySure China might consistently top the watch lists, but Russia and Mexico are consistently high as well, and the recent US watch list also includes Spain near the top of the list!
  • Poisons, Pollution, and ContaminationSure the cities in China are bad, but so are the cities in India. And the water in much of India is terribly polluted — over a million children die each year from disease and infection from the polluted water, and it’s a major reason that 50% to 60% of women living in the slums suffer from chronic malnutrition, recurrent gastro-enteritis, and helminthic infections.

Now, I’m definitely not saying these aren’t valid concerns where China is involved, just that these concerns aren’t restricted to China and that if you’re gonna beat on China, you should be fair about it.

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Making Cost Cuts Stick

A recent article in the McKinsey Quarterly noted that it is often difficult to make cost cuts stick, especially when the economy is improving, and that only 10% of cost reduction programs show sustained results three years later. To try and improve the situation, they offered us “five ways CFOs can make cost cuts stick”, which, briefly, were:

  • Assign accountability at the right level

    Make sure the people actually spending the money are accountable for how it is spent, and that their compensation is related to how well they adhere to the initiatives.

  • Focus on how to cut, not just how much

    Set policies and procedures that are in tune with desired spending behaviours.

  • Don’t Let P&L accounting data get in the way of cost reduction

    P&L categories don’t give the kind of per-unit insights that help focus cuts in specific categories, like travel expenses, that the company can most afford to cut.

  • Clearly articulate the link between cost management and strategy

    Strategy must lead cost-cutting efforts so managers can deliver a consistent message on how the identified cost reductions will strengthen the company.

  • Treat cost management as an ongoing exercise

    It’s not a one-off exercise driven by the need to manage short-term profit targets, but a long-term initiative designed to build a competency in cost management.

And these are all great ways to control costs and maintain cuts, but I think the real key to making cost cut sticks is to cut what needs to be cut. If you cut what needs to be cut, then the cut is a justifiable and defensible one. This makes it easier to articulate the link, focus on the how, treat cost management as an ongoing exercise, assign accountability, and bypass the P&L as you go straight to the data source.

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From the Brink to Cash in the Bank – Supply Chain Management Can Save You Too

The SCMR is back, Quinn is still in charge, and it looks like he’s striving to maintain the quality that the SCMR was known for. I was quite impressed with one of the first articles on driving a turnaround in tumultouos times, which presented a case study on PolyOne and how it came back from the brink of bankruptcy. In March of 2009, it’s share price reached an abysmal low of $1.32. On May 27, it was $10.19. That’s an eightfold improvement in a little over a year and the reason analysts are now recommending it as a buy.

In the past year, it generated $218 Million of free cash flow and reduced its net debt by $233 Million. This is very significant given that it’s sales in 2009 were only 2.061 Billion as it means that PolyOne not only freed up 10% of their total sales for working capital but also managed to direct over 10% of their total sales to reduce their net debt. Plus, not only is their long term debt only 60% of what it was in 2005, but they went from a net loss of 273 Million in 2008 (when sales were 33% higher) to a net income of 68 Million in 2009, an incredible turnaround.

So how did they do this? Great supply chain management. Specifically:

  • Manufacturing RealignmentA series of mergers and acquisitions left PolyOne with over 40 global production facilities, considerably more than it needed to meet demand and mitigate risk. A detailed network analysis indicated that they could more than meet demand and mitigate risk with only 80% of manufacturing capability. This allowed them to close nine production facilities and significantly decrease operating costs.
  • Inventory ReductionAt the end of the third quarter in 2008, the company was carrying $331 Million in inventory, a number equal to 16% of sales in 2009 and an incredible cost. They undertook a two-day Kaizen event to identify opportunities to reduce inventory and cash-to-cash cycle times that identified consignment inventory reductions, opportunities to reduce costs by way of distributors, better inventory transfer practices with key suppliers, and opportunities to improve reorder points. Specifically the first thing they did was kill the re-order points that were on autopilot in the SAP MRP, which didn’t reflect the plummet in demand that came with the economic downturn. Moving to regular, manual review, helped them reduce inventory by $139 Million in just six months.
  • Process ImprovementsThrough numerous process improvements that included inventory stratification, PolyOne also reduced DSI, which dropped from 55 days in first quarter to 37 days in third quarter, while improving on-time delivery.
  • Greater Customer FocusManagement established the mindset that on-time delivery was critical and by improving customer focus, PolyOne improved on-time delivery from 81% in 2005 to 93% in 2009, a 15% improvement.

In short, it was supply chain that saved the day, and its the best practices described in this blog that will get you there. Get a strategy, manage your finances, lean your supply chain, improve your forecasts, optimize your inventory, analyze your opportunities, adopt e-Sourcing, and optimize your awards and you too can go from a net loss of 10% to a net income of 3% literally overnight, on your way to becoming a best in class supply chain company.

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Webinar Wackiness X: Webinars This Week from the #1 Supply Chain Resource Site

The Sourcing Innovation Resource Site, always immediately accessible from the link under the “Free Resources” section of the sidebar, continues to add new content on a weekly, and often daily, basis — and it will continue to do so.

The following is a not-so-short selection of 15 webinars THIS WEEK that might interest you:

Date & Time Webcast
2010-Jun-8

 

10:00 GMT-07:00/MST/PDT

 Say Goodbye To Manual Performance Reviews. Hello SuccessFactors Express!

Sponsor: SuccessFactors
2010-Jun-8

 

11:00 GMT-04:00/AST/EDT

 ROI & Beyond: What’s Next in Measuring Information Management’s Value?

Sponsor: Outsell
2010-Jun-8

 

9:00 GMT-04:00/AST/EDT

 Cool Vendors 2010: Staying Cool in Economic Heat

Sponsor: Gartner
2010-Jun-8

 

15:00 GMT/WET

 The New Basel Requirements for the Trading Book

Sponsor: Risk Metrics Group
2010-Jun-8

 

14:00 GMT-04:00/AST/EDT

 Does Your Cloud Have a Silver Lining?

Sponsor: Unitrends
2010-Jun-8

 

13:30 GMT-05:00/CDT/EST

 Winning Green Business with the Government

Sponsor: Acumen Advisors
2010-Jun-9

 

10:00 GMT-04:00/AST/EDT

 Implementing a Flexible ERP platform that will support change and work harder for your organisation

Sponsor: SSON
2010-Jun-9

 

11:30 GMT-05:00/CDT/EST

 Business Process Intelligence

Sponsor: Lanac Technology
2010-Jun-9

 

12:00 GMT-04:00/AST/EDT

 Maximizing Talent, Minimizing Risk: New Approaches For Compliant Independent Contractor Engagement

Sponsor: IQ Navigator
2010-Jun-10

 

14:00 GMT-04:00/AST/EDT

 Covering your Assets – Four Steps to Reduced Supplier Risk

Sponsor: Hiperos
2010-Jun-10

 

15:00 GMT-05:00/CDT/EST

 Transforming Work Arrangements into Vendor Relationships as an Effective Engagement Solution

Sponsor: Back of the House
2010-Jun-10

 

11:30 GMT-05:00/CDT/EST

 Financial Controls in the Cloud – How To Prevent Runaway Costs In Your Cloud Infrastructure

Sponsor: enStratus
2010-Jun-10

 

13:00 GMT-05:00/CDT/EST

 Taming Your MRO Spend

Sponsor: Global eProcure
2010-Jun-11

 

10:00 GMT-07:00/MST/PDT

 Winning Opportunity Management

Sponsor: Relationship Economics
2010-Jun-11

 

13:00 GMT-04:00/AST/EDT

 Globalization Opportunities in Software Development for Enterprises and ISVs

Sponsor: Global Services

They are all readily searchable from the comprehensive Site-Search page. So don’t forget to review the resource site on a weekly basis. You just might find what you didn’t even know you were looking for!

And continue to keep a sharp eye out for new additions!

Intelligent Sourcing through Intesource

Founded in 1999, Intesource is another player in the e-Sourcing / e-Negotiation space, but one with a bit of a twist. Whereas most SaaS providers are trying to sell you the all-powerful self-service fluffy magic box cloud solution, Intesource is still focussed on providing a full-service offering. Specifically, while you are given full access to the platform, their sourcing experts, who have conducted tens of thousands of events for hundreds of companies with a combined supply base that consists of over 10,000 companies, handle all of the event details for you which frees your organization to focus on high-level strategy and analysis. (Of course, if you need guidance in that respect, their sourcing experts are willing to work with you to identify the categories that are likely to generate the greatest ROI.) This approach has proved very successful for them and their customer base, and they typically drive an ROI of 10x for their clients within one year.

In addition to their sourcing expertise, they also have the ability to deliver a customized platform, as they built their entire solution in-house. This customization can go beyond just look and feel and include integration to external systems or new functionality and customized workflows based on organizational processes and best practices.

Platform-wise, they have a fully featured e-Negotiation platform with extensive RFX, Auction, Supplier Information Management (SIM), and document/contract management capabilities, which integrates with Microsoft Sharepoint for those who want a (collaborative) contract and document authoring solution in addition to the ability to track contracts and associated meta-data. And while the platform is not multi-lingual, it is multi-currency and they are integrated with multiple currency exchange data feeds. As a result, up-to-date currency conversions are always available.

With respect to e-Negotiation, or the RFX and Auction component, a buyer can use a templated workflow, capture as much cost and supplier information as they need to, and iterate through as many rounds as required. Plus, there are thousands of templates available to choose from for just about every category imaginable, built up by the Intesource sourcing team over the last decade as they captured the knowledge and best practices that materialized from the tens of thousands of events they ran, many with the global sourcing teams of some of the largest food, beverage, and retail companies in North America (which are the verticals they have particular expertise in). These templates contain complete workflows, customized RFIs, and customized bid templates with all of the relevant cost components. This allows bids to be broken down into unit cost, transport cost, duties & tariffs, utilization costs, warranty costs, etc. And, of course, the auction functionality is full featured and permits suppliers to be ranked against each item, group, or total award; the auction to be automatically extended based on last bid time; and bids to require a minimum decrement.

With respect to Supplier Information Management (SIM), you can capture all of the basic overview, classification, financial, product, service, and catalogue information associated with a company and augment it with feeds from D&B that include risk indicators and MWBE information. You can augment this with your own categories and fields of interest, and collect the data with the built in RFI capabilities. You can also get current marketing pricing on a wide range of commodities, as they have integrated data feeds from over 160 market exchanges.

The document / contract management module is a straight-forward repository- based solution that lets you manage as many documents, and as many kinds of documents, as you want with meta-data indexing and search. Creation capabilities are available through Sharepoint integration.

Based on their extensive workflow capabilities, which supports the hundreds of customized templates that are available across hundreds of categories, they have built a solid e-Sourcing Project Management Module that allows you to not only track your progress, but build your own customized workflows and category templates which can capture a significant amount of detailed information with respect to each task.

Finally, Intesource has an extensive SaaS interface for the supplier as well as the buyer, where the home-page dashboard — which shows current events, previous events, offered awards, accepted awards, pending tasks, etc. — can be customized for each supplier as well as the buyer.

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