The IFRS is Coming – Is Your Supply Chain Ready?

That’s right, the International Financial Reporting Standards (IFRS) could be replacing the Generally Accepted Accounting Principles (GAAP) at your US headquarters in as little as four years with the current proposals on the table. And since you have to maintain double books for a year (in GAAP and IFRS) before you switch over, to make sure you have a good handle on the new rules, that means your new IFRS-friendly systems have to be in place in less than three years. Which means your people have to be trained in less than two years … especially since major exams, like the CPA, will start testing on IFRS material in 2012. (And when you consider that the EU has been using IFRS for five years now, and that over 120 countries have already adopted it, it’s about time that North America caught up. Canada catches up next year, and Mexico follows suit in 2012.)

The IFRS has a number of changes in store for supply chain management, including these four outlined in this recent ISM article on the “accounting changes ahead”:

  • Last In, First OutIFRS does not permit inventory to be valued using LIFO. This can have significant tax consequences.
  • Inventory ValuationUnder IFRS, the inventory valuation you use must reflect current market price.
  • Long-Term ContractsUnder IFRS, when you take possession of inventory, you take responsibility for it and it must be reported on financial statements.
  • Management ResponsibilityThe responsibility of management with respect to data collection and reporting is much greater under IFRS.

The complete overhaul of systems that will be required at many companies could make SOX look like a walk in the park. If you haven’t yet figured out how it’s going to affect your organization, better find an expert sooner rather than later.

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What is The Price of Flexible Supply Chains? Part II: Strategy

In this post, I’m going to discuss highlights from the CPO Executive Debate on “the price of flexible supply chains” and focus on why you have to take a strategic focus.

In response to whether a CPO would be prepared to be more fluid on quality or on price in order to get that flexibility, Colin Davis said that their organization’s primary goal is going all the way back to the sourcing decision and making sure that they have got everything absolutely aligned to business drivers with the initial contracts and also in the relationship going forward. In response to whether non-retailers get this flexibility to be part of the corporate strategy, Andrew Vaughan said that it comes down to the link with the market, and that if you start with the market from a strategic perspective and work back down, then to my mind it is just about effective communication. And in response to what extent might they be out of the loop if the stakeholders are talking to the suppliers directly, Andrew then said you want your stakeholders to engage because you want to drive innovation. What we try to do is operate cross-functionally so we go together as a team and discuss innovation; we discuss delivery and we discuss quality and costs.

Clearly one of the primary prices of flexible supply chains is strategy, but this is a good thing. Because when you get right down to it, your ultimate success or failure comes right down to your supply chain strategy. If your strategy is to ocean freight high-priced low-volume consumer electronics like laptops, tablets, and cell phones to try and save a few dollars on freight, which is a rather low percentage of the total cost of these items, instead of air freighting them in well-engineered, low-volume, packaging, you’ll not only have difficulty responding to demand changes (when it takes three weeks to restock instead of three days), but lose more in market value than it costs you to ship the products (as most products depreciate in value a couple of percentage points a month).

Furthermore, if your strategy is purely to get the best price today and you overlook the going-forward innovation capabilities of a supplier who could be a strategic partner and who is willing to work with you to take cost out over time, you could not only be giving up 5% year-over-year savings in the future, which the supplier might be willing to commit to because your contract will enable them to purchase more efficient equipment and institute more efficient processes, but a potential source of innovation, integration, and/or inspiration that could be the source of the next big breakthrough in your market … which the supplier might end up taking to an emerging competitor who is willing to look beyond current cost to future value.

You need strategy, and in particularl, you need a strategy that is collaboratively derived through the participation of stakeholders because if what you have is a failure to communicate, your supply chain won’t be very effective, with everyone walking around blindly with dead eyes, following orders, not knowing what they do, not caring. If you want to succeed, you have to remember that your assignment tonight is strategic. You can’t give the enemy a break and the only way to win is to saddle up, lock and load and tackle strategy head on. But with double digit percentage returns available from strategic spend analysis, strategic sourcing enabled by advanced negotiation methods (such as strategic sourcing decision optimization), and global trade visibility, what do you have to lose?

In the next post we’ll address why a customer obsession has to be part of this strategy.

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Price is Only ONE Component of Cost

A good reminder of this is Jim Anderson’s recent piece on The Total Cost Approach for Dealing with Unmovable Prices over on The Accidental Negotiator. As Jim notes, the purchase price of an item is not really the true price that we’re going to end up paying for it. There are lots of additional costs, fees, and services that go along with it. Ultimately it’s the total cost of what we’re going to end up paying that really counts, not just the initial purchase price. So if the seller won’t move on unit price, focus the negotiations on another cost component.

As Jim notes, if you’re buying fleet vehicles, negotiate on service costs, warranties, financing, etc. Decent (extended) warranties can easily run you over a thousand per vehicle, and if the vehicle is made well, this is all profit for the manufacturer (as the warranty will expire before something major goes wrong). Here’s an easy few hundred (or more) per vehicle with very little effort. Plus, your average vehicle will need (at least) a few thousand dollars of regular services over the first 60K miles / 100K kilometers, most of which is profit at high hourly service rates. If you’re buying in bulk, you can easily save thousands by negotiating a significantly lower hourly rate. And then financing could run you ten thousand or more per vehicle. Knocking a few percentage points off the rate can save you a small fortune.

If you look at the total cost, it’s often easy to negotiate quite a few percentage points away when you move away from the “fixed price” to the variable total cost components, some of which will be high margin (with lots of negotiating room). Especially since the seller will generally want your business and move where she has wiggle room.

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What is The Price of Flexible Supply Chains? Part I: Flexibility

In this series of posts, I’m going to discuss highlights from the CPO Executive Debate on “the price of flexible supply chains” and focus on not only why you need flexibility in your supply chain, but what you have to do to get it.

In response to how do you balance flexibility with cost and quality considerations and can you measure whether you are striking that balance, Michael Walsh said that beyond knowing that it will be cold at some point in the year and it will be warm at some point in the summer, it is hard to be accurate. We need to build in flexibility to drive the volume responsiveness, and the trade-offs need to be thought through carefully and he was right. With many types of consumer goods — like electronics, fashion, and toys, you can’t predict precisely what demand will be or when demand will surge. You have to be ready to respond or lose business. It’s as Guy Allen said, the nearer you are to the consumer retail market, the more flexible you will need to be. This requires long term flexibility in your supply chain, especially if you are selling multiple types of goods, as well as short term agility which, in the words of Martin Hogel, determines how you react to sudden changes on the demand or on the supply side.

With regards to longer term flexibility, also in the words of Martin Hogel, you need to figure out how you adapt to wider changes in the market structures, such as shifting vertical industry structures, stricter environmental legislation, technological changes or movements in international labour costs? How do you incorporate that into your corporate strategy, your manufacturing footprint, your supply chain approach and so on?

The reality is that vertical industry structures always change over time. In the early part of the century, we had centralized supply chains where companies owned their end-to-end supply chains and centralized them as much as possible. Then we had the downsizing, rightsizing, and outsourcing crazes where everything was outsourced and sophisticated multi-echelon supply chains were formed that cross many borders and included many players. Now we are seeing a shift to center-led supply chains where a center of excellence, which some consulting companies might term a 4PL, will manage (warehousing and global shipping) operations across a supply chain for multiple parties (in contrast to a traditional 3PL that would manage logistics for a single player).

Environmental legislation is still in its infancy, and we are soon going to see many Asian equivalents (in India, China, and other progressive countries) to the European RoHS legislation and at some point, as India and China take more and more global GDP, the US is going to have to sit down and play nice with the rest of the world. Technology never stands still, and the low cost country of today is not the low cost country of tomorrow once the low cost labour market is saturated, which results in a swelling middle class, which results in the demand for a better quality of life, which results in higher salaries. You have to be flexible, or you’ll be left behind.

However, you’re only going to get this flexibility if you design it into your supply chain. As Andrew Vaughan said, one of the keys to flexibility is effective supply chain design where you segment your supply base to focus on key components that you source as generic parts from a variety of suppliers, and customized parts that are specific to your requirements. With your generic parts, you set up a structure that allows you to resource from auxiliary or new suppliers quickly if you need more than your current suppliers can provide, and with customized parts, you set up relationships with custom manufacturers who have the ability to increase production when necessary (even if it is at overtime costs, etc.).

And finally, you have to be cognizant of the impact of each decision you make. As Martin Hogel said, when you look at the supply side, really advanced procurement supply chain organisations understand today the ripple effects that a natural disaster, or an epidemic, has on their overall supply chain, and take immediate preventative action even though only a sub-tier supplier to their main supply base is directly affected, because they know that if their supplier won’t be able to get they part, they won’t be able to get the part … and by taking action right away, they know they’ll have the product when they need it.

In the next post, we’ll discuss how flexibility starts with strategy.

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ASG Software Proves the Peter Principle

There’s a reason “leaders” generally only account for a small percentage of the total market (no more than 30%, and usually only 10%). That reason is the Peter Principle which says that in a hierarchy, every employee tends to rise to his level of incompetence. In other words, your average company will continue to promote its “rising stars” through the executive ranks until they implode into black holes and suck the company down with them.

As proof that these “rising stars” are promoted until they implode into black holes at your average company, I offer up a recent press release from ASG Software which describes the results of a commissioned Enterprise Management Associates study of IT and business executives that found that two-thirds of executives say dashboards deliver clear financial advantage.

In other words, it found that two-thirds of respondents were brain-dead corporate zombies who thought that dangerous and dysfunctional dashboards were a money saving tool — even though I’ve told them twice how dangerous and dysfunctional the average dashboard was. The reality is that, even in the best case where the dashboard is properly designed to show you what’s not working, where data is missing, and where you need to investigate performance, it’s not going to save you money. It’s just going to point out where you need to take action to improve performance and save money.

However, you have to determine the action to take and then you have to take the action … and, more than likely, you will have to apply another tool (which will likely cost money) to take that action. Now, if you select the right action, the right tool for the action, and implement the action properly, then you will improve performance and reduce operational costs and, over all, save more than you spend buying the tool … but these savings will not be the result of the dashboard. They will be the result of the appropriate tool and / or your action.

And, furthermore, if you decide to rely solely on the dashboard to judge overall corporate health, it will end in disaster. All a properly designed dashboard can tell you is that there are no problems of documented types. It can’t tell you that there are no problems of undocumented types. For example, it can tell you that the production line is still pumping out finished units within an acceptable range on a weekly basis. It can’t tell you that no one has bothered to properly service the one-of-a-kind robot arm in over a year, even though it’s supposed to be serviced every three months or 30,000 units, and that it’s 30 units from a major lock-up that will cause it to self destruct and shut the production line down for at least a month. And while it can tell you that your new phone is still selling within the forecasted range, it can’t tell you that sales are about to drop 80% next week because the market is going to suddenly prefer your competitor’s new product coming out next week that the model didn’t account for. The false sense of security the dashboards provide will, if you’re not careful, lull your business into an eternal sleep.

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