Monthly Archives: December 2007

Supply Management in the Decade Ahead IV: Impacts to Business Models & Strategies

In Part I of our review of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, we overviewed the various external forces that will impact a company’s supply chain. In Parts II and III we took deep dives into the eight major forces that were identified specifically by supply managers who took part in the survey. In this post, we will address the impacts that these forces, and others, are going to have on business models and strategies in the decade ahead.

According to the report, the following five strategies, designed to improve the financial performance of companies and impact both their income statement and their balance sheet, will be the most salient in the decade ahead.

  • Focusing on Cost Competitiveness
    Due to the constant increase in available products from developing economies with low labor costs and the need to offer products and services at lower prices in developing markets, companies will need to take an extreme cost management focus. This means that supply management will have to achieve year-on-year cost reduction targets while developing supply strategies to offset or dampen the effects of unfavorable commodity price swings.
  • Aggressively Managing Resources
    The prediction is that many companies will be focused on increasing the return on their asset base and will choose assets that can be managed in such a way as to maximize productivity. Simultaneously, they will choose to reduce their asset base by outsourcing manufacturing and business processes or reducing working capital such as inventories and receivables. They may also invest in businesses with higher returns while exiting business with marginal or low returns on assets. Supply will have to find sources of capital equipment that is flexible, has high uptime, and that can be competitively leased rather than purchased. It will be increasingly involved in VMI (Vendor Managed Inventory), consignment inventory, and pay-on-use or pay-on-shipment inventory plans.
  • Pursuing New Revenue Sources
    Businesses will pursue revenue growth over the next decade through a combination of incremental and radical changes to their business models. A major challenge will be the need to enter emerging markets and compete against low-priced domestic markets to increase, if not maintain, market share. Supply will be tasked to find suppliers that can support growth strategies such as innovation and global expansion.
  • Targeting Specific Customer & Market Segments
    Same old, same old and supply will need to find suppliers that can support shrinking product life-cycles and constant innovation as well as suppliers with market-specific knowledge and the capabilities to manage the upstream supply chain to insure it adheres to sustainability and regulatory requirements.
  • Improving the Level and Speed of Innovation
    First to market will continue to be an important, and profitable, business strategy. Supply management will need to identify suppliers that can support shrinking product life-cycles and constant innovation while bringing knowledge of changing consumer tastes.

There’s no surprises here … and very little change from the state of affairs today. Companies have been focussed on cost-competitiveness for quite some time, have already begun to aggressively manage their resources to maintain that cost competitiveness, have always pursued new revenue sources, and have been targeting specific customer and market segments aggressively for at least the past 50 years! The only noticeable change is that innovation will have to continue to be sped up on a regular basis to allow a company to compete at the same level it is competing at today.

What I would have liked to see is some more aggressive predictions on the strategies that are likely to emerge over the decade ahead. For example, I predict the following trends will begin or continue through the next decade and that some early adopters who get it right will gain massive advantages over their competition, at least in the short term:

  • Vertical movements towards Keiretsu
    A keiretsu is a set of companies with interlocking business relationships and shareholdings. As private equity firms continue to take public companies private at an aggressive pace, they are going to look for ways to to maximize the value of their continually expanding portfolios. Some will pursue vertically oriented strategies and encourage their companies to form synergistic business relationships that will start to mirror the traditional Japanese keiretsu system.
    In addition, as certain verticals continue to come under intense competition from new entrants, public companies within those verticals will start to band together in an effort to more effectively compete as a group than as a set of completely independent entities. Although this will not be a widespread strategy, it is likely to emerge in the near future.
  • Increased Niche Specialization Around Talent Pools
    With talent harder and harder to come by in developed economies, some companies will choose to focus only on one or two business functions (for which they have an unusually large talent pool compared to industry norms) and literally outsource every other aspect of their business. Just like some major brands today outsource almost everything to contract manufacturers and do not own much more than their brand, the offices their employees work in, and the equipment they use, more and more companies, including non-brand name ones, will adopt this model. Some will specialize on design. Some will specialize on integration. Some will specialize on the manufacture of a single, common, component. You’ll also see this model in consulting as well – some of the bigger players struggling to survive in the more aggressive global marketplace will spin out or sell off divisions until they are focussed not only on one or two offerings, but often niche plays within those offering. For example, it won’t be just engineering design, or even automotive engineering design, but automotive frame engineering design.

In Part V, we will address the new and expanded missions, goals, and performance expectations for supply management as identified by the report.

A New War for Talent in the Supply Chain Future

It looks like the relevant media is finally starting to accept that the talent crunch will soon be upon us and that they have to start making a lot more noise if the business world is going to accept that it’s not just a top ten issue for the organization as a whole, it’s a top three issue! (The other two being corporate social responsibility and business sustainability, both of which will only be solved if the organization has the right talent.) I think I’ve stumbled across more articles in the past month or so than I have in the past year, including “The Future of Supply Chain Management – Part 3: Organization + Talent” in the Supply Chain Management Review, “The New War for Talent” over on ZDNet technology news, The Global Fight for Top Talent in Fortune, and “It’s More Than Just Money” in Knowledge @ Wharton China.

This is a good thing, because the reality is that we’ve been starving for talent in the developed world for over a decade. Technology has progressed so rapidly in this information age of ours (because Shift Happens) that even many individuals with University degrees more than a decade or two old are having significant problems keeping up – so imagine where that leaves the majority of the workforce without one! And now that the vast majority of the baby boomers are within a few years of retirement, at most, we’re in for some serious workforce shortages, especially since the number of young workers in the US alone will decline by 1.7M next year. Recent predictions are that the US will face a 10 million workforce shortage within 2 years and a 35 million workforce shortage by 2030! (Where will they be? In India of course! Already, HCL technologies, a mega-player in offshore software development is finding that new employees are seeing India as the most compelling source of opportunity and do not want to be sent on overseas assignments to North America!)

But the war is about to intensify. To date, the talent war has mostly been fought in the U.S., Western Europe, and Japan, but with the rapid rise of developing nations across the globe (and the BRIC block in particular), along with the resurgence of other key players like Canada and Australia, the war is now truly global. Furthermore, even rich nations like Saudi Arabia know that their future relies on talent (as even their oil reserves will dry up some day). To this end, King Abdullah is spending 12.5 Billion ( yes, that’s Billion with a B ) to found a new graduate research university to attract the best researchers in science and technology in the world!

And anyone without the right talent today is pretty much guaranteed NOT to be here tomorrow. The average business life-span may have been 14 years in the past, but we’re marching to a future where 14 months may be closer to the norm. With 70% of the value of companies in the S&P 500 now in intangibles, compared to 20% back in the 1980, almost all of the value in an average company lies in it’s people, their knowledge, their goodwill, and their ability to manage and capitalize on those intangibles.

So you better get your talent strategy ironed out quick, because if you don’t, you might wake up one morning to find that you have none and that you’re out of business.

the doctor’s Guest Contributions: The Half Year in Review

Since the last summary of my guest post contributions (in June), I’ve blogged a number of guest posts over on eSourcing Forum [WayBackMachine] as well as authored or co-authored a number of the initial versions of the wiki-papers over on the eSourcing Wiki [WayBackMachine]. I’ve also contributed articles to the EyeForProcurement monthly newsletter as well as Efficient Purchasing.  For those looking for some more insights on various topics, here they are.

e-Sourcing Forum

A Case for E-Sourcing and E-Procurement Integration
A Global Trade Primer
Applications of Spend Analysis
Brunswick Corporation’s e-Auction Best Practices
Collaborative Negotiation
Confucious eSourcing Project Management Tips
Five Ways to Take Your Sourcing to the Next Level
Incentives Motivate
Key Challenges of Tomorrow, Part II
Key Challenges of Tomorrow, Part III
Nine Steps to e-Procurement Success
Optimal E-Tool Selection
Optimization is the Future And The Future is Now
Seven Tips for SaaS Selection
Some Low Cost Country Sourcing Insights
Supplier Enablement
Ten Common Negotiating Mistakes
Ten Tips for Talent Retention
The Benefits of Purchasing Consortiums
Twelve Steps to Purchasing Program Predominance

e-Sourcing Wiki

The Basics

  • Strategic e-Sourcing Best Practices : A Total Value Management Perspective
  • On-Demand / SaaS Application Platforms : Introduction to a Rapid Software Deployment Model
  • The Quest for Purchasing Fire : Develop the Internal Strategies for Selling the Procurement Tools Internally
  • Strategic Sourcing Success Factors : Best Practice Principles of Corporate Procurement

The Technologies

  • Spend Analysis and Opportunity Assessment : There’s Gold in Them There Hills … Of Data
  • e-RFx & Supplier Management : The Strategic Sourcing Workhorse
  • e-Auctions in Sourcing : The Strategic Sourcing Equilizer
  • Sourcing Decision Optimization : The Inefficiency Eliminator
  • Contract Management and Compliance : A Total Value Management Introduction

The Methodologies

  • Center Led Purchasing : The Procurement Organization of Tomorrow
  • Cost Reduction and Avoidance : Best Practice Principles of Corporate Procurement
  • Demand Driven Supply : A pull-based customer-centric approach to supply chain planning and execution
  • Next Generation Sourcing : 21 Strategies to Innovate Sourcing
  • Procurement Outsourcing : A Brief Introduction
  • Purchasing Consortia : The Emerging Collective
  • Six Sigma : Improve Supply Chains through Methodology
  • Supplier Performance Management : Measure, Analyze and Manage
  • Suppliers in a Supply Organization
  • Talent Management : Build and Retain World Class Sourcing Talent

A Global Sourcing Primer

  • Corporate Social Responsibility : A Sustainable Solution
  • Low Cost County Sourcing : A Blogger’s Perspective
  • An Introduction Global Trade : The Basics of Global Trade
  • An e-Procurement Primer : 9 Steps to Procurement Success
  • A Supply Chain Finance Primer : Financing Your Way to Success
  • A Customs and Security Primer : Keeping the Global Supply Chain Secure
  • A Free Trade Primer : Global Tax Relief
  • A Regulatory Compliance Primer : Keeping it Legal
  • Supply Risk Management : Mitigate Risks and Reap Rewards

Articles

Why aren’t you optimizing?, Efficient Purchasing Issue 5, Fall 2007

Why Aren’t You Optimizing Your Sourcing Decisions? EyeForProcurement August 2007 Newsletter

 

the doctor Would Like To Remind You That Any Balloon Will Pop Under A Sufficient Pressure Differential

I don’t care what it’s made of – there isn’t a container in existence that won’t explode if filled to a point where the internal pressure exceeds the external pressure by a sufficient amount. Remember the second law of thermodynamics – the entropy of an isolated system not in equilibrium will tend to increase over time, approaching a maximum value at equilibrium .

In free-market economics we have a similar law, called the law of supply and demand which predicts that in a competitive market, price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity . Taken to extremes, it means that if prices skyrocket, demand plummets, falling to zero at the extreme. This holds true in the stock market as well, as it’s a free market where the good is ownership.

That’s why we have boom and bust cycles and why an unrestricted boom is guaranteed to result in a spectacular bust. There comes a point where investors en-masse are going to decide that the price is just too damn high and want out, even if we don’t know what that point is in advance. That point is much more likely to be hit if share prices rapidly skyrocket. If this happens market-wide, due to a sizable increase in invested capital in a short time-frame, we have a boom. If the boom continues unabated, a bust is guaranteed.

So, needless to say I was quite annoyed to see an article titled “Emerging Market Mania: Is It Different This Time” on the Knowledge @ Wharton site (one of my favorite publications) – because the answer is bloody obvious. It’s not different! It’s never different! The laws are immutable! As long as we use a system of measurement that places a finite value on the GDP of each nation, the sum of the GDP for all nations is going to be finite. This guarantees that there will exist a point in each stock market, and each stock, where the price will be too high for the average investor, and these investors will want out en-masse. When this happens, you have a bust. “Market Mania” is always bad! Participating in market madness again and again is equivalent to putting your hand on that hot burner again and again. You’re going to get burned. That’s not going to change! And don’t give me that “it’s a different company” or “it’s a different market” bullshit as your excuse. The fact is that any burner on the stove will burn your hand just like any burner on any stove will burn your hand.

So, before you go diving into a market everyone else is diving into, be sure to do your homework and make sure it’s a justified move. If a market is extremely under-valued or under-served or has a considerable excess of supply, then it will be able to support a large influx of competitors and currency. However, if it is over-valued or over-served or does not have enough supply to meet current demand, any investment or entry by any organization is a very bad idea and you never know what entry is going to be the entry that causes the market to reach the tipping point and start the rapid downhill slide from boom to bust.

If you’re wondering why I’m rambling on about the inevitable bust that’s sure to follow an irrational boom, just remember that it’s not just finance that needs to worry about market valuations – supply management has to as well! The financial strength of your supplier is at least partially dependent on the financial strength of the market it’s shares are traded in or on the strength of the local economy. From a risk management perspective, the financial strength of your supplier is a key factor in terms of evaluating how much risk an award to that supplier poses – and any supplier in a risky market is going to carry a certain amount of risk.

Before I conclude this blogologue, I should point out that the article did have some good points. It pointed out that emerging markets cannot be evaluated en-masse – each is distinct and needs to be evaluated on its own. It stated the need for differentiation between emerging markets like Brazil, Russia, India, and China (the “BRIC”) and the frontier markets like Egypt, the Balkans, Bangladesh, and parts of Africa that could be the next investment hotspots. It noted that countries with abundant natural resources will likely experience an economic boom for the foreseeable future (thanks to increasing demands from the developing economies). And it noted that knowing where to go next with investment capital is always a challenge.

Supply Management in the Decade Ahead III: The Eight Major Forces – Part II

In Part I of our review of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, we overviewed the various external forces that will impact a company’s supply chain as identified by CAPs, AT Kearney, and the survey respondents. We then concluded with the eight major forces that were identified specifically by supply managers who took part in the study. In Part II, we dove into the details of the first four of the eight major forces. Today, we dive into the last four of the eight major forces and explain not only why they are important, but what can be done about them.

Customer & Channel Dynamics

The downstream supply chain will change rapidly due to economics and government policies in some industries. In other industries, supply chain dynamics will be influenced by the poor financial condition of major trading partners in the chain. The impact of private equity firms will also be significant, who will continue to take public companies private, slash costs, raise prices, and change business relationships.

In other words, the only difference between conducting business today and conducting business in the next ten years with respect to channel dynamics is that these changes will continue to come at an accelerating pace and you will have to adapt faster than you do today. This means that the winners will be those companies that have good visibility into their supply chains – the ones that can identify when an impending regulation or buy out will affect them before it happens and have a contingency plan ready to go the instant it happens.

Increased Product Variety & Shorter Life Cycles

Variety will continue to mean more models, brands, and products tailored to different geographies and price points. Consumer tastes in emerging economies will be new and different from traditional markets. Traditional lines of competition will blur as companies try new products and markets.

True, but eventually someone will realize that you don’t want to browse the web on the screen the size of a credit card, you don’t want your fridge to tell your local grocery store that you consumed six litres of rocky road this week, and that you don’t want the ability to cut yourself seven times in a jagged fashion simultaneously while shaving. Amongst the big winners will be the companies that realize sometimes you just want a phone, a fridge, and a straight razor – and not all the garbage hallucinators are trying to shove into these products today. And, oh yeah, there comes a point where it doesn’t matter how many fractions of an ounce less it is than the previous product, how many extra cubic inches you squeezed into the door, or how fast it vibrates (at least in the case of the razor).

Social Responsibilities

Companies in developed economies will continue to be held to high standards wherever they do business in the world. Companies will have to monitor working conditions in their supply chains all the way back to basic extractive and farming practices. Supply management will have to ensure that the supply base meets environment standards. Commitments to a diversified supply-base will become more important in developed economies.

This is true, but it misses the point that it won’t be Green Peace and PETA that you worry about in the years to come – it will be your customers, who, greater informed about your supply chain practices than ever before, will start to boycott your products even before Green Peace and PETA gets their campaigns against you off the ground. Industry self-regulation will require you to exceed government standards, or be barred from cooperative partnerships and organizations that could help you survive in the dynamically changing marketplace to come. And, oh yeah, today’s “social networks” will have nothing to do with the solutions.

Environmental Responsibilities

Continuing the social responsibility theme, customers, consumers, shareholders, non-govermental organizations, and governmental bodies will all increase their scrutiny of corporate environmental practices in all regions of the world and demand that companies take environmentally friendly actions. Companies will be forced to meet the environmental expectations of the general populace. Environmental issues will become brand-related issues and influence how companies are viewed in the marketplace. To meet environmental commitments, companies will put together cross-functional teams with executive leadership to monitor environmental concerns in the extended supply base.

All this is great, but I believe that sometime in the next decade, carbon offsets will start to peak out in the developed nations as consumers smarten up and realize that some of the larger companies with the deepest pockets are using them as an out to avoid every doing anything to decrease their environmental footprint. When their only other options are to make the hard choice of investing hundreds of millions, if not billions, to upgrade your factories or re-invent yourself around less harmful products, most executives are just going to take the easy out and buy the carbon credits. These are the same companies that today are content with buying innovation whenever they need it, as they are pseudo-monopolies due to the high cost of market entrance and / or the time it takes to build up the sizable customer base they’ve acquired. Fortunately, when the impending commoditization is combined with consumer revolt, there’s a good chance that their currently unchallenged position at the top will not remain unchallenged for much longer.