Monthly Archives: December 2007

The Third Era of Supply Chain Transformation: The Everyday English Version

World Trade Magazine recently published an article by Dr. Sandor Boyson titled “Supply Chain Globalization: The Era of Revitalized Command is Upon Us” that wasn’t too bad, provided you could translate all of the academic-speak into everyday English. Since it’s slow reading for anyone not accustomed to such pretentious verbiage, and almost ten pages, I thought I’d summarize some of the more salient points.

It starts off by noting that the first era of supply chain globalization was the era of vertical integration, exemplified by the Ford Motor Company that organized its production and supply chain as a completely vertically integrated system in the 1920s. It owned the entire process: manufacturing and assembly plants, lumber camps, intermodal transportation assets, and even private airports. Its strategy was designed to ensure continuous availability and “the uninterrupted supply of raw materials of high quality free from market changes”.

The second era is defined as the era of virtualization that began in the late eighties and early nineties and consisted of a broad fabric of alliances for managing the entire value chain. Sun Microsystems exemplifies the virtual enterprise approach – it never touches 90% of the server computers it sells globally – rather, an outsourced Sun supply base receives Sun customer order signals directly and ships the orders to the global customer base via outsourced third-party logistic carriers. Information technology and pervasive outsourcing have enabled the pooling of assets and capabilities into multi-enterprise virtual networks well beyond the formal/traditional boundaries of any single enterprise.

However, according to the article: We are approaching the end of this headlong plunge into supply chain virtualization and dispersion. While this business model has driven cost efficiencies and operational flexibility across global enterprises, it has also led to a heightened perception of eroded strategic command and control and a loss of network coherence at the level of the corporate senior executive suite.

Furthermore, the emerging emphasis is on corporate risk management. Enterprises are re-calibrating their globalization strategies and strengthening the core of their organizations as the risks of the over-extended and over-outsourced enterprise have come into sharper focus.

Thus, according to the article, As we go forward into a third era of globalization – that of revitalized command – we are witnessing yet another metamorphosis in enterprise strategy and structure. The multinational enterprise is becoming more risk-averse and less likely to over-extend itself through alliances, and is showing an emerging bias toward more direct absorption and control over assets in its network.

Or, in plain English, companies have realized that the strategy of outsourcing every function but the function of outsourcing itself might not have been the best strategy. Although it’s true that end-to-end vertical integration is probably not the right strategy, because no company can do everything well, it’s also true that outsourcing too much is not a great idea either, because then you’re left with a shell that can’t do anything. Thus, companies are beginning to realize that the right approach is to find a balance somewhere in the middle – a balance that allows them to retain the functions that they are good at, and core to their, business and to outsource those functions that are not core, or that they are not very good at. Thus, the third era of supply chain will be the era of balance – where a nice equilibrium is found between the “vertical” do-it-all-yourself strategy of the past and the “horizontal” outsource-everything-under-the-sun strategy of the present.

The article then discusses what this might mean for the public sector, the varying impact by company size and scale, and the results of a survey designed to help determine the extent of supply chain management in the global marketplace. The study, which tried to assess a range of factors, found that the degree of supply chain collaboration between respondents and suppliers was moderate at best. Considering that failure to develop a supply chain management program that fully accomplishes integrated operations may result in poorly engineered products, product recalls, excess inventory costs, stockouts, and diminishing levels of customer satisfaction, I would hope that the sample size (of about 300 respondents) is not indicative of the vast majority of global multinationals, since this would indicate most companies still have a long way to go to get a grip on their supply chains and find the balance that is their key to success.

the doctor Goes Mental on Auctions

With respect to e-Auctions, there’s a host of myths out there that need to be busted. Where-forth they sprang from, I don’t know, but to the graveyard, they must go! I’ll start with some of the more dangerous ones, and maybe the experts from e-Sourcing Forum [WayBackMachine] and Where Next will chime in with some of their personal favorites (or is that afflictions) in the comments.

Myth 1: Auctions won’t save me a single penny!
Dozens upon dozens of providers have saved hundreds upon thousands of clients millions upon tens of millions (and sometimes hundreds of millions) of dollars using e-Auctions – and sometimes saved this much on the first auction! Done right, on the right category, an e-Auction will save you money – with savings in the 5% to 35% range, depending on the category and whether or not this is your first time applying serious e-Sourcing to the category.

Myth 2: I’ll e-Auction it! e-Auctions always save money!
This myth is almost as bad as myth #1. Not everything can be auctioned – and anytime some fool starts with the one – and I mean the one – high dollar category in the company that can’t be auctioned, and gets dismal results, he all of a sudden does a 180 and decides that he was wrong, and that myth #1 is right – and won’t ever budge from that position. (Even though his stupidity costs his company tens, if not hundreds, of millions!) There are a number of requirements for a successful e-Auction. The first two are the existence of a competitive supply base and demand exceeding supply. If there are only two suppliers in the whole world for the item you need, and if demand is increasing faster than their production capabilities, even if the suppliers agree to an e-Auction, your prices aren’t going to go down. The suppliers are going to bid high and stay there. And that’s if you’re lucky! If you’re unlucky, they’ll collude and you’ll be up sh*t creek without a paddle or a way to plug that slow leak in your canoe.

Myth 3: If I don’t like the results of the e-Auction, I can just hold it again.
If you believe this, then you’re the one giving e-Auctions a bad name! Assuming you can even get any of the suppliers whose chains you jerked to even agree to another round, do you really think they’re going to give you anywhere near their best price? And do you think they’re going to want to participate in your future auctions? And do you think they don’t talk to each other? The rule is this – if you commit to an e-Auction, you commit to an award based on the result of the e-Auction – whether you like the results or not. That’s why you do your homework before deciding to do an e-Auction and make sure that the category, and market, is right for an e-Auction. If it’s not, you choose another negotiation method, such as a multi-round sealed-bid RFx with Decision Optimization to help you appropriately analyze potential awards.

To find out more about the Key Steps to a Successful e-Auction and the ethics you need to abide by to build and maintain a positive reputation in the supplier community, check out the e-Auction wiki-paper over on the eSourcing Wiki [WayBackMachine]. You’ll be glad you did.

It’s Time To Get Your Trade Data In Order

Did you know that, right now:

  • You could be eligible for VAT rebates?
  • You could be eligible for Import Duty refunds?
    or that
  • You could be overpaying for freight?
  • You could be saving more if you took advantage of trade agreements or trade zones?
    or that
  • You could be buying counterfeit goods?
  • You could be weeks away from having your supply chain frozen?
    and more!

Let’s start with the Aberdeen findings, which have been, more-or-less, corroborated by Hackett. There are millions (upon millions) of dollars in working capital languishing in your international supply chain. A $1B company can easily free $10M to $40M in cash by better controlling just its basic global trade processes. Aberdeen found:

  • Large companies’ international supply chains are only 50% as automated as their domestic supply chains.
  • 87% of large enterprises have inadequate staffing to manage global supply chain and global trade compliance processes.
  • Trade compliance is consistently a low priority for IT funding.

Now let’s add the Global Data Mining findings that error rates in global trade processes approach 10 to 20% and that effective control of global trade processes is often 100 to 200 times worse when compared to accounts payable processes in an average company!

Basically, the following is a reality for your average multi-national, whether it realizes it or not:

  • It’s manufacturing facilities in China are still failing to claim VAT rebates they are eligible for, because it is unaware that some of its goods are now eligible under the recent changes that took place this summer.
  • It’s using outdated HTS codes and some of these codes have a higher tax rate than what it could be paying if it was using the new HTS codes that took effect in January of this year.
  • It’s not keeping track of total freight payments by carrier and cross-referencing its 3PL agreements and not demanding the discounts that were supposed to come into play once a certain threshold was reached – discounts that sourcing spent a lot of time negotiating into the contract in an attempt to save the organization money.
  • It’s not taking advantage of special economic zones in India and China that offer tax exemptions for items simply passing through the country and / or lower tax rates on corporate profits and not taking advantage of US Foreign Trade Zones that allow payment of duties to be deferred until the product leaves the trade zones.
  • It’s going through a distributor to buy its goods from China, and this distributor is actually distributing counterfeit goods!
  • It still hasn’t updated it’s entire fleet to be ACE compliant. Now that ACE has been rolled out at almost every land border port in the US, CBP expects that all truck-based shipments will be supplying ACE-compliant e-manifests BEFORE the truck reaches the border. Send the wrong truck – and it won’t be going anywhere for a while – freezing your supply chain!

So what can you do? Besides better educating yourself on what’s involved in Global Trade, starting with the Introduction to Global Trade wiki-paper, and the Customs and Security Primer, Free Trade Primer, and Regulatory Compliance Primer on the e-Sourcing Wiki [WayBackMachine], you can start by getting an audit of your processes and data and see where you’re weak and where the greatest refund and savings opportunities are.

Make sure to do a complete review of trade agreement management, FTZ/STZ analysis, HTS classifications, VAT payments, supply chain finance strategies, freight, and sourcing opportunities. If you’re a Fortune 500 company, this could easily identify 20M to 100M (or more!) of savings that are instantly attainable, above and beyond what you’re going to find in an average strategic sourcing project (even if it does use strategic sourcing decision optimization as this only optimizes the model provided at the category level – it does not look at your sourcing network holistically from a trade perspective, which should be done once every one to three years, on average).

And we still didn’t talk about the fact that “Gender & Age Discrimination is Costing US Importers Billions of Dollars!” (Global Data Mining, acquired by CUSTOMS Info, acquired by Descartes) Data mining analysis has determined US Importer’s have overpaid more than $1.3 billion in discriminatory duties over the past two years. When it comes to tariffs on clothing, shoes, and other age or gender differentiated products, there is often no apparent pattern which penalize men in some instances, and women in others. Research has identified more than 2,200 pairs of US Harmonized Tariff codes (HS codes) impacted by discriminatory duties, over 300 for Age Discrimination and more than 1,900 for Gender Discrimination. More than 40 importers have already filed a lawsuit to protect their interests. Have you?

That’s why Global Data Mining is Sourcing Innovation’s Vendor of the Week. Not only is it one of the few companies offering these desperately needed audit and data mining services, and doing so at a rate every company can afford (it’s goal is to provide you with a blended cost of under $100 per man hour – compared to the Big Consulting Shops who want to charge you at least three times that), but it’s also one of the few companies making a concerted effort to educate you on what savings opportunities you may be missing in your global trade operations and what issues, such as the gender & age discrimination in HTS duties, you should be aware of, and speaking out against. Check them out.

Real Analysis Solutions Uncover Actionable Data

Supply & Demand Chain Executive recently publish an article by Kari Dwyer titled “Paving The Way For Continual Performance Improvement” that stated that through the availability of actionable data, supply chain visibility solutions become an invaluable asset in providing continual performance improvement.

The article, which pointed out that actionable data are the precursor for effective change, since isolating the root causes for specific performance measurements and providing a tactical approach to resolving them is the fastest, most effective way to gain performance improvements, also submitted that one effective and powerful way to receive actionable data is made possible through supply chain visibility solutions. This is because visibility solutions have the infrastructure in place to prominently display data that need attention, whether through alerts, dashboards, reports, e-mails, hand-held devices or text pages, and direct the information to the right people.

The author then states that visibility solutions allow the presentation of higher-level metrics with the ability to drill into the supporting detail, often through multiple layers, to get to the detail that drives action and that robust visibility solutions build metrics from the bottom up, using the most granular level of detail available to build a solid foundation as a basis for all higher-level metrics. Up to this point, I agree wholeheartedly!

The issue that I have is that the author appears to be implying that a visibility system is enough to turn data into actionable data. A visibility system is absolutely necessary, but it may not always be sufficient. Just because a dashboard turns red does not mean you have enough information to fix the problem! The author correctly notes that:

    • for the majority of supply chains, corporate-level metrics and performance numbers are often comprised of results from different systems,
    • information [only] becomes actionable once the data can be analyzed in such a way that a decision can be made to effect a desired outcome, and
    • knowledge of pertinent information is essential to effecting change that will lead to cost savings

.

However, the author then implies that a visibility solution alone will meet all of these requirements. Let’s analyze the example provided which states that knowing that vendor compliance averaged only 98% last quarter is not actionable in its truest form. If you take out the two worst performing vendors, it could be that compliance was 99%, with the two worst vendors performing at 95% and 93%, respectively. In this situation, it would be wrong to chastise all of your vendors and say they had to do better – as the correct solution would be to, if they were willing, sit down and jointly work out the reasons for their poor performance along with the required resolutions, and if they were not willing, to terminate the relationship. However, just being able to drill down into the performance metric and find out you have two vendors with poor rankings is not enough. It does not tell you why the rankings were poor.

What if the rankings were poor because the supplier was consistently one day late with their shipments – would the visibility system tell you this? Presumably you would be able to drill down on the supplier’s overall performance metric and determine it was it’s delivery metric leading to its poor performance, with quality and reliability and other rankings A+. If the visibility is based on a reporting system – it might only contain this scorecard data and you might not be able to figure out that the supplier was only one day late when it was consistently late. Although the visibility system has identified the source of the problem, the data is still not actionable. Unless you know how late the shipments are on average, and the reason for the lateness, you cannot act upon the data to effect a desired outcome. What could be happening is that the truck could be showing up at 10 am when it’s supposed to be there at 8 am. Because the warehouse inventory system only tracks lateness in terms of days, each time the truck shows up at 10 am, it is recorded as being one day late in the metrics column being sucked in by the visibility system – which ignores the arrival time column, which shows it arriving on the correct day, but two hours late. Furthermore, this could have all been because of a simple miscommunication by a junior member of the procurement team who told the supplier that the warehouse needed the truck there by 10 am to have it unloaded on time, when in reality the warehouse needed the truck there by 8 am to have it unloaded on time. And as far as the supplier was concerned, it was compliant on delivery terms at least 99% of the time.

The fact of the matter is that most visibility solutions today are simply reporting solutions on top of traditional data warehouses, which suck data into a static cube and run roll-up reports on that cube to produce metrics and KPIs. Although this is often a great solution for identifying where you have a known problem, it doesn’t always give you enough information to allow you to figure out why you have the problem and what you need to do, at a detailed level, to correct it. Chances are you’ll need to augment it with a sophisticated analytics (or business intelligence) tool that can not only do a deep dive into the data in the solution and the data in the systems the data was amalgamated from, but one that can also build cubes on the spot and slice and dice them in dozens of different ways until you find the data you need to identify the source of the problem.

Furthermore, visibility tools can only tell you when you have a known problem type, they can’t tell you about unknown problem types. For example, let’s consider small package freight. A visibility solution would only generate an alert or turn a dashboard red if you were not being charged at contracted rates. It wouldn’t detect that 90% of your packages were going out as 5 pounds when, in fact, 80% of these packages should be going out as 2 pounds or less because most are simply short documents and contracts! And it definitely wouldn’t detect when you are sending federal express packages between neighboring buildings or, even worse, between two floors in the same building! (It happens!) Thus, a visibility solution on its own will never be enough – you need to constantly be applying analytics to find missed exception cases which translate into new rules that need to be added to the visibility system.

Buying Time!

To the tune of Closing Time by Semisonic.

Buying time – time for you to go out, go out and meet the day
Buying time – turn the lights on your suppliers near and far away
Buying time – one month left on the contract, so finish your auction or quote
Buying time – you don’t have to decide if you call a vote

You know who you want to win the bid
You know who you want to win the bid
You know who you want to win the bid
win the bid …

Buying time – time for you to rank the responses you get from the crowd
Buying time – your work won’t be finished ’til your team-mates and bosses are cowed
So gather up your courage, and move it to completion – I hope you still have a friend
Buying time – every new beginning comes from some other beginning’s end

Yeah, You know who you want to win the bid
You know who you want to win the bid
You know who you want to win the bid
win the bid…

Buying time – time for you to go back to the market your goods come from…

You know who you want to win the bid
You know who you want to win the bid
You know who you want to win the bid
win the bid…

Buying time – every new beginning comes from some other beginning’s end…