Monthly Archives: May 2008

Not Just A (Manufacturing) Litmus Test for Politicians! (CEOs and CSCOs, Take Note!)

Industry Week recently ran a good article called “Just In Time – A Manufacturer’s Litmus Test for Politicians” that had some very good questions that I doubt any of the current US presidential candidates would have good answers to.

However, they, or their equivalents, are questions that any CEO, and, more importantly, any CSCO should be able to answer. Specifically:

  • Vision
    What is your vision and mission for the supply chain department … and how does it sync up with the vision and mission of the company?
  • Relevant Experience
    Have you ever worked on a design team that made products similar to those being made by your company? If not, how do you plan to acquire the expertise needed to help the design team make the right decisions in the design stage before up to 80% of the product cost is locked in?
  • Customer Focus
    How have you improved the customer experience in the past? What can you do for your current customers?
  • Management Experience
    How do you plan to improve ROIC and contribute to overall company growth?
  • Competitiveness
    How are you going to increase overall competitiveness of the company supply chain compared to the industry average?
  • Environmental Stewardship
    How are you going to reduce the organization’s carbon footprint while reducing cost and increasing efficiency?
  • Trade Practices
    How are you going to achieve best-cost country sourcing while optimally determining what work to keep in house vs. what work to outsource?
  • Training & Education
    An educated employee is a productive employee. What is you plan to insure your team stays up to date on best practices, processes, and methodologies?
  • Research & Development
    Innovation should not be confined to R&D. What is your plan to insure that supply management contributes its fair share of innovation to corporate growth?

Spend Analysis Meme Busting, Part II

Today’s post is again courtesy of Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI).

9. Spend analysis is a “big iron” problem requiring large servers and databases.
Nonsense. Global 100 datasets fit easily onto ordinary laptop computers, and a modern laptop computer can deliver near-instantaneous drill-down times.

10. Static reports can deliver profound insight, replace procurement analysts and sourcing consultants, and even direct the course of entire sourcing programs.
This idea surfaces every now and then in the writings of pie-in-the-sky analysts and on blogs like Spend Matters. Most recently, it is being promulgated by spend analysis vendors who have run out of new marketing ideas. Of course, if it were really true, those reports would have existed long ago, and we’d all be out of a job.

11. Extracting data from accounting/ERP systems is difficult.
In fact, it’s easy, and usually doesn’t require IT resources to accomplish. The only difficulty I’ve ever experienced was a situation where a customer’s head of IT folded his arms and swore up-and-down that it simply wasn’t possible to dump data from their accounting system. One telephone call to the accounting system vendor (a helpful Canadian firm) provided the command necessary to extract the data trivially.

12. Accounts payable data is all you need for spend analysis.
This meme is on the decline. By now, many practitioners know that A/P spend visibility will find low-hanging fruit, and that it will identify buckets of spend that might be worth a closer look. But they also realize that in order to get to the next level of savings, it’s necessary to build commodity-specific analyses that take into account existing contract terms and invoice-level data, as well as balance-of-trade and demand-side considerations. And, this is only the tip of the iceberg when one considers the analysis possibilities buried in HR data and in ops data such as service repair records. Experienced practitioners build data analysis cubes whenever necessary, throwing them away when done, or retaining them if it is useful to do so.

13. Real data analysis requires statistics and applied mathematics.
Some consultants argue that unless rigorous statistical analysis is applied to a dataset, no meaningful conclusions can be drawn. For sourcing, though, the data visibility provided by a spend analysis system is usually more than sufficient. For example, try loading invoice data for a particular SKU over an extended time frame, and scatter-plotting the price. Is the price the same? Many times it isn’t, even if you have a contract that should have locked it down. When you find this pattern — and chances are you will — you’ve just written yourself a check, with no applied mathematics required.

14. Spend analysis systems should react in real time to real-time data.
This meme is becoming popular amongst armchair analysts and bloggers, but it’s scoffed at by practitioners. What does real time mean? When the requisition arrives? When the PO is issued? When the invoice arrives? When partial payment is made? When full payment is made? And what is anyone going to do about it, anyway, in “real time?” This ties into the notion of the “executive dashboard,” where the idea seems to be that an errant transaction will set off some sort of red alert. Even intrusion detection systems, which actually can justify a real-time component, have largely given up on this idea; the “fact” of an alert is not necessarily indicative of anything, and only in-depth after-the-fact pattern analysis can distinguish signal from noise.

15. “We already purchased an enterprise license for [xyz BI system or OLAP database], so we don’t need yet another analysis capability.”
This is the classic argument that the head of IT feeds to the CFO, which enables the CFO to kill the incipient spend analysis project, as she often does when fed such an argument (CFOs being people who really dislike spending money). Everyone feels good about saving money, and they move on to the next item on the agenda. Procurement doesn’t dare argue with IT, typically, so that’s the end of the story. Unfortunately, IT and the CFO have just doomed their company to another N years of zero spend visibility, because (a) nobody in Procurement knows how to configure either a BI system or an OLAP database, and (b) nobody in IT is going to take any time out to help them — assuming, that is, that IT themselves understand the BI system or OLAP database, which in many cases they do not.

16. “It’s important to deploy a spend analysis solution enterprise-wide, immediately.”
Here are three reasons why this can be a poor idea.

  • Procurement is a tricky business with lots of opportunities to overlook things even when work has been done competently and professionally. A spend analysis system, unfortunately, does a great job of pointing out those things. Why should Procurement hang its dirty laundry out the window for the whole company to see? Wouldn’t it be a better idea to find (and correct) obvious errors quietly and privately, before publishing a company-wide spend cube — if a company-wide cube is even necessary?
  • Company-wide initiatives create company-wide inertia, starting with IT sticking its thumbs in its belt and making trouble about how much time/money/effort it’s going to take to “set up a server” or, worse, how much time and effort it’s going to take to “evaluate the vendor’s remote hosting site for security compliance.” Wouldn’t you rather be running the spend cube immediately on your laptop, rather than waiting months for IT to get its act together? You can always deploy the cube company-wide, later, without any pressure.
  • Company-wide spend analysis initiatives create company-wide opportunities to kill the initiative. These days, spend analysis can be obtained inexpensively and set up quickly, within your discretionary budget and without asking anyone’s permission.

17. It will cost a lot to outsource cube construction, or to train internal resources on the spend analysis system.
This situation has improved substantially, and it continues to improve. New services offerings from some vendors have cut this price substantially from the levels of a few years ago; and contingency-based sourcing consulting firms will not only build your spending cube for free, but also return solid savings to your bottom line.

In summary:

9. Spend analysis can be done on a modern laptop computer.

10. A static report is not capable of providing much in the way of insight.

11. Data extraction from the vast majority of accounting / ERP systems is quite easy. (It might take some mapping to get it into cube form, but that’s why spend analysis tools come with good E”T”L tools.)

12. Accounts payable data is just the beginning. Every database is its own gold mine!

13. Data analysis starts with well mapped and relatively complete data – not advanced statistics or applied mathematics. Visibility is key.

14. The spend analysis system should be capable of accepting updated data when the data – and the analyst – is ready for new data. The answer does not lie in “real-time” or “monthly updates” because every organization, and every data set, is different.

15. BI & OLAP is not spend analysis.

16. As with any solution, initial deployment should be limited in scope to that which is controllable while the learning curve is overcome.

17. Training and consulting is a lot more affordable than you think, and if deployed on invoice data first, will return immediate ROI.

Thanks again, Eric!

An Introduction to Carbon Footprinting

This is a topic I’ve been meaning to write about for a while, but due to the depth required even in an introductory piece, and, thus, the time it would take to construct a post I’d be happy with, I’ve been putting it off until I had the time. I still don’t have the time, but Industry Week just published “The ‘What, Why, How and When’ of Carbon Footprinting”, which is a really good introduction to the topic. It’s five pages, but worth the read. I’ll highlight some of the key points below, and add a few of my own.

The article starts off by noting that H.R. 2764, signed into law by President Bush in December of 2007, contains a section that states that of the funds provided in the Environmental Programs and Management account, not less than $3,500,000 shall be provided for activities to develop and publish a draft rule not later than nine months after the date of enactment of this Act, and a final rule not later than 18 months after the date of enactment of this Act, to require mandatory reporting of greenhouse gas emissions above appropriate thresholds in all sectors of the economy of the United States’.

This is a lot more innocuous than it may sound. This says that, by September of this year, reporting guidelines on draft emission standards will be drafted and, more importantly, by July of 2009, GHG emission reporting will be mandatory in the US – just like it is in Australia under the “National Greenhouse and Energy Reporting Act” of 2007. (And if you’re reading this down under and need help preparing the reports, there’s a new offering by Tradeslot Pty Ltd called Carbon Navigator that might be able to help.)

Chances are those guidelines will be similar to the mandatory reporting regulation that California is expected to introduce any day now, which is expected to be largely based on the GHG protocol Standards developed through a joint effort of the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI), which is becoming the defacto Global Standard.

However, the introduction of legislation is not a bad thing. Collection of this data will help consumer and manufacturer alike! Consumers will have the power to differentiate between green claims and green reality, and the companies that are green in practice, and not just in advertising, will gain favor in the hearts and minds of environmentally conscious consumers. Furthermore, forward-thinking managers will be able to use the resulting data to reduce costs, drive efficiencies, and even open up new sales opportunities. Without the data collection effort that is required to properly tabulate and report emissions, Wal-Mart would have never figured out that the refrigerants used in its grocery sections contributed a greater percentage of its greenhouse gas footprint than its truck fleet!

So what is a carbon footprint? It’s a greenhouse gas emissions inventory that includes all of the greenhouse gases (methane, nitrous oxide, and HFCs) in addition to carbon dioxide that is generated by a company in its day to day activities.

How is it measured? The GHG Protocol specifies standard calculation methods and provides worksheets that a company can use to calculate its carbon footprint in a manner that can be compared in an apples-to-apples fashion with other companies. It has three scopes:

  • emissions from sources owned by the company
  • emissions from electricity purchased from the grid
  • emissions created by suppliers in the company’s value chain

The first time you do it, it will be a major undertaking. Eaton Corp. started doing ISO 14000 (environmental management) back in 2000, but wasn’t able to aggregate verifiable data until 2006. However, the article contains some advice from John Hoekstra of Summit Energy in implementing a program to document and report carbon footprints. It goes as follows:

  1. Know the Goal and the Road Ahead
    A formal plan lets you focus on the key data requirements.
  2. Set a Realistic Baseline
    Understand your operations and determine if it is possible to compile a historical emissions inventory that meets data materiality thresholds.
  3. Define the Boundaries
    Bite off what you can cost-effectively chew.
  4. Map out all of your Sources
    Identify each facility, asset, and potential emissions source.
  5. Make appropriate assumptions.
    Identify ways to calculate emissions that ensure completeness, but balance level of detail. Where possible, use the GHG Protocol as a guide.
  6. Centralize Data Management
    Data is the key.
  7. Be flexible
    The regulatory requirements are going to be in a state of formation and flux globally for some time. Be sure you can modify and enhance reporting processes and systems as required.and to this I’d add
  8. Be patient
    You’re not going to accomplish all of your goals overnight.
  9. Start Now!
    As per rule 8 above, it’s going to take some time – so get a jump start on it and you’ll be a leg up over the competition and that much closer to identifying cost savings opportunities that are environmentally friendly.

Until you’ve collected the data, you won’t know where your biggest offenses lie and where your biggest opportunities are. Consider the example of a life-cycle analysis on a 12-pack of glass bottled beer that found that 68% of the carbon footprint was due to supplied materials, and that glass bottles accounted for an astonishing 56% of the carbon footprint.

The life-cycle analysis that will be required as part of the carbon footprinting will pay off! Consider the recently published article “Life-cycle Analysis Pays Off” in the same publication that documented Caterpillar’s Life-cycle analysis project where they found that the remanufacture of a cylinder head reduced GHG emissions by 50%, energy usage by 80%, water usage by 90%, and material usage by 99%, when compared to the manufacturer of a new one.

Garbage In, Garden Out: Trash Processing Goes High Tech

Wired recently had a short, graphical, article, on the new trash processing facility in Sydney, Australia that was built by Global Renewables in its effort to shrink the millions of tons of recyclables that end up in landfills every year. A high-tech marvel of a processing plant that uses technology that includes wind sifters, optical scanners, magnets, and electrical currents, it is capable of diverting 75% of a city’s waste stream to recycling. This significantly cuts down on landfill space requirements, methane production (from rotting garbage), and greenhouse gas emissions.

The 6-step plus process, depicted in the graphic linked through the thumbnail below, is quite ingenious.

  1. Robotic Arms open the trash-bags (to prevent workers from injuring themselves on dangerous or hazardous materials) and then workers remove contaminants and toxic materials for safe disposal. The rest of the trash is allowed to proceed on a conveyor belt.
  2. A vacuum separates paper and plastic, which are separated by optical scanners.
  3. Electrical eddy currents subject the trash to a magnetic field which makes the nonferrous metals actually ‘jump’ into a bin.
  4. Electromagnets attract ferrous metals and a small belt channels the material into a separate chamber for compacting and resale as scrap.
  5. A computer-guided camera tracks paper and plastic and air jets blow the refuse into appropriate bins.
  6. What’s left is fed into a percolate tank and washed with warm water to dissolve readily soluble carbon and other organic compounds. The liquid enters a digester which turns the dissolved carbon into bio-gas to power the plant. A composting hall ferments everything else into fertilizer.

Supply Chain Shocks Get the Attention of “Chief Executive”

One of the publications I like to peruse regularly is Chief Executive, but more often than not, supply chain has been missing from their pages. However, it looks like that might be changing and it was nice to see the recent article on “Shocks to the Supply Chain” that noted the importance of the supply chain and the need for a company to look at its supply chain “holistically”.

With fuel costs approaching 120 a barrel as I write this, limited shipping capacities, skyrocketing raw material costs in certain categories, and supply chain risk increasing by the day, it’s nice to see supply chain getting more press in publications targeted at chief executives as it could be the only shot at profitability for many company’s in today’s economy which is currently undergoing a recession and stagflation.

It’s also nice to see that it noted that supply chain is taking on importance in companies of all shapes in sizes. For example, the article noted that Jamba Juice takes supply chain issues so seriously that last July it made the effort to lure the Vice president of Global Procurement at Wal-Mart to its operation. Furthermore, in an effort to control costs, they also use long-term forecasting models to minimize surprises and develop a holistic approach to mitigate future cost risk.

And although the article was pretty high-level, and not that useful to a supply chain pro, it also had some good advice at a level an executive not well versed in supply chain can understand. For example, the article notes that the supply chain should be flexible and allow for different modes of sourcing, manufacturing, and transport if breaks emerge or if costs increase. So, even though it won’t tell you anything you don’t already know, it would be worth your time to make sure your CEO’s copy of Chief Executive falls open on those pages. Because maybe, just maybe, they’ll get a little closer to understanding just how important you are.