Monthly Archives: September 2009

Is the Downturn an Upturn for Offshoring?

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A recent press release from the Conference Board announced the results of the fifth annual survey on offshoring trends that was done in conjunction with the Duke Offshoring Research Network. The survey found that more than 50% of companies had a corporate offshoring strategy last year, up from just 22% in 2005 and that 60% of companies currently offshoring have aggressive plans to expand existing activities.

Wow! Twice as many companies are now planning to offshore, and almost two thirds of companies offshoring are planning to increase their offshore activity! Risk be damned. The threat of peak logistics costs rolling around again in ten years or less be damned. The threat of losing a shipment to the Somali pirates and being stocked out for three months be damned. The threat of IP theft be damned. We’re offshoring anyway!

Let’s be clear … I’m not against offshoring when it makes sense, but I think many companies have been overdoing it and I fear that, in efforts to cut costs quickly to “get through this recession” they are going to take overdoing it to the next level. It’s not about the lowest cost today … it’s about the highest value over the lifetime of the project. When you offshore when the economy is down, costs can only go one way — up! Wages will rise as the new “low-cost” locale gets used to a higher quality of life. Raw material costs will only increase as demand in the region skyrockets. Shipping costs will only increase as the ocean carriers approach capacity again. And unless you’re outsourcing to a mature region with mature plants and experienced people, quality will be an issue, IP theft will be an issue, and lack of innovation will be a big issue. Investing in the right innovative partner who can help you find ways to take costs out of design and production while improving quality will usually provide you more value in the long run than the lowest cost provider today will provide you (because their costs will go up while their contributions stay flat).

Now, I do agree that companies with a well-thought out corporate-wide offshoring strategy can achieve significantly better performance in cost savings while meeting target service levels and improving relations with providers and overcoming internal resistance if they do it right, but I also believe that many companies just aren’t there yet. If the offshoring craze heats up again and they jump in head-first without the experience and planning required for success they will fail before they succeed. Given the weakened financial state of many companies right now, I just don’t think many can afford even a single failure.

So if you must jump on the bandwagon that is looping around again, get some help before you do. Start with Dick’s seminar and course on International Sourcing through Next Level Purchasing (now the Certitrek NLPA) to get a grip on the basics and then bring in a professional consultancy that does this every day to help you. Because, as Arie Lewin, Professor of Strategy and International Business at Duke says, “simply offshoring more functions isn’t the solution … to achieve real savings, companies need to get the processes right“.

What is a Successful ERP Implementation?

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A recent CIO blog post asked “what does a “successful” ERP implementation actually mean”? This puzzled me, because the answer is easy:

One that is never started.

As the author notes, there’s just no way the majority of these bloated projects come in on time, on budget and without one or two people losing their jobs … because all big bang projects do is blow up.

Not that they can’t be successful, they can, and a handful have been, but, in reality, with the complication inherent in today’s business and the complication inherent in today’s systems, they usually aren’t … no matter how well contingencies have been planned for, how reasonable the expectations are, or how good communications are from start to finish. After thirty years, these systems are still so complicated that they are still beyond the comprehension of the average company.

That’s why you should approach your enterprise software needs one step at a time, one core system at a time, and one standard at a time. Define your basic architecture and your basic interoperability model and then select systems that fit into that model. Implement one system to solve one set of problems at a time, insuring one is working before starting on the next, and you’ll greatly reduce the risk of your project being a catastrophic failure.

This isn’t to say that you can’t standardize on one ERP platform … a few companies have found success with mostly end-to-end SAP and mostly end-to-end Oracle, but that if you take the approach, you do it one module at a time. If your integrator says you have to do it all at once, find a new integrator. If your provider says you have to implement the entire system at once, find a new provider. It’s literally as simple as that because, when you get right down to it, it’s your money … let it talk.  After all, as Vinnie astutely points out, if you really want to succeed, don’t upgrade, escape.

Managing Military Supply Chain Risk

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.

To highlight the importance — and invasiveness — of the concept of the supply chain, take a look at Section 254 of the Duncan Hunter National Defense Authorization Act For Fiscal Year 2009.

As stated in this section: “The Secretary of Defense shall conduct an assessment of selected covered acquisition programs to identify vulnerabilities in the supply chain of each program’s electronics and information processing systems that potentially compromise the level of trust in the systems.”

The assessment includes identification and prioritization of vulnerabilities, recommending ways of managing supply chain risk, and identifying lead Department of Defense personnel for developing an integrated strategy for the management of risk throughout the supply chain.

Of critical importance in the military supply chain is the acquisition of electronic components. The goal is to ensure full operational readiness of US military forces. With the heavy reliance on technology to support the US military, the failure of an electronic component could be costly, not just in terms of tax dollars but also in terms of human life.

Repeated through this section is the word “trust“. In fact, it is repeated eight times not including the definitions of the terms “trust” and “trusted” in the last two paragraphs or the title of the section, Trusted Defense Systems.

I think Section 254 can be summarized as follows: Trust, and verify.

And it’s not just the electronic components that require verifiable trust, it’s also the verifiable trust in the “information processing systems” used in the supply chain. (It sounds to me like they’re talking about the computer systems and communication networks.) Verifiable trust needs to also exist in the design and fabrication processes, packaging, assembly, and quality assurance testing.

So, how should verifiable trust in supply chain relationships work? Perhaps true collaboration between trading partners who monitor each other and (immediately) report discrepancies, especially when the necessary goal is 100% accuracy.

This reminds me of a slide in my supply chain fraud presentation, which simply states: “You can outsource manufacturing, but you can’t outsource responsibility.” As opposed to verifiable trust, it would seem that for too long some supply chains have been operating under the concept of blind trust.

Retailers have been establishing their own quality assurance departments to verify that children’s toys are lead free. Verifiable trust could have helped avoid the deaths from tainted pet food. Tainted peanut-based foods may have never made it to the store shelves with just trust that no supplier would purposefully want to damage their reputation by harming the consumers who buy their products. Shouldn’t retailers and grocery stores be able to trust their suppliers to manufacture quality products that, when eaten or used accordingly, will not cause injury or death?

An argument is that this would come at a cost that consumers who must be willing to bear higher prices, or that companies must be willing to accept in terms of higher operating costs that will reduce profit margins, upsetting financial analysts and thus lowering stock prices which will then upset stockholders, especially if it results in lower dividends. But isn’t this a responsibility that a company manufacturing a product should be willing to — if not expected to — bear? Shouldn’t a company be valued more on the quality of its products then the quantity of its profit margin?

Maybe the government got this one right, folks. Maybe we need more verifiable trust in our supply chain relationships, especially the ones involving the products we purchase as consumers. It’s okay to trust, but verify too.

Norman Katz, Katzscan

Survey Says … Many Users Underwhelmed by SaaS

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Many users are underwhelmed by on-premise software too. The sad fact is that when many people buy a new software package, they get caught up in the hype and not the reality. Regardless of the delivery model, it’s still software … and in the business world, it’s software which is designed to help you perform many remedial business tasks that are often pretty underwhelming in themselves, to be blunt. Furthermore, should anyone in their right mind ever claim that the software itself would “wow” you more on-demand than it would served from your own data center? (I hope not!)

As I pointed out in the wiki-paper and in numerous posts here on Sourcing Innovation, SaaS comes with a large number of advantages over traditional installed software, but, by default, “wow” is not one of them. A delivery model alone won’t “wow” you as you don’t see it. Only software can “wow” you, and while there are many great SaaS software packages out there for sourcing, procurement, and supply chain management, most of them aren’t going to “wow” you … because that’s not going to provide you value. Good supply management software increases your visibility, helps you identify cost reduction opportunities, and makes you more efficient. “Wow” eye candy might be nice to look at, but not only does it not provide you any value, it costs you. You pay more for the software (because the provider wasted money building the eye candy) and your people lose productivity, because the “wow” will distract them and just get in the way.

So while Gartner’s recent survey, summarized in a recent S&DC Executive piece, that found underwhelming customer satisfaction scores, hesitation over the true-cost of SaaS solutions, and concerns regarding how successfully SaaS applications can be integrated with other applications does raise some issues that SaaS providers need to address up-front, I’d contend that “wow” is not one of them.

Don’t Forget About the NPFTF …

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If you’re on the ball and a US public company, you’re probably worrying about the SEC (Securities and Exchange Commission) and the FCPA (Foreign Corrupt Practices Act) because the government has been cracking down — hard — on violations and handing out million, and billion, dollar fines to violators. But while you’re making sure your staff are adhering to the SEC guidelines and not bribing foreign officials, you better make sure they are not committing fraud at home because the National Procurement Fraud Task Force (NPFTF) is ramping up too. Established by the Federal government in 2006, the NPFTF members include the FBI, the DOJ Inspector General, inspector general, defense investigative agencies, federal prosecutors, and various divisions of the DOJ.

Focusing on civil and criminal enforcement, the NPFTF has pursued more than 400 fraud cases since its inception. While bribery is the most prevalent type of fraud, bid rigging, embezzlement, money laundering, false claims, product substitution, misuse of classified and sensitive information, and mischarges have also been pursued. To date, these cases have resulted in more than 300 criminal convictions and hundreds of millions of dollars in settlements and judgments.

It’s important to remember that your average organization has a greater risk to fraud than you realize, according to PwC research summarized in a recent S&DC Executive article that notes that the “risk of waste, abuse and fraud in procurement is seeing an increasing threat in a down economy”. That’s why you need to insure your processes and controls are strong and that they are regularly monitored and evaluated. After all, it’s not just the Feds that are on the ball … over 20 states and cities have followed their lead and started enacting their own civil false claims acts. If you’re a career procurement professional, chances are your ethics are second to none, but who knows what your internal customers, trying to circumvent your processes with their maverick spending habits, are up to.

So what can you do to minimize your risks? Look for, and eliminate, these red flags:

  • inconsistent data across procurement-related systems
  • data quality issues related to spend data and vendor data
  • lack of controls around preferred vendors & negotiated contracts
  • lack of compliance with preferred buying guidelines
  • multiple instances of the same vendor in master data
  • inconsistent payment terms across the organization
  • duplicate payments
  • inefficient invoice processing
  • lack of sanity checks

And take the following actions:

  • streamline procurement processes
  • strengthen IT systems
  • do not rely solely on a code of ethics & whistleblower hotline
  • perform periodic due diligence of vendors
  • analyze procurement trends, payment patterns, & product change mix