Monthly Archives: September 2009

Will the Big Shift Waves Give You The Big Shaft?

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Honestly, I don’t know the answer to this. What I do know is that I agree with the Supply Chain Editorial Staff and that graphs based on loosely defined waves don’t tell you very much. But let me back up.

Recently, Deloite released “the 2009 Shift Index” which is a 142 page PDF where they attempt to define and measure the forces of long-term change and understand the deeper trends that might soon make the concept of “normal” in business a thing of the past. To this end, they defined three “waves” that they believe capture the shifts that are taking place in the global economy:

  • Foundation Wave
    changes in the business landscape, including digital technologies and the liberalization of government policies
  • Flow Wave
    the increasing pace in which knowledge, capital, and talent move across a company and around the globe
  • Impact Wave
    the business impact of the first two changes with respect to overall corporate financial performance

Then they created indices and measure the shifts. And this leaves me scratching my head. How do you prescribe meaning to a rate of change in an index with a definition that is nebulous to begin with?

That being said, some of the trends that Deloitte has been tracking, which were quantified in the report, are certainly worth noting. For example, the average Return on Assets (ROA) of US companies has decreased 75% in the last 45 years and digital technologies are being adopted at rates 2-5 times faster than previous infrastructure shifts such as the telephone and electricity. If they are relevant to your industry, the sooner you identify these trends and their potential impacts to your operations, the better off you will be. If you don’t plan for them early, you might soon find yourself among the companies that are experiencing a rapid deterioration in performance.

To that end, it’s certainly worth downloading a copy of the report and giving it a cursory read. It contains a lot of good information on a number of trends that could impact your supply chain, some of which are summarized in this recent Supply Chain Digest article on a new normal. Just don’t be afraid to shaft the shift indices with the short straw. I don’t think anyone really knows what the global business landscape will look like in 10 to 20 years, and I certainly don’t expect a magic index to shed any long-term insights.

They Killed Kenny … You B@st@rds!

Those of you familiar with South Park are aware that poor, cursed, Kenny McCormick died in nearly every episode during it’s first five seasons, before staying dead for a year, and then returning to die occasionally in seasons seven through thirteen. However, even though Kenny McCormick has died over 100 times, the number of deaths he has experienced is only a fraction of the number of companies killed last year because many companies wouldn’t pay on time!

A recent article over on SupplyManagement.com, which summarizes research from the Federation of Small Businesses ( FSB ), notes that approximately 4,000 small suppliers were forced out of business last year as a result of late payment. That’s just small suppliers tracked by the FSB! How many companies would still be in business if their customers simply maintained and adhered to fair payment schedules? How many? Think about it.

So, if you are extending your payment teems to sixty days, ninety days, and beyond … all I can say is … you killed Kenny … you b@st@rds!

Have No Fear … the CFO is Here!?

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Recently, no doubt due to the severe financial implications of a poorly performing supply chain or unexpected supply chain disruption in this economy, I’ve been noticing a lot more articles about supply chain finance. This is a good thing … and a bad thing. It’s a good thing in that it shines light upon the savings that are available as a result of good financial decisions and a bad thing in that some articles are still written by people who don’t have a clue and think that factoring, extending payment terms to suppliers, and / or shifting inventory to suppliers are good financial decisions. (They’re not … if you don’t put your supplier out of business, at the very least you will see higher prices. You’ll probably see a lot of animosity and an unwillingness to do anything beyond the contractual obligation and, when the next boom comes and the supplier can choose their customers again, you will ultimately get dumped for a better customer.)

However, one article in particular on “supply chains and demand” in CFO Magazine made a few points that should be highlighted.

While it might be convenient (and even more profitable from an optimization perspective) to model multiple supply chains around product groupings, geographies, or raw commodity requirements … you should only have one global supply chain from an administrative perspective.
When Sara Lee integrated essentially two separate supply chains, administrative costs were reduced by 10%. Furthermore, one chain means one set of best-of-breed applications, which means one set of fees, and one (set of) centralized data store(s) … which saves you big come spend analysis time.

You need to be deliberate and rigorous when it comes to the financial security of your suppliers.
You need to not only make sure that they have enough business to remain in the black, but that they are also getting paid on time. In this economy, working capital loans … assuming your supplier can get them, are very expensive and could tip them into the red and on the fast-track to bankruptcy. You also need to analyze key financial metrics like working capital, ROIC, and ROE to insure that they have stability.

If you’re not sensing demand, your forecast accuracy is likely to cost you significantly when the market picks up again.
Even in stable markets, most traditional forecasting software is barely tolerable. In this market, its accuracy is likely unusable. But new demand sensing based forecasting software that updates daily can be quite reliable in the hands of a knowledgeable user with enough historical data at a granular level. Improvements of 20% to 40% are not unheard of, like the improvement of 25% at Unilever.

For more good advice, and a good introduction to supply chain finance, see the supply chain finance primer on the e-Sourcing Wiki.

Uh-oh … Looks like Chinese tire manufacturers are going to take a hit for health reform

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Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In “U.S. Adds Punitive Tariffs on Chinese Tires” (NY Times), Edmund L. Andrews states that:

The tariff, which will start at 35 percent this month, is a victory for the United Steelworkers union, a crucial ally in President Obama’s health care overhaul.

and that

the decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001. Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

It also looks like the Times has an editing problem. It’s not a punishment at all, unless you regard a penalty for mere success as punishment. The tariff isn’t connected to any misdeed by a Chinese company.

And the connection to health reform is rather tenuous. The union would continue to support reform even without this tariff.

At least this step is better thought out than former President Bush’s tariff on Chinese steel. That wasn’t connected to any misdeed either. Because the tariff applied to the steel only, and not to products containing the steel, it made it more efficient to build steel-containing products outside of the US. I don’t think this one will hurt the US car industry like the previous tariff hurt US steel fabricators.

It’s an unfortunate trend though. Rather than take the time to build a case against Chinese tire manufacturers on the normal grounds (dumping, safety violations, pollution) they took the lazy way out. There’s no way for the Chinese companies to defend themselves. The only response can be retaliation.

Dick Locke, Global Procurement Group and Global Supply Training.

When Will Organizations Learn That Complex Software Is Not Easy!

A recent article over on Procurement Leaders titled “software procurement blunder grounds vital military helicopters” has me fuming.

First of all, it contains the phrase “procurement blunder” when the blunder does not appear to be the fault of the Procurement department, but the fault of idiots higher up.

Secondly, it contains the statement that an organization should “cut costs by developing its own software“.

I guess I should step back a minute and summarize the article. The UK MoD (Ministry of Defense) purchased eight (8) Chinook Mk3 helicopters in 1995 from Boeing which were delivered in 2001 at a cost of £259 Million. As of 2007, they were still not deployable because they could not be flown in poor visibility or at low altitudes because they were missing key operational software. This software, which would only have cost £50 Million (which is only 2.5% of the purchase price of the eight helicopters), was not included in the purchase because the UK Treasury demanded the MoD cut costs by developing its own software.

This is just nuts in so many ways. For starters:

  • Over 90% of software projects fail to come in on time and on budget.
  • Complex software systems, especially operating systems, typically require thousands of man years to develop. Red Hat 7.1, which only has to operate a PC and not a complex military helicopter with dozens of systems and hundreds of controls, required about 8,000 man years of development effort.
  • Complex (operating) systems can only be built by senior developers, which, fully burdened (with salary, benefits, hardware, and software costs), will cost you about 200K / man year.
  • This says that 100 M (slightly more than £50) only buys you 5,000 man years.
  • Even if your programmers knew exactly what to do, it’s doubtful you could even match the market cost of an already developed system which is being amortized over a large group of buyers.
  • The only way the MoD could make the helicopters flyable was to spend untold millions stripping them down to Mk2a configurations, which also delayed their deployment for 2 or more additional years.

But, more importantly, you’re trying to save pounds by pinching pennies! That never works! It would have been much more logical to try and find ways to reduce the purchase price of the helicopters by 2.5%. For example, could the purchasers have worked with Boeing to help them execute more strategic sourcing projects to reduce Boeing’s cost in a savings-split? Could UK MoD manpower have been lent to Boeing? Since most purchasers believe in the old maxim that you can take 10% off of the cost of anything, how hard would it really have been to reduce costs by 2.5% to cover the software costs if Procurement was allowed to be creative instead of having to deal with idiocy pushed down from the top?