Monthly Archives: May 2011

Where is Global Trade’s Groove?

A recent headline over on the World Trade Magazine site that asked whether or not global trade still has its groove got my attention because, even though the global economy tanked from 2008 to 2010, a lot of leading companies are focussed on accelerating the development of Global Business Services centers (which was one of the foci of the recent Hackett Group Best Practices conference) in order to take advantage of lower labour rates in other parts of the world. Plus, I haven’t seen any drop in services outsourcing to India or product manufacturing outsourcing to China. And there has been a resurgence in interest (though not necessarily much in the way of action yet) in moving or creating new manufacturing locations in Mexico and Brazil by US (and even European) companies. So while Global Trade may not have grown as fast as we were predicting back in 2008 before the global recession, it does not appear to have taken any backwards steps by any stretch of the imagination.

Nevertheless, it’s always good to check the pulse. The article addressed the question from a risk, optimism, and emerging market viewpoint.

Risk
The eruption of Eyjafjallajokull in Iceland, the disaster in Japan, and the political upheavals in Egypt, Libya, Bahrain, Algeria, and even Albania are placing risk front and center in the Supply Management landscape. Plus, the consistently high price of oil, which could go even higher due to the instability of oil-exporting countries, puts global sourcing of certain goods at risk as the cost of transportation could soon make some global buys unaffordable. In addition, as more of the household budget goes towards fuel, consumers will have to spend less on unnecessary consumer goods. Then we have price increases across certain categories of raw materials as countries like China implement quotas on rare earth metals and create global supply constraints.

Optimism
The article has an interesting quote from Carlos Rice, Vice President of Supply Chain Services for Crowley Logistics who says that we’ve seen an upturn in the economy recently and we are watching the emergence of new markets — not only in India and greater China — but closer to home in Central and South America. What is happening with Brazil’s economy today is almost unprecedented. So, we see lots of opportunities not just east-to-west, but also north-to-south as well. Plus, there has been continuous growth in the trans-Pacific and Asia-to-Europe markets for some logistics carriers, balance is returning to many global trade lanes, and some carriers are seeing up to 20% growth in logistics to emerging markets that are creating a consistent demand for commodities. The expectation is that container trade will be at upper single-digit growth as a whole.

Emerging Markets
Adrian Gonzalez, director of Logistics Viewpoints, notes that the traditional economic powers like the U.S., Japan, China, and Germany are all looking at other developing areas as opportunities for future growth and you see these countries starting out first as sources of low-cost labor in much the same way as China began its development. Then you see the development of a middle class that begins buying products. And we have the situation where countries like China and India are now able to grow and thrive independently of richer countries. In fact, the World Bank states that developing economies were responsible for 45% of world growth in 2010.

So what’s the projected return on equity (ROE) for those invested in global trade? According to Paul Bingham, economics practice leader at Wilbur Smith Associates, barring another unexpected calamity, the [logistics] industry anticipates a slow yet steady global economic recovery. Right now, about 20% of what comanies manufacture is consumed in other parts of the world. Carlos Rice expects that this number will grow to 80% in the next 10 years or so. I personally think this is a bit ambitous with the high price of fuel, but don’t doubt that it will continue to rise as multi-nationals find new low-cost locales to produce in and new markets to sell it. I think the big difference is that there will be more near-sourcing from neighboring countries, or at least countries on the same continent, than there will be global sourcing from locations halfway around the world. What do you think?

Bob’s Three Dimensions of Sustainable Success

I’d like to point your attention to a recent post of Robert Rudzki, author of Straight to the Bottom Line and the forthcoming Next Level Supply Management (which is a must read for anyone who desires to take their Supply Management organization to the Next Level) over on the SCMR Blogs on alignment and compatibility with supplier partners. In it, he reviewed his simple, yet powerful, framework for evaluating the likely success or failure of two companies working together.

The basic idea is that success is more likely to occur — and be sustainable over time — if there is alignment, and compatibility, across three key dimensions:

  1. Strategic
    the overarching business strategies of the two parties should be close since they will need to be in sync for success
  2. Operational
    the two company’s systems and procedures will need to be integrated into one set of systems and procedures; if the will is not there to make this happen, the chances of success will be diminished greatly
  3. Cultural
    the business cultures must be similar; the core mission and values must be similar and it holds true whether you are merging two operations in New York or an operation in New York with an operation in Singapore and puting a head office in London

While these conditions are not sufficient for success, they are necessary. So if you fail the SOC test, sock the partnership from the get-go.

Apptio – Helping you with your IT Portfolio

Earlier this week, in reference to an article on the SCRC site on The Supply Chain IT Investment Enigma and Hackett group recommendations, I asked what is the right portfolio view of the Supply Chain IT Investment. Given the laundry list of Supply Chain Technologies — DM, PLM, PP, APS, SCEM, SRM, WMS — that one has to consider; the dizzying array of hardware, software, infrastructure, and support options; and the difficulty in capturing and computing cost metrics and comparing them to industry averages, it’s a good question.

One vendor trying to make sense of the situation is Apptio. A Technology Business Management vendor with a background in system management and automation with capabilities in IT Services Transformation, Infrastructure Optimization, Application Rationalization, Cloud Business Management, Data Center Consolidation, and IT Financial Transparency, this week they released a new IT Service Performance Solution with supplier/vendor relationship management (SRM/VRM) capabilities. Building on their deep expertise of IT systems of record, application stacks, hardware platforms, and on-site and off-site infrastructure solutions, they have created a unique service performance management (SPM) solution that is customized to the unique needs of IT.

Designed to give an organization a holistic view of internal and external suppliers, and apply supply chain best practices to IT, the purpose-built vendor relationship management solution, which can import data from over 40 major systems-of-record (SAP, Oracle, JD Edwards, Peoplesoft, Ariba, etc.) out-of-the-box, allows an organization to define and manage vendors and contracts, understand spend by vendor and category, monitor and benchmark performance against pre-defined and custom KPIs, and hold vendors accountable to performance. In addition, due to their ability to also integrate with multiple major accounting systems out of the box, spend can be tracked against contracts at a category level by unit of time and IT managers can see how spend is trending relative to projections.

The Apptio VRM solution supports the full IT supply chain from IT planning and vendor identification, to Bill of IT creation, service costing, service performance, and IT benchmarking and allows IT sourcing personnel to effectively manage negotiations, contracts, costs, relationships, performance, and spending over the life-cycle of the relationship. In addition, a custom scorecard can be created for each vendor which can not only track custom metrics and KPIs, but also overall customer satisfaction.

Purpose built for IT, the solution allows the IT relationship managers to define a custom dashboard that displays, for each vendor, the current financial, quality, performance, and satisfaction ratings (which can be defined against pre-defined or custom KPIs) and whether the vendor scores good (green), satisfactory (yellow), or below contract requirements (red) on each rating — allowing problem vendors to be quickly identified. The user can then drill into the vendor and see the basic supplier info, contact info, contracts, debits/credits, and scorecard details summarized for each vendor (and whether each contract, balance, and scorecard is good, satisfactory, or below contractual requirements).

In addition, the top-n vendor and contract summaries allow the IT sourcing managers to quickly see which vendors and contracts are consuming the most spend and how these particular vendors and contracts are trending over time. In addition, the IT sourcing manager can just as quickly get breakdowns by internal vs. external spend, contract type, and vendor relationship. Given that most of the leakage will occur in the biggest contracts, this is a useful capability for IT sourcing managers. Especially since the metrics can be defined against activity based costing (ABC), which is not a feature common among many service or performance management platforms.

And while it’s true that most of the analytics can be easily computed with a good spend analysis tool that allows for the definition custom metrics in the hands of a spend analysis pro, if data needs to be pulled from mutliple systems, the reality is that performance will only be analyzed against most contracts one or two times a year, and by then it might be too late to insure real savings (as the organization is not likely going to get 1 Million in support overpayments back). Plus, most spend analysis tools or platforms are not going to be integrated with a benchmark database that allow an organization to quickly identify what the usual service/software/hardware costs are for its usage levels and save an average of 20% to 30% in its negotiations. (In fact, some beta testers saved 50% on some hardware, software and/or support categories due to a better understanding of usage, industry standard pricing, and past performance and the ability to do what-if analysis in conjunction with activity-based costing.) While it will be a while before we know ROI of the solution for an average organization, I agree that it is likely that an average organization with significant IT spend will begin to see payback within 90 days and that a 20% savings on major contracts will be common the first time around as only those organizations that have, or bring in, IT sourcing expertise tend to get best pricing in the IT category. It’s definitely worth a look for those organizations with a large IT spend as there are very few solutions out there that understand the unique nature of IT categories.

Is a New Age of Partnerships Near at Hand?

There is an interesting article over on the IndustryWeek site about “how the world is coming to Partnership”. Apparently the message that came from the Horasis Global Russia Business Meeting in Limassol, Cyprus in mid-April was that whatever happens in business, in nations, in economies during the coming months and years, we have to be working hand in hand. In other words, the message was that we’re partners.

It is definitely time for businesses, and the supply chains that drive them, to globalize if they want to be world class, but are true partnerships required? The first stage of globalization for an average business or supply chain is typically outsourcing. The second stage is typically expanding operations on site. Only in the third stage are true global business units created. But even then, partnerships are usually restricted to the most strategic of suppliers. True partnerships are few and far between, and most companies believe that if they want local market intelligence, production, and delivery, they either outsource the whole kit and kaboodle, or build a local operation and hire local talent. Many companies still don’t see partnerships with a local operation as a viable option.

However, I do agree that the smart people will form business partnerships that use technology to advance the interests of both organizations as best-in-class organizations use leading technology solutions to increase their efficiency and effectiveness from spend analysis through sourcing to procurement and trade management.

Lessons Learned from Best-in-Class, Part IV

The following are some more of the lessons learned shared by some of the participants at this year’s Hackett Best Practices conference in no particular order.

15. Fish where the fish are
If a fisherman wants to catch a fish, it’s more likely that he will catch a fish in a lake filled with them then in a lake that is devoid of aquatic life. Similarly, it’s easier to find savings in a category rife with overpayments, maverick spending and/or contracted rates (well) above market average. Thus, if the Procurement organization wants to get some quick wins to establish credibility, it should focus on those categories that represent the largest opportunities.

16. Focus on efficiency of the company
Procurement efficiency is important, but corporate efficiency must come first. Procurment must put the good of the company first, especially if it wants to graduate from the kiddie table.

17. Governance and Sponsorship must start from the top
Since Procurement success will usually require change, and organizations generally resist change, support will be required to achieve success. However, success will be a lot more likely if support comes from the top as it may be difficult to overcome resistance without executive support.

18. Have a Talent Management Strategy
Procurement transformation and success will require top talent, and top talent, which is in critically short supply in Procurement, will require a talent management strategy to identify talent, recruit talent, retain talent, advance talent, and capture their knowledge when they move up. A critical part of this strategy will be to transition or use critical resources from other parts of the business either through cross-functional teams or re-assignments.

19. IT is Procurement’s new best friend
Not only will Procurement transformation generally require new processes and systems, which will require the support of IT (as reengineering takes time and expertise), but IT is often in a situation similar to Procurement — being asked to reduce cost while delivering more value. Together, Procurement and IT can work together to reduce costs, increase value, and gain more recognition and respect for both business units as they transform the organization to a world class organization.

20. Leverage outsourcers and outsourcing relationships
Sometimes the best way to get ahead is to outsource part of the Procurement function to allow the organization to do more with less or maximize the capabilities it has. Sometimes this will involve outsourcing the tactical parts of the Procurement function, such as transaction processing; sometimes it will be outsourcing generic categories such as office supplies, tellecommunications, or commodity hardware buys to a GPO where the organization “fits”; and sometimes it will be working with consultant organizations to get better results on strategic categories where the organization doesn’t have the (market) expertise to get savings (without sacrificing quality or reliability of supply) on its own.


Our next post will continue our overview of the lessons learned that were shared by some of the participants at this year’s Hackett Best Practices conference.