Monthly Archives: May 2011

Selected Insights from the Hackett Best Practices Conference

Despite talking to Hackett personnel for years, including the one and only Pierre Mitchell, it was the first time I made The Hackett Best Practices Conference. It was interesting, to say the least. I took lots of notes and will probably write a number of posts over the next few weeks, but for those of you who missed it and are anxious to find out what you missed, here are a few takeaways until Thomas* (who is the new Analyst at Spend Matters) and I have a chance to collect our thoughts and publish a more detailed analysis on our respective platforms. (We’re still waiting for a deep dive into the new Hackett Performance Exchange.)

Do more with less and grow at the same time (or at least add more value) is the new mantra for Procurement and (Shared) Service Organizations.

Despite the uncertainty and volatility of the market, many organizations believe now is the time for growth while simultaneously believing that they still need to conserve (or is that hoard) cash. As a result, they are tasking every organization to achieve growth without an increase in budget or headcount.

Talent is on everyone’s mind.

The leaders / world class organizations can’t find talent. The average performers / Hackett “peer group” can’t afford talent. And the laggards / those below the median can’t get their cost of temporary / contract labour low enough.

Strategic Sourcing / Procurement has become so complex at the leaders that they can’t find anyone that fulfills the job description, regardless of what they are willing to pay. The average performer, where sourcing and/or procurement is moderately complex and can be done by someone who worked for a leading organization, as a result of the budget crunch brought on by the downtown, can’t lure the talent they need away from the leaders who will, literally, pay whatever it takes to keep the talent they have. And laggards, with rising cost of oursourced labor in “emerging” economies that, in many ways, have “emerged” in their own right, can’t keep costs down (as they haven’t moved to an appropriate global services model and learned how to be more cost effective with more higher paid workforces who are more skilled and can realize exponential efficiency gains with automation).

Transitioning to Global Services Model is a Journey.

And it will take you longer to realize sustainable value than just throwing work over the wall to a GPO or outsourcing to India. If you’re a large organization, you’re generally looking at a minimum of two years to realize any sustainable value and five years to maximize value from efficiency and effectiveness if you’re doing it right.

While everyone likes to talk about their success, few will talk about their failures.

Not a single speaker didn’t tout the success of the finance / services / procurement organization over the last X years, due at least partly (if not largely) to Hackett’s help and expertise in benchmarking and best practices. However, not every speaker would openly discuss lessons learned (as that would imply some roadblocks / failures). Only a few would talk about mishaps or false steps along the way (and a shout out to Rick Wertsching of Disney for willing to be candid in this regard) and only one speaker (of the presentations I attended) was willing to not only admit that they weren’t world class, but show exactly how they compared to world class (even though they aren’t yet anywhere close to where they need to be). (And major kudos to Thomson Reuters for being completely honest about the fact that while they have made great progress in the last 4 years, they still have a journey of at least 4 years ahead of them.)

If you want Spend Matters to attend and cover your event,
the surest way to get their involvement is to make sure Sourcing Innovation has already committed.

*I’m thrilled that Jason added Thomas to the Spend Matters team. His technical prowess is a great complement to Jason’s business savvy and provides a solid foundation for Spend Matters to become the next great Analyst 2.0 firm.

Do You Know What Disaster Will Strike You Next?

Of course you don’t, but you can calculate the risks of one disaster vs. another and one site vs. another with some simple research into natural disasters.

Earthquakes
Earthquakes are more likely near the edges of tectonic plates than they are in the interior, especially if the plates are moving together and pushing on each other (and there is a history of earthquakes and activity). You can quickly identify areas at high risk by looking at a tectonic map, such as the one over on ThinkQuest. One quickly sees that high risk areas are the west coast of North and South America, South East Asia, Japan, and the island domains north of Australia, as per the Global Seismic Hazard Map over on Countdown.org.

Volcanos
You can get a list of volcano activity reports from the Smithsonian Institute which maintains a USGS Weekly Volcanic Activity Report. Most are usually in the Ring of Fire, which encompasses the high-risk earthquake zone around the Pacific. GeoCodeZip.com Google maps them for easy viewing.

Tsunamis
Coastal areas near sesimic hazard (earthquake) zones in the oceans are at the greatest risk of Tsunamis, which tend to build up in power and force as they approach shallow water and land. This says that some of the riskiest areas are on the Ring of Fire in western North and South America, Japan, and south-east Eurasia in the island domains North of Australia. More information on Tsunami Risk Zones can be found over on the International Tsunami Information Center.

Hurricanes
The greatest risk centers for hurricanes are coastal areas near the equator where hurricanes are normally a problem. The east coast of the US is particularly susceptible to hurricanes. The Global Weather Oscillations site specializes in in hurricane risk probability zone forecasts for the US and the risk zones for the coming year can be found on the Global Weather Cycles web site. The National Weather Service tracks the 10 global hot zones over on the National Hurricane Center site and a review of historical data will tell you how risky a certain area is.

Tornados
Tornados can occur anywhere in the world (including Antarctica, although this is the one continent where a tornado has not been documented) when the atmospheric conditions are exactly right. However, the most at risk zones are the middle latitudes between about 30 degrees and 50 degrees North or South where cold polar air meets warmer subtropical air and generates convective precipitation along the collision boundaries. As a result, taking weather patterns into account, the most at risk areas are the United States, western Europe, South Africa, the eastern and western coasts of Australia, New Zealand, the eastern and western borders of China, the eastern coast of Argentina, Japan, South Korea, and the Philippines. Good information on tornado climatology as well as a great map of global risk zones is found over on the National Climatic Data Center site.

Ice Storms
Blizzards can be bad, but generally don’t do much in the way of lasting damage. Ice storms, on the other hand, can do severe damage to infrastructure on a wide scale by downing power lines, and grids, damaging structures from the sheer weight of the ice, and even taking down trees. The most at risk areas tend to be Canada, the US, the UK, and most of Northern Europe and Russia.

Floods
Floods are not limited to the coastal variety, and can happen anytime the water level rises too quickly. Thus, in addition to worrying about flooding in coastal areas as a result of a tropical storm, hurricane, tsunami, or storm surge (tropical cyclone), flooding inland can occur from intense thunderstorms, sustained rainfall, or rapid snow melt. Thus, all of the coastal areas identified in your hurricane and tsunami risk lists are at risk at flooding plus any area with a history of flash floods, sustained rainfall (like they get in India during Monsoon season), or rapid snow melt (in Northern Canada) are at risk of floods.

Wild Fires
Wild Fires can occur on any continent at any time whenever the conditions are right and are likely to follow heat waves, droughts, and cyclical climate changes (such as El Nino) and high-pressure ridges. They are most common in climates that are sufficiently moist to allow regular vegetation growth but where extended dry, hot periods are also present. This keep parts of Africa, South America, South Eastern Eurasia, and Eastern Europe at high risk, but parts of the Southern US, Mexico, India, and Australia also enter the high risk zone on a regular basis.

In other words, there’s no excuse for not knowing which suppliers are at risk of which natural disasters and how great that risk is. (Some historical research will give you frequency of disasters in the area and a local climate institute likely has probabilities of occurrence for the event, such as once every twenty years.) So while it may be hard to say how risky your supply chain is from a holistic perspective (as some financial or political risks may not be identifiable until the last minute), it should not be hard to say how risky it is from a natural disaster perspective.

A Streamlined Supply Chain Is Integrated

I was pleased to see this recent piece on “Making It Right” over on Stores.org that quoted Brandon Arbiter, the Business Intelligence Manager for FreshDirect LLC, who said that we are operating three businesses simultaneously and that to execute each of these on a daily basis, every department needs to use the most up-to-date information and have that information at their fingertips.

Just like FreshDirect is simultaneously a grocer, an online merchant, and a transportation company, an average CPG supply chain is a manufacturer, a broker, a transportation company, and a bank that has massive amounts of data that needs to be managed in the physical, financial, and information flows. The business operations of manufacturing, brokering, transporatation, and finance cannot be conducted independently if the supply chain is to be successful. Otherwise, goods will be produced too fast or too slow, or they will get held up in customs somewhere, or they will sit in a warehouse for too long, or they won’t ever leave the factory because the last order wasn’t paid for on-time. That’s why a successful supply chain has to be integrated, and also why it’s the only way to arrive at a streamlined supply chain that has to simultaneously minimize the physical, financial, and information flows that need to be in lock-step for success.

Furthermore, not only are the operations and data flows integrated, but so are the metrics. Instead of metrics like shipped complete and on-time delivery, you have metrics like perfect order that say right product at the right time at the right price that integrate all of the operations. So take a lesson from FreshDirect and integrate your supply chain operations.

IP Good, Knowledge Better

I enjoyed this post over on the HBR Blogs that said you should “stop obsessing over intellectual property rights” because what inevitably happens when companies obsess over IP rights is patent frenzy, and that just results in patent pirates plundering. And if that isn’t bad enough, since the full text of your patent is only a click away on the USPTO site, your secret sauce can easily be copied by any set of eyes with interest, and if their country isn’t very protective of IP rights, and they don’t try to sell into your home country, they can profit off of your IP royalty free and you have no recourse.

That’s one reason I’m not a big fan of patents in general, and think that North America should follow the EU and ban software patents specifically. There’s not much value in patenting “processes” that have existed since the dawn of civilization (and we have records of “auctions” going back thousands of years) as the patent can be easily knocked down, and there’s no value patenting a technology “invention” that is based almost entirely on open source, as a simple substitution of a few pieces, a few changes to the integration strategy, and a few new steps makes it a different invention — which means that someone else can use your publicly available blueprint to create their own “invention” with very little effort. Plus, the process is very time consuming and expensive in terms of dollars (as patent lawyers aren’t cheap) and time (as the documentation and questions from the lawyers and USPTO will take up a lot of time). And you can’t defend them unless you’re cash-rich, making them weak defenses if you’re cash poor.

I’m not saying IP isn’t important, it is, and, fortunately, it is protected under copyright law and other laws if you keep it trade secret. I’m just saying that IP isn’t everything. As the post points out, it’s what you do with the IP that matters. And effective use requires effective knowledge management. As the post points out, pursuing IPR (IP Rights) entails structuring and documenting knowledge, and the irony is that this very structuring allows diffusion to other firms who get access to it and either work around the IPR or eventually imitate it — so if you don’t effectively manage your knowledge, you lose it, or at least the benefits of it.

However, since a powerful strategic opportunity lies in binding your tacit knowledge assets to your structured knowledge, proper knowledge management can lead to significant market advantages and revenues, and make you a thought leader, like it did for Adobe, McKinsey, and Bloomberg.

So how do you create a knowledge management strategy? The authors suggest that you start by mapping your knowledge assets against a codification/diffusion grid that separates them into core compentencies, patents & copyrights, industry wide principles, and industry conventional wisdom, using the process described in this post on “are you wasting money”. Each type of asset requires a different strategy where protection and revenue generation are concerned.

In the end, legally owning your knowledge pays off only if you’re cash-rich enough to monitor and enforce the IPR. For most organizations, what ultimately drives performance is the organization’s possession of deep, tacit knowledge and its ability to identify, construct, and exploit knowledge networks using that knowledge to generate continual revenue streams.

Disadvantages of Home Country Sourcing

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.)

I’m afraid it was a Republican who used the line “There you go again” in a US Presidential debate. But … there you go again.

I have a few specific comments on the doctor‘s article on the advantages of home country sourcing:

  • Lower freight costs:
    Often true. However, consider that the distance from nearly all of Mexico (except the Zihuatenejo area) to Chicago is less than the distance from San Francisco to Chicago. And Shanghai is closer to San Francisco than Rio is.
  • Air freight is too expensive except for electronics:
    Often true. However you should do your own risk analysis. If you are considering ocean freight, also get an air freight quote. See what percent of the volume would have to go by air before the lowest cost supplier is no longer lowest cost. I’ve seen analyses showing more than 100 percent would have to ship by air.
    Incidentally, this is the basis of risk analysis during the sourcing phase. Find the lowest landed cost supplier and then evaluate several risks to see how much would have to go wrong before the lowest cost supplier is no longer the lowest cost. Consider if the same thing would happen with the second lowest cost supplier. If possible, assign costs to risk-mitigation techniques.
  • Fuel Prices increasing:
    True. That will raise costs for all forms of transit. It will be a smaller increase for ocean freight than it would be for air or truck.
  • Lower inventory Times:
    Having to hold safety stock is a risk mitigation technique. Do a risk analysis and see how much safety stock you would have to hold to make sourcing from the lowest cost supplier the wrong decision.
  • Time Zone Advantages:
    That’s right, unless you are in about the same time zone. It is tiring to make and receive those phone calls at odd hours. On the other hand, during development, there are advantages to having a supplier working during your night shift.
  • Labor productivity:
    Possibly true. The US has the world’s highest labor productivity. However, it might not apply to your product. And labor productivity isn’t the only factor affecting cost. Purchasing skills at the suppliers is another.
  • No Culture Clashes:
    That’s just silly. Try telling your boss that you can’t source from country X because you can’t deal with cultural differences. In most companies, proclaiming ignorance isn’t the road to success unless you state it as part of a training request. It’s a bit self-serving for me to suggest this but there are international purchasing training programs available. Good ones will help you understand the differences between domestic and international purchasing. Cross cultural skill is one of the most important.
  • Low cost factory repair:
    It might well be true that it’s cheaper to repair product at the manufacturer. That’s of course true for domestic suppliers too. But wouldn’t you require the supplier to cover transportation costs for returned goods? And why are you buying from a supplier from whom you expect failures?

It’s the easiest thing in the world to raise objections to buying outside of your home country. Unless you make that decision on a product by product basis based on facts and unless you separate costs from risks, you aren’t doing your job right. At the very least, any professional buyer should know the costs of products, shipping, and duties from major potentially supplying countries.

Dick Locke, Global Procurement Group and Global Supply Training.