Monthly Archives: April 2012

Why Gas Prices Are Too Damn High!

OnlineBachelorDegreePrograms.com recently created an interesting infographic that, after breaking down the cost, demonstrated that the underlying reason was global instability and how it affects the price of crude oil which accounts for about 75.5% of the cost of gas in the US. The second biggest cost component was, expectedly, taxes, which account for about 12.25%. A reduction in taxes would help, but even if taxes were chopped in half, you’d still only save $2.44 on a 10-gallon fill-up.

The problem in the US is that Wall Street has changed the formula in the U.S. for pricing gasoline. Until last April, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma which hosts the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude which, today, happens to trade at a premium to U.S. oil by around $20 a barrel. Good for the US oil exporters adding Billions to their bottom lines, but bad for the average U.S. consumer. (Remember, just because a company drills in the U.S. doesn’t mean it has to sell in the U.S. So if you’re a protectionist, maybe you should be fighting for more wildlife preservations. It’s not like you’re going to get cheaper gas anytime soon.) [For more information, see this Fortune article on “If the U.S. is now an oil exporter, why $4 gas?”]

So, unless OPEC decides to try and regulate prices, or the US produces more oil and passes laws mandating that such oil is kept it on its own soil for domestic use and reduces the cost of acquisition for domestic use (possibly by legislating how oil is to be priced in the U.S.), it looks like gas prices are going to be too damn high for a while.

Click the image below to see the full graphic.



Created by: Online Bachelor Degree Programs (.com)

EQ does not matter more than IQ — Nice to see not everyone is getting caught up in the hype!

EQ, short for Emotional Quotient and also known as EI, short for Emotional Intelligence, and the next resurgent craze in talent management, is very important in Supply Management given the regularity with which supply management professionals need to interact with suppliers and peers around the globe, the number of disruptions that occur on a semi-annual basis, and the intra- and inter-organizational conflicts they will be regularly called in to resolve. After all, people with high EI have more empathy, tend to stay calm under pressure, and have a knack for effectively solving conflict.

But, despite what Daniel Goleman may have claimed back in 1995 (when he authored a book titled Emotional Intelligence: Why it can matter more than IQ), it does not matter more than IQ. As Zoe Lewis, a director at Harvard Lewis, notes in this piece in CPO Agenda on how “clever is no longer enough”, EI must complement IQ. EI and IQ have equal value and it’s equally important for leaders to have a high IQ because in that position they need to be able to make certain decision. You can be the most motivated, empathic, and socially adept individual in the world, but if you don’t understand a balance sheet, ROI, or even the basics of a production line, there is no way you are going to effectively lead a manufacturing organization — or even make any important decision in its day to day management.

In Supply Management, IQ is just as important as it is in senior leadership. In order to be successful today, a Supply Management professional has to be a master of transition and technology — that includes Spend Analysis, Decision Optimization, and Predictive Analytic Demand Planning Solutions. That requires some serious IQ to understand not only how to use the tools, but what patterns to look for, what models to build, and what statistical and interpolative techniques are appropriate for the categories and commodities being sourced. You can be the most emotionally intelligent man, or woman, in the world and be perfect company for Jonathan Goldsmith, but if you don’t understand how to navigate a spend cube, breakdown costs into raw components acceptable to an optimization solution that uses a piecewise linear mixed integer programming model, or understand the difference between statistical interpolation and comparative pattern matching, well, let’s just say that there’s hundreds of thousands in technology purchases and licenses down the drain.

Of course, it is EQ that makes the difference between a good buyer and a great buyer as the dynamics of the position will continue to change much more along the way of relationship management. This is primarily because the need to reduce costs today is as dire as it ever was and traditional methods of working with suppliers and stakeholders only achieve 3% to 4% improvement a year — not the 30% to 40% improvement targets now placed on some buyers. Even spend analysis and decision optimization, the only two technologies in supply management proven to deliver year-over-year returns in the double digits (at 11% and 12% respectively), will not come close to these targets. Only collaborative sourcing techniques that utilize these technologies as part of joint efforts with suppliers to identify opportunities for significant cost reductions (which take major EQ as well as IQ to pull off) have a chance of delivering those returns.

And the good thing about EQ is that, unlike IQ, it can be improved over time. While you generally realize your IQ potential early on in your life, with effort, your EQ can keep increasing. Even if you start of with no social skills and are outcast like a Napoleon Dynamite, if your IQ is smart enough, you can still become a James Bond, or at least an Alastair Donald, who is a secret agent of business improvement. Once you develop self awareness, self-regulation, social skills, and eventually empathy can follow if your motivation, and patience, is strong enough. You can take self-assessments, courses, or get a mentor. It may not happen over night, but you can get there.

And you can get there faster if your organization makes the move from a training organization, where lessons are forgotten as soon as the next fad is brought in by senior management, to a learning organization where best-in-class methodologies, that are really only best-in-class for your competitor, are not force-fed from the top but developed bottom-up by motivated, engaged employees who want to make the organization a better place to work and share what they learn. That’s the foundation for true EQ in an organization.

Has the Best been Bought from Best Buy?

StorefrontBacktalk recently ran a couple of pieces on Best Buy that followed up their recent pieces on “Best Buy’s Black Friday Fiasco” and “Best Buy’s Wifi Porn”, which was expanded upon by SI in its recent posts on how if you wanted a best buy experience, you weren’t going to get it at Best Buy (Part I and Part II). In its first piece on “Best Buy’s Last Hope”, the author says that Best Buy has one shot — an expensive, painful, highly disruptive shot — to truly turn itself around. It must embrace customer service in-sore to an extent that would make Nordstrom, Trader Joe’s and Whole Foods blush. That means store associates who are true experts in the electronics they are selling.

Frankly, I don’t think this is going to happen. The mentality would have to change from “who will work for us for minimum wage and pretend they know enough about this product to actually sell it” to “where can we find someone who knows what they are talking about, is passionate about the products they sell, and will actually work for us as a sales rep” and “what is it going to take to get that kind of people”. Right now, the type of service I’m used to is “this isn’t my department, you’ll have to find someone that is working in this department” to queries as simple as “can you tell me if you still have any of this product in stock” (which any associate can do simply by logging into one of their terminals and doing a query) or, my favourite, in response to “I’d like that” (pointing to something in a cage). Get the key, open the damn cage, give it to me and/or walk it to the cashier. An untrained monkey could do it! (And monkeys are smarter than you think. Pete the Monkey taught himself to do dishes.)

Plus, as the author notes, they would probably have to fire most of their staff and replace them with Apple-store caliber employees. And any employee of that caliber is probably going to go work for Apple or, if they prefer Windows, Sony where knowledgeable associates are preferred.

After all, as the author notes, they currently think they can win a price war with Amazon. A company with massively deep pockets, minimal physical overhead (compared to a retail store chain), and a willingness to go eight years without turning a profit just to conquer a market. Winning a price war against Amazon in the electronics space is not going to happen. Amazon can, and will, win on margin every time if that’s what it takes to be the next major electronics retailer and put Best Buy and its competitors out of business. (And it won’t be hard when it’s customer service reps often give better service over the phone than Best Buy associates in store!)

The other piece that got my attention was that “Best Buy Planned Outages Due to Its Move to the Cloud”. If you believe the hype (and the doctor does not), the whole point of moving to the cloud is so that you don’t have outages. But the most ironic aspect to this story is that Best Buy is cutting Amazon a check for its cloud efforts. They might as well just sell to Amazon.com now and become Amazon’s mobile presence. One little glitch and a propagated purge command and — voila! — no more Best Buy online. (Not that it would make a huge difference anyway. What good is a web store that a growing portion of your market can only order one item from at a time anyway? [See Best Buy Experience? Not at Best Buy! Part II.] the doctor is now ordering more electronics from the local office supply depot because their web site actually works! And if you send them an e-mail, customer support actually responds! On the other hand, it seems that Best Buy’s method of dealing with problems is just to ignore them. It’s not a problem if you don’t recognize it, right?)

The nostalgic part of me would like to say that Best Buy still has a Bright Future, but, in the doctor‘s view, the only chance of Best Buy lighting up the sky is if the same thing happens to it as happened to the Buy More in the season three finale of Chuck. The way things are going, it’s going to be closing 50 stores (CNN Money, March 29, 2012) on a regular basis. And I don’t think China’s going to save it. If Best Buy truly takes off in China, there’ll likely be so many indistinguishable clones in three months that it will just be hastening its demise.

Are All of Your Supply Management Planning Processes Aligned?

A recent article over on Supply Chain Brain from JDA software on Building the Supply Chain of the Future made a great point when it noted that in any supply chain there are … core business processes that must be closely synchronized in order to enable organizational agility and market responsiveness. Unless business processes are aligned in closed-loop planning processes, the organization will be unable to sense demand shits and … balance a number of priorities, including costs, customer service levels, supply risks, production constraints and environmental targets in its quest to achieve the best possible outcome.

The article from JDA indicated that six core planning processes must be synchronized in order to achieve agility, market responsiveness, and success. And they are right. The following six planning processes must be synchronized:

  • Sales & Operations Planning (S&OP)
    A good S&OP process provides a disciplined cadence for monitoring and synchronizing demand, production, supply, inventory, and financial plans via a rigorous Plan-Do-Check-Act process as a foundation for allowing the supply chain to share a common perspective on issues and potential resolutions.
  • Demand Planning
    Typically involves the utilization of advanced statistical and predictive modelling to ensure that sourcing, production, inventory, transportation, and distribution models are optimized on a shared forecast.
  • Inventory Planning
    Good inventory planning allows for tailored “designer” models for each category and commodity to minimize overstock, out-of-stock, and financial risks based upon key commodity and category attributes.
  • Master Planning
    That allows for S&OP, inventory, and demand-based supply plans to be analyzed and updated daily in response to demand and supply changes.
  • Factory Planning & Scheduling
    The creation of optimized production plans by plants by scheduling backward from the requirement date, with material and capacity constraints simultaneously considered for feasible plan creation.
  • Collaborative Supply Planning
    That allows manufacturers to monitor multiple tiers of the supply chain and each supplier that is supplying a raw material, component, or service necessary for the creation of each product being sourced from a tier 1 supplier and work with multiple suppliers simultaneously to identify minor hiccups before they become major issues to collaboratively resolve a problem before it becomes a major headache.

But this is not enough to ensure success in today’s fast-paced fickle global marketplace. Not only do we have extreme demand, supply, and cost volatility across materials, components, products, and markets, but we also have extreme competition on the sales side as penny pinching buyers, short on cash, are looking for the best deal possible. As a result, your organization not only has to be leaner and meaner than ever before, but it has to be more focussed on the value it can provide. As a result, your S&OP, demand, inventory, factory, master, and collaborative supply plans have to be linked to, and reinforce, your organizational strategy. As a result, each of these plans need to be aligned with organizational:

  • Strategic Planning
    which is the process of defining the organizational strategy and direction and the allocation of resources, financial and human capital, to pursue this strategy.

If these seven planning processes are aligned, your organization just might have what it takes to make it through this decade and emerge a supply management leader when the smoke clears.

Will Your e-Auction Be A Success? Or Will You End Up in Court?

 

As an April Fool’s joke, SupplyManagement.com ran a piece about how a ‘court battle looms over e-auction “error”‘ which discussed a fictional case in the UK High Court as a result of legal proceedings initiated by a Chinese business in an attempt to hold a supplier to a price submitted in an e-auction. According to the article, one independent consultant William Sommers (represented by the UK law firm Jester & Prank), said he was participating in an e-auction for project management services while working at home where he left his iPad alone for a few moments to answer the door. He claims that during that time his daughter grabbed the iPad (because she loves a bit of Angry Birds) and must have pressed something to place a bid on his behalf as he returned to the iPad to find a bid he couldn’t change. As a result, to honour the bid he would have had to offer his services for “almost nothing” for a three-month project and argues that the supplier, Hohhot Axle Industries, is being unreasonable in trying to hold him to an offer that was a “genuine mistake”.

While this article was a prank, the issue it discusses is all too real. As pointed out in this recent piece on ‘a genuine bargain or a genuine mistake’, (poorly designed) e-auction software makes it very easy for buyers to submit incorrect bids and, even worse, correct bids that the supplier might decide, after the heat of the auction is over, that it does not want to honour. What do you do when its time to sign the contract, after you’ve informed all of the other suppliers that they lost and won’t be getting your business, and the supplier tries to back out? Especially if you need the goods or services quickly?

Chances are you panic and pay more because not only were the other bids higher, but when you desperately have to scramble to find product quickly, suppliers will know they have the upper hand and won’t be as competitive as when they (believed) they had to compete for your business. You’re taking a loss. But can you recover it in court?

As the above article indicates, if one party makes an error that the other party should know is a genuine error, the offer, even if it is an implied contract, can be rendered void by the courts. In fact, if the court believes that the details or circumstances of the offer from one party are such that the other party should know that a genuine error has been made, or the council for the party can argue that the other party should have known that a genuine error has been made, that is enough to void an offer.

So what can you do to prevent this from happening? Take lots of precautions.

  1. Describe the auction process in detail.
    Describe end-to-end how the event is going to play out from the initial invitation, through the pre-event data collection and supplier qualification, to the actual auction and the final contract award. There should be no unknowns in the supplier’s mind.
  2. Define the rules and force a bidder to accept the rules.
    Describe the rules for participation, the process for bidding, and the terms and conditions associated with the contract award up-front and force the supplier to accept all of the rules, processes, and terms and conditions before they can participate in the event.
  3. Create a secure account for each individual authorized to use the system and force them to accept full responsibility for the account.
    Force each representative to assert that this is their account, they take full responsibility for it, no one else will be allowed to use it, and they take full responsibility for all offers made through the account.
  4. Use software with controls and make sure you use the controls.
    Not only should you force confirmations on bids to prevent “genuine mistakes”, but you should also put limits on how much lower a bid can be with respect to the current lowest bid (to minimize errors as a bid should not drop from 10,000 to 100, which would indicate either a decimal point error or a misunderstanding as to lot size) as well as an absolute floor that defines the minimum acceptable bid (as you should not accept a bid that you know is lower than the theoretical lowest cost based on your cost model and the maximum efficiency that is achievable).

While this may not be enough to guarantee that 100% of bids will have to be honoured, as you cannot always predict the results of a court case if an argument were to go to court, it certainly puts the odds in your favour and minimizes the chances of a supplier making a bid that the supplier would be uncomfortable in honouring (especially since you’d have a stronger case if it went to court).