Author Archives: thedoctor

All Your Peers Are Chasing a Lost Cause — Are You? Part II

In our last post we pointed out that the number one supply management priority in the average organization is the lost cause of cost reduction. This is exemplified in many recent studies and reports, including eyefortransport’s recent “Global Chief Supply Chain Officer Strategy – European Focus” report which has it as the number one priority. But this is a lost cause because inflation is back with a vengeance, food reserves are at fifty — or one hundred — year lows, critical raw materials are in very short supply, and, as pointed out in Supply Chain Insight’s recent report on “Supply Chain Metrics that Matter: Driving Reliability in Margins” report, between 2000 and 2011, 75% of companies in process industries lost ground on margins! In other words, even the mighty are falling — year over year.

For the foreseeable future (and most likely the rest of your supply management career), costs are going up. There’s nothing you can do about it. The best you can do is control the cost increases, and make sure you do it better than your peers. SI truly believes that this will be the difference between your company staying in business and your company filing for bankruptcy.

And you will do this not by focussing on cost, but on cost drivers. What are the main components of the cost? How much does each component contribute to the cost? How much does an increase on a core component increase the overall cost? Where is the greatest opportunity to reign in cost increases through process improvements, requirement reductions (for unnecessary services or needlessly expensive materials)? Where is the greatest risk of a cost increase? What can be done to prevent it? What should be done to prevent it?

This requires your organization to acquire the following competencies:

  • Cost Modelling
    The first thing you need to do is accurately model the cost components — including raw materials, labour, energy, and services.
  • What-if Analysis
    Understand how costs will change if each component increases, decreases, or maintains stability in line with (global) inflation. Be able to model the estimated impact of product, process, or service initiatives on overall costs.
  • Optimization
    The only true way to minimize cost increases and keep costs in check is strategic sourcing decision optimization, because the only true way to minimize costs is to minimize them holistically. Reducing unit costs is pointless if logistics costs double. Reducing labour costs is pointless if quality declines and return and warranty costs triple. Only strategic sourcing decision optimization allows you to see the whole picture and minimize costs across the board.
  • Real-Time Visibility
    You can no longer get away with NOT having real-time visibility into your supply chain, which should go beyond knowing when your order was shipped by your first tier supplier. At the very least, you should have visibility into your suppliers’ suppliers across the board and you should have visibility into any third-tier suppliers who supply critical or scarce raw materials.
  • NPD with the Goal in Mind
    In their “Supply Chain Metrics that Matter: Driving Reliability in Margins” report, Supply Chain Insights shared a great insight — most supply chains are based on functional excellence based on inside-out thinking. Companies are not clear on supply chain strategy and the delineation of the financial metrics that matter. When designing a new product, the goal is not to make the coolest (or most desirable) product, the lowest cost product, or the product you think you can charge the most for. The goal is to make the product that the organization will generate the most profit from — which is a function of margin and profit (and, specifically, the multiple thereof).

So acquire these competencies, and maybe you can stop chasing the lost cause of cost reduction and start focussing on the achievable goal of cost control.

All Your Peers Are Chasing a Lost Cause — Are You? Part I

While I believe that the average company is still chasing the cost reduction myth (as highlighted in eyefortransport’s recent “Global Chief Supply Chain Officer Strategy – European Focus” report, for example), I am having a very hard time understanding why. As SI has pointed out a number of times over the past couple of years (including in it’s recent piece on the Top Ten Things To Do in 2013 To Control Costs), for any organization that has been pursuing any form of supply management over the past five years or so, cost reduction is a fantasy that’s not going to happen within your tenure. Inflation is back with a vengeance — it will be decades, if ever, before we see a return to the 1% inflation rate we enjoyed in the noughts. Global food reserves are at fifty, and in some cases, one hundred, year lows — and the past couple of years have seen riots in the first world over the cost of basic staples (like wheat and rice). And with rapidly increasing global demand, certain raw materials are scarcer than they’ve ever been. In other words, cost reduction is a pipe dream.

Moreover, recent research by Supply Chain Insights LLC (recently released in “Supply Chain Metrics that Matter: Driving Reliability in Margins”) has demonstrated that, for the average company, cost reduction never happened anyway. That’s right! You might have saved millions in those auctions when you had the power, or taken millions out of your distribution chain with optimization, but cost increases across the board ate up those savings in other areas. The researchers found that through analysis of publicly available balance sheet and income statement data [from 2000 through 2011], we find that 75% of companies in process industries lost ground on margins and only 5% of companies improved their positions on the number of days of inventory! In other words, despite all their supply management efforts, relatively speaking, their costs went up.

This isn’t to say that you shouldn’t be focussing on supply management or cost control, with rising, and increasingly volatile, raw material and commodity prices, supply unpredictability, demand unpredictability, and the rate of supply chain disruptions increasing super linearly, cost containment is a must. But thinking you’re going to reduce costs in this economic climate is foolish. The best you will do is control them — and that will be the difference, for many companies, between staying in business and filing for bankruptcy. Literally.

What you need to be focussing on is not cost, but cost drivers and how you are going to maintain visibility into those drivers to help you figure out where costs can be best contained, when your organization will likely have the greatest (or least) advantage in a negotiation, and how much cost certainty is worth. For example, is it worth locking in a one year contract when prices are volatile and possibly higher than the projected prices due to a recent disaster that reduced supply? They could go up if demand increases, but if another source of supply appears in six months, or the backlog of orders is cleared, they could return to pre-disruption levels (which will still be higher than last year).

So how do you do this? We’ll discuss it in part two.

Mexico’s Education System Improves Overnight!

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 archived for your perpetual enjoyment.)

I believe that one of China’s long term advantages over Mexico has been that the Chinese are more serious about education. Education in Mexico has not been as high of a priority in policy as it has been in China.

Yesterday, the extremely powerful head of the Mexican teachers union was arrested for corruption. It was a little matter of allegedly siphoning off 200 million USD for her personal benefit and sometimes for the benefit of high ranking union officials. They didn’t mention that teachers sometimes have to buy their jobs from the union.

Details in the: Idaho Statesman (“mexico arrests elba esther gordillo”)
and in the: New York Times (“ap lt mexico union leader”)

Thanks, Dick! (Global Supply Training)

You Need to Get a Handle on Your Global Trade Risks – FAST!

Because, if you don’t, in three months, one in every five shipments you make is going to result in a large fine! By the end of May, the United States Customs and Border Protection (CBP) is expected to issue a proposed rule that would make various changes to increase the accuracy and reliability of the advance information submitted under the Importer Security Filing (ISF or 10+2). No big deal, right? Wrong! It is further expected that the final ISF rule will follow later this year and that the CBP will, upon release of the new rule, begin to enforce (the full extent of) the penalties associated with the ISF.

This is a major risk for most organizations as the most recent statistic that is publicly available where 10+2 compliance is concerned is a compliance rate of 80%. In other words, 20% of shipments are not compliant! It’s hard to say why. It could be because, up until now, the CBP has not issued much (if anything) in the way of penalties for violations and failures, and many importers, (customers) brokers, and forwarders are taking advantage of the situation and not doing anything to improve their processes and procedures when they (regularly) make late and inaccurate filings. And if this is the case, this is a dangerous game — for you!

We have to remember that the CBP has the right to enforce a minimum fine of $5,000 for EACH 10+2 violation. If you do a lot of importing, this will add up fast if you are in violation with every fifth shipment. Even if you only did 10 inbound shipments a month, you could expect to lose at least 120K a year to fines! And that’s (significantly) more* than what an average mid-size organization can expect to pay for an annual license to a basic SaaS e-Trade Document management system these days. So they should get one, and begin to get a grip on their global trade risks, fast, before they burn money needlessly.

* A good (end-to-end) global trade management system will still run you six figures, but it goes way beyond e-Document management and provides multiple ROI in terms of process improvement, tactical man-hour reduction, global supply chain visibility, compliance monitoring, etc. (But if you’re small, or just getting started, you can start with just the e-Document management and ease your way into a bigger system.)

DropShip Commerce Brings Drop-Shipping and e-Commerce Enablement to the Distributor and Retailer Masses

On Monday, we announced that BizSlate Just Released its ERP for Mid-Sized Distributors and Retailers that gave the masses a useable, and affordable, ERP solution with exceptional supply chain support — especially where inventory and order management were concerned. With the BizSlate ERP, it’s a breeze for a retailer to order hundreds of variants of dozens of SKUs with a few mouse-clicks and keystrokes and to see inventory requirements at any point in time in the future. And this is great for inventory and storefront management, but what about the e-Store?

As more and more retailers need to turn to online sales to compete in the new marketplace where a consumer can get almost anything she wants online — and do so within two days, as the bigger retailers, following Amazon’s lead, are now packing and shipping same-day if an order is received by the cut-off time — the mid-sized and small retailers have to offer the same convenience or get pushed out of the market. Also, sometimes the only way to survive is to create a unique shopping experience for a niche market and offer all of the products, and only the products, related to that niche through a single, customized storefront. (For example, maybe the way to survive is to cater to the fantasy gaming enthusiast and provide a unified storefront for all of the relevant card games, board games, video games, RPGs, and spin-off/related novels and/or movies when the shopper might normally have to go to a local comic/game shop, book store, and online DVD store to find the items of interest.)

However, this need to both integrate (live) inventory (feeds) from dozens, and sometimes hundreds of suppliers (like Amazon) does, and then parse a customer order into separate orders for each vendor that is supplying an item to you and sending it direct to the consumer through its drop-shipping capabilities poses an integration nightmare for the average e-tailer. The reality is that every supplier will have a different database format / taxonomy and every other supplier will have a different access method. One (group of) suppliers will provide access through an FTP site that will contain inventory exports (in a multitude of raw or compressed file formats), another (group) will provide database access through a secure tunnel, the more technical will provide a web API, and the non-technical will e-mail spreadsheets. Some will use (a variation of) CSV format, some will be on an (old) version of EDI, the more techie will have an XML format, etc. Nightmare!

But this is only a quarter of the challenge. The inventory files need to be processed and the relevant data pushed to the live site, after a human has selected or verified what items need to be pushed. Then, the orders need to be pulled from the live site, parsed, and the proper data pushed back to the suppliers for (drop) shipping in the required time-frame — in the format required by the suppliers.

In other words, today’s small-and-mid-sized e-tailers need a solution that makes it trivial to get inventory manifests (if you will), process those manifest, select (groups of) product(s) for the online store, (create a schedule to) push those products to the store, define rules for parsing orders and pushing them back to the appropriate suppliers (on a schedule), create the requisite e-documention, and push the documents to the vendors and the order management systems.

This is the system that DropShip Commerce provides, and it’s the first solution that the doctor has seen that solves the round-trip mid-market problem in a manner uniquely tailored to the specific needs of retailers and their drop-shipping suppliers. And like the other modern SaaS solutions on the market, it’s slick, quick, and very easy to use. By targeting a specific, relatively unaddressed, problem for a specific vertical (consumer-oriented retail), like BizSlate, they were able to create a unique solution that is just what the average mid-sized e-Tailer needs. The DropShip Commerce solution is definitely something the average mid-size e-Tailer that sources from multiple suppliers needs to check out if they haven’t already.