Category Archives: Cost Reduction

Will Factories in a Box Revolutionize Sustainability Initiatives?

Gizmodo just ran a very interesting, and vey insightful article on how “The Next Industrial Revolution Starts in this 20-foot Shipping Container” about Re-Char and their “Shop-in-a-Box” that can perform rapid fabrication of steel parts by way of software and a CNC plasma torch. With the Shop-in-a-Box described in the article, Re-Char can produce 600 lids for Climate Kilns. This is a specialized lid-and-chimney integration that adapts a 55-gallon drum to produce the soil amendment biochar. (In Kenya, farmers burn sugarcane debris in an open field and release tons of carbon. A Climate Kiln controls the burn to produce the carbon-rich charcoal biochar that, mixed into soil, reduces the fertilizer requirements for crops by half.) This required the precision cutting of 18-gauge metal, which, in East Africa, leaves you the option of using a guy with an oxy-acetylene torch on the side of the highway or importing a full production run out of China, one full shipping container at a time. But for 30,000, Re-Char was able to produce a Shop-in-a-Box metal cutting and joining setup that could be run by two two people and produce 600 lids as a time, when needed, where needed (as the shop in a box can be moved to a new community when the needs of the current community have been fulfilled).

From a sustainability perspective, this is incredible. It’s lean, green, and completely against the routine. Actually, lean is an understatement. The power requirements are limited to what is needed to produce the lids. The energy required just to light, cool, etc. an average factory typically takes a 600 V feed … or two … or three. It’s green in that it can be powered by sustainable energy, including wind power, water power, or solar power – whatever is available. (Transformers come with the standard kit, along with generators for [natural] gas power for stability. Just add batteries and a UPS and it’s 100% green power most of the time.) And it’s completely against the routine. When the industrial revolution started, you can be that the robber barrons never predicted a moveable factory.

To date, the most (wide-spread) innovative use of containers has been data center modules, with Google a leader in this technology. (But this has been taken to the next level. For example, Green Data Center has designs for completely self-contained data center modules that you can drop anywhere. Just hook-up a power feed and an internet feed, and you’re literally good to go. (And since you can easily put a generator, or two, in a second container, you don’t even need a power feed. Just a natural gas feed, split between a couple of generators if you don’t have a sustainable power feed, for a primary feed.)

But we don’t have to stop at data centers and steel-part fabrication shops. Especially when we are talking about the developing world (which still includes much of Africa, South America, and parts of Asia). Do we really need to refine cane sugar 2,200 kgs at a time, for example? Or how about water purification? If we’re talking about a small community of a couple of hundred people, and the primary focus is clean drinking water, we don’t need to purify 100,000 liters a day! Purifying 1,000 liters would do nicely! Both processes would fit nicely in a container system. (After all, the sugar refinement process is not radically different from micro-brewing in terms of what is needed, and you could fit that nicely in a container too — although we can’t necessarily bring the same humanitarian arguments if we did.)

And when we’ve insured that everyone has the absolute necessities of clean air, clean water, and healthy food — we could ship them clothing factories in a box. It doesn’t make sense to sew shirts in sweat-shops on another continent just to ship them to small communities in Africa, or South America, or Asia, where the living wage is $2 a day or less. Considering the shipping costs alone, you couldn’t set the price at a point where you’d make many sales. Just ship a container to the town, train a few locals on the cloth-cutting production lines and find a few budding seamstresses to do the stiching, and produce the clothing where it will be sold. A zero-mile supply chain that emits zero-carbon and has zero shipping costs. And since you don’t have time-sensitive fashion industries in developing economies, you could even rotate it between a few small communities in the beginning while the consumer base and local economy built up. (Hopefully you’d also move the employees too if they were willing, as you could outfit another container as temporary living quarters without much cost or effort.)

I think the physical manifestation of the Solution-in-a-Box approach has the potential to revolutionize manufacturing, distribution, and sustainability. And it’s not like we have a shortage of containers thanks to the outsourcing craze of the last fifteen years. They’re just sitting there waiting for a good use. And with all the super-panamax ships, and super-panamax capable ports, that we have at our disposal, we can get them from any continent to any other continent with ease, in bulk, and pretty close to where we want them. And then we just need a freightliner to haul them, and there’s no shortage of those.

Robbie and the Coupa Factory

Oompa Loompa Doom-pa-dee-do
We’re still building great products for you!
Oompa Loompa Doom-pa-dah-dee
If you are wise you’ll try it for free.

What do you get when you get lots of cash?
Filling coffers and enlarging the stash?
Teams of developers coding like mad!
Making the app work on your iPad.

You’ll like the look of that!

It’s been a long time since Davie ran the Coupa Factory, and while there may have been a number of notable changes in management, one thing hasn’t changed at Coupa — and that’s the original product direction (and the heart of the development team*). Coupa’s goal is still to make the best P2P platform out there that’s so easy to use that even your grandmother and three-year old can use it and get all your spend under management (SUM).

In terms of progress since our last major review of the platform in 2009, which focussed on QuickStart, there has been a flurry of development — of a very interesting sorts. Having built one of the richest web-based P2P platforms on the market in three short years (with everything capable of being custom configured by an administrative user), Coupa made a very important realization — 90% of P2P is simple, straightforward, and limited in terms of required functionality. Find what you need, put in a requisition, get approval, cut the PO to the vendor, accept delivery, accept the invoice, queue it for verification and approval, issue the goods receipt, and make payment within the agreed upon timeframe when the invoice has been verified and the goods accepted. There’s not a lot of inventory management, logistics, payment structuring, etc. in an average corporate purchase made by an end-user outside of the Supply Management organization.

What there is, in fact, is a lot of bypassing of e-Procurement systems that make the process of getting your printer, paper, or widget for your production line more troublesome than going to the Best Buy website, the Office Depot website, or just calling up the supplier and asking for another shipment. So, if you want widespread adoption, which is the key to maximizing your SUM (Spend Under Management), you have to make it at least as easy to use as Amazon. Whether you’re using vendor catalog, punch-out, cXML, or an in-house catalog, searching, shopping, and requisitioning is seamlessly integrated. And it’s all accessible through their new Super Search Bar that seamlessly integrates Google search for what you need, Amazon browse by category, and free-form item/service search (which also allows product/service retrieval through internal or vendor product/service numbers) which can be global, by commodity, category, or vendor — depending on your configuration. Plus, their new dynamic shopping cart, which integrates accounting and budgeting data (so you know against what budget item a requisition will be charged, how much is left on the budget item, and how much will be left when the requisition is approved the minute you add an item to the cat), allows for split-billing and overrides in the cart in a process that is as easy as Amazon’s “one-click” checkout. And, policies can be linked to each item and service that allow for additional information within a search to be “popped-up” so the user can get full information (which can include budgetary and billing information) before an item is even added to the cart. Supplier taxes can be imported and validated against your own tax tables, fending off future nightmares for finance down the road. And when all is said and done, payments can be recorded and integrated with you ERP (and Coupa now supports out-of-the-box integrations with a couple of dozen major ERP and e-Procurement platforms).

Upon checkout, the system will automatically create the necessary requisitions (which will be sent to each individual who needs to approve an item in your master requisition), and, upon approval, the necessary POs for each vendor will be automatically generated and delivered — and all are easily accessible from your order history page with a single click.

The other big developments since our last major review are their Expense Management Solution, which was still in its infancy, and their new Spend Optimizer Solution, which could more accurately called a 360° Spend Visibility solution (which you can use as a starting point in spend analysis and spend optimization). Their Expense Management application is a great way to get your T&E under control (as iPhone integration allows expense reports to be automatically generated by users who simply have to take a picture of their receipt and import it into the application). They’ve taken usability to a new level with this one.

Spend Optimizer is their mega-dashboard reporting solution that is completely configurable and allows for the creation of just about any spend report you can dream up. Done right, you can have it display off-contract spend; late payments; budget overruns; high-spend categories, commodities, and vendors; and other spend hot-spots that could get you or your organization into hot-water down the road if not proactively managed by exception. It’s still a dashboard (which can be dangerous and dysfunctional), but you have the option to see green, see red, or see where the black holes are. It’s this last capability that makes the real difference between useless reporting tool and powerful spend miner, because, generally speaking, off-contract is where the trouble starts.

And brand-spanking new functionality is lined-up for fourth quarter. Their recent announcement that 9.635 Billion has passed through their platform is impressive, but when they pull off their next round of application development, that will be more so. Coupa is still a company to watch, so don’t take your eyes off them for too long.

Oompa Loompa Doom-pa-dee-do
They’re still building great products for you!
Oompa Loompa Doom-pa-dee-dar
They have the goal to take your spend far.

* Dave and Noah may be gone, but David Williams is still there as VP Technology, overseeing day to day development.

Finally, Someone Else Who Gets A Key Point of Working Capital Management!

Regular readers will know that SI has been ranting about all the hype-talk about Working Capital Management for years, including this post where the doctor got sick of all this working capital management talk. The simple fact of the matter is that most companies don’t understand what working capital management really is and mistake screwing suppliers (whether or not it is intentional) for lowering supply chain costs. The reality is that lowering your cost today is not good working capital management if it only raises your cost of acquisition tomorrow.

That’s why it was great to see this recent post over on Purchasing Insight on “Supply Chain Leakage – Stemming the Flow of Costs”. As per the article, when you calculate the scale of costs that leak from the supply chain, it reveals astonishing waste and it’s time that businesses — suppliers and their customers — took a closer look at collaborative techniques to take out these pointless costs.

As the article says, payment terms can be a double-edged sword. While it’s good to contribute to the reduced cost of working capital by extending payment terms, this doesn’t always support healthy supplier relationships and it can put an inordinate strain on the finances of the supplier, which is in the interests of neither party. If your cost of capital is 1%, and your supplier’s cost of capital is 10% or 20%, you’re just increasing your costs by 10% to 20% by paying late to save a paltry 1% or 2% cost on a short-term loan. The numbers just don’t add up.

True savings propagate through the supply chain. They are not limited to your organization.

Good Tips on Strategic Cost Management from the eSide

That’s right. “The eSide”. Not necessarily where you would expect them if you’re old school and always flipping to the b-Side, but that’s the beauty of high-tech. Even though the goal of Supply Management should be to increase value to the organization, the reality is that the C-suite in most organizations, big or small, global or local are still focussed on maintaining — or, preferably, reducing — the costs for procured goods and services. Plus, quick wins in these categories give the organization more leverage to take-on bigger, value-focussed, projects.

However, as the article notes, before you start, it’s worth noting that there’s a discernible difference between price reduction and cost reduction. Cost reduction is typically sustainable over the long term, while price reduction is often a short-term commercial concession, which is then typically reversed later when the power balance in the buyer/supplier dynamic changes. And, most importantly, managing cost with suppliers who can often considerably help with cost savings is complex and requires a lot of effort.

However, costs are controlled by drivers, and suppliers often have a better understanding of these drivers than your organization does, especially since your organization is typically buying components from these suppliers that are buying raw materials that are the primary components of your cost. And even if the supplier provides a cost breakdown that underpins the price structure, it can be very difficult to understand what the information is telling you. You need a cost model that allows you to provide repeatable analytic capability that lets you understand what the information is telling you and whether costs are going up or down or staying flat. And, as you know, this will require working with knowledgeable colleagues in other functions such as finance and engineering, and the best candidates for the latter will often be in your supplier’s organization. Plus, suppliers will often bring new and innovative ways of reducing cost to the table that might not have been considered previously. Especially if you explore looser specifications with suppliers to broaden the opportunity for cost reduction through innovation and generation of alternative solutions. Remembering that for manufactured products in particular, the majority of suppliers’ costs are incurred at their factories, the suppliers will often have the best ideas for cost reduction — which might come in the form of an alternative (easier to manufacture) design, different raw materials, or even a different manufacturing process.

Suppliers are your allies, not your enemies, and collaborative efforts, focussed on profit sharing, can be the best way to control cost for the long term.

Is Co-opetition a Good Thing for Your Supply Chain?

Not too long ago, the ISM ran a cover story on “Collaborating with the Competition”. In this article, they addressed horizontal collaboration, which is the sharing of supply chain assets for mutual benefits, and which is becoming common among some manufacturing groups. This typically occurs between companies in the same industry that, while not direct competitors, market and sell to similar customers and consumers. As an example, if one manufacturer made HDTVs and another made Blu Ray players, which do require similar raw materials and even chipsets for encoding and decoding, they could cooperate in sourcing because, while they are selling to the same consumer, they are not selling the same product. However, this is now occurring between companies that, at least in some product categories, often directly compete with each other. The case of Hershey Co. and the Ferraro Group, as pointed out in the article, is one example. “Higher-end” hershey bars and “lower-end” Ferraro chocolates are in the same price category and target the exact same consumer that will likely only buy one of these products during a trip to the store. This is an example of co-opetition in the supply chain.

According to the “North American Horizontal Collaboration in the Supply Chain Report”, published by EyeForTransport, while still in its early stages, the benefits [of horizontal collaboration] are clearly recognized and there are companies already optimizing their supply chains with this cutting-edge strategy. This is especially true if the collaboration is deep, and extends into sharing warehousing, distribution and even manufacturing capabilities. And of course, the collaboration is going to achieve efficiencies and savings beyond what either company can achieve on its own if you collaboratively optimize everything, as the article recommends. [This echos what the doctor has been saying for years. No other technology or process delivers the returns that optimization delivers, and the maximum effectiveness is always in a collaborative application.] But the real question is, what is the value that is going to be delivered? When you optimize everything within your organization, you maximize the value to your bottom line. But this isn’t necessarily the case when you optimize a joint supply chain.

Why? To understand the rationale, we need to take a step back to the predecessor of horizontal collaboration — the Group Purchasing Organization. The idea behind the group purchasing organization was that if a bunch of companies came together and pooled their total purchasing volume, they could get a better deal from a single supplier than each could on their own. (In simple terms, they are the enterprise version of today’s consumer GroupOn or TeamBuy.) This was true for each company if they all had volume requirements in the same order of magnitude and there was enough companies in the group to take the volume to the next order of magnitude (which, in manufacturing terms, is defined based on the throughput of a production run and the threshold at which manufacturing the product becomes cheaper). If one company had an order of magnitude more demand than the others in the GPO, then the reality is that it could get just as good of a deal if it had a good negotiator, and if a company had an order of magnitude less demand, then it was getting a way better deal than everyone else.

In addition, a deal is only a better deal if it doesn’t help a competitor more than it helps you. So if the GPO contained direct competitors, typically it was only used for buying indirect or non-essential products or services (like office suppliers, maintenance parts, and temporary labour services), and never for components or raw materials used in direct manufacturing. So the organization never saw the full value of what a GPO could deliver unless it joined a smaller GPO that prohibited direct competitors from belonging to the GPO. And then it still didn’t get the best possible deals across the board because smaller GPOs generally had smaller volumes, especially since not all companies were buying the same products or services, or they were not all ready to buy the same categories at the same time.

Co-opetition is taking the concept of a GPO to the next level. It’s essentially saying “why stop at products and basic services when you can also collaborate on warehousing, transportation, and manufacturing asset purchases and take GPOs to the next level”. And while this sounds good in theory, the reality is that you can really only collaborate this deeply with an organization in the same space as you making similar products, and maximum benefit (from an optimization viewpoint) will only be achieved when they are making the same category of products. And if the other companies are making the same categories of products, even if they are not directly competing (like tablets and laptops), they are probably close enough that they are vying for the same consumer dollars (as many consumers have limited disposable income these days), and if the products are that close, and your competitor ends up getting more efficiency gains then you, with the indirect knowledge of your products that they are going to acquire, what’s to stop them from creating a product that directly competes with yours, at a lower production price, using the supply chain you helped them build?

And yes, there are always legal precautions you can take, but first of all, you have to think of every eventuality and then, if the competitor is determined, be prepared for a lengthy, and costly, court case. In other words, the greater the savings are for you, the greater the value your competitor is likely to see. Is it worth it? the doctor doesn’t have the answer, but thinks it is very important that you ask the question!