Category Archives: Procurement Damnation

Organizational Damnation 59: Warehouse Management


This warehouse frightens me.
Has me tied up in knots …
   Dave Matthews Band

And if your warehouse doesn’t frighten you, obviously you haven’t taken a good look at it.

The warehouse is responsible for inventory, and inventory is very costly even when it’s well managed. Some studies of inventory (carrying) costs have estimated inventory costs to be 25% of the value of the average inventory level. Having your inventory cost you up to 25% of its value is a damnation in itself! That’s why many organizations have been migrating to JiT (Just in Time) inventory strategies. But this brings its own problems — and is another source of warehouse damnation (but we’ll get to that).

If an organization aggressively pursues a JiT inventory strategy, even a slight delay can result in a stockout which can result in production line downtime if the product was needed internally or a loss of sales if the product was for sale and needed on the shelf.

Now, besides costing a small fortune, why is the warehouse a damnation?

They control product availability.

If they take their time unloading product, temporarily misplace product, damage product, miscount product, or store it in the least efficient location, the product won’t be available when you need it.

They are the final product quality check.

If they don’t carefully check deliveries for apparent damage, don’t return defective units (and accidentally restock them), and don’t perform any quality checks they are supposed to perform on delivery, defective (or tainted) product can get in the system, get shipped to customers, and give you a black eye.

They control product delivery.

If they take their time loading product, or get behind in orders, customers won’t get their product on time and you will be blamed even if the order arrived on time.

They have a huge impact on inventory cost.

You can move to JiT and optimize inventory levels, but inventory cost is the overhead costs and the depreciation costs, and the overhead costs are the space utilized, the manpower employed, and the operational overhead. If poor planning requires 50% more manpower, on average, than is needed, that bumps up cost. If poor organization means each product retrieval or shipment takes 50% longer than it should (because the warehouse is not lean), that bumps up cost. If poor operational policies or systems means that it is heated 24 hours a day, even though only staffed 10 hours, that bumps up cost. Warehouse controls all of this, not Procurement.

Even a warehouse staff with the best of intentions can cause Procurement the worst of nightmares. It’s yet another organizational damnation that you need to deal with on a daily basis.

Societal Damnation 49: Gamification

Gamification, a noun defined as the application of typical elements of game playing to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service, as per the Oxford Dictionaries, is also a damnation that you need to contend with on a daily basis in Procurement.

Why is gamification a damnation? Especially since, as per Merriam Webster, it’s supposed to encourage participation as it is supposed to be, according to Wikipedia, enjoyable and motivating. There are a plethora of reasons, including:

Definitions Vary

There is really no standard definition of gamification. To see this, all one has to do is go to their favourite e-book store, download the five cheapest e-books on the subject (which may even be free), and read the first few pages. Some are focussed on the incorporation of traditional game elements, whether they make sense or not; others on team building, regardless if it is game-like or not; and others on getting marketing success or social media penetration at any cost.

Gamification is often rooted in RPGs or Video Games

Yes, RPGs are the classic team-building cooperation games and video games are all the rage, but not everyone likes RPGs (because they think of D&D and basement dwellers*) or video games (because they think of computer geeks and basement dwellers*), and not all RPGs and video games are the right fit for the task at hand.

Most of it is marketing or social media focussed

Which means that most of it is used by marketing and social media and directed at you by marketers to try and daze and confuse you, and does not help you do your job in any way.

Anything not marketing focussed is team building focussed

There are a number of methodologies out there for team building. Gamification provides little additional value in this regard unless you’re playing games that everyone likes that builds camaraderie.

As Procurement professionals, there’s nothing for us

When it comes to gamification, nothing has been developed for us. Nothing to help us. Nothing to teach us. And the beer game doesn’t count. It hasn’t been updated in fifty years, doesn’t capture the complexity of modern supply chains, and has over a dozen failings that need to be addressed in order to be useful. It’s primarily a logistics and inventory model that just doesn’t cut it in today’s just-in-time supply chain world.

In short you don’t know what it is, it hasn’t been used to help you, and suppliers’ marketers will be hitting you with their perverted version of it through broken social media channels on a regular basis. It’s a continual annoyance that serves as the background music of your eternal Procurement damnation.

* Stereotypes die hard.

Provider Damnation 68: Carriers

In our last, and only Provider Damnation post to date, we talked about how 3PL Firms were a damnation because in exchange for cost savings obtained by the 3PL, the organization gets IT headaches. In exchange for flexibility, the organization gets a loss of visibility. And in exchange for focus, the organization gets a complete loss of control.

At this point, carriers might have thought they got overlooked because we chose to focus in on the 3PL that wants to take over part of your business and make you as dependent on them as an addict on meth (which is one of the most physically addictive drugs ever created) and seemingly overlook them. But like an elephant, the doctor never forgets that all they do is hide yet another layer of damnation – the carriers themselves.

Thanks to the outsourcing craze that began in the 80’s, no one makes their own stuff anymore which means that they are dependent on logistics carriers to get the products to the warehouses and then again to get the product to the retail stores. And these carriers know that, to use a common expression, they got you by the balls. Now it’s true capacity isn’t always at full capacity, especially in off season, and at these times there is some negotiation room, but at peak season when the holiday rush is closing in and half (or more) of your annual sales are at stake, and they’re at peak capacity, they’re in control and they know it.

Fuel surcharges pile up. Overtime charges pile up more. And you’ll pay because if you don’t, your product won’t arrive on time, putting your sales, and profits, at risk. But this isn’t the biggest problem.

It’s bad enough that they can put you over a barrel at any time, but it’s even worse when you can’t even get your product delivered. There has been a shortage of drivers for the past decade, and it’s only getting worse. According to a recent article over on JOC.com, not only is the US truck driver shortage getting worse, the driver shortage in the US alone is now an estimated 40,000 drivers with a turnover rate of 96%. But this is just the tip of the iceberg. With so many drivers set to reach retirement age over the next 5 to 10 years, the global driver shortage could reach into the millions in the next decade.

According to a joint report just released by the U.S. Department of Education, the U.S. Department of Transportation, and the U.S. Department of Labor entitled Strengthening Skills Training and Career Pathways across the Transportation Industry, more than 2 million jobs in the trucking subsector will need to be filled within the 2012-2022 time frame and nearly half will be in the trucking sub-sector as more than half of the current truck drivers will reach retirement age by 2022!

Soon it might not be a matter of how many ridiculous overcharges and surcharges you have to pay at peak season to get your product delivered, it will be a matter of if you can even get your product delivered at all! (Let’s put it this way, unless you’re ready to embrace Uber-like delivery services, this is likely going to be a reality very soon.) Carriers have you over a barrel, and soon, from lack of good planning, they’re going to lose that barrel, leaving you stranded on a bare dirt road. The only upside is at least you’ll be in the right place to summon a crossroads demon should you choose to embrace the damnation that is coming for you.

At this point, SI has to ask, do you still doubt this is the year of damnation?

Societal Damnation #48: Worker’s Rights

Now, you’re probably wondering why this is a damnation. Worker’s rights are a good thing, and if one is ethical, there’s absolutely nothing wrong with them or respecting them. The problem is, not everyone is ethical, especially in the corporate world. One has to remember that 1% of the population are psychopaths (with enduring antisocial behaviour, diminished empathy and remorse, and disinhibited or bold behaviour), and that the top four professions that attract psychopaths are

  1. CEO
  2. Lawyer
  3. Media / Publicist / PR / Marketer
  4. Salesperson

and four of the five jobs that every company relies on. You can’t have a company without an incorporation, and laws are so convoluted in most places that you pretty much need a lawyer. Plus, once you get big, you’re gonna get sued. A company needs a leader. A company has to sell something to survive, and it has to advertise that something. The only other must is that it must keep its books and pay its taxes (Finance). In a nutshell, your company is evil. The only real question is “how evil”. Skim a bit off the top evil? Steal from sick grandmas evil? Drown the kittens evil? Or sell guns on the mass market to a guerrilla group planning a coup and a mass genocide evil? (Google knows this. Why do you think it’s motto is “don’t be evil”? It knows that, especially with the power it holds, without a constant, conscious, effort to not be evil it wouldn’t take much to fall down that slippery slope and become the most evil weapon of the most evil empire on the planet as it has access to more data than even the NSA.)

In a nutshell, regardless of the talk they talk, or the walk they walk when they are looking, these psychopaths don’t care about respecting worker’s rights beyond what is absolutely mandated under law (as they don’t want to get sued or fined as that tarnishes the brand imaged which, for most companies these days, is their biggest asset and, thus, their biggest money maker).

Now, this wouldn’t be a problem if every country had good worker’s rights laws and agencies that insured those laws were enforced, but we know that, outside of the prosperous first world nations, there is a lack of worker’s rights laws, if there are any laws at all. In some countries, it’s not uncommon for employers to force employees to work 12 hours a day, in unsafe working conditions with insufficient access to clean water, without any protective gear, under the constant fear of immediate dismissal without recourse if they don’t hit high productivity targets for wages less than what an acceptable minimum wage would be if there was one. If working conditions were good across the board, employees had access to the help and services they need, and employees were generally happy, you wouldn’t see headlines like this Headline from the Huffington Post in 2011 that said Apple Manufacturer Foxconn Makes Employees Sign ‘No Suicide’ pact, which, of course, followed headlines like Foxconn worker plunges to death at China plant, which were numerous as at least 20 employees attempted suicide in 2010 and 2011 at Foxconn, as chronicled on the Foxconn Suicides Wikipedia page.

And while we might want to pretend the companies we buy from are socially responsible and only buy from companies that are themselves socially responsible, that’s not always the case. (We shouldn’t have to enact anti-human trafficking laws in the supply chain in this day and age, but California and the UK just did because we still have to!) If the companies we bought from really were socially responsible, we wouldn’t have seen the headline that More than 100 die in garment factory fire, the deadliest in Bangladesh’s history or Death toll from Bangladesh building collapse climbs above 400 as no one would have working in these buildings to begin with if these companies were socially responsible and respected the rights of a worker to work in safe working conditions.

And making sure your suppliers respect workers rights, so you don’t get a media black eye and a tarnished brand, is not so easy. You can’t schedule an audit — they’ll clean up the plant, instruct the workers who are the most subservient on what to say, send any they don’t trust home, reduce numbers to those they have sufficient safety gear for, and even bring in a doctor for a day to show you they care about employee health. The next day, the doctor is gone, the facilities are dirty and crowded, and it’s back to business abusing employees as usual. Now, if they know you might show up for random audits, they’ll employ one or more tricks to make it look like they’re better than they are, which might include misdirection or outsourcing.  We’ll tackle misdirection first.

If the supplier is big enough and serves enough big customers, they will need multiple plants and locations. A cunning supplier subject to, or afraid of, random audits will designate one plant as the “customer” plant for *every* customer, and in that one plant they will be sure to spend extra time making sure it is clean, uncrowded, and safe. They won’t get much done in that plant, because the whole point will be to make sure it always looks good for a surprise visit. Meanwhile, their other plants will be overcrowded in squalor conditions to keep their overall cost low.

Smaller, cunning, suppliers, who can’t afford extra factories, or don’t want the headaches of having to appear responsible at all times due to the threat of constant, random audits will instead outsource the more dangerous, dirty, or workforce heavy task to a sub-supplier who they claim will meet the requirements you place on them for fair worker treatment but who, in essence, do not come anywhere close.

It’s a management nightmare with the constant risk that a bad media circus could erupt at any time.  It’s pure damnation as you will do your best but still get blamed when a scheming supplier does its worst.

Economic Damnation #6: Mega Global Corps & the continued M&A Frenzy

While the general consensus from a sourcing perspective is bigger is better as it allows for volume discounts from economies of scale, this is not always the case, as recently pointed out in our post on Economies of Anti-Scale. Sometimes it is not only the case that bigger is not better, but also that bigger takes a bigger bite out of the limited butt that you have to work with.

Let’s start by going back to two of the big examples of anti-scale in our post from a couple of weeks back: Energy and Short-Term Contingent Labour.

With respect to energy, as per our post, most energy platens still rely on coal, oil, and natural gas, and, as a result, energy costs are dependent on the somewhat unpredictable prices for these limited natural resources. And since the energy companies can always extract the maximum prices for their energy produced from these limited resources from consumers and small businesses with no negotiation power, they are not overly interested in negotiating with you unless they are not close to their maximum production potential and you will guarantee enough annual usage that it’s worth their time to even talk to you. And even then, unless you have a couple of other energy companies that are also willing to talk, they aren’t going to give you great deals. In any given area, there aren’t that many energy companies, so if a merger or acquisition happens and your options drop to 2, or 1, you are, as they say, up the creek without a paddle and your prices will go from bad to worse.

The situation is similar in contingent labour. If the resources you need are scarce, in demand, and their are only a few providers, the last thing you want is a merger or acquisition. This gives the provider all the power, and your cost is as much as any competitor is willing to pay. Don’t even bother to negotiate. Just sign the offer, thank them endlessly for even thinking of you, kiss the ring, and go on your way. The best you’re going to get is a bit of spit on the pitchfork.

If economies of anti-scale were the only thing one had to worry about when Mega-Corps entered the picture, all would be manageable, but Mega-Corps take you out of the frying pan and dump you in the lava pit when negotiation time comes and categories that were once in your favour all of a sudden shift very fast to their favour.

Buyer power depends on a number of things, but always depends on two critical market conditions being in the buyer’s favour:

  1. Supply exceeding demand.
  2. Multiple vendors competing for the business.

When a Mega-Corp swoops in and buys up one or more suppliers in a category which only had a few suppliers to start with, or multiple supplies merge into a Mega-Corp, the number of vendors competing for your business decreases, and with the smaller guys only being able to support a smaller customer base, more and more companies are forced to go the big guys, like it or not, and these big guys can essentially dictate the prices across the critical goods and services you need for your supply chain. Previously low cost electronics, CPG, MRO, and services categories in some regions can jump double digit percentages overnight and there’s nothing you can do.

But this isn’t the worth. Let’s say two suppliers merge, and one had an exclusive mega deal with your direct competitor which became null and void if that company serviced you. Guess what? Your contract is getting dropped faster than a hot potato covered in scalding oil. And your primary supply source goes up in smoke.

Besides the fact that these Corporations Will Soon Rule the World thanks to the likes of politicians like the Harperman (who makes Chicago politicians look good!), which will bring with it a new level of damnation to the entire world, they are a damnation unto themselves and generally hurt our supply chains at least as much as they help.