Category Archives: Product Management

Commodity Structures Are Not “One Size Fits All”

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Over the last 15 years, I have had hundreds of discussions about commodity structures with CPOs. Invariably, I am asked, “What is the right commodity structure to use?” Or, “Use the UNSPSC structure. It’s an international standard, so it must be the right one.” Or, “You’ve been doing this for years, why haven’t you figured this out by now?”

Once we work with clients for a while they realize that there is no “one size fits all” commodity structure. You can leverage existing structures, but every client has to make some adjustments to any structure based on:

  • What industry they are in (and therefore the products and services they buy),
  • How their business works (how they are organized internally),
  • What vendors they use,
  • How they want to manage your spending, and
  • Past experiences on what works and doesn’t work.

Take the simple cardboard box. Let’s use the example of a 1.2 square-foot, folding box with a removable lid, used largely for the storage of old files. These get used in many different ways at different companies.

The right UNSPSC code for these boxes appears to be: 44111515 “File storage boxes or organizers”. This places this item within the following hierarchy:

  • 44 00 00 00 Office Equipment and Accessories and Supplies
    • 44 11 00 00 Office and desk accessories
      • 44 11 15 00 Organizers and accessories
        • 44 11 15 15 File storage boxes or organizers

The UNSPSC code for an item is useful but, because companies use this box differently, the general classification of the item may also be different as well as its place within the hierarchy

Type of Company Use of Box Top Level Classification
Company with office records (most companies) Storage of files General Office supplies or Records Management supplies
Office supplies company Box is bought from a converting plant and sold to customers Cost of Goods Sold – purchased items
Manufacturer Store parts in the assembly line MRO
Paper company Manufactured for customers Cost of Goods Sold
Records management / warehousing company Sold or provided to customers Cost of Goods Sold – or – Production Parts used in delivery

So even for something as simple as a cardboard box, there is no single commodity structure that is “right” for all companies. You need to think about the structure in terms of what is right for your organization. The last thing you want to hear from users is, “The data jocks in Purchasing have a commodity structure, but it’s just not right.”

Things You Should Know Before You Launch a Project That Depends on IT

A month or so ago, on a busy day, I came across this ZDNet article on the “Top 5 issues your IT staff wants to address but is afraid to tell you” that I think everyone should read — twice — before embarking on any system modernization that will require the involvement of IT. For some of you, it might be a real eye-opener!

  • There is no history of the code.
    If your current application has been in place for five or more years, it has probably evolved substantially as a result of regular vendor upgrades and in-house customizations to meet your business needs. As support needs increased, and response times took priority over change management, tracking the changes (and who was responsible for them) fell by the wayside and the process of unraveling the underlying code is now likely as challenging as building the application from scratch.
  • We don’t know exactly how many applications we have or how they all work together!
    Applications make their way into organizations through procurement overrides, departmental purchases, trials, upgrades and, of course, open source. This treasure trove of technology makes an aerial view of the infrastructure nearly impossible to create. Chances are many departments don’t even know how many applications they are using or how they all interact. I can’t remember a single instance as a technology architect or consultant where I’ve asked for “all of the applications this product interacts with” or “all of the applications your department uses” and received a complete list the first time. Sometimes it’s only in the final phases of an RFQ when I’m building a list of detailed integration requirements and I’ll ask “so, where does this data get pushed to” only to find out that there’s yet one more application that has to be added to the list!
  • We’re actively seeking a new job.
    As the article points out, the average IT turnover rate is 22%. If you’re counting on a single resource to pull a project off, you’re in trouble! Also, there is probably a lack of interest among the millennium generation to work on older technologies just as there is often a lack of interest among the old-timers, only a few years away from retirement, to learn another new-fangled language that’s probably not going to reach the critical mass necessary to still be around in five years.
  • If you can’t prove the ROI, we’re not on your side.
    Your IT staff knows that faster, stronger, cheaper are BS marketing terms. Before they commit their overworked behinds to yet another project, they want to see real benefits in terms of skills, cost savings, and time savings using before and after metrics generated by a third party on similar projects at other firms.
  • We’re not mind readers … you need to share you vision.
    Your IT people are not going to accept that this resulted from long-term planning that was designed to anticipate the next three, five, or seven years of the organization’s technology needs just because you told them it would. Remember, they are the experts in technology, not you. If you want them to share your vision, and get behind the project, you need to involve them in the strategy discussions. They can help you build the right infrastructure for your business, but only if you let them.

Why is the Perfect Order So Difficult?

Reading the latest research, you’d think that finding the Holy Grail would be easier than filling a perfect order. According to “Benchmarking the Perfect Order”, a recent study by Kate Vitasek of Supply Chain Visions and Karl Manrodt of Georgia Southern University that was commissioned by the Vendor Compliance Federation, the Perfect Order Index for 2007 was a measly 27.2%, assuming that every order was damage free (due to data unavailability for a proper estimate). Let me say it again — 27.2% at best! That means that three out of every four orders was flawed. That’s performance so bad, that it’s three times worse than the US aviation industry, the poster child for poor performance, where, on average, only one out of four flights was delayed.

After all, how hard should it be to deliver an order:

  • on-time,
  • complete,
  • damage free, and with
  • correct documentation

Think about it:

  • you know the delivery date when you agree to the order,
    and you shouldn’t be agreeing to anything you can’t deliver on
  • you know, line item by line item, what you have to deliver,
    as well as how many units are required
  • you know the fragility of your products,
    and should be packaging and handling them accordingly, and
  • you have to know the documentary requirements, especially if you’re exporting
    as failure to know can result in seized and destroyed shipments at your expense

So what’s the problem?

Well, obviously, you are!

But Why?

That’s the Billion, if not Trillion, dollar question, isn’t it? And the answer is, ultimately, that you’re not prepared for it. Why not? Although it’s hard to say in any individual case, it’s most likely because you haven’t shifted your focus from internal performance to customer delivery. In essence, you haven’t prepared for it. Instead of abondoning outdated software, processes, and metrics that focus on you for newer software, processes, and methods that focus on the customer, and allow you to get everything that really matters right, you’re still using the software, processes, and metrics that you were using 20 years ago during the quality revolution.

Let me explain.

With regards to on-time, most of you are probably still tracking “on-time” as shipped on-time with respect to whatever internal production and distribution schedule you devised. When you ship is irrelevant if the stores need it by Monday for a promotion on Tuesday that’s expected to generate tens of thousands of sales. If on-time to your system is “shipped four days before due date”, but you’re shipping by truck from Texas to Alaska, you’ve got a problem! With limitations on how many hours a driver can drive in a day and border delays, you ain’t gonna make it. You need logistics management software that understands minimum, average, and worst case delivery time requirements (by season) and you need to schedule each shipment to a different location in a large order separately.

With regards to complete, you can’t tackle it on a line-item by line-item basis, split across half a dozen shipments on two different carriers and wash your hands of it when the system says everything’s shipped. It’s only complete if it arrives complete. This means that you have to have an extensive shipment and delivery tracking system in place to insure that everything in a disaggregated order hits the checkpoints that need to be hit when they need to be hit so that part of an order doesn’t get lost. Again, just shipping it “complete” doesn’t make it “complete” if you’re breaking the order up across shipments – because then all shipments have to arrive by the designated date and time for the order to be complete. You need a web-based supply chain visibility solution that can be utilized by your partners to update progress as it happens.

With regards to damage-free, you can’t just package it in accordance with minimally acceptable padding, check a box, dust your hands, and call it a day. You have to ensure that all third parties in your distribution network that handle the product do so with the necessary care and that it passes through each checkpoint undamaged. If one of your distributors screws up and breaks something, you need to get a replacement shipment out, and maybe even expedited, before it arrives broken and useless at the customer site. Again, you need a web-based supply chain visibility solution that can record the order status as it clears each checkpoint.

With regards to correct documentation, you need to make sure that all of the documentation required by each check-point is included before it leaves your facility. These days, if you’re importing or exporting, this requires a Global Trade Management Solution, because it’s almost impossible to manage the dizzying array of requirements otherwise.

In short, unless your key metrics have been defined to be 100% customer-focussed, and you have the proper logistics management, supply chain visibility, and / or global trade solutions in place, you’re not going to be able to achieve the perfect order the majority of the time, and the perfect order will continue to be a “holy grail” when, in actuality, it should be a common occurence. The solution, like the problem, rests with you.

A Chief Executive’s Advice for Performance Improvement

In “Turnaround Time: Ways to Jump Out of a Slump”, Mark Gottfredson and Steve Schaubert wrote a remarkably perceptive article that outlined a clear and simple process for navigating your way out of a downturn:

  1. Diagnose the “Point of Departure”, or where your business went wrong
  2. Identify the “Point of Arrival”, or where your business needs to be at the end of a period of time to be successful again
  3. Define a small number of key initiatives that will sequentially get you from the “point of departure” to the “point of arrival”

Ok, maybe it’s not so simple as many business have a hard time identifying, at least internally, where they went wrong, have a harder time figuring out what will make them successful, and often have the hardest time of all identifying that sequence of innovative initiatives that will take them from here to there. However, the article does note that when businesses start to fail for performance reasons, the vast majority of the time it is because they violate one of the following four fundamental laws that, despite not being built on an economic theory, do capture, in an almost eery way, some fundamental truths of business:

  • Costs and Prices ALWAYS Decline
    It is a basic law that inflation-adjusted costs and prices in nearly every competitive industry decline over time. Raw material costs going up? Then you have to find an innovative method of production to keep costs done, or a way to make the product from an alternative, cheaper, material, or a way to make a higher quality product that carries more (perceived) intrinsic value. (Successful cell phone manufacturers live and die by the latter.)
  • Competitive Position Determines Your Options
    Leaders are always in a good position to gain more market share through investment or to raise industry standards in quality, service, and innovation. Followers are stuck with doing their best to keep up until they hit upon an aggressive innovation strategy that can move them into a leadership position.
  • Customers and Profit Pools DON’T Stand Still
    The desires of your customers will change over time, as will the amount of disposable income they have. You need to know what your most profitable customer segment is and meet their needs.
  • Simplicity gets Results
    In addition to simplifying your processes, you must also simplify your strategy, organization, breadth of product line, and, most important, usability. Apple understands this well.

The authors also give you a good working definition of “point of arrival”. Specifically, it means a set of defined, numerically specific goals that can be accomplished in just two or three years. In other words, don’t shoot for the moon if you haven’t even successfully launched a rocket into space yet. Although the goals should be bold and compelling, they must be realistic. No amount of motivational speaking will get your employees behind something they know is fundamentally impossible.

Finally, they give you some advice on how to select the right initiatives to get you there. Specifically, select ones with measurable metrics that address the following characteristics of the four laws:

  • Law 1: Costs and Prices Always Decline
    • Cost/Price Experience Curve
    • Relative Cost Position
    • Product-Line Profitability
  • Law 2: Competitive Position Determines Your Options
    • ROA/RMS
    • Market Share Trends
    • Capability Assets and Gaps
  • Law 3: Customers and Profit Pools Don’t Stand Still
    • Customer Segments and Trends
    • Customer Loyalty
    • Profit Pool Migrations
  • Law 4: Simplicity Gets Results
    • Product & Service Complexity
    • Organizational & Decision Making Complexity
    • Process Complexity

Protecting Your Brand From Counterfeiting

A few months ago in Does Trouble-Free Mean Fraud-Free, I pointed you to a recent study by Kroll that found that, in some sectors, fraud in the supply chain has increased five-fold in the last six years. Even though these numbers include fixed asset fraud, inventory fraud, distribution fraud, and return fraud, a lot of this fraud, especially in certain sectors (like pharmaceuticals and CPG) is manufacturing — and counterfeiting — fraud. This is because, as a recent Industry Week article points out, counterfeiting is one of the largest and most profitable businesses in the world.

The article quotes YottaMark, a SaaS-based innovator in security coding, who estimates the direct loss due to counterfeiting of technology products alone at over $100 Billion a year, as 1 out of every 10 technology products sold in the world is counterfeited. For example, even before the iPhone 3G was released on July 11, hundreds of iPhone counterfeits were available overseas, for less than half of Apple’s suggested retail price, as reported in the Irish Times.

So what can you do to protect your brand? The article suggests turning to a trusted partner that specializes in brand protection solutions, like YottaMark or Brady Corporation that offer a combination of overt, covert, and semi-covert technologies that uniquely identify your products.

Overt technologies, like holograms or color-shifting ink, include a clearly visible mark of authenticity on the product; covert technologies, that include hidden bar codes and images, allow the product to be authenticated by a trusted party using a specific tool or knowledge of what to look for; and semi-covert technologies blend overt and covert features into a multi-faceted security solution that can be used to instill trust in the consumer and in trusted supply chain participants.

I think the article is on to something here. Sure you could follow the lead of big corporations and create brand protection teams and do your own research into overt and covert technologies to protect your solutions, but how well are you going to do on your own when there are a number of disreputable organizations out there that dedicate all of their resources to cracking the latest security technology? Not well. In comparison, a partner company that is 100% dedicated to creating the best security and anti-counterfeiting technology possible will be years, if not decades, ahead of you and using their solutions will make your products much more secure than you could make them on their own. It’s sensible outsourcing — do what you do well, and outsource the rest to a partner that can do it better, faster, and, most importantly, more cost-effective.