Category Archives: rants

Free Market? What Free Market?

In the developed world, we supposedly have a free market, defined as a market structure in which the distribution and costs of goods and services, wage rates, interest rates — along with the structure and hierarchy between capital and consumer goods — are coordinated by supply and demand unhindered by external regulation or control by government or monopolies. (Dictionary.com) However, every time you turn around these days, governments are imposing new policies to restrict free trade (which allows for a free market on a global scale) or failing to abolish old policies that allow monopolies to persist in this day and age.

For instance, after taking steps to bust up the telco monopolies, the U.S. has now made it illegal to unlock your cellphone. (Read the full decision if you like.) In other words, instead of being forced to use one monopoly, you now get to choose between six mini-monopolies. (Now, it’s true that the FCC will investigate the U.S. mobile phone unlocking ban, but it’s no guarantee they will reverse the decision.) The absurdity of this cannot be put into words. (Imagine if you had to buy your TV through the cable company and you couldn’t use the TV again if you switched cable providers. Does this make sense? Basically, the law is saying a telco carrier gets to choose how you use YOUR phone.)

But this isn’t what I’m ranting about today, as this is a Supply Management blog after all. My rant today is about the fact that it’s 2013 and we are still subject to captive shipping in the railroad and inland barge industries because there is no mandated reciprocal switching (in the United States). So, not only are you forced to use the carrier that owns the line your port/warehouse/etc. is located on, but you cannot ship to a destination if that carrier does not service it. Not only does this increase shipping rates by an average of 20% by some accounts, but it forces many shippers to use long-haul trucking way more than they would otherwise need to.

The fact that captive shipping has not been eliminated is costing the U.S. economy billions of dollars each year. As per a recent report issued by the National Industrial Transportation League (NITL), and summarized in “shipper group says reciprocal switching proposal could save rail users up to 1.2 billion a year” over on DC Velocity, the introduction of new switching rules that would allow for limited reciprocal switching between the nation’s four major railroads could save rail customers up to 1.2 Billion a year. Simply allowing a (truly) captive shipper or receiver to gain access to a second rail carrier if the customer’s facility is located within a 30-mile radius of an interchange where regular switching occurs would shave up to 1.2 Billion off of shipping costs according to the accepted Revenue Shortfall Allocation Method (RSAM) formula. (So imagine how much could be saved if reciprocal shipping was mandated across the board or more freight shipped rail instead of truck!)

The Surface Transportation Board (STB) could use the powers granted to it under the Staggers Rail Act of 1980 and order the railroads to create reciprocal switching agreements between each other to eliminate captive shippers, but since they’ve had thirty three years to do this, and have made zero progress, it’s not likely to happen. So we’re going to have a monopoly until, as the DC Velocity article notes, angry shippers descend on Capitol Hill and demand that Congress update the Staggers Rail Act to include mandatory reciprocal switching. Maybe then we’ll finally have a free market on the rails two-hundred and fifty years after the first railroad* (Montresor’s Tramway) was built in the US.

* Note that the first railway in North America, drawn by horses, was not built in New York, but in Nova Scotia forty-four years earlier to support the construction fo the Fortress of Louisbourg in Cape Breton! (Source: Nova Scotia Railways)

WOW! Finally a Decent Piece on Higher Education!

A recent press release over on Brookings.edu that summarizes a recent paper by Robert D. Atkinson and Stephen Ezell, who are calling on Congress to “Support the Designation of 20 ‘U.S. Manufacturing Universities”, is a breath of fresh air where the debate on (higher) education is concerned.

Despite what some academics might think, including Mr. McAfee who published this unbelievable post on the HBR blog site calling for us to “stop requiring college degrees” when every single job that doesn’t involve serving food is going more high tech every day, we need more college education, not less. The problems we have are a) it costs too damn much (which should not be the case because an educated society is a productive and innovative society, and if anything is going to be subsidized, it should be education) and b) we are giving too many people the wrong education. As those who follow me on Twitter will know (as I try to avoid the crushing weight of the fail whale), I do not lament the fact that “Liberal Arts Colleges are Disappearing”. How many English literature and classics PhDs do we need anyway? (The answer is not that many.) As long as we save the historians, so we don’t repeat the mistakes of the (recent) past, it wouldn’t hurt to have the number of literature and the philosawfical majors approaching extinction levels compared to the counts for science and engineering majors. (I’m not saying we shouldn’t study these disciplines, as we all should study them to a degree, but graduating tens of thousands of students when there are only so many teaching jobs opening every year is just a waste of money and potential all around.)

We need people focussed on science and technology and other pursuits that benefit the economy and them, especially where jobs are concerned. And to this point, after a decent grounding in the basic theory has been conveyed, we need programs with a strange focus on the practical. Even in Engineering, we only need so many designers — after that, we need manufacturers and maintainers. We need people with a grounding in the practical. Now, I know the academic among you will argue that university is about improving the mind and increasing the mental potential of the individual, the real world be damned, but lets face the fact that, right now, for the most part, we have no trade schools, we have no apprenticeships, and we have, in many industries, no other way of identifying someone who is likely to be intelligent and educated enough to do a job. The College / University degree is the passport to a job in today’s world, and its about time we had programs that were appropriate.

So the suggestion by Atkinson and Ezell that Congress should establish an initiative to designate 20 institutions of higher education as “U.S. Manufacturing Universities” as part of a needed push to strengthen the position of the United States in the increasingly innovation-driven global economy is one of the best, and most logical, suggestions I’ve seen in a long time. And since we are not going to return to the way of apprenticeship (which is the answer), let’s finally create the outputs that industry wants from Colleges and Universities. This doesn’t mean that all programs have to be practical, just that there should be practical options where they are needed and required by today’s society. It just makes sense. (So, as you all know, you can bet that Congress won’t do it. Especially since this would mean raising taxes to beyond the point necessary to prevent the budget reductions that are coming into effect that could cost America up to 1 Million jobs because the Republicans refuse to allow the rich to pay their fare share of taxes. But still, it’s nice to know that somewhere there are still some level, practical heads.)

Don’t Take Late Payments Lying Down

As pointed out repeatedly by Pete Loughlin over on Purchasing Insight (and in this recent post on “social media the new weapon to combat late payment”) and SI (including this recent Blue Friday post), big customers are trying to push payment terms to ridiculous extremes and, frankly, hoping their suppliers will bend over and take it without any resistance. But just because it’s their fantasy, it doesn’t mean it should be your reality. You have to stand up for yourself and help bring this foolishness to an end.

How do you do it? A recent article over on CFO.com on what to do “when your big customer wants to pay late” had some great advice. Summarizing, and extending, it, we can see that you should:

  • Know Your Worth
    Chances are that you are providing a unique value and you should not be afraid to make it clear. And if it’s really unique, your customer doesn’t have (very m)any options besides you.
  • Understand the Relationship
    Has it been a long term relationship? A good relationship? Have you been paid on time regularly in the past? Have you been providing value over and above committed levels? If the relationship has been good, if you were contracted to provide a product but have also been providing free value-add consulting, if you were always paid on time for always delivering on time and maintained a good relationship, point that out.
  • Create Flexible Payment Strategies
    This doesn’t (necessarily) mean early payment discounts, but it could include such for (really) fast payments. Consider multiple (milestone-based) billings that the customer can digest over time, rather than one big bill at the end (within reason).
  • Avoid the Procrastinating Accounts Payable (AP) Department
    They are the boneheads that still believe extending DPO is a good thing (even though a recent Hackett study demonstrated that playing this game actually costs them an extra 10% in the end). Deal with Procurement and/or the buying organization who have a better chance of understanding that delaying payments unnecessarily only hurts everyone in the long run.
  • Suggest Financing
    where the customer enters into a relationship with a bank who pays you right away, at a small discount, and then the customer pays the bank on their schedule, for a fee. Done right, it’s better (for you) than an early payment discount as its an immediate payment.

and if all that doesn’t work, do what Pete suggests:

  • Name and Shame Them Publicly
    Be civil and respectful, but don’t be afraid to let the world know, in no uncertain terms, that they are either being deliberately cruel or incompetent.

SI likes Pete’s suggestion best, but agrees that you should try the more professional methods listed in the CFO article first. But if they don’t work …

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.