Category Archives: rants

Do We Have to Send CPOs to Disney for Training?

According to Steve Hall of Procurement Leaders, who was busy blogging while most people were off on summer vacation, the CPO’s challenge is to re-imagine supply chains. Traditional transformation is just not enough – you have to come up with radically different designs. You have to do for supply chains what Walt Disney Imagineering does for Disney – blending imagination and engineering in a unique way to create unique experiences with their creations.

It seems that according to Steve, rapidly escalating issues such as material shortages, commodity price volatility, increasing government regulation, and financial risk in the supply base cannot be tackled by current supply chains unless they are suitably re-imagined. I’m not sure I entirely agree.

It’s not that I disagree that CPOs will need more imagination, and more engineering skills, in the future, but we must remember that:

  • material shortages happen all the time as a result of natural disasters, unexpected spikes in demand, etc.
  • commodity prices go up and down as a result of shortages, or expected shortages, or expected surpluses
  • government regulations are never-ending – going back decades
  • financial risk has always been there – it’s just at a high-point now due to global economic instability

In short, these risks are not new. They’ve been around since trade began, we’ve had, and developed, methods to deal with them since trade began, and we’ve survived. The only difference now is that all four risk categories have simultaneously hit (near) all-time highs — and the situation is only expected to get worse. Plus, whereas shortages always disappeared in the past when production ramped up, in some categories, either due to space restrictions, climate issues, or production issues, the shortages are not going to go away any time soon. In some areas, there is only so much suitable farmland; in others, the climate is no cooperating, and others still, we can’t mine the materials as fast as we need to concern them. So, in these cases, we are going to have to engineer products to use less of these materials, or alternate materials, but this is as much of an engineering challenge as a supply chain challenge (and proof that Supply Management needs to be involved earlier in product development and closely collaborate with the rest of the organization).

In short, CPOs will need to use their imaginations more often and be more creative in their solutions when backed into tough corners, but it’s not time to throw away the time-honoured supply management toolkit just yet. We’ve faced many of these problems before (even if it has been a decade or two), and many of the solutions are still relevant.

The Price is the Price Only if You Pay the Price

Over at Next Level Purchasing, Charles recently published a good article on How Suppliers Defend Price In Negotiation. In summary, if the supplier thinks that you are not on your game, it will defend its price with a steaming pile of bull-crap.

Of the 7 examples that Charles gives for a common supplier response used when you attempt to start negotiations, my favourite has to be:

We are the only company that provides this product/service, so we don’t play pricing games – our price is our price.

First of all, unless you have it in your head that you have to have an iPad, there is no single source provider of any product or service. Pick a product. Any product. I guarantee there’s a dozen variations of it out there, somewhere. Maybe not all providers can meet your volume demands, and it’s probably the case that not all have the same quality level, but still, unless you’re insisting on a name-brand product, there are always multiple options.

Second, any supplier who wants to sell something bad enough will negotiate on price. Very few companies have the power to set a price in stone, and they are all selling branded products or services, like iPads, Wiis, or Playstations. Everything else is up for negotiation. And even if the price on the base product can’t move, maybe a value-added service can be thrown in at a deep discount.

The price is the price ONLY if you pay it. Given a choice between moving a line in the sand or being stuck with a mountain of inventory, which choice do you think a supplier is going to make?

Now, this isn’t to say that you should be requesting unreasonable price concessions, as everyone deserves a fair margin, but that you shouldn’t believe that the price is the price.

And if I was asked to choose a runner up, it would be:

“Is price the only criterion on which you are basing your decision?”

Of course not, but don’t let the supplier distract you. If you’ve done a proper cost model and determined that the supplier has built in a hefty margin of 20%, compared to the market average of 10%, unless you’re getting very valuable value-added services thrown in for free, you need to cut that margin in half to stay competitive.

The Real Problem With Most of Today’s Supply Chains?

They’re too fast and too slow.

And no, this is not an oxymoron.

As highlighted in this recent post on Supply Chain Digital, the product life cycle is in decline now that 50% of annual company revenues across a range of industries are derived from new products launched within the past three years at the same time that there are 250 supply chain disruptions to public company supply chains every month (Supply Chain Brain) that result in shareholder value dropping by 10.28% on average (SAS) and that takes the company an average of 50 trading days to recover from.

They’re too fast. There are too many products being introduced too fast. For example, how often do you need a new phone anyway? It’s a damn phone. And a dress shirt is a dress shirt. Now, it’s true that you need to constantly improve computing technology (to keep up with the bloatware), but do you need to change the form factor every year? Sure you need to increase the memory, the processing power, and the storage, but there’s no reason the form factors can’t stay the same — especially since density keeps increasing.

They’re too slow. The average company can’t respond to supply chain disruptions or market shifts fast enough to prevent significant stock-outs, significant drops in revenue, or reputational damages that take it, on average, two months to recover from.

Companies need to balance the competing agendas of innovation, renovation, and reverberation. While constant product innovation is needed, the innovation needs to enhance the product lines and not destroy them. Since research is expensive, the gains from each effort need to be maximized. That means reusing designs, components, and innovations to the extent possible for more than just a year or two.

Furthermore, some things just can’t be reinvented. A toaster is a toaster is a toaster. A new design every year isn’t going to drastically increase revenues and is, to be blunt, a waste of time.

Unnecessary efforts need to be eliminated and redirect to risk management. There’s not enough focus on risk or the mitigation thereof. For example, the benefits of an innovation efforts can be eliminated by the failure of a strategic supplier and the expected profits from a new a product launch can disappear if a supply disruption translates into stock-outs across the board in peak seasons.

In other words, your supply chain needs to slow down and speed up.

It’s About Time You Get a Grip on Risk!

Risk management is about more than just the disclosures the auditors make your accountants put in the fine print when you release your financial statements and annual reports. And it’s more than the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. For example, from a supply management point of view, risk management is modus operandi for supply assurity when there is an average of 250 supply chain disruptions for public companies every month. (Source) And from a profit point of view, it’s value. Less money dealing with the financial and brand fallout from a disruption is more money spent on innovation to meet customer demand.

And, as per this recent Ernst & Young post over on the Harvard Business Review blogs, it’s money in the bank. Their recent research fund that companies in the top 20% of risk (management) maturity generated three times the level of EBITDA as those in the bottom 20%. Wow!

So why is this? I think it’s due to the fact that less than 40% of companies are actively managing (supply) risk to the level they should be. In 2008, a Marsh survey found that only 35% of organizations self-reported that supply chain risk management was moderately effective at their companies. In other words, 65% of companies did not have a risk management program that was at least moderately effective. In 2011, researchers at Vlerick Leuven Gent Management School and Ghent University did a supply chain risk management study and found that 64% of the companies have no one responsible for managing supply chain risks! That’s essentially 0 improvement in the last three years! And while the initial introduction of a risk management program will require a significant investment of talent, it’s not that difficult, relatively speaking. As the post says, the critical factors are communication, openness, leadership, framework identification, formal methods, coordinated planning, standardized monitoring, and occasional (stress) testing of the different facets. With the right leadership and training, everyone will be able to do their part. And in the end, just like the Global 50 consumer products company highlighted, in the post, the organization will have

developed a governance structure that allows it think about risk proactively, and has aligned its risk profile and exposures more closely with its strategy. Its governance leadership group and supporting management clarified the company’s risk appetite, defined its risk universe, determined how to measure risk, and identified which technologies could best help the company manage its risks. Aligning risk to strategy, by identifying strategic risks and embedding risk management principles into business unit planning cycles, enabled the company to identify and document 80% of the risks that have an impact on performance. This alignment of risk awareness and management practices, from strategy to business operations, enabled the company to monitor risk developments more effectively. Managers could keep the organization within acceptable tolerance ranges, driving performance to plan.

So just do it. You’ll double your EBITDA in the process!

Robotistan, I Think Not!

In a recent post over on Horses for Sources, Jim Slaby gives us Greetings from Robotistan, outsourcing’s cheapest new destination, and tells us that software robots are going to replace outsourced labour.

According to Jim, you will soon be able to have your own business process analysts create software robots to do the work instead of outsourced labour because you can get the robots up and running in five months and they will do the work for less than half the cost of Indian FTEs.

His rationale, the existence of a UK startup by the name of Blue Prism that makes a software development toolkit and methodology that lets non-engineers quickly create software robots to automate rules-driven business processes.

Pretty flimsy. For starters, here are the caveats that he finds:

01. The process must be repetitive back-office and not require human judgement or much exception handling.
Which probably limits it to data entry, account review, and creation of initial online access credentials.

02. IT buy in is required.
For starters, the software requires a virtual machine cluster. And the maintenance of such adds to what is probably already an excessive workload.

0.3 There is a learning curve.
It typically takes two to four months to master the tools to model, automate, test, and optimize the robots, according to Jim.

And this is just the beginning. Yes, a large wireless carrier and a major BPO services provider may have found some limited success, but you can’t overlook the facts that:

04. When you scale up, any unhandled exception has the potential to effectively crash the system.
Let’s say you created a robot for account review, a prime example for the technology as indicated by Jim, and you define an exception as any new account under a year that is overdue more than 10 days. Let’s say you are a wireless carrier, which typically has relatively high customer turnover thanks to the fact mobile numbers are portable, and you run the robot on a small test set of 1,000 records and only come up with 10 exceptions. You think it’s great and set it loose on the system with millions of subscribers, but fail to realize your sample set was abnormal and the exception rate is actually 5% and not 1% (and that you failed to insure the less than one year test was properly coded) and all of a sudden you get a queue with 100,000 exceptions that need to be manually processed. Chances are the robot will crash when the manual reviewer tries to load the entire queue!

05. BPM software is currently the be-all, end-all of bloat-ware, especially when you’re trying to create an “AI” application.
As a result, the amount of memory, processing power, and storage required to automate even simple queues is exponentially more than what would be required by an application set up to support a human. And while processing power and storage is still doubling on a regular basis, Moore’s Law is coming to an end as we are close to hitting the point where quantum uncertainty will prevent us from shrinking chips any further. This means that, as you try to build more sophisticated robots, the number of machines you require will double, quadruple, octuple, etc. until the cost to run the hardware will exceed what you could pay a human to do the same task in an emerging market (because machines require energy and energy costs and they are going nowhere but up). And, unlike the machine, the human won’t have to push every tenth transaction to the queue for someone else to process as she’ll know how to deal with the majority of transactions by the virtue of her intelligence, dedication, and desire to keep her job and have a better life.

Software is going to continue to get more powerful, and it is going to continue to automate more data processing, and continue to minimize the amount of data that requires human review, but human review is still going to be required and we’re not going to replace humans in any process that matters any time soon. We might reduce the number of humans we need, but we won’t eliminate the need for them or replace them with robots just yet.

And anyone that disagrees with me can bit my gloomy fleshy ass. 😉