Category Archives: rants

How Not to Excel at Forecasting

Simply put, use Microsoft Excel. It’s appalling that a recent survey by ToolsGroup and the Global Market Development Centre (GDMC) found that even though two-thirds of companies in the consumer goods supply chain consider demand volatility and forecast accuracy a high businesses priority, half still rely on Excel spreadsheets for forecasting.

Relying on Excel for forecasting is like relying on:

  • a Longship to get you across the Atlantic
  • your first guess on Let’s Make a Deal to be the right one
  • a shareholder proxy getting on the ballot at a Fortune 500
  • Florida surviving a hurricane season without any major city suffering damage
  • the price of fuel going down and staying down for an upcoming series of spot buys
  • natural resource supply to be consistent and predictable year-over-year
  • a flip of a fair coin to come up heads seven times in a row

Now, it’s true that:

  • the Vikings did make it across the Atlantic in a Longship, but a single storm could sink it
  • the first door you pick, with one-in-three odds, could be the right one, but the odds are actually twice as good if you switch
  • an activist shareholder can sometimes get a proxy on the ballot if he or she has enough time and money, but as pointed out by John Gillespie and David Zweig in Money for Nothing (How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions), examples are few and far between
  • even though no storms made landfall in Florida in 2011, this is Not a common occurrence
  • gas prices did consistently drop in the USA between September 2008 and December 2008, but have been otherwise steadily rising for the last five years
  • in some years the rice, sugar, and corn crops are almost the same as in the previous year, but given the increase in hurricanes, tsunamis, droughts, and other natural disasters in recent years, this is not a common occurrence
  • yes, heads can come up seven times in a row when flipping a fair coin, but the chances of this happening are less than 1%

In other words, you can forecast with Microsoft Excel, but your chances of doing well, especially given that 90% of spreadsheets have non-trivial errors (and collectively cost enterprises billions, as Fidelity and Fannie Mae found out), are (vanishingly) small (as the complexity of the forecast increases). One has to remember that there’s no intelligence behind a spreadsheet and they are just a source of peril that can cost your organization millions without anyone noticing.

Sound, Conventional Financial Management is NOT Good for Supply Chains

And it’s not good from a cost of capital perspective either!

While skimming through Purchasing Insight’s recent white-paper on “Supply Chain Finance: A Procurement Strategy” (after stumbling upon their recent “Supply Chain Leakage” post that got them a Sourcing Innovation Thumbs Up, I stumbled on the following paragraph:


By extending payment terms to suppliers (paying them as late as possible) DPO is maximized and by being efficient at collecting from customers (getting the money in as soon as possible), DSO is minimized. This is sound, conventional financial management. It’s all about keeping hold of cash for as long as possible, minimizing the need to borrow and providing an opportunity to earn interest on cash deposits. Poor management of DPO and DSO increases the need to borrow and, in an economic environment where credit is scarcely available to some, borrowing can be very expensive indeed.

It may be sound conventional financial management, but, in reality, maximizing DPO is just another name for screwing your supplier, and all that does is increase your costs while decreasing the overall value you are able to extract from the relationship.

All I can say is that I’m glad the next section went on to say that:


For the procurement community, 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.

Finally, someone else who realizes that screwing suppliers is a bad thing! (I’ve lost count on how many times I’ve had to rant on this subject over the last six years.) Because, as the white paper goes on to state:


There is another, more compelling reason why the traditional approach to working capital management doesn’t make sense from a procurement point of view. It costs a fortune! The fact is that the traditional, siloed, adversarial approach adopted by most buying organizations toward their suppliers has a huge supply chain cost especially in the current economic climate.

Hear, hear! In order to extract a 0.1% return by holding on to your cash an extra 30 days, you’re risking a rise in costs of 1% to 3% as your supplier passes on their high cost of factoring to you!

However, when trying to improve your working capital practices in such a way that they benefit you and the supplier to take cost out of the entire supply chain, don’t limit yourself to early payment discounts as the sole tool at your disposal. It can be a great tool, as cash strapped suppliers get cash early and you get a better return, but it’s not the only tool. Another option could be to buy the raw materials or components on behalf of your supplier. You might have more leverage with a supplier that you are doing business with on another category and be able to get a better price. A third option, especially in this economy, could be to barter services for better prices. Maybe they need help with their back-office functions. Maybe you have a great relationship with a GPO that could help them and your weight could get them better pricing, or, your technical experts, who recently oversaw the implementation of good back-office accounting and P2P software in your firm could oversee the implementation of the same software in their firm in exchange for free value-added services from them. Be creative. There are many ways to win-win.

New Trend! Globalization!

Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement.

Over at a blog called pool4tool the company (apparently an Austrian company with large clients) alerts its readers of opportunities in globalizing. It also talks of the breakthrough concept of Total Cost of Ownership and holds “Boeing’s outsourcing of Dreamliner design and construction” (Supply Chain Digital) as a success story. Strange alternate universe over there in Austria.

Film at 11.

Rant on, Dick, Rant on! (Global Supply Training)

We Need More Corporate Ethics – Bring on the No-Maximum Mega Fines!

As noted in a recent article on Fine and Punishment, it has been a bumper summer for corporate fines and settlements. With firms in Britain and America agreeing to pay over 10 Billion in the past three months alone, there’s too much corporate wrong-doing these days. But the current fines are not enough. For example, a mere 5K for violating 10+2 is a CEO’s lunch money these days in most Global 3000’s. The only act close to defining a fine that will take a real chunk out of the corporate coffers of the guilty that the doctor knows of is the National Defense Authorization Act (NDAA) which allows 15 Million Dollar fines for first offenses and 30 Million Dollar fines for second offenses.

The reality is that a fine is only a deterrent if getting caught would mean a loss. Let’s say the fine for stock-fixing is 1 Million but an investor group could make 10 Million on the fix. Guess what’s going to happen? The stock is going to get fixed if the investor group has anything to do about it because, worst case, they only make 9 Million. The fine HAS to outweigh the reward, or corporate wrongdoing is going to continue to permeate both the financial sector, and the supply chain practices in industries where unlicensed knock-offs (especially in pharmaceuticals or electronics) can save a middle-man millions of dollars and push profits through the roof. As the Economist article stakes, given a risk-free opportunity to mis-sell a product, or form a cartel executives will grab it. To them, it’s all about the almighty dollar — and earning more than their peers to earn Wall Street’s favour and have something to boast about at the next charity dinner. (For a great Wall Street Perspective, you have to check out Randall Lane’s The Zeroes: My Misadventures in the Decade Wall Street Went Insane [now at a bargain price for the hardcover edition on Amazon.com — you can’t go wrong]. Audiobook also available).

Unless the potential fines are crippling, wrong-doing will persist*, and so will cheapening out. And this is the biggest problem. Right now, we need sustainability in supply management, but initial investment in sustainability always costs more, so not only are executives not going to green light sustainable efforts, but if the organization has to look green or socially responsible, they are going to fund the lowest-cost “accredited” third parties that they can find to be “socially responsible”, and, in particular, likely fund those that use shady practices and cut corners everywhere possible. Because when the dollar rules, as long as you can buy the image, why create the real thing?

But if we force ethics back into the corporate world, then maybe we can force sustainability in as well. And when the only choice for gains is again long-term strategy, which is precisely where the economics of sustainability really make sense, maybe we’ll see improvement in ethics and corporate responsibility across the board. Or maybe it’s a pipe-dream. Either way, heftier fines would be a great start!


After all, remember what Randall Lane discovered when he did a Trader Monthly survey in the zeroes:
  If you received an illegal insider tip, a sure thing, and had a 50% chance of getting busted, would you use it? Only 7% would. What about only a 10% chance of getting caught? The numbers spiked to 28%. And what if you had a 0% chance of getting discovered? Suddenly, the number surged to 58%! To the majority of our readers, cheating wasn’t an ethical issue, it was simply a matter of whether they’d get caught.

Can the US Post Office Be Fixed?

As chronicled in SI’s winter post that decided it was Too Bad the US Post Office Did Not Follow Royal Mail’s lead (before we got wind of the Royal Mail Fiasco), it’s old news that the US Post office is in dire straits. (No, no, not this Dire Straits. The US Post office definitely are not The Sultans of Swing.)

When you have more debt than 50+ countries have capita, that’s a bad thing, and not something a single (barrel) of sourcing projects is going to fix overnight. (Any operation hemorrhaging cash that bad should have hemorrhaged management years ago!) A drastic Supply Management-led transformation is required, but what should it look like? Obviously, Saturday service can be eliminated (as we Canucks do without it just fine), and obviously the sorting centres should be more efficient, but that’s a small drop in the labour and overhead categories relative to the 20 Billion the US Post Office needs to save (if it doesn’t want a good excuse to be shuttered).

Where should it start? Damn good question. Obviously, a technological transformation is a great place to start, but even the doctor is at a loss at how you cut 15 Billion when the bigger problem is obviously that you lost it in the first place! However, a few people are taking stabs at it, and this recent piece over in Progressive Railroading, on how Intermodal rail [is] a ‘sensible’ transportation option for U.S. Postal Service, that quoted a report recently issued by the U.S. Postal Service Office of Inspector General‘s Risk Analysis REsearch Office, showed someone has a head on their shoulders.

In “Strategic Advantages of Moving Mail by Rail”, shifting a portion of mail volume from tuck to intermodal rail could yield $100 Million in annual cost savings without requiring changes to the postal service’s network. Wow! Imagine how much could be saved if the network was optimized. I’m guessing double that, or more. If I’m right, that could yield 1 Billion in five years. With almost no effort!

They have to do something. As CNN notes, it’s a “summer of discontent at [the] Postal Service” (CNN Money, Jul 19, 2012). But given that it’s on the verge of defaulting on a $5.5 billion payment covering retiree health care due August 1, what can we expect?

At this point, I have to agree with Bob Ferrari, who, in his recent Friday Rant*, said that solving the problems of this agency involves a number of structural changes as well as an infusion of modern supply chain management practices related to efficiency and productivity. We have been clear that the U.S. needs a vibrant and efficient postal service and that may not necessarily equate to wholesale privatization. And, most important, there is an obvious need for a non-partisan, independent commission to oversee the process of re-structuring the USPS. Instead of audit agencies reacting to the obvious and pointing to required management changes, an independent commission should be tasked with a comprehensive look at how the USPS can be transformed to a highly efficient agency that instills modernized physical distribution and information management practices. Hear, hear! Let’s face it — 3.3 Billion is an awful lot for highway transportation contracts, even if you are the USPS.

* What’s with S.M. bloggers and Friday Rants anyway? Haven’t they figured out yet that any day is a good day for a rant!