Category Archives: Supply Chain

The Seven Deadly Supply Chain Sins (Repost)

Originally posted on April 20, 2008, something tells me it’s time for a repost …

Over on the World Future Society, there’s a great piece in the President’s Web Log where he recounts a creative interpretation of the sins of the future. What really got my attention is how each of them have their supply chain equivalents, and how the first five in particular require very little modification. So, without further ado, here are the seven deadly supply chain sins.

  • Earthism
    Holding humans superior over all other life-forms, and putting our needs over the needs of the other species we share the planet with. This can take the form of plotting a sea-lane through areas wales like to call home or of a new highway through areas of woodland where animals on the precipice of the endangered species list live.
  • Harmful Technology Replication
    The reproduction of environmentally dangerous means of production, power, and transport when greener, friendlier methods have been identified.
  • Innovation Theft
    Stealing your competitors innovation and calling it your own.
  • Online Misbehavior
    Misrepresenting yourself and your capabilities on your website, in electronic negotiations, in electronic marketplaces, and anywhere else in the virtual world created by the internet.
  • Transportation Recklessness
    Use of highly expensive, environmentally damaging, and resource-intensive fuels to ship functionless trinkets and knick-knacks halfway around the globe or to travel halfway around the world to play golf with your counterpart at a supplier.
  • FTZ and STZ exploitation
    Regularly shifting your base of operations to take advantage of Free Trade Zones and Secure Trade Zones to avoid paying taxes and your debt to society.
  • Bribery
    Bribing public officials to change the laws to your corporate advantage … be it a reduction in environmental regulations, a reduction in safety regulations, or a reduction in social welfare and employment regulations to increase corporate profits at society’s expense.

The Supply Chain Paradox

The best supply chain is invisible, but an invisible supply chain gets no recognition in your average company.

This is the one lesson they don’t teach you in Supply Chain 101, probably because they don’t want to discourage you given the upward battle we still face in our chosen discipline of Supply Management.

The sad reality is that, outside of Disney, as expertly explained in this recent post by Christopher Sciacca over on Supply Chains Rock, your average company, or at least your average employee in your average company, has no knowledge of this paradox. Just like your average person is unaware of Bernoulli’s Paradox or even the Birthday Paradox.

At a Disney theme park, the supply chain function is invisible from visitors, who never see a delivery truck or van on the premises, or shelves being restocked by employees. Visitors get the feeling that all of the food and merchandise somehow magically shows up exactly when it’s needed. Disney accomplished this by building a one-square-mile-wide labyrinth below the park’s main streets, called the “Utilidor” that feeds goods to the park attractions surreptitiously and that is stocked with a three day supply of inventory at all times to ensure merchandise is there when needed.

In a smoothly flowing supply chain, raw materials and components show up almost just-in-time (JIT) at the plant that is producing your goods. Then the boxes are waiting at the other end to package them, and as soon as the boxes are filled, the palletizer is there to pallet them. As soon as the pallets are full, the pallet jacks are waiting to load them unto the truck that just pulled up to take them to your distribution centers. Etc. Etc. Engineers don’t have to worry about raw materials or components being late or in insufficient supply. Loading dock personnel don’t have to worry about needing extra temporary storage as the trucks are there when the order is complete. Etc. Etc. Not only do they not have to worry about supply chain functions beyond their jobs, but your job looks like it’s the easiest job in the world because, like magic, everything (and everyone) is there when they need it. As a result, the better your supply chain runs, the less respect you get in an average company for doing a “hard” job because you make it look so easy.

That’s the supply chain paradox, and one of the reasons we still don’t get No Respect.

Supply Chain Difficulties in Latin America

Inbound Logistics recently ran a great article on Beating the Odds in Latin America that did a good job of summarizing the changing situation in Latin America and the challenges associated with your Latin American Supply Chain. Given that it might be true that Latin America “is all about growth”, it’s a market you want to understand.

The first challenge that the article pointed out is that of logistics costs that are high compared to other regions of the world-about 15 percent of the cost of goods sold. Ouch! Like parts of India and Northern China, transportation options are few, roads are not great, rail is (almost) non-existent in many places, and ports are congested. As more investment flows into the region, the situation will improve as it did in China and India. The situation in Brazil in particular is going to improve rapidly with the 2014 World Cup and 2016 Olympic Games on the radar. And this isn’t the only transportation issue. The transportation industry is fragmented in Latin America, with a lot of small players and this makes it more difficult to manage, especially when handling volume spikes.

The second challenge is that of lagging productivity. Average productivity in the region has increased only 1.4% per year for the past 20 years, which is much less than in Asian economies. This is partly due to restrictive labour rules and sector specific regulations but also due to taxes and lack of investment.

The third challenge is that of supply chain expertise — there is a relative lack thereof in Latin America. Universities aren’t even offering logistics degrees yet, yet alone supply chain management degrees. Without even basic Operations Research programs, people entering the logistics field have to learn everything from how to manage a distribution centre to how to interact with customers.

The fourth challenge is that of systems. Technology systems infrastructure generally lack sophistication, and in some cases, even availability. Plus, for an average logistics carrier in the region, a TMS (Transportation Management System) is too expensive for a single company to justify. As a result, many companies end up doing a lot of manual work that is time and cost intensive.

The fifth, and final challenge, that was noted is that of security. Crime is pervasive throughout Latin America, and takes a heavy toll. The homicide rate in some Latin American cities is extremely high. For example, the crime rate in Rio de Janeiro has eight (8) times as many homicides as New York on an annual basis and eleven (11) times as many as Toronto. Plus, surface transportation is the most difficult security risk area of the supply chain in Latin America. Sincethere usually aren’t multiple routes to destinations within a country. In many cases, criminals simply block the highway and start checking trucks to see what products they like and they get away with it because the police are understaffed so they cannot patrol every road.

It’s not an easy situation, but it does appear to be a navigable one for those willing to roll up their sleeves and get their hands dirty.

How Do You Handle Inside Theft? Same Way You Handle Drug Dealers!

Apparel just ran a fascinating article on how former federal agents can help solve retailers’ employee theft problems. According to the article, the same practices used in fighting drug dealers applies to tracking down thieves inside the workplace. In particular, professionally conducted interview and interrogation tactics and procedures play a critical role in identifying the prime suspects in inside theft and solving this costly problem.

Given that the employee theft rate, which held steady at 15% from 1969 to 2006, skyrocketed to an alarming 75% later that year, and that employee theft cost U.S. Retailers $18.4 Billion in 2011, this is becoming a critical issue.

So where do you start? First, start with the red flag employees.

The article notes that there are four types of employee thieves actively engaged in stealing time, money, or products from their employers:

  1. Thieves by Nature
    who enjoy stealing
  2. Employees who feel Entitled
    because the world owes them more than what they earn
  3. Employees Stealing out of Desperation
    as they are in extreme debt or have a drug/gambling/other problem compounded by a weak economy
  4. Theft by Target of Opportunity
    where money in plain sight will be taken

These employees can be identified by well trained private investigators, with experience in the right areas of law enforcement, who can ask probing questions, confirm facts, corroborate allegations, and identify the full magnitude of theft in your organization. These interviews should focus on scheduling, accounting and inventory activities, and similar supply management practices where the greatest opportunities for theft occur. And conducted properly, in full accordance with the law, they will identify the perpetrators of theft much faster than if the organization waits until its losses mount to the point where law enforcement agencies take notice.

Is Co-opetition a Good Thing for Your Supply Chain?

Not too long ago, the ISM ran a cover story on “Collaborating with the Competition”. In this article, they addressed horizontal collaboration, which is the sharing of supply chain assets for mutual benefits, and which is becoming common among some manufacturing groups. This typically occurs between companies in the same industry that, while not direct competitors, market and sell to similar customers and consumers. As an example, if one manufacturer made HDTVs and another made Blu Ray players, which do require similar raw materials and even chipsets for encoding and decoding, they could cooperate in sourcing because, while they are selling to the same consumer, they are not selling the same product. However, this is now occurring between companies that, at least in some product categories, often directly compete with each other. The case of Hershey Co. and the Ferraro Group, as pointed out in the article, is one example. “Higher-end” hershey bars and “lower-end” Ferraro chocolates are in the same price category and target the exact same consumer that will likely only buy one of these products during a trip to the store. This is an example of co-opetition in the supply chain.

According to the “North American Horizontal Collaboration in the Supply Chain Report”, published by EyeForTransport, while still in its early stages, the benefits [of horizontal collaboration] are clearly recognized and there are companies already optimizing their supply chains with this cutting-edge strategy. This is especially true if the collaboration is deep, and extends into sharing warehousing, distribution and even manufacturing capabilities. And of course, the collaboration is going to achieve efficiencies and savings beyond what either company can achieve on its own if you collaboratively optimize everything, as the article recommends. [This echos what the doctor has been saying for years. No other technology or process delivers the returns that optimization delivers, and the maximum effectiveness is always in a collaborative application.] But the real question is, what is the value that is going to be delivered? When you optimize everything within your organization, you maximize the value to your bottom line. But this isn’t necessarily the case when you optimize a joint supply chain.

Why? To understand the rationale, we need to take a step back to the predecessor of horizontal collaboration — the Group Purchasing Organization. The idea behind the group purchasing organization was that if a bunch of companies came together and pooled their total purchasing volume, they could get a better deal from a single supplier than each could on their own. (In simple terms, they are the enterprise version of today’s consumer GroupOn or TeamBuy.) This was true for each company if they all had volume requirements in the same order of magnitude and there was enough companies in the group to take the volume to the next order of magnitude (which, in manufacturing terms, is defined based on the throughput of a production run and the threshold at which manufacturing the product becomes cheaper). If one company had an order of magnitude more demand than the others in the GPO, then the reality is that it could get just as good of a deal if it had a good negotiator, and if a company had an order of magnitude less demand, then it was getting a way better deal than everyone else.

In addition, a deal is only a better deal if it doesn’t help a competitor more than it helps you. So if the GPO contained direct competitors, typically it was only used for buying indirect or non-essential products or services (like office suppliers, maintenance parts, and temporary labour services), and never for components or raw materials used in direct manufacturing. So the organization never saw the full value of what a GPO could deliver unless it joined a smaller GPO that prohibited direct competitors from belonging to the GPO. And then it still didn’t get the best possible deals across the board because smaller GPOs generally had smaller volumes, especially since not all companies were buying the same products or services, or they were not all ready to buy the same categories at the same time.

Co-opetition is taking the concept of a GPO to the next level. It’s essentially saying “why stop at products and basic services when you can also collaborate on warehousing, transportation, and manufacturing asset purchases and take GPOs to the next level”. And while this sounds good in theory, the reality is that you can really only collaborate this deeply with an organization in the same space as you making similar products, and maximum benefit (from an optimization viewpoint) will only be achieved when they are making the same category of products. And if the other companies are making the same categories of products, even if they are not directly competing (like tablets and laptops), they are probably close enough that they are vying for the same consumer dollars (as many consumers have limited disposable income these days), and if the products are that close, and your competitor ends up getting more efficiency gains then you, with the indirect knowledge of your products that they are going to acquire, what’s to stop them from creating a product that directly competes with yours, at a lower production price, using the supply chain you helped them build?

And yes, there are always legal precautions you can take, but first of all, you have to think of every eventuality and then, if the competitor is determined, be prepared for a lengthy, and costly, court case. In other words, the greater the savings are for you, the greater the value your competitor is likely to see. Is it worth it? the doctor doesn’t have the answer, but thinks it is very important that you ask the question!