Category Archives: Supply Chain

Headline From the Land of D’OH: Bypassing Proven Supply Sources Invites Unacceptable Risk

Really? I did not know that! Tell me more!

Don’t we all know this by now? Needless to say I was a little disappointed when I saw this headline in Industry Week on “bypassing proven supply sources invites unacceptable risk”, one of my favourite publications in recent times as they usually avoid the obvious diatribe I expect from the WSJ (and used to expect from the now deceased Purchasing) and focus on the core issue, such as how to maintain quality and proven sources of supply in tough times.

There wasn’t a single sentence in the article that I don’t think we all know by now. We know cheap often translates into poor quality, lack of service, and all too often as of late, recalls. We know that production line downtime costs tens or hundreds of thousands of dollars. We know that moor Procurement needs to meet regularly with Engineering and they have to work together to maintain the necessary budget.

What we need is advice on how Procurement can stave off the incentive to “go for the lowest cost no matter what” when the top line design and production managers know that the associated costs of such a decision far outweigh the savings. We need some advice on how Purchasing can qualify the total cost and risk associated with a decision and show that “the 10% cheaper solution will in fact cost the company 10% more”. We need a discussion of cost modelling, optimization, and simulation that can be used to demonstrate the true total costs.

And when health and safety is on the line, we need the reminder that even the simplest of parts can spell disaster. Remember, it was a single O-ring that resulted in the Challenger disaster. That’s right, a single vulcanized rubber part brought down a Billion dollar piece of equipment. We can’t overlook quality, but until the cost of poor quality is quantified, uneducated business leaders will continue to do so. So let’s teach our buyers about cost modelling and optimization every chance we get. It’s the only way we’re truly going to end this view of relentless cost cutting as business as usual.

Resource Allocation Processes Have to Change

The March edition of the Harvard Business Review had one of the best articles on strategy and restructuring (in response to the recent downturn) that I’ve read in a long time. In finding your strategy in the new landscape*1, the author notes that for much of the next decade, we can reasonably expect to see weak global growth, pressures from overcapacity, persistently high unemployment, volatility in the financial markets, costlier capital, a greatly expanded role for governments, a much larger burden of regulation and taxation for all, and maybe even increased protectionism. Essentially, a global marketplace that is pretty common when you consider not the last 5 years, but instead look back through the last 500 years (and the last 50-60 years in particular as there is lots of detailed economic data available post WWII).

Up until the invention of the standard shipping container in the 1950s, global trade, and global growth, was very slow. Up until the exuberance of the IT boom, and the virtual wealth it created, capacity was limited, as demand was, more or less, steady and predictable most of the time. Even in the developed world, unemployment has been traditionally much higher than it was between 1997 and 2000 and 2005 and 2009 for most of the last few centuries which saw a lot of poverty, war, and suppression of the rights of women (who were encouraged to stay home). There have been booms and busts in the markets for hundreds of years. After all, the IT bust wasn’t the first great bust — at the very least it was preceded by the crash in the Dutch Tulip Market in the late 1630’s where, at the peak of Tulip Mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman! Capital has traditionally been much costlier than it has been in recent years — as recently as 1981, the Bank of Canada interest rate exceeded 20% (and from 1976 to 1992, it averaged significantly more than 10%). Throughout most of history, it was the governments, and not the global corporations, that held most of the reigns, regulation was the reaction to every problem, and when cheap imports threatened an industry, tariffs were slapped down faster than a bell clapper in a goose’s ass*2.

The author, Pankaj Ghemawat, then goes on to state that managers cannot afford to ignore the risks of pursuing a global strategy in the uncertain years ahead and that they must change their strategic approach in several dimensions. In particular, companies whose strategies currently emphasize smoothing differences and achieving economies of scale across national boundaries may need to shift toward adapting to local conditions and their resource allocation processes will have to change, too. And the changes will have to take place on the sell side and the buy side. Not only will the one-product fits all strategy be unlikely to work, but so will the one location produces for all. When you consider steadily rising shipping costs, increasing labor costs in “low cost countries”, and the costs of a single factory having to regularly shut-down and retool a line for different products (or variants), outsourcing sometimes becomes more expensive than near-sourcing or even home-sourcing. That’s why a strategic shift will need to be made across the board.

Furthermore, in addition to rethinking the scope of off-shoring, companies also have to:

  • simplify supply chains,
  • import process innovations from emerging countries, and
  • move R&D to where the (best) researchers and market growth are.

Your supply chain is too complicated.

You have two many products that use too many different raw materials coming from too many suppliers and travelling down too many lanes in too many shipments because you’ve never optimized and consolidated your suppliers, SKUs, and lanes. While you need redundancy to avoid risk, there’s a difference between using 3 suppliers and using 13-30 suppliers, which is what the average company who hasn’t fully analyzed the category (and the end-to-end supply chain behind it) is doing. (And since less than 10% of the market is using SSDO regularly, opportunity abounds!)

When you have to do more with less, that’s when you innovate or die.

When you have no money, you tend to think different than when you have more than you can spend. This often leads to completely different kinds of innovation than what we produce in the western world. And that’s likely the kind of innovation you need to tap an emerging market where the middle class makes 1/10th to 1/8th of what the middle class makes in the USA.

The best researchers know the market.

If you’re trying to innovate a new product for a market, you need people who understand what the market will like. Those kind of people are native. Maybe they’re not your people, but maybe that’s a good thing. Not only will they innovate for their market, but they’ll bring you new ideas, and some of these ideas might improve your global operations.

In other words, the elastic that holds the global market together is trying to snap back, and you’re going to have to be agile and adapt if you’re going to hold on.

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*1 I was thrilled that, unlike just about every other publication out there, the author did not use the all-too-common, and all-too-stupid, “new normal” terminology which drives me nuts because anyone with half a brain that either (a) studied her history or (b) lived through it knows that it’s just the old normal coming back with a vengeance, and doing it on a global scale.

*2 Ask a Texan.

The Governator Has Your Supply Chain In His Sights!

Are you prepared?

As recently reported in Procurement Leaders, California Governor Arnold Schwarzenegger is being lobbied to sign a bill that, if enacted, would require retailers and manufacturers doing business in California to disclose their efforts to eradicate slavery and human trafficking from their direct supply chain. A letter, signed by 32 signatories representing organizations with assets of $40 Billion under management, which supports The California Transparency in Supply Chains Act of 2010 (SB 657) has been sent to the Governor, urging him to sign the bill, which will affect approximately 3,200 global companies with revenues of more than 100 Million each.

Beginning January 1, 2001, the bill requires companies (with more than 2 Million in annual sales) to publicly disclose the policies they have in place to ensure their supply chains are free of slavery and human trafficking, including the extent to which the company uses third party verification to evaluate and address human trafficking and slavery risks in their direct product supply chains. It also requires companies to conduct independent, unannounced audits of suppliers to ensure compliance. A company that does not comply will face action from the Attorney General for injunctive relief in addition to remedies that may be sought for violating other state and federal laws.

Giving the realities of the marketplace, the pressing need for companies to be sensitive to social and ethical issues, and the support of organizations that control over 40 Billion in assets, there’s a very good chance that the Governator will sign the bill into law. Are you prepared?

The Unspoken Key to Successful Supply Chain Transformation?

There are many keys to supply chain transformation success including, but not limited to, good people, good technology, an effective globally integrated sales and operation planning process, a well designed network, tight links with customers and suppliers up and down the chain, effective logistics partnerships, and a good go-to-market strategy. But there is an unspoken secret to success, as suggested by this recent Harvard Business Review article which asks “why is it so hard to tackle the obvious”.

As per the article, the unspoken key to success is knowing what to forget. That’s right, the unspoken key to success is knowing not what practices and processes to keep, but what practices and processes to throw out with the trash — including those practices and processes that were successful in the past.

The key is to ask the following questions:

  • What processes are not working?
  • What processes are not adaptable to the proposed supply chain?
  • What positions* are no longer needed?
  • What systems are not equipped to handle the change

And then lose those processes, positions, and systems and replace them with new processes, positions, and systems more suited for the modern supply chain you are trying to build. (And then train your people accordingly.)

* Positions, not people. If a good person is in a role that is being eliminated, you train them for a new role that is being created.

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What Is a Smarter Supply Chain?

Late this summer, while most of you were on vacation, the Supply Chain Digest asked a good question — What Is a Smarter Supply Chain?. They attempted to answer this question using the 2009 IBM Report which said that the supply chain of the future needs to be instrumented, interconnected, and intelligent, which is right, but instrumentation and interconnection alone, even enabled by AI workflow management, does not make an intelligent supply chain.

Only one thing makes an intelligent supply chain: smarter people. I’m probably the biggest fan of supply chain technology that there is — focussing primarily on the technical capabilities of the products and platforms when I cover a vendor — but even I recognize that even if you spend millions implementing end-to-end best-of-breed solutions throughout your supply chain, it will all be for nought if your people don’t have the education, experience, and EQ to use it!

Let’s face it. To take full advantage of a spend analysis tool, your sourcing analysts need to understand how to cube, slice, dice, and identify meaningful trends in PO, invoice, and T&E data to identify true savings opportunities. To take full advantage of an e-Negotiation suite, the sourcing professional needs to know when to use RFX, when to use e-Auction, and when to do a fact-based negotiation with the incumbent supplier(s). To take full advantage of optimization, you have to know how to break the cost structures down, what constraints are necessary, and what constraints are unnecessarily imposed by the business. And contract management is more than electronically filing a contract in an electronic vault, it’s ensuring the terms of the contract are adhered to — especially the pricing. I could go on through each stage of the procurement cycle and each stage of the global trade cycle and so on, but the simple fact remains that if you don’t hire smarter people, you won’t have a smarter supply chain. The days of high-school drop-outs pushing paper in the back office are long gone. Time to modernize!

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