Category Archives: Supply Chain

How Will McKinsey’s Five Reshaping Forces Affect Your Global Supply Chain? Part II

Our last post overviewed a recent article in the McKinsey Quarterly that discussed the “five forces reshaping the global economy” that every executive has to grapple with, which left the reader with as many questions as answers. This post will attempt to shed some light in the directions the answers may lie.

The following are the forces that were identified:

  1. Growth and Risk Management in Emerging MarketsMultinationals will have to get in on the ground, attract local management talent, and let the local management talent craft an appropriate strategy for the local market. The multinationals that don’t do this will likely miss out on most of the growth opportunities that are available as the current economic climate, coupled with declining population growth, will significantly limit growth opportunities in developed markets. As a result, your supply chain leaders will be working considerably with local talent in analyzing product costs and sourcing for remote developments.
  2. Labor Productivity and Talent ManagementMultinationals will have to look to developed countries for R&D talent, engineering capability, and innovation and focus on grooming talent in emerging markets to manage the new breed of talent available to them. In addition, management will have to double down on new technology, process innovation, and alternative delivery models to maintain productivity levels with a decreasing workforce in developed economies. Sourcing teams will continue to become global. At first, the team leaders will be in the developed world, and the supporting analysts, with the technical and mathematical skills, will be in emerging markets. (A couple of big consultancies are already very successfully applying this model today.) As time goes on, your leaders will move to emerging markets (following IBM’s example), and the leaders of tomorrow will be just as likely to be in Shanghai as Chicago or London.
  3. Global Flows of Goods, Information, and CapitalMultinationals will have to learn how to maximize efficiencies in existing trade flows as current global economic conditions will likely slow down the introduction of new channels and opportunities. They will need to adopt trade management software to automate manual processes, decision optimization to optimize carrier and route selection, and “spend” analysis to analyze trade data to identify emerging trade patterns that they can take advantage of. Your supply chain will increasingly see solutions developed by Asian multi-nationals, like Algorhythm and Zycus, implemented by local consulting powerhouses, like InfoSys and Wipro.
  4. Natural Resource ManagementCompanies will have to design new products with resource and environmental management in mind, or risk incurring additional costs, and bad press, in the future. Even if the up-front costs are higher, decisions not to use more environmentally friendly materials and processes will have to be very carefully considered. In addition, identifying the effects of forthcoming regulations in India and China will become a top priority.
  5. The Increasing Role of GovernmentsCompanies will have to continually analyze the potential impact of major government programs on the economy and GDP and determine the best markets in which to pursue not only new product introductions (NPI) but new product development (NPD).

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How Will McKinsey’s Five Reshaping Forces Affect Your Global Supply Chain? Part I

A recent article in the McKinsey Quarterly, that summarized some of their global survey results, tackled the “five forces reshaping the global economy” as executives are still grappling with how to seize the opportunities of an interlinked world economy. It provides some good information and insight, but leaves one with as many questions as it provides answers. This post will summarize the five reshaping forces and the next post will attempt to shed some light in the directions the answers may lie.

The following are the forces that were identified:

  1. Growth and Risk Management in Emerging MarketsEmerging markets and their young and growing populations will not only raise consumption, but will also become the major contributors to the global talent and innovation pools. However, most multinational executives in developed economies still aren’t betting on significant revenues from emerging markets for at least the next five years.
  2. Labor Productivity and Talent ManagementDeclining birth rates and greying workforces in developed economies are impeding growth, mandating the need for major gains in productivity just to maintain stability. Developed economies are already projecting significant talent shortfalls in management, R&D, and strategy.
  3. Global Flows of Goods, Information, and CapitalThe relatively free flow of goods and capital in recent years drove globalization to unprecedented heights, but the economic downturn and global financial crises appear to be preventing further growth. Most executives do not expect more than moderate increases in the short term.
  4. Natural Resource ManagementIncreasing constraints on supply or usage of natural resources continues to affect companies’ bottom lines in the developed world. A significant number of executives, 25% on average and 45% in energy and manufacturing, expect this trend to have a negative effect on profits.
  5. The Increasing Role of GovernmentsExecutives in North America and Europe are haunted by the perception of crippling public debt levels created by the government and expect that the net impact on GDP growth in their home markets will be negative.

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Don’t Forget to Take Advantage of LKE When Upgrading Supply Chain Assets

A recent article over in Inside Supply Management is “shining a new light on asset reinvestment” by pointing out that many companies can save as much as 44% of sale proceeds if they use like-kind exchange (LKE) or “1031” exchange to defer capital gains tax on sold assets when the sale is being used to generate cash to buy new, similar, assets to replace deprecated supply chain assets.

If you plan reinvest the the funds from the same of an asset in a similar or like-kind asset within the IRS established timelines to identify and purchase the replacement asset and conduct the transaction through a qualified third-party intermediary, then you defer the capital gains tax. This can save your organization a considerable amount of money over time if you’re selling over a million dollars of depreciated assets each year as you bring new, like, assets into the mix. As per the example in the article, if you sold $2 Million worth of assets each year and replaced them with like assets, after five years, that’s $10 Million worth of assets sold. If you ended up paying the equivalent of 40% in taxes, that’s 4 Million dollars you lost from cash-flow if all of the assets were replaced.

Seems like a no-brainer to me, especially since it will only cost a few thousand a transaction to have a qualified and knowledgeable legal or accounting firm act as the qualified intermediary, which is a fraction of what you’ll save when you’re selling Million dollar assets.

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What is The Price of Flexible Supply Chains? Part V: Eternal Vigilance

In this post, I’m going to discuss highlights from the CPO Executive Debate on “the price of flexible supply chains” and focus on why you have to be eternally vigilant.

Getting straight to the point, in response to how does emergence from the recession affect supply chain flexibility, Andrew Vaughan noted that there is a dynamism in the whole supply chain piece and therefore you have got to keep reviewing it constantly. Raw material shortages can bring an end to a product’s life, earthquakes can take out factories, and bankruptcies can take out suppliers literally overnight. One day your supply chain is running like a well-made Swiss timepiece … the next day it’s brought to a screeching halt as your fine tuned Ferrari slams into a brick wall.

Even if you, as Colin Davis points out, maintained a reasonably broad supply chain during the recession and maybe compromised some of the commercial advantages you could have taken in those situations so that you can then call on people as you go forward, if your suppliers or partners are in worse shape than you are, despite their good intentions, they might not be able to respond to the call. The safety net you think you have can be taken down at any time. Just like that information flow you painstakingly set up can disappear over night if you built it on a proprietary copper network which was just dug up and sold for scrap.

Furthermore, you need to keep an eye on the entire supply chain, which, as Andrew Vaughan points out, doesn’t necessarily end when you get the product delivered to the installer or customer. For many products, there is also the service chain to consider. Whereas many customers will just as happily trade up to a new model when their current cell phone dies, most customers want to keep their cars and high end (Apple) computers for a few years (or more). You need to be able to provide them with parts and services quickly when they need maintenance or repairs … because it all affects your image as a provider of quality goods and services.

Furthermore, not only do really advanced procurement supply chain organisations understand today the ripple effects that a natural disaster, or an epidemic, has on their overall supply chain, and take immediate preventative action even though only a sub-tier supplier to their main supply base is directly affected, as Martin Hogel notes, but these organizations also know that a ripple effect can start anywhere … even in the retail stores. For example, retailers can notice that product sales for a new category of product, like e-readers, is heating up across the board. They place orders into distributors for more product, who place orders into manufacturers for even more product, who place orders into component suppliers for much more flash memory, which is in limited supply. In this classic bullwhip effect scenario, the flash manufacturers will quickly sell out of all available inventory, and an artificial shortage will be created in the market. Those manufacturers who are not vigilant will not be among the first to get their orders in, their products will be delayed, and this will likely result in lost sales.

All in all, the need for eternal vigilance — in addition to strategy, customer obsession, and a strong supply base — is pretty clear and the debate (on the price of flexible supply chains) was quite an interesting one. If you haven’t yet done so, and can spare the time, I’d strongly recommend that you check the entire debate on the price of flexible supply chains and join in the discussion. It’s your supply chain on the line.

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What is The Price of Flexible Supply Chains? Part IV: Active Supply Base

In this post, I’m going to discuss highlights from the CPO Executive Debate on “the price of flexible supply chains” and focus on why you have to include the supply base.

The reality is that, no matter how much you try, only so much innovation and flexibility is going to originate from within your four walls. Most of the innovation, should you be ready to accept it, is going to come from your partners, and your supply base in particular. Furthermore, an A+ supply base can revolutionize the way you do business and significantly increase your profit potential. Consider the case of Zara, as discussed by Martin Hogel. Zara sells 85 per cent of its store stocks on initial price and the average in the clothing retail industry is 60-70 per cent. Zara’s on-target price:sales ratio is clearly an effect of a well-crafted and executed supply chain strategy … a strategy that is significantly increasing it’s revenue, and profit, by enabling it to outsell it’s competitors on an additional 15% to 25% of its product offerings.

While the obsessive customer focus discussed in the last post is critical, as Austen Bushrod notes, you need to get the supply base involved in that too because you truly need to have every stage of your supply chain involved to maximize your success. Even if it means, as Michael Walsh points out, that you have to nurture the supply base where they are struggling. After all, if you help them, they’ll remember that in your times of distress and help you. While there may be a few sociopaths in the business world, most people in business want to do what’s right, and that generally means helping you when you help them.

So how do you get there? As Guy Allen noted, you start with a transparency of information flow, then you, as noted by Colin Davis, cooperate, and finally, when it comes time for negotiations, leave the gun, take the cannoli. And before you’re done, you should, as Martin Hogel puts it, have a really good understanding of the structure of your supply base: which are strategic suppliers, which are, let’s call them preferred suppliers, and which are commodity suppliers or vendors. Then you can work with your strategic and preferred suppliers to come up with products and services that are truly value add to the customer, which, as per our last post, should be your obsession.

In our next, and final post, we’ll talk about how the final price of a flexible supply chain is eternal vigilance.

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