SUPPLY CHAIN RESOURCE COOPERATIVE

A senior executive from a large global manufacturer came to speak in my MBA class this week, and discussed the major shifts in global business that was occurring due to the emergence of omni-channel capabilities in the supply chain.  His insights and presence were most appreciated by everyone, especially given the snowfall we were experiencing in Raleigh last night!

He began with a brief history, noting that for many years legacy businesses had a single channel, and then multi-channels came along – which included multiple touch points in the channel.   Retailers channel knowledge  existed in technical and functional silos – people had separate silos of activity in this model.  This led to Omni-Channel sales.  This view of the supply chain is focused primarily on how we get inventory to the customer.  This is the major  crux of the problem.  He pointed out that the customer doesn’t care which division owns the inventory – they just want the product whenever and wherever they desire.  Retailers have established a single view of the customer, but are still operating largely in functional silos.

This is rapidly changing. For instance, Amazon knows that if you order something from a website, and it comes in three packages, you would expect it to be one transaction.  But if Amazon tells you when the packages will be delivered, on which day,  the customer now has a predictive delivery schedule, and doesn’t care if they come in three packages even though it is one transaction.  Some people even want to be told what two hour window the delivery will fall into.

The Omni-Channel capability is associated with getting product to the customer in any possible fashion, that is convenient for the customer.  This is largely driven by the emergence of e-commerce, and in the process, is turning traditional business models on their heads.  To give you an idea of what this is doing, the classic retail metrics, “same store sales” and “sales per square foot”, are no longer being reported by Macy’s department stores.  Why?  Because Macy’s is now fulfilling orders from stores….so store sales and inventory at stores don’t matter.  And so they aren’t reporting it.  Think about this scenario:  you walk into a Macy’s, find a popular shirt you like, and they just sold out of the last small (your size).  But the sales person tells you, “I can find you a small at the store in Phoenix Arizona, and will have them ship it to you free of charge…you should get it in two days.”  This causes additional problems, however.  The sales person who wants that commission is happy – but the one in Phoenix who has to ship what is perhaps the last small shirt in the store, loses on that potential sale.  And this causes all kinds of mischievous sales person behaviors!

Deloitte has developed an Omni-Channel framework that discusses the many different capabilities required to launch a good omni-channel business.  Some of the issues impacted include   manufacturing, catalog management, BI and analytics, pricing, order management, customer service, fulfillment and transportation, and many, many others.  A few of these were discussed in our class last night by this executive.

Catalog management – Apparel manufacturers sell to department stores, sporting goods and specialty shops, Macy’s, Dillard’s, Penny’s, Herrods, and many other chains.  In many cases their channels are competing with one another.  Online sales allow consumers to compare prices between channels, however, the information about that product is uploaded by a “catalog manager”, who provides the data associated with that particular product.  Too often, the information about the very same product, appearing on different websites, may differ significantly!  For example, one may say machine washable, the other hand wash, one says made in USA, the other Made in Vietnam – for the same product!  Standardizing product descriptions is a real headache for web content describing products.  The non-profit organization GS1 is trying to figure out how to standardize all this data.  For example, a simple description like a “boot cut jean” may mean many different things to different manufacturers!  This becomes very complicated, because some jean manufacturers have their own particular fashion issues that they attach meaning to that they consider unique and proprietary!  Even the way companies measure the inseam on a jean can be different.  Companies are trying to work together to define even standard sizes like SM in men’s vs. SM in a children’s department – and tables that define what a SMALL really means are required to drive this type of standardization!

Checkout – Many companies are starting to use  a mobile computing device for checkout.  This works well in the Apple store, but can be complicated for apparel.   There may be a hangar, and there may be a box or a tag that goes with it, as well as other issues.   For many reasons, mobile checkout in apparel doesn’t work as well, and have to think about it differently.  And security is an issue – the Target data breach spilled information on as many 70 million customers to thieves.  These criminals dressed as technicians and put in card skimmers for every card reader in Target stores!

Order Management  Order management is about fulfillment of orders.  Amazon is now bigger than Walmart if you look at the total volume of transactions, and so Order management is a big issue.  Amazon has a fee based structure where they get X% of the cost of stuff they sell – but they never own the inventory.  If I make 5% of $50 – my annual revenue is $2.5.  Walmart’s revenue is on the $50 side of the equation – so if you grossed up Amazon’s revenue – they are bigger – even though they don’t make as much money.

Ali Baba is a different market in China – they are what’s known as a “marketplace”  that takes demand and gives it to vendors who fulfills it on their behalf.   This graying of the boundaries between order taking and order management is creating a lot of complexity and confusion.  Who is responsible for fulfilling the transaction – and how do I capture demand and hand it to somebody?  To have this capability, involves having the technology integration to make it look like my event…not somebody else’s event.

As noted earlier, order fulfillment is now using retail stores as warehouses.  If we run out of shirts, the sales person can check on the system to see if it is in a store, call up the sales person at that store, and ask them to send it to the customer.  The store is a node in the network.  The problem is that stores don’t do order fulfillment very well.  Sales people like to be working with customers, not shipping stuff in boxes.  Also I need the intelligence in the network to know where inventory is.  But how do I incentive people to fulfill an order from a store if the origin of the order is an online website?  Hmmmm…

Marketplace

Capacity for order fulfillment is a massive question in the omnichannel environment.  On December 22, 2013, everyone launched promotions, and people clicked on orders that were supposed to ship and be delivered by Christmas.  We all know what happened – the UPS network failed.  In 2014, UPS bulked up on capacity and people, anticipating the huge Christmas rush.  However, the promotions didn’t show up as promised.  Everyone predicted Christmas would break UPS again, but the promotions didn’t come, and UPS had added so much capacity in their network, that their costs soared and they missed their profit and earning projections, which Wall Street dinged them severely for!   A similar metaphor is:  Do you build a church that can fit people for Easter Sunday or for a regular church day?  (Easter Sunday is when everyone who doesn’t normally show up for church shows up!)   UPS built a network for Easter Sunday, and no one showed up….

Inventory and Warehouse data

If you are into sustainability, check out Patagonia’s website and look up footprint chronicles.  Patagonia has made a commitment to be more environmentally conscious, and have carbon footprint on shoeboxes.  If you look for an item on their website,  the instant they are out of stock they tell you where to go buy it – from Zappos or Travel Country for instance.   Essentially they are giving up the sale and handing it to Zappos, who can tell you the exact number of items in inventory, and shows this on the Patagonia web catalog!  To enable this Patagonia is getting real-time inventory data  from Zappos and Patagonia is essentiailly giving away a sale to another channel….so a natural question is – will customers go over to Zappos first next time?

Promotions Management

Promotions by their very nature drive huge variability in sales – up to 25X of a standard sales rate during a promotion.  Companies cannot provide the same service level at a 25X sales level as they can at an X level of sales.  So the Easter Sunday question comes up again - will I build a network to service a 25X promotion?  UPS tried to do it and got killed.  As supply chain professionals  ponder how to design their network, omni channel and internet shopping is changing every prior rules and algorithm on network design ever known to man!   If you buy things online, you might see a summer sale, back to school sale  Private Sale, Thanksgiving Event, Holiday Sale, etc.  So if you buy something, and you call up the retailer and ask for a lower price when it goes on sale a week later …the cost of return and re-fulfillment is huge – the retailer in most cases will simply give you the money (the difference) in the sale price.   Most people won’t go back and to the same store and ask for the refund, but omni-channel retailing allows you to simply sit at home, pick up the phone, and get the refund.   Which sort of defeats the purpose of promotions as a sales incentive tool..

Global considerations

Malltail is  a company in Korea.  Because tariffs are so high in Korea, this individual built an entire business on people in Korea ordering anything in the US, and having it shipped to an address in the US.  This service will then repackage the product, and send it directly to Korea.   Believe it or not,  Samsung TV’s are cheaper to buy on Amazon and have shipped to Korea – even though they are made in Korea.  But personal import exemption on duty is so high, and certain states in the US don’t charge sales tax that there is an entire business based on avoiding regulatory fines and sending product to people in Korea who buy TV’s and clothes.

 RFID  One of the big promises of RFID is that it improves stock accuracy and reduces item degradation.  RFID tags are still expensive, up to 10 cents each, and so it is still a dubious investment.  But they do hold the promise of being able to provide more efficient inventory tracking and auditing capabilities in a store or location, and thus can make people more confident in systems that show that an item is indeed on the shelf somewhere in the location.  It is a little known fact that Macy’s has $1B of inventory that has only 1 item in a number of stores.  But people don’t have confidence that this inventory actually exists, because of “item degradation”, or lack of confidence in the data.  Macy’s can unlock this inventory and make it saleable with RFID – otherwise they would have no confidence on having that inventory on the shelf.

Inventory Integration with Wholesale Partners – If Samsung is selling a television, and show that it is in-stock at one of a number of local Best Buy stores, then what is the relationship that transpires?   Will Samsung will get a kickback from them for the sale?    To enable this requires visibility that Best Buy made the sale because of a reference coming from Samsung’s website – but how does this occur?

The ultimate outcome for Omnichannel sales is the integration and merging of the Brand (the Nirvana of this view) where it is about the entire brand experience, not a channel within a brand.  Retailers leverage their single view of the customer in coordinated and strategic ways.   The integration that is happening between channels in the market is incredible – and it has all happened in the last two years.  And many of the problems have still to be worked out, as you can tell by this short set of descriptions….more to come!

 

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Joydeep Ganguly from Biogen Idec spoke in my Supply Chain Relationships class last week, and shared his insights on how Biogen’s supply chain evolved.  Since graduating from the NC State Jenkins MBA program in 2006, Joydeep Ganguly has risen through the ranks at Biogen Idec – the world’s oldest independent biotechnology company and the largest biotech employer in North Carolina.  Today, Ganguly, vice president of manufacturing and general manager of the company’s Research Triangle Park operations, says the Jenkins MBA program prepared him for the challenges he faces from day to day.

Joydeep began by sharing his views on the importance of linkages between academia and industry, including the SCRC partnership model.  “Academia leads industry by about 10 years.  Supply chain has a big focus on the currency of today’s theories being implemented here.  The Supply Chain Resource Cooperative at NCSU played a big role in helping to shape our supply chain.  Biogen is all about where the genome and biotechnology intersect and Wall Street has been very positive about what we are doing.

Joydeep’s primary discussion was around the topic of “How do we Design Our Supply Chains?”  He noted that “My passion is Process Analytics:  taking business datasets and using my technical background in engineering.  I love data and analytics that create insights into processes and approaches.”

“Supply chain design is grounded in supply chain principles, but the problem is that in biotech, standard demand forecasting techniques don’t work.  It takes six years to build a biotech production facility, and a billion dollars, so increasing capacity in the face of uncertain demand is a huge issue for us.”

In 2009, I moved into the supply chain area, and worked with Rob in understanding how to apply analytics with a procurement focus.  I then moved over to work in Biogen’s first small molecule site at Eisai, and now am the General Manager of our largest manufacturing site in RTP.  We have 7000 employees and are growing into a$10B company.

In 2009 we were $2B, and suddenly had five new drugs approved in two years.  This was unheard of, as the typical hit rate on clinical trials is 3%.  We had 6 up for approval and 5 out of 6 hit – that is uncanny hit rate.  Our CEO in 2010 needed to create a deliberate way to build the pipeline, and he did this by eliminating programs that were not productive.  The results were phenomenal, but now we had to commercialize these discoveries.”

Ganguly used this situation as a live case study for my class.  He posed the following scenario:

You are the COO of a Biotech company tasked with designing a supply chain.  The biologics process is complicated you have to procure raw materials and put in a cell culture and grow cells through a system which multiply, then have to purify, separate proteins, etc. which is a 90 day process.  We make a small amount of product –  a gallon is $40M.  The supply chain is NOT nimble and people struggle.

Our old model was to build it ourselves.  We used to integrate everything and manufacture it all, as opposed to young biotech companies that outsource everything.  So this becomes a classic buy vs. make, except that there are other options as well.   So our take was to create a supply chain that met four constraints:   high quality, a well-managed integrated CMO(Contract Manufacturing Organization) base, economics/tax benefits, and risk reduction/capacity.

If we stock out – our stock price drops.  You can’t mess with quality of a product, as it is what we have to do.  You want favorable economics, reduced risk, and reduced numbers suppliers.  So how do you build an efficient supply chain that will minimize risk, maintain quality optimize economics, and manage it with a smaller staff, using a balanced approach.

Our 2010 supply chain was less than optimal.  Our new pipeline included what are called small molecule products (pills), that are swallowed, versus our traditional manufacturing competency which was large molecule drugs that are injected and infused.  Not many companies do large molecule well – but we had perfected it.   Unfortunately we had no small molecule manufacturing facilities, and were going to outsource these to a few managed CMO’s.  But when the five products were approved, our CEO realized that none of our facilities had the capacity to produce, and it takes 9 years to build and qualify a facility, and costs $1B to to do so.  We couldn’t spend $5B in 9 years, when we were a $2B sales revenue company!

The problem is when you go to external CMO’s, you also lose leverage, and you have zero purchasing power.  CMO’s know you need it and will charge you a premium, as our stock price was doubling.  But we didn’t know how that was going to go.  The worst thing you can do is build a facility and then demand doesn’t materialize, and it is idle, with $1B of slow depreciation!

We had to do something quick.  At the time we had 30 CMO’s, and one CMO’s controlled the majorityof our spend.  So what options are available?  There were four options:

1.  Build facilities

2.  Look at current operations and expand available space.

3. Outsource the entire operation and lose leverage.

4. Vertically integrate existing manufacturers.

We started off with option 2, which was to take what we have   in our current facilities and see what we can do to operate them more efficiently.  If we took all five launches and looked at the gap, we had a 200 batch gap, and couldn’t make it through current runways, so had to seek the lowest investment cost is to make our existing facility more productive.  We launched a series of yield improvement projects to exploit the bottleneck and the first step was to improve productivity.  We were able to become 25-30% more productive, which got us part of the way there.

The facility option wasn’t popular, because if your product falls off patent cliff,  the facilities become  museums.  So we looked to see if we could instead think about different types of supply chain relationships.    In the process, we had to RETHINK supplier management.  Our industry is very paranoid about IP, and the only business models considered in biotech are build or buy:  you either own it or you outsource it.  The relationship with CMO’s was largely transactional:  here is a check for $X build us Y grams of products.

So we had to look at alliances.  Alliances are different from CMO relationships, because you develop a partnership.  We picked the companies, and started to look at all facilites built by biotech companies all over the world.  Then a sudden thought hit us: “What if we got a competitor to build it for us?   What if we asked to lease your facility – how cool would that be?! What if we approached someone like an Amgen or Genentech, and told them that “we just need your capacity and a place to make our stuff.  There was a lot of extra capacity out there depreciating with nothing being produced in it… no one had thought of this before!”

So we formed a brain trust of experts, and asked them to look at unconventional models.  This was considered  heresy –  sharing capacity is sacrosanct.  The thought of sharing idle capacity was kind of like the Uber question:  Do we have idle capacity – cars have 10% capacity – and how can we use more of it?

We were used to playing the role of the arrogant company that told CMO’s how to make stuff.  But working in a partnership is like a marriage….you can’t tell your partner to do stuff!  You have to treat one another like equals.  Alliance management is difficult – we do not have conventional balance in a typical transactional relationship.

Outsourcing is a one way relationship – you pay and you get the product.  In an alliance, to gain purchasing power, you need to make sure the partner needs something from you that you can provide!  So we had to find a way to provide the a service, and they provided one to us.  Our strategy was we had a burgeoning small molecule pipeline, and had strong large molecule production capabilities with  protein purification expertise.  So we went to companies with the same mission, that didn’t compete in our markets, but needed protein manufacturing expertise.  We used our existing facilities as currency and asked them if there was a need for you to make large molecule biologics?  So the deal was, we will make the large molecule stuff – and you make the molecule stuff for us.  We will provide each other a service – and call it even!

This also required a lot of work to manage these alliances.  We have  a VP of alliance management who keeps 7-8 people busy negotiating contracts and thinking strategically.  We have 1400 people sitting on top of a billion dollars of capital and want to keep our expertise. And we also had to make sure we were keeping our CMO’s happy to keep our network robust.  This involved lots of economics and lots of risk mitigation, and took 3 years to implement.  In the end, we used all four strategies:  we have multiple CMO’s and 2 internal sites and capacity constraints of 80%.  We have started a new site and improved processes, have built out one site, have  gotten into 2 alliances, and picked two partners and negotiated with our CMO’s for more capacity.

The number of CMO’s has been reduced, but through our alliances we also took work from CMO’s and moved it, and our pricing per gram of protein went down.  This in turn created greater purchasing power!  We didn’t expect that and our cost profiles were lower then the industry as a result.  This allowed us to come out and modify our supply chains.  With multiple alliance partners, we have lower lead times and greater flexibility in building out inventory to meet demand.

The beauty of this strategy is that if we have five new launches, we have scalable leverage.  We know which alliance partner to dial up, or use one of our five facilities.  We have created a supply chain of CMO’s, internal sites, and alliance partners as a network  that allows us to be more robust.  Creating alternatives was the key to this strategy.   We learned that nothing encourages good behavior more than if you don’t have a monopoly.  Competition switches the balance of power significantly.  But we couldn’t alienate them – as they still produced a lot of stuff for us.  Porter Five Forces comes into play.  We built our muscle on supplier management and business cooperation, contract negotiation and sourcing.  These terms are very real to us, and mean very specific things.

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I was able to listen to Christopher Nassetta, the CEO of HIlton Worldwide, speak to his team of global supply managers in MacLean Virginia this morning.

Chris spoke about a number of important themes at HIlton, which related directly to the role of supply management in running a major hotel chain.  He emphasized that “The reason we are where we are today is because that as an organization, we have been focused and aligned.  Our organization has come together.  We had a 100 year history, but were seriously disjointed.  Supply management was not fully integrated.  We have come a long way in the last five years– and have more to do, and will be launching the next step in our cultural revolution.  The secret sauce of what we do is the culture – it is the people.  We are about serving people, and that is what we do in the business we are in. – and the Hilton Supply Management team played an important role in bringing us together.”

“At the core of one of our competitive advantages, is serving any customer anywhere in the world for any travel need they need – which drives a higher market share of wallet, and getting the returns, and faster growth.  A big part of this is connecting with our customers, and providing the infrastructure and services to support this.  We are all digitally connected, as it gives us more choice and control over everything we do.  We can do texts, emails, and control our environment.  We have to think about our business in the same way – all of our customers want the same thing in the way we interact with us. We need to find ways to have people become more directly loyal to us.  Giving them technology and more choices of control is a key part of that – and making them feel special.  The message for supply management to bring this technology enablement is key.”

On the growth side, we have to continue to serve customers in more places at different price points.T here was huge opportunity to do things more efficiently and to buy more efficiently as we grow our network.  Hilton Supply Management is tasked with providing strategic sourcing capabilities to both managed and franchised locations globally.  This global network is expanding rapidly, (for example, we are building 400 new Hampton Inns in China!)  Previously, supply management was NOT an EBITDA producing operation.  This year supply management had a great year, generating savings that have been critical in enabling supply management to engage and participate in the vision and mission of Hilton Worldwide .  The savings generated, the number of incremental owners, the third party partners on the franchise side of the business are growing, because of the service and transparency created by the supply management group.  Better results and costs are driven because of the talent, the ability to create a shared vision.  There has been a commitment to Ariba and spend analytics, as a baseline for enabling measurement of supply management outcomes.”

Another important set of outcomes involves the creation of a Director of Strategic Sourcing Sustainability position, and designation and launch of a global Responsible Sourcing Advisory Group.  This involved a number of initiatives, including a focus on data and spend visibility, and global awareness and collaboration on a number of initiatives, including cage-free eggs and gestation crate-free pork, sustainable seafood, UK welfare and sustainability guidance, recycling programs, and a Green Lodging highlight.  There has been a lot of work on recycling, waste management, batteries, lights, and other forms of waste reduction.  There are a number of labor and human rights issues as well, focused on child labor, awareness of human trafficking in foreign regions.

Overall, the core themes of supply management as an enabler to Hilton’s growth, customer intimacy, financial outcomes, diversity, sustainability, leadership, and community outreach was emphasized in this great set of discussions.

 

 

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Acquisition in the federal government has been identified as a major source of potential savings in the future, as in the private sector, but a recent set of workshops and interviews identified some major challenges that exist.  First, the majority of data exists in a database called FPDS, or the Federal Procurement Data System, which was created in 1979.  This was a system written in COBOL, and was largely used for transactional purposes.  In 2006, the Federal Funding Accountability and Transparency Act called for searchable website database, leading to FedSpending.org.  In 2008, the Office of Management and Budgets created the database USAspending.gov.  Although intended to be able to provide transparency into federal spending, USAspending.gov was widely known to have major flaws and gaps.  For instance, the website claimed 0 dollars spent on Medicare in 2011 and 2012.

There are multiple challenges with FPDS data.  First, over 40% of FPDS data is not categorized.  GSA does not have control over much of the data that goes into FPDS and the codes used by agencies, unless this becomes a centralized function.  The product service codes are also outdated, and do not allow for correct transactional coding.  The system is also unable to split out codes within a transaction.  For example, a Marine Navy Internet technology transaction will have a single PSC codes, and cannot recognize spending on hardware, software and services separately.  Similarly, a construction PSC code cannot break out materials, labor, project management, and other services.

It is also difficult to get transactional data from suppliers.  Suppliers are generally not forthcoming with data, unless it is stipulated in contracts that data on spending be provided.  This is an opportunity for the future, as this requirement would need to be written into new contracts with suppliers, and this is currently not happening.  Future contracting practices should mandate specific formats and types of data that suppliers should be prepared to submit on a timely basis.  This is happening in a few remote sectors, but is not a standard practice.

Additional challenges for spend analysis of federal acquisition elements is driven by the fact that there is no easy way to reconcile and audit transactions.  Because invoices are in a different format and may not be tied directly to a specific PSC code, it is not easily amenable to a “three way match” that is traditionally used in a procure to pay system.  Many of the problems originate at the user level in agencies, where there is significant variance in the level of accuracy and precision when requisitions are entered into the system.  In addition, there is considerable variance in the level of maturity and ability of agencies to conduct spend analysis on their data.

The DATA Act

In May 2013, the Digital Accountability and Transparency Act was unveiled by the House Oversight and Government Reform Committee.   This act mandates that the federal acquisition system will provide information about budget authority, obligations, and outlays on the agency, agency component, appropriations account, program and object class level.  It is also intended to combine transaction-level obligation information (contracts signed, grants awarded, loans made) with outlays (actual checks cut).  Another important component is to assign universal unique identifiers to contracts and grant awards, establish government-wide data standards, and work to reduce improper payments.  There is also a provision to create a pilot program with contractors to examine the feasibility of recipient reporting of funds received, and it would transfer responsibility for running USAspending.gov from OMB to the Treasury.

Analysts in the federal government conducting spend analytics have had to rely on a variety of innovative data mining approaches to portray spending priorities and patterns, and are making headway in this direction as acquisition becomes more of a priority in the federal government.

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I recently spoke with an oil and gas executive, who shared with me his thoughts on post-award contract management.  He noted that “Demand management and specification management are some of the biggest problems encountered in post-award contracting.  A few years ago we reviewed this situation, and found that the biggest problems were often ones that we imposed on ourselves, and that the supplier couldn’t help us with!  As a result, I was appointed to a role that consists entirely of working with different business units to develop approaches that resolve issues in contracts.

The importance of assigning full-time managers from procurement who can address problems and issues was also empirically validated in a recent study that Marcos Oliviera and I have published in an upcoming article called “Effective Relationship Management In Oil & Gas Projects: Insights from Procurement Executives”, to be published in the new Journal of Strategic Contracting and Negotiation.

Managing post-contract projects in the oil and gas sector is particularly challenging, due to the extreme circumstances faced in oil and gas environments that lead to project disruptions and difficulties. A significant set of challenges are attributable to the macro level factors associated with the environment in which oil and gas projects take place. Because the majority of oil-exploration projects are in remote regions with poor logistics infrastructure and risky, there are significant challenges in the mobilization of equipment. Second, there are numerous sources of unquantifiable sources of instability, including regional conflict in producing areas, theft, and uncertainties raised by the nationalization of oil companies, which can lead to significant disruptions in both investment cycles and short-term availability.  Finally, corrupt contract award practices in oil-producing countries has a major impact on project outcomes, particularly at procurement and in permitting, permissions, and regulatory negotiations with local governments.

In our study, we find that when comparing successful versus unsuccessful projects, supply chain and procurement strategies play a significant role in project success, due to their impact on project value and on the way project risks are managed. In this study, we review insights gleaned from 13 oil and gas senior procurement executives, from which we derive a set of propositions and some preliminary results related to the success of these elements. .

In general, we find that relationship management plays a critical role in the outcomes associated with oil and gas project success. Procurement relationship management practices affect the way the needs of project stakeholders outside the contract (users, suppliers, communities affected by the project, etc.) are attended as well as the way project relationships are managed inside and outside project teams. As a result, those strategies are also related to important drivers of project success such as relationship and stakeholder management.

Projects deemed “successful” emphasized project measures that focused on being “on-time” (46%), meeting contractual scope (39%), and cost (15%). The way that projects were measured during post-contract award was also critical.  All of the executives interviewed during the course of the study similarly echoed the importance of using the “right” measures. A preoccupation with cost targets was deemed to provide only a limited as opposed to a holistic view of contract performance, and many emphasized the need to go beyond a value proposition expressed in dollars or reimbursable costs. A number of interesting contractual measures were identified through the interviews:

  • Percent of contracts with a contract management plan – execution plan post award.
  • Percent undergoing regularly scheduled performance reviews.
  • Key process expectations – % of contract managers that have undergone training in their roles

Representative comments also included the following:

  • “If senior leaders have the right data, they will know when to intervene. The financial measures from the project do not point to the contract…you get information on clusters of spending, but cannot easily see how specific projects and contracts are doing. People want to be the deal maker early on, but don’t want to manage the project!”
  •  “How well we communicate expectations early on and translate that into scorecard that enable hitting the targets is key.”

Executives interviewed also emphasized the need to get the “right” parties engaged early on in the contract renewal or new project contract negotiation process.  Representative comments included the following:

  • “Instead of just rounding up the usual suspects when a contract expires and needs to be renewed, procurement needs to be involved earlier in the process.”
  • “Companies need to be able to have legal and contracting, commercial and financial side all represented. Most operators aren’t set up to do this.
  • Relationships have to be an affirmation – I can’t say I have a relationship – you can’t say we have it – it has to be the other person (e.g. the supplier) who says we have a good relationship.

The importance of the “soft skills” – communication, early involvement, and open dialogue – rise to the top again as the key issues to management of complex contracts.

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There has been a huge amount of economic data pouring out in the last two weeks, all the while in the face of news of increasing violence in the Ukraine, Jordan, and the Middle East.

Domestically, we seem to be in a situation negative total inflation – the Fed will be on hold until December delaying any further interest rate decisions.  It seems the global economy will pick up by the end of the year, and there is some growth in the US for the next little while. The biggest worry in global markets at the moment is around oil and commodities.

My discussions with experts lead me to people that people are very concerned about the wild swings in commodity prices, and there are a lot of people thinking about hedging.  This is coming from buyers who have exposure on the spend side, who have seen commodities fall, but are hoping to be able to manage that risk in the next 3-6 months.  Prices dropping aren’t always a good thing, because people then factor them into their contracts, hoping they will stay low – which they don’t always do.

By the end of the year those electing to hedge are hoping to hedge out 25% of next years risk into the second half of 2016. The other big discussion is around oil.  Oil dropped to the mid-40’s, and in 50’s, and was back into the 40’s,  and on Friday was about 51-52. Brent is at 58  or $15 off the bottom and there is lots of exposure.  People are asking the question “Should I hedge or is there another possibility it could go down even further?”  And consumers are asking – this bounce looks real, and are we off the bottom now?

The focused challenge for everyone on oil is whether are we at the bottom.  Most certainly we are close to it, but we could be. Oil could certainly drop further,  but one thing is for sure – it will definitely rebound and go back up in the next 16-20 months off . Why you ask?  The US is having record levels of sales of SUV’s and trucks this year.  And the Chinese are also buying lots of cars.  The demand for oil is not about to drop any time soon!   And the ominous sounds of violence are always a threat to distribution and market channels, which is always a predictor of oil price increases.  So those counting for a period of extended low prices in oil should enjoy it while they can, as what comes down…..will eventually come back up.

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NC State supply chain research students recently met with Dan Stanton, Vice President of Education and Professional Development at the Material Handling Institute.  MHI (“The Industry That Makes Supply Chains Work”) publishes an annual U.S. Roadmap, that identifies some of the major technology and logistics trends on the horizon.  As noted in their publication, some of the trends have been around for awhile, including the growth of e-commerce, relentless competition, urbanization, and Big Data/predictive analytics.  In fact, many of my predictions made in 2014 also appear in my 2015 predictions as well.  

However, the MHI study, conducted through interviews and surveys with logistics executives, provide a compelling view of what the future will look like.  The group held workshops in 2013 at several locations, and spent eight hours over two days discussing them…a team of academics from Auburn, Florida, Georgia Tech, Clemson, and MHI worked on the report.

On page 21, the U.S. Roadmap for Material Handling & Logistics calls the Physical Internet an “ambitious, comprehensive vision that addresses a wide variety of [supply chain-related] problems.” 

The concept, put forth by Benoit Montreuil, Professor and Coca-Cola Chair in Material Handling and Distribution at the Georgia Institute of Technology (Georgia Tech), proposes an open global logistics system that leverages interconnected supply networks through a standardized set of collaborative protocols, modular containers and smart interfaces that enable universal tracking and communication. The goal is to increase efficiency and profitability while promoting sustainability.  This is indeed an ambitious goal – but the details on the infrastructure, technology standards, and ownership of IP in such a system precludes it from happening in the short-term, unless major players take control and become the “owner” of these systems (in my humble opinion).

Another interesting proposal is the idea of sensors, data, and algorithms that drive technological capabilities, of the so-called “Internet of Things”.  One of the roadblocks here is the need to work with data in different formats, and the challenges around standard data formats.  I’ve seen this in person – witness the simple challenges associated with a “spend analysis” using structured data, and the challenges on trying to derive meaning from stuff companies already know they are buying! The roadmap predicts 2025 as the date when standards emerge….as well as appropriate forms of data sharing across boundaries to ensure real-time data.

Other predictions include total supply chain visibility – and development of GPS capabilities across transportation assets.  (Again the magic time frame is 2025 – which seems to be the magical year when all of this will come to fruition!  The ability to track things in real-time also applies to people – and UPS recently deployed this for their Xmas rush program…which went way over-budget by the way….resulting in a downgrade of their stock…so cost does in fact matter when investing in technology! The Atlanta-based company also warned that its 2015 earnings projection is now likely out of reach in part because of pension costs and currency fluctuations..

There is lots more in this report to read about…drone deliveries, shared-use self-service parcel delivery kiosks for urban areas (already a reality in China), shared-use distribution facilities, driverless vehicles – and lots more!  Any techie or futurist should have a look at what our future world is going to look like!

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As organizations seek to drive supply chain integration across global business units and markets, billions of dollars have been invested in massive systems known as
enterprise resource planning (ERP) systems. ERP systems are generally thought of as large systems with transaction processing and data structure capabilities that promote intra-organizational communication.   ERP systems are deemed to be a critical enabler for real-time information sharing to align business decisions and to increase visibility to transactions across internal functions is the largest technological investment for Fortune 500 companies.  Such systems are also instrumental in establishing aligned tactical and strategic performance metrics systems that drive improved economic outcomes (Bendoly et al., 2007). Companies such as Honeywell, Caterpillar, Procter and Gamble, GlaxoSmithKline, and others have made decisions to implement ERP systems across their end-to-end supply chains, from customer order  management to supplier collaboration. ERP systems are designed to integrate transactions from finance, human resources, procurement, operations, sales and marketing, logistics, and other functions in a firm. ERP systems serve as massive databases to standardize business processes and to support decisions concurrent with planning and managing of businesses.  ERP systems were developed from material requirements planning (MRP) and manufacturing resource planning II (MRP-II) systems to supplement the need of an automatic interface between operational activities and corresponding accounting transactions.  They have been touted as the key to manufacturing excellence and supply chain integration…

But what is the real ROI on ERP system implementation?  And how do these benefits accrue?  A research study published recently in the International Journal of Operations and Production Management by my PhD student, Yun-Yung Huang and myself, suggest that the data point to some interesting results.

First the research shows that organizations who had implemented an ERP system had a higher overall level of supply chain maturity and performance.  This however may be due to the supplier segmentation process that occurs when organizations have access to better spend data.  Segmentation, generally associated with strategic sourcing practices, is the basis for building sourcing strategies, which require an ability to negotiate prices based on leveraged volumes of purchases from across the organization.  This in turn drives transformational value in the form of category teams that include multiple stakeholders across the enterprise, leading to improved supplier relationships and other forms of intangible value (e.g. innovation, total cost of ownership improvements, etc.). All of these capabilities take time to build and create, and for that reason, deployment of ERP systems become a catalyst for change within the organization, but is not the sole source of value formation that occurs. Our model would therefore predict that organizations who do not follow-up ERP deployments with other strategic efforts are not only missing out on the potential benefits!

Our research also found that organizations selecting a large provider (SAP) had improved outcomes relative to users of Oracle, other ERP systems, and no ERP system.  However, the results also pointed to some other interesting relationships. An important finding was a negative significant relationship between non-ERP users and category management, supporting our earlier contention that one of the foundational elements in building effective insights into supplier management is the ability to measure what you are spending your money on! With no system in place, users are likely to use multiple forms of transaction channels, including purchase cards, online vendor web sites, purchase orders, or in many cases, contracting after the fact! This form of activity ( known as maverick buying) is one of the most challenging behaviors to control in the enterprise, and leads to deterioration of supplier leverage, and a focus on transactional activities to the exclusion of strategic value-added
procurement activities.  This form of activity ( known as maverick buying) is one of the most challenging behaviors to control in the enterprise, and leads to deterioration of supplier leverage, and a focus on transactional activities to the exclusion of strategic value-added procurement activities.  In a sense, implementing an ERP system “forces” people to “use the system”, rather than navigating the back channels.  By forcing people to go through authorized buying channels, it makes it more difficult (but not impossible) for people to dodge the approved contracts and suppliers.  This discourages most people, apparently, and drives better data accuracy, which in turn, leads to better analytics, and better control of organizational spend.

A secondary effect was a positive significant relationship for Oracle users, but only for the supplier relationship management. This result provides some level of assurance that higher-order supply management benefits are being derived by Oracle users, but neglects to provide evidence of foundational supply management improvements. A confounding factor here may be that Oracle users tend to be congregated in services industries, where achieving a higher level of spend management and strategic sourcing may be more difficult, due to the more fragmented nature of spending on service contracts.

Please go to the IJOPM website to download the article if you’d like more details!

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Last year around this time I made a lot of predictions about what 2014 would hold in store…Let’s revisit some of these, and see what has happened (or what hasn’t!)  Here are my predictions from 2014, and an update on what I think will happen in these areas.  Most of them really haven’t panned out yet…but have a longer time horizon than I originally anticipated..

Global supply chain footprints will continue to expand.

No question the global supply chain is still going strong.  However, the global economy has certainly gone soft…with the exception of the US!  While it seemed like many companies would be moving more towards the BRIC countries, global events have proven this uptake to be relatively slow.  Brazil had an election that proved to be radically unpopular with the global business community, Russia has alienated itself and is hurting due to the rapid drop in the price of oil, while India and China are in a holding pattern, with tepid growth.  So while globalization hasn’t gone away, people are re-thinking global supply chain outsourcing, particularly as wages and risks are both rising in global emerging countries.

As Companies Expand Globally, So Will the Level of Operational Complexity

No surprise here – many, many complexities continue to arise.  With Amazon and others going to same day deliveries, the e-commerce boom is making transportation and delivery infrastructure more difficult to navigate.  Everybody seems to think that digital devices will somehow reduce all this complexity.  Sorry, but having my iPhone tell me my shipment isn’t going to make it in time, isn’t going to make the shipment make it in time!  Physical logistics will become more and more important, which comes down to fundamental process execution, performance measurement, teamwork, and communication…in other words, back to the basics!

Increased Globalization Brings Increased Risks of Supply Disruption

Duh!  I sure called this one right…Globalization linked with increasing labor costs in countries such as China, as well as fuel costs and regulatory shifts, are driving a dramatic impact on where companies source, where they produce, and the complexity of processes required to sell to the customer.  The recent spate of terrorism in France, the massive and mysterious number of airplane disasters in Malaysia, and even more regulatory risks will continue to drive greater disruptions – which again means better communication, risk mitigation, and early warning systems to alert managers when there is a problem.

 Regulatory Requirements Will Grow as Governments Seek to Overcome Shortfalls in Operating Revenue

The last SCRC conference again emphasized the increasing complexity of logistics regulations, protectionist policies, product regulations, compliance to customs, trade, local content issues, and security requirements.  This is likely to continue.  More of the same.  If you aren’t thinking that “the government is part of every supply chain”, then you are in for a rude awakening.  The solution?  Make government relationship management an important part of your strategic planning process.

Supply Chain Technology Investments Will Continue to Escalate..and so will Master Data Management.  As multiple parties across the extended global supply chain have access to the same “sheet of music”, the global supply chain orchestra will be playing their instruments and produce a masterpiece of sound. The only problem is….we need someone to establish a solid master data system so we are all in tune!  This is the biggest problem I see on the horizon.  Without accurate and timely data that is properly coded and classified, whatever fancy “big data” analytics are produced will be utterly meaningless.

Cost Pressures Will Continue to Escalate.  This is an area many companies are continuing to attempt to navigate using “hardball negotiation” methods that focus on “tips and tricks”, as opposed to collaborative “fact-based negotiation”.  An increasing number of companies I’ve been working with are making the increased investment in training to drive improved market intelligence, cost modeling, and power-leverage management, that emphasize working with supply chain partners to drive down costs, while keeping an eye on margins to make them palatable, but not excessive.  All parties in the supply chain will need to have a common view to cost reduction through productivity, quality improvements, value-added activity, transportation efficiency, and working capital management.

Supply Chain Analytics Will Emerge as a Key Enabler to Performance.  I’ve been most disappointed by what I’ve seen in this area.  There are a few interesting providers out there, but many companies are still floundering when it comes to using analytics to envision what is happening in their supply chain.  Hopefully 2015 will produce some products that work and that are interesting, and not created by techies with no knowledge of how supply chains really work…

Internal Analytics Applications Will Focus on Business Intelligence, ERP, and Product/Process Cost Data.  This is the biggest opportunity I see for 2015.  An NC State team worked with a major manufacturer to create a backbone cost database that establishes different types of cost data, including actual data, assumptions about the data based on prior history, and approximated data based on “best available information”.  Cost modeling will be the most important of all supply chain tools and methodologies in the coming year, not only for building “cost to serve” models, but also to identify opportunities to drive collaborative cost reduction models… with supply chain partners, internal discussions with engineers, sales account managers, and purchasing category managers.

Network Analytics Applications Will Draw on Data from Partners with a Focus on Sharing Across Platforms.  Lots and lots of work to do here…we continue to see many legal teams are loath to do this, but the fact is that knowledge and data sharing drives better performance….period.  Understanding what is inside people’s heads and being able to share that knowledge will be one of the biggest issues at work here..

Collaborative Analytics Will Determine the Winners Information derived through collaborative sharing of information from diverse sources, sometimes pulled together from various sources, and jointly acted on will build capabilities that will be difficult, if not impossible, for competitors to copy and mimic.  Again – people need to LEARN how to share insights and capture them in a meaningful way.

Community-based Analytics - analytics that are contributing to insights on sustainable supply chains and corporate social responsibility, both critical imperatives for manufacturing companies today.  This is especially true for predicting disruptions in today’s globally extended supply chains.

So, my predictions in 2015 really haven’t changed much since 2014…maybe we will see some real progress on these though in the coming year!

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The leading IT magazine, CIO Review,  today published a special issue on supply chain transformation, and included an article I wrote on spend management as a core capability.

Rather than striving for “perfect data” in all supply chain systems, my research suggests that primary efforts should be focused on the most fundamental yet most critical form of supply chain systems output: the spend analysis.

A spend analysis answers the simple question of how much money has the organization spent on all third party products, services, and expenses in the last year, what is the budgeted rolling horizon for the next year, and what is projected change in the mix of suppliers we are contracting and spending with?  This seems like a simple question, yet most Fortune 500 companies struggle to provide any type of granularity beyond top line spending numbers.  A spend analysis was often viewed as a one-time annual event to derive budgeting estimates, and develop insights into annual contract negotiations.  Today, spend analysis is evolving into spend management, which is a much more dynamic and on-going assessment and tracking of spending patterns, matched to other cost drivers and activities.  Spend analysis does not need to occur only on an annual basis, but can be applied also to reviews of a category or subcategory of spend that occurs when a contract is being negotiated, or when a strategic sourcing project is initiated for a particular category group.  Spend analysis is also a critical component of effective budget planning, and setting key performance indicators for sourcing teams to consider in their assigned duties.

Some of the most basic questions that determine whether an adequate spend management system is in place include the following:

  • What did the enterprise spend its money on over the past year? This value is an important component in calculating the cost of goods sold in the financial statement. Purchased goods and materials are often more than 40% of the total cost of goods sold in healthcare and manufacturing sectors.  Many systems fail to include indirect spending in their analysis, which is missing an important piece of the spend analysis piechart.
  • Did the enterprise receive the contracted level of products and services based on payments made to third parties?  Although many companies route purchases through an ERP or purchasing system, there is nevertheless a need to audit and verify that services and products delivered met not only contracted pricing, but also service level agreements, statements of work, and appropriate levels of support services.  A thorough spend analysis will often reveal areas where products and services are being paid for, but the goods or services are not even being received or being used by the system.  This is particularly true, for example, in the case of software licenses, where many licenses are auto-renewed or contracted for, but never used.  In other cases, multiples licenses may exist across the enterprise with varying terms and requirements that overlap.
  • What suppliers received the majority of the business, and did they charge an accurate price across all the units in comparison to the requirements in the POs, contracts, and statements of work? (This is an important component to ensure contract compliance.)  Understanding WHO we are spending our money with is an important input into making decisions on strategic leverage, and ensuring that the same prices, same levels of service, and potential economies of scale are being fully applied.
  • Which divisions of the business spent their money on products and services that were correctly budgeted for? (This is an important component for planning annual budgets for spending in the coming year.)  Understanding the “power users” of a particular category of spending can help drive the right sets of discussions for the supply chain team when they being to rationalize the supply base, and eliminate poorly performing suppliers.
  • Are there opportunities to combine volumes of spending from different parts of the enterprise network, and standardize product and service requirements, reduce the number of suppliers providing these products, or exploit market conditions to receive better pricing? (This is an important input into strategic sourcing).
  • Are we dedicating the right resources to categories of spending that represent not only an important source of cost savings, but which are deemed critical to the organization, in terms of enterprise risk, impact on revenue, or customer impacts?  This issue has been of particular importance to the financial services sector, which is concerned with the right level of risk mitigation for suppliers that handle customer data.

Moreover, spend management provides insights and clarity into these questions and yields an important planning document for senior executives in operations, supply management, and financial management. Despite the importance of this capability, many enterprise systems struggle to develop a comprehensive and accurate spend analysis report.

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