SUPPLY CHAIN RESOURCE COOPERATIVE

I had the opportunity to visit EMC’s manufacturing facility in Apex, NC this afternoon.  Brent Taylor, who I met the week before at Procurement Leader’s, took me on a tour of the plant.

One of the first interesting things about EMC is that like many other manufacturers in the industry, EMC’s demand is highly cyclical, and has a “hockey stick” effect at the end of the quarter.  50% of revenue shipped takes place in the last 3 days of the quarter.  As Brent describes it, “part of it is the way we sell, and customers are looking for the best deals, and so it is a game we always play!”

To cope with this hockey stock effect, EMC has a highly lean and flexible manufacturing facility.  The company has a large open space in the center of the facility called the “doughnut hole” – which is essentially a 10-15% buffer area that they can use to accommodate any sudden surges in demand that might come up.  They also have almost all of their assembly and kitting cells on rollers, meaning that it can be moved around on a moment’s notice, oftentimes over a weekend – to cope with a sudden unexpected demand for a product.

They also use a “inventory train” concept – which is a cart with rolling stock.  The cart goes around the factory, and identifies empty kanbans that are required to pull material.  The material is then pulled from a “supermarket” stock on the floor – which in turn triggers a replenishment from the warehouse that is next door.  The warehouse in turn triggers replenishment from suppliers.  Major suppliers include Flextronics, Jabil, and Foxconn…contract manufacturers who produce finished components that are then assembled, configured, and tested for major server clients.  EMC serves a lot of large corporations and universities that want servers that are literally “plug and play”.

The facility operates in a constant state of readiness, and must deal with a high degree of demand variability.  EMC is also actively engaged in sustainability initiatives, which is a big driver in the server market.

I learned a lot this afternoon – and hope to learn more in the coming months!

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We are in the last stages of planning for our upcoming 31st Semi-Annual Supply Chain Resource Cooperative (SCRC) Meeting  on Monday and Tuesday, April 27-28, 2015 at North Carolina State University.

The theme of the general meeting will focus on a topic of great interest to supply chain professionals at every level of the organization: “Creating a Supply Chain Risk Management Capability.”

Planning and forecasting in an increasingly complex and volatile global environment presents many management challenges, as supply chains are exposed to an many sources of disruptions and resulting financial impacts.  A number of potential threats exist that can cause severe disruptions and problems at different stages in the supply chain network, including supplier performance issues, logistics-related delays, regulatory intervention in operations, geo-political unrest,  human resource and environmental violations, major storms and weather-related issues, port operations, financial and economic issues, and multiple other sources of unexpected events.  To address these concerns, organizations are devoting more attention and resources to create a supply chain risk management capability.  This event will explore many of the emerging approaches being used to address supply chain risks on the horizon:

  • Creation of supply chain risk monitoring and forecasting capabilities.  These capabilities require not only a commitment from senior leadership to fund and staff such an effort, but also a commitment to ensure regular reviews and a governance structure to support rapid decision-making when information on risks is elevated to senior leaders’ attention.
  • Enabling decision-support techniques and structured analytical approaches to assessing many sources of supply chain intelligence, that support management insight into risks 6 months to 2 years into the future on a rolling horizon.
  • Monitoring of regulatory, weather, transportation providers, and port operations to ensure timely alerts of sudden disruptive events
  • New technologies that create material and supply network visibility, through GPS, alert systems, and predictive modeling technologies.
  • Network models that are used for supply chain design, that take into account incident forecasting, probabilistic approaches for modeling risk, mitigation planning, redundant resources, and business continuity planning activities.

In exploring these issues, I will be sharing with you insights I’ve derived through interviews with a number of government and private sector companies, as well as work on recent SCRC student projects.  Additionally, we will be joined by a number of supply chain executives from other industries who will also share their insights into these issues.

  • “A New Approach to Quantifying Supply Chain Risk”, including David Shillingford, Senior Vice President, Supply Chain Solutions, Verisk Analytics, Jersey City, NJ, and Sung In Marshall, Principal Analyst, Human Resource & Societal Risk Team, Verisk Maplecroft, Bath, UK.  Maplecroft is one of the world’s leading risk management portals, and this will be a fascinating introduction into the subject.
  • Mr. Jason Schenker, Economist and President of Prestige Economics. A regular presenter at the SCRC meeting, Mr. Schenker will share his thoughts and views on the current health of the economy and the impact of current geopolitical events on global business conditions.  Bloomberg News has just released its rankings of forecast accuracy through the end of Q1 2015.  Once again, Bloomberg has ranked Prestige Economics a top forecaster of metals prices, energy prices, and foreign exchange rates.
  • Dr. Stefan Wolff, CEO, 4FlowAG, Supply Chain Management, Berlin, Germany.  Stefan will share insights on managing risk in the transportation network, and how the role of a 4PL can help create visibility and real-time network redesign capabilities in response to changes in the transportation ecosystem.
  • Mr. Mark Beasley, PhD., NC State Deloitte Professor of Enterprise Risk Management.  Mark will be talking about key trends in the enterprise risk environment, based on the ERM initiative in the Poole College of Management.
  • Mr. Stephen Fecho Jr., Director of Value Chain Management, Merck & Co., Inc.  Steve will be sharing insights on how Merck developed and implemented a Center of Excellence on supply chain risk and intelligence, which he led.
  • “Parallels between Supply Chain and Intelligence Risk Analysis”  I will be leading a panel discussion on this topic, including the following individuals:  Randy Pherson, CEO, Pherson Associates LLC, Stacey Kaminski, Associate, Pherson Associates LLC, Dr. Judith Johnson, Adjunct Behavioral / Social Scientist, Rand Corporation.  This will be a highly insightful meeting of the minds looking at how intelligence capabilities can be combined with SCM requirements for risk management.

In addition, we will also be featuring our student ‘gallery walk’ showcasing graduate and undergraduate supply chain practicum projects completed with industry partners this semester.  The meeting will also include formal student / company presentations, showcasing practicum projects with SCRC partner companies such as: Bayer CropScience, Biogen Idec, Caterpillar, Duke Energy, Foodbuy, GlaxoSmithKline, John Deere, Lenovo, MetLife, NACCO, Novozymes, Quintiles, Revlon, R J Reynolds.

Can’t wait!!

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A group of my MBA students are working on a project benchmarking vendor profiling approaches.  If you’re interested in this topic, be sure to take the survey.

The goal of the study is to

  • Understand different information companies ask from suppliers
  • Identify industry classification codes for categorizing suppliers
  • Compare your company’s supplier profiling practices to other companies

All participants will receive a best practices report after the survey is closed, in May 2015.

 

 

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I had the opportunity to host a good colleague of mine  in my supply chain relationships class this week.  We worked together years ago to help define the a baseline framework for strategic sourcing and category management that was deployed within the  a large oil and gas company’s lubricants group, and which later became deployed across the entire Procurement organization.  Much of our work together focused on the importance of market intelligence, cost models, using the appropriate price index, negotiating the right contract archetypes, and establishing the right internal stakeholder needs.  This work was instrumental in shaping my thinking about how to structure category management at a global level. In my class this past week, my colleague spoke further about how procurement is markedly different in an era of $40 oil.

This conversation was further clarified in my mind when I spoke with a journalist,  from the Mexican journal Manufactura, about the importance of procurement in Mexico.  As the industry is becoming privatized with more private companies coming in to explore, the need for procurement will continue to escalate.  This is due to the fact that local suppliers, particularly in contracting services, will need to be developed to identify the right skills and talent that can enable safe, efficient, and profitable operations, when revenue is dropping.

As my colleague emphasized, CFO’s and COO’s are much more interested in what procurement can offer them in an era of $40 oil, versus when oil was $100 a barrel.  All of a sudden, it is critical to find cost savings, and identify opportunities to drive out costs.  But this requires that oil companies don’t pursue the traditional approach of demanding price cuts from suppliers.  Rather, it requires true collaboration with trusted supplier partners. The day after my class, he was scheduled to fly out to one of their major rigs in the Gulf of Mexico.  He notes that “I walk into a room of about 30 people, representing 5 suppliers as well as Shell people.  For these meetings we bring in benchmark data, comparing the different operating cost categories for Shell, and another chart that shows the cost models for all other rigs operating in the GOM.  This allows us to compare this rig’s cost versus others, and the cost of our fleet operating relative to other fleets on 10 different performance metrics. He also noted that “What is interesting, is that people in the room hardly look at  the data.  We have a rule, that we only want operators in the room, no sales people!  Many of these guys are from the Bayou, have been working on rigs for 10 or 20 years, and they know the rig inside and out.  They also know how their company makes money, and they know the things that they are getting paid to do that isn’t a core part of how they make money.  So I ask a very simple question:  “We all know we have to save money given the environment.  So I need your help.  What is it that bugs you about the way we operate today?  What is the ‘stupid money’ we are throwing at today in the way we opeate that doesn’t make sense?” Now consider that it costs about $1.2M   per day to operate a rig, which includes the lease, the people, the surrounding infrastructure, etc.  And the people involved in operating that rig are drillers, pipefitters, seismic people, mudders, and others.  In every case, people will open up and tell me – “look – here is something that you are asking us to do that is probably costing you $100K a day!  We will then look at the chart – and sure enough we will see the differential in the cost category that they are talking about.  Now in a period of $100 oil, no one is going to look at $100K per day – because it is all about “first oil” – getting the oil out as quickly as possible.  Don’t talk to me about skimping to save a few dollars.  But suddenly, $100K a day is a big deal.  Safety is number one, so we also have to consider if that savings improves or doesn’t compromise safety.”

My friend also emphasized to students that to be able to engage and talk to people and be successful in procurement and supply chain, you need to also think about your “brand image”.  He noted that “you need to develop a brand image, which will help you throughout your entire life.  You want to develop a brand around your strengths, and what you do well.  If you are good at analytics – that is ok – but you can’t just be in the room and not be able to also talk about what you did, and the meaning of the data that you analyzed.  Other possible strengths might be your ability to network within the organization, your ability to influence people towards a solution, your ability to lead a team, or even just being known as someone who is on-time and will do what they promise!  For me in my role, I need to get clarity from the business on what they want – or I will not be able to cut a good contract.  For upstream – it is all about getting the well out of the ground in an efficient and safe manner. So I know that my personal brand is about being clear and always following up on my commitments to individuals.

Wise words for all of us to take away…

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Lynn Good, Duke Energy’s CEO, spoke at NC State this week, and shared her many thoughts on leadership and transformation.  Her vision for what is otherwise often considered a stable and boring industry, energy utilities, provided a great deal for students and faculty to think about.

Duke Energy’s roots lied in seeking to harness the power of the Catawba River to create a reliable energy system that could be used to support the textile companies.  Duke’s roots in hydro energy have come  full circle – starting with hydro power, then coal, then a lot of nuclear, and today Duke has 11 nuclear facilities in NC and SC that provide 50% of energy for these regions.

Good is seeking to transformation in an industry that is vital to everyone, and it will take a lot of capital, as well as a lot of innovative thinking and effort. Good noted that “When we think about leadership, we think about 3 things:  customers, innovation, and the community.”

Good noted that “the customer has to be at the center of anything we do.”  Customer services involves two primary dimensions in the energy industry:  Reliability and Price. Reliability is simple:  when you turn the light switch on, it works.  Customers need reliability in the form of continued, 100% availability of power.  Industrial customers also demand a continuous flow to operate the many robotic and computer-driven technologies that drive their business and create uptime.  One of the biggest challenges in the developing world is the lack of reliable energy platforms, and we often take this for granted.  But this also has to be delivered at a reasonable price.  For the average customer in North Carolina, he or she pays about $3 a day for electricity.  This price is 40% below the price on the West Coast, and 70% below the price in Europe.

Second is innovation.  Universities are all about innovation – and the amount of technological change in the industry is critical to continuing to improve.   Technologies on the forefront include shale gas and renewables, battery storage, wind, solar, hydro, and nuclear, are all critical to understand.  Innovations also requires a long-term investment cycle -  investments in 2015 still need to be viable in 2020.  Duke Energy has invested over $4B into renewable energy to determine how they fit into the portfolio.  Battery storage is a major barrier to many renewable energy forms, something that environmentalists often fail to understand or consider.  Energy requires a constant flow from a source, but there are not yet batteries big enough to store the power from a wind farm – and what happens when the wind stops blowing or the sun stops shining on a cold winter day if that is your source of power?

The last point was on Leadership in our environment and in our communities.  Good admits that Dukes does burn coal and uses nuclear generations – but also pointed out that   nuclear and fossil generation is necessary to generate power – right now.  We need to have power to have something to turn on during those winter mornings – and what we have today is nuclear, gas, coal, and hydro – with some level of battery storage.  If we look out at 2025 and forward, environmental leadership is key, and Duke is committed to be as environmentally responsible as possible.  The utility has retired coal plants in the Carolinas and nuclear plants have an extraordinary role and environmental stewardship is key and committed to.  Her comments echoed much of what I heard in Germany by Dr. Michael Seuss, head of Siemens at a conference in Germany, and documented in a blog I wrote last year.

No energy company is without fault.  Good acknowledged that they had a pipe that broke at the Dan River plant and discharged coal.  This problems has been repaired at that site and she noted that “we have raised our standards to demonstrate leadership on problems that are good and bad – and we will make it right.  We take community stewardship and commitment to the community.

It was at that point that a group of protesters began shouting at her in a typical “mic check” event, similar to what we saw last year at the Dupont speaker forum.  After they were effectively drowned out by the crowd and escorted from the building, I happened to pick up a copy of their “protest” document that they were shouting out.  In so many words, they were protesting the fact that Duke Energy is opposing the Energy Freedom Act to get affordable solar power from qualified third party vendors….an act which ignores the fact that solar power is unreliable.  This group, like so many others, has a naive idea that solar and wind power are the solution to all of our ills, and that Duke is simply protecting a monopoly.  These views represent an uninformed and silly disregard for the facts of how energy is created, and the importance of reliable and cost-effective energy to our community.

Good was very gracious about the whole incident, and went on with her speech discussing her backgorund, and her commitment to doing the right thing.  She noted that “I understand and appreciate their passion and energy – I have that same passion about energy and the community.  And I want to do the right thing.”

 

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Many people are talking about Key Performance Indicators, Metrics, Analytics, and other indicators of performance.  The importance of selecting the right metrics or “measures” as I prefer to call them, is critical as we all know that metrics drive behaviors.  Rather then selecting a plethora of meaningless metrics, it is always better to focus on a critical few, and select them wisely.  Here are a few guidelines I’ve encountered over the years that might help people think more about selecting and establishing metrics for your supply chain.

Step 1 – Translate Organizational Objectives Into Supply Chain Metrics

Before beginning to establish supply chain metrics, managers must first take the time to ensure that they fully understand key organizational objectives. Once these are understood, they can be translated into specific facility, process, functional, or business unit objectives, which can then be defined in terms of metrics.

Company objectives are generally set by an executive leadership team, and consist of a broad set of objectives that are communicated along with quantifiable objectives. If this is a public company, these objectives are often communicated to shareholders in the company’s annual report, and may consist of specific quantifiable elements such as revenue growth, return on assets, etc. However, underlying these quantitative measures typically imply an implicit set of company-level and business unit-level objectives that support these results.

in defining how the company  will compete and succeed in the global environment, the leadership must clearly and succinctly communicate the following to their business unit team leaders:

  • What markets will the firm compete in, and on what basis?
  • What are the long-term and short-term business goals the company seeks to achieve?
  • What are the budgetary and economic resource constraints, and how will these be allocated to functional groups and business units?

When faced with these challenges, business units must then work together to define their functional strategies, which are a set of short-term and long-term plans that will support the enterprise strategy.

Next, the leadership within the business unit must understand its key markets and economic forecasts, and provide a clear vision on how the enterprise will differentiate itself from its competitors, achieve growth objectives, manage costs, achieve customer satisfaction, and maintain continued profitability in order to meet or exceed the expectations of stakeholders. Once this is understood, these objectives must be clearly communicated to plant leaders, and expressed in terms of order winners and qualifiers.

In effect, a champion form the leadership team must clearly define the supply chain team’s task based on their understanding of order winners and qualifiers. Once defined, that objective will be used to drive performance objectives for specific individuals in the facility, and ensure that everyone understands the objective.

Step 2 – Develop Metrics and Data Sources

A major output of the first phase of the metrics development process is a set of functional strategic objectives, including business unit or supply chain management strategic objectives. As supply chain managers interact with other members within their business, as well as with corporate executives, a major set of strategic directives should begin to emerge. These strategic objectives may or may not provide details concerning how they are to be achieved. However, the process is not yet complete. Unless supply chain management executives can effectively translate broad-level objectives into specific functional or plant-level management goals, these strategies will never be realized.

Senior management must couple each objective with a specific goal that it can measure and act upon. These specific goals become the initial step for development of a metrics system. The following are examples of corporate-wide management objectives associated with various supply chain management goals.

Cost Reduction Goal

  • Be the low-cost producer within our industry. (Goal: Reduce material costs by 15% in one year.)

Inventory Goal

  • Reduce the levels of inventory required to supply customers. (Goal: Reduce raw material and WIP inventory to 20 days’ supply or less.)

New Product Introduction

  • Reduce product development time. (Goal: Introduce new products in half the time accomplished on the last iteration.)

Quality Objective

  • Increase quality of services and products. (Goal: Reduce average defects by 200 ppm on all material receipts within one year.)

This level of detail requires translating companywide  management goals into specific supply level or plant-level goals. Note that each metric may be further broken down into metrics that apply across all products within a facility, or may be assigned or designated to specific processes or product lines within the facility.

Once each metric is identified, then it must be defined in terms of the data that will be used to track the measure. For instance, a quality measure such as parts per million refers to the number of defective products found for each million produced. However, this does not define what a defect is.. This may require further defining the manufacturing specification that constitutes whether it is in tolerance or not, or it could mean whether the product is tested at the end of the line and operates as it was designed to. Another example is “on-time delivery”. This could refer to the time when the product was requested by the customer for delivery originally, or the time that was “negotiated” with the customer because the original due date could not be met. Each metric must be defined carefully, and the source of data (whether from the MRP system, the accounting system, etc.) must be identified and formally documented.

Step 3 – Develop a Balanced Scorecard

Once management has defined a set of different metrics, there is a need to ensure that the scorecard is “balanced”, and the different metrics are weighted properly to achieve the overall optimal outcome.

The balanced scorecard was first presented by Robert S. Kaplan and David P. Norton in 1992. The original premise was that a total reliance on financial measures was leading organizations to make poor decisions. Kaplan and Norton argued that firms must go beyond financial measures, which are lagging indicators, and utilize measures that are leading indicators of performance.

They further suggested that the most appropriate measures that would cause organizations to do the right things would be those metrics that measure the strategy of the firm, its functional activities, and processes.

According to Kaplan and Norton, the balanced scorecard included four key linked performance measurement areas:

  1. How do customers see us? (customer satisfaction perspective)
  2. What must we excel at? (operational excellence perspective)
  3. Can we continue to improve and create value? (innovation perspective)
  4. How do we look to shareholders? (financial perspective)

In addition, Kaplan and Norton stressed that measurement itself is not the objective. Measurement and specific metrics provide clarity to general statements and a strategy focus around which to provide performance recognition and rewards.

The balanced scorecard and its related ideas have been adapted by numerous companies and applied to purchasing and supply.

An example of a supply chain scorecard will similarly consider the metrics and assign the right weight to each metric, considering:

  1. How do we look to shareholders? (financial perspective)
  2. How do our customers see us? (internal and external perspectives)
  3. What must we excel at? (operational excellence perspective)
  4. What do we need to do to improve? (innovation perspective)

 Based on the company’s objectives, the balanced scorecard would then be connected to a specific set of appropriate performance measurements. The result will be a scorecard by department or people with specific key performance indicators.

 Step 4 – Establish Measurement Requirements and Owners

Once the right set of metrics is established, it is then required to develop a method for tracking, communicating, and assigning responsibility for each metric.This involves identifying an easily comprehended set of graphs or tables that summarize the key metrics, one that is easy for people to understand at a glance. The team must also understand the reporting frequency, how often will each metric be updated, once a week, once a month, or once a quarter? Next, the management team must assign responsibility for each metric to each group, and explain how it is calculated. This can be a delicate activity. For example, if the demand management group is held accountable for the requested customer service date, and manufacturing and supply are also held accountable, then they are more likely to work together to achieve the metric than if one or the other were held accountable individually. Similarly, scrap and obsolescence may be a metric that is controlled by manufacturing, but is also the joint responsibility of engineering, who designs the tolerances on these products and services.

 Step 5:  Measure Current Performance and Benchmark with Best-in-Class Competitors

The final step in the supply chain metrics development process is to set targets for improvement. This involves establishing the current baseline performance for each of the metrics defined, and then comparing their performance relative to competitors. This is often known as “benchmarking”, and is an important step in performance improvement. In selecting a benchmark, it is important to select competitors who are similar to your company in size and range, and to ensure that the metrics being compared are similar to the metrics in your system. There may be a need to put together a team to study more closely why there are differences and/or gaps between metrics, and to then establish your company’s position relative to these metrics. This often requires understanding the underlying capabilities that may drive differences in performance, as well as setting interim targets for closing these gaps.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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A recent post by my colleage Kate Vitasek (author of the “Vest Outsourcing” model) in Forbes magazine argues that procurement is taking too aggressive a stance in negotiations with major logistics providers.  She uses the example of a company who decided to use a reverse auction to award business for a logistics contract worth hundreds of millions of dollars, based on “lowest price”.  That is effectively what reverse auctions do – ignore quality, service total cost of ownership, and focus simply on lowest price.  I have argued in many other of my posts that reverse auctions do a disservice to all parties, but in the end, hurts the stakeholders impacted by this more than anyone.  The executive making this comment also noted that “Many logistics service providers are at a breaking point – especially when you factor in providers that have taken a huge hit with the West Coast labor issues that slowed global commerce to a screeching haltup and down the West Coast.”

Kate also refers to my new book (written with my colleague Gerard Chick), The Procurement Value Proposition: The Rise of Supply Management, which effectively calls for change in procurement!

The books documents how procurement organizations need  to move away from being only about cost reduction to playing a role in value-adding activity and influencing business strategy.  Value will become the “Holy Grail for procurement” in the modern era of global business.

Our book talks about the key trends that will force change: “Organizations continue to grow their supply chain global footprint. As companies expand globally, so does supply chain complexity. Increased globalization brings increased risk of supply disruption.” What do they believe should be done about this? We argue that organizations should “embrace complexity” and manage it through more rapid responses, better market intelligence and greater adaptive capabilities.

Kate notes that It’s myopic to simply shift your risk problem downstream and hope it won’t affect you.  The smarter move is to create highly collaborative relationships with key suppliers where buyers and suppliers work together to mitigate (or even eliminate) risks.  This is a major shift for many procurement executives, but is indeed a critical part of the move to strategic procurement.

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I have been working with Jay Golden at Duke University on the biobased forecasting project for the USDA, seeking to understand the current scope of the biobased product market ( focused on non-fuel, non-food products).  I had the opportunity to speak today with an educated economist who works  for the OmniTech International.  He has been working in the industry for over 25 years, and we had an opportunity to share thoughts on the “food vs. fuel” debate.

As a representative of the soybean farming community, there is strong empirical evidence that the “food vs fuel” debate is a non-issue.  Many people, including legislators, argue that we should not be using agricultural land for biobased fuels like biodiesel or corn-based ethanol, as there are starving people still in the world.  This is a misguided argument.  This individual noted that “We need to understand and the public and regulators and legislators need to understand that there is no shortage of food.  There is hunger in the market, but it is not caused by a shortage of food.  Looking at vegetable oils, with a global population of 7B people, each consuming the recommended 40g of dietary fat per day, 365 days per year, would require just over 100M metric tons of oil.

We are currently according to the USDA producing over 160M metric tons of refined vegetable oil alone.  We have another 100M metric tons from animal sources.  We have 2.5 times the recommended amount of dietary fat to feed the world’s existing population – so it doesn’t hurt to make a little soap from for biobased products, or biobased diesel.

You can make arguments on what it does to the cost of food , but we have spent too much time and effort discussing issues like indirect land use, which is irrelevant, and has no impact on the availability of food.  If there is real demand for a commodity, and that demand is between energy and food and industrial uses, it is going to be produced by somebody if the market will pay enough for somebody to produce it.  If we use soybean oil to make biodiesel in this country which promotes palm tree growth in Malaysia – it is not something we can control.  Somebody will do it regardless of our country – there is X amount of demand for total fuel and chemicals in the market and nothing we can do policy-wise is going to change that.

We can with empirical evidence show that there is no shortage of food in the world, since sometime in the 1960s.  We have more than we need to eat.  It is just about getting it distributed more evenly, and overcoming poverty, which raises the real issue of most every part of the world can practice agriculture, but they don’t because they aren’t efficient and can’t compete economically with Western countries.  Haiti grew all of its own rice, until the World Bank told them to take the tariff off – and once they removed the tariff – they could buy it cheaper from the US and Vietnam than they could grow it in the country.  The problem became poverty was increased in Haiti, because they lost the income they had enjoyed from growing rice.  Cheap food is not good for third world countries – more expensive food helps them become at least partially self-sufficient.”

This individual then commented on the need to create efficient markets for bioproducts that will promote their use.  He  noted that  “I served on the biomass development technical advisory committee a few years ago, and the first five years was under Bush, and the last years was under the Obama administration.  We saw a lot more initiative in the last year than we did in the first five!  But I was asked the question once from an old soybean farmer from SD as we we were specifically looking at the use of solid biofuels.  He asked the question:  “What would it take to get solid biofuels used to replace coal in generating electricity?”

My response was “When you go to plant in the spring – you look at the markets.  But if you are a power company and are thinking about using biomass –  how do you look at the price of what biomass is going to be a month from now?  Or six months or a year from now. The old farmer responsed “I understand”.   Hee went to the Chicago Mercantile Exchange and tried to negotiate having them build a futures contract for wood chips and pellets – something that is still not out of the gate, 8 years later.  If I I were a Duke Energy or ConEd, and could compare co-firing biomass products vs. coal, I would have a clear economic picture of the benefits.  A CO2 premium would make that even more appealing…but we won’t go there…

 

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Recent articles, posts, and future trends studies are all awash with excitement about the Internet of Things.  For instance, Mike Morley writes on the Material Handling and Logistics site that the Internet of Things will change everything:

“Billions of connected devices associated with global supply chains will transform the amount of information that can track shipments in real time. Digital information coming from these connected devices will drive increased levels of pervasive shipment visibility and this in turn will allow organizations to move towards more intelligent value chains.”

“Big Data” fans truly believe that mounds and mounds of data will be totally awesome, dude.  All that all we need to worry about is how to capture this data.  For example, Morley notes that:

“The key challenge moving forward is how companies capture and analyze a whole host of critical information from a variety of products, appliances and equipment and then communicate status updates and information as we approach the next phase in the evolution of the Internet.”

Given that I have a degree in statistics and operations management, believe me – I am a huge fan of having data.  However, I am also a big fan of something called the “scientific method” – which means you can’t start digging into data unless you have a really good idea about what it is you hope to find in this pile of gibberish!  I have been doing a lot of work recently in the area of supply chain intelligence and risk management… one of my favorite areas of discussion (if you haven’t noticed!)  However, there seems to be some confusion in the press in relating intelligence to data collected from objects.  What is the difference between intelligence and data?

It seems that there is a a whole school of thought  that says that “If we have big enough data sets we will be able to locate non-obvious correlations because we have so many tests available to us.”  That is the whole sales pitch in a nutshell.   And lots of people are selling the idea of searching for non-obvious correlations, and making plenty of dollars in the process.  However, searching for non-obvious correlations will never help identify the root cause of whatever it is you’re trying to solve.  In fact, there is a whole set of tools and approaches called the Structured Analytic Methods that are used to derive and build the hypotheses that drive you to look for relationships in the data to address whatever it is you are trying to solve.  These approaches have to do with the way that people think, how they elicit information, how to explore and arrive at what a root cause might be.  This is a whole different capability, that has nothing to do with buying enough machines, RFID tags, or benchmarking dashboards.

It is interesting that one of the major consulting firms in DC is offering “big data” capabilities to construct dashboards that provide real-time data.  But if you look behind the curtain at this organization, it involves human curation.  There are human beings who are doing the data crunching, analysis, and production of the dashboards.  They are buying large datasets, and working through them manually to cleanse, organize, and perform statistical analysis to derive performance measures.

Supply chain intelligence and  all the other stuff has trended towards the thinking that big data will solve all our problems.  In my opinion, organizations need to be investing more in analysts who understand how to codify and employ standard analytic methods  to specific problems using the scientific method and the power of evidence applied to competing hypotheses.  There are ways to derive much more intelligent outcomes if you are careful and thoughtful about it…

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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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