SUPPLY CHAIN RESOURCE COOPERATIVE

I participated in the Diversity Alliance 4 Science event last week held in Newark, NJ.  For those of you who don’t know, this is a fantastic event held by most of the major life sciences companies, to encourage networking and open collaboration with a host of small, minority-owned, women-owned, and veteran-owned businesses.  Life Science companies have a commitment to increase the value of their minority spend, and all of the majors (GSK, Merck, Pfizer, Novartis, Amgen, BiogenIdec, Teva, Takeda, and others) were present and actively engaged with suppliers.  Networking sessions led to opportunities to bid on new business, as well as sharing of opportunities and challenges.

I helped to facilitate one of the workshops, called “Cash Flow for the Business:  Understanding Payment Terms for the Good, the Bad, and the Ugly, Supplier and Corporation.  the objective of the session was to identify and discuss key concepts which all suppliers and corporations should be aware of in the current business environment, and provide insights into the trends, challenges, and opportunities to overcome many of the different cash flow scenarios encountered by minority suppliers.

The workshop was also “played up” a little bit, by having a ‘Shark Tank’ theme.  As anyone who has watched the show knows, there is usually a panel of financial and business experts who are listening to a “pitch” by an entrepreneur, and critiquing him/her and offering advice.  In this case, the entrepreneur was Luke Twomey, Director of Finance, for Philosophy IB, a small diverse supplier from New Jersey.  The “sharks” in this case included Todd Bittiger, Senior Manager of Sourcing from Novartis, Thierry Cauche, Finance from Novartis, Jon Heuser and Len Dunleavy, from J.P. Morgan’s Supplier Finance Program and Global Trade and Loan Products, and Carmen West, form the Minority Business Development Agency, US Department of Commerce.

I opened up the panel, by introducing the problem of supplier payments.  New suppliers, especially smaller ones that tend to be in the diverse supplier space, are often eager for new business, and when they encounter the typical leadtime on most “big pharma” supplier payments, which span 90-120 days, they are astonished.  However, they often don’t want to disclose their challenges in managing working capital under these conditions, as they are afraid of losing face and thus losing the business.  Buyers, on the other hand, are often completely unaware that there is a cash flow challenge associated with these long leadtimes on payments.  The workshop was intended to emphasize the importance of transparency, regular performance reviews, and open discussion of how to reduce supplier risk under these conditions.

Luke was the “entrepreneur” in this case, and emphasized that his consultants often didn’t want to potentially damage their client relationships by bringing up the long payment terms.  He also noted that financing solutions for operation were needed, but that such arrangements were not evident, and it was not clear where a supplier was supposed to go to explore these conditions.

The first “Shark”, Todd from Novartis, passed on the “typical” procurement managers’ response, which was generally unsympathetic to the supplier’s plight.  (Note this was a “role play”, and in no way reflects the typical response from Novartis on this position!)  In general, Todd emphasized that he had risk concerns with a supplier who balked at these payment terms, and that there was a possibility they might default on their obligations.  Further, he was also concerned that the commercial credit expense for commercial loans to cover working capital obligations might be passed on to the buying company in the form of higher prices and higher cost of operational rates.

Next, we heard from Thierry Cauche playing the “Finance manager” role.  Thierry emphasized that big pharma companies struggled with their own long cash payment cycles from insurance companies and governments, and were merely passing on their own cash flow elements.  He emphasized that pharma companies were not in business to be a bank for suppliers, but acknowledged that poorly functioning Procure to pay systems might often cause delays if suppliers did not properly complete invoices, left out crucial information, and other transactional issues.

Next, Leonard and Jonathan from JP Morgan introduced the concept of Supply Chain Finance.  In effect, this was a program where a supplier would work off a program sponsored by a specific pharma company, and could get early payment less a small discount factor, leaving the payable with the bank.  The benefit was that the buyer would not be aware of this transaction, it is optional (on an invoice by invoice basis), and would not negatively impact the suppliers’ credit score.  The discount rate would be based on the buyers’ credit score, not the suppliers’, so it would be a very reasonable number.

Finally, Carmen pointed out that the MBD Agency at Commerce was actively encouraging major corporations to drive these types of supply chain financing programs, and to also promise to provide lower leadtimes on payment terms to suppliers.  This is recognized as a critical element to promoting supplier diversity in the United States.

There were of course some interesting questions and answers following the session, but it was clear that this is an important topic which affects many different suppliers in multiple industries.  One of the key takeaways is that suppliers should be “up-front” in discussing their payment term challenges with buyers, and that they need to be proactive in participating in buyer-sponsored financial programs by major lenders.  Buyers also need to be more forthright in educating suppliers and making them aware of programs such as the one that exists between Novartis and JP Morgan, and introduce suppliers to the right people to facilitate these arrangements.   In general, this is an issue we will continue to see as being a rich area for research going forward…there are no simple solutions!

[No comments]

I had the opportunity to speak to a group of utility companies and many of their direct suppliers at the annual Utility Supply Management Association in Savannah, Georgia, on Monday.  This was a great opportunity to share insights from our recent research, on the subject of driving closer buyer-seller relationships , and the role of analytics.

There were a lot of people at the conference, including the Sourcing Interest Group with whom we have a partnership, as well as our friends from Duke Energy, SPX, PSEG, CenterPointe Energy, and others.  Many of the people at the conference had been going there for 20 years, which incidentally was the anniversary of this gathering today.

It was interesting speaking with people at lunch and in the breakouts as well.  It was clear from my discussions that many energy utilities are under pressure to drive down cost.  Many of the executives at the supplier (manufacturer) organizations noted how this was translating into a tendency for purchasing to focus almost exclusively on price, at the expense of reliability, durability, and in many cases quality, all of which translates into total cost of ownership.

For example, a supplier quality manager at a large public utility described it this way.  “I work in supplier quality, and am constantly  preaching to our purchasing people that we need to be thinking more about total cost.  As an example, we buy transformers, and have put incredible pressure on transformer suppliers such as ABB, Eaton, Alstom, and others.  As we continue to push them, they find ways to make the product less expensive.  Maybe they substitute materials, use less oil in the transformer, use a lower grade of aluminum or copper that costs less, and other ways to “value engineer” the product’s costs down.  But what we are finding is that when we take these down from the poles, that the new ones will last only 7 years, whereas the transformers we are taking down from poles that were built in the 70’s are 30 or 40 years old, and have withstood the test of time!  And we have done this to ourselves!  Because we are so focused on unit price out of the box, we have lost sight of the long-term costs of having to replace these every 7 years!”

One of the key elements of driving closer buyer-supplier relationships is the willingness to look at these types of issues, and to drive innovative solutions that define the measure of success.  Success needs to be defined in terms of OUTCOMES, not just price of the product or the lowest lump sum bid.  As such, organizations need a better way to evaluate all components of value, not just price.  In my presentation, I noted that RFP’s often included a space for suppliers to define new approaches or innovative solutions that were not specifically identified in the RFP or RFQ.  These approaches can often create new solutions that buyers haven’t always thought about using.  (Many buyers also admitted that RFP’s were often “cut and paste” from prior contracts, and did not always include new technology requirements!)  One supplier asked – “does anyone ever read these solutions proposed on RFP’s?”  Many people stood up and said “Absolutely!”  If suppliers are able to find new solutions that take out cost for buyers, and result in improved solutions, you’d have to be crazy to ignore them.  After all – it is their business and they know it better than anyone else – including buyers!

[No comments]

I had the pleasure and honor of attending the 2nd annual Supplier Forum, hosted by Union Gas & Spectra Energy in Hamilton, Ontario at the end of April.  The meeting was intended to bring together senior executive’s from Union Gas’s top 100 suppliers, in a forum to open discuss how to drive improvement in the major projects that lie ahead in the next three years.

The meeting opened up with a business strategy by key executives, including Paul Rietdyk, Senior Vice President of Engineering and Construction, and Michelle George, Director of Major Projects.  This was followed by a presentation Reggie Hedgebeth, Senior Counsel, of the major growth objectives that lie ahead for Union Gas.  These executives provided an overview of the incredible growth in the natural gas pipeline structure that is being driven by the massive shale gas reserves in North Dakota, Pennsylvania, and Ohio that are driving the need for gas and LNG distribution lines.  This growth also requires that suppliers be ready to drive improvements going forward.

As part of this effort, I also shared some of the insights from a recent paper I published in the newly minted Journal of Strategic Contracting and Negotiation Management.  In this paper, my coauthors and I explored some of the key ingredients that make up the “secret sauce” for successful vs. unsuccessful complex projects in the oil and gas industry.  These presentations led to the discussion of the theme for the meeting on Focused Performance, which entailed the need to drive out inefficiencies from current operations modes.  This presentation also set the stage for some of the most important discussions of the meeting:  breakout groups held between suppliers and Union Gas executives, openly discussing the following questions:

–What are the right measures that should be included at the beginning of the contract to drive the right outcomes?

–What is the cadence for planning and review that is happening today, vs. what you think would be better?

–What are the opportunities in the sourcing process to improve planning?

–What improvements in technology can enable these to occur?

I sat in on these breakouts, after assuring supplier executives that these breakouts were in fact a safe place to openly share what they liked about the relationship with UG, as well as those issues that needed improvement.  Some of the important points that came out of the meeting included the following:

RIGHT METRICS:  In general, the right metrics include not just dollar measures of dollars spent, but true measures of Earned Value that involves measures of value that are meaningful to project stakeholders.  Daily metrics of on-time, project dollars spent versus budget, and key milestones on time, as well as the use of two-way scorecards are important.  It is particularly important to engage in discussion of the right metrics during the contract formation process.  During these discussions, an overbalanced emphasis on cost can be at the expense of other factors of value.

RIGHT PEOPLE:  As mentioned earlier, having stakeholders at the table during contract formation is key.  In addition, simply having two individuals work out the details face to face can actually be problematic.  It is far better to have systems to document performance, and have all parties aware of the activities that lead to these outcomes.  This has to occur not just on new projects, but on the core business as well.  For example, during the contract formation process attention can be called to long leadtime items, that require improved planning.  For new business and upcoming projects, early warning is key to ensure a jump on these leadtimes can occur.

RIGHT MEETINGS:  Meetings between all major parties should occur at all major milestone reviews, or at a minimum every quarter.  These meetings should have the right cadence, agenda, and structure to drive the right discussions and identification of issues that need to be resolved.  Regular reviews will lead to the right innovative solutions and identification of capabilities.  In addition, post-mortem reviews should document “lessons learned” that are integrated into future project planning activities.

RIGHT TECHNOLOGY:  Technology (in this case, a procurement technology) is causing inefficiencies for suppliers as they ramp up to the new approach.  Training and operational issues need to be addressed.  In particular, individuals at each site should be targeted to become “subject matter experts”, and handle all major transactional activity if possible.  Sharepoint was also identified as a way of improving updates and communication for technology updates, performance scorecards, and event management.

Finally, participants discussed the start/stop nature of contracting is often at odds with the spirit and advantages of developing an Alliance relationship.  As one supplier put it – “we are friends, then we go into contracting mode, and then we become friends again…”  Still more work to do…

[No comments]

The Supply Chain Resource Cooperative concluded its two-day meeting on the theme of “Building a Supply Chain Risk Capability”, which proved to be one of the most popular themes yet that resonated with our audience.  We have over 175 executives, students, and faculty attending the event.  We enjoyed hearing from an “All-Star” lineup of risk experts, who presented a number of different perspectives illustrating the multi-faceted nature of risk, and challenging participants on new ways of thinking about risk.

I provided an initial overview based on the work our SCRC Risk Analytics team has been engaged on this past year.  A lot of this work involved beginning to include traditional supply chain risk analyses, but utilizing new methods introduced by the Intelligence Community.  Specifically, we have been working on a risk project with a large manufacturing partner, focused on utilizing Structured Analytical Techniques to identify sources of risk, including tools such as Alternative Competing Hypotheses, Scenario Analysis, Sensemaking Diagrams, and Bayesian modeling approaches.

This was followed up by a tremendous presentation by David Shillingford from Verisk and Sung In Marshall from Maplecroft, describing the approaches they have been engaged in on risk analytics.  The Maplecroft approach emphasizes having a unified and integrated approach for measuring risks, in order to be able to connect risks and assets at risk in the supply chain.  They also pointed to the challenges of developing predictability as an element of risk management, especially around issues such as Human Rights and Societal risks.  Maplecroft is a unique product that utilizes a number of resources, including US State reports, Human Rights Watch reports, and NGO’s to develop a quantitative score for these criteria.  They are also able to drill down to the regional and industry level (e.g. NAICS code level) that provides a basis for understanding specific risk issues.  The approach also leverages the huge amount of data developed by Verisk as a partner with the insurance industry, which is updated whenever raw data is available.  Risk quantification is indeed an exciting development, but both Sung In and David pointed out that putting a dollar figure on risk is key, as the issue of “Who Owns Risk” determines ultimately the Value Proposition for putting resources behind the mitigation of supply chain risk…

The next presenter, Steve Fecho from Merck, shared insights on how Merck has developed a global Center of Excellence for supply chain risk.  Steve has recently been appointed to a newly created role tasked with looking at supply chain risk.  Merck has already established a Center of Excellence for market intelligence, and utilizes a variety of sources to develop insights into how to develop insights into supply markets across the globe.  In his new role. Steve was quick to point out that most firm’s response mechanisms aren’t prepared to deal with risks.  For instance, he pointed out that we were 3/4 of the way through the day after the Nepal earthquake, and no one in the room had received any word of the net impact of the earthquake on their supply chains, even though most people had supply chains that extended through Asia!

This was followed up the next day by a panel discussion (composed of Randy Pherson, Judith Johnston, and Stacy Kaminski).  The focus was on risk analytics, which included former analysts and intelligence officials.  The panel focused on the use of analytical methods to improve techniques of managing supply chain risk.  One of the presenters, Randy Pherson, pointed out that in his former role as an intelligence analyst, he often relied on his own judgement in reporting information, and often didn’t have the benefit of formal structured approaches.  In many cases, analysts do NOT have access to detailed data, and it is difficult thus to use detailed models.  Today, however, analysts have more structured techniques that will allow them to begin to fill the gaps, and think about problems more transparently that lay out their assumptions and observations.  Research shows that when there is input from experts on intelligence and risk studies, the result is greater than 90% accuracy, as expert judgements are able to better fill in the gaps with data.

Many of the problems supply chain risk analysts face involve what the panel called “squishy questions”….as they don’t have definitive structure.  For this reason, it is important to establish a structured framework to enable analysis of these types of questions – that determine “where things go” in a more structured manner, to ensure analysis doesn’t go “off the tracks”.  The panel also pointed out that putting things into a framework might often convert a perceived “threat” into an “opportunity”, that enables being able to get “ahead of the curve” on the problem.  This was also mentioned in an interview I conducted with Rick Hughes, former CPO of Procter & Gamble, who mentioned that “procurement can take advantage of situations where the market is going up or it is going down, but there is little we can do when it is stagnant!”

[No comments]

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!

[No comments]

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!!

[No comments]

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.

 

 

[No comments]

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…

[No comments]

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.”

 

[2 comments]

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[No comments]