SUPPLY CHAIN RESOURCE COOPERATIVE

The SCRC meeting was a huge success yesterday.

I led off the discussion and took this opportunity to share some of the highlights of my new book, The LIVING Supply Chain, (with Tom Linton as co-author), and try out some of these new ideas on an unsuspecting group of people!  The SCRC meeting featured a group of executives, students, and faculty participating at the Supply Chain Resource Cooperative meeting yesterday in Raleigh, held at the new Talley Student Center on the NC State campus.  In this sleek, modern building, we also spent some time in breakout sessions reflecting on what this means for companies who are seeking to start to create their own real-time, globally transparent supply ecosystem.

In my session, I articulated some of the “New Rules of Supply Chain Management”, that follow along the lines of the natural world that exists in the Serengeti and in nature.  Many of these rules have to do with the idea of creating a broader view of the supply chain as a LIVING network of entities, that rely on their mutual balance to remain healthy.  For instance, I referred to the example of the wolf population in Yellowstone, a perfect example of what naturalists call a “trophic cascade”.  The elimination of wolves led to a massive growth in the elk population and coyote populations, which led to a drop in the antelope population, as well as a reduced number of willows and aspens due to over-feeding.  The restoration of predators in the system resulted in the more balanced ecosystem.  In the same way, supply chains require competition to thrive, but also require the entities to operate in harmony.  The ability to visualize what is happening in your end to end supply chain in real-time, through the massive shifts in cloud computing, big data, visualization, and mobile technology, is shifting our ability to monitor the health of our ecosystem.  Managers who think about not just the technology shifts, but the shift in mindset as we move more towards “federated”, integrated networks, will be the ones that will avoid extinction in the massive shifts that lie ahead.  The book is slated to come out next year.

This discussion was followed up by a great presentation from Vince Messimer, who is retiring from Shell Oil after 34 years with the company as their head of procurement for Shell Manufacturing.  Vince shared six of his “lessons learned” that relate to creating the right mindset for decision-making using a “total cost of ownership” approach, which is an essential principle for operating the supply chain ecosystem  While this approach has been around for many years, the practical realities of adopting it in decisions is challenging, especially in the oil and gas industry.  Vince noted that:

“My job in Shell is to drive complex change – when you are accountable for driving change and the challenges are predictable. Secondly I believe that in all industries, there are pockets of examples of total cost of ownership. The biggest challenge is that it is not systemically done throughout the company.”

He then articulated six challenges with deploying TCO in the company.

  1. Total Cost of Ownership is determined by  Purchase Price (20%) + Demand (40%) and specification/service level (40%).  Purchasing focuses mostly on the first component, as the last two are difficult to control and measure.
  2. The diversity of the business portfolio in oil and gas is so complex, it is difficult to measure TCO across the business.
  3. Senior leadership priorities are diverse. Vince gave a great example using a picture of a pipe rack. “You want a  pipe rack to be built to industry specifications. You want your craft labor operations people to use it. If you work in our projects and technology, and you believe the Shell spec is better because it has has less risk, easier to maintain, it makes sense to buy it that way.   But the Shell spec will cost 30% more. If you are an Executive VP with oversight over 20 sites around the world, and you do turnarounds every 15 years and you tear out the piperack every 15 years, you have different priorities. So how do you calculate TCO?”
  4. Business Planning and Accounting Practices may drive different behaviors.  For example, OPEX is about ongoing costs for running a product or business. Maintenance manager cares about that. He gets budget and wants to do it as easy as possible.  CAPEX is the cost of developing the non-consumable parts for the product or system (Growth CAPEX or Stay in Business CAPEX (turnarounds)). This is really important and finance is your partner. COGS is a direct cost attributable to the production of the goods sold and done in aggregate.  So how does TCO operate vis a vis these different accounting practices?
  5. Information Systems.  Most companies use large ERP systems such as SAP or Oracle or others.  These systems make life harder for the business to operate.  Yet we want to bolt on more systems for procurement to make their life harder still!
  6. Talent.  Do we have senior leaders that are ready? It takes some development to get them where they are ready.  In general, SCM professionals are not always ready to be the ones to drive change, and aren’t equipped to be able to truly lead that change.  Vince’s observation for young poeple graduating is that “your first job should be to go out and work in an asset.  Go work in a warehouse in Odessa Texas (which is how I got started), and see how that asset is operating in the real world!  That is the key to understanding how to drive change, as you see how the business really operates!”

The breakout sessions highlighted many of the points from the previous two sessions.  Some of the discussion points that came out of the breakouts:

  • We’re looking at increasing visibility of the supply chain as a whole so that everyone is looking at the same figures. We’ve implemented portals that help the suppliers to have input. The next level is to make an integrated portal for us and our suppliers to interact.
  • We do a lot of this collaboration when we’re in the heat of battle. Is there an appetite for the type of collaboration that shines a light 18 months down the road to determine where the trouble spots might be later on?
  • From a procurement standpoint, we get updates daily. Further down the supply chain, we do not get real-time data. We’re working on on-time delivery and sharing real-time information with our suppliers.
  • The reporting data that we get on cost sometimes requires us to be reactive because it might come a month later. We’re working on getting it after a week, which would be an improvement for us. The closer we can get to real-time data, the closer we get to developing a just-in-time system.
  • The dashboard is the easiest part. I spend 90% of my time doing the data mining to get the right data. The biggest key is figuring out which question you want to answer. Visualize the dashboard that you’d like to see and then determine what type of data we need report on in order to achieve those visualizations.

There were many more comments and discussions that came out of the meeting, but these are some of the highlights.  Following the breakouts, the student gallery walk featured 28 student projects presented on poster boards.  Walking around and looking at student projects was fascinating!  I’m proud of all of our students for their accomplishments this semester, as well as the project sponsors who worked with them to bring their ideas to fruition.  The winners of the project competition included the Revlon Transportation Dashboard project at the undergraduate level, and “Project Meatball” who worked with the Center for Environmental Farming at the MBA level.  However, all the projects were really, really good this year (as always!)

Thanks to everyone – Troy, Dana, our MBA Research Fellows, judges, students, and sponsors for making this a huge success!  If you missed the meeting this year – then we hope to see you on April 20 for the next SCRC meeting.  Put it on your calendar!

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We are at the beginning of a completely different era in the history of global trade: the era of the digitized  real-time supply chain. In the 25 years I have been teaching students and conducting research in the field of supply chain management, I have never seen the degree of change evident in the face of this new digital era. The changes we are witnessing are unparalleled in scope, and their implications for the way humans work will have significant impact on our daily lives. This is the era of the transparent, real-time supply chain, enabled by the rapid digitization of the communication infrastructure, cloud-based computing, mobile technology, and the rise of the digital ecosystem. These changes have less to do with technology than our mindset and understanding of how to adapt to this new reality.

This is about developing and sustaining a deep understanding of the components of customer value while making pre-emptive strategic plans that can better respond to sudden shifts in customer requirements and market conditions. This nimble response will be enabled by a series of dramatic shifts in the way we monitor not only the explicit needs of customers for materials, information, services, knowledge, and capability, but also to the intangible elements that drive the cost to provide this level of service. We are moving to the era of real-time supply chains that involves understanding and predicting what internal users and customers will need right now, even before they themselves recognize that they need it. Response velocity is the next capability that will define competitive survival.

Velocity as the Next Frontier

The next competitive capability in the supply chain will be visibility with real-time response and digitization as ingredients for driving growth in a flat economy. Visibility requires transparency, which in turn can be leveraged through the new technological capabilities of inexpensive cloud-based computing, distributed computing “at the edge,” and the growth of a digital ecosystem. Those who harness these technologies through collective innovation with their supply chain partners will win. In a single digit growth world, velocity will become the only thing that matters.

There are two key core elements of real-time supply chains: velocity and visibility. Velocity is the ability of an organization to drive working capital rapidly from suppliers through end customers. Visibility is the relative transparency of events, material, and flows to all key decision-makers in the extended supply chain. In concert, these elements move supply chain activities towards a frictionless and sustainable future.Visibility allows individuals to see what is going on, and empower these individuals to interpret information and rapidly make decisions in response to data. These principles are not new. Many of the concepts around “lean production systems” have emphasized flow and visibility; however, in the context of supply chain digitization, these concepts have a new meaning and importance.

Velocity and visibility are only possible to the extent today because of the evolution of technology. Clearly the establishment of the Internet spurred the explosion of information and the plethora of supply chain management tools and applications now harvesting data, and driving the evolution of “cognitive” computing. Yet this disruption has not fully matured; in fact, it is really only just beginning. As organizations begin to engage and mediate impacts upstream and downstream, the power of this force will become evident. It will be those companies that not only survive, but thrive.

In this year’s SCRC Semi-Annual Meeting forum, we will introduce insights into the rapid changes in velocity, digitization, and analytics across the supply chain. We will facilitate a series of roundtable discussions which will allow you to address and gain insight into the following sets of questions:

Challenges:

 

  • What are the major challenges your organization is facing in driving change and adapting to these changes?
  • Where are you in your journey to move beyond price leveraging and creating value, innovation, and impact on Total Cost of Ownership?
  • How are you able to create a budget and justification for investment in a digital supply chain?
  • What are the major places in your supply chain where visibility is needed?

The Mechanics of Transparency

  • What types of data and information are needed to be able to be transmitted in real-time versus those that could be completed in batch mode. (“Not all data gets a first class ticket!”)
  • How can risk data be created in real-time (natural disasters, financial issues, market shifts, capacity issues, operational breakdowns), versus those that can be communicated and transmitted in batch mode.
  • How will legal counsel deal with the issue of real-time transparency?
  • How will our team be prepared to get their heads around the issue of transparency?

Our meeting agenda will include:

  • An SCRC Board of Advisors meeting (by invitation only)
  • The SCRC Forum “Preparing for the Digital Supply Chain” by Dr. Rob Handfield, Bank of America University Distinguished Professor of Supply Chain Management and Executive Director of the SCRC.
  • Shell OIl Products Chief Supply Chain Officer Vince Messimer, speaking about “The Challenges of True Total Cost of Ownership Understanding”
  • An update on SCRC programs and services
  • Student Projects Showcase presenting ~30 graduate and undergraduate practicum projects completed by all academic concentrations within the Poole College of Management this semester.
  • Supply chain professionals and practitioners networking opportunities.

I’ll be keeping you updated as the event rolls out today…. stay tuned!

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Proponents of integrated supply management propose that successful Contract Management (both pre and post award) requires a collaboration between the business functions (Engineering, Operations, Maintenance) that have the need (demand, specifications & service levels) that require contracting with third party services. The procurement function (contracting supply chain) typically provides the market & commercial expertise for creating the contract.

At many companies the traditional model is that the Business function is the “Contract Holder” given that it establishes (“owns”) the demand, specifications and service level requirements. The Business function is thus deemed to chair a collaborative Contract Management Team of Procurement, HSSE, Key Users, Finance, etc. The standard approach involves a progressive transition of delegated responsibility that begins with three Pre-award Elements (Assess Demand, Develop Strategy, Award and Source) stage in which Purchasing has the primary responsibility for the activity. Their role is then transitioned whereby responsibility for Post Award Elements (Implement Contract, Execute & Manage Contract) is carried out by the Business function.

But is this the only model enterprises should follow on major projects?

In addressing this question, I interviewed a number of oil and gas executives and looked to research in the Journal of Strategic Contracting and Negotiation.  The findings points to the general best practice that joint ownership of the contract should be assigned to both the business and to procurement. It is general acknowledged that the business may not have the necessary skills to manage the contract independently, and that procurement does not have the vested interests of the business in the contractors, so the ideal outcomes seems to be that joint ownership occurs.

For instance, one of the most important differentiators of “successful” projects in a recent study was that projects risks were identified early during the contract negotiation phase (77% of respondents). Early risk identification was found to be a function of getting the right people at the table early on in the negotiation process. The results also indicate that having key stakeholders at the table during contract scoping will more likely lead to identification of project risks, and better outcomes. This is especially true for large complex oil and gas projects in which clients and sponsors (especially investment companies) are seeking returns on large investments with multiple stakeholders involved.

A number of other interesting themes were also discovered. For example, many of the companies designated specific roles for contract managers from procurement that was accountable to ensure all contract terms are in accordance with the contract, the business contract owner ensured the work was completed according to the scope of work, and a contract coordinator form the business who was accountable to the contract owner to ensure the daily work was being down according to the plan. What is also clear from this and other responses is that the process must be documented to clearly define roles and responsibilities, because in the end the contract management work requires close cooperation between the business and procurement. It is also interesting that organizations such as IACCM are doubtful that the “typical” procurement department, with its focus on cost savings and lump sum bids, do not have the right capabilities to drive value. I agree in so much as the right type of people who understand how to drive continuous cost improvement throughout the life of the contract cannot focus on the upfront price, but rather should focus on risks, identifying non-value-added costs, and explore opportunities for on-going productivity and efficiencies.

Executives in the oil and gas industry I interviewed by and large advocate that procurement/category managers should be the primary drivers for commercial negotiation, whilst business owners be accountable for daily performance management and operational details. This separation of duties suggests that each group must develop a well-defined process that assigns clear roles and responsibilities. The research also suggests that both parties be involved in identifying and prioritizing risks in the early stages of the project contract formation period, and that procurement’s role should be one of being informed and present during major performance milestone reviews, as well as involved in payment processes at major milestones.

Several parties advocate having procurement own the entire end to end process, including operational details, but this may result in confusion and poor outcomes. For example, Tim Cummins from IACCM notes that “You can’t really give ‘ownership’ to Procurement – or impose the cost of their resources onto the business unit – unless you are going to hold them accountable. And that really doesn’t work because you have essentially removed operational responsibility from the business.” The implication here is that operational accountability must reside with the business, as they are most familiar and knowledgeable with what needs to “gets done” and whether performance is in fact meeting the specification and service levels outlined in the contract. If procurement takes over all ownership of the contract, a dysfunctional situation can arise as there may be too many parties involved in managing the complexity of the contract who are not directly involved in the operation. For example, a field contract manager at Suncor Energy noted that:

“The field personnel were .. confused and miffed about the entire supply chain matrix.  As a result they began to do their own things (not unheard of when field personnel become frustrated).  Initially when the category management process was put in place their input and feedback was significantly requested and provided by them as everyone was excited about this new process that was advertised as making things better.  When the bureaucracy and administration became too much for the field personnel, they began to push back, slowly, but then more pronounced.  Unfortunately those changes were not good for anyone, and as a result, I suspect that the field personnel have really made an effort to rein back their contract control (by just doing their own thing, again), without any supply chain input up front, and then dumping what they have then subsequently done to supply chain management, after the fact.”

It is also interesting that the two individuals (Tim Cummins from IACCM and Katherine Kawamoto from UnitedLex) both expressed the need for a separate and distinct contract management professional that does not reside either in procurement or in the business. However, this could be something that is in the future, as Tim notes that “None of the companies doing this are very mature”, and he acknowledges that “Most companies are struggling with this issue.”

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On election night last week, I was stationed in Calgary Alberta, watching the results unfold in Mountain Time, and wondering what was going on in the country I’ve adopted as home.  You see, I’m a native Calgarian, and was visiting my home town to share insights with a group of supply chain executives at the University of Calgary this past week.  At least half of these executives were from the oil and gas industry, which is suffering severely during a period of low priced oil.  The unemployment rate has peaked at 10% in Calgary, with thousands of oil industry workers and executives laid off, and many have been looking for work for the last two years.  Building vacancies in downtown Calgary are at 30%+, yet more buildings and homes continue to go up.

I went in to meet the group on Wednesday the day after the election.  A surprising outcome was that Trump announced that very day that he would support the Keystone XL pipeline, which was welcome news for many Calgarians.  To understand why, it helped to also share the insights provided that day by Peter Wallis from the Van Horne Institute. The Van Horne Institute is recognized both within Canada and internationally as one of North America’s leading research institutes focused on transportation, supply chain and logistics, regulatory affairs and information and communications, as measured through its contributions to the strategic decision-making and implementation processes in the public and private sectors. policy and transportation.

The Van Horne Institute is led by Peter Wallis, who helped found the VHI. He discussed the need for consideration of public policy in any strategic logistics decision. To facilitate research and legislation in this area, the VHI has three Centers that focus on the Center for Transportation, Center for Regulation Information and Center for Communication. All three of these are related to supply chain strategic planning. One example of this is the case of autonomous vehicles and the unlocking of the resources for thinking about how to adopt these to our society. VHI research is beginning to test autonomous trucks in Nevada, and has taken the bold step of seeking to license autonomous vehicles.

Since its inception in 1981, the VHI has grown from a handful of members to 60-70 corporate members. This program is a manifestation of the opportunity to understand supply chain, logistics, and transportation. Canada is a trading nation, and so getting products to market is critical to the national economy.

One of the major research initiatives is also focused on how Canada can get its oil to export markets. Two areas the group has focused on are particularly bold and audacious. In seeking to ship oil and gas offshore, Alberta has sought to build pipelines in three directions: Energy East through Quebec, south through the Keystone XL pipeline, and west through the Northern Gateway. After Tuesday night’s results, there is renewed hope that Trump will revive the Keystone XL pipeline, despite the protests in North Dakota. The Energy East pipeline seems to be a challenge, particularly as individuals such as the Mayor of Montreal insisted that “I don’t want it in my backyard”. The Northern Gateway going west through BC has had many challenges.   This leaves one option open: Go North.

The Alberta government asked the Van Horne Institute to examine the case for building a railway from the Oil Sands fields of Fort McMurray to the Delta junction in Alaska. Their economic model envisioned using 196 cars with distributed locomotive power, with six to nine trains of that nature running 24-7. The goal would be to create a logistics channel capable of exporting 1M to 1.5 M barrels a day of bitumen. The bitumen would be heated in tanks in McMurray and unloaded in heated tanks at Delta Junction, where the Alaska Pipeline connects with the Alaska Railway system,which goes to the port of Valdez. The proposition of the study would be to have the bitumen mixed with product coming off the north slope, and offshored to customers by ships in Valdez.

The study was conducted with the University of Alaska and involved the potentially affected Indian communities, with engagement to understand and communicate what this would mean to them financially and socially. The project would involve a purpose-built railway going from Fort McMurray to Delta Junction, spanning almost 3000 kilometers. The team was not sure that the Alaska Pipeline would be interested in taking Canadian oil into their system. The projected cost was in the range of $CDN 24-30B.

The study is online at the Van Horne Institute. The study has been picked up by the Alberta to Alaska pipeline, and they have First Nations money to look at a feasibility study, for construction of the service. Their estimates are in the range of $CDN 14-20B.

Other issues the VHI is examining include congestion management, and the proposal for highway tolls and privatization of highways in Canada to generate government revenue. The other issue is the emergence of infrastructure banks, which are done all over the world. Infrastructure banks are developed to create pools of capital, to generate returns on investments in logistics infrastructure.

These are all topics that will surely shape the discussions between the US and Canada in the months ahead. We all remain on the edge of our seat this week as we wait on how Donald Trump’s forms his cabinets. But one thing is for sure: big changes are ahead for the Canadian oil and gas industry.

 

 

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Contract management analytics are critical for tracking transactional compliance with contract pricing, terms and conditions, but also as a vehicle for workflow management around negotiation of contract renewals, and aggregation of supplier performance data on service level agreements, delivery, quality, and service performance. Transactional data must be rolled up to ensure suppliers are providing the requisite price discounts, clauses, rebates and charge backs negotiated in the original contract. Contract analytics can provide a summary view on performance and pricing deviations, risks, statistics (expiry, renewal and pending), procurement and sales metrics.

Current best practices in contract management systems are associated with application of searchable contract databases, allowing comparison and rapid access to contract information, as well as comparison of contractual terms and exposure for common suppliers, categories of spending, and specific price benchmarking internally. When spend analysis is combined with insights about contracts that are outstanding, another layer of insight can be created. Contract management systems enable summaries of when contracts are expiring, which can spur buyer-level activities, assignment of resources and timing of preparation for contract renegotiation sessions. Contract Management systems can also provide insights as to outstanding terms and conditions, and which are out of line with corporate policies. In a presentation at the EMPOWER conference held in Orlando, a large utility shared how procurement had used the decision-making algorithm embedded in the Emptoris suite of tools to guide users into the appropriate contractual mechanism. By asking a series of questions regarding the type of requirement the buyer was sourcing, an artificial intelligence tool guided the user through a decision-tree that led them to use the right contract and the right tool. The tool also helped support a well-documented statement of work, and ensured that the right regulatory requirements and questions were being addressed in the contract.

The real value of contract management systems (CMS), however, will the actual data contained in contracts.  Contract data is the real ROI  behind the adoption of these systems, as this data becomes foundation for application of artificial intelligence systems, that will lead to even more interesting and useful applications for supply chain management.  Data obtained from contracts should be sent to a data warehouse for cleansing and processing and eventually be used in business intelligence and possible statistical (regression) analysis that can explore major trends in supply chain behaviors, and also help drive strategic planning in the face of new and emerging trends. Data from CMS’s can be used for upstream/downstream analysis, comparing how customer needs are translating into supply market capabilities, prices, and capacity requirements.  This ability to link supply and demand characteristics of the market place is the true “nirvana” of supply chain analytics.  . Language used in contracts such as labels, specific terminologies, suppliers, products, etc need to be classified to make the data useful, as analytics can provide insights into these components.   Use of AI in contract management will help maximize the accuracy of automated results.

The application of contract analytics for analyzing data helps drive efficiency and effectiveness within the contracting process, and also helps in gaining an understanding of the source to pay workflow cycle. Contract management systems helps companies focus better on proactive management of spend and revenue as opposed to management based on historical data. The potential of Contract Analysis can help organization’s contracting function give a potential competitive edge with the organization’s counterparts and can typically lead to ROI of 15 to 20 percent. Data obtained from the contracting and the transaction systems needs to extracted, enriched and dissected to measure

[1] https://infocus.emc.com/mauro_caputi/contracts-management-and-analytics-the-source-of-truth-for-big-data/

Three years ago the decision was made to apply analytics to the upstream procurement supply chain at a large CPG company, but instead of the 10 biggest customers that make up 80% of sales, it was applied to the 10 biggest suppliers that make up 80% of the spend. Rather then selling, the focus was instead of prioritizing, creating visibility of spending against a baseline by region, and developing should-cost models to prioritize the scale opportunities to create leverage. Contracted volumes and  spend data were used the base data set. However, the executive we interviewed noted that “spend data only gets you so far, and we realized that to move to our vision we needed to enable connections of spend data with other datasets. Using our partners in that space as classification engines, we were able to pull data out of our different operations and logistics systems, and began integrating them with our spend data in the cloud. This included budgeting tools, commodity management data, SAP inventory data, contract information, and other data from multiple parts of the organization. As we began to consolidate and link the data, we found that we were better able to drive to greater insights.” The limitations are that the data is not real-time, and the vision is to utilize Hadoop to better create connections between sensor data, real-time data, and sourcing data in the future. The sourcing analytics team has made such progress, that other functions such as R&D, quality, and production have seen the dataset and recognize that they also would like to be connected into this workstream to have better information on supply chain analytics. These functions are wanting to “pour in their own data over time based on a use-case prioritization, and we will be there to continually build the dataset to meet the differing needs of the organization.   Today, the analytics team has begun embedding different functional subject matter experts into the center, and proects are prioritized based on business need. Some of the areas being explored into end to end supply chain optimization, risk assessment and categorization, and source to deliver interactions that can improve economic outcomes. The team has begun to hire data scientists from universities who arrive with a strong skill set, and also fund subject matter experts to work with the scientists who can share their tribal knowledge and add context to the project data insights and interpretation. This is a key component of the sourcing initiative.

“Our biggest successes are when we can take a “belief” and put a number to it. Someone in the organization comes to us and believes there is a benefit to a certain strategic decision, but has never been able to quantify it. We approach these types of problems through cost modeling and prioritizing against the potential benefit, and seek to answer questions that people can’t answer. For example, what is the best way to source sugar? Should you do it in bulk, in pallets, or other channels based on transportation, spoilage, and consumption factors? This often results in not just cost models and price tier outcomes, but results in a modified business process that has to be implemented to achieve that outcome. Our analysis provides insights into how we have to operate to achieve the outcome, as well as scorecards and metrics that require additional analytical insight. Unfortunately, this is an ad hoc process. It would be great to highlight all opportunities against value, and be able to prioritize these opportunities, yielding a decision on what is the key glaring opportunity leading to an intelligent conversation around where to invest analytical resources. We are not there yet, but are more likely to work on activities that pop up to the surface when someone has an idea they’d like to explore.”

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I really enjoyed hearing Professor Mike Walden from NC State speak at the NC Museum of Art this morning.  Mike gave a really nice talk on the fundamentals of economics, as well as some interesting observations about the impact of the presidential elections and the condition of the local economy as well.  Here is a transcript of his talk.

We are at the tail end of the election cycle. The economy has been front and center. The top issue – have we been growing, and productivity has been holding us back. Where are interest rates going? What is the impact of the election?

We re growing – but very slowly. This was the worst recession – a contracting of the economy, and we are past the recession which ended in 2009. But if you look at GDP, GDP per capita, and payroll jobs – are growing at 2.4, 1.4, and 1.9% respectively. This economic recovery has been the slowest in history. Various election candidates have ideas about this and how to turn this around. Rowth rate and GDP when compared to history.

On the demand side, one of the biggest factors is income inequality. As the economy grows, more of the growth is for high income people, and less to lower and middle income. Doesn’t mean they are getting less, but their take of the growth is less. You can argue that economies grow when people are buying stuff, in order to have a business that hires people and pay people. What you find is that high income people don’t buy as much stuff – and do more investing. Lower income people spend more of their disposable income. So if you don’t see as much spending, than the economy grows at a slower rate. Other arguments are that people stay in school later.

The Supply Side explanation – is one that you often hear. If we are not growing it is because there are disincentives for workers to produce. We need to relax those.. This focuses on tax rates, regulations, and other components that will increase jobs and production.

But there is a major change in the presidential views. Clinton’s focus on increasing taxes on higher income are the prescription is you were on the demand side of the equation. So if we give more income to lower income people, they will spend more, and the economy will grow more. They also advocate help with college debt, child care, and early childhood education.

Mr. Trump’s prognosis is a supply side argument. His arguments are that we are growing slowly because workers aren’t incented, so we need to lower taxes and regulations. He is vague on regulations to be lowered. He has a very aggressive tax plan reduction.

These competing perspectives are not new, but display the differences in these two camps. But wait – there is also a third explanation: we are an aging population.   All developed countries are aging and experiencing slower economic growth. Our growth rates are arguably higher than those in other countries – so there must be a common thread – and the idea of an aging population going up, the birth rate and number of people who are younger is going down. When you age, you become more frugal. You are in an established household, so you are not only going into debt for the house, but for a washing machine, etc. And there is more saving in bonds, etc. which also decreases economic growth.

One of the biggest worries is interest rates. This has been a dramatic change over the last little while – and the 10 year interest rate has continued to drop. Some argue the Federal Reserve has managed it in a better way, and people don’t borrow as much, and the demand for borrowing is not as high due to the older population, so interest rates will also go down. And demand for new products is not as much, and the demand for borrowing has also gone down. And finally, the internationalization of finance has driven the flow of global money everywhere, which some argue is why there was more money coming in that fueled housing prices and easy money. We may see a bump in interest rates, but it is unlikely that we will see an increase.

Along with this there has been a dramatic drop in inflation. This has trended down to about 2% today. There have been some dramatic shifts in food prices, and people have been eating in more and out less. Most economists believe both numbers will continue to be low.

For energy, the price of a barrel of oil rose, and then dropped dramatically in 2009.   Prices went up again until 2014, and then dropped again due to hydraulic fracturing technology, which allowed drillers to find oil in new places that were unattainable previously.

Housing prices also had a boom, which ran its course, and a dramatic drop-off on housing prices, which dropped by one third after doubling between 2006-2010. There was never a housing crash like this – at a time when banks felt that mortgage loans were the safest bet. Alan Greenspan said he felt there would never be a housing crash as there never had been.   The housing market is improving, but one of the big questions is what will the millenials be doing – between 1980-2000 – about 76M generation of people. They are taking over the economy, and have been different in a number of ways. They have largely avoided buying homes and are renting, because they have been delaying marriage, staying in school longer, and eventually they finish school, pay off debt, and marry. But will they rent condos downtown, or buy homes in the suburbs? This will impact a lot of elements in the economy.

The likelihood of an increase in interest rates? The Federal Reserve has been in a bind. When we have another recession, which is likely to occur, in the next presidency. It will likely be a mild recession. But what happens is that lowering interest rates is what the Fed responds. But if interest rates are zero, how do you respond? You can move to negative interest rates, which has occurred in some countries. In several countries, the question is what will I have to pay you to keep my money? The Federal Reserve has stated they do NOT want to move in this direction, to go to negative interest rates. So they would like to increase rates at some point. The Federal Reserve is a semi-independent organization that gets money from federal banks.

The Federal Government, on the other hand, has continually increased the debt. We will know what those prescriptions will be likely in the next few months.   But what can we do in terms of forecasting the future? Mike predicts Real GDP growth of 2.2-2.4%, unemployment will remain at 4.4-4.5%, inflation will grow bo 1.7-2%, and the real benefit will be an increase in real disposable income of 3.0-2.5%.

But what about North Carolina? We tend to follow the national economy. The growth rate in blue for NC and in red for the US were almost identical. Our demographic make-up is more like the national economy and we are a Purple state – a combination of red and blue, Republicans and Democrats. Our state unemployment rates are however slightly higher then the US average. This has occurred primarily in the last three years, as prior to that time the state unemployment rate was much lower then the US average.  If you are in a Charlotte or Raleigh, or a metro area, the economy is much better. But if you are in a rural area, unemployment is in the double digits, and is much more severe.  And as many as one-third of counties may depopulate as more people go to the urban centers.  Having said that, NC has a lot of advantages, as there is more movement to the south, a lower cost of living, a right-to-work state, and there is room to grow.  Mike noted that the NC economy was re-made from a textile economy to a new economy in a very short period of time, a topic of his recent book.

One of the major social shifts in the coming decade will be aging.  In 2010, 13% of people were over 65.  In 2050, 21% will be over 65.  This will have a dramatic impact on the overall economy with an aging population.  The forecast is that only those with more education will get ahead, as we move more towards a “brain-based” economy, as more machines are doing more manual labor.  Automation is evolving even for tasks like brick-laying!  But a lot of white collar jobs, like paralegals, will also be impacted, which can be done by computers.

My own comment:  this is a good time to get a degree in supply chain management!

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I had the opportunity to attend a number of exciting events on procurement analytics in the last month.   First, I attended a CAPS Research event in RTP on Procurement Analytics, held right down the road at IBM headquarters.  Next, I attended a second CAPS Research Roundtable held in Tempe, AZ. Finally, I attended an event held by IBM, called Empower2016, in Orlando, which featured a number of speakers and analysts discussing the emerging technologies being developed around Watson Cognitive Analytics. This last event was rudely cut short by the arrival of Hurricane Michael, but I nevertheless was able to stick around long enough to gain some great insights into the capabilities of IBM Procurement combining the power of Emptoris with the emerging capabilities of Watson.  I also was able to sit in on numerous user group meetings sharing how companies are using Emptoris capabilities to improve their contract management outcomes.  For instance, one presenter discussed how she was using Emptoris decision tree features to guide users to the right contractual template.  All the user had to do was answer a series of questions, and the system would guide them to the right contractual template that had been developed and recommended by legal.  At this meeting, I also had the chance to speak with a number of analysts from Gartner and other software analytical companies to better understand their opinions of what is emerging.

What is emerging is certainly impressive.  I sat in on a number of demos, and saw the capabilities emerging in a number of IBM systems for procurement that are briefly described here.

 

Spend analysis  Real-time spend analysis combined with visualization techniques and structured queries on contracts can provide another level of value that is currently being developed by software providers such as Coupa and Emptoris.  In a second example, Emptoris is able to provide visualization of data analytics by category, by geography, etc. to permit deeper drill-down understanding of spending across a category across the business. In a final demo,   I saw how Watson is able to query the current spend analysis in and quickly return a number of parameters of interest. For example, in response to the query of “What is our spend with Dell?” a dashboard is produced that allows “drill down” capabilities to better understand the opportunities for combining contractual requirements.

Sourcing and market analysis (Watson Buying Advisor). This approach combines IBM catalog information, and uses natural language classifiers and speech to text technology, combined with mobile-enabled and smart digital technology to create a buying assistant. This assistant allows users to input their requirements (either through visual cameras, text description, or other approaches), and the system provides a list of preferred products and suppliers. The disruption in technology is that the technology interacts with the user through natural language, mobile picture devices, unstructured text and digital imagery, combined with clarifying questions, to understand the need and channel the need to the right sources. The system can provide suggested products and services based on the description or picture input by the user, and narrow the search using a decision-tree like set of questions. The user is guided to the right product from an approved supplier at a pre-negotiated price in many cases.

Contract management   IBM Watson has also invested in programs to cognitively manage contracts across the supply base (Blue Hound). Contract technology cognitive applications seek to accelerate contract analysis by identifying clauses that link to changing market conditions, specific supplier conditions, and how this relates to the contractual agreements in place that govern such changes. There is also a need to better able to compare and contract different terms and conditions across multiple contracts within a spending category, and determine alignment of agreements across both buy-side and sell-side agreements. Contracts for an entire organization often span hundreds of millions of pages, and these are rarely read and reviewed. Cognitive computing provides the capability to be able to rapidly scan contracts using specific queries and keywords to help understand exposure, limitations, best practices, and other insights. This is made even more complicate during a merger or acquisition, when another entity’s contracts are absorbed and must be rapidly integrated into the current supply base. Currently, extracting insights from statements of work given the high volume of unstructured data is a very painful process. Cognitive technology holds the promise of being able to parse key terms in a contract, and train it to become smarter, thus building a corpus of knowledge around what represents best in class contractual terms and conditions. This could down the road to an engine that could construct a contract for specific supply situations, or an expert system that drives the right activity.

Market Intelligence   An emerging technology at IBM is the increased understanding of price movements in the market (Pricing IQ). These technologies will provide market intelligence advice, and is envisioned to be deployed across technical services and other categories of spending. The opportunity is to correlate pricing with events in the market, including election results, interest rates, natural disasters, and other issues that impact supply and demand. Technologies that correlate pricing to such macro events can help drive predictive pricing for 3, 6, or 12 months into the future. Understanding price predictions can help drive contracting and hedging strategies. This technology is also envisioned to collect and refine real-time market research events and update contracts with pricing clauses in real-time. The technology may also be able to eventually work to establish how employment statistics from government websites will impact labor availability, and eventually impact labor pay rates. For instance, the trends may dictate the need to pay above market rates in some locations to avoid high labor turnover rates, and other areas where pay rates are well in excess of reasonable market rates.

These emerging opportunities for building greater insight into spending patterns using cognitive technologies are emerging and will be available in the next 2 to 4 years.

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This week’s blog is a guest blog from a PhD Student, MD Rejaul Hasan.  Rejaul is from Bangladesh, and is working on his PhD in the College of Textiles at NC State University, and is passionate on the subject of sustainable apparel from his home country.  This week he provided a great set of summaries from the Harvard Conference on “Sustainable Models for the Apparel Industry” held on September 24 at the Harvard Law School.  The issues provide a great backdrop for the analysis of a “should cost” model to truly understand what is a fair price for apparel, in a sustainable supply chain.

What is the fair price of an apparel product responsibly sourced from Bangladesh, and what price do apparel suppliers need to ensure a safe and sustainable work place and fair wages for the workers in Bangladesh? Are big name brands really paying a fair price to a supplier in Bangladesh? What are the major facts inhibiting the Bangladesh apparel industry in being safe and sustainable? Are the major factory accidents in Bangladesh linked to the lower price paid by the brands to Bangladeshi supplier? Who is making the bulk of profit in the apparel supply chain? These are some of many discussions on building a “Sustainable Model for the Apparel Industry” that occurred at the Bangladesh Development Conference 2016 on September 24 at Harvard Law School.

All the major apparel industry stakeholders across the world participated in the conference including representatives from U.S. retailers, U.S. State Department, EU, Bangladesh Government, Bangladesh garments business association, Bangladesh suppliers, US Embassy Bangladesh, World Bank, Netherland Ministry of Foreign Affairs, International Labor Organization, Solidarity Centre, Worker Rights Consortium, Cotton Incorporated, Better Buying, South Asia Water Advisory, Ethical Trading Initiative, Harvard Business School, and Penn State University.

Bangladesh is the second largest exporter of apparel and textile after China with $28 billion in exports last year. It directly employs 4 million workers, 80% of them are women; the industry is playing a vital role in the country’s huge economic development and women empowerment since early 80s. Though the incidents of “Rana Plaza” and “Tazrin Fashion” in 2012-13 attracted the world’s negative attention and showed still how vulnerable Bangladesh is in terms of work place safety and labor rights, it remains the most desired sourcing destination for major apparel brands and retailers in US and EU.

During the Conference, Prof. Ross from Clark University mentioned the recent “Tempaco” factory fire in Bangladesh that caused the death of more than 30 workers. He supports the US government decision of not assignment duty free access as a GSP facility for apparel exported to the US. He mentioned that until such time as Bangladesh ensures major improvements in factory safety, this GSP facility should not be assigned and the EU should also ban this duty free access. Regarding the GSP facility, Evan Fox, the Political Officer in US embassy at Bangladesh explained how they are working with Bangladesh Industry to build a 16-point action plan and execution to support the Bangladesh industry to get GSP facility assignment as soon as possible.

Regarding factory safety, suppliers and business associations leaders from Bangladesh claimed that every year the price of product is going down with an increase in requirements for more advanced product design, quality and overall sustainability requirements from the brands and retailers. This is a major challenge for suppliers to improve factory safety as fast as expected. In support of that, Prof. Mark Anner from Penn State university showed how the US apparel import price went down in the last 20 years and the correlation between import price and the labor rights situation of exporting countries was very high. Suppliers from Bangladesh also mentioned how accord and alliances are inspecting a huge number of factories and making corrective action plans, which is causing labor wages increase and more recent environmental initiatives by governments and suppliers in Bangladesh.

Liana Foxvog from ILO shared a study mentioning how female workers getting harassed by co-workers or supervisors was prevalent, and that a lack of effective monitoring systems by the factory and labor unions in Bangladesh is problematic. In 2010 to 2016 the Bangladesh Joint Directorate of Labor (JDL) approved 362 labor unions against 783 registration applications. Tim Ryan, Asia Regional Program Director from the Solidarity Center added and reinforced the necessity of labor unions in preserving labor rights.

Representative from retailers mentioned the increasing competition in retail and how the industry is really struggling to survive. Consumer expectations for having the most fashionable apparels are the lowest price possible, consumer lack of interest of paying high prices for sustainable product, challenges from competitors and increases in production cost in Asia is putting the whole apparel retail industry in survival mode. Many brands and retailers already modified their product to adjust for price competition but are struggling to stay competitive. However, a report in the Sourcing Journal on 8 Aug 2016 “Cheap Clothing Created Some of the World’s Richest People” mentioned how owners of major apparel brands and retailers became billionaires through the apparel business. This remains a matter of heated discussion and arguments arise around who is making most of the money in the apparel supply chain: the consumers, the brands and retailers or the suppliers.

The ultimate question that arises is what is the standard price or minimum price of any product sustainably sourced from Bangladesh? Suppliers from Bangladesh also emphasize that having such standards would provide an industrywide benchmark. This could probably justify the claim whether brands and retailers are really paying lower prices to suppliers than necessary to ensure a safe work environment, fair wages and overall sustainability of the supply chain. At the same time, it is important to examine whether factory fires or compliance violations in Bangladesh are really linked to price issues. It is really that expensive to ensure a safe work place? For instance, the Rana Plaza, Tazrin Fashion and recent Tempaco factory fire seem less linked to low prices as opposed to compliance with regulations, monitoring, a sustainability culture and of course ethical sourcing practices of top brands and retailers.

A big question in everyone’s mind at the conference is if the price goes up, whether Bangladesh will survive and be able to compete against strong competitors such as India, Pakistan, Sri Lanka, Vietnam and Cambodia. Yevgeniya Savchenko, an economist from the World Bank mentioned how apparel manufacturing is going to move from China to South Asia because of high prices from China and the question is who is best able to seize market share. clearly Bangladesh is ahead of any competitors in terms of apparel export business growth (8.11% growth last year, the highest in the world). But it will be key for Bangladeshi manufacturers to improve every stage of the manufacturing and supply chain to not only improve cost but also to build a sustainable industry that will grow in the long-term.

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Stuart William was in one of my former MBA classes at NC State in 2008, and graduated into one of the worst economies ever in May of 2009. Upon graduation, there simply weren’t any jobs available at all! During that period, he networked with as many people as possible, including a fund raising arm at Wake Tech. He met a colleague who worked at Car Quest, and after several interviews, started there. He started in supply planning, overseeing over $100M of spend in batteries and other categories. He then went into global imports for the central purchasing group in Raleigh . He became a director at that point, working with sales planning, inventory planning, and financial planning, and pulling together the Sales and Operations Planning team, as well as introducing new products and eliminating obsolescence. This was a lot of planning, a lot of analytics, and a lot of work. At that time Carquest went up for sale, and this led to a position at Marsh Furniture.

Marsh did not have centralized approach to supply chain management.   One of their HR people reached out to me (as they already had a relationship with our Forest Products College), and I put them in touch with Stuart. This was a new era for Marsh, as it involved moving towards a much more centralized approach to SCM.

Marsh is a 110 year old company, with the 3rd generation of leadership. The are a regional make to order kitchen cabinet manufacturer, and have two primary sales channels of modular kitchen and bathroom cabinets. They have 5 MFC retail outlets, and a dealer network. Their primary customers are single family homes and multi-family homes.

During the boom time Marsh had sales in the triple digit millions. But because of their less mature supply chain organization, the net income percentage was in the low single digits. A lot of companies no longer exist in High Point because of the housing crash. In 2009 it lost two-thirds of their sales – and lost money for four years in a row. The company had invested and saved well – they owned their factories and equipment – and had a rainy day fund to make it through. They went from 1000 employees down to less then 300 – and a lot of people lost jobs, but they were able to survive.

In 2013 housing began to come back, and survived. By 2014 and 2016 revenue was back up to almost its previous high point. This also led to new product offerings to survive, including more styles, more product offerings, and greater value. The company grew at an enormous rate of 30-35%, through overtime and labor increases. There was also a transformation in operational flow and how we operated our factory. In 2013 we had $8M of raw material inventory – due to poor purchasing, poor safety stock decisions, and a lot of WIP in the system. Today, we are at 5.5M in inventory, and well over double the sales volume.

Kitchen cabinets are simple – but there are 5 species, 20 colors, and 6 glazes, 30 door sizes, 3 overlay options – which leads to 2500+ cabinet configurations, as well as 7000+ accessories (panels, moldings, etc. When you throw in multiple hardware options, and multiple case construction options, you have the opportunity for a lot of excess inventory to build up in finished goods.  In the last year, Stuart has disposed and destroyed all that inventory and taken it off the books. “We would never move that material!”

Stuart discussed the need for a supply chain Swiss Army knife skill set.  On any given day, he has to pull one of many tools and skills to deal with the problem du jour. Relationship management, data modeling, problem solving, sourcing analysis, negotiation, data-driven decision-making, metrics development, forecasting, process flow, BOM understanding, MRP/production schedule, Pareto analysis, and information presentations are all key skills that he applies in his CPO role . In short, he has to be able to “figure stuff out” using whatever tools he has in his Swiss Army knife. In supply chain, you can focus in procurement, sourcing, inventory control, logistics, and other off-shoots that occur on a daily basis.   The basic approach is to  first try to understand what went wrong, and how to fix it.  This means having a broad understanding of a number of different supply chain tools and concepts and being able to pull them together to apply the tools to the problem on hand.

Stuart described a great example:  “We had a supplier in Myrtle Beach that got hit by Hurricane Michael last week – and we receive material from them every day! But we didn’t more then 2 days of inventory onhand, as we receive daily deliveries by truck. They had both their phone line and internet knocked out. So how am I going to place an order? We have a truck that runs every day – and can we send a thumb drive so they can scan what they are sending us? So we figured out to go to a server – and coordinate with a local lumber mill that did have access to internet nearby, to figure out what we need in an Excel format – so it could be printed out in a format to use. And we had to coordinate with the general manager at the mill that has connectivity who can get it to him! How is the information going to flow – and how much do I need – and how much inventory do I have? We have a secondary source but can’t turn in less than 5 days –and we will run out before then! So that is what I did and recrafted the plan for tomorrow morning. The GM will run over at lunch time and get them the information so they will know what we need, load their information on the thumb drive, and get it back to us with the shipment!”

This is just one of many great examples that illustrate the need for multiple skill sets in supply chain managers that requires a ton of different capabilities. You have to be able to justify assumptions, and be able to defend them appropriately!

Stuart also discussed the importance of using scorecards with their suppliers to establish performance expectations.  This dovetailed nicely with the MBA class assignment that involves a supplier scorecard assessment – and his description of scorecards as an essential element of long-term relationships rung well with the approach that students are currently working on in their take home midterm.  Thanks Stuart!!

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As a young assistant professor at Michigan State University in 1992, I was part of a group called the Global Procurement Benchmarking Initiative. This initiative benchmarked over 300 global companies, and set forth many of the principles for what we called “World Class Supply Chains”. Many of these principles became the foundation for consulting practices at Accenture, Deloitte, Booz Allen, and others. The principles at the time were certainly appropriate, and were considered ground-breaking at the time.

Many of these principles were based on the theme that supply chain managers could move beyond being a “buyer and shipper of stuff” “ but as a centralized function that combine spending across both direct and indirect categories of spending, leveraged this volume through purchase power, and sought to achieve significant cost improvements and efficiencies. An automotive executive recalls how difficult this was given the technology limitations that existed in the early 1970’s.

To drive centralized buying I had to dive down into the Bill of Materials and do a cross-tab. Fortunately, we had a decent commodity coding system for each part number with a prefix that described the car the part was attached to, the function of the item and the suffix that described engineering levels, color, and material to a certain degree. This was the first intelligent database system at the time that allowed me to look at a “deck” of the current buy for a commodity group for our production buy. I started by looking at no more than 10 commodity groups, and looked at the production buy across these commodity groups. With the data organized this way, I was able to see that I could consolidate the number of suppliers by commodity, the value of the buy for the group, using data that no one had ever seen before! This was really exciting! Then I created a matrix of around 35 existing buyers, pulled all the heavy truck stuff out of it, and ran summaries of the data. I could then start to see how many commodities I was dealing with, and was able to reload the commodities to a smaller group of buyers with broader responsibilities that might cover more than one commodity.

Over time, executives also began to understand and realize the critical role that suppliers and distributors played in driving revenue and controlling costs. They began to establish systems for measuring supply chain participants’ performance, improving performance through development activities when they could not do so on their own, and acknowledged that not all relationships with these third parties were the same, with some needing more attention because they were more strategic than others. Over time, the terms “strategic sourcing” and “logistics integration” were coined, which largely involved combining volumes of requirements from across the business, grouping them into large bids, and driving down costs due to larger quantity discounts achieved. This also led to the use of “reverse auctions”, where suppliers would bid on these quantities online. In logistics, the focus became on centralization of distribution centers and warehouses to drive optimization in transportation routing, reduce inventory carrying and handling costs across the system.

Many of the traditional concepts that evolved from this perspective of “driving down costs” focused on driving efficient operations in the supply chain from supplier through to end customer. Many of these principles also coincided with the introduction of “lean manufacturing”, based on the “just-in-time” thinking pioneered by the likes of Toyota. For example, the “Theory of Constraints”[1] emphasized that to optimize the end to end system, the “bottleneck” operation had to be addressed by adding capacity at this operation. The concept of “just-in-time” and “lean manufacturing” focused on standardization of products, improving coordination between different enterprises to reduce inventory, and only delivering the exact amount needed in small quantities that could be immediately consumed by the follow-on operation.

Another group at MSU under the leadership of Dr. Donald Bowersox led the concept of the “Logistics Renaissance”, proclaiming that logistics was a value-added function that could drive market penetration through technology adoption. All of the work going on during this period highlighted many important issues, that were encapsulated in a “maturity model” that identified how organizations could develop these capabilities over time towards a truly “world class supply chain” organization.

However, “world class” still emphasized distinctions between the functional areas of purchasing, operations, and logistics, which were still viewed as disparate functions. Arguments broke out internally and in academic debates over which area had dominance over the others. The three groups involved in these activities (purchasing, operations, and logistics) were lumped together as “supply chain” functions, but never really stopped working independently from one another. Professional disputes emerged among the logistics, operations, and purchasing trade associations over who was really in control of the supply chain; purchasing felt they are calling the shots, while logistics professionals claim that they have oversight over all movement of material in the chain! All the while, they claim to be driving “world class procurement” or “world class logistics” practices, implying that these practices are the best of the best. In fact, “technology integration” was supposed to bring all these groups together, but in fact there still exists lingering tensions, discontinuities, and waste in the end to end supply chain of many organizations. Sure, they could buy things more efficiently, and ship things more efficiently, but were they really linked? Hardly.

One executive I interviewed emphasized this very succinctly:

We get hung up on World Class too much. World Class is simply a set of tools on a tool belt – but the real wave of change is on understanding the business well enough to apply the tools that will drive a total cost model, that spans the end to end value stream. Leveraging and strategic sourcing has gotten in the way of that. And a centralized world-class solution is not always appropriate in every operation globally, because a single model may not work for every small, medium, and large operation. 

World Class is focused on ticking the box around completion of the tools. We are too focused on getting an answer, rather than focusing on an outcome. We want to create nice two by two’s with a label for a supplier, rather than generating and delivering a coherent strategy. I see supply chain practitioners using the tools incorrectly, and should be spending more time instead understanding what a performance specification looks like before going to the supply chain. There needs to be much more focus on the pre-award phase of the business, and the competence of the people doing this. And the total cost concept goes well beyond that.

In the end, there are some real problems with the “World Class” view of the supply chain. Although transactional excellence and efficiency is certainly an operative element that forms the basis for excellence, there is a shift away from the idea that “World Class” is something that applies to every situation.  And so we need to approach the problem with a different toolbelt, and be ready to use a number of different tools depending on the different business drivers and geographic components that are in play.

[1] E. Goldratt, The Goal, 2nd ed. (Great Barrington, MA: North River Press, 1992).

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