SUPPLY CHAIN RESOURCE COOPERATIVE

As organizations move towards visible, high velocity, transparent supply chains, a number of questions arise that are fundamental to the business, but which executive often struggle to answer with any clarity.

  • How do we extend the concept visibility and control beyond our four walls to drive better execution in our supply chain?
  • How do we get materials from our suppliers to our partners to our customers – given that we rely primarily on spreadsheets and email to interact.
  • How do we understand and limit the data we focus on for decision-making? The problem in most supply chains is “not enough data”, because data is being created from machines, from people, from systems, and from external sources. No, the problem is too much data, not enough!
  • What do I care about and therefore focus on, that is the primary factor that will hinder my ability to get products and services to customers? This means finding the right data, the right tools, and finding the exceptions, and rendering decisions based on the data excerpts available. No easy task.
  • How do we identify problems that may be surfacing, that are hidden in the mass of unfiltered data we have today? Often the sources of information are hidden in piles of data that we don’t think about. For example, Elementum identified the Tianjin explosion when someone took a photo of the explosion, tagged it and posted it on Sina Weibo, the Chinese version of Twitter. Social media feeds are just one more form of intelligence that can be leveraged to deal with the flood of information. But the challenge is that although companies have all sorts of news and media monitoring, very little of it is actionable information.
  • The problem thus becomes contextualized into the following sets of questions: How do we take information and data, and put it in the context of our company and our situation, and leverage this information into actionable insights? How will real-time intelligence help me any more than what I’m doing today? What impact does digitization (the internet of things, or IoT) have on my organization and my employees? Will digitization change the way we measure things and monitor metrics?

In addressing these questions, Dana Martin from Elementum emphasized the need to think about the next generation of supply chain. Vertical integration went away because we have moved in the direction of running virtual vertical integration. Brand owners are a key part of this. Companies like Flex are looking for ways to integrate vertically, not just on product manufacturing, but also in terms of how to collaborate better to drive more efficiency. This also implies the need to restructure contractual terms to be able to ensure that as problems arise, (whether due to fluctuations in demand or other factors), managers can quickly adapt to these changes in the supply chain to drive the right outcome.

This ability to contextualize data into decision-making does not occur overnight. It is an evolution that occurs in stages. Today, we are mostly reactive, because we are so close to the problem. Although you may not realize it, but executives really aren’t making many decisions, because there aren’t many to make! We are forced down a path because you found out too late. But if we can begin to learn about problems earlier and earlier, we have more options available to us, and very often these options happen to have much lower costs.

Data Crosses Functional Silos

Dana emphasized “This is a journey people are taking as they drive visibility into the supply chain. The responsive piece is all about how to align teams within the organization, not just internally, but across the organization. We are used to operating in functional silos that involve managing people and keeping them in buckets, and the data these people are exposed to reinforces these silos. And very often, the processes those functions have are within silos as well. A problem in procurement can impact manufacturing and logistics and planning, but often these dots are never connected, so there never emerges a cross-functional approach to working on them. But when we connect the dots linking a problem to other functions, we are now able to create a coordinated and multi-disciplinary team that together is able to solve the problem faster.

OK, great! We now know that cross-enterprise data can tie people together and be automated. Big deal – people have been saying that for years! But the real challenge here is not only automating this process, but ensuring that it is only the exceptions that are used to pull the functional silos together to solve problems.

Let me emphasize that: it is the exceptions that govern and bring the right team of people from silos together to solve a problem! So as you look across the enterprise, there is a need for a mechanism that pulls exceptions and pulls together in real-time a cross-functional team that can across the end to end supply chain, (including manufacturing sites, 3PL, 4PL, transportation, distribution sites, and suppliers.) This mechanism must be driven not simply by external impacts, such as floods in Houston or explosions in Tianjin. The mechanism must be at a far more finite level to extract data showing events that impacts the overall efficiency and throughput of our supply chains.

Monitoring Small Events, not Black Swans

The mechanism for screening data is therefore not just about tracking Black Swans. Black Swan events don’t happen very often, and you don’t optimize your supply chain in the expectation of a Black Swan. The challenge is to be able to filter out small issues and events that happen day to day. Customers change the quantity they ship inside of lead times set by the supply base, and the quantities double. There is a quality problem in production and the schedule falls behind while the problem is resolved. The server goes down for an hour and shuts down communication. Or there is a quantity shortage on a critical raw material at a sub-tier supplier that delays shipment by a day.

These types of small but important events require the attention of a cross-functional team, composed of individuals from multiple functions, including design, marketing, sales, order fulfillment, logistics, procurement, manufacturing and suppliers. A demand fluctuation or a planning issue, if left unresolved, can quickly escalate into a bigger problem, unless it is solved using the right team of individuals. The later delivery may be escalated if there is a contractual obligation with the customer. Small issues represent friction on the flow of the supply chain that drive up cost and impact customer satisfaction. To address these issues means taking a small team for the initial assessment, and building a larger team if the problem is bigger than anticipated. The speed at which teams are drafted and combined to solve problems is in direct proportion to the ability to solve the problem quickly at a low cost and minimize this friction.

Going back to this example – a problem in on-time customer delivery – really only becomes a major problem if the problem is not visible across a multi-carrier network route. The ability to quickly become aware of the problem and solve it means having the right data pulled and put in front of decision makers at the right place and the right time? Improved decision-making occurs when data is presented in a fashion that escalates the nature of the issue to decision-makers. This is also challenging if we have dispersed decision-makers in Brazil, the UK, the US, and other locations. The worst case scenario is that everyone believes everything is fine until the customer notices recognizes hasn’t got his stuff, and contacts the company to inquire about it. This is effectively the first recognition that the delivery is late, but it is too late in the process to do anything about it. The late delivery has already occurred. So buyers are now in a firefighting mode to try to find the right data to explain where the shipment is, why it’s late, etc., which isn’t about solving the problem before it impacts the customer. No matter what happens, the customer is upset now that the shipment is already late.

Assumptions for Creating Transparency

The problem of course is that information in the supply chain is never complete, and will always contain bad data. Even as US-based companies worldwide invest in software such as SAP and Oracle, the standards, availability and consistency of the data produced by these systems will never be 100% stable. And when you now expand your supply chain to places like China, Vietnam, and Latin America, where emerging country customers are located, the variability in data standards and integrity will only increase, as many individuals are still using fax and phone calls in these regions.

So the de facto position should automatically be that data is relatively easy to get, often contains errors and incomplete datasets, and is produced by a multitude of technologies. Any visibility system must be constructed with these basic tenets in mind.   Elementum uses non-relational databases that have no set data schemas, allowing them to input any kind of data that will be stored and analyzed. Graphical interconnections between people, parts, and functions are constructed that enables a problem in one area to be immediately linked and related to another area, where the problems can be quickly scanned and potentially solved. This approach of linking data through non-traditional forms of relationships is the true “secret sauce” behind effective visibility systems in real-time supply chain systems. It is a characteristic that makes the approach powerful and actionable.

How are these connections identified, established, and hard-coded into the visibility system? Dana notes that “We want to understand your end to end supply chain, and begin by literally mapping the entire supply chain from supply distribution through to customers.   We want to know where your subassemblies come from, at as granular a level as we possibly can, which is the level at which there is specific risk. We want to know how you are organized, where you have external dependencies, whether it be a location, a supplier, or something else, and how these elements are interconnected to your supply chain.” This mapping activity is something that should be happening anyhow – but companies often overlook this simple process mapping tool as a vehicle for driving continuous improvement, as well as visibility.

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We kicked off the 33rd SemiAnnual SCRC Partner Meeting today, with a room full of people from various segments of government, industry, and academic attending.  We kicked off the session with a round of introductions, and an overview of the SCRC recent accomplishments achieved this past year.  A summary of these is shown below.  What is remarkable is the growth in our rankings given how young the Poole College of Management is (it was founded in 1994), and has grown in stature at an exponential rate.  We are particularly proud of our Bloomberg #6 ranking of Undergraduate Supply Chain programs by Bloomberg, as well as the#15 ranking by Gartner #18 ranking of SCM programs by SCM World.  This is a quick rise, given the SCM program and the SCRC was kicked off only 15 years ago!

Rankings 2

This was followed by a great set of insights from Dana Magliola, Lindsay Schilleman, and John Elliott, three MBA’s who shared their insights on the impact of the supply chain industry in North Carolina.  This project provided a great set of insights related to the huge economic impact that the supply chain industries have, and the need for infrastructure investments.  This report was presented to the North Carolina Legislature, as well as the NC Chamber of Commerce.  Several participants noted that the government of North Carolina has really fallen beyond relative to other states like Georgia, which recently held a state-wide Logistics government this week, attended by the Governor, as well as 1700 representatives form industry government and academia.  We believe this is a call for the NC Legislature and government to sit up and take notice of the impact of the supply chain to the state of North Carolina.

 

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Sculley Handfield

I sat in on a great session at SIG today, where SIG’s CEO Dawn Tiura had a “fireside chat” with John Sculley.  Sculley was the legendary CEO of Pepsi Cola Co who was recruited by Steve Jobs to Apple. John served as Apple CEO for 10 years increasing sales over 1000%. Under his leadership the Macintosh became the largest selling personal computer in the world in December 1992.

John recounted an interesting story that he recalls from those days.

“It’s 1978 and I’m CEO of Pepsi and we have been wildly successful in our marketing campaign.  The Pepsi Challenge has allowed us to pass Coke in sales and market share. I was speaking at Harvard University, and at the end of the class -a student comes up to me, and says ‘I created something knowing you were coming here that I want you to look at, that I developed specifically for you.”

“So we go over to the other building and I see for the first time in my life – what looked like an Apple II personal computer. This was something this kid had put together, before Steve Jobs and Wozniak – and it has rows and columns on the screen.”

“What do you call it? I asked him. ‘I call it an Interactive Spreadsheet.’  The kid’s name was Dan Bricklin and he joined with Bob Frankson to start a company called Visicorp that became Visicalc …and what he had just showed me was the first spreadsheet in the world, which eventually became the foundation for Excel, one of the most applied tools in the world.”

“I was also there at the beginning of Power Point and Hypercard. I’ve watched small teams create tools that change the way we work – companies like People Ticker. We create tools that improve productivity that improve the workforce. These are tools that improve productivity. Slack went from 0 to $4B in sales in three years –because it is a great tool that improves productivity.”

“I’m a huge fan of tools for people.  The most important development is that we need to equip our workforce with better and better tools. Humans still have judgment and they can do things that are repetitive and they can process things quickly. But give our talent out there the tools, especially in contingent skilled labor, and they will double their productivity. Get the people who recruit that talent and benchmark that talent better tool to use, and the organization will be that much more productive now that they have radar.”

A question came from the audience:

“Fundamentally – procurement is measured on cost savings as the primary metric. But this can be destructive on the business. You set the requirements and set the solution that results in the requirements. Other metrics are whether you agree off of purchasing agreements in the company, and some customer satisfaction metrics – and are internal stakeholders satisfied. If we are going to be truly strategic and not just drive towards cost mitigation – what are the things we should look for in terms of tools and sensory capabilities to help us evaluate more strategically what we are buying to drive customer retention and top line metrics? How do you see strategic sourcing leaders to do that?”

Sculley replied with a very insightful comment:

“Here is how I think about it. I believe all technology commoditizes. What is unique and valuable today will become affordable at different price points tomorrow. The way I think about those various points I brought up – is you have to judge how you are recruiting talent  in the context of domain expertise – and can’t focus just on the costs in isolation of the domain expertise issue.  Strategically when you are looking to staff a project, almost all work will be done with project teams, inside of organizations and outside with contingent teams.”

“Let’s imagine we are back in 2007 – and Kodak was focused on a project which sought how to compete with Walmart in a single use camera taking market share away from their camera. They made a decision based on their expertise (and their business was film cameras) to double down and spend billions on additional vertical integration on film processing to compete on a cost basis better with Wal Mart. (And remember – Kodak were the ones who invented the digital camera!”

“At the same time, Steve Jobs introduced the iPod and began to make the connections around what was happening in the market around the development of digital components for consumer products. And he also understood another domain, which was wireless operators, were moving from 2G (text sending) to emails and photos (3G). Apple understood that there were these other domains that would impact consumer electronics, in terms of how to take a photo from software to another mobile device. In 2007, Apple launched the I-Phone. Three years later – Kodak files for bankruptcy.”

“Strategically when you look at recruiting talent, you need to look at domain expertise beyond the domains that you have in your company, and a wider scope of things you are looking at. We are all vulnerable and we have seen that in the last 15 years. And at the same time one can get into a new domain by procuring talent that may not already be in your organization.”

Sculley made an important point: Innovation takes place on the fringes. We can draw a circle around domains and they are in motion – and as they touch, they start to collide and change things. Which means that procurement can adopt change to drive innovation and create new technologies by working on the edges of different technologies, where things touch. Innovation in procurement has to be done in the context of different domains, which means developing talent in domains that you don’t currently have and recruiting talent that is not on your full time payroll.  And in many cases, that domain involves working with suppliers that we haven’t worked with before.  And this means working with more contingent labor as well, as the economy continues to shrink, and more people are working on their own.

I even got my picture taken with Sculley later that day….Wow!  I’ll be sure to be back for the next SIG Summit next year!

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I had an opportunity to sit in on the second day of the Sourcing Industry Group meeting in Orlando today.  Ed Hansen from the law firm of Morgan Lewis presented on the essentials of writing a good contract.  Good is a difficult word here, but it is important to think through how contracts operate in the “complex” world.  This was truly one of the best presentations I’ve seen on how to write effective contracts and make good deals that drive mutual benefit.

Ed began by pointing out that the definition of successful contracts has nothing to do with “never having to work it again”. It is not a weapon to battle the other side – and not just something that legal should haggle with every time. But contract management is about getting the ROI that you negotiated, and ensuring that it is driven by a common sense approach.

An important caveat is to differentiate contracting in terms of commodity vs. complexity deals.

A commodity is something you can completely describe in a contract.  The specifications are right and supplier agnostic.  Price and value is generally a linear relationship.

Complexity occurs when parties are very interdependent, and neither party can be truly successful without the input, support, and cooperation of the other. The price/value relationship may not be inverse.

It is much more difficult to write a contract for a complex deal.  Economic rents are often involved, and there can be different facets of the deal.  For example, software license usually is not considered complex sourcing – but the systems integration work most certainly is.  The people skills can be critical in systems integration, as driving change is a non-linear activity that may not be easily quantified into a price.  Think about using a fixed price deal on an ERP implementation system where there are so many unknowns and requirements.  Talk about complexity!

Ed went through his list of “pet peeves” when it comes to ineffective contract management terms and phrases. He emphasized how important it was to avoid the use of nominalization, the passive voice, and a pompous voice.

For example, one might have a simple statement of working stating that “The supplier will drink a glass of water” or even better, state a specific outcomes (“I will do what is required to remain hydrated, including drinking water, Gatorade, or another beverage.”).  Examples of poor contract language include the following:

  • “After they agree on the timing, the supplier will drink a glass of water.”
  • “He shall partake in the drinking of water from a glass.”
  • “I will fill a glass with water and raise it to my lips. For the avoidance of doubt, I will not pour the water on my head, or use it to wash my hands.”
  • “I will grab a glass, fill the glass, raise it to my face, open my mouth, and pour the contents of the glass into my mouth.”

A supplier will prefer this last statement – but it could mean they are drinking bleach!  In fact, the supplier may not know they are expected to stay hydrated!  The important part here is that clear contract language provides transparency. When you do contracts with clear language, you reduce the level of stress and the more likely you are to get good results.

Simple language also helps to make the contract easier to read and understand.  If the lawyer is the only one who can understand a contract, then it’s poorly drafted. A lawyer doesn’t have better reading comprehension than a business professional. If reasonable people can differ, they will. Anything that requires “mutual agreement” means that the other party has a veto…so you have to try not to agree to agree. If substitutions are allowed – what are they. The operational element you are hiding, will come back to hide you later.

It is important to have a good limitation of liability clause, that is determined by market conditions. You need to have an emphasis on execution, not just terms. You need to look at the overall investment, including up front costs, soft costs, etc. to maximize return on investment. Limitation of liability clauses are invoked in less than ½ % of all contractual deals…. but this doesn’t mean you shouldn’t have one!   If you don’t pay attention to your fee schedule, then you are making a big mistake.

A good contracting process should avoid the RFP prisoner’s dilemma. The idea is that the other party shouldn’t be able to rip you off on cost, but if you make price important upfront, you will not see the solution-ing capabilities of the supplier. You may get a good cost, but if the project is 200% over budget, then where is the savings?   The worst you can do in a complex deal is eliminate the right supplier for the deal. To try to force a bad supplier into a good deal, or vice versa, is not a good idea, as you may not be able to enforce it.  Contracts are based on relationships, but relationships based on contracts tend to fail. If you have a good relationship and you contract for what you want – and try to build the relationship after you have signed – it is a recipe for failure.

Looking forward to more insights tomorrow!

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When Coca Cola set about thinking about how to drive sustainability into their supply chain, they recognized from the outset that the entire end to end life cycle of a bottle of Coke needed to be considered. Most people don’t think about this relationships – but the fact is that recycling and renewable feedstock go hand in hand when thinking about a simple item like a plastic bottle. Renewables are the feedstock that go into the “Plant Bottle”, and on the back end, when the consumer is through with it, it can be recycled and ground up to crate a carpet and keep the CO2 sequestered. As such, the plant is used to not only create the product, but the plant is also used to create the following product that comes in the secondary form of the carpet.

Coke’s website[1] notes that: PlantBottle™ is made with a combination of traditional materials and up to 30% made from plants. Because the end product is still PET plastic, the PlantBottle™ package delivers the same performance (e.g. shelf life, recyclability, weight, chemical composition, appearance), but it reduces potential carbon dioxide emissions when compared to PET plastic bottles made from fossil fuels. PET plastic is made up of two components: MEG (mono-ethylene glycol), which makes up 30% of the PET by weight, and which is made from plants, as well as and PTA (purified terephthalic acid), which makes up the other 70%. What is now exciting is the on-going innovation projects by Coke and other companies to take the 70% of the bottle that is non-renewably sourced, and move it towards a 100% biobased resin technology. This will involve using second generation feedstocks, such as cellulosic sugars and technologies, to utilise new available technology on the journey to a 100% plant bottle.

This is moving slowly, but definitely in the right direction. The avenue that is being explored is the development of Furanics building blocks from plant based sugars, under the name YXY. These Furanics building blocks are the basis of a next-generation plant-based plastics and chemicals, and the company producing it (Avantium) is focused its efforts on using the YXY technology as a catalytic process to convert sugars to FDCA, a biobased alternative to terephthalic acid (TA). FDCA can be used to produce the polyester Polyethylene-furanoate (PEF), a 100% bobased material that could replace PET in large markets such as bottles, fiber, and film. Coca-Cola is working Avantium, Danone, Gevo, and Virent, to support the scale-up of Avantium’s plant-based PEF.   Virent’s chemical allows the remaining 70% of the bottle to be plant-based.

Coke is in more than 40 countries with the plant bottle, and has launched over 40 billion bottles. This is a large and critical mass of PET that is used in a number of other leading brands such as Simply and Minute Maid, Gold Peak team, Dasani, and Smart Water. The program is continuing to grow, despite the drop in crude oil prices. Bio-based PET was predominantly used for the packaging of CSD (Carbonated Soft Drinks), accounting for more than 75% of market share in 2013. Growing beverage consumption in emerging markets of BRICS is expected to drive bio based PET market growth. CSD marketing companies such as Coca-Cola are committed on promoting the use of bio-based PET in packaging, which is expected to have a major impact on market growth in the near future.[2] This is occurring despite the price of crude coming down. The feedstock for the Plant bottle is sugar cane out of Brazil, which is moving towards cost parity relative to crude oil-derived PET. The small premium for biobased is absorbed by the system, but Coke sees a pathway to having the renewable plant bottom emerge as the dominant package in thelong run, especially as oil is expected to go up in price in the long run.

There were three driving forces around the championing that occurred in making the decision to move towards a 100% plant bottle.

1.  Sustainability platform and carbon capture. The response from consumers was overwhelmingly positive around the plant bottle, and any misunderstandings occurred around the technology, and has been a strong positive reaction.

2.  Cost and line of sight around competitive elements. This came about as the cane sugar feedstocks in Brazil proved to be cost competitive. Coke also needed to prove that the cane was being farmed on arable land and was not creating competition for land or water with other crops , and used by-products derived from extracting sugar from products. GMO-grown products was also not a factor in this case.

3.  Top-line growth and brand differentiation. The Plant Bottle has become a core differentiating element to the Coke brand, especially in light of the growing awareness of sustainability in the population. Coke works with the WWF and other consortiums, including competing brands such as Nestle, Danone, Unilever, Ford, P&G, and others – to set the guidelines and industry standards that prevents others from jumping in with “green washing” claims, and drive confusion over the issue.

A Coca Cola representative notes that “We are the largest biobased PET buyer, and we see ourselves as a catalyst for the industry to move towards renewable material, and we are working with our partners to make it happen. We are working hard to enable other companies to come into the space and benefit from the PET supply chain that we are creating, and allowing access to technology. ”

It should be noted that one of the benefits that the Renewable Fuel Standard provides significant benefits to biofuel, but the polymer market does not enjoy such benefits. It is easier to get ethanol into biofuels then to take ethanol and make plastic out of it. Ethanol goes into fuels, but the benefit does not translate into plastic. Fuel companies also tend to have limited partnerships that provide tax benefits, that the buyer of renewable plastics do not have. Hopefully, this will change!

[1] http://www.coca-colacompany.com/stories/plantbottle-frequently-asked-questions/ [2] https://globenewswire.com/news-release/2014/12/01/687467/10110349/en/Bio-Based-Polyethylene-Terephthalate-PET-Market-By-Application-Packaging-Bottles-Technical-Consumer-Goods-And-Segment-Forecasts-To-2020-Is-Expected-To-Reach-5-800-kilo-tons-By-2020.html

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Automotive news seems to be coming up a lot lately.  A story in the Wall Street Journal revealed that Bo Andersson, the current CEO of Russia’s largest car maker AvtoVAZ, plans to step down. The Renault-Nissan Alliance is the majority owner of the firm.  According to the story, Mr. Andersson joined Renault in 2013 after he helped turn around Russian truck maker GAZ Group.  He started at AvtoVAZ in early 2014 and slashed tens of thousands of jobs at its main Togliatti plant. He also renegotiated contracts with local suppliers in a bid to cut costs.

Further details were provided in a story in today’s edition of the WSJ.  When he arrived, the company was, in his words, “the biggest mess I’ve ever seen in my career.”  Upon arriving he found low morale, rampant corruption, theft of parts from the plant, a reputation for poor quality and a Soviet-style employee culture that rewarded seniority over job performance.

Today’s story notes that “The cost-saving moves angered many in Togliatti, a one-industry city some 500 miles east of Moscow. Discontent trickled up to the highest echelons of Russia’s political elite and prompted a warning shot last spring from an ally of President Vladimir Putin.  “You’re playing with fire,” Sergei Chemezov, a friend of Putin, recalls telling Mr. Andersson. Mr. Chemezov runs a state-owned defense and industrial company that holds a minority stake in the auto maker, OAO AvtoVAZ.”  Industry experts note that “the Russian government wants it both ways—AvtoVAZ as a social project and a competitive business in the modern era. It’s impossible.”

Let’s see – what exactly did he do that was so horrific, that he deserved the wrath of Putin to descend on him?

Well, he made the horrible mistake of laying off workers, even though the layoffs were formally approved by the AvtoVAZ board.  He then went about renegotiating contracts with suppliers to set a target of 5% cost reductions (a target that, by the way, is considered a year over year requirement for suppliers in the automotive industry).  Such targets are typically discovered through value analysis, productivity improvements, application of  cost models, and material substitutions.  He also sought to improve quality.  (AvtoVAZ vehicles are known for spending more time in the shop being repaired then on the road).  He worked with Renault to invest another $448M in new technology in the company.  He even required the filthy facility toilets to be cleaned on a daily basis!  In Bo’s words, “The only way we’ll become world-class is if we’re clean—toilets and floors, too.”

This story reminds me of my visit to General Motors in late 1999, when I was working with their senior automotive team prior to an education session I was helping them organize in China.  At the time, I had the opportunity to interview most of the major executives leading their supply chain.  My arrival occurred just after the departure of the infamous Jose Lopez.

The Purchasing  revolution occurred at GM in the early 90’s with the appointment of Jack Smith, CEO, and Jose Ignacio Lopez as Vice President of Purchasing. Despite his bad reputation, one the things that Lopez should get credit for was raising awareness around  quality, service, and price (or QSP, a “mantra” at GM). By creating an internal culture focused on driving improved internal integration between purchasing, engineering, logistics, and operations, Lopez turned around GM around at a time when it was literally on the verge of bankruptcy. During his brief two-year tenure at the head of GM’s purchasing organization, he established a different mindset and raised the importance of purchasing and supply chain management as a core contributor to GM’s competitive success. On that visit I was able to also conduct interviews with top-level purchasing executives at GM during this period, including Harold Kutner, Tom Fabus, Bo Andersson, Woody Williams, Bob Burkhart, and John Calabrese.

After leaving GM, Lopez was replaced by Harold Kutner. Kutner took Lopez’s concepts and extended them beyond the simple mantra of QSP, to include T: Technology. Kutner and Jack Smith realized that to truly be successful, global integration across all of GM’s product lines and platforms would be required. To do so, they created a new purchasing organization called World Wide Purchasing (WWP). WWP was a matrix-based structure developed across product lines and commodity groups, that enabled vehicle platform teams to scan the entire globe for leading-edge technologies at the best quality, service, and price. A new measurement system for certifying and selecting suppliers in QSTP was instigated, with commodity managers and product platform managers working hand-in-hand. Every Friday morning, leading executives from all four corners of the world gather around a satellite camera for a global teleconference. Information shared includes updates to product development efforts, changes in market conditions, pricing updates, and new developments. This helped to ensure that on a weekly basis, all parties throughout the world are up to date and on the same page.

When I interviewed Bo Andersson during this period, I recall that he drew a triangle for me, and stated that there were three elements of supplier relationships represented by the three sides of the triangle:  Price, Performance, and Place.  Performance related to the QSTP dimension, and Price was obvious – but Place referred to the local relationships that existed between suppliers and purchasing.  Bo emphasized that all three dimensions needed to be in balance, but that what had happened at GM was that the Place dimension (e.g. the relationship that existed between suppliers and purchasing) had gotten too important, resulting in a “squashed” triangle.  He emphasized that purchasing often got too comfortable with their current suppliers, and developed a personal relationship with them, that sometimes got in the way of price and performance.  “Competition is a good thing”, Bo emphasized to me.  “It doesn’t hurt to shake up these relationships from time to time so we don’t get too comfortable with our suppliers.  They need to know that performance and price is important, and that we must be globally competitive to succeed and grow.”

Evidently that is also what Bo Andersson was seeking to do at AvtoVAZ.  But it didn’t work so well.  I will note that when these principles were introduced on my visit to China with Shanghai Automotive in 2000, the Chinese were very receptive to the concept, and recognized the importance of competitive sourcing to drive cost, quality, service, and technology improvements.  Not so much in Russia at the moment.  Putin just got his wish by driving out Bo Andersson, and ensured that Russians will be driving shoddy cars for some time to come.

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Debates over outsourcing are appearing with more frequency in the press. Companies have outsourced so many of their processes, through “Business Process Outsourcing”, that many now just sit as marketing companies. Examples include Apple, Google, Amazon, IBM, and many others, that produce very little, but have contract manufacturers such as Jabil, Flex, and others produce for them. Even automotive companies are now nothing more than assemblers, having the majority of their components built by tier 1 and tier 2 suppliers that must come together in assembly.

But there is one notable exception: Tesla. Their story is documented in an article in the Economist which discusses the radical approach being adopted by Tesla. As noted in the article, “Tesla has also rewritten the economics of making electric cars. It tackled high costs by stringing together hundreds of small, mass-produced laptop batteries. Tesla claims that its power-packs cost half what big carmakers pay their suppliers for custom-designed large-format batteries, and that its Gigafactory, a huge battery plant close to completion in the Nevada desert, will cut costs by another 30%.”

Tesla makes most of their parts inhouse. One reason is that they are seeking to innovate – and have “super chargers” that can charge a battery in 40 minutes. One of my students who worked with them last year, also developed one of the most sophisticated “should cost” models I’ve ever seen! This is testimony in my own mind to their ability to cut costs and understand the true insource-outsource tradeoffs that have to be made, that enables their frugal outcomes. He also noted that they have streamlined their procure to pay approach, which is much more streamlined than his former experience at a large Japanese automotive company, where 5 signatures were needed for a $30K purchase order. Tesla places greater trust in individuals, and as an intern he was able to get a purchase order for millions approved in 20 minutes….

Tesla isn’t just insourcing their production – they are also insourcing their sales channels. Tesla sells directly to the public through its website and in showrooms in shopping centers (of all places!) The retail market compared to the cost of maintaining showrooms is unsure at this point – but it is one that others like Apple have certainly factored into their calculations.

This is all to say that “insourcing” may be coming back. Other examples include Amazon, which is leasing 20 Boeing 767 jets for its delivery service, and reducing their contract volume with FedEx by purchasing their own fleet in selected major cities in the US. What’s next? Recall that Henry Ford used to own coal mines that was used to produce the steel for his cars….but that may be stretching it a bit…

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Can people really trust information produced from a system under high stress, high risk, supply chain disruption situations? This problem was indirectly explored by a group of researchers from NC State University’s Laboratory for Analytic Science. These researchers asked the following question: what happens when humans have to trust real-time data under the types of high-stress, high-pressure environments that are typical of major supply chain disruption events? Humans tend to rely on available information while completing complex tasks. But what happens when information is presented by human and automated sources? And what happens if those information sources conflict? This situation occurs more than you might think. For example, a Russian passenger jet and cargo plane in 2002 crashed in a mid-air collision. Automation told the two planes to change elevation in different directions, but so did an air traffic controller; these two messages directly conflicted in terms of the directions delivered to the pilots. One pilot listened to the automation and the other pilot listened to an air traffic controller, and the planes collided. In a series of tests with undergraduate students, the students were presented with the following scenario:

“You will be performing as the leader of a vehicle convoy. Your mission is to deliver critical supplies to a nearby warehouse. Your task will be to select a delivery route. Participants must select a route for their military convoy from three possible options.

You will be shown a map displaying three delivery routes. The map will identify the location(s) of past IEDs (Improvised Explosive Devices), as well as areas of insurgent activity. You will also receive information from a local intelligence officer who will provide you with additional data about the area.

Consider the three routes and select one. Make your decision as quickly as possible; you will have 60 seconds to complete this task.”

In this scenario:
• An automated tool provides a map that contains information regarding past IED explosions and insurgent activity to illustrate one optimal route choice.
• The human provides information that conflicts with the map and recommends a different route.

Under this simulation, the findings were very interesting:

• Presentation order did not significantly affect reliance/trust in human and automated sources within risky decision making tasks. In other words, there may be more critical design choices worth considering when designing systems to promote reliance for this type of scenario.
• When presented with conflicting information from automation and human sources in high workload scenarios, operators may increase trust in human sources. In other words, increased workload negatively affected trust in automation.
• When presented with conflicting information from automation and human sources in high risk scenarios, operators may decrease trust in automated sources. Increased risk positively affected trust in the human. This may be due to the added load of assessing automation’s trustworthiness.

The implication of this research is that any real-time supply chain system must have the following characteristics to be successful:

• The system itself must produce data that is trustworthy. In other words, the data must represent the reality of the situation.
• The information provided by the system must be aligned with human perceptions of what is happening as well. It also suggests that combining human observations with system data can augment and increase the level of trust that others observing the information will have in the data.
• Under high risk situations common in major disruptions, people will trust humans over system-produced data. This is a cultural artifact that should be considered, and an obstacle that may need to be directly addressed.
• Under a high level of workload stress, again operators may trust more in human dialogue. The need for human to human communication under these types of situations is important.

Because the emergence of real-time supply chain systems is so novel, there are many such cultural artifacts that may need to be overcome, even if the systems issues are addressed.

(Source: In Automation We Trust? Identifying Factors that Influence Trust and Reliance in Automated and Human Decision Aids. William A. Boettcher, Roger C. Mayer, Christopher B. Mayhorn, Joseph M. Simons-Rudolph, Sean M. Streck, Carl J. Pearson & Allaire K. Welk, Ph.D., Presentation made at LAS, March 23, 2016.)

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A good friend, Craig Reed, presented this morning at the ISM Global Procurement Tech Summit.  He serves as Director, Raw Materials, Energy and Packaging at Dupont.  He has a long history in procurement, working Eaton, MWV, Delta, Deere, BMW and Honda, and he is also an ISM Board member.  Craig is an old colleague, who has a long history working with NC State and the Supply Chain Resource Cooperative.

Craig spoke on the challenges of adopting technology in a large company, in which there are niche systems, large ERP systems, and much of the data resides on people’s desktops.  He believes the cloud is very important for corporations to think about using multiple sources of touch points into Sharepoint, and other forms of integration into data.

One of the big things Craig thinks about in his role is how to drive value. Dupont announced that it would merge with Dow Chemical – creating one of the largest companies in that industry. When Dow and Dupont merge at the end of this year it break into three companies: Ag markets (seeds, chemicals that protect the seeds, herbicides etc.),  an advanced material business on plastic, aerospace and automotive, and a specialty products (industrial biosciences, nutrition and health.)

With a a merger comes expectations – the expectations is $3B of synergy from these two coming together – and a big expectation for procurement and sourcing. He notes that “We need to leverage the INFORMATION part of IT. It is important for information to be strategic as well as agile.”

The big issues Dupont faces are oil prices, commodity prices, palm oil and currency.  The last point is key.  Dupont does business in 180 countries and sells in a lot of currencies. The issues involve handling contracts, and the balance of trade on the financial side of the equation with the buy side of the equation. Craig notes that “We partner with finance to figure out how to set up contracts to leverage expectations on currency. We had a lot of dollar based contracts and with the dollar peaking – created a difficult situation for suppliers because the breakeven point of those contract. Or those in local currency also were an opportunity to drive value. There was an expectation on operations and finance to drive value for the corporation and it wasn’t an easy task!”

What are the opportunities? We need to build on what we’ve got. Start with what you have and what you need strategically – the best way to gain some traction on alignment. From a technology standpoint. Also critical is alignment with the IT organization. We have a CIO that sits on our staff – and accountability for soucing and logistics – and we sit on his staff – and we have responsibility for sourcing IT for the organization. So it is really a partnership in the organization and highly strategic for us to be aligned. If you CIO understands what you want to do and we have a single solution that gets us 80% of what you want and he defines requirements for your world – he doesn’t understand your needs. At my last company – he understood the opportunity for sourcing and logistics. We need to get someone else advocating for us – and we are still a cost center and budget based, and they tend to be flat and go down. So hardest thing for us to do is to make an investment that is difficult to quantify. But IT can help you to be an advocate in that process.

 

Craig concluded with some key takeaways.  “We have to have the best and brightest.  Data is great – but it’s only useful when it’s information that provides insight and intelligence.  Information is the key to strategy.  It’s the key to agility, It’s the key to unlocking value.  Business adoption moves slower than technology innovation.  So there is a need to speed up adoption of innovation!  We need strategies so technology remains an enabler rather than a barrier.  But the opportunities are there if you stay in touch with tech innovation.”

 

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Jason Busch provided a great view on Block Chains, and their impact on the future of funds in the supply chain, at the Global Procurement Tech Summit in Baltimore.

Jason started out by discussing the fact that a company ledger is just a source of truth. Because we are having more and morecomplexity in our supply chain trading systems, keeping track of all our transactions is becoming increasingly difficult.  In the old days, we had a single mainframe computer, and a single tape drive.  Over the last few years the number of different sources of information has grown at a logarithmic rate, making it very difficult to synch systems across different parties: SAP, Oracle, JD Edwards, and all the different legacy systems. How do we connect all these systems with trading partners? Most retailers and CPG spend time gathering data from sources to create a demand forecast for suppliers. Many will spend 3 weeks gathering data – and 2 days running analysis – just to produce a demand forecast. This doesn’t scale up!

To look at what the future looks like, Jason started with a simple question:  “What is money?” It is a unit of account, a medium of exchange, and a store of value. It is also a way of reporting stored up value.  Barter system led to commodity currencies. Shells, grain, Rai stones, swords were all used to represent money, which was often used to offset timing around a coincidence of wants. If a wheat farmer needs what a fruit farmer produces, a direct swap is impossible, as seasonal fruit would spoil before the grain harvest.  So money is used to store the value of the trade.

Increasingly complex trade economies, societies and governments led to paper money (the gold standard), and eventually to Fiat currency. But eventually the gold standard behind paper money wouldn’t scale and so we moved to fiat currency.  But given the level of global trade and uncertainty, fluctuation in currencies also makes this difficult to control and manage.  So we have volatility because currency is not backed by gold, and when the Euro drops, it is a statement of trust in other currencies (the US $ which most people seem to trust the most at the moment). And currencies are about trust, and people have great trust in the dollar. And it is not a virtual currency.

Jason pointed out that 8% of the world’s currency exists outside of electronic records! Who has it? For the most part, it is trusted parties including banks, accountants, brokers. Examples include FedWire, SWIFT ACH, CHIPS, SPEI. Government systems enable trust, and a mix of people in the financial world manage this responsibility, including banks, accountants, and others.   All these systems provide trust that enable us to get transactions done.

But there are problems. Trust is not efficient! Settling a stock can take days. Funds take days to settle, and 50% of businesses still pay by checks. This is very costly, and there are over $1T in fees paid by businesses, and over 62% of companies were targets of bank fraud in 2014.  And procurement systems are complex – 70% of payments require manual intervention. Over 76% of business report problems forecasting short-term cash flow. Accounts Payable should be automated and should eliminate manual intervention by 90% – instead, it is still largely manual. Banks are targeted for fraud… and suppliers don’t know when they will be paid due to uncertainty in the P2P process.

So how do we establish trust beween otherwise unrelated parties over an untrusted network like the Internet. How do we overcome these issues?

What the internet has done for information and the way we communicate, the blockchain will do for value and the way we look at trust. “The financial world is going to flip upside-down.”

What is a Block Chain? A very simple answer – “a peer to peer ledger maintained by a decentralized network of computers that requires no central authority or trusted third parties.”

Block Chains consists of three components

  • A transaction (pubic-private key cryptography)
  • A transaction record (a record in the blockchain – SHA-256).
  • A system that verifies and stores the transaction

Bit coin is just a history of transactions – which goes back to the history of the record – and it simply stores transactional details.  All that is needed is an address and a private key – a sequence of letters and numbers. The nodes chronologically store information on all transactions that have taken place in the chain. Each block is sealed mathematically to the block before it – altering any proceeding data that conflicts. This makes it difficult to hack…you have to hack not just a single moving train, but every train on the track.

Block chains are a very new idea that is only now beginning to emerge.  But there is no doubt that in this digital age, it may well replace the flow of funds as we know it today.  And maybe a new, trustworthy form of commerce may eventually emerge.

 

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