SUPPLY CHAIN RESOURCE COOPERATIVE

In the RFQ process, procurement should ideally be transparent about answering this question.  Too often, however, the sales team at suppliers providing the bid have to “guess” at what they think will be important.  The Request for Quote process, if done correctly, is a way for procurement to be able to quantify the elements of value and in many cases, and for the sales team at suppliers to educate the customer on what their true performance capabilities are.  The RFQ process is really an opportunity to explore and understand the potential range of performance outcome that are possible.  Unfortunately, many outsource tenders are “botched”, often because the procurement organization does not have a full level of understanding of the different forms of performance and value that a third party outsourced provider can deliver to their business and/or does not fully understand what the true business need is. Safety is almost always a primary concern – but there are many five other elements that come into play that should be explored and defined specifically with the customer in the context of the current and targeted business.

  1. Cost – What are the elements of not just the price of the outsourced process, but the total cost associated with operating the process?
  2. Serviceability – What are the elements of service and how can they be measured?
  3. Quality/Safety – How is quality defined? What are the key safety performance issues that are unique to this situation?
  4. Innovation – What are the proposed ideas to drive improved outcomes across all of these other factors?
  5. Contract Compliance – How will the terms of invoicing, payment, and all terms and conditions be defined in the contract?  (This is important to know upfront for the supplier!)

These elements may need to be reviewed and defined in specific terms at the beginning of the RFQ process, so that the appropriate set of responses can be appropriately defined in the supplier’s proposal. Each of these elements will have a different impact on cost drivers that will ultimately impact the proposed cost, etc.

Procurement may use a form of scorecard to not only evaluate potential suppliers of services during the RFQ process, but also to manage the on-going relationship after the contract is awarded. Scorecards can be built after the contract is awarded but also defined in more detail in the RFQ response. The weighting of the different factors is also important, and understanding this weighting is fundamental to how the response is crafted.

The RFQ ideally should also include other questions relative to past performance which the sales team should be ready to respond to:

  • How long have you performed this type of activity?
  • Who have you done it for?
  • What is the capability you possess to deliver a solution that meets our needs?
  • What are the capabilities and quality of the people who will be assigned to perform this work?

In turn, it is essential that a dialogue be established during the RFQ respond process for sales to engage procurement and understand the drivers behind the outsourcing initiative.  Procurement should be fully versed on stakeholder needs, and be open and transparent in their willingness (and ability!) to answer the following questions.  If procurement doesn’t fully understand the business need, then they need to go out and speak to business owners before they launch the RFQ!

  • What is the business outcome you are striving to achieve? What is driving the need for this outcome?
  • Why are you asking suppliers to provide solutions for these outcomes? What is the driver?
  • What is the reason you are engaged in the outsourcing exercise?
  • What is the level of continuous improvement you are expecting after the award is made?
  • What are the transformation costs, including the switch-out costs (if there is an incumbent) that need to be considered in this proposal?
  • What is the level of pre-and post-award contract savings you are expecting to deliver on the current state?

In many cases, the sales team may not know the exact weights assigned to each of thse criteria. However, these questions can help facilitate an “estimation” of the weights and can help deliver a more focused and coherent proposal. Asking the above questions during customer reviews can help the team to better understand the expectation.

In some cases, the procurement team running the RFQ may not be fully cognizant of the different criteria that need to be considered. This is often the case especially with a “price-conscious” procurement team that is only rewarded for price savings over the current state.   The cost of change is a significant factor that should also be well-understood and communicated in these discussions. This could also span the “political” costs, particularly when the incumbent is favored over any new party by local constituents. In many cases, an incumbent to the contract will try to sell the statement that “you can’t do without me, and I’m the only one who knows how to serve you,” while the potential competitor will sell the point that “changing over to our system is easy and will be seamless.” Neither statement is true.

It should also be emphasized that procurement has a responsibility to fully understand the capabilities of potential suppliers in the process. One executive noted:

“As a result of the RFQ, we selected two different suppliers for two different DC’s. We used an identical process, and they appeared both highly qualified based on their respective responses and proposals. One of the suppliers operated flawlessly, and only required two meetings annually to review performance. The other supplier had horrible performance, which required weekly reviews to deal with a stream of continued operational issues.”

To bar against the likelihood that the business will “game” the weights to get their preferred supplier, mature supply management organizations will establish the weights ahead of time. There should be a “referee” who sits on top of the weighting system, and in most cases it will be the company auditor. A good procurement practice will have an audit requirement to define the weights before the RFQ is issued, and not change them during the process.

If as a result of this assessment it becomes clear that the RFQ performance criteria and weights are not aligned with the supplier’s key capabilities, the sales team may make a decision to not pursue the proposal. However, unless these types of questions are asked through engaging the procurement team, the pursuit strategy will not be fully informed, which could lead to a tremendous waste of resources.

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One of the truths that is often overlooked in the splurge of press and hype around “Analytics” is the need for data integrity.  You can’t have analytics without data that is reliable, timely, validated, and accurate.  In a 2014 Deloitte survey of 239 chief procurement officers and directors from 25 countries, 67% of respondents stated that poor data quality was a key barrier to implementing systems. In another recent study by Procurement Leaders, 95% of procurement professional identified data quality as extremely important or crucial to achieving procurement objectives.  Another Deloitte study in 2017 also found that 49% of CPO’s believe the quality of data is a major barrier, and the lack of data integration was the number two barrier (42%).

Why is data integrity such a barrier?  The primary reason:  the lack of a data governance standard business process. One of the biggest challenges faced by major companies who are seeking to build real-time integrated supply chains is to keep the data synchronized across the data execution systems. This is especially important across transactional data, to ensure that the entire system is aligned in terms of using the same “source of truth”.  This only occurs when there is a strong governance structure across the end to end supply chain.  There is no point in having lead-time data if it is not coming together very well and misleading in terms of the conclusions people will make based on this information.  Poor data integrity will undermine the viability of the entire system.  The top supply chain executives I meet with note that this is the biggest challenge they face today.  And data governance is challenging, because it is a “people problem”, not a data or technology problem.  Bad data has a source and a root cause- and it is almost always due to human errors in inputting information into a system.  It is easy for people to fall back into their old behaviors, once a data synchronization standard is put into place.   The fact is that the data integrity flows are part of our life. You never can get to 100% correct data;  rather, the challenge for analytics is to figure out these flows and mend the integrity issues so they are synchronized and people can trust the execution of the systems, and not have to question the integrity of the data underlying them.

It is important to not only have lead-time data, but the RIGHT data lead-time data, and the correct execution related data. Once collected, data also has to be filtered in analytical approaches to eliminate noise and prioritize what data is looked at, to render it truly exception-based. With current trends around data capture, the amount of data we are exposed to is exponential. Most of the data says the supply chain is fine, so there is no need to look at this information.   Instead, people need to focus on the things that are delayed, and have to extract information from data on what needs to be done to fix the problem.   Filtering and prioritizing – allows people to focus on the decisions that can be made faster and impacted by performance.

On the downside, incorrect data can have massive repercussions.  Think of the price of a single component, and if it is off by only 10 cents.  That can escalate based on the millions of parts that are in the product line and bills of material for that company, and lead to incorrect pricing and cost reporting in the customer base.  It can lead to massive discrepancies.  The same goes for lead-time data, which can impact working capital and free cash flow.  Bad data is an easy excuse when people complain about their systems.  It’s about time managers start doing something about it.

 

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I recently interviewed a large semiconductor company that developed a cross-enterprise initiative to drive analytical learning across its entire supply chain. The company established a supply chain IT organization that reports up to the CIO. It focuses on leveraging the corporate infrastructure and its SAP and SAP Hana implementation, in order to span all activities from order to cash and from demand planning to customer delivery and return. There are systems directors in both the procurement and logistics/planning teams. There are two IT support teams: one creates business process informatics centrally, and the other delivers locally required capabilities. The linkages between the enterprise and local teams are very tight, to ensure that functionally unique applications are inventoried centrally so all parties can leverage these tools. Recognizing the importance of having the right mix of data scientists and SMEs, the company has established a supply chain information and analytics organization composed of data scientists, operations research, and statistics PhDs to work on problems they are directed to from the business.

An important governance mechanism that drives analytical process is the Supply Chain Director’s Council, whose mandate is to focus on the availability and ability of the supply chain to deliver parts and core finished goods to customers. All of these groups (supply chain IT, systems, supply chain analytics, planning and logistics analytics) participate in the Supply Chain Director’s Council. Because of the long lead-times associated with the manufacturing infrastructure required to source and produce semiconductors, the Director’s Council espouses a long-term vision and tactical planning scenario. They work with the Supply Network Steering Committee (senior executives in supply chain and IT) who set the direction for the company’s supply chain capability. This includes setting direction for how the company will use emerging technologies (e.g., 3D printing, IoT technologies, and artificial intelligence). However, the Director’s Council defines the critical needs and availability requirements for existing and mature product lines, as well as experimental and emerging growth categories. Questions addressed include, “What will be the next generation of products?” The team also leverages insights from university research centers and consulting groups, including CAPS Research, MIT, XEM, Gartner, ProcureCon, and Procurement Leaders, to ensure they are connected to emerging ideas. They are also involved in pilot programs with multiple customers exploring the application of IoT and analytics approaches, with customers such as Caterpillar, P&G, Monsanto, Amazon, and Unilever. These pilots are used to provide input into how the enterprise wants to design data collection and analysis structures; for instance, how environmental requirements impact wafer fabrication, constrained timeframes, and temperature. The supply chain analytics team is involved in a great number of simulations to address these industry-specific local questions. The team acknowledges that there is much work to do in predictive analytics, to create mature systems for on-going operations, and to be able to collect insights from third parties.

As an example, the company is beginning to triangulate analytical approaches with external data to drive improved planning. Demand planning is influenced by GDP growth factors, how this affects the movement in semiconductors, customer refresh cycles, current order status, and seasonal variations. It also considers leading indicators that provide clues as to what customers are planning to ship, interesting correlations that have been developed, and hypotheses and their implications for internal capital investment and capacity planning. This is broken down into more minute analyses of what could happen with a smaller range of capital, and what could be delivered with different product health indicators including yield or other operational metrics. All of these pieces get meshed together and reviewed by a pricing team and corporate economists who understand the macro trends and impact of pricing changes on the market. There is a fine line between investing too little in capacity that would leave money on the table, and investing too much in capacity that would incur a waste of investment dollars. The company always tries to err on the side of supporting customers at the highest level.

The data analysis today is intense, involving a huge amount of data crunched for review. According to the team, “One of the biggest limiters for us is the ability to ask the right questions!” The team relies on the aggregated insights of practitioners and analysts in solving problems. Practitioners bring the operational reality of construction programs to light so the environment can be modeled correctly, while analysts provide skills like Monte Carlo simulation that can model the range of variability and the level of risk each scenario implies. The outcome of these simulations is used to plan supplier capacity and supply network design, with mix and model monitoring information passed on. The company recognizes that both mobile and cloud computing are new vectors that must be planned for, and the new technology group considers these developments in its long-range strategic plan. Leaders believe that two of the biggest changes for supply chain will be in robotic automation and the application of artificial intelligence and how we improve the learning of the workforce to leverage the tools and available data to parse and leverage talent in new ways.

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One of the most important elements suppliers seek to avoid involves participation in an RFP when there is a low probability of success.  Procurement people think that every supplier will go after every RFP they put out.  Think again . Request for proposals require a business development team to expend resources.  An RFP can be just to gather ideas and do nothing. And so suppliers may often push back to do  a customer assessment upfront, and test whether the organization is all-in or not.

Generally, there are several “red flags” that will lead a supplier to explicitly decide NOT to respond to an RFP:

  • Is it the right relationship with the client?
  • What is our market position and strength of our portfolio relative to the other competitors? If this is an area that is not our strength, then don’t pursue it.
  • What is our ability to deliver and execute over the life of the contract with this customer in the past?
  • Is the customer very price-sensitive to the exclusion of other forms of value? (“We will not be the lowest cost supplier.”)
  • Do we want to bid and put some hurt on our competitors? (This is generally not a good reason to compete in the RFP, as it is not good for the client)
  • Does the client have data that can be compiled through interviews and templates? If there is low access to data, we can’t build a case. However, we may not want to work to collect data to present to the client, which they in turn present to their incumbent!
  • Are we just a third supplier added to the bid list? Are they really committed to a change in the incumbent? Or are they just shopping for bids, which they will turn over to procurement to put pressure on the incumbent for a price reduction?
  • Is the customer just looking for a “directional quote” (sometimes positioned as a “hypothetical”)? This can lead to confusion, particularly if the scope of work has not been effectively articulated.
  • The RFP is sent out with a short time period (less then two weeks), and there is no way to mobilize a well-developed proposal in that period of time. The minimum time required for a typical logistics outsourcing proposal is generally 6-8 weeks.

In all of these cases, suppliers must pick and choose RFP’s that make sense for their limited business development teams to pursue. These teams are often constrained by design, so as to not have to pursue every RFP, and achieve a lower win rate. Many business development groups are expected to complete about 12 major deals in a year, with a 50% win rate yielding 6 major deals. But if the win rate goes up to 9 deals to yield 6 wins, the resources can be better focused and allocated efficiently. That means that the team can be unconstrained, so long as the right resources are dedicated to the right opportunities.

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In a recent discussion, a large supplier of services shred that they fail to respond to almost 50% of every RFP that comes their way!  This insight was very surprising to procurement executives we spoke with….few could believe that sales would actually not try to pursue every opportunity that came their way! There are four primary reasons why customer pursuits are halted in their tracks by a supplier.

  1. Limited access to the decision maker – if sales does not have an opportunity to present to the decision-maker, then they won’t proceed. If sales has the opportunity to make a presentation to the decision-maker (whether it is at the corporate or local level), they are almost always going to succeed. An important issue here, however, is the need to understand WHO the decision-maker is. The internal procurement-stakeholder relationship is therefore critical to understand by sales at this stage, and will thus strongly influence the outcome of the business development executives. Sales executives note that if there are three coaches (influencers on the decision-maker) that you can speak to, than you have a good chance of success to influence the process.
  1. Lack of existing relationship. This is often known as a “cold” RFQ. If there is no pre-existing relationship with a customer, and no prior engagement, the odds of success are also very low. This means that an entire education process has to occur. Also, it is important to recognize the cost of change that the customer will need to go through, and evaluating whether the benefits provided by a potential change in sourcing strategy will outweigh the costs of doing so. Procurement may not even understand the value proposition, and are using the supplier as a “check in the box” to get a third quote to their RFP, in the hopes of putting more cost pressure on the incumbent supplier!  Being “window dressing” on a “cold RFQ” is something that no sales person wants to spend their time working on…
  1. If the potential customer has never outsourced before, they are unlikely to understand the value proposition of a third party logistics provider. If the decision-maker at the customer does not recognize the value statement, and doesn’t understand the value provided, and is purely shopping around for a low price, there is a low chance of success.  “I’m out!” says the supplier.
  1. Competitor environment, strong incumbent. If a business development leads goes into a situation where there are multiple other suppliers in the running, then you are clearly viewed as a “commodity” supplier by the customer, and there is a low likelihood of success.

In all four of these cases, however, there is an education process that must occur, and an opportunity for sales to help procurement understand the nature of the business decision they have to make. The sales team needs to offer a process and business model that presents an opportunity that will cover the cost of change. Is there enough value on the cost of change on their side? If not, then the sales opportunity is simply not present. On the other hand, Procurement is selling ideas as well – up the chain. And selling procurement on the tool kit to help them sell the sales organization, and coaching them through the benefits and business case, will be important here.

Understanding the decision-maker in the process is clearly an area that requires an in-depth assessment, as this can heavily influence the nature of whether to pursue the customer. In the past, sales would rely on internal relationships with the business unit, who was the presumed decision-maker. As procurement organizations have matured and have come into their own, sales reliance on C-suite relationships can occur at their own risk. In one healthcare provider, a supplier went to the CEO when turned down by procurement due to performance issues, and was promptly told that they needed to go back to procurement, who held the decision-rights! Many sales deals in services are $50M+, and these decisions are made carefully and with a great deal of due diligence. There is often a ‘tactical” element to the procurement process, especially with the advent of RFQ tools such as those in Ariba. These processes often result in impersonal interactions, and value-based relationships may be damaged in the process.

There is a need for both parties to better understand when, why, and how an RFQ should be run, and the reasons behind it.  Transparency on why it is happening is key to making the outcome competitive and successful.

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Here’s a new insight by Tim Barnes in a guest blog this week, after Donald Trump announced the withdrawal from the Trans Pacific Partnership for the United States.

I’ve been traveling the country this week meeting with both American business leaders and government and trade representatives from several Asian countries. During these discussions, I was asked two key questions, the first being “What does Trump’s withdrawal of the TPP mean to the U.S.?”, and secondly, “Will the 11 other nations work to resurrect the agreement?”

To answer the first question, the action President Trump made on Monday was no real surprise to anyone following both the TPP and the comments Trump made during the election campaign, however many were still holding out hope such as Japanese Prime Minster Abe and Australian Prime Minster Malcom Turnbull. To provide a little prospective (for a deeper analysis, order my book here), the only two ways the TPP was going to be implemented was if all countries ratified the agreement, or if a minimum of six countries collectively representing 85% of more of the combined GDP of the twelve countries. Given the U.S. represents 60.3% of the combined GDP, without the U.S. signature, the entire deal dissolves.

So, getting to the question, what does Trump’s withdrawal of the TPP mean to the U.S.? There are two key impacts that will occur, the first is the domestic trade impact. Given the TPP has never gone into effect, the U.S. will see very little impact per se. Of course, there are other trade policies currently being discussed, such as the border tax that could impact trade (feel free to connect with me directly if you want to go into those discussions) If ratified, the TPP would come with some very positive impacts to specific U.S. industries including opening additional doors for trade in Asia. Conversely, it would also provide negative impacts to a few other specific industries. The U.S. International Trade Commission report confirmed that there would be an annual increase in GDP of $42.7B by 2032 as a direct result of the TPP, however key industries such as manufacturing ($10.8B loss in exports annually) and electronic equipment ($3.7B loss in annual exports) would be the two most impacted. The big gainers would be the professional services industry ($11.6B annual increase in exports) and the agriculture and food industry ($10B annual increase in exports). As you can see, there are plusses and minuses when it comes to the impact of U.S. industries via a major multi-lateral agreement such as the TPP.

However, there is the second impact which is more geopolitical in nature. The TPP was eventually developed and led by the U.S. (it started as a bilateral agreement between New Zealand and Singapore, but read my book to learn that story) to write the rules for trade in Asia, while conveniently leaving China and India out of the picture. Unlike many other trade agreements, the TPP also included many social elements, focused on environmental protection and labor laws, two key subjects that are typically forgotten as poorer countries work desperately to grow and export. Those countries that were left out of the original 12 were almost falling over themselves to be added, with India, Korea, Thailand and even China stating that they wanted to be included sometime in the future. The stage was set for the U.S. to be both the writer of the rules and beneficiary of Asian trade. On Monday the 23rd of January 2017, with one signature, President Trump dissolved the entire deal, leaving a huge void in Asian Trade leadership.

The ASEAN community has been working on another regional trade agreement, called the Regional Comprehensive Economic Partnership (RCEP), that includes the 10 ASEAN countries, and six of their major trading partners in Asia, namely Australia, New Zealand, India, China, Korea and Japan. It is now widely believed that China is taking the lead in the agreement, using both their heavy investment in South East Asia, and other initiatives such as the “one belt – one road” initiative to provide significant influence over the negotiations, effectively replacing the U.S. as the writer of the rules of Asian trade, while simultaneously moving the U.S. to the side lines. You can read more about the RCEP in my article “The possible death of the TPP will give China the keys to half the world’s trade”

The second question I’ve been asked a lot recently is “Will the 11 other nations work to resurrect the agreement?”, or as Japanese Prime Minister Abe, who has already ratified the agreement, has said “twelve minus one”. Australia’s Prime Minster, Malcolm Turnbull is also pressing ahead to ratify the agreement, to apply additional pressure on Trump. Turnbull stated “It is possible U.S. policy could change over time on this, as it has done on other trade deals.” However, many agree that this maybe nothing but wasted energy.

My personal belief is that the TPP will die a natural death now that the U.S. has excluded itself. I have spoken to many Asian government officials both involved directly in the TPP negotiations, and those involved in trade policy, and many believe that their respective countries agreed to terms and conditions at the request of the U.S.; terms that they otherwise would have objected to with a less powerful country leading the agreement. Now that the U.S. has left the agreement, many countries will want to start negotiating from the start, a process that originally took over eight years. Most of these countries have already shifted focus to the RCEP, and with China reaching out with gusto after the U.S. withdrawal of the TPP, with equally lofty promises of trade opportunities and growth, my feeling is the Asian shift to a China has already started, and Japan and Australia will quickly fall in line.

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Look out for my new book, “A Naked View of the Regional Comprehensive Economic Partnership – An Unbiased Informational Review in Plain English”, available at the end of 2017.

Timothy Barnes is the President of Asia Pacific Consulting, and author of the book “A Naked View of the Trans-Pacific Partnership”

www.apacconsult.com

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The relationship between sales and procurement has always been a contentious one. The issue at the core of this tension is the concept of value recognition. Sales account managers accuse procurement of being purely price focused, and not recognizing the components of value. Procurement executives on the other hand complain that sales account managers are always trying to “work around them”, and to make the commercial sale to engineering, operations, clinicians, or other business stakeholders. “Sales people are always trying to raise prices and “design themselves in” to our organization, without being competitively tendered.” But sales people complain that procurement “does not recognize the value we bring to the business, in terms of quality, service, and reducing the total cost of ownership!”

So who is right? We recognize from the outset that these conditions will vary by firm, by industry, and indeed by individual characteristics. This situation does not always accrue – as there are cases where harmonious partnerships exist between sales and procurement. But this is the exception, not the rule. In an effort to better understand this issue, the NC State Supply Chain Resource Cooperative held a one-day executive summit, to discuss these issues in an open forum. We invited eight procurement executives from oil and gas, electronics, business services, industrial manufacturing, chemicals, and healthcare industries, and brought them in to meet with five sales executives from a large third party logistics provider. In this forum, we covered several major questions, and held open debates on these issues. In addition, both groups shared their internal tools and mindsets around customer/supplier segmentation, key issues that define strategic relationships, the effective use of performance measurement, and the types of disagreements that occur around contract negotiations. The outcomes provide a compelling picture of the great misunderstandings and myths that often exist in both sales executives and procurement executives as they approach one another. We will be working on continued research to document these findings, and offer solutions for helping to improve the nature of the sales-procurement relationship over time.

Putting People into a Box: Segmentation Approaches

One of the first topics identified in the workshop is that both procurement and sales put one another into a “box”, through their segmentation analysis. Procurement uses a set of strategic segmentation tools that commonly look at a number of criteria. As shown below, procurement will focus on creating category or “market sector” strategy teams, that seek to create an overall strategy for a given classification of spending (e.g. castings, professional services, logistics services, insurance, etc.) The first ‘cut’ is to examine the business impact of the overall category and the value to be derived, in terms of importance to stakeholders and potential for savings. Next, a “supplier preference” classification attempts to target suppliers that deem the customer a “core” or “developmental” high potential target. The next segmentation looks at the level of power in the relationship, and buyers prefer to be in a position of high power to drive a relationship. Finally, the degree to which results can be achieved are highlighted, with difficult complex, low value opportunities receiving less priority. This “filtering” process results in less than 1 percent of the supplier population within a market sector being a true target for closer relationship meriting performance management reviews and strategic aligned planning.

In our discussions, sales executives were astonished at this framework. Many noted that “we had no idea we were being viewed in this manner!” They also noted that the portfolio approach could vary depending on if it was applied across the enterprise, or at the local business level. For instance, someone mentioned hat “at the business unit level, they don’t broadly about which quadrant we are in. But at the enterprise level, they are much more aware of this. The business person will state that “I want this player to serve me”, and won’t think in terms of the portfolio view.

On the other hand, sales also establishes sales targets using the criteira of “value” and “winnability”. A process known as an Opportunity Risk Assessment seeks to answer a series of questions about the following issues:

• Are we seen as strategic to this customer?
• Is it something we are good at?
• Can we differentiate ourselves in a discrete opportunity?
• How actionable is the data?

These questions can help influence the sales organization’s view of competitiveness, and determine if different commercial strategies are needed for this customer.   But there is a long way to go yet to even begin the relationship….

Stay tuned!

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As we look back on the chaos that erupted during the pre-Christmas rush, discussions with executives suggest that there is still a long way to go.  Most logistics companies are still far from being able to fully integrate data and analytics to better manage.  Not many people are doing much with big data and we all need better systems to manage all that data to make better decisions and cut through the massive complexity that exists in the supply chain.

One of the big new trends we are all talking about is how transparency in data is related to better customer service. One executive stated it clearly –  ” the back office is the same as the front office now.   Customers want to know where the product was shipping from! Amazon is driving that requirement.

But it’s also extending from the big box retailers into the logistics providers today.  I spoke with a colleague who operates a large third party logistics forwarding and shipping company for consumer products, and handles major accounts for all the big box retailer.  He shared with me that he was not able to come up for breath until Christmas had actually passed.  Why?  Every one of his major retail big box customers (about 6 of them) required detailed conference calls lasting an hour and a half, almost every other day, requiring detailed information on the location and origin of the just about every single trailer, shipment, ocean carrier, and third party provider down to a granular level of detail.  Pulling the data for these calls, as well as addressing the inevitable delays that will occur, proved to be a gargantuan task!

So how can companies begin to organize data to cut through the complexity, and make it simple for customers and sales team to make decisions – that drive the right outcomes?  Transparency is supposed to be a virtue in such cases, right?

Not always.  In speaking with a large manufacturer, I learned of a story where being too quick to be transparent worked against them. “On December 10, 2014, there was a big hiccup in one of our big supply markets. Something happened and our systems supply line went to zero. Everything got pushed out three weeks, and we told our customers that they wouldn’t be getting orders until December 28. We were being transparent, and committed to our customer. I even remember getting a note from a major customer, who told us that they were going to put a gift box wrapped up under the Christmas tree with our product logo on it, and his daughter would be opening it up on Christmas day. He said he was going to videotape it and post the video on YouTube – then told us “It is up to you to see what the outcome is on that video!” We were panicked about missing Christmas deliveries.”

“But then something happened – the supply category market freed up, and we discovered we could recover 80% of that market! And we went back to our customers and told them “Wait we are okay now and can make the commitment by Christmas!” But guess what…. They had all gone to competitors. So in retrospect, maybe we should have done something different other than being completely transparent, as it ended up hurting us! Perhaps we should have waited two or three days before letting our customers know… and then recover, and they would never have known anything had potentially gone wrong! This is a big question we are struggling with.”

Transparency is the essence of what the digital supply chain can deliver.  It is becoming more important then ever for sales people to understand the importance of the customer experience, and that the supply chain is the lead partner and driver in being able to deliver the customer experience. It is no longer enough to have just a commitment culture. You have to to commit to the customer, AND exceed their expectations.

Here’s a great example. We had a huge snow and ice storm in Raleigh last week.  A colleague of mind shared his experience with Amazon during this time.  “I needed a product called “Ice Melt” for the snow storm. I went on Amazon on Friday in the middle of the snow storm and they committed to be able to deliver the Ice Melt by Saturday. I was doubtful they could do it, since the roads were un-safe after the ice storm! They didn’t deliver it Saturday – but they did deliver on Sunday. I noted this to them, and they acknowledged that they didn’t deliver on-time, so gave me a 60% discount on the product. They gave away margin and maybe cost to “Wow” me – and that went a long way to impress me a a customer.

This new level of commitment and transparency and impressing the customer is raising the bar on supply chains to be able to deliver on-time, faster, and at a lower cost.  The expectation is only going in one direction….up!

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I was interviewed at the IBM Emptoris conference back in November on some of the emerging trends in terms of the value added that procurement can add through analytics, the importance of data governance as the foundation for analytics, sources of data for creating  cognitive analytics, and the rise of Big Data and the possibilities in terms of applications.  These trends are based in large part on the findings of our recent CAPS Study (completed in conjunction with Tom Choi at Arizona State), which is forthcoming in the next few week…

Procurement’s shifting focus: Growing strategic value through the use of analytics: https://youtu.be/HNQ07ME87nc

Data: The critical foundation for procurement analytics: https://youtu.be/VrvHi6d0vEE

Supply chain data sources fueling cognitive solutions: https://youtu.be/06ELlm-XOEQ

Cognitive applications: Price movements, contracts, and supplier IQ: https://youtu.be/7GgoHwBtmlk

Exploring supply chain visibility, cognitive solutions, and blockchain: https://youtu.be/z6JS2SrIUYo

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A dominant theme that my co-author (Tom Linton) and I emphasize in our forthcoming book, “The LIVING Supply Chain” in the need to establish balance in the supply chain ecosystem. These rules apply within the Serengeti Desert, and we adopt several of the “Serengeti Rules” that naturalist Sean Carroll talks about in his book of the same name, and apply these to our thoughts about the emergence of the federated, living digital supply chain.  These two concepts have a common theme:  the importance of balance in ecosystems.

wolfpack

For example, Carroll discusses the wolves that were eliminated from Yellowstone in 1926. This national park, with the largest concentration of mammals in the 48 states, saved the population of bison and grizzly bears from extinction. When the wolves were all killed off in 1926 (ranchers believed the wolves were decimating their sheep), the elk population erupted.  Unfortunately, the larger herds of elk took a heavy toll on the system’s trees and plants.The elk pushed the limits of Yellowstone’s carrying capacity, and they didn’t move around much in the winter-browsing heavily on young willow, aspen and cottonwood plants. That was tough for the beaver, who need willows to survive in winter.  The resulting shrinkage in the tree population – known as a “trophic cascade” –, also impacted the lives of beavers, which feed off willows, and the beaver population shrunk.

Naturalists pushed to have the wolves reintroduced into Yellowstone in 1974.  By 1984, ten years after 31 wolves were reintroduced into Yellowstone, the population had grown to 301. In the years that followed, not only was the elk population reduced by half, but elks’ over-browsing of tree species, notably aspen, cottonwood and willow, was curtailed.  The reintroduced wolves also reduced the number of coyotes, which feed on young pronghorn antelope.  Studies show that fawn survival rates are four times higher in sites with wolves than without them.  As the elk and antelope populations got back in balance, so did the beaver population.    Today, with three times as many elk, willow stands are robust. Why? Because the predatory pressure from wolves keeps elk on the move, so they don’t have time to intensely browse the willow.  A US Geological Survey showed that as the beavers spread and built new dams and ponds, the cascade effect continued.  Beaver cuttings actually produce healthy stands of willow, and beaver dams have multiple effects on stream hydrology. They even out the seasonal pulses of runoff; store water for recharging the water table; and provide cold, shaded water for fish, while the now robust willow stands provide habitat for songbirds.

The rationale behind the idea of good, balanced environments is one that applies equally to the concept of the LIVING Supply Chain: Predators maintain balance in nature, and mankind needs to seriously consider letting the natural rules of evolution play out in the world of supply chain commerce as well.  The “natural rule” of evolution emphasizes open and free trade and open forces of competition, which drive naturally occurring outcomes. When wolf or elk populations are out of balance, bad things start to happen to the natural ecosystem. By the same token, supply chains should compete fairly within the guidelines of being “good.” Unbalanced supply chains cause things to begin to go wrong.

The marketplace is the essence of creating balance in the supply network, as first advocated by Adam Smith in The Wealth of Nations. Balance is an organic concept, found in nature. In his book, Carroll documents how every living creature participates in and helps maintain balance in the ecosystem, which helps the system to flourish. If human beings kill too many wolves, the elk population explodes.  If there are too many elks, the aspens and willows will start disappearing, and the coyote population will explode.  According to The Serengeti Rules, a system is either in balance or out of balance; the same is true for a supply chain system.

This is an important concept to remember, as we face a new world order that is increasingly being localized, and closing borders.  The general population is unaware of the many of the benefits of open trade that have accrued due to the benefits of globalization, seeing only the jobs that have gone away.  In this new digital, fast-moving economy, however, we need to think about the importance of open competition to keep the balance in the supply chain ecosystem, which can spur innovation and continuous improvement.  We will all be better off in the long run, by keeping our supply chains open and balanced.  This is a concept that our faculty and students are consistently working on promoting at the Poole College of Management.  The NC State Wolfpack is dedicated to keeping the global supply chain strong and balanced!

 

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