SUPPLY CHAIN RESOURCE COOPERATIVE

The idea that large organizations can create a “federated” network, by integrating smaller firms into their network and drive a common purpose is a concept that is emerging as key to global competition. Federation implies common operating procedures, established standards, driving aligned supply chain processes and tacit understanding of how things work. The idea of federated supply chains have actually been around for awhile, and Peter Drucker first descried the idea.

Any organization requires both strong parts and a strong center. The term “Decentralization” is actually misleading—though far too common by now to be discarded. Federal decentralization requires strong guidance from the center through the setting of clear, meaningful and high objectives for the whole. The objectives must demand both a high degree of business performance and a high standard of conduct throughout the enterprise.”[1]

Suppliers that work for a larger company in a federated supply chain are generally pretty happy. The suppliers I’ve interviewed at federated supply chains like Honda, John Deere, Intel, and Flex don’t want to leave, as they feel like they are treated as equals, and assured a steady revenue, and also understand that they are in it for the long haul. Over time, suppliers’ loyalty towards the dominant firm grows. That is one reason why companies like Honda have begun using the term “Supplier for Life”, which suggests a strong, paternal relationship that is governed by high performance expectations, fair product price negotiations, and deep understanding of long-term technology and customer roadmaps.

An interview I had with Jeff Ng, Chief Procurement Officer at Steelcase, provides some clues on how how global collaboration is key to building a federated supply chain system.

This need to understand many different points of view is the central theme of collaboration. It requires that you be able to understand who people are, and what they do. It also requires that you understand how work happens today, and be willing to allow some variation in processes, up to a point.

The idea of aligning people around data and a common process for decision-making makes sense.  But what we are seeing now is something beyond collaboration:   the idea of federation.  There has always been a need for organizations to establish standards of performance embodied in policies and procedures, but in a our study of global  logistics providers[2], we discovered that top performing organizations developed a form of supply chain governance that build in some level of flexibility to adapt to local requirements, by design. For instance, organizations would develop a global process for delivering an outcome in the form of a “maturity framework”, but which allowed people in the global network to achieve the outcome in the appropriate manner that was aligned with their local cultural norms.

As an example, many of the leading organizations we interviewed have recognized that logistics requirements vary from region to region, and as such have moved to a regional logistics design, governed by a centralized supply chain council. The governing council establishes overall guidelines and structures for regional work to operate at a world-class level. Typically such councils have developed standards consisting of three components: process, policy, and playbooks. First, the standards define the processes that must be in place (e.g. customer order promising, transportation planning, order fulfillment). Second, they define the policies that must be followed (e.g. finalizing orders, allocation, scheduling). Finally the standards come with “playbooks” that act almost as a user guide on how to think through the process requirements and get them done!

In cases when there are major tradeoffs or conflicts that occur between regional requirements, organizations have adopted a global sales and operations planning function to optimize global requirements across regional requirements, especially around global product lines. Once established, however, top executives realize that these plans will be interpreted and acted on differently at a regional level. The outcome – a federated supply chain – is the desired outcome when this approach is utilized.

Federation is based on the simple thesis that supply chain leaders cannot standardize the entire world, and need processes that will be a solution in 80% of the cases, allowing for local adoption for the remaining 20% of cases, (so long as the outcome meets the process playbook). This requires a clearly defined organization, with clear roles, and responsibilities, so that people can speak to the same processes, with the same toolboxes. This ensures that all parties are “speaking the same language” and are using comparable metrics and plans. At the same time, differences should be highlighted. Leaders should be aware of the challenges and successes of regions, what they struggle with, and what they are proud of. Leaders should also be prepared to accept a different point of view on what is working locally and what is not, and be prepared to adapt the process to fit the right local requirement. And this means that interactive communication is required to ensure that when decisions are made, everyone is aware of it and is kept informed. Because it is the interaction that creates intelligence, in a cyclical view of new ideas, feedback, and response that forms the interactivity that drives new knowledge. Technology is the game changer that allows this to happen more quickly – but trust is the essential ingredient that allows data to cross boundaries, and forms the glue for federation.

[1] Drucker, Peter, The Practice of Management, 1956, p. 214.

[2] Handfield, Robert, Straube, Frank, Pfohl, Hans-Christian, and Wieland, Andreas.  Trends and Strategies in Logistics and Supply Chain Management, BVL International, Berlin, 2013.

 

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Globalization and supply chains have been tied at the hip over the course of history. Supply chains naturally take advantage of efficiency and cost advantages and over the centuries, as transportation methods, technology and global knowledge improved, there has been a drive to take advantage of each and every step. Trade between countries and continents has been occurring for thousands of years, using the silk road as an example. Silk was produced in China, and then traded across India, Persia, Arabia and Rome where it was considered a luxury good, dating as far back as the 1st century BC.

Fast forward to 2016, where we live in a highly connected and globalized world where the Panama Canal can now cater for vessels that can carry up to 13,000 TEU (previous maximum size was 5,000 TEU). Raw materials are sourced from one country, products are manufactured in another country, and the final goods are transported to customers all over the world. There are complex webs of free trade agreements, trade barriers, international movement of labor and economic blocs like the European community.

As long as there has been globalization, there has been an element of anti-globalization. A primary concern is job losses in specific geographic areas as companies align their supply chains and business models to the most globally economical strategy. As borders open up, labor moves between countries, and as hot spots of conflict occur, there are, at times, mass movement of refuges. These concerns have grown dramatically recently, creating what some call the fragmentation of globalization.

We have heard of the most recent examples of fragmentation, however let me recap while avoiding the political and emotional arguments. The decision by the majority of voters in the UK to leave the EU (Brexit) was primarily based on concerns around globalization including immigration and free labor movement. The recent election in Australia could result in a hung parliament and the return of Pauline Hanson to the senate. Ms. Hanson is the leader of the right wing “One Nation” party – a strong supporter of anti-multiculturalism, anti-immigration and anti-Islam policies. And then we have the public debate in the US, led by the presumptive Republican presidential nominee Donald Trump who has articulated strong views on anti-globalization – including very tight border controls – restricting Muslims from entering the US and calling for the renegotiation of NAFTA (North American Free Trade Agreement) and the rejection of the Trans-Pacific Partnership (TPP).

These are only some examples of a stronger public voice against globalization. Brexit is a perfect example of fragmented globalization. There are still many unknowns on how the UK will partner with the EU going forward, or even if the UK will remain unified with Scotland and Northern Ireland perhaps seeking their own referendum to separate from the UK. These concerns are critical for supply chain leaders as they struggle to understand how the global trade game will change, and how to restructure their supply chains based on the vast number of changing pieces. Fundamental trade elements are currently unknown, i.e., will there be free trade between the UK and the EU, will UK citizens still be able to work in the EU, and vice versa? Will the trade agreements between the EU and other nations still include the UK?

As we look outside the EU and Brexit, we start asking other questions, what happens if the TPP is not signed (refer to my previous blog for a review on this question)? What happens if NAFTA is renegotiated? And if NAFTA can be renegotiated, does that open the door for every other free-trade agreement (FTA) to be reviewed?

As I conducted the research for my upcoming book on the Trans-Pacific Partnership, called “A Naked View of the Trans-Pacific Partnership – An unbiased informational review in plain English”, I was surprised at how smaller and developing countries are very positive about globalization. In a survey conducted by Pew Research Centre, a nonpartisan fact tank, across 44 countries globally, 81% said trade is good and 54% agreed that trade creates jobs. However, when a similar survey was conducted on American citizens, only 47% said that trade was good (43% saying it’s bad) and 17% said global trade created jobs (46% said it leads to job losses).

So how do global supply chain executives plan for the future? As globalization becomes more fragmented, key developed countries like the UK, US and Australia are questioning the benefits of globalization. How do we plan our supply chains out 5-10 years, and how do all these changing chess pieces impact our ability to maximize efficiency and cost management?

As with any decision that needs to be made without all the critical information, it’s better to be directionally correct than exactly wrong. It is critical that leaders identify which parts of their supply chain can be flexible, so that contingency plans are in place. An example would be raw material suppliers where a vendor plan would be created that will allow easy switching between suppliers from different geographies. For those areas that are less flexible, such as manufacturing plants, alternatives can be reviewed, such as setting up redundancy across different geographies, moving to contract manufacturing or any other risk mitigating change.

Most importantly, in today’s increasingly fragmented global environment, it’s absolutely critical that supply chain leaders understand what is changing globally, and how it will affect their global movement of products and services. As Brexit showed us, anything is possible, and the only protection against uncertainty is knowledge and flexibility.

Timothy Barnes is the President of Asia Pacific Consulting, based in Chapel Hill, NC and author of an upcoming book on the TPP – “A Naked View of the Trans-Pacific Partnership – An unbiased informational review in plain English.

Email: tbarnes@apac-nc.com

Facebook: https://www.facebook.com/asiapacificnc/

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A recent visit to a mid-sized hospital in the Northeast United States provided a number of important insights into how is great a problem material handing data integrity is in the daily life of those people who work in operating rooms across the country. The nurses, buyers, surgical techs, operating room specialists, and physicians who work on the front lines of hospitals, are having to deal with massive forces of friction that are reducing their ability to provide top tier patient care. The scenario described in this case study is being repeated in 95% of hospitals across the country. The operating room (OR) is also the primary source of revenue for hospitals, as 80% of all revenues taken in occur through OR activities. These facts alone provide ample evidence of the need for massive change in the way that hospitals manage their supply chain data.

The Parkdale (fictional name) hospital is like many others you’ll find across the country. This one has about 450 beds, with its own warehouse that stocks items at a separate location. The hospital relies on Group Purchasing Organizations to order many of the thousands of items it carries in its different wards, as well as the drugs and biologics it must keep in its pharmacy.

Purchasing at Parkdale

The purchasing function at Parkdale consists of about 9 people, who are primarily involved in transactional activities. One person orders supplies for the OR, another does non-medical supplies and services, and others who manage the catheter lab, interventional radiology, and stock items. Stock items are those that are used on a repetitive basis. Another person manages IT supplies, and another hospital renovation services. Like many purchasing functions at hospitals, these individuals are often paid by the hour, due to strict budgeting in a world where purchasing is considered primarily a transactional activity with low value added. Their role is to “get stuff that physicians need, and don’t run out!”

The Operating Room purchasing staff has people who buy cardiac and non-cardiac parts, heart and vascular products, and the Physician Preference Items (PPI). The latter category consists of products that are custom ordered by physicians, especially OR surgeons, based on their specific preference. Many such items are selected based by physicians based on different criteria, including:

  • They used the products in medical school, got used to them, and insist on using them in the OR,
  • Sales representatives convinced the physician it was a superior product and they should switch to it,
  • Physicians read about the item in a journal article or medical report, and are trying it out as they believe it is superior to the old alternative, or
  • The physician is being courted by a medical products company through perks or benefits which is leading them to choose the product.

In some cases, purchasing works through the local Group Purchasing Organization (GPO), which operates under the theory that buying in bulk will render lower prices. By combining volumes from multiple hospitals, the theory continues, GPO’s can pass on the savings to hospitals, and collect a fee of 5%, leaving hospitals with a savings over what they would pay otherwise. However, “lower prices” is contingent on something called “contract compliance”, a term that is often poorly understood and not well defined for hospitals by GPO’s. Although GPO’s state that you can “choose to opt in or opt out” for any product, the reality is that compliance to the terms of the contract often fail to fully disclose that GPO’s make much of their money on rebates with the manufacturers or medical products, much more than the 5% they charge the hospitals. This renders the entire manufacturer-GPO-hospital relationship opaque and difficult to truly sort out whether savings are real or not.

The Parkdale purchasing officer notes that “We have an on-site person who works for the GPO under a consulting agreement. They are in charge of helping us with PPI items as well as purchased services. We are working with a new GPO , and they are supposed to help us identify how we can convert our items over and get compliance and lower prices for the OR and also for orthopedics.”

“We struggle even with simple items to get agreement. For a simple tourniquet product, it took us two years to get physicians to agree on a single product. We thought it would be easy to negotiated based on the simplicity of the items, but this was not the case. We tried to negotiate with a book of business based on forecasted usage, but there are always new items coming up, so we have to negotiate with them to give us the same pricing on new products unless they are revolutionary. And we have to trust that they won’t sneak behind our backs and raise prices.”

The Head OR Nurse’s Perspective

A meeting with the head nurse from the OR provided a glimpse into some of the many challenges that occur in this environment.

“We are constantly challenged with trying to get part numbers for the parts and products that are coming into the OR, as every part has to be entered into the computer during the surgery. We had made a decision not to add new vendor parts for pins, plates, and screws for implants, but could not get all the surgeons to agree on the list. To get agreement requires getting the department of surgery involved, and this gets complicated.”

During a surgery, we often find that there is no description for an item, because there is a 30 character limit in the system in the description field. So for instance we might be using a 15mm screw in the surgery, and the nurse is at the computer during the surgery trying to record this into the patient log. But maybe she can only find a 13mm screw, so she puts that into the record instead. Or perhaps she just enters MISC and adds a note to the record saying that this is missing in the catalog. Or maybe she just writes it down on a piece of paper and hands it over to the recording nurse, Judy. This can occur for multiple parts and items.

For every surgery, there is something called the PPI card. This card is supposed to contain all of the PPI items for a particular surgery, that have been pulled out of the surgery stockroom by the people prepping the OR cart for the surgery. Every cart has the items loaded onto it, based on the PPI card. But we still find that the items on the PPI card can’t be found in the system.

The sheet of parts comes from the OR and has to be sent over to the Cost and Budget department. But I spend an hour a day just cleaning up the part numbers on the systems. We have a person who does nothing but work through the part sheets correcting the part numbers. We have had to learn how to do this ourselves, as there was no IT support, no documentation on how to fix it, and no information on how to convert data from one system to another.”

Despite being a multi-million dollar revenue source, the operating room is dependent on multiple people having to fix it. In the words of one physician, “this is a $2 trillion dollar cottage industry.” And even though IT departments are 20 times the size they were 10 years ago, the support for physicians and nurses is less than it ever was.

The Head OR Nurse expressed this challenge:  “I feel very frustrated, because I went into nursing because I wanted to help physicians and patients. However, I am spending more time on the computer searching for items than I am working with patients. Many of our nurses are becoming equally frustrated, and we are seeing many of them quitting because they say they can’t stand working at this job any more, as there is too much computer time spent searching for items in the catalogue.”

 

These types of data integration issues are fundamental to addressing the many shortfalls in our healthcare system.  This is an activity that the SCRC will be dedicated to improve in the coming years.

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The vote by the British population to leave the European Union (“Brexit”) was greeted with massive volatility by financial markets worldwide. It also raised a number of concerns regarding the stability of the overall disposition of populations to the growth of globalization and linked economics between countries all over the world. According to a USA TODAY poll (July 1, 2016), Americans agree that the United Kingdom’s vote to leave the European Union was a sign of anger and dissatisfaction that can be seen in other countries, including the USA. Many also believe that it is an indication of a broader feeling among people around the world, as the polls suggest that many of the “Leave” voter population were from rural areas, lower education, and elderly, while many in the “Remain” voter population were from the financial community, larger cities and young people.

Regardless of the reasons, the Brexit vote will have lasting repercussions, and may threaten the stability that has existed in global markets for some time. While the majority of leaders (Obama, Cameron, and others) have pushed for greater free trade, the fear of open borders and increased immigration, particularly from those regions such as the Middle East, is pushing voters towards fear of open borders and more towards closed markets.

In the financial markets, equities dropped precipitously the day after the vote, but have returned to their normal levels. Yields on the benchmark 10 year and 30 years Treasury notes in the US and the UK fell to their lowest levels ever. This indicates a flight to safety, as equities are viewed as much more volatile.

In the short term, it seems that there is no major impact on stability of operating conditions in the supply chain. In a recent ISM press release, a “quick poll” of purchasing executives suggests that they were most concerned about financial market uncertainty and currency movements. Secondly they were concerned about global growth overall. Supply chain executives were least concerned about their firm’s trade links with the UK and the EU.

In the longer term, the Brexit vote could have political and economic repercussions that are much more serious however.  Some of the issues that executives should consider as they enter into strategic planning meetings are the following:

  • What is the likely future for the UK and the EU economic scenario given Brexit?
  • What is the impact on financial markets?
  • What is the impact on US elections and government trade talks?
  • What is the impact on the Trans Pacific Partnership Talks?
  • What areas of the supply chain will be impacted by these changes?
  • What areas of global supply and demand will be impacted?
  • Will this lead to the eventual fragmentation of the EU as other countries such as Spain, France, Portugal, the Netherlands, and others begin to debate whether they should remain?

These and other questions are important parameters for supply chain executives to consider.  I will continue to update this blog as new information comes to my attention!

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Transition at the SCRC

July 1, 2016
by: canteen
categories: Supply Chain Management

Today’s guest post is from Dana Magliola, the new director of the Supply Chain Resource Cooperative here at NC State who shares some thoughts on transition at the SCRC.


The supply chain is an ecosystem where constant change is the norm and time is currency. Transitions are ubiquitous, yet to thrive any organization must become an animal of innovation. The Supply Chain Resource Cooperative at NC State is no different. To keep our curriculum, research, and student engagement relevant, the SCRC has developed and refined its unique supply chain management curriculum. With constant care, the organization’s leadership has led the SCRC with distinction and a steady hand. In the final days of June this year, the SCRC celebrated the service of outgoing SCRC director, Clyde Crider, and welcomed in a new director. For everyone involved with the SCRC it is a bittersweet, but exciting transition.

The SCRC of today, and the practicum-based learning model, maximizes student exposure to real industry environments and pairs them with talented and engaged project sponsors from SCRC Partner companies. Together students, advisors, faculty and sponsors truly think and do together to develop innovative solutions to actual business challenges. This unique model attracts prospective students, researchers, and industry leaders to NC State to see the impressive things going on in Raleigh. From its founding in 2000, the SCRC has benefitted from not simply the vision and hard work of its leaders, but from the value it has delivered to industry, community, students, and the University.

Since joining the organization in 2010, Clyde Crider’s leadership carried the SCRC through headwinds of economic recession early in his tenure and built it into the stable and growing entity it is today. His commitment to the “Voice of the Customer” and dedication to his vision of the SCRC as a “Solutions Provider” are evident in the strong relationships and friendships developed under Clyde’s stewardship. Today, NC State also boasts a fellowship of student leaders and alumni fellows in the SCRC Supply Chain Scholars program which began during Clyde’s tenure and reflect his belief in the importance of growing young leaders. The SCRC organization could not have a more passionate advocate for the type of pragmatic education experience students have at NC State. Clyde also speaks the language of business; his awareness and experience in industry helped him bring a unique perspective to teaching, project management, and leadership. I often hear great things said about Clyde from executives and students alike. Challenging his second attempt at retirement, we aim to keep him engaged as an ambassador for the SCRC. His “lessons learned and tribal knowledge” alone is a part of the SCRC fabric.

In this theme of transitions, I am honored to assume the role of SCRC director. I believe strongly in the vision of the SCRC to be a solutions provider, as well, and its ability to make a significant impact on student’s career potential and outcomes. I will strive to amplify the impact and connectivity of the SCRC. Our industry is changing rapidly; student dynamics are shifting, and the SCRC will, as always, adapt. It is good to have ideas – and I look forward to sharing mine with the broader SCRC network – but right now I’m doing a lot of listening. In my ongoing conversations with faculty and leadership at the Poole College of Management, as well as across NC State University, I am finding much goodwill and interest in collaboration. I’m also enjoying the opportunity to get to know each of our Partner companies better, and I have been learning a lot from the conversations I’ve had (and continue to have) with our sponsors and project managers. Our students and alumni also have a viewpoint, and hearing from them has been inspiring, informative. It is exciting to learn about the positive impact of the SCRC from so many different audiences and stakeholders.

So true to our supply chain roots, we are embracing the transition at the SCRC, and are excited about the opportunities it presents. Yet, we also have functional deadlines to meet. For our Partner companies and organizations, our project submission window is now open, and we are receiving the projects that will engage our students this fall. Our effort to grow our partnership is ongoing, as well. Continuing into the summer and on to the fall semester, we have some great events and activities scheduled for our students and Partner companies, as well as broader supply chain industry and community audiences. Stay tuned for information in the coming weeks.

I look forward to updating you soon with good news and stories of our shared successes along the way.

– Dana Magliola, director, SCRC

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I had the opportunity to attend the Procurement Leaders in San Francisco forum two weeks ago, followed by attending the ISM Carolinas-Virginia meeting in Winston Salem last week.  Procurement analytics was discussed at length at both sessions. Several key takeaways emerged from the discussion with executives, which represented a wide array of companies including AARP, Roche-Genentech, Silex, RJR, Flex, Google, Northrupp Grummon, GE, and others.  Here are some of the comments I heard in speaking with different individuals.

  • The large procurement providers, such as Ariba, Zycus, Brave, Coupa, and others are making good strides into the market. Ariba has the advantage of being able to be linked into SAP systems, while Coupa has not been able to achieve this integration, which has been problematic.
  • Most companies discussed the fact that they do not have a lot of “good” data. Most are still focused on spend analytics.  Procurement analytics is fairly new as an area, and I did not see a lot of major inroads using cognitive analytics or combination of different data sets to produce insights.
  • Maturity in analytics is a progression from Descriptive (Historic) to Predictive to Prescriptive to Cognitive. Most companies are just getting past the descriptive stage, which is just about being about being able to describe and get in touch with reality. Predictive is about understanding the future. A key observation was that “analytics are useless if the customer can’t make sense of and use the data.”
  • Analytics is still seen as an emerging discipline. There are a few companies that are in advanced stages of being able to drive spend analytics, risk analytics, and others, but this has been at great expense. Even so, many are not doing sophisticated analytics, but are still primarily focused on spend analytics. For example, one company is still working on use of shopping carts and purchase orders – was the PO coded directly?
  • Spend analytics is indeed the primary focus of most companies. Executives note that spend is the foundation for many other forms of procurement analytics, but is not an end unto itself. The primary outcomes from spend analysis is the ability to identify multiple instances of a product under four different SKU’s. For instance, one company gave an example of a valve with four different SKU numbers, multiple prices, and multiple names across their facilities, and pointed out that spend analysis allowed them to build a business case around driving down complexity of their spend.
  • Not all decisions require real-time data to be useful.  There seems to be a real need to digest and create visual aids, and to find ways to speed up analysis of information. How data that is used to highlight exceptions in a real-time environment, it must be highly consistent however.
  • Procurement is increasingly taking on the role of being able to become the “source of truth” for data – and enabling other functions with data. This is occurring because they have the most to gain, but also can serve other stakeholders in this role and get their buy-in, particularly when there is an enterprise focus on analytics. Procurement should step up and lead these roles when possible. Procurement should also be at the table when system design is occurring with the IT function, and not wait for IT to tell them what they need. They need to be an active participant in designing systems.
  • A common problem faced by companies is how to structure the front-end data entry process to enable improvement of data quality. So many users are prone to enter information incorrectly into the PO and the system, which degrades data quality significantly. Examples include the use of “Other”, “Miscellaneous”, or random product codes in category fields when entering requisitions. To address this problem, companies shared best practices that included limiting the number of users who have access to the system, to only those who have been trained and have the discipline to use it in a compliant manner. A second approach is to limit the number of PO categories, to ensure they are used correctly. Finally, a best practice was to use “drop down windows” to ensure that the purchase is mapped into the proper General Ledger account. Even Google notes that we “Automated wherever we could. It was very complicated – we had to write about 10,000 lines of code to get it to where people could enter the right element.”

 

I found the discussions to be very compelling, as we continue to chart the path ahead in the CAPS study that our team is engaged on!

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I had the opportunity to speak with a Nike executive about how the company has moved into the world of mass-customization.  Many people have heard about their partnership with Flex to build mass-customized shoes in Mexico, which is a big shift for the company from it’s largely Asia Pacific supplier network.  Although it is certainly not abandoning Asia, Nike is moving towards more near-shoring due to the need to mass-customize and meet many of the requirements for VELOCITY that we have discussed in this blog recently.

Nike went about creating a three-tiered customized supply chain for their shoes. Shoes are a relatively complex assembly, and are hand-made for the most part in China. In fact, Nike hired a manager to go over and begin production of shoes in a Nike-owned Chinese factory, run by one of their employees. They approached the employee about buying the factory from them, as they made the move to a complete off-shore provider.

As Nike moved into an e-commerce strategy, they decided to offer three levels of customization. The first was their Core Customized shoe, which had 15-20 choices. The price point was around $200, but with the customization, “some customers designed some really ugly shoes. A midpoint was a simpler, faster model with 4-6 choices, that could be made in 2 weeks or less. The third was a more standard shoe that they called the “Sub-7”, which is one where they take an order, the product is customized onshore or near shore with some stock inventory and light customization and personalization. This is 7 days from click to delivery. Nike also realized their expertise wasn’t in doing quick turn manufacturing in country, so they have made an agreement with Flex around what they call their “Manufacturing Revolution” – which is focused on mass production of slightly customized shoes and manufacturing them near shore, which in this case is Mexico.

The Sub-7 body of work involves taking finished goods and component inventory, and pulling it together with some personalization. For example, one was the elite sock, where a printer is run over a tube sock, which prints a number, initials, colors and in 5 minutes is shipped in a box to a consumer. A sock that sells for $20 now goes for $35. These proof of concepts turned into a broader scaled up project with Flex.

This is considered the “bottom of the pyramid” as it appeals to the broadest population, and is the lowest cost. There are a limited number of people for the mid-tier and the pyramid peak which is the core customized product. Most people can’t decide around 20 choices, and were designing really ugly products! By creating it more easily, with fewer options, teams can now buy shoes with names and numbers on them, hats, shirts, socks, all through Nike.com and outfit an entire team relatively cheaply. And it is selling exceptionally well.

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Today’s guest blog is posted by Timothy Barnes, who I met through the SCRC.  Tim is a global supply chain executive originally from Australia, who has been studying the evolution of the Trans Pacific Partnership closely, and is writing a book on the subject.  He has put together some great advice here about how the TPP is going to dramatically impact the supply chain landscape in the near future….

Supply chain decision makers play a continuous game of identifying what and where to source raw materials, the most cost effective location for assembly, and the most efficient structure of their transportation network, to achieve the ultimate goal of low COGS, good quality and delivery to their customer base in an efficient timeframe. However, as some expert’s estimate, around 2% of supply chain professionals time is spent thinking about account free trade agreements, and how they can utilize the provisions to take full advantage of efficiency and cost reductions, and to identify areas that could result in higher COGS.

In a highly competitive world, where cents on the dollar savings are typically the difference between hitting EBITAR targets and gaining market share, and being left behind, understanding the opportunities and threats that free trade agreements provide to a specific industry or company, are critical.

Let’s look at the Trans-Pacific Partnership (TPP) agreement as an example, where 12 countries around the Pacific Rim have signed an all-inclusive deal that excludes China, Korea and India, and promotes trade between critical nations in South East Asia, North and South America, South Pacific and Japan. This agreement will be a game changer in the way trade is conducted over the next 30 – 40 years, however it amazes me how many of my clients and companies I interviewed for my upcoming book, know very little about the opportunities and challenges the TPP will have on the US economy as a whole, and how critical it will be for supply chains to evolve with the changing landscape.

The most common question I get is “Will the US ratify the agreement? I heard that it’s not going to go ahead.” So let’s look at this question from both angles. Firstly, let’s say that congress does not ratify the TPP. Do things then stay status quo? Absolutely not, and this is where a knowledge of global trade agreements is critical. There are nations in South East Asia that have been asked to join a similar trade agreement called the Regional Comprehensive Economic Partnership (RCEP), which is China led that excludes all nations outside Asia. There is an overlap of countries that are party to both the TPP and RCEP, however for those nations, such as Japan, Vietnam, Malaysia, Australia, New Zealand, Singapore and Brunei, most have gone on the record saying that they see the US led TPP as the most critical and inclusive, and will put the RCEP on hold pending the decision on TPP. If the TPP is not ratified by the US congress, then the entire deal dissolves[2], creating a great opportunity for China to take the lead in Asia trade via the RCEP, and leaving the US on the sidelines. Supply chain leaders then need to re-look at their structure, to understand how the RCEP will further restrict trade with Asia, both in manufacturing product, but also in exporting product from the US into Asia.

So let’s look at it from the other angle, and that is if the US congress does approve the TPP, especially as they are recently obtaining a huge amount of pressure to approve it from a number of US organizations such as the National Council of Farmer Cooperatives (NCFC), as they risk losing not only the benefits of the agreement, but existing access in foreign markets. [3] In addition, a number of key issues such as the exclusion of the finance sector from the ability not requiring companies to hold data in a specific geography, has now been sorted out and has agreement by both regulators and financial sector representatives to move forwards. Having said that, the largest risk to the TPP being signed is the upcoming Presidential election, however as the result will not be known for many months, the only thing supply chain leaders can do is plan and prepare.

So if the TPP is approved, then this creates a different, but equally as critical challenge for supply chain leaders. The total delivered costs of goods will now change, as over 18,000 tariffs are reduced to zero either immediately or over a phase out period. Non-tariff trade barriers will change, the measurement on food safety (sanitary and phytosanitary measures) will be uniform, the Rules of Origin requirements in raw material and final assembly will need to be understood (and in most cases, sourcing from China, India and other non-TPP countries will exclude those products from the benefits of the TPP) and most defiantly, companies will need to adjust their supply chains to comply. These changes are only a few examples of the wide variety of opportunities and threats that the TPP will provide.

So supply chain leaders have two options, they either ignore the fact that trade agreements have a material impact on their supply chains, like 98% of their peers, and react only when it becomes clear that COGS and other critical elements are impacted. Or they prepare themselves with an action plan to capture the benefits and protect themselves from the threats, with an implementation plan ready to go depending on the overall outcome. And that is why global trade agreements should always be a part of supply chain planning.

Timothy Barnes is the President of Asia Pacific Consulting, based in Chapel Hill, NC and author of an upcoming book on TPP.

Email: tbarnes@apac-nc.com

Facebook: https://www.facebook.com/asiapacificnc/

[2] To pass the TPP, either all nations ratify the agreement, or a minimum of six ratify it as long as they make up 85% or more of the combined GDP. The US is 60.3% of the GDP, as such, if the US does not ratify, then the entire deal dissolves.

[3] World Trade Online, June 14, 2016 http://insidetrade.com/daily-news/froman-urges-farm-group-seek-tpp-vote-year-warns-losing-market-access

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I had an interesting discussion with an expert in the food industry, and we discussed some of the emerging trends going on in food packaging and local sourcing for food.  It turns out that consumers are now getting very picky about where and how their food was grown, and what they are ingesting into their bodies.  Imagine that!

The food expert I spoke with noted that many of the food packaging companies are beginning to add the term Locally Sourced and Organic. However, many of these same packages show a very, very, small asterisk – with the words “where we can” at the bottom.

This has led to a whole lot of confusion. A report by the National Restaurant Association notes that “While chains explore local and organic and develop updated supply chains, questions remain over which is more cost effective, which is more sensible, and which customers prefer.Although both local and organic fall under the now-umbrella term “green,” the two sourcing strategies are different. Organic food is regulated by the United States Department of Agriculture (USDA), and concerns how the food is grown and processed.”  Organic also implies that it they are not Genetically Modified Organisms – which is another ball of was entirely.  The problem is  – most companies can “source” non-GMO, organic food, but in reality, are unable to distinguish the upstream separation of non-GMO from mainstream food, particularly for corn and other broad categories, so in reality, it is all blended together in the upstream supply chain!  Hence the term *where we can…

The term “local” is also highly variable – and this can mean within a 150 mile radius, or if you are shopping at the Chapel Hill Farmer’s Market, a 25 mile radius. (In fact, I heard rumors that the guy who started the CHFM was kicked out for bringing in vegetables that were from outside the radius! Shame Shame!)

People also sometimes think that locally grown is the same as organic.  In fact, local producers often falsely tack on the term “organic” to nonorganic food items because it is a buzzword. With the shaky definition of what constitutes local ingredients, comparing them with organic ingredients can be impossible. But one thing is for sure: Organic ingredients are more expensive than other ingredients.

The NRA report notes that “According to the USDA, the average premium for organic ingredients is as much as 100 percent for vegetables, 200 percent for chicken, and 300 percent for eggs.”

The other problem is that some communities only have a two week growing period – so it is virtually impossible to grow local food for sale year round.  One of our MBA student teams this summer is exploring the possibilities for “flash freezing” locally grown produce, and exploring the market demand for this type of produce in supermarkets.  This work is being done in conjunction with the Center for Environmental Farming Systems (CEFS).  The results should be very interesting!

There are also huge risks associated with local foods.  Consider the Chipotle case.  The first problem, norovirus, is notoriously contagious, and involved employees coming to work sick and rendering the entire facility  breeding ground for germs.   But the other issues related to food safety and handling that resulted in the E.coli and salmonella outbreaks were primarily due to poor material handling procedures.  Nevertheless, Chipotle has suffered dearly for these issues, and the lines at their stores are nowhere near as long as what they used to be!

Local food faces an uphill battle in other ways.  People want perfect round peppers and tomatoes – so a lot of the “ugly vegetables” get rejected on the incoming dock, even though they taste way better than the stuff that looks perfect in many cases.  There was even a recent Shark Tank episode where a guy was selling the non-perfect stuff to people in shipments.

But one of the biggest challenges of all is supply.  Local farmers don’t have the production volume, the scale, and the expertise to produce in mass quantities.  So in the meantime, local food sourcing will remain a challenge – but the work of CEFS and our students will hopefully try to change that.

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Today’s guest post is from Graham Givens.  Graham is a Research Fellow at the Supply Chain Resource Cooperative, where he works closely on local food systems through the Center for Environmental Farming Systems.  He reports on his recent visit to the National Restaurant Association  Supply Chain Management Executive Study Group meeting in Chicago.

“The NRA’s Supply Chain Management Executive Study Group’s main mission is to share information and skills between supply chain professionals in the restaurant industry by holding meetings like the one I attended. In attendance are some of the largest restaurants, distributors, and service providers.

At this meeting, I had the chance to meet with supply chain professionals from Sheets, The Shake Shack, Church’s Chicken, P&G, and Restaurant Services, Inc. The meetings provide an array of useful information for industry professionals through panels and presentations from industry experts. The most interesting presentation was one by David Donnan, Partner at A.T. Kearney. David’s presentation detailed the current trends in industry and offered predictions on where the industry is headed. From increased supply market volatility to increased technology usage across the chain, the industry appears to be going through some major changes.

Most pertinent to my own research at the SCRC is the increasing demand for localized and fresh options. David labeled this as one of the top 5 market trends in the industry today with serious implication for sourcing and marketing. He suggested that this is mostly coming about with the changing taste profile of the millennial generation. Though a few restaurants in attendance were already working to capitalize on this trend, most appeared to be stuck in their old ways.

This was most apparent when someone asked a senior executive from a major fast casual chain, who was on a panel the day before David’s presentation, whether the company would be changing their product portfolio to fit the increased demand for fresh, healthy options. The executive made it very clear that there wouldn’t be a change. Though he did bring up the fact that millennial’s top restaurant was McDonalds (upon further research I couldn’t find whether this was correct), it surprised me that there was such strong resistance to change in response to an up and coming trend. With McDonalds quickly changing their product offerings (breakfast all day) to bring back sales after fierce competition from Chipotle and Shake Shack, you would think other large restaurants chains would be considering the increasing threat from restaurants that differentiate their products on freshness. I guess many of these large restaurant chains are taking the wait and see approach to this up and coming trend. Only time will tell if this was the best option.”

Graham and CES are funded by a grant from the USDA to support local food systems.

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