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Sourcing Complex Professional Services in a Competitive Supply Chain

 

A Review of GlaxoSmithKline Case Study  

Quality is one of the most important factors for companies in the relationship between suppliers and customers (Ackerman, 2007). It requires integration of processes and data harmonization in a complex, global environment. Critical processes and strong relationships develop mutually beneficial outcomes, trust, strength and competitive advantage. We live in a time where globalization has forced industries to adopt cost efficiency strategies in order to compete. Top-line spend is being scrutinized and the legal industry is no exception to the new normal. In 2012, more than 25% of companies in the U.S. and UK spent over $5 million annually on litigation costs, and among healthcare companies that proportion was estimated to be 30%–40% (Gardner, H., & Silverstein, 2016).

Because professional services have become such a prominent cost of business, executive leadership has pressured the supply chain function to enhance the efficiency of spending. Professional services like legal counsel have historically been defined as too complex to transition to alternative billing arrangements that were ordinarily reserved for predictable, simple items. Complex legal services hinge on quality and explicit expertise that are determined on a case-by-case basis.

This case study examines an organization’s process for introducing competition and alternative billing arrangements for complex professional services using innovative sourcing techniques and Six Sigma methodology to monitor and control performance.  The goal of this analysis is to: 1) evaluate alternative sourcing and the utilization of reverse auctions, 2) examine the successes and gaps of the GlaxoSmithKline (GSK) sourcing and procurement model for legal services, 3) determine if the GSK model can be applied towards other complex services, and 4) recommend improvements using the case study of GlaxoSmithKline: Sourcing Complex Professional Services (Gardner, H., & Silverstein, 2016).

Situation Audit

In recent years, the legal industry has experienced a global paradigm shift in the delivery model for legal services (Kane, 2017). This includes a consolidation among law firms, change in size, culture, and regulatory policies that encourage more competition and new entrants. While legal expertise is a necessary expense of organizations, it is historically viewed as a cost center. The 2008 economic downturn created additional competition among law firms as pressure to reduce costs increased and inadvertently diminished client loyalty. As described in the business case, “the size of the legal services market in the U.S. had increased by 4%–5% annually in the years preceding the economic crisis, it contracted by 3% in 2009” (Gardner & Silverstein, 2016).

In September 2008, the GSK law department appointed a new General Counsel who was a proponent of change and believed that the hourly-rate billing system inherently promotes inefficiency. His goal was simple: to reduce costs while increasing quality and value creation. The department’s focus scaled to include a Global External Legal Relations Team (GELRT) and an Outside Counsel Selection Initiative (OCSI). GELRT moved over three-fifths of outside counsel assignment to value-based fees (VBF) which is an incentive based payment structure that encourages integrity and six sigma efficiency in billing monitored and controlled through defined KPIs. Within 2 years it achieved a savings of nine figures (Silverstein, 2014). The over-arching message was that “if firms are willing to put some ‘skin in the game’ to help us meet cost savings goals” they should be rewarded with the value they provide to GSK (Salopek, 2012).

The focus of OCSI was to leverage best practice in e-Sourcing and Procurement using an e-reverse auction program. Based on case-specific criteria, GSK uses a mini-RFI tool that allows it to view an outside firm’s qualifications for the intended case. GSK Legal can then aggregate KPIs to ascertain the firms’ quality as well as their ability to adhere to VBFs. Additionally, the OCSI reverse auction process or “Sourcing Room,” attempts to neutralize aggressive fee competition among the qualified law firms by elevating value creation and fit per case assignment (Salopek, 2012).

In the context of this analysis, GSK has been served with a complaint wherein “A patient, Catherine Whitmore, died of an aortic aneurysm while on our blood pressure medication,” and the responsive pleading is due in just 20 days; an extension allowing more time to prepare a response is unlikely (Gardner & Silverstein, 2016).  A recently hired attorney must act quickly and within the defined processes adopted by GSK including preparing for a reverse online-auction as part of the OCSI process. Throughout the case and while awaiting responses from the “Sourcing Room”, she questions the purpose, process, integrity, and intended outcomes of GSK’s way of working:

“This system reminds me of buying office supplies or landscaping services. Can it really be applied to a complex legal case like this one? Why can’t we just engage the same firm that we worked with last time? Why would this new system encourage firms to use their best lawyers and ask for less? How could law firms suddenly afford to devote more work from their top brass for less money? Where would all of these savings come from? Even if the reverse-auction system saves money, we are paying it back in increased risk as we sit on our hands and watch our response date inch closer. I thought I’d return as the hero who doles out work, not the villain who pushed the legal industry into online bidding wars.”

Problem Identification

The fundamental questions that must be answered are: 1) does the reverse auction system reduce costs while ensuring quality,  2) what are the risks in using reverse auctions for sourcing and procuring professional services, and 3) can reverse auctions be applied to complex legal cases and yield successful outcomes? To better understand the framework of reverse auctions, the impact of compensation models on cost savings will be examined. This includes the impact on supplier relationships and how GSK’s processes may be applied to other complex services.

Alternatives

  1. Competitive Pressure

The legal industry presents complexities in procurement requiring sophisticated coordination of suppliers based on specialized criteria. Competitive pressures are forcing traditional law firms and corporate legal departments to minimize costs, increase flexibility and expand their in-house capabilities. Participation in legal process outsourcing (LPO) has become vital to controlling costs (Kane, 2017). It transfers the work of attorneys, paralegals and other legal professionals to external suppliers, both onshore and offshore. Therefore, “supplier and customer relationship management processes can enhance or inhibit competition” (Sadikoglu, 2014). Using a more agile e-sourcing and procurement strategy, GSK has achieved price advantages by leveraging a Six Sigma approach to managing costs and quality, and using alternative fee agreements, reverse auctions, and VBF to form value-add partnerships. Within lean constraints and a “buyers market”, GSK must quickly respond to changing market needs with no room for error. Overall efficiency increases because “each firm in the supply chain can maximize its competitive advantage through strategically focused resource allocation” (Christopher, 2011). Lastly, competitive pressure introduces a need for increased awareness and intelligent, real-time information flow.

  1. Operational Pressure

The aforementioned process coordination of procuring firms with highly specialized areas of expertise adds a layer of complexity that makes quality and cost control more difficult. In a time-sensitive environment, using a reverse auction process may contradict the need for greater speed and efficiency. GSK must support powerful mobile devices, software-as-a service, and secure, web-based technology to facilitate its way of working and global infrastructure. Advanced communication solutions that align with the “virtual firm” are becoming increasingly necessary in the legal market (Gehrke, 2007). The efficiency of process management emphasizes activities not results, where “proactive approaches to quality management to reduce variations in the process and improve the quality of the product” comes with a cost (Littlefield, 2012). Balancing the costs of operational efficiency can create pressures for GSK in obtaining quality legal services.

  1. Financial Pressure

The stability of the Pharmaceutical Industry and Financial Institutions can affect the financial health of GSK and its supply chain. Competing in a global environment has forced many companies to closely monitor their suppliers’ economic viability (Littlefield, 2012). GSK depends on timely responsiveness and counsel from suppliers. If in the event firm deadlines are missed due to disruption, GSK is left vulnerable.

Additionally, GSK faces pressure not only to reduce costs, but it must transform the perception of a corporate legal department from a cost center to value-add activity. As the cost of legal services continues to rise, GSK faces pressure to innovate legal delivery models, while closely monitoring their efficiency.  Utilizing e-sourcing and reverse auction techniques can provide “higher cost efficiency, larger scale, and possibly lower financial costs such as borrowing costs and tax rates” (Fishell, 2012). However, setup and ongoing costs, any skilled labor costs, and the total costs of quality and risks should be considered, which may increase GSK’s total costs for legal services.

  1. Regulatory & Ethical Pressures

“Domestic law firms are expanding across borders, collaborating with foreign counsel and forming intercontinental mergers, erasing traditional boundaries on the geographic scope of law practice” (Kane, 2017). Technology and globalization are disrupting the speed at which automation of legal processes and emerging e-sourcing and procurement tools are being adopted to remain competitive.  This exposes GSK to a broader Regulation of the Pharmaceutical Industry and legal sector, including quality and safety, ultimately increasing pressure for the company. As referenced in the case, “new governmental policies favoring deregulation and liberalization, such as the Legal Services Act 2007 in the UK, encouraged more competition in the legal market and provided a new route for consumer complaints about lawyers” (Gardner & Silverstein, 2016). GSK faces ethical pressure by engaging in foreign territories with suppliers that may have differing business practices. Moreover, GSK must have full-disclosure of possible defects in its products, some of which may be unknown at the time of release. The catalyst for the complaint in this case is the possibility that a GSK product contributed or caused a patient’s death. While GSK can use legal contracts to try and shield itself from any financial liability due to product implied guarantees or misuse, it still has a regulatory and ethical obligation to ensure product conformance to protect human life including all costs associated with auditing, monitoring, and ensuring product quality compliance

Critical Issues

A critical component of GSK’s success not only lies in its processes and use of DMAIC, but in its creation of a framework in which institutional change can thrive. This takes leadership, vision, structure, and engagement. Despite the assurance from GSK staff that the OCSI approach drives down costs and improves the quality of work by systematically increasing the rigor in the procurement process, the new attorney insisted on analyzing and comparing the competing firms’ bids. Her uncertainty speaks to the critical issues in this case: 1) organizational leadership in institutional change, 2) the utilization of reverse auctions in complex services, and 3) qualitative analysis of cost savings, supplier value, and risks.

Leadership is a critical component of Sourcing & Procurement because it influences, directs, and manages the resources of a supply chain, ultimately impacting a firm’s profitability. The problem for many organizations is that procurement is often perceived as a tactical function rather than a strategic function. For example, even in the P2P process, procurement professionals begin sourcing after a need has been identified. As quoted by GSK’s new General Counsel in 2008, “Before I came to GSK, legal spend had not been managed centrally, and individual lawyers responsible for the matters often didn’t have budgets. The firms often knew more about what GSK spent with them than GSK knew about what it spent at the firms, so GSK was not leveraging its spending power” (Gardner & Silverstein, 2016).  The transformation of how professional services were managed involved detailed planning and managing through process and KPIs. Resistance to change can make it difficult for organizations to adopt new strategies such as redesigning work processes, adopting new organizational reporting structures or establishing new pricing strategies. In addition, many firms are set in the “we’ve always done it that way” mentality that inhibits creative alternatives to procuring professional services.

Analysis

In the context of sourcing and procuring professional services, the GSK model for strategic action and leadership involved promoting a vision, setting strategies, defining goals, providing direction, and adopting a Six Sigma approach to performance management. A scorecard was thoughtfully crafted for each matter, weighting key firm selection factors including matter-specific credentials, experience in jurisdiction, along with pricing (Salopek, 2012). GSK’s e-reverse auctions involve a competitive bidding process where multiple law firms compete for the same project. This can drive price competition for large-scale legal projects such as mergers and tax filings. While there are risks of collusion and price tampering amongst competing firms, the over-arching mantra is that if the prices are expected to be lower, then firms “need to be increasingly savvy with their resources in order to compete” (Clarke, 2015). GSK viewed reverse auctions as an opportunity to create value and govern productive partnerships, not focus just on price which is seldom representative of total cost. The lowest bid was not always selected (Salopek, 2012).

e-Reverse auctions can be used to source and procure any complex professional service. It takes leadership (aforementioned), framework and process, and robust analytics. Using the GSK model, the RFI tool provided conditions around expertise and quality performance, where suppliers derived clear scope to propose solutions to an expected and known end result. When coupled with performance measures to help drive delivery value, satisfaction, and opportunities for improvement, these internal control mechanisms – by design- minimized mistakes, promoted sound decision making backed by data, and rewarded good performance both within and outside the organization (C.I.P.S., 2017).

By the end of 2011, more than 68 percent of GSK’s external spend was through VBFs, resulting in major savings. “One reason for this success was Dan Troy’s <new General Counsel> tone from the top,” (Salopek, 2012). He backed his VBF directive by connecting the annual bonus objectives of law department personnel to GELRT’s quantifiable cost savings. He also participated in global broadcasts to the Law Department communicating progress toward goals. This level of engagement was crucial to OCSI’s success, where the willing participation of all parties was needed in the e-reverse auction process. Since its launch, 57 OCSI events have been completed to date, resulting in total estimated savings of over $32.6 million when the winning firm’s budget (based on hourly rates) is compared to its final VBF offer, and over $21 million in savings when the winning firm’s initial VBF offer in the Sourcing Room is compared to its final VBF offer. These savings are a subset of overall, even more substantial VBF savings” (Salopek, 2012).

While the qualitative analysis of cost savings appears favorable, one must consider the supplier value and risks in using reverse auctions. The two most commonly voiced criticisms directed against reverse auctions are that they do not support strategic goals and do not encourage long-term supplier engagement.  In fact, many might argue that suppliers do not like them. Typically, reverse auctions are designed for routine or predictable purchases that “feature little collaboration, shorter term contracts, products with common specifications and little complexity, and purchases where there are savings opportunities” (Gehrke, 2007). Some view reverse auctions as transactional in nature and, contrary to GSK’s mindset, highly focused on obtaining favorable pricing where “strategic relationships with suppliers rarely meet these criteria” (Clarke, 2015). However, at some point, particularly in the search for specific know-how and execution, price will cluster and a baseline will emerge. If consistent pricing at market-value is assumed, I’d offer that reverse auctions are the perfect forum to steer focus toward expertise and value-add services. This would, for all intents and purposes, be the perfect marriage for e-sourcing complex services.

Recommendations

This case illustrates a deep-seated challenge for procurement departments: how to strike the subtle balance between quality, cost and managing complexity. GSK considered new ways to generate efficiency by integrating leadership, DfSS processes and rigorous control systems, and by improving the way it leads interaction with global suppliers and trading partners. GSK’s integrated processes ensure quality specifications are met on a per-case basis. With active management, it can assume best practice processes and guarantee a process control system (measure, analyze, improve, monitor, control) and favorable outcomes based on a proven track-record.

Communication and connectivity are a vital component of its strategy. A challenge specific to GSK’s legal department is to maintain its success through the necessary conduit of infrastructure…SRM, CRM, voice, data centers, and connectivity. Before GSK makes this investment, I’d recommend prioritizing where the highest percentage of interaction takes place and where a solution can have impact across multiple areas (cost savings, revenue growth, and increased productivity). For example, GSK can consume communications services on a utility pricing model or proven lower TCO with leasing, deferring a pricey capital investment. This would provide scalability and faster expansion of infrastructure as needed and give GSK advanced communication technology to sustain competitiveness.

GSK leadership should continue to support initiatives with its suppliers that promote teamwork, close internal communication, and developing a cooperative culture that fosters trust and collaboration. As supply chain complexity and off-shore outsourcing continues to increase, the need for visibility will require even more enhanced collaboration and real-time data to measure GSK’s performance. This may be difficult for GSK to achieve because relationships, particularly across global and cultural boundaries, are the most difficult to manage (Fishell, 2012).

Lastly, I’d recommend GSK scale its methodology for all professional services. It should continue to embody procurement best practice as described by the Chartered Institute for Purchasing & Supply where, “The supplier-buyer relationship between supply chain members requires that quality start at the top. That is, it is imperative that company visions, goals and strategies be aligned for the betterment of both companies. Joint projects, shared technology, buyer-supplier councils, and collaborative relationships can enhance the relationship. The end result is a culture of continuous improvement throughout the supply chain, and as a result, a highly effective, competitive one.” (C.I.P.S., 2007)

Conclusion

The sourcing and procurement of complex professional services continues to be an on-going area of development for many organizations. Evolving market demands, the shifting legal marketplace, deregulation, and cost reduction are all contributing to the need for innovative solutions in a digitized world. With increased competition across the legal landscape, utilizing e-reverse auctions is a way to achieve cost savings, but not at the expense of service and value differentiation.  In this fair forum, clients like GSK are empowered with the pricing of legal matters, where previously these decisions were dictated by law firms. Just like globalization of other goods and services, “a ‘buyer’s market’ for legal services is bringing increasing demands from clients,” and forcing the legal firms to evolve into a “more nimble, leaner competitors with greater pressures for efficiency” (Abbott, 2016).

 

References

Abbott, M. (2016, January). Georgetown Law Review: 2016 Report on the State of the Legal Market. Retrieved April 19, 2017, from h https://www.law.georgetown.edu/news/2016-report-on-state-legal-market.cfm

Ackerman, K. (2007).  Relationships for Supply Chain Success. Retrieved April 19, 2017, from http://www.supplychainquarterly.com/topics/Strategy/scq200704book/

Christopher, M. (2011).  Logistics and Supply Chain Management, 4th Edition. Harlow: Pearson Education Limited.

Clarke, P. (2015, June). Reverse Auctions are Here to Stay for Law Firms. Retrieved April 19, 2017, from http http://blogs.findlaw.com/strategist/2015/06/how-to-deal-with-a-competitive-bidding-process.html

Fishell, J. (2012, May 31). Maintain Quality in a Complex Supply Chain With Better Information Management. Retrieved April 22, 2017, from http://www.supplychainbrain.com/content/general-scm/sc-analysis-consulting/single-article-page/article/maintain-quality-in-a-complex-supply-chain-with-better-information-management/

Gardner, H., & Silverstein, S. (2016). GlaxoSmithKline: Sourcing Complex Professional Services. Harvard Business Review, Harvard Business School. 9-414-003.

Gehrke, A. (2007, January). Reverse Auctions: Crusade or Curse? Retrieved April 19, 2017, from http://www.appliedclinicaltrialsonline.com/reverse-auctions-crusade-or-curse

Ideson, P. (2016, May). Crack the Code to the Successful Procurement of Legal Services, with Silvia Hodges Silverstein. Retrieved April 19, 2017, from http://artofprocurement.com/legalservices/

Kane, S. (2017, April). 10 Trends Reshaping the Legal Industry. Retrieved April 19, 2017, from https://www.thebalance.com/trends-reshaping-legal-industry-2164337

Littlefield, M. (2012, April). Supplier Quality Management: A Risk Based Approach. Retrieved April 19, 2017, from http://blog.lnsresearch.com/bid/136869/Supplier-Quality-Management-A-Risk-Based-Approach

Sadikoglu,  E.  (2014). The Effects of Total Quality Management Practices on Performance and the Reasons of the Barriers to TQM Practices. Retrieved April 23, 2017, from https://www.hindawi.com/journals/ads/2014/537605/

Salopek, J. (2012). ACC Value Challenge: Committed Leadership Combined With Technical Innovation. Retrieved April 22, 2017, from https://www.acc.com/valuechallenge/valuechamps/2012champ_profile61.cfm

Silverstein, S. (2014, May). Buyers, Influencers, and Gatekeepers. Retrieved April 20, 2017, from http://www.silviahodges.com/wp-content/uploads/2011/09/2014-NYLJ-Legal-Procurement-.pdf

The Chartered Institute for Purchasing and Supply (2007). Contract Mangement Guide. Retrieved April 22, 2017, from https://www.cips.org/documents/CIPS_KI_Contract%20Management%20Guidev2.pdf

 

 

 

How to Negotiate with Powerful Suppliers 

 

Sharing insights from Prashant Dedhia who describes how to navigate in supplier relationship management in a global landscape.

Source: How to Negotiate with Powerful Suppliers in Procurement and Supply Chain

Authored by | Prashant Dedhia
In many industries, the balance of power has dramatically shifted from buyers to suppliers. A classic example comes from the railway industry. In 1900 North America had 35 suppliers of cast rail wheels; railway builders could pick and choose among them. A century later no one looking to build a railroad had this luxury, as only two suppliers remained. Today there is just one, which means that railroad builders have no choice but to accept the supplier’s price.

The shift has come about for various reasons, any or all of which may be in play in a given industry. In some cases, suppliers have eliminated their competitors by driving down costs or developing disruptive technologies. In others, fast-growing demand for inputs has outstripped supply to such a degree that suppliers have been able to charge what they want. In still others, buyers have consolidated demand and forced suppliers’ prices down so far that many suppliers exited the market, giving the remaining few more clout.

Whatever the reason, companies that have gotten into a weak position with suppliers need to approach the situation strategically. They can no longer rely on hard negotiations through their procurement offices. To help with the strategic reappraisal, we’ve developed an analytic framework with four steps, in order of ascending risk. Companies should start by assessing whether they could help the supplier realize value in other contexts. If not, they should consider whether they could change how they buy. They should then look at either acquiring an existing supplier or creating a new one. If all else fails, they must consider playing hardball, which can have a lasting impact on the relationship and is the last resort.

Let’s look at each step in detail.

#1 Bring New Value to Your Supplier

This is the easiest way to redefine your relationship with a powerful supplier. It can rebalance the power equation and turn a purely commercial transaction into a strategic partnership. You can provide new value in several ways. For example:

Be a gateway to new markets.

The quickest and least expensive way to redress a power imbalance is to offer the supplier a market opportunity that is too good to pass up in exchange for price concessions. Finding the right carrot can take some digging. Here’s a case in point: A beverage company was facing annual price hikes from a beverage packaging supplier. It seemed to have no way out; the supplier had patented its manufacturing process, and its pricing was lower than that of other sources.

But as it happened, the buyer was about to enter two large developing markets in which the supplier had tried but failed to gain traction. The procurement manager realized that the company could give the supplier’s products a foothold in those markets. She and her team put their heads together with the marketing team and presented the supplier with an offer that was hard to refuse: In exchange for a 10% price reduction globally, the company would use the supplier’s cans in the new markets.

Reduce the supplier’s risks.

If a company is well placed to help a supplier reduce its price risks, it can demand some concessions in return. For instance, a large chemical company was working with a single, recalcitrant supplier. To produce titanium dioxide it required feedstock manufactured to tight specifications, and only that supplier could meet its needs. When the chemical company tried to increase its order, the supplier claimed to have limited capacity and demanded a price premium.

Given the cyclical nature of the industry, the company surmised that the supplier would jump at the chance to lock in a long-term contract—a commitment other customers lacked the financial strength to make. Procurement worked closely with a team from finance, which created detailed models to determine a price range that would let the supplier generate returns of 15% on invested capital. The supplier agreed to a multiyear contract with prices that would not fluctuate more than 10% annually, and the chemical company got a 10% discount from the original quote.

#2 Change How You Buy

If no opportunities exist to help the supplier create new value, your next best alternative is to change your pattern of demand. Because this strategy can have implications for other parts of your organization, it requires close collaboration with any functions that could be affected. A company can change its demand patterns in three ways, all of which may require intensive data collection and analysis.

Consolidate purchase orders.

This is the least-risky option and the easiest one to implement. It may involve little more than acting on an internal audit of procurement data.

At one aircraft manufacturer, various business units were independently purchasing components from a large supplier, which was doubling or tripling the prices it had originally quoted. The supplier was reaping gross margins of about 20%, whereas the aircraft manufacturers were only 10%. And deliveries were unreliable, which drove up the manufacturer’s overall costs. Individually the business units lacked the power to force a change in behavior. But the unit CEOs got together, consolidated their spending data, and went to the supplier’s top executive with a threat to suspend all purchases unless changes were made. The supplier became far more responsive, cutting prices so that its margins were also about 10% and improving the timeliness of deliveries. Small companies that don’t order through multiple units can form purchase consortiums with other firms in their industry. In 2008 an oligopoly of four suppliers controlled the ATM market in one European country. To counterbalance the group’s power, four banks created a purchasing consortium for ATM parts and maintenance, ultimately cutting their ATM costs by 25%. To succeed, consortiums must align their members’ interests and have the right governance in place. To avoid raising antitrust issues, they should not be too powerful themselves, which means that this approach is best suited to relatively fragmented, competitive industries.

Rethink purchasing bundles.

If a company cannot create large purchasing bundles within product categories or geographies, it should consider purchasing across them. One telecom company dealing with a powerful supplier for a particular component gained price concessions by pointing out that it also bought other components from that supplier—ones it could easily obtain elsewhere. Similarly, a global chemical manufacturer accustomed to buying a key ingredient from two suppliers, one in the United States and one in Europe (and each with a monopoly in its region), announced that it was considering consolidating to a single supplier and began a qualification process to choose which one. By awarding a single global contract, it would have given the winner a toehold in the loser’s monopoly territory. Faced with the threat of competition, each supplier agreed to a 10% discount. At other times the right strategy is to pick apart your existing bundles; this may enable you to create competition among suppliers where none previously existed. When a consumer goods company decided to renegotiate its contract with a powerful information provider that offered an integrated global product and services package, the procurement team quickly realized that it needed to differentiate between data (for which the supplier held a monopoly in some geographies) and analytic services (for which the market was generally competitive). It also decided to negotiate at a country level—enabling suppliers that could cover some but not all geographies to participate. As a result, it obtained savings of 10% on data and 20% on analytics.

Decrease purchase volume.

The third way to alter demand is to shift volume away from a powerful supplier, ideally by switching to a substitute or lower-cost product. The mere threat of this can increase the supplier’s openness to negotiation—but the buyer’s organization needs to stand behind its negotiation team and be willing to revisit what it purchases. Determined to reduce IT costs, one retailer we advised determined that most of its staff members did not need to create documents—they needed only to read them. It was able to eliminate 75% of its office software licenses, replacing them with a lower-cost, read-only alternative.

#3 Create a New Supplier

If options for changing your company’s demand profile aren’t available, you should next explore creating a completely new supply source. Like the first two strategies, this ultimately shifts demand away from powerful suppliers, but it tackles the other side of the equation. It is most likely to be necessary for industries where price negotiations have gone so far as to drive most suppliers out of business, effectively giving the survivors a monopoly. Of course, such drastic action risks alienating your supplier completely and may change your company’s business model. It will also alter the competitive dynamics and perhaps even the structure of your supplier’s industry and your own. For these reasons, it is a risky proposition, but if well executed, it can transform your prospects. There are essentially two options:

Bring in a supplier from an adjacent market.

The easiest way to create a new supplier is to bring in a competitor from an adjacent geography or industry, one that might not otherwise have entered the market. One major airline reduced its food costs and improved quality by enticing a European catering company to enter the U.S. airline-catering market, which had been controlled by two well-entrenched suppliers that were reluctant to lower prices. The new entrant had an innovative, off-premises production model that enabled it to offer higher-quality food at significantly lower prices in exchange for longer-term contracts.

Because the airline would need to give the new supplier a multiyear agreement, the procurement team shared its plans with the airline’s chief operating officer, its head of airport operations, and its head of catering. After aligning these key functions on the strategy, the airline announced that it had awarded its contract at a major U.S. hub to the new entrant. After losing that share of business, one of the established suppliers replaced its management team and took a more collaborative approach with the airline.

Vertically integrate.

If no plausible new suppliers are to hand, consider making yourself the new supplier by investing in the requisite assets and capabilities, possibly in a strategic partnership or joint venture with a company that has some of those assets and capabilities. If you’re lucky, a credible threat to take this action will be sufficient to shift the balance of power, as was the case with a paper company that relied on a regulated utility for electricity.

Unable to secure a better rate from the utility, the company began planning to build its own power plant—and it made sure the utility knew about its plans. It spent nine months finding a location, securing pipeline capacity, getting permits, and partnering with a dryer company that wanted to use the steam that the plant would generate. The strategy worked—the utility agreed to reduce its rates by 40% to prevent the company from building the plant. The danger with this approach, of course, is that your threat to vertically integrate may be called. So before embarking on this option, make sure that the new venture could deliver value that exceeds the investment costs and compensates for the added management attention and the hidden risks and challenges that might arise.

#4 Play Hardball

If everything else fails, canceling all your orders, excluding the supplier from future business, or threatening litigation—or some combination of those actions—may be the only answer, short of going out of business. These are truly tactics of last resort.

A global financial services firm had its back against the wall because it had to reduce costs by $3 billion. To cut IT infrastructure costs, it asked its major hardware supplier for a 10% price decrease. When the supplier refused, the firm’s chief information officer contacted the supplier’s CEO to say that all the supplier’s projects in the company were suspended, effective immediately. Within an hour the supplier was deactivated in the payment system, and the procurement, IT, and development teams were notified that they were no longer to work with it. Faced with the costly loss of existing and upcoming projects, the supplier quickly agreed to the price cut.

Then there’s litigation. In the early 2000s a security company that provided cash transportation services to banks decided to increase its rates by 40%. Because it controlled 70% of the market, its customers had few alternatives. But one bank that faced significant margin pressures wasn’t ready to accept the price hike. To better understand what was driving the increase, it asked to review the security company’s financial statements, which revealed only a 10% cost increase—nothing that would justify the drastic hike.

If all else fails, canceling your orders, suspending future business, or threatening litigation may be the only answer.

The bank took a two-pronged approach. Its chief operating officer met with the COO of the security company to explain that the increase was unacceptable and would undermine their relationship. And the procurement team threatened to join forces with other financial institutions and bring the matter to the attention of the national authorities in charge of restricting monopolies. The security company backed down and instituted a price increase more in line with its cost increase.

As we’ve shown, companies negotiating with powerful suppliers have plenty of ways to redefine the relationship. Whichever option they choose, they need a clear understanding of the problem, an ability to work on it across functions, a willingness to think outside the box, and strong analytical capabilities that can reveal the enterprisewide picture and generate useful insights. It’s also important that senior executives commit to strategic rather than tactical moves. With these elements in place, what had seemed an impossible negotiating task becomes one that is merely challenging.

Author Credit: Petros Paranikas, Grace Puma Whiteford, Bob Tevelson, Dan Belz

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Guiding Your Team Through Sustainability

I’m sharing insights from Jennifer Woofter, chief-consultant at Strategic Sustainability Consulting. Interesting perspective in addressing the management of change which can often be much larger than the green-change initiative.

Source: Guiding Your Team Through Change, Sustainably — Strategic Sustainability Consulting

Change can be difficult. Whether it’s a shift at work or in your personal life, embracing change can be a challenging issue for many people. For companies moving toward greening the workplace, it’s key that they remember that even small changes can result in small stressors to employees. It’s important to recognize the added stress and think from employees’ perspectives during the transition. Organizations that are working to be more adaptive and innovative may find that the resulting culture change becomes a huge roadblock to their efforts as employees resist or respond to the stress.

Innovation and change require leaders and employees alike to embrace new behaviors, which may initially seem antithetical to existing corporate culture. When making such dramatic shifts, it’s vital that leadership understands it’s impossible to dictate optimism, trust, conviction or creativity and consider the needs of everyone in the company.

With that in mind, the entire team should work together to establish a joint purpose and utilize internal efforts to make sure everyone on the team is onboard before changes begin.

One of the best ways to motivate employees, particularly during a transition is praise. Praising people not only motivates them, it also encourages and inspires them to do even better.

If you are helping to lead a cultural movement toward a greener workplace, consider these tips:

1. Frame the issue in a way that will excite your employees and motivate them to action. In order to engage your team’s commitment you have to inspire a desire and responsibility to change. A good organizational purpose calls for the pursuit of greatness in service of others and asks employees to be driven by more than simply personal gain.

2. Demonstrate quick wins that can show how actions toward change are working. Instead of simply declaring the culture shifts you want to see, highlight examples of the actions you expect to see more of in the company.

3. Create safe havens. If you intend for individual to act differently, you might find that changing their surroundings in order to support new behaviors to be incredibly helpful. Outposts and labs are often built as a way to give people a safe space to embrace new beliefs.

4. Embrace symbols that will help create a feeling of solidarity and demarcate who your employees are and what they stand for to the outside world. Symbols can help define the boundary between “us” and “them” for movements and can be as simple as a T-shirt, bumper sticker, or button supporting a general cause, or more elaborate like a new corporate brand identity. Internally and externally, such an act can reinforce a message of unity and commitment — that an entire company stands together in pursuit of a singular purpose.

It’s important to remember that even with the best guidelines, and the best intentions, change isn’t easy. While harmony tends to be most people’s preferred environment at work, a moderate amount of friction should be considered positive during a transition. Creating a culture shift with a complete absence of friction probably means that very little has actually changed. So explore the places where change faces resistance in your office. These areas may indicate where the dominant organizational design and culture need to evolve.

And culture change can only happen when people take action. While articulating a mission and changing company structures are important, keep on tackling the tough issues after you’ve shown people the change you want to see.

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Blockchain Will Do to the Financial System What the Internet Did to Media

 

Source: The Blockchain Will Do to the Financial System What the Internet Did to Media

Even years into the deployment of the internet, many believed that it was still a fad. Of course, the internet has since become a major influence on our lives, from how we buy goods and services, to the ways we socialize with friends, to the Arab Spring, to the 2016 U.S. presidential election. Yet, in the 1990s, the mainstream press scoffed when Nicholas Negroponte predicted that most of us would soon be reading our news online rather than from a newspaper.

Fast forward two decades: Will we soon be seeing a similar impact from cryptocurrencies and blockchains? There are certainly many parallels. Like the internet, cryptocurrencies such as Bitcoin are driven by advances in core technologies along with a new, open architecture — the Bitcoin blockchain. Like the internet, this technology is designed to be decentralized, with “layers,” where each layer is defined by an interoperable open protocol on top of which companies, as well as individuals, can build products and services.

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Like the internet, in the early stages of development there are many competing technologies, so it’s important to specify which blockchain you’re talking about. And, like the internet, blockchain technology is strongest when everyone is using the same network, so in the future we might all be talking about “the” blockchain.

The internet and its layers took decades to develop, with each technical layer unlocking an explosion of creative and entrepreneurial activity. Early on, Ethernet standardized the way in which computers transmitted bits over wires, and companies such as 3Com were able to build empires on their network switching products. The TCP/IP protocol was used to address and control how packets of data were routed between computers. Cisco built products like network routers, capitalizing on that protocol, and by March 2000 Cisco was the most valuable company in the world. In 1989 Tim Berners-Lee developed HTTP, another open, permissionless protocol, and the web enabled businesses such as eBay, Google, and Amazon.

The Killer App for Blockchains

But here’s one major difference: The early internet was noncommercial, developed initially through defense funding and used primarily to connect research institutions and universities. It wasn’t designed to make money, but rather to develop the most robust and effective way to build a network. This initial lack of commercial players and interests was critical — it allowed the formation of a network architecture that shared resources in a way that would not have occurred in a market-driven system.

The “killer app” for the early internet was email; it’s what drove adoption and strengthened the network. Bitcoin is the killer app for the blockchain. Bitcoin drives adoption of its underlying blockchain, and its strong technical community and robust code review process make it the most secure and reliable of the various blockchains. Like email, it’s likely that some form of Bitcoin will persist. But the blockchain will also support a variety of other applications, including smart contracts, asset registries, and many new types of transactions that will go beyond financial and legal uses.

We might best understand Bitcoin as a microcosm of how a new, decentralized, and automated financial system could work. While its current capabilities are still limited (for example, there’s a low transaction volume when compared to conventional payment systems), it offers a compelling vision of a possible future because the code describes both a regulatory and an economic system. For example, transactions must satisfy certain rules before they can be accepted into the Bitcoin blockchain. Instead of writing rules and appointing a regulator to monitor for breaches, which is how the current financial system works, Bitcoin’s code sets the rules and the network checks for compliance. If a transaction breaks the rules (for example, if the digital signatures don’t tally), it is rejected by the network. Even Bitcoin’s “monetary policy” is written into its code: New money is issued every 10 minutes, and the supply is limited so there will only ever be 21 million Bitcoins, a hard money rule similar to the gold standard (i.e., a system in which the money supply is fixed to a commodity and not determined by government).

This is not to say the choices Bitcoin currently offers are perfect. In fact, many economists disagree with Bitcoin’s hard money rule, and lawyers argue that regulation through code alone is inflexible and doesn’t permit any role for useful discretion. What cannot be disputed, however, is that Bitcoin is real, and it works. People ascribe real economic value to Bitcoins. “Miners,” who maintain the Bitcoin blockchain, and “wallet providers,” who write the software people use to transact in Bitcoin, follow the rules without exception. Its blockchain has remained resilient to attack, and it supports a robust, if basic, payment system. This opportunity to extend the use of the blockchain to remake the financial system unnerves and enthralls in equal measure.

Too Much Too Soon?

Unfortunately, the exuberance of fintech investors is way ahead of the development of the technology. We’re often seeing so-called blockchains that are not really innovative, but instead are merely databases, which have existed for decades, calling themselves blockchains to jump on the buzzword bandwagon.

There were many “pre-internet” players, for example telecom operators and cable companies trying to provide interactive multimedia over their networks, but none could generate enough traction to create names that you would remember. We may be seeing a similar trend for blockchain technology. Currently, the landscape is a combination of incumbent financial institutions making incremental improvements and new startups building on top of rapidly changing infrastructure, hoping that the quicksand will harden before they run out of runway.

In the case of cryptocurrencies, we’re seeing far more aggressive investments of venture capital than we did for the internet during similar early stages of development. This excessive interest by investors and businesses makes cryptocurrencies fundamentally different from the internet because they haven’t had several decades of relative obscurity where noncommercial researchers could fiddle, experiment, iterate on, and rethink the architecture. This is one reason why the work that we’re doing at the Digital Currency Initiative at the MIT Media Lab is so important: It is one of the few places a substantial effort is being made to work on the technology and infrastructure clear of financial interests and motivations. This is critical.

The existing financial system is very complex at the moment, and that complexity creates risk. A new decentralized financial system made possible with cryptocurrencies could be much simpler by removing layers of intermediation. It could help insure against risk, and by moving money in different ways could open up the possibility for different types of financial products. Cryptocurrencies could open up the financial system to people who are currently excluded, lower barriers to entry, and enable greater competition. Regulators could remake the financial system by rethinking the best way to achieve policy goals, without diluting standards. We could also have an opportunity to reduce systemic risk: Like users, regulators suffer from opacity. Research shows that making the system more transparent reduces intermediation chains and costs to users of the financial system.

The Takeaway

The primary use and even the values of the people using new technologies and infrastructure tend to change drastically as these technologies mature. This will certainly be true for blockchain technology.

Bitcoin was first created as a response to the 2008 financial crisis. The originating community had a strong libertarian and antiestablishment spin that, in many ways, was similar to the free-software culture, with its strong anticommercial values. However, it is likely that, just as Linux is now embedded in almost every kind of commercial application or service, many of the ultimate use cases of the blockchain could become standard fare for established players like large companies, governments, and central banks.

Similarly, many view blockchain technology and fintech as merely a new technology for delivery — maybe something akin to CD-ROMs. In fact, it is more likely to do to the financial system and regulation what the internet has done to media companies and advertising firms. Such a fundamental restructuring of a core part of the economy is a big challenge to incumbent firms that make their living from it. Preparing for these changes means investing in research and experimentation. Those who do so will be well placed to thrive in the new, emerging financial system.

A Better Path to Supply Chain Excellence

 

Source: A Better Path to Supply Chain Excellence

Abe Lincoln once told a story about a frontiersman who had lost his way in an uninhabited region on a dark and stormy night. The rain was torrential and was accompanied by terrible thunder and lightning that encased the evening sky like an electric spider web. To increase his trouble his horse halted, being exhausted with fatigue and fright. Just then a bolt of lightning struck a neighboring tree, and the ensuing crash finally brought the man to his knees. He was not an expert in prayer, but his appeal was short and to the point: “Oh, good Lord, if it is all the same to you… give us a little more light, and a little less noise.”

Small to mid-size manufacturing companies sense they are in trouble. Customers want more—more variety, more convenience, more flexibility and more service. Yet satisfying them adds even more cost and complexity at a time when pressures are felt from tight labor and increasing raw material prices. Big players have steadily acquired new skills needed to identify and capture the difficult improvements. But with fewer resources, smaller companies aren’t always able to run the business and keep up with the competition at the same time.

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To make matters worse, the manufacturing industry is awash with wonky jargon that serves to complicate and intimidate as much as it does educate. Businesses without legions of in-house resources must worry about how to adopt “circular economy” business models, migrate to “smart” manufacturing, leverage Industry 4.0 technologies, and harness the Internet of Things. Whitepapers by consulting firms swirl about in a never-ending vortex looking for a desk to land on.

In short, there is a lot of noise out there, but not so much light.

The companies that continue to achieve competitive distance do so because they drive only those supply chain improvements that truly matter to the customer and the bottom line. Those that are falling behind don’t necessarily need to “digitize” their supply chains as much as they need to stop making tradeoffs between functional competencies. For example, heads of manufacturing try to rationalize overcapacity issues in their plants, procurement officers consolidate their purchasing to leverage scale, and logistics managers seek to cut costs and improve delivery rates at their scattered warehouses. Such piecemeal efforts, however, won’t make much difference unless they’re part of a broader operational-improvement effort.

Too often, improvement in one area translates into chaos in another.

The answers for small operators who don’t have the resources to keep up with the Joneses lie not in adopting management fads but in shoring up common areas of opportunity that are ripe in value. Businesses that can execute these supply chain strategies have an opportunity to become the overall market leaders.

Minimize Self-imposed Volatility

If there is one common headache shared across all businesses, it is missed forecasts. There are, as the old joke goes, two methods to get an accurate forecast, but neither one works. A big reason for this is that forecasts are typically cannonballed by two forces of volatility: one that is market-driven and the other that is self-induced. Companies that have straightened out their forecasting woes have rooted out their own volatility drivers.

One real example: Company A discovered that 30% of its forecasting problems stemmed from stockouts. Upon further review, the underlying reason for the outages was the plants had no knowledge of sales promotions and thus had little reason to create inventory. The takeaway was to minimize the self-inflicted chaos and then invest in reactive measures like production flexibility to handle the rest.

Prioritize Key Customer/Product Combinations

Collaborations between customer and manufacturer have proliferated in recent years as supply chain improvements have become exponentially harder to come by. Companies without a sales and operations planning group can barely find the time to find the right mix of products and services to protect their customer bases.

However, in a short amount of time (at little to no investment), an operator of any size can implement a “consumer value” approach, which means that customers are prioritized based on profitability and strategic importance while also sorting products on volume demand variability. The “sweet spot” focus for the business is found at the intersection of these products and customers, which should then be serviced at the highest priority.

Periodically Redesign Your Logistics Network

Conventional wisdom states that concentrating inventory in fewer distribution centers leads to inventory savings. However, centralization usually increases logistics costs from underutilized capacity and longer distances. Given the significant position of transport costs on most P&Ls, suppliers can’t afford to ignore inefficiencies in their logistics operations. A company should periodically design its network (every few years) based on precise knowledge of what customer types need and which activities add value.

To maximize on the optimum profitability, businesses intending to compete must lean on a robust model that incorporates all relevant variables and constraints. Supply chains can typically reduce logistics costs by up to 7% while maintaining or even raising service levels with an in-house linear program model.

The pace at which supply chains have been incorporating new business models has greatly accelerated over the past 10 years as gains in technology have boomed. Now more than ever, supply chain management is evolving into a cross-functional activity. Teams will have to interact more closely with other functional areas to identify the factors that influence self-induced volatility, customer profitability and network hemorrhaging, and agree on actions to manage them better.

The answer in this era is not subscribing to complicated precepts but being able to translate information into action and using language that is easy to understand.

Take it from Honest Abe.

The Two Levers of Inventory Optimization

 

Source: Supply Chain Comment: The Two Levers of Inventory Optimization

Back to present day and the supply chain. Two powerful levers a company can use to optimize inventory are “Working Capital” and “Customer Service Levels.” Through the effective use of these levers, you can free trapped working capital while improving service levels.

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Your company’s inventory efficient frontier is a tradeoff curve between working capital and service level and represents the currently achievable service level at any corresponding inventory investment. At its most basic, start with a piece of graph paper and plot your current service level on the x-axis and current inventory level on the y-axis. Chances are you are not on the inventory efficiency curve that is theoretically possible given your current operating capabilities. When you remove inefficiencies, failures, etc. and estimate how much your service level will go up and down with changes in inventory investment you end up with a curve – your current inventory efficient frontier curve. Organizations can slide up and down along this curve by manipulating the service and inventory levers (see Figure 1).

However to create real value you have to be able to shift the inventory efficient frontier so that higher service levels can be achieved without increasing inventory or the same service levels can be achieved with less inventory. Multi-echelon Inventory Optimization (MEIO) allows you to truly optimize your inventory across the entire supply chain and enables you to shift to a new efficient frontier for your entire supply chain.

By modeling the end-to-end supply chain, MEIO determines not only the optimal inventory to carry at each location but also at which locations each item should be carried. MEIO looks across sales channels, distribution tiers, and even types of inventory (raw, WIP, FG) to understand how best to minimize total inventory while still providing the desired customer service levels. MEIO can take you into unexplored territory providing reductions in working capital of up to 30 percent or more. For most companies that amounts to millions of dollars in savings annually. That is an impressive use of levers.

What is important to understand is that the supply chain is a living, breathing and constantly changing organism. Your optimal inventory strategy for this month might be suboptimal next month due to changes in demand or supply, changes in competition or market health, or a variety of other factors. Modeling your end-to-end supply chain inventory is not a “one and done” activity and therefore there is always opportunity to shift that efficient frontier into new and undiscovered territory.

Do you understand your company’s service level – working capital tradeoff? Can you model your end-to-end supply chain to determine your optimal inventory locations and levels?

About the Author
Henry Canitz is The Product Marketing & Business Development Director at Logility. 

Just Because Another Company Or Product Does Things A Certain Way, It Doesn’t Mean You Need To

 

Source: Just Because Another Company Or Product Does Things A Certain Way, It Doesn’t Mean You Need To

I get annoyed by articles that look at big tech companies (the usual suspects being Amazon, Apple, Google) that do certain things, and how you should too.

I’m sure you’ve seen the articles like the following:

  • 5 key takeaways from Amazon’s customer service process that can improve your company
  • Eight ways to make your company more like Google
  • Five things you can learn from Mark Zuckerberg by how he eats breakfast (#3 will shock you)

My issue with these articles isn’t that they break things down into bite-sized chunks. The problem is when people look at these chunks, pick them up, and try to apply them in their own company, or product without understanding the reasoning behind it.

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You can’t just pick jigsaw pieces from another puzzle set and try to shove them into the puzzle you are working on.

Do you understand why other companies do things a certain way? Do you understand why they’ve made their product a certain way? I’m not just talking product features — I’m talking about the things that are intangible, the thing that make that product their own creation.

These intangible factors are hard to describe and write about. Try taking a piece of DNA from another company and splicing into your own, and it’s not going to work out.

That’s foolish: You need to take a step back and take a look at the reasoning behind what others are doing.

  • You can give me all the equipment (guitars, effect pedals, amps) that Jimi Hendrix used, give me the exact settings he used, but I wouldn’t be Jimi Hendrix. Give Jimi Hendrix a $70 guitar from a pawn shop and a $50 practice warmup amp and he’d still run circles around you and you would know that it’s him playing.
  • Take Tiger Woods in his peak. Give me all his best equipment. Give Tiger equipment from the early 20th century, and he’d still run circles around me in a round of golf.

You could give people the same resources, the same procedures from other companies, make a carbon copy of them, but have nowhere near the same success, because you didn’t understand the why behind why they do things. That’s why you can’t just clone a product by getting it developed offshores for cheap without understanding the intangible factors behind the product. It’s missing the heart and soul.

That intangible factor is priceless and hard to quantify, much to the chagrin of people who think that everything can be quantified.

To be clear, I’m not saying that you should not get influenced by the works and practices of other companies.

You should! Be influenced by the world around you. It’s a great idea to take bits, pieces, and chunks from processes of other companies, examine them, and find ways to mold them that it fits with your product and company. You can look at these chunks and twist them so that you can fit them into your puzzle. You can also make tweaks on your side as well. Companies do this all the time.

One example I want to discuss would be the lean startup, a methodology that many seem to understand, but seem to fall short in its execution.

There are some very good principles behind the lean startup, yet I feel that too many people try to just take it as it is, drop it into their company and their culture, and expect everything to take care of itself. You need to adjust it accordingly to fit in with your culture.

Lean Startup Methodology focuses on building what customers will use, not what you think they will use. It values eliminating waste, maximizing learning, and measuring results. Iterating through the Build-Measure-Learn loop quickly is the goal.

Many folks miss the maximizing learning part of Lean. They build products quickly, release them to customers, and ask them if they like it. As soon as they get a yes or see a bit of traction, they think they are done. They stop talking to customers, and just keep building. Soon customers are out of the feedback loop. If you are focusing more on building your solution than learning from your customers, you are not Lean.

I’ve known companies where people came from other companies and inject some principles and ideas from prior companies with various levels of success.

If they’re forming new processes, getting in at that ground level to create these processes can work. However, depending on how different the cultures are at the company, it may not work out whatsoever, or major changes have to be made. This can result in forced change that upper management wants to see, but those further down can see the writings on the wall. We’ve all heard of plenty of great companies lose their way when other outsiders are added to the team, and try to shove certain things down the throats of others, without realizing the consequences. Just because it worked somewhere else, it doesn’t mean it will work the way you want it to elsewhere.

There is nothing wrong with change, but when you try change for the sake of change without thinking about the long term impacts, that is when things can easily go astray.

You have to be your own company, your own product, and your own Product Manager .

Yes, take influence and ideas from others, find ways that fit with your company culture, and see what happens. However, don’t do something because all the other companies are doing it. Understand why it works for them, and see if it will work for you.

To repeat, you can’t just take a piece of a different companies DNA and splice it into your own without thinking of the consequences.


Originally published at www.pmpaul.com on July 27, 2017.

Get Beyond Tier 1 Suppliers to Engage with Labor Risks | Innovation Podcast

 

Source: Get beyond tier 1 suppliers to engage with labour risks | Innovation Forum

Smith, analyst with Ecovadis, talks with Innovation Forum’s Ian Welsh about how companies are now beginning to look for modern slavery and labor risks beyond their tier 1 suppliers. They discuss what supply chain mapping actually means in practice, and the systems that companies are developing to uncover where their risks are and how to target resources effectively.

Click Here to Listen

Lessons in Demand Management

Demand Management: The function of recognizing all demands for goods and services to support the market place. It involves prioritizing demand when supply is lacking. Proper demand management facilitates the planning and use of resources for profitable business results.
Source: http://www.apics.org/ (10th ed.)

The last few decades have seen an increasing demand for enterprise software applications that can streamline supply chain processes and provide lean manufacturing capabilities. At the other end of the supply chain, companies have been moving towards outsourcing their product distribution in order to keep sales overhead in check without sacrificing revenue.

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These recent trends have resulted in a unique dilemma. While companies can produce products more efficiently, they have little knowledge regarding what to produce, for whom and when. They now have better visibility into their supply chains but they lack the same kind of visibility into their often-fragmented demand chain.

The current economic slowdown and huge inventory write-offs resulting from this lack of visibility have highlighted the need for a systematic way to predict and manage demand. New technologies provide the capability to extend supply chain visibility that can support a truly dynamic collaborative internal environment; but companies are looking beyond sources within the enterprise, such as sales and promotions groups, to include customers in the demand management cycle (1).

Accurate forecasting remains central to the success of a demand management initiative, but demand management is much more than just forecasting. Traditionally, forecasting involves looking at past demand data to predict future demand. Demand management goes beyond the static forecasting of yesterday, replacing it with a more fluid, ongoing view of determining demand that involves all demand-chain constituents. Currently there is a thrust towards real-time synchronization of the supply chain to the demand signals. This collaborative method enhances the accuracy of forecasting since all factors affecting that forecast can be viewed by all stakeholders, including customers (2). Companies can begin to bridge the gap between their supply and demand chains by doing the following:

1. Reshaping relationships with channel partners to ensure accurate demand forecasts. Manufacturers should implement a closed-loop process for gathering, analyzing and filtering demand forecasts from channel partners. The demand management system should be tightly integrated with management systems for entitlement and other benefit programs for channel partners. This would help to ensure that just-in-time manufacturing is performed for the right products, in the right quantity, at the right time.

2. Basing inventory allocations on real-time demand forecasts that incorporate information from all channels—both direct and indirect.
This increases revenues by targeting allocations to those channels and locations that are the most effective sellers.

3. Ensuring that your own house is in order.
According to Andy De, director of solutions marketing for i2, demand management solutions are most effective when paired with other supply chain applications. Says De, “Having an accurate picture of demand is irrelevant if you don’t have a supply chain that can meet it.” In addition to cooperation from other supply chain partners, in order to achieve the benefits of a truly dynamic collaborative environment, companies need to get their internal demand management processes in order (3). For example, the promotions group in a company responsible for creating and driving demand is often disconnected from the operational group that produces the product and as a result ends up spending money promoting a product that operations cannot deliver. Ensuring that the different groups that have a stake in the demand process are connected is important.

4. Ensuring the presence of accurate intelligence along with collaboration and automation.
New technological developments have enabled real time flow of information within and across enterprises leading to better forecasts and an enhanced ability to respond rapidly to customer requirements. The downside to these automated processes is that they could be transferring bad information. Despite sophisticated statistical methods, it is impossible to eliminate market uncertainty from the forecasting process. Customers’ purchasing departments have every incentive to inflate estimates. It is important to have people in place who can analyze the forecast to see how it fits in the total market so that the company builds to actual end-unit demand rather than estimates that have been distorted as they travel through intervening layers (4). Providing greater supply chain visibility to downstream supply chain partners will eliminate their need to overstate forecasts.

5. Choosing demand management applications that address the unique challenges faced by the specific business. Many existing applications fail to fulfill the specific demand management needs of companies. Some enterprise applications support fixed pricing strategies but their solutions cannot easily maintain dynamic forms or manage prices across channels. Other applications are limited in terms of other demand management challenges. Certain customer relationship management systems, such as those from Siebel Systems or KANA, assist sales personnel but lack insight into price sensitivity and supply chain capacity and are therefore of little value in terms of deciding which orders to take and which offers to recommend.

In the near future, companies are likely to embrace three continuous demand management strategies that incorporate feedback loops from downstream processes and market conditions: I) linking forecasts based on causal variables, like economic indicators, to current sales activity and field-level orders to create market sensitive demand forecasts that set corresponding capacity and inventory recommendations; II) linking capacity to changes in demand so that companies can optimize service levels, safety stocks, and inventory levels, even in conditions of sudden demand variability; III) adjusting price and contract terms to changing market conditions (5).

References:

Lavey, P. (2001, September). Best practices in enterprise relationship managment. KMWorld.com.

(1) Anderson, A. (2002, June). Togetherness pays. MSI, 20(6), 60-65.

(2) Jones, K. (2002, June). In the driver’s seat with demand management. MSI, 20(6), 62-64.

(3) Anderson, A. (2002, June). Togetherness pays. MSI, 20(6), 60-65.

(4) Parker, K. (2002, February). Events happen but demand is always. MSI, 20(2), 40-43.

(5) Kilgore, S.S. (2002, March). Continuous demand management boosts margins. MSI, 20(3), 44-46.

Source: Lessons in Demand Management – SCM | Supply Chain Resource Cooperative (SCRC) | North Carolina State University

The Bitcoin Economy

As you see on this head-spinning graph below, the total amount of money in the world is $84 trillion. But that includes money in the bank. In physical coins and notes, the total global money supply is only $31 trillion. See the problem? Hence the rise of Bitcoin and other cryptocurrencies. Bitcoin is the cryptocurrency that refuses to die. Its demise has been predicted numerous times, and one expert calculated that its value is eighteen times more volatile than the U.S. dollar. Yet the virtual money keeps going from strength to strength.

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Last year, Bitcoin became more stable than gold, and earlier this year, the price of a Bitcoin surpassed that of an ounce of gold for the first time. Currently, all the bitcoin in the world is worth $41 billion. If that amount is hard to grasp, just think of it as one Larry Page – because $41 billion also happens to be the net worth of the guy who co-founded Google with Sergey Brin.

You’ll find both fortunes at the right side, and the lower end, of this graph, which gives you an idea of all the money in the world. You and I don’t figure on it unless you’re Larry Page. Or Bill Gates. The richest man in the world is worth $86 billion, or the net worth of Larry Page and Bitcoin combined – with enough change to buy the L.A. Lakers, the Toronto Maple Leafs, the Chicago Cubs and the Solomon Islands (not a sports team, but an entire country).

Bitcoin is the Uber of cryptocurrencies: the biggest, baddest and best-known, but not the only one. Add it up to Litecoin, Monero and all the others, and the total volume of virtual money floating around the internet, out of the reach of governments and banks, is a whopping $100 billion. That is about as much as the current GDP of Morocco – the 60th-largest economy in the world.

The monetary value of tech giants like Amazon ($402 billion) and (Apple $730 billion) is equivalent to the GDP of much bigger economies (Nigeria and the Netherlands, respectively). In fact, you would only need a little more than two Apples to equate the amount of actual money in dollar notes and coins in circulation around the world today – $1.5 trillion.

Money, of course, is fiduciary, which means it only has as much value as the trust we place in it. The same goes for gold: it derives its value solely from its rarity, combined with its desirability. The current world supply of mined gold is around 171,300 metric tonnes, which could be molded into a cube with sides of about 68 feet (20.7m). Its total value? Currently around $8.2 trillion. Or about 200 times the total value of Bitcoin (or Larry Page).

Just to give you an idea: unless you own at least $205 million (i.e. 1/200th of $41 billion), the monetary distance between the net value of Larry Page and the world’s entire supply of gold is smaller than the distance between Mr. Page’s fortune and your own. If your head is not spinning already, consider the amount of narrow money that is held in banks and wallets, under mattresses and in piggy-banks around the world: $31 trillion. ‘Narrow’ money is defined as physical money: the coins and notes that used to be the standard form of currency before the rise of more derivative forms of payment, such as checks and electronic forms of money.

‘Broad’ money also includes the deposits in easily accessible bank accounts that can be converted into cash relatively quickly. The sum of money under this definition is $83.6 trillion. You will have spotted a flaw in the system: if the amount of money that can be easily converted into cash is almost three times the volume of the actual worldwide supply of cash, we would have a problem if we would all want to empty our accounts at the same time. Or we could all buy shares. The total market value of publicly traded shares at stock exchanges around the world is $66.8 trillion. Not only is that a fabulously large amount of money, it is also subject to the laws of supply and demand, and highly fiduciary. A run towards or away from stocks would thoroughly deregulate the global economy, and nothing more dramatic than a minus sign in front of that amount would lead to the collapse of global civilization.

Does that sound overly dramatic? If the see-sawing rise of Bitcoin tells us anything, it is that people are losing their trust in money, and other traditional measures of wealth. Let’s talk again when the total value of all cryptocurrencies surpasses that of the world’s supply of gold…

Source: The Bitcoin Economy, in Perspective