Supply Chain Management

Creating A Better World through Supply Chains

2012-01-30T21:21:00.001-05:00

Could the smudges on your shining ipad be the tears of a child forced into labor? Or may be the tears of a husband, a wife, a child who lost their spouse, parent or a sibling to a suicide under hopeless desperation? As always, Apple is taking the lead so you won’t have to worry about that. Apple released a Supplier Responsibility Progress Report in 2012 detailing its efforts to monitor its suppliers and improve worker protections and factory conditions.

Not everything in the report is rosy as reported by Reuters. But the fact that Apple is taking the responsibility and pushing for a social agenda to make workers lives better says a lot for their corporate philosophy. This may also have been a reaction to the events at Foxconn in 2010, one of the largest suppliers to Apple, where several young workers took their own life. Or this may have been a reaction to the California Transparency in Supply Chains Act. This act becomes effective from this month and requires that companies disclose their policies and actions to fight forced/child labor and human trafficking in their supply chains. It is applicable to all manufacturing and retail companies doing business in California with a revenue of $100 million or more. Whatever might have been Apple’s motivations, this is an industry first that needs to be lauded. Since Apple just happens to be the biggest (and most visible) company in the field, their lead is likely to be followed by others in the industry – and that is a good thing.

How will it affect your supply chain? For starters, do the following:

Review you supplier on-boarding processes. Make sure that the requirements of the law are built into the supplier selection process. If possible, verify or engage a local audit company to verify the supplier’s manufacturing facilities, labor practices, pay and overtime rules, and other general policies regarding hiring, working hours, bonus, overtime, and working conditions. Keep records.
Establish an active supplier audit policy to institutionalize the process and to ensure that audits are scheduled at acceptable intervals. Engage a third party audit company if possible. Schedule unannounced audit, which in some cases may mean modifying contracts with the suppliers to allow such unannounced audits.
Make sure that there are training programs in place to teach the employees about the legal obligations. The law requires such training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products for all employees with direct responsibility for supply chain management.
Finally, review your supplier relationship management systems. No matter how well your processes are, remember that detailed supporting records of all related activities will be what will eventually satisfy an auditor!

Other Resources:

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Aston Martin and Supply Chain Strategy

2012-01-16T13:36:00.001-05:00

Where will you find an Aston Martin and a book on Supply Chain Strategy together? Well, these are two of the things Pankaj Munjal considers as essentials. Pankaj is the managing director of Hero Motors Corporation in India, the largest two-wheeler company in the world.

In “My stuff: Hero Motors Pankaj Munjal's favourite things”, Business Today reports on Pankaj Munjal, Hero Motors managing director and a business titan in India. Of course, I was pleasantly surprised to find my book on supply chain strategy in this list, because Pankaj leads a 4 billion dollar business manufacturing two wheelers. Hero Motors became the world no. 1 two wheeler manufacturer in terms of volume in 2001 and has since maintained that position with impressive financial growth and professional management. A summary of Hero Motors 2012 performance says more:

5.4 million two-wheelers sold (a growth of over 17% over 2011)
Revenues of 194 billion INR (approx. 3.8 billion USD) (a growth of over 22% over 2011)
Growth in operating income of 22.32%, at 19.4 billion INR

Even more impressive is the company’s cash-to-cash cycle time. The company maintains a Dell-like cycle of negative 20 days, which means that the company operates on negative working capital! This has to be a result of their impeccable focus on superior manufacturing and supply chain processes. Supply chain appears prominently in one of their corporate beliefs: “Delivering value through seamless and efficient supply chain”. The 2012 annual report states: There was a strong focus on supply chain
integration, process efficiency and accurate and prompt decision making.

In 2011, the company made substantial investments in supply chain IT integrating their partners supply chains to their own. The dealer portal integration provides a direct view into the product demand trends. The integration with the suppliers forms the basis of building flexibilities into the supply chain operations, so that the vendors could easily adjust their production during company’s routine business cycles. Analytics and cost modeling solutions are routinely used in decision-making.

Other Resources:

Business Today: My stuff - Hero Motors Pankaj Munjal's favourite things

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Hours of Service: Bane or Boon?

2012-01-12T15:40:00.001-05:00

The Federal Motor Carrier Safety Administration issued a new Hours-of-Service (HOS) rule on December 22, 2011. This may make the American roads safer, may make carriers more profitable by adjusting the demand-supply equation in their favor, and may enhance the quality of life for the American workers in the logistics industry. Or it may make the retail supply-chains more inefficient and more expensive to operate and everything just a little more expensive. As always change is hard to adopt and there is some truth on both sides of the argument.

The effective date of the new rules is February 27, 2012, and the compliance date of selected provisions is July 1, 2013. Here is a summary of the new rules, reproduced here from the FMCSA website:

HOURS-OF-SERVICE RULES
Property-Carrying CMV Drivers	Passenger-Carrying CMV Drivers
11-Hour Driving Limit May drive a maximum of 11 hours after 10 consecutive hours off duty.	10-Hour Driving Limit May drive a maximum of 10 hours after 8 consecutive hours off duty.
14-Hour Limit May not drive beyond the 14th consecutive hour after coming on duty, following 10 consecutive hours off duty. Off-duty time does not extend the 14-hour period.	15-Hour On-Duty Limit May not drive after having been on duty for 15 hours, following 8 consecutive hours off duty. Off-duty time is not included in the 15-hour period.
60/70-Hour On-Duty Limit May not drive after 60/70 hours on duty in 7/8 consecutive days. A driver may restart a 7/8 consecutive day period after taking 34 or more consecutive hours off duty.	60/70-Hour On-Duty Limit May not drive after 60/70 hours on duty in 7/8 consecutive days.
Sleeper Berth Provision Drivers using the sleeper berth provision must take at least 8 consecutive hours in the sleeper berth, plus a separate 2 consecutive hours either in the sleeper berth, off duty, or any combination of the two.	Sleeper Berth Provision Drivers using a sleeper berth must take at least 8 hours in the sleeper berth, and may split the sleeper-berth time into two periods provided neither is less than 2 hours.

Here is how some of the provisions compare with the existing rules:

PROVISION	CURRENT RULE	FINAL RULE – COMPLIANCE DATE JULY 1, 2013
Limitations on minimum "34-hour restarts"	None	(1) Must include two periods between 1 a.m.- 5 a.m. home terminal time. (2) May only be used once per week.
Rest breaks	None except as limited by other rule provisions	May drive only if 8 hours or less have passed since end of driver's last off-duty period of at least 30 minutes.
On-duty time	Includes any time in CMV except sleeper-berth.	Does not include any time resting in a parked CMV. In a moving property-carrying CMV, does not include up to 2 hours in passenger seat immediately before or after 8 consecutive hours in sleeper-berth. Also applies to passenger-carrying drivers.
Penalties	"Egregious" hours of service violations not specifically defined.	Driving (or allowing a driver to drive) 3 or more hours beyond the driving-time limit may be considered an egregious violation and subject to the maximum civil penalties. Also applies to passenger-carrying drivers.

Irrespective of the arguments on both sides of the story, one thing is for certain: The rules are more cumbersome and keeping an accurate log of all drivers and their schedules for most carriers will require some level of automation. That is good news for the shipment-management solution vendors who provide such functionality and can accommodate the FMCSA constraints in creating the schedules in the first place and adjusting them as they are executed in the field.

Of course, there is more to optimizing your transportation needs. If you are thinking in terms of these solutions, review your extended shipping needs because some best-of-breed solutions for shipping industry may provide you much more than simply the driver scheduling and logging.

Other Resources:

Federal Motor Carrier Safety Administration

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

The Power of the Process

2011-12-20T13:24:00.001-05:00

Earlier this year, coming out of my book on supply chain strategy, I was highly focused on exploring what constitutes competitive advantage? How do companies build it and how do they sustain it? I believe superior processes lie at the heart of creating such advantages: Because a superior “process” not only creates a capability with a competitive advantage, but it is also what makes it repeatable and sustainable in the long run.

While such capabilities may exist in all areas, for example, in manufacturing processes or packaging, but in today’s information-based economy, a large number of these capabilities routinely look like business processes enabled through technology. Take the demand forecasting process – the difference in the quality of the forecast can create a competitive advantage for you in several ways, from directly increasing your revenues by reducing the stock-outs, to improving your cash-flow by reducing the inventory. This can further result into increased customer satisfaction and allow you to create cost advantages by having to carry less inventory while maintaining the customer-service levels.

But what does having a better demand forecasting process mean? How does one create a better demand forecasting process? It depends on the industry: For a retailer, it may mean having a better process to collect real-time demand data from the POS systems, having the capability to aggregate these across all demand points, across all channels, across all supply chain echelons, having a better process to account for the impact on demand due to stock-outs, promotions, prices, and weather. It also means having a better process to track the forecasts to continuously update the forecasts as changes in demand patterns occur and finally, having a process to leverage the forecasts into the sub-sequent planning processes to optimize inventory, prices, and promotions. The last step is important, no matter how well your forecast is, it does not create any returns unless you also build the capabilities to execute on the forecast, to respond as the demand changes, and do so quickly enough to be effective.

Having all these processes creates a business capability – capability to forecast demand and act on it. Any capability can create competitive advantages if it is superior to the capability of your competitors. What makes a capability superior? A superior processes. And what makes a process superior? A process is superior if it creates any one of the following advantages:

Time Advantage: Time advantage is created when one of the business processes is faster than the other in achieving the same result. It is best exemplified with the time to market examples. Time advantage is typically created through careful analysis of all the activities supporting a process and elimination of those that don’t add any value to the process, but only add lead time.
Cost Advantage: Cost advantage is created when the superior business process is cheaper to operate than the inferior other. Cost advantage can be created through elimination of waste from the process, but also by optimizing the process within the process constraints.
Efficiency Advantage: Efficiency advantage is created when the superior business processes provide higher throughput. Throughput measures the output of a process per unit time. The efficiency advantage can be created by automating, simplifying, or expediting a process.
Quality Advantage: Quality advantage is created when the superior business process creates fewer defects than the inferior one. Quality advantage is generally a result of standardizing, automating, or simplifying a process.

Other Resources:

Supply Chain as Strategic Asset

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

The New Global Supply Chains: Shorter, Nimbler, Local

2011-11-16T20:14:00.001-05:00

Past couple of decades have generally seen supply chains stretching ever longer from one end of the world to another. As manufacturing started becoming heavily concentrated in China, more and more companies found it was just cheaper to build or buy in China and ship it to their factories, assembly plants, and markets rather than maintaining traditional domestic sources. The volatility in energy prices and growing awareness of the cost of supply chain disruptions might just change that.

The graphic below traces the path of a DVD player as it gets added to a retailer’s assortment driving the production of components, assembly, and distribution back to the retailer’s home market. The picture pretty much summarizes the state of global supply chains that our commerce routinely depends on. The story is not much different whether it is ipads, hybrid cars, electronics, kitchen electrics, or for that matter even our food! The trends that drove such cross-global supply chains were substantially low wages in some of the Asian countries, cheaper raw materials, growing process automation, and cheap cost of energy.

But most of these trends may be reversing. A Forbes story reported in 2007 that the wages in China nearly doubled in past four years outpacing the growth of GDP. According to the Department of Energy, the cost of diesel fuel has almost quadrupled in the same time from 1998 to 2008, (see: http://www.supplychainmusings.com/2008/05/optimization-transportation-versus.html). In the meantime, the supply chain disruptions have grown due to natural disasters as well as socio-political instability across large parts of the globe.

Off-shoring is so passé! Near-shoring, Right-shoring, and building local supply chains are the new trends. Redesigning supply chains can help. Consider the following and you may be on your way to a more sustainable supply chain:

Energy profile (Production). The energy profile models the total energy requirements of producing the raw materials as well as the manufacturing process that converts them into finished merchandise. Consider how can you leverage such data to create and manage the energy profiles of the manufacturing process and the energy profiles of your raw materials as well as the packaging materials.
Distribution profile. This captures the carbon footprint of the material movements required to manufacture a given product, with elements such as the distances traveled by the raw materials from their source to the factories, and by the finished goods to reach the retailer’s warehouses and stores from the factories. The modes available on these routes and energy profiles of these modes may affect such scores. Consider how you can model and manage the distribution profiles to better manage your distribution costs. Some of the related articles at the bottom provide clues on how to better manage your transportation processes to reduce costs and carbon!
Recycle profile (Disposal). This profile can model the material’s recycling characteristics, types of facilities required, and regional laws governing recycling requirements by collecting data on the recycling profiles for the merchandise as well as for the packaging materials.

Other Resources:

Another oil shock?

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

From Fashionable to Foundational

2011-11-03T18:57:00.001-04:00

Sustainability has been slowly gaining traction. This may be the year when it becomes mainstream theme for a majority of companies. While most companies adopted sustainability as a tool to enhance their corporate brand, a lot of them have discovered that it can also affect their bottom-lines. The sustainability seems to be going mainstream within the corporate culture and is being adopted as a business strategy to drive Growth, Return on Capital, and even Risk Management. That is the message from a recent survey from McKinsey Quarterly.

Some of the major takeaways from the survey:

Corporations are thinking of sustainability beyond the corporate image. In fact the survey shows that the top two reasons for adopting sustainable approaches to business now focus on reducing energy and waste from their operations. In response to the areas where companies are taking action, 63% of the respondents chose reducing energy, followed by 61% who chose reducing waste, compared to only 51% choosing “managing corporate reputation for sustainability”. This is of huge significance for supply chain executives, since supply chain processes control significant portions of operations for most industries.
Corporations have also integrated the sustainability themes across several processes in their businesses. These processes vary from mission and values to budgeting and employee engagements. Number of the respondents who said that their companies have integrated sustainability into the following areas: Operations 58%, Strategic Planning 57%, and Supply Chain Management 41%.

McKinsey also assesses the impact of sustainability activities on growth, return on capital, and risk management, claiming that opportunities in these areas vary by the type of industry. For example, businesses in the energy sector may find more opportunities to leverage sustainability activities to impact growth and risk management; while for the retail industry, the opportunities primarily lie in increasing the return on capital with some impact on managing risk. This follows logic: For example the energy sector is generally seen more damaging to the environment and therefore, any changes in their portfolio to add more sustainable energy sources are certain to open more opportunities for growth in the future. For retail, the message is simple as well – there are cost-savings to be achieved by managing their energy footprint largely by optimizing their distribution network and operations while simultaneously reducing business risk by creating a more environmentally friendly brand.

Resources:

The business of sustainability: McKinsey Global Survey results

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Big Data, Bigger Opportunities

2011-10-25T19:23:00.001-04:00

Big data is here: The tools, technologies and the opportunities for gathering and analyzing large-scale data have finally evolved where most technology-savvy businesses can think of leveraging such data for competitive advantages. While retailers are focusing more on understanding the customer preferences to better manage their merchandise and enhance the business profitability, there is a definite play on leveraging the big data in supply chain functions as well to enhance operational efficiencies and reduce costs.
McKinsey Quarterly recently published several articles on this emerging technology. They profile AstraZeneca which recognized the power that real-world data (such as medical claims) gave the pharmaceutical company’s customers in evaluating the cost effectiveness of its products, and a retailer who found themselves perplexed by the sales reports showing that a major competitor was steadily gaining market share across a range of profitable segments. It explains that this “...competitor had made massive investments in its ability to collect, integrate, and analyze data from each store and every sales unit and had used this ability to run myriad real-world experiments. At the same time, it had linked this information to suppliers’ databases, making it possible to adjust prices in real time, to reorder hot-selling items automatically, and to shift items from store to store easily. By constantly testing, bundling, synthesizing, and making information instantly available across the organization—from the store floor to the CFO’s office—the rival company had become a different, far nimbler type of business.”
While such focus on collecting the sales data to analyze the customer behavior is getting quite commonplace with retailers pioneering the space (think of Amazon and Nexflix’s “you might also like” lists, based on your buying behavior and reviews), there is plenty of big data streaming from the supply chain operations that can be leveraged for optimizing processes, automate decision making, and increasing overall efficiencies. Part of this big-data wave is being driven by the RFID tags that are slowly becoming embedded in all parts of supply chain and have moved from pallet-level tagging to item-level tagging and the other big part is the ability to capture, analyze and use the real-time POS data from the stores and other selling-channels. Together, these two data streams can be leveraged to better understand demand and manage inventory, supplies and resources.
The real-time POS data from the stores holds a treasure-trove of data for managing demand. It helps identify what is moving and how fast it is moving; it also holds information on quantity, price, discounts, and coupons being used; and enriched with the geo information! All this can help manage demand better by evaluating and optimally deploying inventory in the chain to prevent stock-outs at the most profitable stores. This data can also be used for continuously evaluating price and other incentives to enhance overall profitability, manage seasonal ramp-downs, and reduce the need for clearance events. It can drive the open-to-buy decisions and automate such decision-making to a large extent. Changing demand patterns across channels can drive the channel-inventories and can provide critical information for merchants.
As item-level RFID tags become ubiquitous, the retail shelf can also assume the role the inventory analyst at the store! It can send alerts for restocking the shelves when the presentation quantities fall below the threshold, but it can also order store replenishments when the store supplies fall below inventory thresholds. Connect this consumption data to real-time demand and you can think of intelligent automated inventory ordering and replenishment systems in the store that can respond to the real-time consumption in the store to ensure almost zero stock-outs. Now that is service we can all live with!
The RFID tags can also greatly help associates to restock inventory in its correct place so you would never have to find the teabags in the spice shelf.
The warehouses can become intelligent as well by sending replenishment order requests for themselves by continuously monitoring stocks and doing so well before the service level maintenance is jeopardized.
The same tags can track the inventory-in-transit in real-time: Such visibility can help in making intelligent inventory deployment decisions. This is especially true for managing the seasonal/fashion items where the orders are placed well in advance of knowing how the actual demand may play out.
As the ability to collect, analyze, and use real-time demand and inventory data becomes more accessible, it will open up another cycle of optimizing the supply chain operations and provide competitive cost-advantage to those who can leverage the technology for enabling their business processes.
Related Articles:

Understanding The Analytic Spectrum for Measuring Supply Chain Performance

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

IT: The Savior?

2011-09-29T14:15:00.001-04:00

Can IT be your business’s savior? Can IT propel your business, grow it, and give it the competitive edge it sorely needs? Information technology is generally not seen as the savior: Mismanaged IT projects, failed ERP implementations, piles of consulting bills, and too much drama – all of this has given bad rap to a discipline that can become the core strategic engine for your business. But whether you wield IT as a competitive weapon or as a tool to bleed the business, that is a choice you make explicitly.

Since I have worked for several companies that build software solutions for a living and others whose livelihoods depend on using such solutions, I am no stranger to IT. In fact, my book on supply chain strategy squarely deals with technology and how it relates to business strategy. Though I have written several articles on the subject in the past (some listed at the bottom of this post), when I read a similar article in the CFO magazine, I knew I had to share it.

Of course, there are numerous other examples of corporations using IT as their strategic edge and others who failed to do so.

Among the winners: Wal-Mart, Amazon, Cemex, Apple, Fedex, E-Trade, Dell, P&G, Tesco and so on.

And some of the losers: K-Mart (and its new owners, Sears), DHL, Borders, KB Toys, Toys R Us, and so on.

Resources:

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

What do Your Financials say About your Supply Chain?

2011-09-15T09:23:00.001-04:00

What can a financial analyst tell about a company’s future by looking at its supply chain? What should they be looking for? How should they analyze such data? How does the supply chain competency affect the financial prospects of a company? These were some of the topics I discussed with Sherree Decovny of the CFA magazine a couple of months back. The interview is published in their Sep-Oct 2011 issue as an article on what should financial analysts know about the corporate supply chains to make better assessments of their financial future.

Sherree Decovny: Do you think research analysts have a good understanding of supply chain practices and the potential impact on performance?
Vivek Sehgal: When it comes to supply chain, most financial analysts will review things like the cash conversion cycle and inventory turnover as both of them relate directly to supply chain capabilities. However, other financial metrics such as return on assets, return on capital employed, cash from operating activities, asset utilization and profitability ratios also depend very heavily on how well a company manages its supply chain. However, many financial analysts may be unable to trace the links between supply chain capabilities and these financial metrics because they are not very obvious. Then there is another set of metrics that may be not be readily available to the analysts because such data is not public, but it reflects supply chain competency, for example number and frequency of clearance events or obsolete inventory that results from poor operational performance.
Analysts are definitely becoming more interested and knowledgeable in supply chain practices and understand how they influence the overall performance of a corporation and create sustained competitive advantage.
SD: What does the supply chain reveal about a company's performance? What should analysts be looking for?
VS: A well managed supply chain shows up in strong financials. It allows companies to be competitive in what they do best. For most companies, the competitive advantage comes from their ability to manage their costs or provide better customer service and supply chains can help in achieving both.
Visionary companies leverage this fact and pro-actively design their supply chains to achieve competitive advantage. But such transformation is not a short-term panacea to address weak financial results. The financial impacts aren't going to show up in the next quarter but will definitely show up in two to three years time. But many companies simply don’t understand how their supply chains enable their businesses. These companies continue to ignore building their supply chains competence and eventually start to lag behind their competitors.
For the analysts, inventory turnover is a good metric to start with, it is easily available in 10-K statements, and is a quick measure of how well a company manages its supply chain. Another item from 10-K is the cost of goods sold, since most components of cost in cost of goods sold (COGS) are directly or indirectly controlled through the supply chain processes. Therefore, COGS as a percent of revenues provides another quick measure of supply chain competence. Analysts should definitely compare these two metrics for a company with its competitors and the industry averages. Good inventory management also affects the current assets and in turn, the asset turnover and return on assets.
Less obvious metrics are the order fulfillment ratios, which indicate whether a company is experiencing backlogs or having difficulty fulfilling orders. For cash-and-carry retailers, analysts should look at stock outs. For a manufacturer, the analyst can enquire about the perfect order measure, which shows error-free fulfillment of customer demand. However, these metrics typically are not in the public domain and management may choose not to reveal them. These metrics show whether a company is having trouble managing their demand forecast, replenishments, and generally in getting the right stuff in the right place at the right time, which is the crux of supply chain.
Asset utilization is another great indicator of supply chain performance. A retailer's largest productive assets are warehouses, stores and trucks. A manufacturer's largest assets are plants, machinery and equipment. How efficiently a company uses its productive assets directly depends on how optimized its supply chain processes are.
Analysts should ask questions about labor planning and scheduling, production planning practices, plant utilization, shipping and warehousing costs, the number and frequency of clearance events, obsolete inventory write-offs, returns/defects and pricing practices.
Retail analysts routinely review the sales per square-foot, but supply chain efficiencies are better reflected in the ratio of total warehousing space to sales-floor space, and ratio of warehousing, shipping, labor costs, and manufacturing overheads to total revenues.

SD: What tools do companies use to model their supply chain to achieve optimal performance?
VS: There is a very wide variety of tools available to model, plan, and execute supply chain processes. Most companies start with modeling their network and simulating supply and demand flows across this network to optimize where their facilities, manufacturing plants, warehouses, and stores should be optimally located. Designing a supply chain network can provide sustained cost efficiencies for storage and distribution of goods and merchandise. It makes sense to plan that network rather than have it grow organically.
Supply chain network modeling tools allow the firms to simulate their storage and distribution costs. Then there are planning tools like supply and demand forecasting and inventory optimization that help companies design a replenishment strategy and optimally manage demand. Bid optimization tools leverage historical data and demand forecasts to help companies select the best suppliers. There are also tools for production planning and scheduling, labor scheduling and inventory management that help companies plan their operations within the constraints of available inventory and resources.
Finally, the execution tools are used for manufacturing execution, warehousing, and transportation optimization and have a direct impact on labor and plant utilization, storage, and shipping costs and therefore on overall operational efficiency.
Planning tools enhance a company's ability to manage inventory, resources, supply, and demand, and provide sustained cost advantages. On the other hand, the execution tools help control immediate operational costs. It's a toss-up between whether you want to see immediate cost reductions, or a more sustainable competitive advantage, which will accrue year after year.

SD: How can analysts build supply chain factors into their earnings forecasts? Can the analysts do anything to be more proactive instead of waiting for the numbers to come out?
VS: This is a harder question to answer because so many of the supply chain performance measures are internal to the companies and they have no obligation to report any of that information. Even so, analysts can gather a lot of informal data by following their target companies and learning more about their operations. Inventory clearance, order back-logs, expedited shipping, urgent manufacturing orders, unresponsive customer service, inability to track customer order statuses and so on: These are all symptoms of deeper supply chain issues and would result in weaker financial performance in the long run.
At the end of the day, about 70-80% of the operations of most retailers and manufacturers are going to be impacted by their supply chain practices or competences. Improving any part of that process is eventually going to show up in their financial performance.
Related Articles:

© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Are Your Advantages Expired?

2011-08-25T14:10:00.001-04:00

Unfortunately, competitive advantages do not come in the prescription bottles with clearly displayed expiration dates. But advantages do expire: Competitors adopt them so it is no more a differentiation, the capability becomes too commonplace that it simply becomes a basic expectation, it gets commoditized and loses its value. Understanding that the competitive advantages have a window-of-opportunity can help corporations better prioritize their capital investments targeted at creating new capabilities.

As an industry matures, some of its functional capabilities become commonplace and lose their ability to provide any competitive advantage. These functional capabilities might have produced the competitive advantages for the first movers in the industry, but when almost everybody in the industry achieves parity on a functional capability, such a capability simply becomes a prerequisite to compete in that segment without any ability to create competitive advantages.
The figure clarifies this concept: Capability A has a big initial competitive advantage, but this advantage disappears with time as the capability becomes commonplace and everyone in the industry achieves parity. Ability to accept and process payments electronically is an example of a business capability that has progressed from being a differentiator to becoming a prerequisite for all types and sizes of businesses. Another example will be self checkout counters that are fast gaining parity among large retailers and will soon lose their ability to provide any differentiation.
Once a business capability has become standard fare in an industry segment, all firms are expected to have that capability. Presence of the capability then does not produce any competitive advantage, though its absence will produce disadvantages due to the general consumer expectation. This is the process of capability commoditization. However, innovative enhancements to such capabilities will open up the opportunities for creating advantages and the cycle can continue. The impact of such enhancements generally depends on whether they are just incremental or epochal.
However, even epochal changes changes are eventually adopted by a large number of firms and may not remain differentiators. Take the case of online retail, which would have been an epochal change 20 years ago, but cannot really be seen seen as a differentiator any more. More recently, Amazon’s introduction of Kindle is another major shift in terms of established models for selling and delivery of content. Competition from Barnes and Noble’s Nook, Google’s eBooks, Sony and others is already on its way, but Amazon is still realizing a definite first-mover advantage that shows up in their market-share.
Sometimes, the opportunity may not be clear at the onset of a new competitive business capability. This is especially true when a newcomer in an industry breaks away from the conventional model of doing business and changes the paradigm. If the new business capability succeeds, it can provide the new firm with a huge competitive advantage. Such changes can be devastating for the incumbents, though evaluating all such shifts and addressing them proactively is also a risky venture. When Dell started their business based on its custom-built laptops for the consumers, this principle was on play, the rest, as they say is history.
Therefore, companies must continuously evaluate their competitive advantages to ascertain whether they are still providing them the differentiation that their business strategy depends on to survive and grow.
Related Articles:

Resources:

Supply Chain as Strategic Asset

© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Mastered TCO? Now Learn TVO.

2011-08-02T21:10:00.001-04:00

The total cost of ownership or TCO has long been the focus of sourcing and procurement A new report from Accenture says the pioneers are now moving towards total value of ownership or TVO. Just semantics or real evolution: Decide for yourself though there are definite ideas that are worth emulating.

The paper brings out several key differentiators between the pioneers and followers (termed in the paper as masters and contenders), noteworthy among then being the following: the alignment with business strategy, visibility across the extended supply chain, and extended view of spend management.

Understanding the business strategy and aligning your functional strategy with it definitely seems to be the biggest story of this evolution. Very few corporations have achieved the holy grail of such alignment and then again within a few key business functions. But the logic holds: Any functional strategy that does not support the goals of the business strategy is effectively wasting valuable resources and contributing nothing towards creating value or advantage for the corporation. This is the core principle that I have discussed at length in my book on supply chain strategy. In an example provided by Accenture, an automobile company achieves such alignment through first commissioning “a gap analysis to see where the company might need to improve. The exercise revealed the importance of tying procurement more closely to the overall business strategy.” This though is a foregone conclusion: You don’t need to commission a study to find that if your functional strategies are not aligned with the business strategy, you are wasting your resources. What you need to do is to establish the goals of the business strategy clearly enough that each function can quickly assess its contribution and identify capability gaps that must be addressed for effectively achieving those goals.
The visibility across the extended supply chain and extended view of spend management are old stories: These are not so much the evolution in concept as they are the evolution in technology that is making these concepts more real and achievable. The web, cloud, virtualization, computing and connectivity performance is making real-time collaboration possible among business partners at costs that are affordable. These technologies are also driving the corporation’s ability to collect much more data across the spectrum of activities collectively under procurement to create a clear picture of costs involved": Whether these costs are direct procurement costs obtainable from the purchase orders or indirect costs obtained through an expensive activity analysis in the warehouse. Of course, that does not diminish the pioneering work being done by the procurement masters in establishing the processes to extend their view of procurement costs and use the data to effectively support their businesses.
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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Making Capital Investments Matter

2011-07-28T16:22:00.001-04:00

Too many projects chasing limited capital to invest: Almost all of us are familiar with this scenario. Most large corporations go through the annual rigmarole of creating proposals for capital investments, replete with justifications, projected savings, return on investments, and so on. Asking these two simple questions and plotting it on a simple graph may make this process simpler to make the final choices.

Does the proposed investment create any competitive advantage for the company? This question looks like rhetoric, but can be made quite objective. Identify the financial metric that is being targeted through this competitive advantage – it could be reduced cost, increased revenues, lower inventory, lower working capital, better margins, enhanced asset turnover or anything else that the company is trying to achieve as a result of the investment. It can also be an operational metric if that is what is being targeted. For example, if two projects are being targeted to reduce working capital (for example, an inventory optimization system or a bid-optimization system), it is relatively easy to convert their projected benefits to their impact on working capital.
How sustainable is the competitive advantage created by the investment in question? Remember, all competitive advantage is bound to disappear as other firms catch-up. Therefore, assessing the sustainability of the advantage is very important. Between two investments with identical returns, the one that creates more sustainable advantage is definitely the winner.

After assessing the two questions, plot the alternatives into the financial-strategic quadrants shown in the figure. Each quadrant represents the sustainability of the competitive advantage and a financial or organizational metric most critical to the firm. The investment proposals in quadrant 4 should be considered for implementation in the short term as these represent advantages with the longest sustainability and highest ROI (assuming ROI is the financial metric along Y-axis). In general, capital proposals in the two right quadrants should be considered favorably, those in quadrant 1 are highly questionable from the point of view of their ability to create any sustained strategic advantage, and those in quadrant 2 should be carefully evaluated to see how the competitive advantages created by them can be made more sustainable with the intention of developing an alternative that can be moved to quadrants 3 or 4, making them more viable and aligned to the business strategy.
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Supply Chain as Strategic Asset

© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Strategy, Governance and Risk

2011-07-15T10:09:00.003-04:00

With the recent financial melt-down, deep economic recession, and continuing drag on revival and growth, the logic would dictate that companies will focus on their business strategy to identify what makes them a winner, where does the value come from, and also focus on governance to promote risk awareness and planning. However, McKinsey Quarterly finds otherwise: In a survey of the company directors, they find that boards neither understand their company strategies any better, nor have they improved the governance.

Without these commitments from the corporate leaders, business growth and risk mitigation may continue to suffer.

This is really disconcerting not only because a lack of executive focus on strategy can reflect any number of leadership issues that can cripple corporate growth, but a lack of focus on risk can actively lead to corporate disaster. With 32% of boards admitting “limited or no understanding” of the risks their companies face, the role of supply chain executives becomes even more important. While a corporation faces all kinds of risks from credit to government policies, supply chain disruptions one of the most probable risk that corporations need to understand and plan for. Because supply chains cover such a large part of their operations and the effect of any disruption is immediate and intense. Fortunately, this is also one of the most studied, talked about, and well-understood risk for corporations that are supply chain pioneers. For more on the subjects, follow the links to related articles below.
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Governance since the economic crisis: McKinsey Global Survey results

© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

Good Strategy, Bad Strategy

2011-06-30T18:53:00.001-04:00

An UCLA management professor identifies the attributes of what he calls “bad strategy” and lays out a three-step process to build effective business strategies.

I read quite a bit of literature on business strategy in college and then some more when I was doing research to write my second book on supply chain strategy. All along, I thought of strategy as “effective” if it creates competitive advantages and “ineffective” if it does not. Then, I came across this article from McKinsey Quarterly and got acquainted with “bad strategy”.
The author, UCLA management professor Richard Rumelt says, “Bad strategy ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests. Like a quarterback whose only advice to his teammates is “let’s win,” bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values. Each of these elements is, of course, an important part of human life. But, by themselves, they are not substitutes for the hard work of strategy.” Then, he goes on to elaborate on the characteristics of bad strategy as, Failure to face the problem, Mistaking goals for strategy, Bad strategic objectives, and Fluff.
On creating a good strategy, Rumelt lays out a three-step process of Diagnosis, Guiding Policy, and Coherent Actions. This specifically caught my attention because it aligns well with my own strategy life-cycle described in my book and reproduced below.

Creating a strategy must absolutely follow a diligent process of identifying the core-strength of the business that the corporation believes, can be leveraged to create competitive advantage. This is what is created in step 1 of the process depicted above. Once the central principle or the core strength is identified, the corporation must assess the gaps in its capabilities that will prevent it from leveraging the “central principle of business growth”. The third step then simply is to identify specific initiatives that will help the corporation in creating those “capability gaps” identified in step 2.
To learn more on how the business strategy should be developed and how it can applied to drive supply chain strategy and other functional strategies, read the related articles below or my book titled Supply Chain as Strategic Asset.
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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

The Cost of Supply (Chain) Disruptions

2011-06-14T16:07:00.001-04:00

According to Dun & Bradstreet, the business cost of disruptions due to earthquake and tsunami in Japan will be $209 billion in sales volume. This potentially affects 86,418 businesses, 311,934 employees and is spread across 715 industries. Manufacturing durables tops the list of number of suppliers based in Japan that are potentially impacted. Globally extended supply chains mean that this group of suppliers will affect many more businesses across the globe.

Some early estimates of the impact of such disruptions are already available with news from Honda and Toyota.

Honda has revised the projected profits downwards by 63% to $2.43 billion for the fiscal year through March (source: WSJ).
Toyota will lose its number one spot for being the biggest auto-producer back to General Motors, after holding it since 2008. Toyota also lowered its projected profit forecast to 280 billion yen ($3.5 billion) profit for the fiscal year through March 2012, down from 408 billion yen for the previous fiscal year (source: Chicago Tribune).

Electronics is another big area of impact. Citigroup Global Markets estimates that Japan is responsible for 16% to 30% of electronics component supply and that is bound to affect the global electronics supply chains as well. iSupply reports more numbers: Japan supplies 10 percent of the DRAM worldwide supply based on wafer production, 35 percent of global NAND flash production, 6.2 percent of the world’s LCD panels (more than 10” in size).
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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

The Customary Top 25

2011-06-09T13:34:00.001-04:00

Gartner’s Top 25 supply chain list for 2011 is out. The surprises are not in who is in, but who is out! But the financial analysis proves once again that supply chain competence matters, even in a recession.

AMR introduced its top 25 supply chains list seven years ago, religiously kept intact after Gartner took over AMR. Since then, it has become kind of an annual custom. In this year’s list, all the usual suspects are intact: Apple, Dell, P&G, Wal-Mart, HP, etc. Gartner has a new name for them, they have started calling them mainstays and it figures. The new additions this year are Nestle, Starbucks, 3M and Kraft Foods: Not much of a surprise since all these are strong companies with sound management practices and effective business strategies.
The surprises were in the companies that were pushed out to make room for these four. From 2010 to 2011, Nokia, Lockheed Martin, Best Buy, and Schlumberger got the boot. The previous year (from 2009 to 2010), Toyota, Walt-Disney, TI, Publix, and Sony Ericsson were pushed out. All these companies that slid from the top 25, are also leaders in their fields and very strong performers.

So, what is behind these companies getting knocked out from the top 25? You might believe that most of these companies simply lost focus during the last 3-4 years due to the recessionary and consumer pressures. I checked the quick financials for these companies (Google finance), and in most cases, these companies have lost considerable revenue and suffered reduced profitability. While there are obvious exceptions to this rule (for example, Lockheed Martin, which has gone from strength to strength on burgeoning defense contracts), most other companies fit the rule. However, the companies that are consistently on the list: Wal-Mart, Apple, McDonalds, Amazon have also been through the same economic environment and show similar financial trends.
But therein lies the contradiction: You would think that the companies with supply chains in top 25 list would fare much better in a recession because of their supply chain prowess (leading to their ability to have lower cost-basis and higher agility)? Well, they actually did! Even though it may not be obvious. See a quick comparison between Publix (strong supply chain, though slid from top 25) and Kroger (was never in top 25) to convince yourself: Publix revenues held much better and profitability kept the positive trend! Same is true for Wal-Mart (top 25 “mainstay”) and Best Buy (knocked down in 2011) and you see the same trend again: Wal-Mart had very less volatility in revenues & profitability compared to Best Buy.

Conclusion? Supply chain competence matters – even when it is not so obvious!
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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

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Consumer Trends Trump, but Business Strategy Catches On

2011-06-06T11:20:00.003-04:00

Between 2009 and 2011, successful execution of business strategy gained the highest momentum among retailers perception of risks. Retailers are less worried about the consumer spending, however, the consumer trends still rule: Retailers still want to know what interests consumers most and how to translate that into their merchandise on the shelf. Another significant finding from the BDO USA’s report on retailers’ perception of risks in 2011 reveals that they are much more focused on defining and executing a successful business strategy. The report is based on SEC 10-K filings of the 100 largest US retailers.

In fact, the focus on business strategy seems to be gaining ground in a very substantial way: The frequency at which the failure to execute business strategy was mentioned as a risk grew from 32% in 2009 to 80% in 2011. A newfound focus on business strategy should definitely help the retailers in the current situation that is more volatile and competitive than any other similar historical situation.
Some of the other concerns that gain retailers’ attention are shown in the top 10 list.
However, refactoring the top 10 list by the amount of change from 2009, a more interesting picture emerges: Business strategy appears to have gained the most momentum from 2009, followed by changes in regulatory & legal concerns. Loss of key management appears moves into top 5 as well, as the economy improves and mobility among the employees becomes a reality.
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BDO RISK FACTOR FOR RETAIL BUSINESSES

Leverage Your Demand Forecasting

2011-06-02T16:29:00.001-04:00

Not having a good demand forecast can create business inefficiencies from sub-par price realization, higher inventory costs, higher replenishment costs, and significant lost sales. But the same is true when companies have too many (disparate) demand forecasts driving these functions. What is an enterprise to do? Create a single demand forecast that addresses their various needs, across functions and across time, and create plans that are fully aligned with each other.

Recent research from RSR caught my attention. The research focused on how retailers are using (or not using) their demand forecasts. The chart below says it all.

Traditionally, demand forecasting has primarily driven the replenishment for retailers. This means that other departments have created and used their own demand projections: As a result, companies have plans for Pricing, Assortment Planning, Replenishment, and so on, that are simply misaligned. What do these misaligned plans do? Not only do they enhance the silo-ed mentality among these departments, they effectively raise the cost of doing business.

One, every department spends their energy on creating a demand forecast rather than using a central forecast. That is a substantial duplication of effort and cost. In addition, each department will have their own level of maturity in creating a forecast, which means dealing with a large variety of forecasts, with each one claiming to be more accurate than the other.
Two, the misaligned plans based on disparate demand forecasts frequently result into assortments that nobody wants and inventory that must be discounted.

Therefore a good, centralized demand forecasting function can be central to achieving not only functional alignment, but also to reduce cost of operations. While the RSR chart does cover some of the common functions, a good demand planning competency can be put to use across the enterprise in execution functions with a short-term focus to planning functions with a long term focus and a lot of processes in-between. The following tables list some of these functions.

Short Term Processes Driven by Demand Planning
Process	Objective	Horizon	Granularity	Units
Inventory Planning	Establish inventory targets	Weeks to months	Product: Merchandising Category, Departments Location: Facility, Regions Time: Week to Quarter	Dollars & Units
Replenishment Planning	Determine purchase requirements
Sourcing & Procurement	Execute purchase orders
Warehousing	Warehousing & allocation
Shipping	Transportation & distribution
Price Planning	Establish optimal price and discounting
Promotions Planning	Plan for optimal promotion events
Clearance Planning	Plan for clearance events

Medium Term Processes Driven by Demand Planning
Process	Objective	Horizon	Granularity	Units
Merchandise Financial Planning	Revenue & profitability targets, budgets for marketing & discounting	Few months to couple of years	Product: Merchandising Category, Departments Location: Facility, Regions Time: Week to Quarter	Dollars & Units
Portfolio Planning	Product life-cycle planning
Assortment Planning	Product-location determination

Long Term Processes Driven by Demand Planning
Process	Objective	Horizon	Granularity	Units
Distribution Network Design	Optimized network design for projected demand	3-5 years	Product: Category based on distribution attributes Location: Facility Time: Quarter to Year	Weight, Volume, Cases, for the expected flows along the network paths
Distribution Network Capacity Planning	Capacity planning for warehousing & transportation

For a detailed discussion on how to create and leverage a single demand forecast across the enterprise, please click on the related articles links below.
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Crystal Ball 2.0: The State of Retail Demand Forecasting

Technology: Enabler or Inhibitor

2011-05-20T11:21:00.001-04:00

In their enthusiasm to cut costs during the great recession, American corporations cut spending across the board. These cuts included major reductions in capital spending, of which information technology is a substantial part. The result: Companies are now feeling constrained by the ability of their (obsolete) technology to enable new strategic business functions.

For example, consider this study published by McKinsey Quarterly that shows the impact of not adopting an integrated life-cycle-based pricing strategy. As a product moves through its life-cycle of introduction, ramp-up, maturity, and decline, the costs associated with the product change. So does the profitability. However, this is not easily visible to the company unless they adopt an integrated life-cycle pricing strategy. In addition to the product life-cycle, the factors affecting the prices depend on product demand, movement, inventory, promotions, mark-downs, and competitor pricing. For any retailer to capture all these contextual information and consider them in pricing their merchandise, the integration technology and a streamlined integrated process that spawns across organizational boundaries are an absolute must.
An integrated pricing strategy becomes ever more important with proliferating channels and the mobile revolution that allows consumers to compare prices anywhere, anytime.
This predicament of needing to enable an integrated pricing strategy and unable to do so, is precisely what is being captured in a recent RSR survey. In the survey from RSR, 76% retailers reported having to “operate within an extremely price competitive environment” which necessitates an integrated pricing strategy, but almost half the retailers felt that their technology infrastructure constrains their ability to adopt optimized pricing strategies. When asked what would be the most valuable way to overcome the barriers, a whole of 56% selected “improved integration technology tools” closely followed by their desire to have their business leaders help them change their process and process analysis for improvements. You can read the complete RSR article by clicking here.
But most companies have themselves to blame – in the heat of the great recession, sometimes to survive and at others to meet expected Wall Street numbers, companies aggressively cut costs including capital investments. The result is that most companies have fallen behind on their technology investments and are either saddled with higher maintenance costs to support older technologies or are unable to support business innovations, such as the integrated pricing situation described above.
Research from Georgia Tech College of Management shows this declining trend in capital investment driving the companies where they are unable to leverage their technology assets to support changing business requirements.

To understand the relationship between the business goals and how technology enabled business capabilities can help you achieve them, review my book on business strategy.
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Sustainability Gets Wholesome

2011-05-13T13:14:00.001-04:00

“We do not believe there is a conflict between sustainability and profitable growth”, says Paul Polman, Chief Executive Officer of Unilever. The words may be different, but similar sentiments are now reflected in more than one companies business plans. Sustainability seems to have found its (business) footing. And more and more companies seem to develop an understanding of what it means for their survival and growth. It is not constrained to saving energy in the stores or fuel in distribution, it now touches all aspects of the business: A wholesome rethinking of the corporate business.

I will take three examples here to augment and understand how corporations are responding to the social, political, and customers pressures for being better guardians of the environment and natural resources. This is definitely going to be one of the biggest forces that will shape the business and operational models of these pioneers during the next decade.

First, let us talk about Wal-Mart. A few years back, Wal-Mart simply stated three goals for its sustainability aspirations, (1) Be supplied 100 percent by renewable energy, (2) Create zero waste, and (3) Sell products that sustain people and the environment. Since then Wal-Mart has set-up targets and published their progress. In their fourth such report, 2011 Global Responsibility Report, the focus has expanded to include a lot more than optimized logistics. In the words of Mike Duke, president and CEO, Wal-Mart, “We have worked especially hard on the social aspects of sustainability. We know we can play such a positive role in communities around the world. And if we are going to be at our best as a business, we have to recruit, develop and retain the best people and leaders.” Some of their reported accomplishments:

Globally, an absolute 10.61 percent reduction in the greenhouse gas (GHG) emissions from its 2005 base of stores, by the end of 2009 (most recent year for which we have data).
119 factories in China have demonstrated greater than 20 percent improved in efficiency compared to 2007 baseline.
Plastic bag waste was reduced by 47.95 million pounds, or approximately 3.5 billion bags, globally.
Wal-Mart de México reduced water use by 17 percent compared to 2008 baseline.

The second example I will pick is Unilever. Unilever has actually come up with the most extensive business plan marrying the sustainability. They have an extensive agenda and have defined specific goals to reach by 2020. Unilever seems to want to transform its whole business around the concept of sustainability. Their “UNILEVER SUSTAINABLE LIVING PLAN” merges their sustainable goals with their business goal of doubling their revenues by 2020. Of course, this is fully aligned with Paul’s sentiment above at the beginning of this article.
The third example comes from P&G: Another global corporation that has merged its business goals with the sustainability goals. P&G has made a public commitment to the long term vision for sustainable growth:

Powering our plants with 100% renewable energy.
Using 100% renewable or recycled materials for all products and packaging.
Having zero consumer and manufacturing waste go to landfills.

Time will tell whether the trends hold and continue to grow, but the fact is encouraging that more and more corporations are seeing sustainability as integrated part of their business goals rather than an overhead or a marketing ploy…
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Is Bigger Better?

2011-05-03T14:19:00.001-04:00

Bigger may not necessarily be better: Not when it comes to companies’ ability to grow and make money. So says the CFO magazine (Too Big to Succeed, Gregory V. Milano, CFO magazine, April 29, 2011). But what is a big corporation to do, when the conventional growth strategies fail? Innovate!

The conclusion is based on the research on the 1,000 largest public nonfinancial U.S. companies for the full decade of the 2000s. The companies were categorized based on their size and assessed for several performance metrics. The summary of results is reproduced here from the original CFO article. The highlights:

Total Shareholder Returns showed the greatest variance with 9.7% for the smallest companies (less than 2 billion in size defined using EBIDTA) and 2.7% for the largest companies with size more than 10 billion dollars. TSR (Total Shareholder Returns) is defined as the change in a company’s stock price for a given period, plus its free cash flow over the same period, as a percentage of the beginning stock price. (For a more detailed view of the metric and examples, see this article from strategy+business).
Conversely, then, the biggest companies seem to have not much opportunities or inclination in terms of reinvestments back into the business – since the Distribution Rate for the largest companies is 30.5% as against only 18.3% for the smallest group. Distribution rate is a measure of the dividends paid to the shareholders.
The author also points out that the bigger companies have trouble growing as fast as the smaller companies, reflected in their revenue growth numbers (7% versus 11.3%).

While higher dividends to shareholders appear appealing, is that the best use of money to provide shareholder returns? Gregory’s research suggests otherwise, he says: “While those distributions are often labeled "shareholder friendly," our research shows that reinvestment yields strong share-price performance benefits”. See his other article on CFO magazine, “Are You Reinvesting Enough?” for details of his research on the impact of reinvestments on TSR.
Again, the summary of the results is reproduced here for a quick review: Companies that reinvested between 0-50% of their cash-flow generated a median TSR of only 18% compared to a TSR of 193% for companies that reinvested above 150% of their cash-flow. This, of course, directly aligns with the other finding that the growth rate of bigger companies is smaller than the smaller corporations.
Why are the bigger companies not inclined to reinvest and grow faster? Part of this can be explained by reviewing how conventional growth happens at companies. In their book, “The Granularity of Growth”, the authors, Sumit Dora, Sven Smit, and Patrick Viguerie contend that the growth results from one of the three, “portfolio momentum, or the market growth of the segments in a company’s portfolio; M&A; and market share gains”. All of these opportunities get limited in mature industry segments where larger companies are most likely to operate – reflecting the trends confirmed above by the research by Gregory’s company.
So what is a large company in a mature industry to do? Innovate. P&G remains one of the best examples for such innovation driven growth. Between 2002 and 2008, P&G’s revenues almost doubled in spite of it being in one of the most mature industry segments. While some part of the expansion was acquisitions (Gillette, for example), a lot of growth came from products that were simply part of the P&G’s push to innovate when Lafley arrived in 2000. In his book, The Game Changer, co-written with Ram Charan, Lafley describes the case of their fragrance business. P&G acquired the Max Factor and Ellen Betrix cosmetic and fragrance lines from Revlon Inc. in early 90s. At the time, the fine fragrance industry was characterized by slow growth of 2 to 3 percent a year, low margins, and weak cash flow. But P&G wanted to change the game. P&G focused on the innovation that was meaningful to their consumers, including fresh new scents, distinctive packaging, provocative marketing, and delightful in-store experiences and leveraged their global scale and supply chain to reduce complexity and cost. As a result in 2007, P&G became the largest fine fragrance company in the world, with more than $2.5 billion in sales — a 25-fold increase in 15 years.
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Technology: The Fall Guy

2011-04-21T19:40:00.001-04:00

Most IT projects that do not enable business capabilities mandated by the business strategies will fail. The blame, however, is usually attributed to the technology, which is simply an enabler and not the driver! If this reflects your company, there is reason for introspection and review of the process leading to capital IT investments.

Though information technology is the underpinning of modern economy and invariably the single biggest enabler for day-to-day operations of any business, its role is not necessarily well understood. When capital investments in creating business capabilities fail to produce desired results, technology is often the fall guy, the chosen scapegoat. Even though it is almost always the inability of the underlying business capability to produce any competitive advantage that is the problem. After all, information technology is simply an enabler, a tool, a means to the end, but not the end in itself.

strategy+business magazine focuses on this point in one of their recent articles on business intelligence. The authors, Jamie Campbell, Kenny Kurtzman, and Adam Michaels quote Gartner: “through 2012, 35 percent of the top 5,000 global companies will regularly fail to make insightful decisions because they lack the right information, processes, and tools.” They further argue that, “the reason that most companies aren’t getting the most out of their business intelligence has nothing to do with the software itself” and that, “very few companies have the discipline to focus their operations in every business unit and product line on the things they do best. Those that do are the companies that identify their strongest internal capabilities; set thoughtful, strategic goals for them; and then constantly — almost obsessively — measure their performance against those goals”. The authors further claim that, “The key to designing a successful business intelligence strategy is metrics. They should be closely aligned with a company’s strategy and essential capabilities.”
What the articles says about business intelligence is actually true in the larger context of business capabilities as well – almost all capital IT projects that fail do so not because of technology but in spite of it. While some are simply ill-conceived, most of the projects fail to produce results (1) when they are not aligned with the larger business strategy, (2) they do not fill-in specific capability gaps, and (3) they are not based on a good (near-complete) understanding of the capability gaps mandated by the business strategy but missing in its operations.
This alignment of the business strategy to the functional capabilities and the underlying technology requires diligence and focused effort, it remains the holy grail for achieving the promised ROI for most IT projects. This is the focus of my second book on supply chain strategy.
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How was Your Consumer Experience?

2011-04-19T10:38:00.001-04:00

Measuring customer satisfaction has been a core strategy for retailers trying to improve it and they do it in all possible ways. Most depend on asking consumers questions about their latest interaction with the retailer and how well it went.

Temkin Ratings now brings us a new term: Consumer Experience, more accurately reflecting what the retailers have been trying to measure. Temkin defines consumer experience along the three dimensions of functional, accessible, and emotional parts of the interaction.

Functional Component: Thinking of your most recent interactions with each of these companies, to what degree were you able to accomplish what you wanted to do?
Accessible Component: Thinking of your most recent interactions with each of these companies, how easy was it to interact with the company?
Emotional Component: Thinking of your most recent interactions with each of these companies, how did you feel about those interactions?

Temkin’s survey consisted of 6,000 consumers covering 143 companies from 12 industries. The winner: Amazon, a company that really does not interact with consumers in the traditional sense of it. Retailers did the best with all the major wholesale clubs, Costco, Sam’s Club and BJ’s in the top 10. Other highlights:

Retailers did the best followed by Hotels though the Retailers beat the Hotels by a wide margin (average score of 74% for Retailers to 66% for Hotels).
Health plans and TV service providers brought up the rear as these industries scored an average of 50%.
Insurance Firms and Airlines made up the middle with average scores of high 59 and 60%. Banks did marginally better at 61%.
The lowest score among all? Emotional experience component at 37% for the famed “TV Service Providers” – Comcast customer would agree!

You can access the complete Temkin ratings here. Temkin concludes by saying that, “Companies can improve isolated customer interactions, but they can’t gain competitive advantage until customer experience is embedded in their operating fabric.” I agree – any company trying to systemically create a competitive advantage through a functional capability needs to explicitly design and build that capability: as Temkin puts it, to “embed it in their operating fabric”. Only a well-designed and deployed capability can become pervasive enough to become part of everyday “business as usual” and provide a systemic advantage.
But does having the best supply chain affect the the consumer experience? I cross-checked Temkin’s list with AMR’s Top 25 Retail Supply Chains. At first glance, the evidence is mixed: Only four of the Temkin's top 15 retailers also appear in AMR list as supply chain leaders, these being Amazon, Wal-Mart, CVS, and Walgreens. On the other hand, only the first component of Temkin ratings is directly impacted by supply chain capabilities of a retailer – ensuring that the merchandise that the consumer wanted is actually available when they want it. In this context, given that supply chain capabilities affect only a third of the criteria for consumer experience ratings, having 4 retailers out of 15 in both the lists is not a bad correlation.
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IT is Everybody’s Business

2011-03-21T08:58:00.002-04:00

In May 2003, Harvard Business Review printed “IT Doesn’t Matter” by Nicholas G. Carr. It was wrong then and it is wrong now. IT matters. A lot. And will continue to matter for the foreseeable future. Carr’s comparison of IT with infrastructure from the industrial age just does not cut it, it never did.
Of course, the time has provided all the evidence:
Carr’s Advice, Spend Less. The reality is different, very different. Between 2003 and 2008, American corporations continued spending on technology. In fact, the US Census Bureau reports that the expenses on technology climbed up from 229 billion dollars to 296 billion dollars in five years – a jump of almost 30%. In the same time, the US GDP grew by around 28%. As a percent, the spend on technology did not go down at all, in fact, it grew albeit a little.

Carr’s Advice, Follow, don’t Lead. Think of all the technology innovation and the business value created after this advice was dispensed with the outrageous claim of “IT does not matter”. Think of Amazon – its market cap grew from 10 billion in 2003 to 30 billion in 2008 (Reference: YCharts). Its revenues quadrupled in the meantime from 4 billion to 16 billion (Amazon reported 34 billion dollars in revenues in 2010). Think Amazon was following this advice when it came to technology? Not a chance – part of Amazon’s phenomenal success as a company is that it is a technology juggernaut – think of Kindle and the whole content model behind it, Amazon’s store fronts, digital publishing & selling models – its technology provides it with the competitive advantages that others are hard pressed to match and its technology if firmly part of the business strategy of growth!
Carr’s Advice, Focus on vulnerabilities, not opportunities. Surely, Amazon broke this rule as well – they focused on opportunities and won big time. They are not alone, any company that ignored this advice won big, think of Progressive (advanced risk-calculating methodologies. satellite tracking), Cemex (real-time geo-tracking and advanced scheduling), Wal-Mart (continued investments in supply chain, ex. cross-docking and vendor demand collaboration).

Why does the advice not work? Carr’s underlying argument is not faulty, when he says, “What makes a resource truly strategic – what gives it the capacity to be the basis for a sustained competitive advantage – is not ubiquity but scarcity”. But his interpretation, that because the computing technology is becoming common-place, therefore it must lose its competitive advantage, is wrong. He compares IT with the industrial age infrastructure like electric power and railways – but ignores the infinite flexibility of IT that allows you to do anything with it to create advantage – Cemex used IT to create better schedules (and hence differentiation advantage), Wal-Mart to reduce inventories ( and hence create cost advantage) and Amazon used it to create a whole new set of business-models (store-fronts, digital content publishing & selling). In fact, companies who could not manage technology are gone or are on the brink: Borders is a very real example – inability to leverage technology to adapt to the changed business landscape. Or think of Kmart – the retail behemoth that also failed partly due to its inability to leverage technology when Wal-Mart came along and things got a little competitive.
IT as an infrastructure is different from anything we have seen or experienced till now. And I am willing to bet that we have only scratched the surface of where It will take us in next 10 years, 20 years, 50 years! Think of all the technologies that exist but are not wide-spread as yet and their potential in creating competitive advantage: RFID, geo-location-based services, real-time tracking & visibility, artificial intelligence (that is almost completely absent from business applications’ decision making modules), robotics, nano-technology, advances in genetics, and so on. One day soon, there will be no need to take your groceries out and place them on a belt for a cashier to scan – RFID will take care of that as you pass through the check-out counter. Companies will be able to track their shipments, containers, and trucks in real-time as they move through the water-ways and roadways, sense real-time changes in demand, connect to the shipments-in-transit with an artificial intelligence-based decision making system redirecting and redeploying inventory, devoid of any human alerting or manipulation. Though till now, business either don’t have the ability/inclination to gather data or don’t have the capability to make good decisions with it – but a few more years of advances in computing power, mathematics, and analytics, and the petabytes of data on our shopping habits will tell retailers more about us than we know ourselves!
Think of the impact on the drug discovery and introduction, with FDA’s plans on using simulators rather than trials. Ray Kurzweil says, “It’ll soon be the case that using a simulator of human biology is a better simulation of humans than animals are. Ultimately, you’ll see very dramatic results because these are information processes. And when we really understand how the software of life works, we can really reprogram it away from cancer, away from heart disease.” (See Ray Kurzweil’s full interview at http://www.mckinseyquarterly.com/IT_growth_and_global_change_A_conversation_with_Ray_Kurzweil_2728).
Right now, the potential of IT is limited only by human ingenuity. May be some day, some day in real far future, IT may stop to matter – becoming much like the phone my desk, Carr’s comparison of IT with electricity may come to pass, but that day is not now, not tomorrow, not this decade… Till then, IT remains everyone’s business and businesses whose core strength does not include ability to manage technology can reasonably plan to retire early.
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New Channels, Old Problems

2011-03-17T08:39:00.001-04:00

Multi-channel retailing is all the buzz, but familiar problems lurk. There is hardly a retailer who does not operate an online channel, some operate several. To that, the new emerging mobile channels as well as the social media-based sales channels (remember, Delta just enabled their Facebook channel so you can buy Delta tickets without ever leaving Facebook, check out for yourself at: www.facebook.com/delta) and of course the old mail catalogs. You get the picture.

There is also good reason for it – the online retail sales have grown at a much faster rate than conventional retail (see below the data from US Census Bureau).

New research from RSR shows that almost three quarters of retailers now have an online channel, while a full fourth of them operate at least four sales channels in addition to their stores.

While the world of multi-channel retailing is new, their top challenges are not. In fact, the top two challenges quoted by more than half the retailers essentially remain deficient supply chain capabilities followed by merchandising, customer concerns, and inventory optimization:

Real-time inventory visibility/ management (#1, more than 58% retailers)
Managing fulfillment across channels (#2, more than 56% retailers)
Optimizing inventory deployment to speed delivery and minimize holding costs (#5, more than 35% retailers)