Supply Chain Management

What Does it Take to Boldly go Where No Man Has Gone Before?

2013-05-16T09:31:00.000-04:00

That would be 289.77 billion dollars, 1500 suppliers and 84 launches in 2011! These are the estimates from a cool info-graphic produced by the Florida Institute of Technology on the subject of Space Supply Chain. Interestingly, it also notes that “logistician” employment is projected to grow by 26% and that is a full 14% faster than the average for all occupations from 2010 to 2020.

Here is the link to the info-graphic, enjoy: http://www.floridatechonline.com/media/2340138/supplying-deep-space-scm-infographic.png.

Other sources:

Quick Facts, Logisticians (U.S. Department of Labor): http://www.bls.gov/ooh/business-and-financial/logisticians.htm
Best Business Jobs, Logistician (U.S. News): http://money.usnews.com/careers/best-jobs/logistician

JC Penney Does Not, Do You?

2013-05-14T12:23:00.001-04:00

It is amazing how businesses forget the very basics, like who their customers are. But DEE GILL on Y-Charts makes that case for J.C. Penney and it is rather convincing. In 2010, J.C. Penney fired their longtime CEO Myron Ullman to bring in Ron Johnson, then the head of Apple's retailing operations. Ron Johnson did what had made him successful at Apple: Crisper ads, bright stores, and fresh merchandise. But after a short 17 months on the job J.C. Penney board decided to fire Ron. Reason: Lack of results, retail sales were down by 25 percent and the stock had lost half of its value. What went wrong?

You can definitely count on many more reasons that the company's failure to understand and work with its customers, but that seems to be the biggest with their inability to align their business strategy with their operations being the other real culprit! Johnson clearly wanted to change the customer profile from budget conscious to hip-couture buyers with bigger purses, but did not quite get his methods right. J.C. Penney was no Apple, it did not have die-hard customers ready to spend a few hundreds of dollars every few months just to get the new “experience” Apple might come up with: People do not quite wait in lines for their linen and bed-sheets after all, but that was lost in his drive to modernize. Given time, the strategy may have worked. But the abruptness of it all, pulling out the coupons in one fell swoop, for example from a discount retail chain created a clear mis-alignment of expectations among its customers and the retailer. And as the the long built perceptions of its customers crashed, so did their sales!

Mary Buffett, in her blog on Huffington Post writes, “The challenges that mass market retailers have faced over the last generation have accelerated mightily in this Great Recession. While stores like Wal-Mart were able to anticipate how their core customer would shop through market research and state of the art supply chain management, venerable brands like K-Mart/Sears and JC Penney stumbled. Some analysts predicted that some might even join the retail graveyard alongside Montgomery Ward's, Woolworths, or Mervyns.”

As I see it, this is another case of failing to understand the complexity of retail and the need to align the business strategy with the attendant functional strategies. Clearly, Johnson wanted to change the target customer profile of the company and betted on it being his main business strategy to turn the retailer around. But somewhere, the connection between the professed business strategy and the attendant functional strategies in marketing, merchandising, pricing, and supply chain broke. This may have been simply a communication failure (inability to elaborate the strategy to get the stake-holders’ buy-in) or a lack of credibility (coming from Apple, it may have been harder for people to believe these tactics would work, resulting in people’s resistance to aligning themselves with the strategy), or worse yet a lack of understanding how the business strategy affects a company’s operations.

Retailing has evolved over the years and unfortunately become more complex. It used to be about the merchandise only, but then Wal-Mart came along and the game changed to supply chain operations. Amazon pushed the envelope on the customer experience (same-day deliveries and over a million products assortment!). The technology enabled the always-on commerce (omni-channel retail) with always-on social channels where continuous, transparent customer feedback determines the fate of brands and retailers. Successful retailing today means tying it all together neatly, in a nice little bundle. And that is what a retail CEO must do to survive, grow, and sustain and it takes more than a single-trick pony to do that.

Other Sources:

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

© Vivek Sehgal, 2013, All Rights Reserved.

Wal-Mart Going the Home Depot Way?

2013-03-28T10:26:00.001-04:00

The Home Depot started in 1979 with their first store in Atlanta. Within seven years in 1986, it hit the $1 billion-mark in sales which grew to $20 billion in 1997. During this span of 12 years, it had an average annual growth in sales of 119% that made them the fastest expanding home renovation retailer. The brand was built on low-prices and the trade-specialists in the stores to support the DIY audience who needed help in finishing their home improvement projects. Then the founders left and the new CEO focused on profitability above all else - almost running the company into the ground before the board decided to replace him. Now Wal-Mart’s laser sharp focus on costs is raising similar questions: Have they gone too far?

In 2000, The Home Depot founders Bernie Marcus and Arthur Blank retired. Robert Nardelli was appointed as the new CEO. Coming from GE and having no retail experience, Nardelli embarked the company on the only path he knew: Cost cutting. Being a retailer, the biggest discretionary spend he saw was the people on the floor. The cuts came hard and fast, and soon the home depot stores lost most of the trade specialists from their floors! The results were drastic – by the time the board decided to replace Bob, the company’s market cap had declined from 104 to 82 billion dollars. In fact, the decline continued for another two years until in 2008, the company was only valued at 35 billion dollars. This contrasts well with the wall-street facing financial results where the company showed revenue growth doubling in the same Nardelli era. To put this context, during the same six-year period, Home Depot’s rival Lowe’s saw its split-adjusted stock price rise more than 200%.

All pointers led to the same underlying reason: The slide in customer service at Home Depot stores. “He's made Home Depot much more profitable and more streamlined, but messed up everything that has to do with serving the customer,” said one analyst. It was all about profitability, at the cost of serving the customer. The situation was so dire that in the summer of 2002, the Better Business Bureau’s Atlanta chapter—in Home Depot’s hometown—suspended the retailer’s membership in response to the skyrocketing number of customer complaints that had remained unresolved.

Now Bloomberg Businessweek reports that Wal-Mart has been cutting staff since the recession. “In the past five years the world’s largest retailer added 455 U.S. Walmart stores, a 13 percent increase, according to company filings in late January. In the same period its total U.S. workforce, which includes employees at its Sam’s Club warehouse stores, dropped by about 20,000, or 1.4 percent.” In 2008, Wal-Mart had an average of 343 employees per store. The number declined to 301 in 2013.

All this is leading to empty shelves while the merchandise piles up in the backrooms! Of course, that directly results into lost sales in spite of the fact that the inventory is actually sitting in the store, just not where customers can see it! It continues, “At a Feb. 1 gathering of Walmart managers, U.S. Chief Executive Officer Bill Simon said Walmart was “getting worse” at stocking shelves, according to minutes of the meeting obtained by Bloomberg News. Simon said “self-inflicted wounds” were Walmart’s “biggest risk” and that an executive vice president had been appointed to fix the restocking problem, according to the minutes.”

In addition to the empty shelves resulting in lost sales, Walmart also placed last among department and discount stores in the American Customer Satisfaction Index last month, the sixth year in a row the company has either tied or taken the last spot.

Sounds like the home depot in 2000s? Time for a wake-up call and review their business strategy, and to find out what is really going on at the world’s largest retailer that has captured our (supply chain) imagination for such a long time!

Other Sources:

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

Amazon: The Faux Retailer

2013-02-25T09:12:00.001-05:00

Amazon’s corporate mission says it for the most part: “We seek to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators.” Three out of their four constituencies are non-consumer. Unlike other retailers, Amazon has been investing very heavily in the back-end logistics and fulfillment technology (Kiva Systems, warehouses totaling almost 50 million sqft) in addition to their intense focus on enterprise technologies (AWS, Amazon Web Services now hosting SAP) and consumer devices (Kindle) and technology (IVONA). But almost everybody thinks of Amazon as a retailer and keeps comparing them to other retailers. Is that fair?

There is no doubt that Amazon started as a retailer sans the stores in the then new and emerging world of online retail. There is also no doubt that retailers are their most obvious competition and they do have a lot of common business objectives. Amazon single handedly has hastened the speed and extent of change that we now take for granted in retailing. They pioneered the concepts of customer reviews, you-might-also-like, people-who-bought-this-also-bought, low prices, fast fulfillment and delivery including their newest “same-day delivery” efforts, delivery boxes to avoid missed carrier appointments, subscribe-and-save, hassle-free returns, Amazon prime bundling 2-day shipping with host of other services like media streaming and book-lending, and digital books and devices like Kindle. The list goes on and these are only some of their consumer-facing innovations.

But Amazon has also been big on innovations on the back-end which in turn enable these consumer-facing innovations like investing in warehousing facilities closest to their biggest customer hubs, technology platforms built for e-commerce including hardware systems like Kiva, hosting thousands of store-fronts that collectively provide millions of products: Amazon Marketplace – definitely the largest under a single brand-umbrella, “fulfillment by Amazon”, “checkout by Amazon”, Kindle Publishing, and programs like Amazon Affiliates.

The fact is that Amazon today is first and foremost the largest retailing platform hosting thousands of stores enabled through Amazon services than simply an online retailer. But how does that make Amazon a faux retailer?

Retail has three core pillars: Merchandising, Stores, and Logistics. One of the biggest focus and risk areas for a retailer is merchandising: Deciding what to sell. By enabling thousands of small merchants (who are not Amazon employees) Amazon has practically sub-contracted the biggest retail function and with it a large part of the risk associated with unwanted merchandise!

Stores and logistics are the other two retailing pillars. Being an online retailer, Amazon obviously does not have to worry about the stores. That leaves Logistics: Once again, rather than limiting to create conventional logistics infrastructure of a typical retailer, Amazon developed a logistics services platform complete with technology, hardware, and operations management that gives them the advantage of scale as they manage receiving and fulfillment services for thousands of merchants, as well as enables them to create a large warehouse-network to enable most optimal shipping for their own merchandise.

Then comes their AWS (Amazon Web Services) or their cloud as it is better known. Once again, Amazon was among the pioneers to develop the cloud services for enterprises and quietly announced hosting SAP in their 4th quarter press release, “AWS announced that SAP Business Suite is now certified to run on the AWS cloud platform. Enterprises running SAP Business Suite can now leverage the on-demand, pay as you go AWS platform to support thousands of concurrent users in production without making costly capital expenditures for their underlying infrastructure. AWS also announced that SAP HANA, SAP’s in-memory database and platform, is certified to run on AWS and is available for purchase via AWS Marketplace.” GIGAOM estimates that AWS is now over 1.5 billion dollars business for Amazon. Granted they may not be making money on it yet (not big money, anyway), but the potential upside of having the world’s best-known ERP available on AWS is huge.

Finally, there is Kindle: Now evolved into a tablet and competing with other tablets more often than the e-readers. Amazon recently bought IVONA that powers “the “Text-to-Speech,” “Voice Guide” and “Explore by Touch” features on Kindle Fire tablets”. What might that indicate? That Amazon will likely continue to enhance their foray into tablets (or consumer devices) at least in the short-term!

With such a un-conventional portfolio, what type of company does Amazon make? Definitely no conventional label works. However, there are two broad themes that emerge:

Technology: This has always been their strong point and Amazon has never been shy about putting it to use. Their seller-platform, logistics services, AWS, and tablets all point to their single strength: Ability to understand, create/develop, and exploit technology unlike any other company we have seen so far.
Logistics: This has emerged as an Amazon strength for the last few years, but their unique way of developing it into a commercial platform is amazing. Suddenly, all the mom-and-pop shops out there can provide you with world-class ordering experience including shipping and tracking and they only have to worry about what to sell. What a way to unleash commerce and entrepreneurship!

Retailer? Technology? 3PL? Consumer Electronics? Enterprise Technology? You decide, but whatever they may be, they are investing in the infrastructure of tomorrow and laser-sharp focus on making their customers happy - without worrying about appeasing Wall Street’s myopic bosses. And, that is more than you can about any other public company of comparable size and visibility!

Other Sources:

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

Go Ahead and Innovate: Just Do It

2013-02-18T10:30:00.001-05:00

So how exactly do you become the number 1 innovative company of the year while manufacturing something as dull and drab as shoes? Simple: By making them not dull or drab. Shoe manufacturers are not what you would be looking for in the top innovator’s list, but Nike is there – at the very top of the most innovative companies of 2013 by Fast Company. Their secret: Continuously reinventing themselves and their business model through disruptive thinking, says Austin Carr, the author of the source article.
Nike CEO Mark Parker says, "One of my fears is being this big, slow, constipated, bureaucratic company that's happy with its success. Companies fall apart when their model is so successful that it stifles thinking that challenges it…”. For now, it looks like Mark is being quite successful at challenging their (extremely successful) business model and evolve Nike into thinking and behaving like a new-age, small, hungry company so much that Forrester Research analyst Sarah Rotman Epps says, "Nike has broken out of apparel and into tech, data, and services, which is so hard for any company to do". Nike's annual revenue at $24 billion, up 60% since Mark took over as CEO in 2006 and profits up 57% firmly support this ongoing and very successful transition.

Austin Carr mentions two specific Nike products in supporting their innovative credentials. The first one is FuelBand, an electronic bracelet that measures your movements throughout the day. This is the product that earned Nike the above comment from Forrester. The second product being the Flyknit Racer, shoes that are more like a sock sewn over a sole. This second product not only required an innovative product design, but also forced a rethink of their manufacturing process to bring it to life.

Read more on how Nike got to be the most innovative company by following the link below.
Related Articles:

Other Resources:

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2013, All Rights Reserved.

Innovation: Money, Commitment, and the Right Time

2013-01-10T10:18:00.001-05:00

Innovation evokes passionate reactions. The term has been so overused and abused that it has become tired and a little lack-luster. However, it still remains what we are all after, because true innovation enriches life and brings prosperity to all involved! Innovation has been used to describe everything from ground-breaking research that truly advances the humanity’s understanding of the world around us (space shuttles, GPS, internet) to everyday incremental improvements in design that would be too obvious to a critical eye. No worries, I am not about to get into another definition of what innovation is or how to promote it in your organization, but I simply want to bring you a real-life story from Apple and Corning to help you make up your own minds about innovation.

In a recent Wired article, Bryan Gardiner traces the history of the beautiful glass surface that we all fell in love with when Apple introduced us to its first iPhone and changed how people would think of their phones ever after. It was a thing of beauty and the glass it adorned was just an integral part of its design and looks. While glass has always been beautiful, it has conventionally been brittle, fragile, and not so much of a choice as a popular building material for things that can easily slip and fall from our hands and pockets and go shatter!

Bryan tells the story of how Corning accidentally created this super-strong, non-brittle glass in the fifties, but had to wait until the next millennium when Steve Jobs actually needed one in a hurry! The story starts in 1952 when a Corning chemist accidentally produced high-strength glass that slipped and fell to the floor, but simply bounced instead of shattering! Quoting from Bryan’s article (emphasis is mine), “The future National Inventors Hall of Fame inductee didn’t know it, but he had just invented the first synthetic glass-ceramic, a material Corning would later dub Pyroceram. Lighter than aluminum, harder than high-carbon steel, and many times stronger than regular soda-lime glass, Pyroceram eventually found its way into everything from missile nose cones to chemistry labs. It could also be used in microwave ovens, and in 1959 Pyroceram debuted as a line of space-age serving dishes: Corningware.”

However, even with that kind of material, the project had to be finally shelved in 1971 due to lack of market demand. From Bryan, “It was a solution that would have to wait for the right problem to arise.” The project got dusted off in 2005 when Motorola released the Razr V3 with a glass-screen instead of the typical high-impact plastic prevalent at the time. And “the right problem arose” when Apple approached Corning in February 2007, suddenly demanding “massive amounts of a 1.3-mm, chemically strengthened glass—something that had never been created, much less manufactured, before.” And the rest, as they say is history, that is undeniable as proved by this quote, “Corning’s revenue from the glass has skyrocketed, from $20 million in 2007 to $700 million in 2011.”

So the lessons? If you are looking for fostering innovation in a business environment, be ready for the following:

Money: Most innovations take upfront investments, which may or may not produce desired returns immediately. While it may not take you half-a-century to see the results, investing in innovations is necessarily an investment risk. Understand and be ready. Make sure you have the resources and the inclination to invest (without stressing your day-to-day operations and survival).
Commitment: Most innovations take time to mature into an idea that be commercially viable. That is just the nature of the thing: Ideas take time to realize and fine-tune before they can be adopted on a large scale.
RIGHT TIME: Finally, make sure that the time is right! The first two factors are important to bring an innovation to fruition, however, the third one is truly critical. If no one wants it, it is of no commercial value. And every company may not have the resources to keep a project alive through decades and bring it online when the demand shows up! Do your homework and direct your innovation dollars where you have the highest probability of success.

Other Resources:

Glass Works: How Corning Created the Ultrathin, Ultrastrong Material of the Future

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

Leaders in E-commerce

2013-01-08T16:33:00.001-05:00

Retail is big business in America. It amounts to almost a third of the national GDP. Within retailing though, e-commerce is the fastest growing segment. Data from US Census Bureau shows that e-commerce sales being equal to 5.2% of total retail sales in the latest reported quarter Q3 of 2012 (see chart below for more numbers). This figure has grown from 0.6% in 1999. So who is leading the e-commerce revolution in the US?

According to Morgan Stanley, Amazon leads the pack. This is not surprising given their online origins! Some other well known names from retailing include Costco, Macy’s, Nordstrom, Wal-Mart, Williams-Sonoma, and Under Armour. Check out the whole list of retailers by following the link to the original story below.

What makes them successful? In one word – Following their customers. The new world of retail is very different from the old (and cold) brick-and-mortar store-centric retailing. The new retail is very personal and very ubiquitous. The social networks now make or break brands and commerce is 24/7. The customers have merged their views of retail: Physical stores, online stores, catalogs, call-centers and mobile. To them, irrespective of the channel they choose to interact with, they are dealing with a single retailer and they expect consistent experience for sales, shipping, returns, brands, assortment, and customer service.

That is the challenge of the new retailing. The omni-channel, omni-present commerce! The companies in Morgan Stanley’s report reflect what it takes to be a leader in this new world of retail. Each of the companies understood the opportunity and has been instrumental in enabling that single/merged view to the customer that has become the necessity in the omni-channel retail.

Wal-Mart was among the first of the largest retailers to enable ship-to-store (and pay no shipping at all)! They also enabled returns in store for items bought online.
Costco.com displays all prices delivered to your door, no more wondering about how mush shipping will be added once you are through to the last step!
Amazon has many firsts – but since they have no physical stores, the concept of omni-channel retailing is hard to align align. However, it is Amazon has to its credit, demand management techniques like “subscribe and save”, free shipping over $25, standard two-day shipping with Prime (along with a whole host of other goodies such as streaming videos and books that you can borrow!). While they may not quite fit in the traditional “omni” channel model, their business model of providing a store-front for millions of merchants and enabling a whole host of services for payment processing, returns, logistics, and fulfillment is likely to continue to be disruptive to conventional retail. Their unambiguous focus on improving customer experience through faster deliveries, delivery boxes, easy returns, almost infinite assortment, low prices, reliable shipping and so on is going to continue to push conventional retailers to find niches where they can excel in the new omni-channel world.

Enabling such customer experience takes seamless processes and services at the back-end, tied together with gobs of enterprise data and cutting-edge technology. It takes a supply chain that provides true visibility into inventory, demand, and supplies; manages variability, optimizes operations, and allows a 360 degree view of the customer no matter how that customer chooses to interact with the retailer. It challenges the conventional supply-chain view focused on creating operational excellence and stretches it to create excellent customer experience.

The companies in Morgan Stanley report have understood – that being successful in the new world of retailing takes creating excellent customer experiences. And that is the lesson to take to heart. If you are in retail and not working towards creating that excellent customer experience, you are regressing!

Other Resources:

These 16 Companies Are Leading A Retail Revolution

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

Apple to Move Back Manufacturing

2012-12-06T15:05:00.001-05:00

Today’s big news doing the rounds is that Apple intends to bring the manufacturing operations back to the US! This happens a day after I wrote extensively on this trend, discussing several examples from many large companies evaluating their off-shored manufacturing operations and deciding to bring them back. Some simply don’t find it cost effective any more, others may have a combination of reasons including the IP and branding risks.
I actually mentioned Apple yesterday in the context of their relationship with Foxconn which has been in the news repeatedly over poor working conditions in their factories that assemble and supply many popular Apple products. However, the current Apple plan is to bring back only Mac computers. In response to a question as to why Apple doesn’t leave China entirely and manufacture everything in the U.S., MSNBC reports Tim Cook saying “It’s not so much about price, it’s about the skills”. Now that is interesting!
Elaborating further the same MSNBC report adds, “Echoing a theme stated by many other companies, Cook said he believes the U.S. education system is failing to produce enough people with the skills needed for modern manufacturing processes. He added, however, that he hopes the new Mac project will help spur others to bring manufacturing back to the U.S.”
In The Insourcing Boom (DECEMBER 2012 ATLANTIC MAGAZINE), Charles Fishman writes that when GE decided to bring back the production of one of their water heaters GeoSpring at Appliance Park, they quickly found out that “although the GeoSpring had been conceived, designed, marketed, and managed from Louisville, it was made in China,” and GE really had zero communications into the assembly line there. He further explains how the team found the design “terrible” in terms of manufacturability. Fishman compares the phenomena to “writing a cookbook without ever cooking”. GE eventually redesigned the water heater for easier manufacturability, and in the process, reduced both the material and the labor costs to actually beat the China price by nearly 20 percent. He writes, “The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.”
I am not sure how precisely can companies account for the value of their lost skills, such as the business processes, manufacturing skills and technologies, operations management, quality control, and other skills required for running an effective manufacturing plant, but this is an aspect we did not touch upon yesterday. While the value of such skills may remain subjective, their importance is underlined by the examples above of GE and Cook’s sentiment on why they just cannot bring back all their products from China (right away)!
Something more to chew upon in addition to the usual costs of fuel and labor when considering where to manufacture.
Related Articles:

The New Manufacturing Destination: Americas

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Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2012, All Rights Reserved.

The New Manufacturing Destination: Americas

2012-12-05T17:08:00.001-05:00

The pendulum on far-shoring for manufacturing may have just swung back. Many factors including higher gas prices, rising labor costs in China, shrinking product life-cycles, innovation premium, environmental-awareness, social branding needs and even political environment have contributed over the last few years to reverse a trend that seemed irreversible. Smaller, nimble, pioneering companies started the reverse trend during the last few years and it may finally become a tide with the likes of GEs joining the fray.

Examples?

Neutex, an LED lighting company, brought back its production from Shenzhen, China, to Houston, saying it will be cheaper to manufacture in Houston.
Master Lock in Milwaukee, Wis., sent as many as 1,000 jobs overseas in the 1990s and just brought back the first 100.
Nat Labs is doing the same, it’s now making dental molds in Florida instead of China and hopes to hire 300 people.
In Detroit, GalaxE.Solutions, a custom software development company, decided to move back, taking over an office building that had been vacant for nearly a decade.
Shoemaker Annie Mohaupt nearly closed down a year ago after her move to make sandals in China proved a bust. The sandals could easily be pulled apart. She looked into what it would cost to make her sandals in another country but returned production to Chicago. The decision, she said, allows her to tap into growing demand for U.S.-made products and to utilize manufacturing technology that makes her company, Mohop Inc., a global competitor.
Whirlpool Corporation brought back production of their KitchenAid hand mixers to Greenville, which for the previous six years had been made by a contractor in Huizhou, China, near Guangzhou.
Otis Elevator is shifting some of its production from Mexico to South Carolina.
On February 10, GE reopened one of its factories at their famed Appliance Park in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. The water heaters it began making had previously been made for GE in a Chinese contract factory. Just 39 days later, Appliance Park opened a second new assembly line to make new high-tech French-door refrigerators. These have been made in Mexico for years.

Wall Street journal says, “A survey of 105 companies in January and February by David Simchi-Levi, an engineering professor and supply-chain expert at the Massachusetts Institute of Technology, found that 39% were considering moving some manufacturing back to the U.S.”

More and more companies are reevaluating the economics of off-shoring and are unable to find the cost savings which may have justified the moves years ago. The fact is, it is not the same world any more! Consider the following:

Fuel: The cost of gas has quadrupled from 1994 to 2012. (See data from US Energy Information Administration).
Labor costs: The wages in China have been rising. A report from TD Economics says, “At the turn of the century, average Chinese manufacturing wages were roughly one-fortieth of their American counterparts. Since then, wage inﬂation in China averaged 12.8%, or more than triple the pace in the United States. ……all-in wages in coastal areas of China specializing in computers & electronics and transportation equipment production may approach one-quarter of wages in southern U.S. by 2015.”
Shrinking product life-cycles: Product life-cycles have been shrinking, which means that companies have to design and introduce new products at a faster rate forcing manufacturing operations to adapt to much faster ramp-up time to learn and establish the new manufacturing, assembly, and quality assurance processes. Charles Fishman, in his article The Insourcing Boom writes, “Just a few years ago, the design of a new range or refrigerator was assumed to last seven years. Now, says Lou Lenzi, GE’s managers figure no model will be good for more than two or three years.” Manufacturing products in factories physically closer to the designers and engineers obviously makes it easier to introduce newer, more innovative products faster.
Innovation premium: Last few years of off-shoring has “commoditized” a whole lot of products. These products have moved from “wants” to “needs”. To stay profitable, companies must continuously innovate to get the premium prices. This obviously introduces the intellectual property risks, but more importantly risks key management and business practices that make a company competitive. Leo Hindery Jr. puts it succinctly in his blog, “we have finally come to appreciate that American corporations committed to offshoring have almost universally been providing their foreign suppliers and overseas subsidiaries with massive amounts of business knowledge, management practices, training and other intangible exports………This massive transfer of intellectual property is what will ultimately be the biggest drain on our economy”.
Social branding needs: In the world with Facebook and Twitter, companies are always exposed and their brand is continuously under scrutiny from their most loyal customers. And companies can do well without the kind of publicity Apple recently got when there were riots at Foxconn’s factories, Apple’s largest supplier in China.
Environmental awareness: The off-shoring trends of the recent years in the developed countries have shifted most of world’s manufacturing activities to developing regions where the environmental regulations seldom exist or enforced. However, the customers in the developed countries with their growing environmental awareness often demand that companies do business with suppliers that are environmentally responsible. This is easier said than done when majority of the suppliers are half a world away. Legislation like California Global Warming Solutions Act and California Transparency in Supply Chains Act also create an environment where companies continuously find themselves responsible for their supply chains. This trend also steers companies towards shorter supply chains that are easier to manage and control.

Other Resources:

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2012, All Rights Reserved.

Logistics Clusters

2012-10-19T16:25:00.001-04:00

All of us are familiar with the concept of similar businesses clustered together in the same geographic area. Of course, the silicon valley comes to mind being the most visible and famous! But there are other lesser known clusters that exhibit the same phenomena: Digital Media City (DMC), a 135 acre complex, outside Seoul’s central business district in the Sangam-dong district in Korea, and SEEPZ (Santacruz Electronics Export Processing Zone) in Mumbai, India are some other examples. Automobile industry around Detroit, steel mills in Indiana, and apparel in North Carolina have all been examples of similar clustering phenomena before the changing business conditions moved them elsewhere.

In his new book, Yossi Sheffi discusses the logistics clusters. Logistics clusters are unique to an extent since they essentially provide a service as against a physical product. Moreover, as Sheffi points out, the logistics services are quite interchangeable and can be offered equally to any industry! Think of it this way: While the “things” in the boxes may greatly differ from pens to bicycles, the logistics services performed on these boxes in terms of stacking, stocking, staging, loading, shipping, unloading, and so on remain essentially the same.

Sheffi takes various examples from around the world from Zaragoza (Spain) to Panama to Singapore focusing on the phenomena of logistics clusters and show how they form, why they matter, and how they create value. In doing so, he answers a key question: Why do these clusters form? Summarizing from his book:

Trust. Since clusters are geographically cohesive, they naturally include people with similar backgrounds and cultures. This makes it easier to develop trust and enables better collaboration among organizations leading to lower transactions costs and better working partnerships.
Tacit knowledge exchange. Clusters make it easy to have physical interactions that enable tacit knowledge exchange. Sheffi claims that such exchanges create rich interactions through interchange of information that is otherwise hard to exchange/appreciate. As examples, he provides parts specifications, benchmarking information, etc.
Collaboration. Similar industries in a cluster have common needs and concerns which may give rise to joint undertakings such as lobbying, cluster development activities and even commerce activities such as procurement.
Research and education. Companies in a cluster may invest collaboratively on research and development or may collectively leverage such investments from common sources such as universities and other research establishments.
Supply base. Due to consolidated demand of materials and services common to cluster residents, clusters attract suppliers that co-locate next to their largest demand centers. This creates economic efficiencies for both the suppliers and the companies located in a cluster.

Sheffi writes with easy to understand examples, using stories to make his points. The book covers the reasons for the formation of clusters, the role of governments, economics and technological reasons, operational advantages and even the impacts of clustering on human capital. It covers points that are obvious to a casual observer and then other points that most of us will be oblivious to such as impact of clusters on education. It analyzes real-life example to establish the underlying reasons for clusters to form, grow, and deteriorate. All in all, a good read with a little-known facts and stories!

Resources:

Yossi Sheffi, Logistics Clusters: Delivering Value and Driving Growth, The MIT Press, Cambridge, MA, 2012.

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

© Vivek Sehgal, 2012, All Rights Reserved.

Holiday Pulse 2012

2012-10-05T15:00:00.001-04:00

If Winter comes, can Spring be far behind? Fall is here, can the holidays be far behind? And with the holidays comes the annual rite of predicting what might the retail sales bring. After all, holidays are big business: $586.1 billion to be precise, expected in 2012. This is the number predicted by NRF after their annual ritual forecast of holiday sales, “Tempered by political and fiscal uncertainties but supported by signs of improvement in consumer confidence, holiday sales this year will increase 4.1 percent to $586.1 billion. NRF’s 2012 holiday forecast is higher than the 10-year average holiday sales increase of 3.5 percent.”

This view is being supported by others as well. A recent paper by Business+Strategy shows encouraging consumer sentiment compared to last year: See chart below.

The positive consumer sentiment is however being balanced by the great desire to find bigger, better, bargains. Consumer’s desire to throw more parties and host multiple gatherings may result into better grocery sales, though that growth may come at a cost of lost revenues at the restaurants!

So what is a retailer to do?

The answer is not much different from any other year. Driving costs down through better operational efficiencies remains the core competitive advantage through the industry and designing better supply chains and developing compelling omni-channel competencies are a good way to start!

Other Resources:

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

© Vivek Sehgal, 2012, All Rights Reserved.

Cost of Your Checkout: $12M Every Second

2012-09-10T12:34:00.001-04:00

Checkout is so much an integral part of retailing. In the world of big box retailing, in fact, checkout may be the only time a customer directly relates to someone representing the retailer. So why are retailers trying so hard to get rid of their only opportunity to connect with their customers?
Because checkout costs them a pretty penny.

As per a Reuters story Wal-Mart says it can save $12 million a year for every second it can cut from the average checkout time at the Wal-Mart chain in the United States. Supermarkets typically have slim margins and profitability and therefore are likely to seek any advantage to reduce on labor that can account for 8-10% or more of sales.

Chances are that you have used a self-checkout counter recently. Chances also are that you did this to save yourself some time and avoid standing in a line waiting for the cashier to serve you. The top three reasons given by consumers to use self-checkout are shorter lines, less time taken to check-out, and convenience. A report by Dechert-Hampe & Company claims that 85% of American shoppers have used self-checkout, two-thirds of the stores have self-checkout lines and almost a third of all supermarket transactions are now self-checkout!
However, the self-checkout process has its concerns for retailers and consumers alike. Immature self-checkout technology has been the bane of consumers. It has been estimated that as much as 40% of Self-Checkout transactions require intervention. Such intervention generally takes out the time advantage that is the primary motivation of the consumer to use these counters.
For retailers, ROI on the self-checkout technology investments remains questionable, though some retailers also believe that increased shrink and smaller baskets are also related to self-checkout counters though data remains questionable. In general, the ROI based on labor savings can be substantial, however, many retailers report the actual savings as soft since they often redeploy people to other tasks.
Wal-Mart’s latest attempts to use iPhone app to provide a “scan and go” self-checkout process may be just the latest shot at solving the problem of providing an efficient solution to a problem that has been a hard case to crack. The process will allow the consumers to scan the items as they shop and then pay at a self-checkout counter. Wal-Mart’s test does not allow users to pay using their phone as yet, but the app transfers the scanned items to the self-checkout kiosk and complete the transaction using the normal self-checkout process. This should definitely allow a more efficient (and hence pleasant) checkout experience compared to the current self-checkout counters, though other technologies had probably looked equally promising at first. From technology point of view, this follows the self-checkout counters, RFID chips, self-service hand-held scanners, and even a tunnel scanner (Kroger’s Advantage Checkout experiment).
Will this be a clincher? Let us wait and watch.
Related Articles:

Other Resources:

Walmart tests iPhone app checkout feature by Reuters
Maximizing Opportunities At Self-Checkout by Dechert-Hampe & Company

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

© Vivek Sehgal, 2012, All Rights Reserved.

Creating Compelling Customer Experience

2012-08-22T15:44:00.001-04:00

When retailers think of customer experience, supply chains are generally not the top of mind. It is all about the glossy catalogs, slick web-sites, product images, interactive product experience, videos and all the other technology, media, and communication glitz bundled together and thrown on the consumer to make the sale! But what happens after the sale is secured? Is customer experience truly limited to slick product presentations and glitzy web-sites? Or is there more to it beyond the glitz, glitter, and glamor?

We believe that great products and presentation is simply a good start for a great customer experience. A truly compelling customer experience goes deeper, substantially deeper and is only enabled when the underlying supply chains can keep the fulfillment promises made and meet the customer expectations of time, quality, and service.

How can your supply chain make a difference in creating compelling customer experience? Supply chain competency affects all the stages of customer experience.

Promise: Imagine you were looking for some curtains to freshen up your room. You spend a good half an hour to search for the right size, material, design, pattern, and color. You check the hanging style, rings, tabs, and eyelets. You make sure it matches the décor and the valence. You compare it with alternatives, review prices and customer comments, and you are all ready to make the purchase. And then it happens – it is out-of-stock! This scenario plays itself all over the retail stores and online channels every day. And, nothing is more frustrating to a customer than the out-of-stock experience after investing a sizable amount of time to decide what they wanted. In most cases, this is a supply chain planning failure. A well functioning supply chain would enable accurate demand forecasts and well-stocked inventories at all the right locations in the chain to maintain a desirable service level to reduce the “out-of-stock experience”. When inventories are well planned, accurately tracked, and visible across the chain, faster replenishments, alternate sources to rush product to locations/channels with higher sales velocity, dynamic deployment of inventory-in-transit, and alternate fulfillment options (buy-in-store, ship-to-home) become available to save the sale.
Fulfill: What happens after the sale has been secured? For all non-store channels, the fulfillment typically is a process that requires coordination among several departments and processes across your organization. Is the payment confirmed? Has the credit been verified? What about fraud? Are all the products on the order available? What is best location from where to ship? Free shipping? Expedited shipping? One shipment or many? Promotions, returns, gifts: There are just a lot to consider between closing the order and the physical fulfillment. And, the expectations have never been higher, the best retailers are working on fulfilling the orders within two hours after receiving the order. Amazon is trying to provide same-day-delivery. Can you match your orders to the available inventory? How quickly can you do it? Can you optimally select the fulfilling location to reduce your shipping costs? Can you keep the promised delivery date to the customer – remember that is the only criteria that matters to the customer. What about alternate delivery options? Buy online, pick-at-store? Can you confirm the availability in the store before accepting the order? Can you hold it? How soon the order will be ready for the pick up? How about Buy in-store and deliver-at-home? Once again, the key is to have a well-oiled supply chain. Perfect order fulfillment is no more a pipedream, if you have a supply chain that is well designed to support your needs.
Keep it Visible: Finally, doing a great job on promising and fulfilling is not enough. Compelling customer experience means that the customer feels in control! Every step of the way, can you keep her informed? If one of your shipments go missing, will your customer know? What about delays? Recalls? How good are your processes in capturing exceptions and alerting all stakeholders inside and outside your organization?
Returns: Make sure handling customer returns is not an afterthought! It is an integral part of the customer experience (and should be an integral part of your supply chain). How flexible are your policies? How flexible is the process? Can you handle cross-channel returns seamlessly? Even if your customer-facing processes for returns are taken care of, managing an effective reverse logistics function can be a challenge. Once again, a well designed supply chain not only supports flexible customer-facing operations, but also a cost-effective reverse logistics function that works equally well for the retailer. It must enable all the processes for handling credit, exchanges, disposition determination, reselling, re-packaging, refurbishing, returns to vendors, storage and management of returned hazmat materials and so on.

So next time you think of creating a compelling customer experience, think beyond the glitter. Think mundane! Think well-oiled operations enabled by a well-designed supply chain.

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

© Vivek Sehgal, 2012, All Rights Reserved.

Omni-Channel Omni-Complex

2012-07-30T14:36:00.001-04:00

According to the U.S. Commerce Department, retail e-commerce sales accounted for 4.9% of all retail sales in the second quarter of 2012, up from 4.6% at this time last year. In fact, e-commerce has consistently grown from less than a percent to almost 5% of the total retail sales during the last two decades, often growing two to three times the rate of growth for conventional retail. Omni-channel retailing is here to stay. That part is concluded! Therefore, if you are a retailer and wish to stay around longer, welcome to the new world of omni-channel retailing. Hopefully, you have been working on building your omni-channel capabilities for some time, because it ain’t going to be easy or quick for that matter!
In 2009, I had presented a process-focused view of the omni-channel capabilities that a company must build in order to be successful in the bold new world of retaining. The focus at the time was on integrated processes across the conventional enterprise silos: Integrated Assortment Planning, Integrated Supply Chain Planning and Execution, and Integrated Store Operations. The premise in that article was that process-based integration will lead to efficiencies across the board bringing cost and customer-experience benefits. Since then, several studies have shown an increased understanding of such an integration across the enterprise. However, actual adoption has been low. Why?
Obviously, there are synergies that can be leveraged across these processes and physical assets. Ideally, the supply chain assets (think the warehouse building, MHE, people, inventory etc.) should be common no matter what channels do you operate. Same holds true for consolidating the sourcing spend, technology overheads, and shipping costs across these channels. Simple logic dictates that if you can consolidate these assets and use them as shared assets across all channels, you will be enhancing your ROA!
Conceptually, the companies get it. I believe that the reason for low adoption are generally more practical. I would put them into the following four categories:

Operational: Consider a distribution facility that is just not designed for picking eaches to fulfill consumer orders. It may be the existing shelving, MHE, order fulfillment system, or the packing area that might constrain the direct-to-consumer fulfillment, but unless redesigned, such a challenge will likely constrain the options a retailer may have in consolidating the warehousing assets across their store and e-commerce channels. Improving a facility’s infrastructure and systems to support mixed order fulfillment to replenish stores, supply wholesale customers, as well as fulfill individual consumer orders can be expensive and time-consuming.
Processes: Lack of integrated processes constrains a retailer’s ability to respond quickly to changes demand, supply, and flows across their supply chains. Achieving a working relationship among the different organizational units responsible for merchandising, supply chain, and store operations may be hard. Quite often, these organizations don’t share identical goals, focusing instead on specific departmental objectives at the cost of collective failure. Purchasing and inventory planners, for example, are at logger-heads and so may be the merchandising and sourcing!
Current Org structures: Independent organizations responsible for managing different channels are quite the norm until now. For example, it is still not rare for the big retailers to bring in a chief honcho for their online channels. This creates inconsistent customer experience and set of objectives that these organizations try to achieve. The conventional channels are entrenched (and larger in size) for the time being, and therefore may not be quite amenable to the requirements of the new channels. This might be the biggest challenge for the retail executives to solve, though this is also a challenge that lies squarely in their own area of influence!
Systems: Finally, as most of the enterprise processes are enabled through technology, achieving a working integration among the systems enabling these business processes is another challenge. These systems span across merchandising, inventory planning, demand and supply management, procurement, distribution and logistics. Since these systems come from different solution providers and frequently hosted on different technology stacks, they are not designed to easily integrate. Lack of industry standards is also an issue creating challenges that may be hard to implement, if not quite impossible. Broken integration among the planning and execution systems is another challenge that retailers have struggled with over the years without a viable solution in sight forcing them to spend their energies in areas where they would rather not.

Other Resources:

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

© Vivek Sehgal, 2012, All Rights Reserved.

Tomorrow is Too Late!

2012-07-13T13:45:00.001-04:00

Sit back and relax. No need to dress up, no need to find your car keys, no need to get into the car, spend on gas, search the endless aisles of your local big-box retailer, no need to worry about whether your size or color will finally be in stock or not! Have a computer on the web and a credit card, you are all set to go. Look for an Amazon warehouse near you enabling same day delivery on thousands of products.
Amazon has been pioneering some of the most consumer friendly retain concepts for years. Think about the product review from other buyers just like you, what others bought after seeing the product you are considering, automatic product recommendations for you, recommendations based on your history, product subscriptions, free delivery over $25, prime membership with unlimited content streaming thrown in: You get the idea.
That was all that was visible to you as a consumer.
Behind the scenes Amazon has been working on technologies to mine the data to bring you’re the magical recommendations, to better define the demand for their products, tune their assortments for you: the Consumer. They have also pioneered the Amazon web-stores, fulfillment by Amazon and checkout by Amazon for you: the Small Business Owner. And finally, they have been perfecting their supply chain operations: procurement, distribution, warehousing and order fulfillment to make the magic that is Amazon by developing technology and systems to enable their supply chain and by buying companies like Kiva Systems to further automate the physical operations of a warehouse.
Building on their successes in enabling one of the most efficient and integrated supply chain, Amazon now seems to be working on enabling “same day delivery” in most of the bigger population areas. According to news reports collated by Slate, “Some of these facilities are very close to huge swaths of the population. Amazon is investing $130 million in new facilities in New Jersey that will bring it into the backyard of New York City; another $135 million to build two centers in Virginia that will allow it to service much of the mid-Atlantic; $200 million in Texas; and more than $150 million in Tennessee and $150 million in Indiana to serve the middle of the country. Its plans for California are the grandest of all. This year, Amazon will open two huge distribution centers near Los Angeles and the San Francisco Bay Area, and over the next three years it might open as many as 10 more in the state. In total, Amazon will spend $500 million and hire 10,000 people at its new California warehouses.”
Though building warehouses near the biggest metros is no recipe for “same day delivery” success, this may quite be a possibility that Amazon can pull off. Amazon has shown unmatched ability to understand the complexity of the retail operations and automate these processes through systems and technology custom built for the purpose. Therefore, if someone can pull this off, it will be Amazon.
Welcome to the new phase of “agility” in online retail! Online consumers, raise your expectations once again!
Related Articles:

Other Resources:

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2012, All Rights Reserved.

Warehousing: What is In, What is Out

2012-06-21T13:44:00.001-04:00

The results are out!

Warehouse Education and Resources Council (WERC) has presented their annual report for 2012 on DC metrics at their conference in Atlanta. The report is based on a survey where the respondents represent a broad range of industries and warehousing needs. What is in? On-time shipments, average warehouse capacity used, and order picking accuracy are the top three metrics. What is out? Annual workforce turnover, line-fill rate, and percent of damage-free supplier orders fell to the bottom of the list.

Read more at Supply Chain Digest. Or get your copy at WERC.

Business Strategy Must Drive Supply Chains

2012-06-06T15:38:00.001-04:00

If you had to decide what supply chain capabilities your company should build to create advantage, what would they be? We are all familiar with constantly juggling the conflicting goals of minimizing inventory while establishing the highest service levels, reducing labor while increasing throughput, and reducing supply costs while maintaining stable supplies. We know that a supply chain that is integrated with the rest of the business functions, that senses changes, adapts, optimizes, and works within the context of the larger business strategy without any conflicts would be great. What we grapple with is how a supply chain strategy can be created that is not only aligned, but actually enhances the business strategy. This is not a theoretical discussion: Pioneering companies must continuously evolve their supply chains to create capabilities mandated by their business strategy to create competitive advantages. The failure to do so can be fatal.
So what comprises an effective supply chain? Is it the ability to quickly react to volatile demand? Is it the ability to maintain the highest inventory turnover in the industry? Does it mean having the lowest days of accounts receivable? What about accounts payable? Shortest cash-to-cash cycle? Highest ROA? Agility? Lean manufacturing? Optimal product mix? Highest resource utilization?

In fact, an effective supply chain may do all of the above or none of them. What makes a supply chain effective is unique to each business and determined solely by its ability to support the business strategy of the company. It is only effective for you if it works for you. Therefore, creating a supply chain that is an organizational asset involves creating supply chain capabilities that are aligned with the business strategy. Without such an explicit alignment, there would always be conflicts between what the business seeks and what the supply chain can deliver. Not understanding the intricate and complementary relationship between business and supply chain strategies can lead to missed opportunities and conflicting investment priorities.

Technology has become the de facto enabler of business capabilities, including those for managing the supply chains. It is great for creating cost effective, streamlined, and standard processes that are largely skill independent. However, technology brings additional complexity. Companies must not only develop effective technology to enable their supply chain processes, they must also ensure that the technology complexity remains manageable and cost-effective at the same time.

Therefore, to create an effective supply chain, companies must understand and articulate their business strategy and use it to pro-actively design and develop their supply chain capabilities. But to do so in the most effective fashion requires that the companies must also develop technology savvy to enable such capabilities and deploy them consistently across their operations.

Consequently, to truly create a competitive asset through its supply chain, companies must strive to align their business, supply chain and technology strategies in a symbiotic and mutually beneficial relationship. If the supply chain strategy is not aligned with the business strategy, the capabilities created by the supply chain may not create the advantages that the business strategy seeks to achieve its goals. If the technology is not aligned with the requirements of the supply chain strategy, the solutions enabling the supply chain processes may not be effective, flexible, and sustainable to create and maintain these capabilities.

To illustrate the point and the disastrous consequences that can come about as a result of the misalignment between the business and supply chain strategies and the inability to leverage technology, we will use the case of Kmart.

Kmart and Wal-Mart were both founded in 1962. Both focused on cost as a business strategy and adopted super-center retail formats. In 1987, Kmart had 2,223 stores and revenues of $25.63 billion to Wal-Mart’s 1,198 stores and revenues of $15.96 billion. When it came to leveraging their supply chains, though, they could not have been more different. Wal-Mart, staying true to their business strategy to cut costs, invested heavily in developing supply chain capabilities that would directly support their business strategy of competing on lower costs. Pro-actively designing their supply chain, Wal-Mart went beyond developing the conventional supply chain capabilities at the time.

Wal-Mart introduced concepts that were unheard of at the time, such as bypassing the whole-sellers to replenish their stores, developing a network of regional and local distribution centers, cross-docking at the warehouses, owning a captive fleet for store delivery, investing in the data-link connecting stores to the headquarters so that demand can be communicated effectively and without delay, and actively collaboration with suppliers like P&G to share demand data. While we take these capabilities as the standard retail staple now, these were pioneered by Wal-Mart in response to developing a supply chain that will support their business strategy.

Kmart on the other hand did not quite understand the value of designing their supply chain to meet the needs of their business strategy. Kmart did not adopt many of these practices mentioned above for over a decade after they had been well established at Wal-Mart. Instead of reducing costs by building a more efficient supply chain, Kmart invested in acquisitions to grow their topline.

Originally conceived as the bargain offshoot of the Kresge department stores, the chain had blanketed the suburbs with stores carrying everything from Tide detergent to clothes, makeup, electronics, and housewares. However, when customers started shunning its poorly made dishtowels, cheap makeup brands, and tacky clothes, instead of reducing costs by building supply chain capabilities (like Wal-Mart), Kmart went shopping, buying Sports Authority, OfficeMax, Builders Square, and Borders.

The Big K and Super K store formats were introduced to lure customers back, but still no concerted effort was made to reduce the underlying cost structure.

Most of Kmart’s investments went into marketing and merchandising capabilities that do not directly help in reducing costs (both of these strategies are targeted toward increasing revenues rather than on reducing costs). The misalignment between the business and functional strategies cost Kmart heavily. In contrast, Wal-Mart chose to invest in the supply chain as a strategic advantage to support its business strategy of being a price leader. In 1991, Wal-Mart sales overtook the sales at Kmart.

By the late 1990s Kmart was heading for bankruptcy and eventually merged with Sears.

The functional strategies at Kmart were clearly not aligned with their business strategy. While the business strategy focused on cost, the functional strategies at Kmart were focused on creating a perceived differentiation through their marketing and assortment, while largely ignoring the cost. Kmart’s inability to create capabilities for direct cost reduction and align their functional competencies to their business strategy eventually led to their bankruptcy.

Wal-Mart started investing in technology in 1966, an innovation that was championed by none other than Sam Walton himself. During the next two decades Wal-Mart invested in several store-based technologies such as computers, electronic cash registers, and UPC scanners for non-grocery items. Wal-Mart continued its investments in technology by building a satellite-based communication system in the mid-1980s and investing in technology that would allow them to get real-time sales and inventory data from their stores. All of these investments by Wal-Mart enabled their legendary supply chain capabilities, including their automated distribution centers, optimized transportation planning, active vendor collaboration, and so on. Wal-Mart leveraged technology in all its business operations and adopted it to enable their supply chain capabilities while directly supporting their ‘‘everyday low prices’’ business strategy.

In contrast, Kmart never quite focused on creating a supply chain that could actually support their cost-based business strategy. Their inability to understand and leverage technology to enable supply chains constrained their capacity to innovate and lead. Kmart’s Ten Deadly Sins states that ‘‘Kmart needed an IT champion at the top and it never had one. Even during CIO Dave Carlson’s tenure, from 1985 to 1995, he worked with a CEO who ‘prided himself on never having used an automated teller machine and used an assistant to print email.’ Such admissions clearly demonstrated that information technology was not a priority for the company.’’ Most likely, it was because Kmart never really understood the role of technology in building their supply chain capabilities, even though they had been investing in it, probably because of competitive pressure. During the 1970s, Kmart was opposed to any major investments in technology and by extension into building any competitive supply chain capabilities.

Kmart did not take up any substantial technology investments until 1978, when it started installing computers in its stores—a full 15 years after Wal-Mart started investing in technology. In the late 1980s, Kmart invested $3 billion in technology that provided them with scanners in 500 of their stores, a satellite-based credit-card processing system, and the ability to monitor sales and inventory. However, this covered only a fourth of their stores, unlike Wal-Mart who had the ability to track sales and inventory in all their stores.

In the 1980s, Wal-Mart invested in electronic data interchange (EDI) for operational collaboration and then created a collaborative network called RetaiLink enabling it to share its current and projected demand data with its suppliers. Kmart adopted EDI only in the early 1990s, pushed into it through their suppliers’ initiatives. Wal-Mart also kept its supply chain strategy keenly aligned with its business strategy to cut operational costs by building a lean distribution network. Company practices such as owning their own fleet and cross-docking drive Wal-Mart’s technology investments in supply chain. In contrast, Kmart had a mixed distribution network and never quite invested in their own fleet for distribution, losing the opportunity to design their own processes or improve operational efficiency beyond what their service providers supplied.

In addition to their inability to leverage technology, Kmart also simply did not seem to have an explicit alignment between its business and supply chain strategies. While Wal-Mart identified operational efficiencies early on as their key to reducing costs, there is no singular theme in Kmart’s history that can be seen as an equivalent strategy.

In 1990, Wal-Mart sales overtook Kmart for the first time; by then, it was amply clear what Wal-Mart had been doing right—Wal-Mart had invested heavily in the automation of distribution centers, communication between stores and headquarters, real-time sales and inventory visibility, collaboration with vendors, and planned investments in technologies like EDI.

Kmart just did not seem to understand the importance of what Wal-Mart had been investing in. Kmart responded by expanding through unrelated acquisitions such as Borders, Office Max, and Sports Authority—only to have to shed these assets in the mid-1990s. Kmart had tough competition on pricing through Wal-Mart’s laser sharp focus on operations and cost reduction, and on assortment from Target’s high-end image. Whereas technology enabled Wal-Mart to create highly effective logistics and supply chain capabilities, Kmart simply stagnated due to a lack of strategy and antipathy toward technology. While Wal-Mart continues to squeeze value from its investments in supply chain, Kmart simply gave up.

Former CIO Dave Carlson depicts Kmart’s information systems in 1985 as one that was ‘‘cobbled together over time.’’ This is a good example of the organically grown supply chain capabilities rather than explicitly designing supply chain processes to actively support the business strategy.

When Chuck Conaway took over as chief executive of Kmart in 2000, he identified the company’s supply chain as the main target for improvement. In 2001, he announced that Kmart was writing off $195 million of assets that no longer had value. This included $130 million worth of supply-chain hardware and software that was being retired and $65 million for the replacement of two outdated distribution centers. He also had to write off 15,000 trailers full of inventory, sitting behind the stores. The inventory existed because the management did not believe its own information systems.5 Although Conaway got rid of the unwanted inventory, the inherent systems problems continued, consistently showing up as out-of-stocks and pushing customers away from Kmart stores.

In 2002, Kmart announced it would invest $1.4 billion rebuilding and refurbishing its supply chain infrastructure and implementing IT changes. At the time, its spokesperson characterized the investment as being ‘‘more money than Kmart spent in the last decade on IT.’’ While the statement was supposed to underline the big investment, it also says a lot in terms of previously anemic investments in building a competitive supply chain for a company the size of Kmart—which had reported revenues of over $37 billion in 2001. In the meantime, time had run out for Kmart. Their revenues continued to falter and the declining sales resulted in a liquidity crisis and halts in shipments from major vendors, leading the company to file for Chapter 11 bankruptcy protection on January 22, 2002, becoming the largest retailer ever to do so. In March 2005, Kmart was merged with Sears to form Sears Holdings Corporation.

The misalignment between the business and functional strategies cost Kmart heavily.

The supply chain strategies at Kmart were clearly not aligned with their business strategy. While the business strategy focused on cost, Kmart’s inability to create capabilities for direct cost reduction and align their supply chain competencies to their business strategy eventually led to their bankruptcy. Even after their merger with Sears, the company has failed to grasp the importance of proactively developing and leveraging supply chain capabilities to support their business strategy. For example, they have failed to consolidate their supply chain assets to improve operational and capital efficiencies: In 2010, four years after the merger, only 4 distribution centers out of 39 were shared between Sears and Kmart, while others continue to serve Sears or Kmart stores exclusively.

In addition to having a well understood and articulated business strategy that drives the supply chains, it is also important to have a long term focus. Among the many reasons leading up to Kmart’s failure in 2002, another important reason was their lack of a long-term strategy based on a proven business model. While Kmart started with the same low-cost premise as Wal-Mart, they digressed from their stated strategy several times during their long history: among these digressions were the introduction of private label merchandise, unnecessary store format changes, growth through acquisitions (Borders and Sports Authority, among others), and their tentative foray into the grocery business. Most of these initiatives were rolled back by Kmart’s successive leaders, thus failing to create any long-term value for the business.

This lack of consistency also showed up in operations. Quoting from the book Kmart’s Ten Deadly Sins, “Few projects begun under one CIO were ever continued or completed under the next, requiring that work be stopped and restarted with each changing of the guard.” It is quite possible that this volatility in IT was simply a result of the lack of having a consistent and articulated business strategy and consequently a missing supply chain strategy that must have added to the chaos in evolving information technology as an enabler. In absence of a long-term strategy, it would be easy for the new incoming CIO to disregard the work already done and restart the project. Surely, this does not bode well for the capital investments in building business capabilities which typically take years to build and leverage, or for the morale of the team involved as they live through the volatile results of executive decisions made without an obvious reason to change direction.

Therefore an effective supply chain strategy must focus on aligning the business and supply chain strategies, designing the differentiators to build advantage, and pursuing a coherent technology strategy to support them—we call this supply chain nirvana. Nirvana typically denotes a state of simultaneous stability and dynamic equilibrium which is at peace with oneself and the world. It also denotes a complete awareness of self and the world outside. In the context of supply chain, it typifies a supply chain that is similarly stable, but also in dynamic equilibrium as it reacts to the changes within and outside the firm, and a supply chain that is fully aware of these changes and its capabilities to react to these changes.

But remember that supply chain nirvana is not a static state. It is a continuously evolving, but sustainable state of enhanced alignment of the supply chain capabilities with the objectives of the business strategy. As the business environment changes and the business strategy evolves, it changes the required supply chain capabilities and the expectations of the business from its supply chain. Since such change is frequent, therefore, the state of supply chain nirvana is an ever evolving journey. The keywords in the state of supply chain nirvana are dynamic alignment and sustainability.

Related Articles:

This article is a reproduction from my four-part series on the subject, published by SCMR in June 2012.
1. Pioneering companies must continuously evolve their supply chains to create capabilities mandated by their business strategy to create competitive advantages. The failure to do so can be fatal.
2. Kmart's demise is a cautionary tale.
3. Wal-Mart started investing in technology in 1966, an innovation that was championed by none other than Sam Walton himself.
4. Wal-Mart had invested heavily in the automation of distribution centers, communication between stores and headquarters, real-time sales and inventory visibility, collaboration with vendors, and planned investments in technologies like EDI.

Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2012, All Rights Reserved.

Is Your Supply Chain Effective?

2012-06-01T09:17:00.001-04:00

You may have spent a fortune in establishing good processes and implementing technology solutions to automate and enable them. So, now do you have an effective supply chain? How do you know when you do? What is an effective supply chain anyway? Is it the ability to quickly react to volatile demand? Is it the ability
to maintain the highest inventory turnover in the industry? Does it mean
having the lowest days of accounts receivable? What about accounts payable?
Shortest cash-to-cash cycle? Highest ROA? Agility? Lean manufacturing?
Optimal product mix? Highest resource utilization?
Ok, you get it, there are far too many metrics that you can track and measure. And each one of them might tell you how a specific part of your supply chain doing. But to get a sense of how well your supply chain is really designed to work, you need to take a step back and evaluate your supply chain along these three dimensions:

Cost: Is you supply chain cost effective? Being cost effective means taking a wholesome view of the costs across integrated processes to arrive at cost-levels that provide a cost-advantage for you. For example, consider if your designers and procurement departments work together so that the products are cost-effective right from design. How about manufacturing? How will your designed and sourced components affect manufacturing costs and efficiencies?
Agility: Is your supply chain capable of handling variability? When demand changes, how long does it take you to change the supply plans? Do you actively collaborate with your suppliers so that they can make you successful? Are you suppliers enabled or even empowered to react to address the demand changes in your supply chain?
Sustainability: Are your supply chain processes sustainable? We are not quite talking about the “green” here, but we are talking about the repeatability and consistency of your processes. Are your processes established through an ad-hoc reactive impulse or are they well thought-out and proactively designed to achieve the objectives of the business function? The cost and labor efficiencies achieved through ad-hoc processes are generally a one-time wonder, but a well designed process can create a sustainable competitive advantage.

While cost has been the primary focus and imperative to drive supply chain initiatives in the past, the pioneering companies have long since discovered that agility and sustainability is where their supply chains create true competitive advantages for them. The cost-based supply chains have become the table stakes, the cost you must pay to play. The operational efficiencies gained through traditional supply chain thinking have gained parity across many players in most industries. To win, you must move to create new supply chain capabilities that allow you to better manage the inherent variability in the supply chains and that is where agility and sustainability come in. Agility is your ability to react in response to changes in the environment and sustainability is your ability to react in a consistently effective fashion. These new supply chains are not stove-piped and siloed, but integrated and responsive. Where do you stand?
Related Articles:

This article is based on a joint presentation by Vivek Sehgal and Chris Barnes in an APICS event held in Atlanta, GA on April 17, 2012.
Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2012, All Rights Reserved.

Changing Face of Supply Chains: Where Next?

2012-04-24T16:13:00.001-04:00

The 20^th century started with the industrial revolution and then the world plunged into WWI. That was quickly followed by the great depression in the US, WWII, and then a long cold-war era between the two superpowers and with large part of the world under communism. Then towards the end of the century, things started to look up: The Soviet Union was dissolved, China introduced its market-based economic and social initiatives, India’s markets started opening up, and suddenly the world was a very different place. The effect on supply chains was profound. As the world stabilized politically, the risk of doing business diminished, and corporations were suddenly able to contemplate commerce without boundaries. The free trade agreements further facilitated the process and we saw supply chains extended across the globe. The picture below captures that image of global supply chains powerfully.

It is astonishing what a few decades of political stability can do!

China became the factory of the world and cost-cutting was the new religion. The foundation of this cost reduction for the western firms primarily lay in off-shoring and sub-contracting their manufacturing operations. The US trade charts below capture this trend, very slow until early 80s, growing through the 90s with the slope becoming ever more steep in the new millennium!

But the last few years have provided reason for the world to pause and rethink. Think of the 9/11, the tsunami in the Indian Ocean hitting several south-east Asian countries in 2004 and Japan in 2011, the earthquakes in Japan and China, floods in Malaysia, the continuing conflicts in the middle-east, and the Somali pirates disrupting the global shipping routes. To the list, add the social and economic impact of the growth of middle-class in countries like China and India creating brand-new markets for the global corporations and pushing their national GDP growth rates that are unheard of in the mature economies of the west. Finally, let us cap it with the growing political influence of China potentially changing the single-super-power world structure that has largely existed since the cold war ended.

Consider rare earth elements (REE). United States Geological Survey (USGS) identifies 16 rare earth elements (REEs). These elements are used in several applications from liquid-crystal displays for computer and television monitors to eyeglasses and permanent magnets. USGS notes that small, lightweight, high-strength REE magnets have allowed miniaturization of numerous electrical and electronic components used in appliances, audio and video equipment, computers, automobiles, communications systems, and military gear. In short, they are critical to modern life! By several estimates, more than 90 percent of the world’s deposits of REEs are in China. A New York Times article in September 2009 reported that ‘‘ . . . tighter limits on production and exports, part of a plan from the Ministry of Industry and Information Technology, would ensure China has the supply for its own technological and economic needs, and force more manufacturers to make their wares here in order to have access to the minerals,’’ and that ‘‘Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China.’’

So how will the world’s supply chains react to all the changes?

Quantifying risk will become more common. Risk can exist in all functions of supply chain and must be managed as a whole: Demand, supplies, distribution, social branding, regulatory, and so on. But all risk is not created equal, nor does it need to be treated like that.
Agility will become the core focus. During the last few decades, the cost has largely driven the supply chain initiatives, while agility has received most of the lip-service! Cost structures will equalize across businesses through capability-parity, meaning the processes, tools, and applications will become so standardized across the industries that cost reduction opportunities will be far and fewer. On the other hand, the demand and supply volatility will continue to increase. The demand volatility will continue to increase through all the new channels and social platforms that are becoming available for commerce and supply volatility will be affected by all the growing uncertainties, political and others as outlined earlier. How will the corporations react? By building supply chains that are much more agile and responsive.
Sustainability will continue to move towards the front and center. This will be mostly pushed through regulation, even though some companies seem to be doing their part already. It is not uncommon for the larger corporations (like Wal-Mart, Apple, and HP) to publish their annual sustainability reports. California Global Warming Solutions Act and California Transparency in Supply Chains Act are just two examples of such regulation that will continue to push companies towards practices that are more sustainable and less damaging to the environment. Supply chains will play a big part in such compliance since supply chains organize the largest parts of the operations from manufacturing, packaging, distribution, returns, and recycling.

What technologies will enable these changes? I believe we are at the cusp of a technology revolution once again that will enable, empower, and endow the supply chains of tomorrow not only to be cost-effective, but also agile and sustainable.

Historically, the supply chain applications enabling the business to plan, track, and manage their supply chain operations have been silo-ed. These were stand-alone applications with little ability to respond to real-time changes. Most were tied together with data integration making the ETL (extract, transform, load) a staple of what vendors called “seamless integration” for years! This model lacked the critical ingredient for being agile: visibility across the chain. The future applications will be integrated by design – they will work across functions, optimize across functions, they will detect exceptions and resolve those that can be automatically resolved by changing plans or execution differently. The technology and information architectures have evolved enough for disparate solutions to work together; cloud, virtualization, and service-based application architectures will enable this trend.
Big data will also enable supply chains just as it is making inroads into the customer focused functions. Technologies like RFID, POS-data streaming, geo-location awareness coupled with the new generation of devices that are always on and always connected will eventually come of vogue to become the tools of the trade. Real-time data from demand, supplies, and inventory streams, high powered computing, and always-on networks will enable us to respond to changes in real-time and take automation to a whole new level.
Collaboration among the supply chain partners will continue to become the focus of optimized supply chains extending beyond the enterprise and connecting the world like never before. Referring back to the first point we made, the other critical ingredient that existing supply chain applications lack for being agile: Ability to collaborate across the extended chain which inherently require consistent service and information architectures. The future architectures will be collaboration-ready by design – they will work across applications, across geos, across languages to enhance partnerships and enable truly global supply chains.

If you think you have heard this before, you may be right. This is the bright future of the supply chains: Except until now it was not in the realm of commercial feasibility and now it is!

Other Resources:

This article is based on a joint presentation by Vivek Sehgal and Chris Barnes in an APICS event held in Atlanta, GA on April 17, 2012.

The Cost of 0.1 Seconds

2012-04-17T13:54:00.001-04:00

April 23rd edition of Forbes focuses on Amazon and its boss Jeff Bezos. Amazon started in 1994 and since then, has defined what it takes to be the largest online retailer. The secret? It is always day one for the Internet at Amazon! From Forbes, “Amazon has metrics showing that a 0.1 second delay in page rendering can translate into a drop of 1% drop in customer activity.” What can that 1% drop in customer activity do to revenues? Assuming a 10% conversion rate (assuming most customers at Amazon are repeat and not just exploring the site), it translates into 48 million dollars!
Metrics like this keep Amazon growing at a 50% clip when retailers elsewhere are struggling to survive. The secret is their twin focus areas:

Fulfilling the customer expectations/needs, and,
Reduce waste in all processes to lower the costs of doing business.

Forbes says, “Amazon tracks its performance against 500 measurable goals. Nearly 80% relate to customer objectives”. The company’s annual reports reprint Jeff Bezos’s LETTER TO SHAREHOLDERS from their 1997 report. Why? Because (in Jeff’s words), “Our approach remains the same, and it’s still Day 1!”.
And, that has been the signature difference between Amazon and other companies – a long-term focus on their business strategy and a relentless pursuit to achieve its goals without fretting over short-term reactions of the Wall Street.
Amazon now claims to have more than 20 million products in stock, majority of them being non-media goods, 164 million customers, and achieved a 99.99% on-time delivery before Christmas in December 2011. But to Bezos, it means that one customer in 10,000 did not get their orders delivered on time – anything less than 100% is not satisfactory! That is the kind of focus it takes to be the number one online retailer and grow like Amazon.
Related Articles:

Other Resources:

Forbes. April 23, 2012.

Infographic: History of Logistics and SCM

2012-03-27T10:48:00.001-04:00

From bullock-carts to today’s super cargo ships, supply chains have always been around. Since humanity discovered commerce, supply chains have been part of our lives. What has changed over time is our ability to understand and manage them better: Better tools, transportation systems, IT applications, science, statistics, management principles all have evolved over time to get us where we are.
Ben Benjabutr of SCM-Operations takes a detour in history and bring us this visual history of the logistics and supply chain management. Ben has done a lot of research in assembling this infographic and has provided the references towards the end. This is being reproduced as is with Ben’s permission.

Source: SCM-Operations.com

Big Data in Supply Chains

2012-03-19T11:26:00.001-04:00

Suddenly, the big data is everywhere. Big data is huge (pun intended). The buzz around big data itself is pretty big. How big is big data after all? IDC says that in 2010, the size of digital universe cracked the zettabyte barrier. How big is a zettabyte: That would be a giga-giga-kilo – that is 21 zeroes after 1 or 1,000,000,000,000,000,000,000.

This data consists of everything: Facebook, Twitter, YouTube, Emails, Web Commerce, Blogs and everything in-between. Almost every click becomes someone’s data that they are collecting to harness some useful information, most of it in the hope of understanding and then managing consumer behavior for commercial and business purposes.
According to McKinsey Global Institute (MGI), US Library of Congress had 235 terabytes of data by April, 2011. It further states that 15 out of 17 sectors in the United States have more data stored per company than the US Library of Congress. What is the commercial potential of this data? According to MGI, there is a 60% potential increase in retailers’ operating margins possible with big data.
MGI identifies several functional areas where big-data driven efficiencies are possible. No surprises among them: Marketing, Merchandising, Operations, Supply Chain, and new business models.
How will supply chains become part of the big data revolution? How ill it affect the supply chain solutions and technology? How will it provide another opportunity for the supply chain pioneers to create competitive advantage? Here are some starters:

RFID:

It was a big hype, then it was not, then it was! No matter how you look at it, RFID has the biggest potential to change how supply chains work. While cost of RFID chips has been declining, the biggest reason for low adoption rates has simply been the inability of the companies to leverage the large streams of data produced. What can SKU-level RFID information provide?

Real-time inventory of of any item in any location: This is a big deal, a really big deal. Some retailers may have this information currently, but it comes at a high cost and is usually suspect due to human intervention. But automated shelves with RFID readers can automate the whole affair, reduce the errors, and even pinpoint the location of items in a store or warehouse when they are misplaced!
Automated replenishment signals can follow, allowing inventory analysts in the stores to support customers on the floor.
Automated receiving and verification of items and quantities received at stores and warehouse: This can be a big deal simply on labor savings, but it also automates the settlement process.
Automated validation of fulfilled orders: Are you shipping what the customer ordered? How about the label on the box: Does it have what it says it does? Correctly filled orders enhance customer satisfaction and perfect order metrics.
Automated checkouts: Think beyond the self-checkout counters – how about simply eliminating them altogether?
Maintaining the cold-chain integrity: Using RFID chips can provide verified temperature controlled merchandise throughout the transit.

GPS-based location services:

While the GPS-based shipment management is entering mainstream, most retailers have yet to scratch the surface when it comes to leveraging this technology to dynamically manage supply-side of the supply chain.

Most retailers have sizeable inventory in-transit at any given point of time. Most often, this inventory is simply headed for a warehouse and does not get into the fulfillment calculations unless physically received. But having real-time visibility of this inventory can work wonders. The ability to sense real-time demand signals (from RFID-based automated checkouts, may be) and combine them with real-time inventory locations including inventory in-transit can make this inventory “productive”. Real-time location sensing can make sure that this can be dynamically deployed for best supply-demand match, and reduce the fulfillment lead-time and inventory levels required without affecting service the customers.
Combining the RFID for cold-chain perishable goods and real-time GPS location, efficiencies can be gained to reduce the goods damaged due to temperature variations and expiration dates.

POS data:

POS data is probably the one part of “big-data” supply chain processes that have been leveraged to an extent by some pioneers. P&G and Wal-mart sharing the POS data to collaborate better is well known. What else can a POS data stream do for you?

POS data can provide a real-time demand signal with price information. As demand velocities change, it allows for intelligent inventory deployments to optimize the inventory in the system, but the price information embedded in the demand signal can actually help optimize the profitability when the supplies are scarce.
Early trends detected for seasonal goods can help better manage the open orders and potentially help the top-line when demand goes up and reduce potential clearance losses when it goes down.
Price optimization can be fine-tuned with real-time POS data to optimize the profitability.
Demand collaboration with the suppliers can not only create more trusting relationships, but actually drive buy-side efficiencies. Creative solutions will include committed percentage of business, vendor-managed inventories in the warehouses, and replenishments in the store.

Other Resources:

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.

Supply Chain Management

What Does it Take to Boldly go Where No Man Has Gone Before?

JC Penney Does Not, Do You?

Wal-Mart Going the Home Depot Way?

Amazon: The Faux Retailer

Go Ahead and Innovate: Just Do It

Innovation: Money, Commitment, and the Right Time

Leaders in E-commerce

Apple to Move Back Manufacturing

The New Manufacturing Destination: Americas

The Insourcing Boom

Apple to Resume U.S. Manufacturing

Apple CEO Tim Cook announces plans to manufacture Mac computers in USA

The New Manufacturing Destination: Americas

Changing Face of Supply Chains: Where Next?

Logistics Clusters

Holiday Pulse 2012

Cost of Your Checkout: $12M Every Second

Creating Compelling Customer Experience

Omni-Channel Omni-Complex

Tomorrow is Too Late!

Warehousing: What is In, What is Out

Business Strategy Must Drive Supply Chains

Is Your Supply Chain Effective?

Changing Face of Supply Chains: Where Next?

The Cost of 0.1 Seconds

Infographic: History of Logistics and SCM

Big Data in Supply Chains

RFID:

GPS-based location services:

POS data:

Creating A Better World through Supply Chains

Aston Martin and Supply Chain Strategy

Hours of Service: Bane or Boon?