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June 25, 2009

Part I: Winning over this "Tsunami" called Global Recession

Apply the balm where it hurts  the most ...In the first of part of the blog series here, we are trying to understand the global economic problem through the the view that matters most for organizations , the lens of "Free Cash Flow", a measure of liquidty and business performance that most organizations operate on. In the interest of keeping this discussion focused, we have limited the point of view around the "procurement and supply management" processes and response strategies , but is well applicable across all operations . As we may still be getting over the worst of this " Tsunami " , wish if all of us could share the experiences and the survival stories for the benefit of the larger supply management community .

We keep getting lashed by these heavy waves of destabilization at frequent randomness, from Katrina, to Avian flu, to global recession and while we were still struggling on these, as if not enough, now the Swine flu. The USP of all these are that we don’t know what, when and how this hit us, when we were least expecting. It takes a good toll of all of us. The good thing about this is that it wakes us all from the slumber and complacency to make us take note and innovate.

The current economic crunch is one such great "Tsunami "which has jolted all the greats and spared none.

Anyone who swims in the sea knows that to win over the "waves", one must accept, understand it and glide over than resist or stand against. Organizations are just a few of the tiny twigs floating in this vast ocean called global economy, which is now the victim here. One cannot aim to stand against it but to understand and work our way around.

To get our arms around this, let us start from where all these began on the Wall Street and how this has impacted. The Credit crisis is significantly testing organizations survival instincts across industries in all the global economies

Let us also appreciate that not all is grey about the recession for the supply management profession. Credit woes are giving buyers a chance to demonstrate the value of supply chain excellence

  • Commodity price indexes show this is a Buyer’s Market
  • With the oversupply of the raw materials, material prices are at their all time low. Oil and commodity prices have also dropped giving a chance for material cost optimizations
  • Distressed sale of material leading to spot buyers market conditions

We agree that liquidity is the primary trigger for all the malaise. Free Cash Flow is a well recognized measure for organizational health, liquidity and shareholder value. This is a widely accepted tool forward looking tool for CEO’s and Executives for business decisions and has clear linkage to valuing a company.

Here is an attempt to analyze how the current liquidity crunch is impacting the value levers leading to the Free Cash Flow measurements

Figure II: Pressure Points on Value LeversResponse Strategy to "Unlocking this Liquidity Lock": Organization response strategies should be to relieve these stress points of economic recession (marked red arrows with the right acupressure techniques) while making the best of the advantage points (marked blue arrows). Suppose that should be an intelligent approach to tide over the situation and prepare for a better tomorrow that be what someone said – " a bull in the china shop " going all hog at cutting costs where ever possible . An appropriate response could be to identify, plan , implement and measure results of business strategies over this value trail all over this difficult phase till we see ourselves over the hurdle

The supply management teams can be the biggest influencers in this turnaround story with their given mandate on the majority of the organizational spend. Theoretically, a 5% reduction on cost of purchase (typically 55-65% of revenue in most manufacturing companies) can improve the bottom line by up to 30-35%).Who else is better positioned to lead the change.Probability and impact of operational disruptions due to supplier bankruptcies are at an all time high. Studies say at least 65% of the automotive supplier base are under heavy financial stress at this point. Supply Management is hence a major focus area for most organizations to survive and compete.

  • Are we still in time to discuss this and look for solutions to successfully impact businesses?
  • What are the various strategies and models deployed by the successful organizations?
  • How have organizations fared in the past recessions? Who were the winners?
  • What were the success platforms then and the learning’s to take?
  • What are the success stories now and the critical success factors? Anything stopping all other organizations to lead / follow?
  • When and how do we get over this? Who will survive?

There are quite some questions on all our minds.

All of us have a task cut out to come with the best answers for this challenge thrown at us in the best possible way and help ensure a better tomorrow. We see job losses as major recession metrics doing the rounds and wonder if pink slips are the best strategic responses with a long term view. Often frantic measures go beyond rationale and emotions when it comes to a need of survival. It will be great if together we can come to some right answers.

It would be great if all of us hear your views, experiences and references of the pains and the results of the response strategies deployed . Each one of them matter to the community now.

…..Hope we will have enough interests for a followup series to take this discussion forward to capture the learning’s  from the discussion and debate on the best solutions.

June 10, 2009

Road ahead for Sterling MCS & MCF Product Suite - An insight from Sterling Customer Connection 2009

The major theme of the Sterling Connect event for 2009 as expounded in great detail was around connecting and collaborating. The launch of the Sterling BIS suite was an obvious manifestation of that idea. However for those of us working with the Sterling MCS (erstwhile Comergent) and Sterling MCF, I picked up two key ideas which seemed to be of great interest and impact to practitioners and customers working on these applications.

For Sterling MCS, it was the projected move to port the application to the Sterling MCF like platform and architecture. This is expected to happen in multiple releases over the next 2 years or so. I believe the first release expects to incorporate the catalog and pricing functions of MCS within the platform offering. Having worked on both products, as a practitioner I applaud the move. The MCS platform could become a lot more extensible, configurable and upgrade friendly. New customers would benefit greatly from the richer catalog, pricing, configurator etc functionality which will now not only be bundled but will be integrated with the fulfillment suite.  However the major gap, I see with this approach is the impact to existing customers who have invested heavily on the current MCS platform. So far, I have not seen a clearly articulated point of view on what this move will bring to existing customers. There does not seem to be a very strong 'benefits' or new features story for these customers to redo their implementations to keep their upgrade and long term support paths clear. Also a clear upgrade path has not been worked out as yet to minimize the investments required by these existing customers. I do think that based on my conversation with Sterling engineering and product management, they are aware of these concerns. I do hope they come out with a comprehensive strategy to address some of these concerns of existing customers.

On the MCF side of the house, one key theme was around 'Multi Tenancy'. As a practitioner, I and my team when working in multi channel implementations have constantly faced the challenge of balancing out 'how much should be common' and 'how much should be kept separate' given the disparate nature of the selling channels. The benefits of keeping configuration and code common are obvious. The more common the processes and interfaces, the easier it is to ensure smooth cross channel operations. There is also significant lowering of TCO by having a common operations and support team. The disadvantages are loss in flexibility, potentially sub optimal processes for a particular channel and potentially longer and more expensive regression test cycles. In the case of Sterling being used in a 3 PL like scenario, there are also customer privacy imperatives where data and processes must be completely siloed while allowing ease of administrative maintenance.

Thus the move to support multiple entities on the same or multiple instances while maintaining the flexibility to have common configuration and integrations has great potential. The Sterling product has tried to enable this for some time for e.g. the choice to inherit configuration, the ability to setup enterprise specific event handlers etc. in the newer versions of the platform. During this conference they also spoke about how they are investing in enhancing this capability so that enterprises could even maintain different data schemas thus allowing more secure separation. However I perceive a gap at this point in time. As I have explained above, with the increased emphasis on multi or cross channel retailing, there is great benefit in keeping processes and integrations common across enterprises (say Retail and Direct). Thus a multi tenancy solution will not be complete if it does not address how the benefits of keeping processes common can be realized without the downside of longer testing and implementation timeframes (since a change in one flow requires regression testing in all other flows).
 

Author - Guneet Paintal, Principal Consultant - Supply Chain Management

June 5, 2009

Buyers & Suppliers - Time for redefined win:win practices

I just read Justin’s blog on “hammering suppliers on price”; Prof. Rob has a very valid advice for companies on early warning signs of danger from suppliers.

Hammering suppliers on price and payment terms “now” vs. “long” term relationship, is a very important aspect in risk management. When there is a financial crunch in the buying organization, their sales are hit and their bottom-line is impacted.... suppliers, as partners or extended community to their organization, are expected and should also be a part of this tough journey. (Hopefully, this is only for few more months) So "renegotiating price" and change in the DPO with the business partners are inevitable. But to what extend?

Hammering suppliers on price, exploiting smaller firms and abusing buying power on smaller businesses is too harsh. Open, transparent and honest discussions can help both buyer and supplier community in difficult times. This will pave ways to new innovation - Collaborate to innovate. Both the organizations should collaborate and align to a new win-win situation. For me, renegotiation will for sure, push the suppliers and buyer to think out of the box. Renegotiating may not be a success always, but if there is something, why not dig that out. An extensive ground work needs to be done before we step on the gas. This should not be tried with all suppliers (buy-in from all the key stakeholders is a must), because this might kill the relationship.

One small example of redefined win-win: why cannot both the organizations implement a tiered payment term? PO to suppliers would say, net 105 days or 2% discount - 70 days or 5% - 45 days. Now if my supplier is in real need of cash to run his business, they should be allowed to choose an option from the above example in his invoice and the buying organization should respect that. This is one way of managing this crisis.

”If we believe a rebound will happen, then let’s share the burden till then."

June 1, 2009

Amazon for Cloud Computing is as Starbucks for Coffee??

I’ve been globe trotting lately - India, UK, US and such. Living in Seattle puts a tacit yet obliging pressure on you to visit Starbucks. Ordering a cup of coffee after 9 months was an all new experience from the previous time I was there. Double-tall, non-fat, de-cafe, extra-hot cappuccino for instance, Sugar free, soy, cinnamon dolce, and no-whip latte for another. So I couldn’t stop but notice the granularity of the orders and what Starbucks had accomplished in the past 9 months.

A year or so ago Starbucks introduced “our promise” concept which promised the customers that they will brew the drinks exactly how they want it. It involved soy milk, brown sugar and a few other options. A slight dissatisfaction would get you a whole new cup of the same drink but with corrections. They did not hesitate until you were satisfied. Once I requested my tall cappuccino be heated and they gave me a new extra-hot cup of coffee – just the way I liked it. I paid $2.85 for the drink and left the store with a sense of satisfaction.

But now, it is a whole new world out there. Customers seemed happier getting their drinks. The more complicated the orders were the broader the smiles were. Bingo!!! That is what we need in Cloud Computing too! I will come to this in the next paragraph. I ordered tall cappuccino but I was recommended that I get a double tall, extra-hot, wet cappuccino. I paid $3.41 but I left the store this time with a sense of delight.

Alright! We have established I like cappuccino. But we can’t miss but notice what Starbucks has achieved with coffee. They have brought in a host of syrups, added a twist of health and wrapped it with a personal touch of “promise” = customized drinks = perfect mornings = happier customers.

Can Amazon and Google achieve this with cloud computing? Can we have “double RAC node, four WebLogic instance, JMS messaging enabled Sterling DOM supported on RAID 5 disks” or a “DB2 based, single instance WebSphere application server hosting Manhattan forecasting engine”?

In my opinion we as service providers should take the onus of encouraging the SCM package vendors to come-up with a “Cloud License” model which takes machine instances to consideration. Dynamically adding a machine instance on-demand may seem hunky-dory but preparing a new machine instance to have the same execution environment as the one that crashed isn’t easy for multi-tiered applications. Besides, instantiating another virtual machine may only work for simpler standalone applications.

Multi-tiered SCM applications require a host of prerequisite installations and configurations to fall in-place before you can even attempt to start a basic version of the engines. Therefore, we need to come-up with cloud licenses which can be maintained as a repository on the cloud. Creating the execution environment is then a matter of following step-by-step instructions that can perhaps be automated.

A host of such vendors will help widen the repository and help Cloud Infrastructure providers like Amazon and Google brew different production environments and attract variety of user communities providing environments exactly how they’d like it.

Hurry up guys IBM is already marking its space. The sooner the better! No?

Fearing supplier bankruptcy? Take the steady steps for procurement collaboration with your competition

In my previous blog I had touched on the “Why” aspect of a supplier platform strategy to avert the impact of supplier bankruptcy. In the market similar trends are taking place where manufacturers are coming together to develop a common procurement platform for sourcing from a common supplier pool. Such a step should be fraught with a lot of caution, as it is not an omnibus solution. Instead of just hurrying up the myriad steps to reach the goal and announce the collaboration success as media hype, a step-by-step approach with attaining stability after each step is necessary. That is why you will see a lot of “yes-no-yes-no…..” iterations in the media about a lot of superficial collaborations being floated. Probably that is the reason you would hardly see much in the media about such platform strategies already in place among many Japanese manufacturers, as they feel that media announcements will only follow once a critical mass is attained.

Here I explain “How” manufacturers are trying to solve the complex puzzle of the platform strategy.

Step-1: The first step is for the manufacturers to decide which program is appropriate for them to introduce the platform strategy. Most manufacturers would be apprehensive of this platform strategy, fearing brand value erosion, to be associated to another brand. Another major hurdle would be the impact of such strategy on the supplier relationship. It is a no-brainer to assume that the best way to introduce this strategy is with the program with the lowest supplier impact. But a closer look would prove you otherwise.

The Diagram below depicts the various programs for an automotive industry. To explain a few terms for the non-automotive audience:

§  Minor modification is the launch of a model variant with changes such as head-lamp, interior, accessory features, wheels etc.

§  Product extension is the launch of a model variant with changes such as notchback extension, station-wagon extension, engine change etc.

It can be observed that whereas new platform launch has the lowest impact value for supplier relationship, but the platform stability period (here it is the gestation period for the platform time-to-market) is so huge that this benefit is neutralized. Arranging the various programs in descending order of priority for procurement collaboration platform strategy is:

Programs

  1. Minor Modifications
  2. Product Extensions
  3. New supplier selection
  4. New product launch
  5. Regular mass production
  6. New platform launch

Step-2: After selecting the proper program where-in to kick-start the platform, the next step is to select appropriate suppliers for this platform. The manufacturer or OEM has to identify the processes involved in the program. Based on the breadth of processes involved the suppliers are selected accordingly. The suppliers are broadly classified into 4 classes based on their maturity level. These are mentioned below.

  •  Contract manufacturer
  • Own-tool vendor
  • Standard product vendor
  • Original design vendor

The level of involvement of the supplier in the various processes of the program is explained in detail in Paper#86, 12th International Symposium of Logistics, July-2007. The suppliers are arranged in their priority for procurement collaboration within each program in the following descending order:

Supplier groups
  1. Own-tool vendor
  2. Standard part vendor
  3. Contract manufacturer
  4. Own design vendor

Common mistakes: The most common mistakes which should be avoided:

  • Do not treat all programs alike
  • Stability period is generally taken as average period between product launches
  • All factors of Supplier relationship impact are not taken into consideration for arriving at the weighted score
  • No incentives to suppliers enlisted for a platform

Once the manufacturer has selected the programs and the corresponding suppliers, the manufacturer has to go ahead next steps of Governance, Evaluation and communication set-up for making the platform a success. I will explain these details in my next blog.

With GM announcing bankruptcy following Chrysler bankruptcy announcement earlier, most automotive manufacturers would be intensifying their supplier risk measures. In such a scenario, a step-by-step approach to develop close ties in procurement would go a long way to ward off possible dangers of supply failure. I would invite your views on the program and supplier selection strategies for this unique procurement platform strategies emerging in the market.

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