SC Visibility: Rapidly Evolving Scope, Part II

Simultaneous Compliance with Multi-Country Regulations!

In February 2007, I had written about the high level of complexity involved in manufacturing products that need to be simultaneously compliant with the regulations of different countries, stating that 'in fact manufacturers may need to very their production process based on the country they are exporting their products to... ' (more)

FDA and the Pharma Giants
For instance, after the FDA found manufacturing deficiencies in Glaxo's Cidra plant at Puerto Rico, Glaxo had to sign a consent decree requiring it to post a US$ 650 million bond contingent on it agreeing to rectify the problems. Subsequently, Glaxo went ahead and reconfigured the Cidra plant to produce drugs complying with FDA regulations, which were only for consumption of Americans! Wyeth had similar problems with its pharmaceutical plant in Guauama.

Americans reject Chinese Goods ....
Earlier this year, toy companies in the US - which rely on China for 80% of the toys sold in the US - were forced to recall series of toys. Mega Brands had to recall almost 4 million magnetic building sets after some children were seriously injured after swallowing the magnets. Mattel too had a series of recalls, first for the use of swallowable magnets, and then for use of lead paint that can be highly toxic if ingested by children. Similarly Toys R Us recalled Chinese crayons.

Elsewhere Chinese-made toothpaste was recalled when it was found to contain hazardous chemicals that are found in antifreeze. There were also cases of pets dying purportedly due to tainted grains exported from China. Among other imported goods, defective tyres, easily flammable infant clothes and defective electrical circuited breakers were other major recalls during 2007 in the US.

China attempted to show it was controlling the problem by executing the head of its FDA - Zheng Xiaoyu - for corruption. Nonetheless, this certainly affected sales of Chinese goods in the US during 2007, and translated into a huge bonanza for European manufacturers who started advertising their wares as being 'China-free', and capitalized hugely on the anti-China press during the Christmas season!

.... while the Chinese reject American Goods!
The wave of recalls in the US was reciprocated by China recalling US goods: A top official in the Chinese government's inspection office, gave the Wall Street Journal a list of US products imported into China which were found to be defective, including trucks, medical devices and farm equipment!

Compliance with Quality Standards: Additional Pressure on Supply Chains
As all of this drives home the harsh reality that companies outsourcing manufacturing need not just visibility into the manufacturing process, but also into the level of compliance with quality standards and processes of individual companies, as per the differing requirements of each country to which the goods will be exported.

From here it certainly looks like the cost increase due to ensuring tighter compliance with quality standards, when combined with rising fuel costs and a weakening dollar, is going to put tremendous pressure on global supply chains, which will have to scramble to find new ways to manage their costs!

End of this two-part article.
Please do keep writing in with your feedback at scm.primer@gmail.com

SC Visibility - Rapidly Evolving Scope: Part I

Supply Chain Visibility now extends to the Manufacturing Process

For a long time supply chain visibility was all about tracking the physical location of goods and products through the physical supply chain.

• From the late nineties, we could see growing emphasis on increasing visibility into the regulatory compliance by outsourced vendors, in terms of not bending labor laws or worker safety laws a la the sweat shops
• Over the last few years, we saw a growing emphasis on visibility into the financial side of the supply chain
• Today, we’re starting to see the need to increase visibility into the actual manufacturing process at the outsourced vendor’s end, with reference to compliance with quality standards.
  

Compliance with Quality standards has become a rising concern as it is becoming evident that a lot of the outsourced manufacturing has been focused on cutting costs at the expense of monitoring of the quality standards.

Manufacturers and global trading houses are now taking compliance with quality standards very seriously due to various factors:

• Consumers will not buy unsafe goods, even if substantially cheaper
  
• Recall of unsafe goods erodes the brand, costing not just the physical cost of the recall, but also loss of reputation, lowered credibility, lowered profitability and sharp dips in share prices
• Recent legislations make the cost of non-compliance prohibitive. For example non-compliance with Material Composition norms prescribed under RoHS could attract a penalty - in Ireland - of a maximum of 15 million Euros, imprisonment of up to 10 years, in addition to recall and prohibition of the violating goods!

To be continued.
Part II of this post will appear in December 2007.

Long Tail Opportunities for SCM Vendors

Challenges thrown up by the disruptive New Economy

o Major Churn in the Offing

As we approach the last quarter of 2007, we seem to be on the verge of the next round of major churning in the solution space for Supply Chain Management (SCM) and ERP software. This is already evident from customers who are starting to feel the sharp need for extreme /mass customization of solutions, specific to their pain areas.

o The 'Big Four' Requirement Sets

Customers will want to see the following functionality added to their solutions:

1. Process and Standards Compliance tools
While Regulatory Compliance solutions abound, customers are feeling the need to govern the growing risk in terms of compliance with standards and processes:
o Work-flow governance
o Process compliance
o Standards Assurance.

2. Risk Management tools
This is a major pain area today, and B2B customers seek functionality to help in planning for - and recovering from - the increasing incidences of supply chain disruptions:
o Recovery from major disasters whether natural or man-made, and integration of 'alternate-flows' in terms of business continuity planning
o Tackling the risks of increasing fragmentation and over-extension of supply chains
o Security management systems for supply chains (as per the ISO 28000 series).

3. Environmental Management (EM) tools
EM is reaching a level of complexity that is becoming difficult for most corporates to handle:
o Waste Management, End-of-lifecycle disposal, Environmental Remediation (cleaning up of waste disposal sites)
o Regulatory Compliance
o Lean Green practices through the supply chain.

4. Working Capital Optimization tools
From the material-centric view of the past, B2B customers are asking for Financial SCM functionality integrated into their supply chain management solutions:
o The standard functionality in terms of tracking of Trade Debtors and Receivables, Cash flow and Inventory Management, and Contract Management
o Tackling value erosion through the supply chains
o Tools to help rapidly quantify the feasibility of mass customization of products for micro-segments.

o Window of Opportunity

There is thus a huge Long Tail for enterprising vendors to take advantage of , though with some caveats:
o These on-demand apps should incorporate well-defined metrics that can clearly demonstrate bottom-line benefits
o Customers want this added functionality sliced-and-diced as add-on software which can integrate into their existing solution suites
o Preferably, these should be complementary to the offerings of the giants in the SCM space: SAP, Oracle, and the like!

Can Green really be Lean?

The two biggest misconceptions on Green Supply Chain Management

Misconception 1:
Greening is only driven by Government Legislation

o The lay population tends to be quite cynical of corporate attempts at greening their supply chains, and most people tend to attribute efforts on the part of businesses to demonstrate environmental responsibility as being due to 3 major reasons:

1. To avoid consumer displeasure which could quickly translate into dipping share prices
2. To manage the risk of regulatory non-compliance and thus minimize fines and penalties with respect to environment-related legislation such as the RoHS (each country has their own versions of such industry-specific legislation for environmental conservation)
3. To comply with the requirements of their B2B customers in advanced economies who are forced by legislations in their respective countries to do the necessary due diligence on the supply chain practices of their outsourced vendors in the low cost economies.

o The truth of the matter is that the single most important key to the increasingly widespread acceptance of green practices in corporate supply chains, has been the bottom-line impact! And the reason for this is not difficult to see: For obvious reasons, all efforts at improving the environmental friendliness of the organization, have to be material-centric, as the costs relating to procuring, handling and disposing of material are the single largest component of supply chain costs. And in reducing the wastage of material, organizations are forced to increase the efficiency of their supply chains by improving their processes and by saving energy, which in turn leads to substantial decreases in their overall costs.

Very clearly, it is not just fear of Legislation that is driving the adoption of green SCM best practices!

Misconception 2:
Green Supply Chains cannot be Lean

o This is probably the most common misconception of not just lay persons, but also many Supply Chain managers! The common assumption seems to be that 'adding' environmentally friendly practices should also - logically speaking - add to the cost overheads. This in turn inevitably leads to the question of whether customers would be willing to pay these additional costs, particularly for products that have cheaper alternatives available.

o This could not be further from the truth. In fact Green SCM looks at minimizing three major factors:
- Wasted Material
- Wasted Energy
- Adverse Environmental impact.

o Elimination of wasted material and wasted energy has the potential to reduce tremendous costs across the extended global supply chains of modern day businesses. Since most global supply chains are already reeling from the impact of rising fuel costs, greening practices have gained wider acceptance as all available case studies on the early adopters of green SCM show a very clear relationship between Green SCM practices and the direct contribution of such practices towards the achievement of the strategic goals of the business and in improved bottom-lines.

In other words, available information from early case studies shows that Green can indeed be Lean!

More on this aspect in future posts ....

Myths of Logistics Outsourcing: Part II

This two-part guest column has been written in collaboration with
Vivek Sood, Chris Merritt, Don Cooper & Rob Sayre

Myth 4:
Outsourcing Logistics Limits One's Risk Exposure

o The senior management and the Board of Directors is usually very clear about their responsibility and obligations for the acts of their managers, servants and all their agents including contractors. However, for some reason the vague belief still persists that if the 3PL makes errors related to performance, security or environmental regulations, or even commercial decisions, the risk is borne entirely by the 3PL and that the party that outsourced the logistics operations is absolved of accountability as a result. However, not just the law, but the prevailing customs and practices too, point to a different reality.

o Even if you have outsourced the logistics operations, your customers will still hold you responsible, and possibly invoke penalty clauses if they don’t receive the product within the contracted time. In case of spillage of dangerous or hazardous products the authorities will trace the responsibility back to the seller of the product. Compliance with regulatory and security measures continues to be the seller’s responsibility, no matter who this is delegated to.

o In most cases, the damage to brand, relationships, reputation with authorities, and even bottom line will be borne by the organization outsourcing the logistics – much more than by the outsourced logistics contractor. Since Logistics is a very strategic - even if non-core function - any failures on this front could directly impact customer satisfaction, which might take months or years to recover from ... and this applies no matter how big the contracted logistics firm is, and no matter how much insurance they carry!

Myth 5:
Outsourced Logistics is a Win-Win Partnership

o While all the multi-varied benefits of Logistics Outsourcing are very real - whether relating to reduction of costs, increased focus on core competencies or increased quality of service levels to the end-user - it rarely leads to a true 'win-win' partnership. A real partnership, by its very nature, is defined by co-dependence where the relationship is indispensable to both parties, as judged by a measure of how much each party would hurt if the relationship fell apart. The truth, in most case of outsourcing, is that this pain is not too much on either side, as in most cases one of the parties is in the high-pressure sales mode, while the other is trying to maneuver their way to getting the better deal!

o Most 3PLs like to bid for long-term contracts, but their customers today are wary about getting tied into long-term agreements despite the value added services being offered by 3PLs. Since the 3PLs have an asset-intensive model, they cannot afford to rely only on their existing customers for business, and have to develop contingency plans to optimize their asset utilization.

o Even from the customer’s perspective, the increasing modularization of the supply chains has commoditized most of the services provided by 3PLs, despite all the hype surrounding technology integration, business process integration and logistics infrastructure integration. And this is true regardless of the scale or size of the service providers. Finally, even if it were a true win-win partnership - just as within a dancing pair one partner takes the lead to improve the joint performance - it is preferable that the lead be taken by the customer whose business is at stake. Corporations should relinquish the lead to the 3PL only at their own peril!

Myth 6:
The tighter the Contract, the healthier your Bottom-Line

o The final and the most persistent myth is that you can have a detailed logistics contract stitched up, which will help you to squeeze every last penny out of your logistics supply chain and thus improve your bottom line.

o While it is essential that contracts are specific and explicit in terms of the tasks, responsibilities and commercial terms, it is the rare business whose logistics requirements do not change from year to year, month to month and day to day. All these variations can be neither foreseen, nor incorporated in a contract, as this is a highly dynamic and fast-changing business environment.

o So where then lies the solution? While the contract is very important, as is the integration process and the relationship management tool kit, the most important element is the selection of the 3PL: An outsourced logistics provider who exhibits a true spirit of service and possesses the flexibility to meet changing needs will go much further than a merely a tight contract in creating and sustaining a mutually beneficial relationship!

The next post will be up on August 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com

About the co-authors of this two-part post:
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com

Chris Merritt: Former COO of Liberty Medical, Chris now consults to the ecommerce and retail sector. More information on Chris is available on www.linkedin.com/in/ChrisMerritt

Don Cooper: Has worked as Senior Director, Project Management for DHL and Exel with over 15 years experience working with Fortune 50 companies and proven ability to lead complex, strategic, and tactical projects.

Rob Sayre: Director of Supply Chain Strategy for Life Fitness (July ‘07), worked as Sr. Manager for Supply Chain Operations at Life Fitness, Outsourcing Manager for North America at Philips Lighting Electronics, a certified Six Sigma Black Belt for Philips, International Business Analyst for Philips, International Manager of Logistics for C. H. Robinson (a 3PL).

Myths of Logistics Outsourcing: Part I

This guest column has been written in collaboration with
Vivek Sood, Chris Merritt, Don Cooper & Rob Sayre

Introduction

o Since starting in a big way around the mid-seventies logistics outsourcing has come a long way. While most companies are outsourcing at least some part of their total logistics – whether transportation or warehousing or value added logistics services - we can already see some companies that are outsourcing their entire logistics operations!

o However 3PLs who earlier led the way in logistics outsourcing have somehow failed to move beyond their core commodity services, leading to poor branding and fragmentation of the 3PL sector. During the last 30 years, while logistics outsourcing has become a mainstream activity, many myths have mushroomed around the business.

o This collaborative article explores and explodes some of the most pervasive myths.

Myth 1:
If the outsourcing is unsuccessful, the activity can always return to the fold

o This myth is based on the assumption that the decision to outsource can not only be easily implemented, but also easily reversed! In most cases this is far from true. Outsourcing is a strategy not a tactic. Since this only makes financial sense if it is a multi-year commitment, the company outsourcing has to dismantle the processes, systems and human resources that have been built up over time. To reverse the outsourcing decision, not only must the infrastructure be recreated, which is a huge undertaking, but this will have to be done rapidly to preserve business continuity, which may not be possible in the short time period available. Thus the subsequent insourcing is often a far bigger, and more difficult to implement decision than the initial outsourcing!

Myth 2:
The smartest people actually work .... on my side of the fence!

o While corporations claim that the smartest logistics personnel work with them, the 3PLs claim that the reverse is true! Though the 3PL business has contributed greatly to the global economy, they have not done too well for themselves, as they have not been able to drive business efficiencies as well as they would like to have done. This has led to the contemporary expression in corporate circles that ‘those who can – do; and those who cannot – work for 3PLs' thereby implying that the smartest people work within corporations who are customers of the 3PLs, and not with the 3PLs! However it is an absolute myth that 3PLs no longer offer the job satisfaction, control, and the holistic view of the business that a corporation can offer. In these risk-averse times, customers demand that their account be handled by managers having industry experience in verticals relevant to their business to ensure rapid implementations and ROI, so the 3PLs have no choice but to get in high-quality industry specialists specific to the domains of their major customers.

o The 3PLs on the other hand perpetuate the myth that unlike them, most corporations cannot offer the scale, career progression opportunities, core functional focus, brand and the cachet to attract the best and the brightest logistics and supply chain personnel! This myth has its roots in the early days of transportation and warehousing, when finance, sales and marketing were the stars of every corporation, and warehousing and stores were perhaps the equivalent of the doghouses. The adage heard in corporate circles in those times was that if the logistics executive can count, send the person to the warehouse; the executive cannot do much damage there.’ Of course the reality is very different today. In our experience, there are today excellent people on both sides of the fence (and they also keep changing sides from time to time!).

Myth 3:
Once the function is outsourced, we can forget about it and get back to work

o Perhaps the most pervasive myth in upper management circles today is the belief that once they outsource the logistics function to the 3PL (generally considered non-core), they can stop worrying about the outsourced functions. However in reality, this can be dangerous. Putting together an outsourcing arrangement does not transfer your core issues to the 3PL. Rather, you swap one set of problems with another: you swap internal logistics management problems with logistics relationship management problems!

o While this topic calls for an entire article by itself, let’s look at some of the problems likely to surface after outsourcing begins: Unpleasant surprises - such as cost creep, technical expertise being lower than expected, lack of flexibility to incorporate changing business needs, potentially large cost over-runs on account of services that were assumed to be included in the service contract but were not, loss of real visibility, control and direction - are just some of the problems often seen in this context.

o The fact is that even after the outsourcing, your management will still be working just as hard on the outsourced functions, the sole difference being that the time they save on the management of the outsourced functions will now be spent in managing the relationship, with some relationships even degenerating into games of contract head-butting and variations management for which both the IT outsourcing and the building construction industry are becoming notorious.

Part II of this article will be up on July 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com

About the co-authors:
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com

Chris Merritt: Former COO of Liberty Medical, Chris now consults to the ecommerce and retail sector. More information on Chris is available on www.linkedin.com/in/ChrisMerritt

Don Cooper: Has worked as Senior Director, Project Management for DHL and Exel with over 15 years experience working with Fortune 50 companies and proven ability to lead complex, strategic, and tactical projects.

Rob Sayre: Director of Supply Chain Strategy for Life Fitness (July ‘07), worked as Sr. Manager for Supply Chain Operations at Life Fitness, Outsourcing Manager for North America at Philips Lighting Electronics, a certified Six Sigma Black Belt for Philips, International Business Analyst for Philips, International Manager of Logistics for C. H. Robinson (a 3PL).

Retail Supply Chains: Tackling Value Erosion

Retail Supply Chains: Porous by Tradition!

o Retail supply chains have traditionally been exceptionally porous in terms of unplanned financial losses and value dissipation. While the sources of value dissipation are many, in this post I’ll cover some major areas which I do not see as getting the requisite attention, such as most of the big Retailers lacking a unified (or panoramic) view of their systems, as also the new areas of risk exposure consequent to increasing the Global footprint, which can cause serious value erosion to occur for the big Retailers.

Retail Supply Chains: Then ...

o Back in the late twentieth century - in a bid to optimize costs - the preoccupation of the big retailers was more on issues such as short shipments and returns; shrinkage, damage, expiry; system errors and discrepancies; process standardization, re-engineering and re-sequencing to postpone differentiation (for instance, operations reversal of knitting and dyeing by Benetton in the nineties); foreign exchange arbitrage; establishing quality, process and planning concepts borrowed from Japanese manufacturers; distribution resource planning to ensure that the goods manufactured reach the retail shelves in the most cost-effective manner, and so on.

o Even as recently as early this century, retailers were more involved with closely scrutinizing lost sales and stock-outs due to inefficient usage of retail shelves, effectiveness of service levels, planning of ‘door-busting’ promos, Transportation Management Software, bar-code fraud, IP theft, cross-docking or pooling networks, seasonal planning, category management, reducing reverse logistics costs, as well as decisions on how much to vertically integrate (a la Zara and several other European companies). Other complications occupying mind-space included avoidance of reputational loss due to adverse publicity on account of unacceptable practices being uncovered at the workplace of their outsourced contractors - violations of basic rights of workers, environmentally unfriendly practices, regulatory non-compliance - or even activist pressure alleging usage of manipulative and socially irresponsible purchase practices imposed by some of the large brands on their vendors in low cost economies, whether in Ankara, Bangladesh, Chile, or Morocco!

o And of course, the complexity got truly challenging for most big retailers, when it came to complying with the socially responsible procurement and manufacturing practices, including complying with the legislation on the greening of supply chains - such as the EU legislation restricting hazardous substances (RoHS) that leach into our environment. (see my post on April 12th 2007on the rising Regulatory complexities in Global Trade).

.... and Now!

o Today, of course we’ve come a long way: For instance postponement of differentiation to the last possible point has moved far ahead from the days of process re-sequencing by Benetton to the advanced models developed by Lectra (www.lectra.com) which has integrated technology elements into a solution that allows a customer in a boutique to step into a body-scanner booth, which captures the complete body measurements of the customer within 10 seconds. The customer can then select fabric, pattern, brand and other preferences, which the boutique owner then electronically transfers along with the body scan data to the appropriate vendor, enabling delivery of the custom-fitted garment to the customer within a pre-defined time frame!

o Despite such technological advances, however, retailers continue to face newer and more daunting challenges, such as getting new products faster to the market, accelerating product lifecycles, linking the production process to customer desires, engineering different supply chain configurations for new or innovative products (as opposed to the functional products), compliance with ‘green’ regulations, and using business intelligence to ‘close the loop’ from anticipating customer’s requirements to fulfillment to monitoring the post-sale feedback. Human rights and environmental issues too have become more complex to handle. Anti-sweatshop campaigners in the past used mass protests to mobilize public opinion and boycott the relevant products. Life was so simple for the retailers then! Now the company that takes the final product to the market will be held legally accountable - and possibly prosecuted - even for acts committed by its contracted outsourced vendors on the far ends of the globe!

o In line with the rapidly changing needs of the Retail industry, a plethora of contemporary solutions are available today, aimed at solving the broad categories of issues mentioned above. There is also tons of academic research providing us with a greater understanding of the increasingly complex reasons for value loss in Retail supply chains. However, hardly any of the currently available solutions have come even close to hermetically sealing all the major points of value dissipation in Retail supply chains!

Cross-Border Trade: Increased Risk Exposure

o I've detailed this in sufficient length in my two posts during April 2007. However, in brief, value erosion continues, and excess working capital remains locked within Retail supply chains, mainly due to the failure by most retailers to integrate and/or factor the following into their business plans:
1. Delays at the point where the goods cross International borders (leading to lost sales through stock-outs, higher obsolescence costs, maintenance of higher inventory levels, and longer cash-to-cash cycles)
2. Overpayment of Import Duties and Taxes (not taking advantage of exemptions or concessional rates due to multilateral and bilateral agreements between the country of origin and the country of import respectively)
3. Penalties due to non-compliance with Export or Import Controls (financial loss coupled with the political embarrassment from adverse publicity, along with possible black-listing by the Customs and other Government authorities)
4. Rising reverse logistics costs arising out of B2C sales over the internet to Africa, South America and Asia (due to the consumers not being accurately pre-informed of the actual landed cost of the product they are buying)!

Retail Supply Chain Management: Panoramic perspective missing

o Returning to where I started from, synching of data and visibility continue to be the biggest integration challenges for the big retailers today. One reason could be that they lack systems that would provide a unified view of the entire system. This is so because not just the retailers, but also their suppliers and vendors operate a patched together consolidation of legacy, ERP as well as Supply Chain management and Regulatory Compliance systems. This is truer when segments of the fulfillment process are outsourced to third parties who work in completely different business and technology environments.

o This disparity effectively makes a meaningful integration a virtual impossibility, and it becomes extremely difficult to calculate lead times or to provide timely forecasts of changes in demand or customer preferences. This severely inhibits the level of efficiencies that can be extracted from the entire system. Plus, no team is responsible for the overall view or big picture, as Technology, Finance, Compliance and Supply Chain teams tend to work only in their own compartments, with very limited interaction and visibility into - or knowledge of - each other’s domains.

o So it is hardly surprising that retailers have been a trifle slow in ratifying technology investments. Some of the reasons for this could be the lack of surety that the proposed solution is the right one for them, whether the proposed system will integrate easily with the infrastructure existing within their organization as well as with their supply chain partners, and most importantly, whether the solution will be able to accommodate the rapidly emerging future needs of their extended supply chain.

o Clearly, the realization seems to be seeping in that the answers to tackling value erosion doe not lie in just technology alone. Technology, combined with decision support and process optimization capabilities working in tandem, and when directed by a core team that is taking the broad picture and new areas of risk exposure into account: Certainly such an awesome combination will extract far greater bottom-line benefits out of Retail supply chains!

The next post will be up on June 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com

Low Cost Sourcing Grows Complex - Part II

Will Rising Logistics Costs nullify Global Sourcing?

o Rising logistics costs are beginning to nullify the cost advantages of sourcing from low cost economies across the globe. Simultaneous with the logistics costs approaching the 10%-of-US-GDP mark for the first time since the nineties, these costs are already over a tenth of the sales revenue of most global corporations. This is putting a major squeeze on the already thin margins of manufacturers and traders.

o While the initial knee-jerk reaction to this - over the last two years - was to tighten the thumb-screws on the logistics and supply chain managers, the pressure is now moving up to the C-levels of global corporations, in response to expectations that logistics costs could increase by over 10% in 2007.

o The trade-offs being considered are the advantages of sourcing from low cost economies versus the fast-rising logistics costs plus the longer lead times involved in global sourcing. Software-based simulations of alternate network designs are being explored to maximize supply chain optimization and supply chain strategies are being completely revamped to get a firm handle on the fast-rising logistics costs.

Factors contributing to the Rising Logistics Costs

o Sky-rocketing energy costs have been raising concern levels for the last couple of years; however the rising energy costs are just one component of the rising logistics costs. Fuel costs are today about a quarter of the total transportation costs, which means the overall impact of fuel cost increases on pricing could probably be of a far lesser magnitude than it is being made out to be.

o A severe shortage of labor - from truck drivers to compliance and supply chain professionals - is pushing up logistics-related wage and salary bills across the globe (labor cost has traditionally been the single largest cost factor in logistics). In addition, interest rates are shooting up across the globe: From the Bank of England, to the Central European Bank, to the US Federal Reserve to the Reserve Bank of India to the central bank of Japan - monetary policy makers are raising interest rates in a bid to control inflation.

o Then again, increasing cargo security costs in the post-9/11 world has become an unavoidable factor contributing to the rising logistics costs. Infrastructure costs necessitated by the boom in International Business, rising warehousing costs and higher inventory-carrying costs are another side-effect of the rising finance rates coupled with the rising transportation costs and longer lead times. Lastly, logistics bottlenecks are increasing at International borders due to the inability of most corporations to meet the increasing Regulatory complexities in Global Trade today, which has its inevitable impact on the bottom-line.

Impact of rising Logistics Costs

o Global corporations are being forced to reevaluate their logistics strategies: The first casualty - most unfortunately - could be the Lean movement, which has traditionally depended on low logistics costs. For example, organizations are carrying more inventory to compensate for disruptions during transit. Supply chain differentiation and segmentation for different product segments is becoming a best practice to optimize costs. Global corporations are also moving away from ownership of warehouses and transport fleets towards outsourced logistics operations.

o Technology is playing a major role in combating the price rise; for example, automation of decision making through software is becoming an accepted practice. Supply chain network design is being revamped and optimized using simulation algorithms, while Enterprise-wide logistics planning is being embraced to reduce the fragmentation of internal logistics operations in a bid to optimize resource utilization.

o And finally, global corporations are re-evaluating their strategy of sourcing products and components from low-cost economies, as the cost of logistics is becoming an increasingly larger component in product price. How this is going to change the global equation is not easy to predict at this point - however a great deal of disruption in the current business models looks certain!

The next post will be up on May 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com

Low Cost Sourcing Grows Complex - Part I

o As sourcing from Low Cost Countries (LCCs) grows ubiquitous, it is also growing more complex for global corporations to handle.

Three major reasons account for this:
1. Regulatory complexities (on account of security and environmental concerns)
2. Rising Logistics costs (due to reasons which I'll cover in my next post), and
3. Rising incidences of disruption in global supply chains!

Regulatory Complexities: Security Concerns

o Security concerns have now firmly moved from 'countries of concern' towards threats from the 'end-users' of restricted technologies and products, since the experiences of the last few years have amply demonstrated that these threats could as easily originate even from friendly countries. This means that the restricted and denied party lists assume even greater importance for dealing with the low cost economies across the globe. This compliance risk applies equally to manufacturers, traders, retailers and logistics providers.

o Global conventions are being more strictly enforced across the globe. Of increasing importance - due to rising security concerns - is the Wassenaar Arrangement that seeks to control illegal diversion of munitions or other materials that can be used to build Weapons of Mass Destruction (WMD). While the 'munitions' list covered by the Waasennaar Arrangement is self-explanatory, the 'dual-use' goods list bears some words of explanation.

o Dual-use products and technologies refer to commercial civilian products with potential military or proliferation end-use: For example, if a certain commercial component exported out of the US could be used by manufacturers in China or Korea to create a product with a military end-use that would attract US export control regulations in its finished form, then such a commercial component could attract licensing norms under the 'dual use' technologies umbrella. This serves to increase the complexities of obtaining License approvals manifold even for some commonly used products!

Regulatory Complexities: Global Conventions

o Then again, there are numerous other global conventions that enforce controls on exports and imports for various environmental and security reasons, such as CITES (wildlife conservation), the various Non-proliferation groups, the Montreal Protocol (controls exports of products that release Ozone-depleting substances into the environment), the Basel Convention (controls exports of hazardous waste), the Chemical Weapons Convention and so on.

o Global Conventions are International agreements or multilateral treaties between countries, which in the case of export controls, lay out the rights and obligations of member states vis-a-vis each other. So for example, the Chemical Weapons Convention (CWC) - which has 182 signatory members - seeks to limit the production, stockpiling and proliferation of chemical weapons in the wrong hands, and the signatory member states have agreed to prohibit the unlicensed export of commodities or technologies that can be used to produce such weapons. The members have also agreed to time-lines to destroy all existing chemical weapons in a phased manner.

o For exporters, the complexity arises in two different ways:
(a) When restricted products are used in the manufacture of commercial products, thus attracting the relevant licensing norms. For instance Triethanolamine which is used in the production of chemical weapons such as nitrogen mustard, is also used as a pH balancer in a wide range of shampoos, cosmetic lotions and gels, detergents, shaving foams and so on, besides being used by oil refineries to remove sulphur, and in formulations such as oil-drilling emulsions. Other common uses include usage in the manufacture of automotive coolants, waxes and polishes, cements and pharmaceutical products.
(b) The ratification of each convention by each signatory country is in accordance with their national procedures .... which means that each new country than a corporation begins trading with, brings in its own new set of regulatory compliance complexities!

Regulatory Complexities: Environmental Concerns

o Coming to the Environmental front, the EU legislation restricting hazardous substances (RoHS) which has been effective since last July, primarily concerns itself with reducing the amount of waste electrical and electronic equipment (WEEE) that enters landfills, and then into our environment. Typical measures involve advocation of separate collection, reuse and recycling. Recycling in turn attracts regulations that seek to ensure that in the process of recycling the WEEE, its content of mercury, cadmium, lead, chromium VI, PBB and PBDE will not be allowed to leach into the environment or will not be allowed to cause other health or environmental hazards. The complexity here for manufacturers and retailers is that they could be held responsible for non-compliant acts committed by their business partners in the far-flung outreaches of their global supply chains!

o The not so welcome news for sourcing from or exporting to the Low Cost economies is that the complexities of Import & Export Regulations in Asian and South American economies are beginning to outstrip the complexities in American and European regulations. Evidently the Governments of developing countries are tightening up import and export controls on all these areas which they consider might have been misused in the past (or have the potential of misuse in the future).

o For instance, on the heels of the restrictions on hazardous substances (RoHS) legislated by the European Union effective last July, Korea is coming out with its version of such legislation this year. China has its own version of RoHS, while Japanese recycling laws are making it mandatory for manufacturers to begin phasing out lead and other hazardous substances such as cadmium, mercury, chromium, PBB and PBDE (the last two are found in certain flame-resistant plastics). So for example, the complexity for manufacturers and retailers could be that a product could be rejected as non-compliant even if its external plastic case has more than the permitted concentration of PBB!

Like I mentioned earlier these complexities are making regulatory compliance for global corporations an almost unmanageable task, and they need specialized professional help to ensure that they do not incur huge penalties and fines for non-compliance.

The next post will be up on April 25th 2007!
Please keep writing in with your feedback at scm.primer@gmail.com

Closed Loop Replenishment Systems

The new Holy Grail: Closing the Loop

o Closed-loop replenishment systems will be the new holy grail, as organizations struggle to tie the demand-side more closely to the supply-side. As the focus moves more and more from supply chain issues to the needs of the final consumer, organizations will strive to become more demand-driven in a bid to maximize net revenue optimization through lower delivery lead times, cross-docking, lower buffer stock, vendor managed inventories, simplification of logistics using Information Technology, shorter cash-to-cash cycles and so on.

o Customers will look for solutions that can aid the transformation to an On-Demand Supply Chain, as well as smooth out lumpy flows. This will translate to the demand for advanced versions of collaborative demand technologies, particularly in complex sectors such as the semiconductor industry, where small miscalculations in demand forecasting can leave one saddled with obsolete or over-valued inventory! And, of course, customers will increasingly expect SCM vendors to integrate - into their solutions - the ability to forecast the impact of planned marketing strategies on future demand.

o Supply Chain analytics, accelerated demand sensing and simulation will find rapid acceptance, as the technology-enabled advances by the early movers in supply chain optimization get nullified by competitors catching up rapidly through the adoption of similar technology at a far lower cost. Predictive analytics, spurred by initial successes, will move towards lower levels of detail; however at the lower levels of detail, 'noise' will amplify, distorting the simulation-based decisions, which might lead to temporary disillusionment with this technology, until more finely refined models develop!

DDSN: Outsourced solutions

o Demand driven supply networks (DDSN - a term coined by AMR Research) will work in tandem with analytics to allow manufacturers to produce smaller lots of what customers are demanding at the moment. Nothing new in this; companies such as Procter and Gamble and DELL have been doing this for years; however more of the brick-and-mortar manufacturers will jump on this bandwagon as they understand that the increased production overheads due to smaller lot sizes will be more than offset by the cost efficiencies achieved in inventories and holding costs.

o Not just the SMB's, but also the larger players will prefer to outsource Demand Driven Supply Network implementation. For instance, one of the early movers in this domain, Cisco has partnered with D.W. Morgan Company to provide advanced supply chain and logistics planning through their DDSC (demand driven supply chain) Solution, which will facilitate the convergence of worldwide resources in almost instantaneous response to customer requirements.

o Similarly, Oracle projects integration and automation of all key supply chain activities through its E-Business Suite SCM family of applications. SAP too has combined its advanced planning and optimization component with other modules that allow DDSN implementation, right from standardization of processes, integration of other business applications, as well as inclusion of the suppliers and customers in the extended corporate network!

Supply Chain Info-Sharing: Fear of Exploitation

o To enhance homeland security, regulations are going to make obligatory the sharing of more and more information with Government agencies. However Data Security will remain the largest concern, as most companies will remain extremely uneasy about having information of their customers and supply patterns (who was supplied what, and when) available on a common database that uses entry level username-and-password type of security for user authentication!

o While the benefits of real-time demand sensing have been obvious for many years now, implementing this, and transforming the business from a push-based system to a pull-based system is far from simple, as this involves not just the application of analytics to point-of-sale (POS) data and improved supply chain visibility, but also collaborative information sharing through the supply chain.

o And it is in this collaborative information sharing that the greatest challenge lies: One the one hand is the difficulty of making the paradigm shift - from the earlier stance of guarding data considered proprietary - to free sharing of this data through the supply chain. For instance, from the point-of-view of B2B buyers, the vendors may not want to share information about the other players involved in the movement of goods through their supply chain. And then again, companies have to get over their mind-set of trying to extract every possible penny out of their supplier network: unless this changes, companies cannot expect to develop peer collaboration within their supply chain!

The next post will be up on April 11th 2007! Please keep writing in with your feedback at scm.primer@gmail.com

Size may matter more than Functionality!

Software Gorillas will grow bigger!

o Over the last decade we've seen a slew of tiny companies releasing products for optimizing different fragments of the extended supply chain. However, shrinking product life-cycles, growing compliance-related complexities due to the expanding global footprint, recent advances in mass-customization technologies and wider acceptance of highly collaborative demand driven supply networks are going to raise the level of complexity of doing business far beyond what can be handled by standard SCM and CRM solutions offered by the small vendors, and customers will begin to turn back towards the software giants.

o In the meantime, the relentless acquisition spree of the software gorillas such as Oracle continues unabated. With the announcement of Oracle's decision to buy Hyperion for US $3.3 billion, the war to grab territory will hot up between Oracle and SAP! While Oracle's strategy has been to buy market leaders for their customer base and technology (25+ acquisitions in 3 years!), and then to cobble these together into a wide application suite, SAP continues to believe in building its own applications.

o Oracle hopes that the acquisition of this Business Intelligence (BI) tools vendor will increase Oracle's offerings to SAP customers. However, though Oracle has announced that it will continue to support non-Oracle databases and applications for Hyperion customers, the sudden uncertainty over the road-map for the integration of Oracle and Hyperion BI tools might cause customer defection to competitors such as Business Objects!

Small SCM vendors will face stiff competition

o Simultaneously, the existing giants in the SCM solution space, SAP and Oracle are aggressively setting their sights at the bottom of the pyramid (BOP) and are seeking to expand their market share beyond the large enterprises to small and medium businesses (SMB's), with offerings such as Business One from SAP, as well as Accelerate from Oracle.

o Customer preferences - in the SMB segment - indicate gravitation either towards the customizable application suites from solution providers, or towards the system integrators who have deep knowledge of specific industry verticals. Customers today expect their vendors to have intimate familiarity with their business, even before they walk into their door! In other words, the small SCM vendors should not only move towards greater vertical-specific solutions to remain competitive, but should also redesign their sales strategy into a building block process to accommodate customers who demand sliced-and-diced solutions as well as a pay-per-use model.

o The writing on the wall, then, seems to be that no matter which way the small players move, they are bound to face financial uncertainty in the near future. Sales cycles will grow shorter increasing the number of deals; however any gains will be offset by the substantially smaller size of each deal as customers demand smaller and lower cost implementations, pay-per-use models, and sub-12 month paybacks!

Small vendors: Increased vulnerability to low-cost acquisition moves

o The small Software-as-a-Service (SaaS) SCM vendors may find the market turning skeptical of this model once customers realize that they're paying a higher cost over time, and at the same time facing major exposure to business continuity risks due to outages, unpredictable performance, loss of control over business data, as well as an unhealthy dependence for security on the vendor. Saas customers will increasingly seek source code escrow as insurance. SaaS vendors have to solve these customer concerns quickly, else the new trends towards 'appliance based software delivery' may completely supercede SaaS, just as SaaS once superseded the traditional software delivery models!

o Customers are also looking more closely at spend-analysis, and are steadily decreasing the number of vendors they deal with, so organic growth does not look like a very feasible option anymore for the smaller SCM vendors. To combat this, the smarter small players will look at getting private equity funding to acquire several complementary players in one specialized niche, integrate them into into a broad suite of applications, cut costs by replacing experience with youth, and then resell this package to a larger player for very handsome returns!!

o Sounds like an excellent plan except for the following trends that threaten to throw the proverbial spanner in the works:
(a) the age of suite-based solutions looks like ending very soon
(b) the low rate of successful acquisitions across the globe is increasing market skepticism about companies that have not grown organically, and,
(c) the tough competition from the software giants, as well as from the small system integrators will act as a double whammy, as the very same customers who will willingly buy a suite from a software gorilla, will demand slicing and dicing from the smaller players.
These trends will lower market valuations, and leave the small players vulnerable to low-value acquisition moves.

However there is a silver lining ...

o This, then, is not the easiest of times to be a small player in this space, and the small players need to do some hard soul-searching and take decisive strategic decisions if they want to survive the next two years.

o This could be through downsizing, organizational restructuring or cutting on development costs to allow them to retain temporary financial stability, even knowing fully well that such decisions will not contribute to the growth of a healthy or stable company, which in turn will make their exit options that much more difficult to achieve! Unfortunately, if being a small player looks difficult, the consolidation route does not look like a sure alternate any more either.

o There is a bright lining however: the small players who are smart enough to align their services to specific industry verticals, or in highly specialized niches will thrive and do well - provided they take care to remain complementary to the offerings of the big software gorillas!

Sounds unfair, but then these uncertainties and constraints are the hallmark of the new economy, and this new economy is here to stay!!

The next post will be up on March 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com