I read a lot of books.    I typically have a few books “in the queue” but occasionally I’ll run out of reading material and have to wait for my next trip to the city to buy more.   When I travel, I’ll bring the book I’m currently reading and one or two more just in case I run out during the trip.  I’ll often re-read books I’ve enjoyed so I tend not to sell or give away books I’ve already read. As a result, my book shelves are stuffed way beyond their capacity.

So, when the Kindle came out a few years ago, I watched with interest.  There were still a few bugs to work out, so I waited.  The Kindle was also kind of expensive and…oh yeah…it wasn’t available to us cave-dwelling Canadians.  The Kindle 3 was announced in July.  It had some nice new features and a great price and was available north of the border, so I decided that I would treat myself for my birthday and ordered one on August 17th.

When I placed my order, Amazon couldn’t tell me when my new Kindle would ship.  Hmmm.   Yesterday, a couple of days into September, Amazon STILL couldn’t tell me when my Kindle will ship…not online anyway.  What’s going on?  Do they honestly not know when they can ship my product?  Is the date so bad that they are afraid I’ll go elsewhere?   Those among you that have been involved in supply chain, customer service or sales, know that the only thing worse than not shipping a product on the date a customer wants it is not being able to tell the customer when they can expect it.  

So what is the cause of the delay?  Bad Forecast?  Supply issues?  We just don’t know and likely won’t know until Amazon tells us (if they ever do). Regardless of the cause, what is stopping Amazon with providing me with a delivery date?  We all know that there are supply chain analytics available that can be used to identify an expected ship date.  Perhaps, being new to the brand owner /  manufacturing side of things, Amazon might not yet be aware of what is possible with good supply chain software.

Desperate for Amazon to tell me where the heck my Kindle is, I broke down and called customer service and finally got an answer that it should ship likely on September 10th.  Why that date wasn’t or couldn’t be provided online when I checked the status, I don’t know.

As someone who understands the complexity of the supply chain, I know that sometimes we can’t ship when a customer wants a product.  However, as a customer, I want to know when you CAN ship my product.  Amazon, you gotta give your customers any insight you can….and don’t make them work for it!

Some companies are rethinking their global product strategies. The article mentions the rising costs in China, the threat to intellectual property and the need for more flexibility.

In my experience working with US companies, this is not yet a trend. Companies outsource for a number of reasons. For some, manufacturing is not their core competency. They want to focus on product development, sales and marketing and not manufacturing. Others certainly outsource to reduce cost.  Unless their workforce is willing to take a pay decrease,  like GE employees did in Louisville, KY, companies have more of an advantage by outsourcing. The savings allows U.S. companies to stay afloat and expand in a highly competitive global market. There are many debates about outsourcing currently due to the high unemployment rates in the US. Some will argue that steps need to be put in place to incent companies to keep jobs in the US while many economists argue that outsourcing increases wealth in the economy and more measures need to be put into place to educate and insure unemployed workers when looking for new employment.

Outsourcing does become a commitment. There will always be times when the outsourcing company wants to bring work back from their partner. This is especially true when there is still some level of manufacturing within the outsourcing company. They are sensitive to capacity utilization and capital  investment and it is natural to want to maintain a steady rate within their own facility. This however does not represent the mature outsourcing model. Companies that have been outsourcing for years have a valued partnership with their contract manufacturer. (By the way, I hear so many terms for this! Contract Manufacturer, CM, EMS, TPM, CMO !! It would be nice to standardize! ). These companies provide their partner with a steady flow of work, keeping costs down for their CM.

Key to the relationship between the outsourcing company (let’s call them the OEM) and the CM is the ‘open book’. This means sharing information with the end goal being a win/win relationship. Information used to be very protected years ago. Now, there is an emergence of trust. I think this is largely due to technology and the software available now to easily share data and collaborate between systems.

The high tech OEMs have been outsourcing for a number of years and with good success. The life sciences OEMs are entering this business model a little later but at increasing levels. There is a significant amount of complexity in the life sciences industry with regulatory adherence and inventory expiry but with the right processes and software they can also be very successful.

In the end, outsourcing becomes a corporate decision. I don’t believe there is a right or wrong answer as long as the company remains globally competitive.

Unlike traditional pirates, today’s pirates don’t want the cargo…in most cases they don’t even care what the cargo is.  The purpose of the attack is to hold the cargo and crew hostage.  For example, in January 2010, somewhere between 5.5 and 7 million dollars was paid to release an oil tanker containing 28 crew and 2 million barrels of oil.   More recently, pirates struck a Panamanian freighter, the MV Suez carrying…you guessed it…bags of cement.  The goal again was ransom, not the cargo. 

It seems that piracy even has a well defined business model, which includes staffing levels, equipment requirements, supplies, investor profiles and profit distribution plans.  Those guys are organized…which means you need to be too.  The SupplyChainBrain article describes several best practices for ship owners to avoid the risk of shipments being attacked;

1. When travelling through the Golf of Aden (the region notorious for piracy) travel the Internationally Recommended Transit Corridor
2. Maintain lookouts to provide warning of approaching small boats
3. Use of non-lethal deterrents such as water sprays and horns
4. Protect logical boarding points with plywood and razor wire.

These best practices are not fool proof, however.  The MV Suez had employed all of the above and was still boarded.

While the protection of a ship from pirates is not directly applicable to the readers of this blog, I found it interesting to see what shipping companies were doing to avoid this risk.   What is applicable, is how you can protect your supply chain from the impact of one of these attacks.  If a ship carrying your cargo is attacked, the best of possible outcome is that your shipment is recovered with no loss of life.  However, your shipment will still likely be tied up for weeks, possibly months.  That can be a disaster for a lean supply chain.  What can you do to reduce this risk?  Back to the SupplyChainBrain article…

The article points out that a supplier in poor financial shape may be tempted to route shipments through dangerous waters to minimize cost.  Further, insurance companies are starting to respond to the additional risk by doing what insurance companies always do in these situations; charge more.  These additional costs could be enough to sink (pardon the pun) a struggling supplier.

So it really comes down to a supplier management issue;  identify the suppliers at risk. Look at the parts they supply. If the part is critical to your business, make sure that you have mitigation strategies in place.  If you have options with respect to suppliers and routes, identify those sources and routes that avoid high risk areas.

Funny titles and supply chain issues aside, the real tragedy is the risk to the lives of the  brave crew members of these ships. As I write this post, the crew of the MV Suez has still not been released, crews from other ships are also missing and some crews have been killed.  Our hopes and prayers go out to them and their families.

Where did you grow up?

Born in Philadelphia, raised just outside Ottawa in a town called Arnprior, still growing up.

Favorite book, movie or song?

Eat, Pray, Love. Oh, the question is favorite book, I thought it was three things you try and do every day! Too many books, movies and songs to list to pick a favorite, but one movie line comes to mind. My children gave me the “Batman Begins” DVD. There is a scene where Bruce and Alfred decide to “order components” for the bat suit. Alfred suggests ordering 10,000 pieces as not to draw suspicion. Obviously Alfred had never worked in sales. Sales never questions the order, they just take it.

What’s your favorite motivational quote (and when/how you came across it)?

I love motivational quotes and analogies, again there are almost too many to list. I would buy Reader’s Digest just to see the “Quotable Quotes” page and regularly check out a site called ThinkExist.com that is all about quotes. However this one has stuck with me for awhile. Back in my early manufacturing days I was part of a new Lean Implementation and one of the directors at that time handed motivational cards to each team member. Mine had a picture of a huge breaking wave on the front and the caption read,

“You become successful the moment you start moving towards a worthwhile goal.”

Our goal was to make the best product faster and cheaper than anyone else in the world, and during that “movement” we learned a ton of lessons, discovered many best practices and ultimately created something every team member was proud of. I still keep that card hanging by my desk today.

What book are you reading now?

“Difficult Discussions.” I wish I had read this back in the day when I had to tell customers they were not going to get what they wanted when they wanted it!

 What single piece of counsel would you offer to your colleagues in supply chain for the remainder of 2010?

Here is another question that offers an opportunity to use a quotable quote, this one from Henry Ford, “If I had asked my customers what they wanted, they would have said, ‘faster horses.’” When embarking on improvement activities, regardless of where they are in the supply chain, don’t settle for a “faster horse.” Seek out best practices, ask “what if?” often and network with your peers in supply chain and lean groups to share ideas.

The key point I want to emphasize is that we are all aware that over the past 20 years the brand owner in the western world is doing less and less of the manufacturing, whether or not they are completely outsourcing manufacturing or buying more and more of the value of the competed item from suppliers. What I find intriguing, especially in the case where a brand owner has either sold off its manufacturing to a third party or started a subsidiary, is that the relationship that exists between the buyer and supplier is exactly that. In other words, it is driven by a procurement mentality that emphasizes cost rather than supply chain flexibility. This should not be a surprise since outsourcing is itself driven by the need to reduce assets on the balance sheet in order to reduce financial risk in the long term and improve financial performance in the short term. Admittedly, there has been a maturing of the approach to outsourcing in that many companies will now assess the total landed cost of supply, not just the manufacturing cost. 

But it is the relationship between the OEM and the supplier/contract manufacturer that I want to address in this blog. I would like to see this progress to a more mature relationship in which risks and rewards are shared. In other words, to a collaborative relationship.

Let’s investigate this loaded term “collaborate”.  According to the Merriam Webster online dictionary, it is defined as follows:

col•lab•o•rate
\kə-ˈla-bə-ˌrāt\ intransitive verb
col•lab•o•rat•ed  col•lab•o•rat•ing

Definition of COLLABORATE
1: to work jointly with others or together especially in an intellectual endeavor
2: to cooperate with or willingly assist an enemy of one’s country and especially an occupying force
3: to cooperate with an agency or instrumentality with which one is not immediately connected

In my experience most companies follow the 2nd definition in their approach to collaboration with suppliers, largely because it is driven by a narrow procurement mentality, not from an end-to-end supply chain value and effectiveness perspective. Therefore the relationship is mostly distrustful and adversarial. In some cases the discussions move from the 2nd definition to the 1st and get bogged down in endless meetings with little tangible progress. In some cases progress is made to the 3rd definition, which is what I mean by collaboration.

In a blog titled “Time to Broaden the Knot on your Bow Tie?” Lora Cecere discusses her experience with collaboration over many years of working in industry or as a supply chain analyst. Lora writes:

My goal of this blog: stop the madness. Reset expectations. Stop fooling yourself. What most people call collaboration is really data sharing. Collaboration can only really happen when you have a lasting win-win value proposition; and in this changing world of power structures, constraints, and demand volatility, this is harder than ever.

According to BusinessDictionary.com Lora is spot on in her statement (my emphasis).

Collaboration
1. General: Cooperative arrangement in which two or more parties (which may or may not have any previous relationship) work jointly towards a common goal.
2. Knowledge management (KM): Effective method of transferring ‘know how’ among individuals, therefore critical to creating and sustaining a competitive advantage. Collaboration is a key tenet of KM.
3. Negotiations: Conflict resolution strategy that uses both assertiveness and cooperation to seek solutions advantageous to all parties. It succeeds usually where the participants’ goals are compatible, and the interaction among them is important in attaining those goals.

Let’s not be naïve though. The Japanese Keiretsu has its legitimate detractors, as does the South Korean Chaebol. Clearly there needs to be some level of tension between the brand owner and contract manufacturer, otherwise there would be no point in manufacturing outsourcing.  But let us take the best part of the Keiretsu concept, which is about true collaboration between partners, and discard the less attractive financial aspects of cross holdings, which meant that poor supplier performance was often tolerated beyond what was reasonable.

From a technology perspective, what caught my attention initially was Lora’s statement that “What most people call collaboration is really data sharing.”  EDI was a fantastic innovation in its time, but it is time to invest in the future based upon internet technologies. We have so often confused raw data with information. EDI only supplies raw data. How many phone calls and emails are required to supplement the EDI messages so that the buyer or seller has a full picture? Lead times as malleable. Due dates are malleable. A lot of supply chain data is malleable, but if all we receive is a binary/digital signal from a trading partner, we can only respond in a binary manner – yes or no.

Lora goes on to state that

Broaden your Bowtie: Conceptually, this approach has been around for a long time, but it has been difficult to execute. Just too time consuming to connect trading partner warehouse managers, traffic managers, customer service personnel, etc.  Not anymore. Use social technologies like Lithium and Jive as a core on partner extranets to connect people to people.  Complete with pictures, interests, microblogging, instant messaging, and fan pages.  Who says that supply chain cannot be more social?

There is no doubt that social media is catching on within companies to facilitate all manners of collaboration within the company. Why not leverage social media technology to transform data into information, adding all the nuances and subtleties of meaning and intent? But if you are using social media to add the additional content, why not exchange the raw data using social media too?

While using social media for supply chain collaboration is possible, it still does not go far enough for me. It most certainly helps to elevate data to information. But why not provide key suppliers, especially contract manufacturers, and customers limited access to your planning systems so they can participate directly in the decision process? You will have then elevated raw data exchange (EDI and transaction systems) to information exchange (social media) to true decision collaboration. This is possible today. (Don’t look to your ERP vendor for this technology. Their focus is inside out, not outside in.) Leave the final decision to the EDI messages and transaction systems, but the communication and collaboration required to reach a decision should be carried using internet technology. Decisions cycles are shortened dramatically in the examples where I have seen direct participation of key suppliers in the decision process. This is not nirvana. It is possible today. And a few innovative companies are taking advantage of this capability.

What do you think? Am I smoking an illegal substance? Do you have collaboration stories to share? What were the barriers? How did you overcome these?

Of course this uncertainty is not restricted to the US economy, which is the point Tom Friedman makes by focusing on the German economy and how it relates to economic recovery in Europe.  In fact he points to three influences that will need to be reversed if the US and EU economies are to recover soon:

The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines.

Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever.

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first “existential crisis.” For the first time, he noted, the E.U. “saw the possibility of collapse.” Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Commenting on Bernacke’s statements, Jeannine Aversa of Associated Press writes that

Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.

OK, OK, so there is lots of economic uncertainty.  What do we do about it?  During my time as a management consultant I learned a fundamental truth: Analyzing a situation is fairly easy, defining a future state is a lot harder, but the really hard part is defining the path to achieve the future state. Not being an economist I can comment little on the efficacy of Tom Friedman’s suggestions for recovery, nor on Ben Bernacke’s for that matter.  My guess is that most of the readers of this blog fall into this category too.  Clearly we all want the same future state of a revived world economy and we are all too aware of the current state of the economy.  Of course we all have our opinions on the path to recovery, which we can express in elections, but for the most part actually pulling the levers of the economy is not something which is in our control. 

Which leaves us all feeling “really unusually uncertain”.

While we may not be able to effect change to the national or global economy, we do have some level of control over the economic performance of the companies for which we work.  As I commented in a previous blog titled “Why S&OP? Why now?”, this is where I see sales and operations planning (S&OP) playing a big role.  But for S&OP to be effective it must provide ways for people to evaluate and understand uncertainty.  There are 4 fundamental capabilities that are required to achieve this:

1. Capture of assumptions made about the future state for knowledge sharing and control
2. Facilitated collaboration across functional boundaries to get buy-in and inputs from multiple parties
3. Super-fast “what-if” analytics that allow organizations to evaluate and compare multiple scenarios in order to maximize performance and to mitigate any identified risks
4. Continuous plan performance management so that deviations are detected early and course corrections can be made quickly

The last point about performance management is often overlooked.  The more uncertain the future, the less likely it is that your plans will be achieved.  It doesn’t help much if at the end of the month you determine that the plan wasn’t achieved.  In a more stable economy this might have been sufficient.  In today’s volatile economy (which is the root cause of our uncertainty) it is really important to monitor performance continuously and to course correct as quickly as possible when significant deviations are detected.

However, what makes this all possible is super-fast “what-if” analytics.  Uncertainty is risk.  Without a mechanism to evaluate many alternative scenarios, your ability to evaluate and understand risk is reduced greatly.  Do you think Excel is up to this?  Do you think this can be achieved without any technology?

The WSJ article, From Snowmobiles to Cellphones, a Scramble for Parts, (paid subscription or preview sign-up may be required) further notes that companies have had to reconfigure offered products due to persistent supply shortages. It notes that shortages of transistors, capacitors and integrated circuits became pronounced in the first quarter, and persist in the second quarter. Telefon AB L.M. Ericsson indicated that shortages cost the company $400-$550 million in sales and delayed shipments, and Royal Phillips Electronics, Polaris Industries Inc. Motorola and Whirlpool are also mentioned as being impacted. Motorola CEO Sanjay Jha  summed it best noting that his company is scrambling in a “constrained environment.” Companies utilizing current hard-to-find components are seeking their own fixes which include offering customers different features or alternative components and/or technologies.

While it is obvious why Ericsson, Philips, and Motorola are affected by electronics component shortages, what is interesting is Bob’s inclusion of Polaris and Whirlpool in the list of companies. The original WSJ article clearly focuses on electronic parts shortages. Polaris makes snowmobiles and ATV’s. Whirlpool makes dishwashers, dryers, etc.  What does this have to do with electronic parts?  Well, a lot actually. I remember working on a project at Volkswagen in Germany in the late 1990’s shortly after they had just come out with the Golf Mark IV.  I don’t remember the exact details but the number of chips in the Golf had gone up from about 5 in the Mark III to about 50 in the Mark IV. Yet the demand that this represented for the chip manufacturer was still relatively low compared when compared to the demand from electronics companies such as Ericsson. The difference in the relationship with the more traditional Volkswagen suppliers, who made mechanical components for the Golf, was profound.  Whereas the chip demand represented a lot less than 10% for the chip manufacturer, often the demand from Volkswagen for the mechanical component suppliers represented well in excess of 30%-40%, sometimes in excess of 75% when factoring in aftermarket sales. Clearly Volkswagen had a great deal more leverage with the mechanical component suppliers.

Other industries, such as the white goods industry, will often design different washer or dryer models using virtually the same mechanical components, but use different chips to provide differentiation. Electronic components are everywhere. Delays in component deliveries affect many industries. The original WSJ article contains a graphic showing how the lead time for a common type of transistor has increased from 10 weeks in July 2009 to 20 weeks by February 2010.

Initially I set out to try to estimate the effect of electronic component shortages on G20 gross domestic product, but the more I looked into the data, the more it seems that electronic component shortages might already be “old” news. Clearly there is still a lot of caution in the industry and the effects are very real otherwise neither the WSJ nor Bob would have written about component shortages. It is also something we have been hearing from customers and prospects for the past 6-9 months. Yet some really good results over the past four quarters, such as those from Intel, seem to indicate that the situation may be easing. Since the financial results of semiconductor companies are a leading indicator of how other companies are investing in raw materials, it is encouraging to see the upward trend in both revenue and gross margin reported by Intel. But this blog is about component shortages. While Intel has shown better revenue numbers, the increase in the margin would still indicate a shortage situation. Looking at Intel’s inventory numbers indicates that these have been rising sharply too, especially finished goods.

The question is whether Intel is the proverbial “swallow that does not a summer make.” Looking at public semiconductor companies around the globe would indicate that the same is true throughout the industry. The figure below shows averaged financial results for all semiconductor companies.

This effect is most pronounced when considering the semiconductor companies in Asia, though a similar pattern is observed in North America, and less so in Europe.

Clearly it takes time for inventories to be built across the entire supply chain, but it is encouraging to see the level of inventories being built in the semiconductor industry. Notice that inventory levels far exceed the levels in early 2008.  In addition, the semiconductor industry is only one segment of the overall electronics industry. But, as I noted earlier, the semiconductor industry is a leading indicator because it is far up the supply chain.

What is your experience? Are you beginning to see an easing in the electronic component supply shortages?

• Excellent data (I agree this is critical, but doesn’t provide for successful S&OP on its own);
• Excellent, repeatable processes;
• Executive commitment and buy-in;
• Communication of the plan to those that must execute.

Now that I have that off my chest, I do agree with the core part of the article which basically outlines the benefits of a successful S&OP process (see the article for an explanation of these points);

• Minimize surprises
• Optimally manage inventories
• Improve margins
• Improve customer satisfaction
• Better resource  utilization

In addition to these benefits, a robust S&OP process will also allow you to respond quicker to the macro events that impact your business.  Worldwide material shortages, changing demand trends (who would have predicted the success of the iPad  besides Apple? ), major world events all can be detected and responded to faster with S&OP.  Those companies that recognize the event first and respond fastest often end up benefiting from the event while their competitors lose business.

What benefits have you seen from S&OP?  Respond back and let us know!

Where did you grow up?
My father was Air Force Military, so we moved around a lot – seems every 2 years or so we would be stationed at a different base. Things settled down when I was a late teen, and spent the longest time in Montreal, Quebec, which is where I went to university and met my wife—the love of my life.

Favorite book, movie or song?
Favorite song: U2 – Miracle Drug
Favorite movies: “Groundhog Day” and Giuseppe Tornatore’s “Cinema Paradiso”

Favorite motivational quote?
“If you’re going to do a thing, do it best” …from my father, who taught me that mediocrity should never be my goal, when mowing the lawn, doing dishes, painting a room, cleaning the garage or washing the car. But this lesson especially resonates when raising my children.

What book are you reading now?
A synopsis of James Hollis’ “What Matters Most: Living a More Considered Life”

What single piece of counsel would you offer to your colleagues in supply chain for the remainder of 2010?
Don’t settle for legacy approaches to emerging supply chain challenges – join the global social discussion with your peers to discover where the next breakthrough will come from – start here: community.kinaxis.com!

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“…They’ve been in existence for decades, they can spread like wildfire, and no one has quite figured out how to stop their proliferation – even if they really, really want to.”

I came across this entertaining rant in the Sourcing innovation blog.  The idea is that despite many attempts on behalf of IT to get key corporate data out of spreadsheets and into dedicated systems, spreadsheets keep coming back. 

The doctor’s post was prompted by an article in CIO.com that indicates that BI vendors have resigned themselves to the fact that spreadsheets are here to stay and have devised means to incorporate spreadsheet data into their systems despite the fact that studies have shown that 80-90% of spreadsheets contain serious errors. You know it’s true…How many times haven’t we been in the situation where user A’s spreadsheet showed different results than user B’s spreadsheet for the same thing?   OK, so there are a few errors…not a big deal, right?  Wrong!  To see the impact spreadsheet errors can have, check out this CIO.com article from a few years ago that outline 8 of the worst spreadsheet blunders to date. Yikes!

So why do people rely so much on spreadsheets?  There are many reasons I’m sure, but the top culprits are as follows;

• The business system (BI, CRM, ERP, etc) can’t present the information the way they need to see it
• The business system doesn’t support what-if modelling
• The business system is too darn hard to use
• The business system logic is fixed and can’t be changed (within a human lifetime)

Until we get enterprise tools that can change these factors, spreadsheets will continue to proliferate regardless of how much bug spray we throw around.

Why do you continue to use spreadsheets?  Do you have any great spreadsheet blunders to share?  (We won’t tell… honest!)