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2010

Sun Tzu, the noted Chinese general, military strategist and author of The Art of War, famously wrote that it is best to prepare for war during peace. I’m reminded of that advice by a story I recently read stating that businesses that scaled back on supply levels during the recession may find themselves or their suppliers suddenly unable to accommodate increased demand as the economy recovers.

In the article, which ran in Supply and Demand Chain Executive (SDCExecutive), Michael Kerner, North America CEO for Zurich Global Corporate, which offers supply chain insurance, said that while reducing supply inventory during the recession may have been an economic necessity, many businesses are now faced with the risk of being unable to reestablish the supplies they may soon need.

What’s more, if businesses wait for an “all-clear” to resume pre-recession production and supply inventories, they may miss out on opportunities, says Dr. Robert P. Hartwig, economist and president of the Insurance Information Institute (III). The problem, Hartwig says, is that since there won’t be a universal signal indicating that the economy is recovering, many executives don’t know when they should adjust their business models.

While business leaders often consider the costly consequences of facing a supply chain interruption, few consider the flip side of the coin. That is, having a supply chain that is not sufficiently prepared for increased demand can also present financial—and even reputational—costs, Hartwig says. Those costs can obviously add up quickly.

Vinod Singhal, professor of operations management at Georgia Tech College of Management, goes so far as to say that disruptions in the supply chain devastate corporate performance. Singhal recently conducted several related studies of supply-chain failure in collaboration with Kevin Hendricks, associate professor of operations management at the University of Western Ontario. Their research shows that disruptions do long-lasting damage to companies' stock prices and profitability.

For example, firms continue to operate for at least two years at a lower performance level after experiencing a disruption, says Singhal. Furthermore, it doesn’t matter who caused the disruption, what the reason for the disruption was, what industry the disruption occurred in or when the disruption happened. Small businesses in particular are particularly vulnerable to the effects of disruptions because they’re focused on fewer products and wield less clout with supply-chain partners, Singhal says.

According to Singhal and Hendricks’ research, companies experiencing a supply chain disruption suffer a decline in stock prices that ranges between a 33 percent and 40 percent decline compared with industry peers over a three year period.

Linda Conrad, director of strategic business risk at Zurich Global Corporate, offers additional metrics. Historically, she says, disruptions can lead to 7 percent lower sales and 11 percent higher costs. Combined with the increased costs of securing additional supply at the last minute, it’s not surprising that approximately 40 percent of companies with extended supply chain disruptions never recover, Conrad says.

All of this makes me wonder: When is the last time your company completed a supply chain risk assessment? Is your supply chain prepared for a possible surge in business? I’d like to hear from you.

When most people hear “China” and “black market” used to describe the sale of electronic products, I think it’s safe to assume that they usually think of counterfeit items being sold in the U.S. That’s why I was surprised by an article that ran in The New York Times on Wednesday about Apple’s iPhones.

It seems that in New York, and, most likely in other cities too, Chinese men and women wait in line at an Apple store to buy the newest iPhone for $600, paying a premium to skip the AT&T contract. They then sell the phones to middlemen, usually at electronics stores in Chinatown, for about $750, according to The Times article.

The phones are shipped off to China, where the iPhone 4 is not yet on sale, and are distributed to local shops and e-commerce sites--where they sell for as much as $1,000. The article also reports that once the phones have been “unlocked” to break their ties to AT&T, they can be used with local carriers.

I found the scope of the operation to be quite interesting as well. I wasn’t surprised to read that iPhone sellers in China say the phones are brought into the country by people who hide them in their bags or even tape them to their bodies. There’s more to it than that, however. More organized smugglers will bring in 100 or more iPhones daily, and some will even put the phones into a shipping container with other goods.

Most people in China can only dream of being able to afford a phone costing as much as $1,000. But millions of Chinese are developing a taste for luxury goods, and Apple products have joined Louis Vuitton bags as totems of wealth, says Shang-Jin Wei, director of the Jerome A. Chazen Institute of International Business at Columbia Business School.

These trading networks have been around for a long time, Professor Wei told The Times. They have recently become a lot more pervasive due to rising incomes in China—partially as a result of exports to the U.S., he says.

It’s difficult to say how much the situation will change tomorrow. That’s when the iPhone 4 will go on sale in China, priced at about $750 for the 16-gigabyte version, according to The Times article.

The article goes on to say that the expected release already has pushed the price for the smuggled phones down. However, Professor Wei told The Times that while legitimate sales will likely cut into the smugglers’ profits, it won’t stop the practice.

At its core, this is all about supply and demand. There certainly is demand, and black market operators have figured out how to meet it. The price seems high, but if some people are willing to sleep outside an Apple store on the sidewalk for a few days so they can be among the first to buy the new iPhone or an iPad as soon as it’s released, I guess I can understand why others are willing to pay a premium to get one of the products in China.

What do you think? Is this good, or bad for business?

CFOs and senior financial executives increasingly understand that there’s more to strategic supply management programs than simply saving on materials, products and services, according to the results of a new survey. Conducted by CFO Research Services on behalf of strategic supply and enterprise contract management software provider Emptoris, the Supplier-Side Economics survey asked CFOs and senior financial executives at Fortune 1000 companies about their supply management practices. 

The study results show that of the companies that have adopted new technologies for supply management, 56 percent of the survey respondents reported savings of five percent or more in their spending on materials and services. Additionally, of the companies that have centralized procurement functions, 41 percent of the respondents reported a savings of five percent or more in spending on materials and services.

While those savings certainly have an impact on a company’s bottom line, the responses to another question indicate a growing recognition of the importance of supplier relationships—and that managing those relationships can deliver significant advantages. When asked which aspects of supplier performance have the greatest impact on their companies' overall business performance, 58 percent of the senior financial executives cited the ability to meet commitments. Quality of materials and services also was cited by 54 percent of the respondents as a factor that has a substantial impact on the company. Price was also cited by 51 percent of the execs.

These results indicate a shift away from fixating solely on price to a more holistic focus on total cost, which reflects a realization that numerous points--such as availability, timeliness and quality—effect the strategic soundness of working with a supplier, says Patrick Quirk, president and chief executive officer of Emptoris. This is counterintuitive to the assumption that companies solely focus on cost factors during uncertain economic times, he says.

I always like to read through survey results to see where there’s room for improvement too. Something that stands out to me in this case, is that there are somewhat mixed results about how the companies’ finance and procurement departments work together. On the one hand, two-thirds of the survey’s respondents say their finance and procurement groups usually work together effectively, which is encouraging.

However, only four out of ten finance executives say their companies are excellent at measuring the performance of the procurement function or the risk posed by suppliers. Improvements in this area, says Quirk, will enable finance groups to more fully integrate critical supplier information into business planning, reducing spending and contributing to risk management.

Finance executives—in part due to the economic downturn—have begun taking a much greater interest in supplier management in recent years, says Sam Knox, vice president and director of research at CFO Research Services. They are paying closer attention to supplier relationships in an effort to manage working capital more closely, to avoid financial and operating risk, and to manage volatility. The results of this study suggest that procurement technology and sound relationships among finance, procurement and suppliers are likely to remain top-of-mind among many finance executives, Knox says.

What about your company? Do the findings of this survey mirror what you see?

When consumers take drugs—particularly prescription medications—they expect those drugs to be not only effective but also to be safe to consume. That’s why it’s troubling to see that the U.S. Food and Drug Administration (FDA) has warned drug maker Bristol-Myers Squibb of possible sanctions if it fails to correct “significant violations” of good manufacturing practices at one of its two plants in Puerto Rico.

Last March, U.S. health regulators inspected Bristol’s plant in Manati, Puerto Rico, which produces the brand-name rheumatoid arthritis drug Orencia, and the brand-name anti-clotting drug Coumadin, among others. They found that plant workers did not comply with practices to keep areas sterile--similar problems were also found in 2005 and 2009. Regulators additionally discovered that there were failures in the plant to check when there were problems with a batch of products, and there were problems with Bristol’s plans to test product standards.

While Bristol responded to the agency’s concerns last April, the FDA wrote in a letter sent to Bristol Chairman and Chief Executive Jim Cornelius, that response “lacks sufficient corrective actions.” That letter, which has been posted on the FDA’s WarningLetters website, goes on to say:

 

“Your firm has not established scientifically sound and appropriate specifications, standards, sampling plans, and test procedures designed to assure that drug products conform to appropriate standards of identity, strength, quality, and purity.”

 

As would be expected, there are serious consequences if the drug maker does not take appropriate corrective action. The letter warns that other federal agencies may take the letter into account when considering the award of contracts, and that the FDA may withhold approval of pending drug applications listing the facility until the violations are corrected.

In a story that ran on Reuters news service, Sonia Choi, a spokeswoman for Bristol, said the company takes the FDA’s concerns seriously.

“We’re working with FDA to promptly address the issue,” Choi said.

Bristol met with the FDA in August before the warning letter was issued, and has already taken some steps to fix some of the problems, Choi said. For example, in the letter, the FDA wrote that due to continuing CGMP issues at the plant, the agency recommends the company engage a third-party consultant having appropriate CGMP expertise to help improve the facility and its procedures. Choi says the company has done that.

I’ve posted before, Aug. 5th, about legislation that was introduced in August. The bill, titled the Drug Safety and Accountability Act of 2010, DrugSafetyandAccountabilityAct, would give the FDA increased regulatory authority over drugs.

The proposed legislation is intended to boost consumer protection against adulterated drugs by establishing quality standards for the FDA, drug companies and their contractors--who are increasingly based overseas where safeguards may be lower than those of the U.S. The legislation also would improve the federal government’s tracking systems of manufacturing sites. If passed, the bill also would give the FDA the authority to require a company to recall drugs that have been found to be contaminated or unsafe.

I’m not sure whether the legislation is necessary or not—and I certainly don’t know if the bill will be passed. However, I am sure that an inability to establish or follow rules to prevent contamination of drugs is exactly the type of scenario Senator Michael Bennet had in mind when he introduced the bill.

There is a lot at stake here for Bristol, and I plan to follow the story. What about you? What are your thoughts on either Bristol or trying to enforce good manufacturing practices at plants--whether they are yours, your suppliers' or partners'--in foreign countries?

I feel a little like TV talk-show host Dr. Phil for asking this, but how are your relationships? I don’t mean relationships with your spouse or co-workers, I’m talking about your suppliers.

I ask that because this year’s challenging business environment has forced many companies to work more closely than before with their suppliers. Some manufacturers have done even more.

According to the results of a survey conducted by procurement and supply chain consulting firm State of Flux, more than 70 percent of the respondents reported that they have made at least “moderate” progress in their supplier relationship management (SRM) initiatives during the past 12 months. Encouragingly, more than 80 percent believe SRM will become more important for their organizations over the next 12 months.

I was a bit surprised, however, by the level of SRM maturity—or, rather, the lack of maturity—cited by participants. When asked to rate the overall maturity of SRM in their organizations, 40 percent reported that it was “undeveloped,” and 37 percent reported it is “formalized,” that is, policies and processes are defined and starting to be implemented with some suppliers.

On the other hand, 20 percent of the respondents cited their SRM initiatives as “established,” meaning the processes are more consistently applied and some benefits have been achieved. Finally, three percent believe their SRM initiative has been “optimized” with all strategic suppliers.

Those companies describing SRM as established or optimized were labeled SRM Leaders by State of Flux. These companies, such as Procter & Gamble and Toyota, enjoy greater business buy in, have more trained relationship managers, and are better equipped to measure the impact of SRM activities than SRM Followers.

These Leaders have obtained measurable results as well. For example, 72 percent of them reported that they have achieved financial benefits through targeted cost reduction efforts. Additionally, half of the SRM Leaders now have more efficient supply chains as a result of their SRM initiatives, and 45 percent of them report better levels of quality.

More importantly, these SRM Leaders focus on SRM as a means to drive innovation and top-line growth: Almost a third of them say they have benefited financially from access to supplier innovations. Furthermore, 25 percent of the Leaders have gained from improved collaborative product/service development, and 20 percent noted financial benefit from increased sales.

Even so, there are still significant barriers to achieving progress. As for barriers within the organization, survey respondents most often cited measuring SRM benefits, a lack of cross-functional co-operation and unchanging mindsets about the role of suppliers. Survey participants noted that chief among the barriers outside the organization, are an inability to measure benefits as well as a lack of shared benefits, cultural differences with suppliers and a lack of trust.

I have to admit that I don’t find those results surprising. After all, changing company culture and corporate mindset is always difficult. People resist change, and that’s often what slows initiatives down.

“All too often, rhetoric about collaboration and partnership isn’t matched by a change in organizational and individual behavior toward key suppliers,” says Alan Day, managing director of State of Flux.

Day further says that changing mindset and behavior is exactly what is required if SRM is to deliver the benefits of a more open and trusting style of business relationship. That requires a strong commitment from the most senior people in an organization along with proper levels of investment in skills, resources and supporting tools and technology.

Other companies would do well to follow the example of the SRM Leaders because what they demonstrate is a willingness to emphasize the relationship aspect of SRM with suppliers, Day adds. They recognize that a genuine relationship is a two-way interaction involving mutual rewards, and that it isn’t simply a more efficient means of extracting value at the other party’s expense.

So, how is your SRM initiative going? Are you an SRM Leader?

Do you remember what company was next to market with a portable audio cassette player after Sony introduced the Walkman? That’s ok, I don’t remember who followed Sony either.

I’m reminded of Sony’s success with the Walkman though by a story that ran in the Wall Street Journal yesterday about Samsung Electronics and Toshiba. Both companies have plans to enter the tablet-computer market, which, of course, has been taken by storm by the Apple iPad.

Samsung’s Galaxy Tab, which runs on Google’s Android software, features a cellular connection and a seven-inch screen. Like the iPad, the Galaxy Tab customizes core applications--such as e-mail and contacts--to take advantage of the larger screen size, offers Wi-Fi capabilities, and provides a hub for reading magazines, books and newspapers.

Samsung will rely on its carrier partners to sell the tablet, rather than selling to consumers. Vodafone Group PLC, the world’s biggest mobile operator, said it would start selling the Galaxy Tab in most of its European markets and a number of its other markets worldwide in October. And while the tablet is expected to launch in the U.S. over the next few months, Samsung will only say it is in talks with multiple carriers.

In other tablet news, Toshiba plans to release the Folio 100 by the end of this year. The tablet computer also runs on Google’s Android operating system, can connect to the Internet via Wi-Fi networks and is equipped with a 10.1-inch multi-touch display and an embedded webcam. Toshiba plans to sell the Folio 100 in Europe, the Middle East and Africa, but the decision has not yet been made as to whether or not the company will sell it in other regions such as the U.S. or Japan.

Toshiba and Samsung aren’t alone in their development efforts either. However, although companies are quickly developing products that match or exceed some of the surface hardware specifications of Apple’s iPad, it’s unlikely that competitors will be able to equal the overall performance experience of the iPad, says Rhoda Alexander, an analyst at market research firm iSuppli. Apple’s complete integration of hardware, software, operating system and applications is a major piece of what makes the device a standout. And on that basis—an integrated hardware/software design—iSuppli doesn’t see anything in the marketplace at present that seems likely to rival what Apple is offering in tablets today, Alexander says.

What’s that mean for the market? iSuppli predicts the iPad will account for 74.1 percent of global tablet shipments in 2010. And despite the arrival of the first real iPad competitors in 2011, Apple will still maintain a 70 percent share of shipments. What’s more, that market dominance will continue through 2012, as iPad sales will account for just over 60 percent of global tablet shipments, predicts iSuppli.

Being first to market has paid off for Apple. What about you? Have you been first to market? Is it always an advantage?

Two recent articles have me thinking about not only the benefits of S&OP but also its future.

Driven by increasing supply chain complexity, business speed and demand volatility, many companies seek out the means to better align financial and corporate objectives. S&OP, of course, offers a method of doing just that.

An article that recently ran in CFO.com offers an example of what business was like for one company before it implemented an S&OP process. That company is Oakley, the maker and distributor of eyeglasses, shoes and athletic apparel.

Richard Shields, CFO at Oakley, a division of Luxottica Group, says that in the past, representatives from sales, marketing, finance and manufacturing would attend planning meetings—but they all had different objectives. Manufacturing people, who naturally focus on production output, would ask for high inventory levels. And with an eye on commissions built on revenue, sales and marketing people would ask for all orders to ship immediately. Finally, the finance team, interested in low levels of working capital, would try to keep inventory levels down.

Since they were all armed with data reports supporting their departments’ position, the first discussion was always geared toward discovering not only who had the right data, but also what data was missing, Shields says. Because the finance team had more analysts, it was equipped with the richest data—and usually got its way, he says.

The problem with the situation was that the company wasn’t getting consensus through sales and marketing and manufacturing, Shields says.

That’s all different now since the company implemented an S&OP process because there’s much better alignment of the four key groups. Today, data issues are resolved at a series of junior management meetings held each month. Then, in a final monthly meeting, senior executives are presented with fully inclusive data in a set of agreed-on metrics.

That meeting is now a discussion of the business rather than a debate about which department’s data is most appropriate, says Shields.

The reason I’m also thinking about the future of S&OP is that I’m intrigued by an article I read today on IndustryWeek, in which Kinaxis' Trevor Miles wrote that although many companies may have a fairly well established S&OP process, it generally requires a great deal of slow and manual effort. And while there’s a definite need for a mature S&OP process today, the level of cross-functional and cross-organizational process synchronization, collaboration and frequency required to achieve such a high-level of S&OP maturity simply cannot be achieved with Excel spreadsheets--and definitely isn’t possible without using any technology.

To reduce planning latency and gain supply chain agility so they can meet operational and financial objectives, forward looking companies should be investigating how they can create a single, flexible planning capability across the planning and execution horizon, Miles explains. Achieving this type of mature S&OP requires adopting new processes that are enabled by technology. Miles notes that these processes will enable users to:

·       Synchronize planning using a single system, with a single data model, and a role-specific UI;

·       Reconcile planning across different time horizons, units of measure and key performance indicators;

·       Immediately test the feasibility of volume-level plans at the mix level and reflect changes made at the mix-level in the volume-level metrics;

·       Employ frequent and robust what-if capabilities to evaluate multiple upside and downside scenarios to mitigate against risks and respond to unplanned plan deviations; and

·       Identify and collaborate whenever needed with team members across organizations and functions to establish quick consensus on action plans.

What do you think? I’d like to hear from you. How is your S&OP process? What’s your take on the evolution of S&OP?