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2011

Biodiversity is becoming an increasingly important subject that industry is start to really think about and address. In recent years in the supply chain we have had a lot of reports, notably the Stern Repor t on Co2. Professor Wilding believes that Biodiversity is the next Co2 in logistics and supply chain management.

 

The reason for this is a recent report just published called the TEEB-report. It stands for The Economics of Ecosystems and Biodiversity.  What they are actually looking at is the whole issue of how biodiversity and industry impacts on biodiversity.

 

 

 

 

What is biodiversity?

 

One way to think about biodiversity is that it is all about encouraging variety. If we think about trying to encourage variety in terms of plant life, we actually encourage variety in terms of insect life. When we have lots of insects we also encourage a lot of birds, mammals, etc. For example, we can look at a garden in someone’s back yard. If you were to concrete your backyard, you will have very little biodiversity. You may have a few blades of grass or some ants. If you put down some grass in place of concrete, you encourage more insects, which in turn will encourage a limited number of insects and birds. As you plant some more types of plants in the garden, more variety of insects and plants are encouraged. In fact, a typical oak tree has about 250 species of insects living on it, in addition to the bird varieties it attracts.

 

From a business point of view the decisions we make have a big impact on biodiversity and our natural environment. This may appear to be a big issue, but it can be a little issue as well. For example, if you are building a new warehouse with large roofs, what do you do with all the water that comes off the roofs? If you just put it down the drain it is not going to encourage much variety in terms of biodiversity.

 

Some companies are already capturing the water runoff from the roof and making a wetland. If they have a wetland this encourages different types of plants, more variety and maybe even fish life etc. This encourages more variety and biodiversity.The way we act, even if it is just thinking about a simple building project, can have an impact on the amount of biodiversity. This is really good news for business because what we are starting to find, for example, is that if we start to wake up to the fact that biodiversity is particularly important we can start to do some things which impact it. Just thinking about the fact that Co2 is locked up in woodlands and that it is believed they hold about 3.7 trillion dollars, just by what is locked up in forests. As we act in industry and work in ways that encourage and minimize the impact on biodiversity, we will be doing a good thing. This will also impact the issue of global warming etc.

 

What are some of the things we need to consider as a business?

 

The first thing that is really important to consider our business impact on biodiversity. We can do this in a variety of different ways. One of the things Cranfield is currently researching is with a company called Middlemarch Environmental, a specialist consultancy on environmental management. This research project is looking at a biodiversity risk assessment tool. When we start to actually assess risks and opportunities and start looking at ways to encourage variety around us, whether in a warehouse or in terms of the way we move our goods, or where we source our goods.

 

Look for Opportunities

 

Another good thing about considering this is that we often find we get extra business opportunities presented to us. For example, businesses who have thought carefully about Biodiversity and have built captured runoff water from their facilities to create wetlands. These wetlands are then being able to become income generating activities in their own right. In fact, some lakes may even be used for water skiing, fish, etc.

 

Set Targets

 

What we need to do is have targets and measures in place. This is really important because we have to start measuring what the impact is and start understanding what that impact is. We need to make sure we get those targets and measures in place and ensure things are actually moving forward.

 

The point is we are all responsible for this. There are things we can do in our backyards, but also if you are a CEO of a business you can encourage your organization and the people within the organization to think about how to encourage this variety. This will be good for the planet, for your business, and at the end of the day will actually generate some additional opportunities for you to create income for the organization as well.

 

By looking at this in the right way we can have an impact on Co2, biodiversity, and protect the limited resources of our planet.

 

About Professor Richard Wilding

 

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Professor Richard Wilding is a Professor of Supply Chain Strategy at Cranfield School of Management in the UK.

 

Website: www.richardwilding.info 

Facebook: www.facebook.com/supplychainprofessor

Linkedin: www.linkedin.com/in/richardwilding

 

 

References

 

http://www.som.cranfield.ac.uk/som/p15700/Knowledge-Interchange/Hot-Topics/Corporate-Responsibility-and-Sustainability/Biodiversity-An-Issue-for-Business

Charles Ehin, an American professor of Management at Westminster College found that management literature really has been out of date. It is very slowly now getting to where we need to be.  What is really driving what we are learning today is the new field of neuroscience and social neuroscience. Essentially, from Charles’ perspective it is turning formal standard management on its head. This is why he has written lately mostly on ideas based on evolutionary biology and neuroscience.

 

 

He just had an article published in October of 2010 in the Journal of Quality and Participation entitled ‘Muddling Through’. He also has another article which will come out shortly on the knowledge board site that has to do with managing homeostasis, essentially how homeostasis extends beyond the body.

 

The Organizational Sweet Spot

 

For years Charles struggled with the fact that we think management is all about the organizational structure (who sits on top, who is below that, etc.). As we are all now learning is that this is not how the world really works, whether in management or anywhere else. It is all about networks. The networks really start in our minds and our bodies, and then extending beyond that.  This is precisely why we increasingly need to pursue collaboration. This is a natural phenomenon and most organizations have a habit of making it very difficult to share information within the organization.

 

Charles looks both at a biological and social standpoint to see how organizations really work.  If we sit back and think about it work really gets done is the ‘Sweet Spots” or the spot between a formal system and the informal system. The reason for this is quite simple. Formal systems can be managed. Informal systems can’t be managed, not matter what you do. There is no way for a formal system to participate in everything that needs to take place in order to get a product or service out the door. You can set up all kinds of systems, processes and technology for a management structure, but you really can’t anticipate what will happen once people are immersed in that particular system.

 

The reason for this is quite simple. People innately form informal systems, based on their roles, identities and relationships. The same is true for the ‘Sweet Spot’. With a Sweet Spot you have the informal and formal systems coming together, both trying to interpret what needs to take place. Work doesn’t take place with somebody telling someone else what to do. It is emergent. People come to a ‘meeting of the minds’ at that spot because they have both management and the informal systems have figured out what needs to take place. They are essentially collaborating to do that.

 

Charles calls the formal system a controlled access system because it is controlled by the management. He calls a system that is essentially a self-organizing system a shared-access system whereby he advises to try to get out of the controlled system and get into the shared-access system as much as possible.

 

Transition is quite simple. Essentially, you are trying to get rid of the management structure. While there is nothing wrong with management structure, you gain a lot more with anything you do. It is a difference between commitment and compliance. You want a system where you have commitment as much as possible, instead of compliance. We all know that when we deal with a compliance system we only do what we are told to do.

 

A classic example is when we talk about specifying what kind of work you are supposed to do. Essentially, when you tell somebody to do something beyond their work contract they can say ‘well, it is not my job description, why are you bothering me?’ This is really not where you need to be.

In order to go from the controlled access system to the shared access system, the best way to do that is to go from a tall hierarchy, medium hierarchy and then a flat hierarchy. However, that is as far as you can go with a controlled access system where you still have management presence.

 

You need to really switch over to a self-organizing, shared-access system. In order to do this you need:

 

1. Bring people on board who are comfortable with self-organizing systems. Sometimes this can be quite difficult.  We have all grown up in structured systems. Some people are fairly comfortable with the 9 to 5 organizational environment where people are essentially told what to do, they carry it out and then go home at night and forget about work. What you really want is everyone pitching in towards the same goals. In order to do that you need to develop an organizational environment.

 

2. Develop an organizational environment. Charles has developed 4 principles over the years in order to accomplish this. Every organization needs to take a look at these principles and apply them in their own way.

 

 

Four Principles for Developing an Organizational Environment

              

1. Individual Identity - Need to give a lot of autonomy. In order to do this you have to have the people there who are responsible, committed, have empathy and care about what other people are doing. Obviously, you also have the talent and skills you need.

             

2. Shared Identity – The key word here is belonging. You have to have a sense of belonging to really be part of something great. One restriction is that you are talking about small groups. You usually can’t grow beyond 150 or so. If you can’t call everybody by their first names you are too large. When you have a large organization it needs to be divided into smaller segments that are collaborating.  W.L. Gore & Associates is an excellent example. A lot of people don’t realize that W.L. Gore & Associates have essentially worked in this particular mode since 1958 when Bill Gore founded the organization.  Another part of shared identity is that you accept people’s varied identities, differences and synergistic relationships.

               

3. Challenging Aspirations – What can we do better? What can we do that we even haven’t thought about? You also need shared aims and incentives and individual aims and incentives. A lot of times we establish goals and objectives for the organization, but we forget the individuals. An individual really won’t go ‘gung ho’ or support the organization as much as possible if he or she doesn’t see that there are benefits for them personally for going along with the aims of the organization. Another factor that comes into play is periodic reflection. A lot of organizations think that periodic reflection is a waste of time because time is money. Yet, how do you know where you are and where you are going if you don’t sit down and reflect upon it?

               

4. Dynamic Alignment – The foundation for this is catalytic leadership. Dynamic alignment means you make transferring decisions, you have interdependent thinking, and you are constantly anticipating change. Everyone knows what is taking place within the organization so that there are no surprises. What Charles refers to as catalytic leadership is founded upon leadership based on expertise, not position and power. A good way to look at this is value-added knowledge facilitation. Value-added knowledge facilitation is nothing about bossing someone around. Charles’ definition of catalytic leadership is encouraging others to participate in value added activities that they are either not aware of hesitant to initiate on their own, that would benefit everyone involved.  It sounds simple, but is very difficult. Part of catalytic leadership is that everyone within the organization takes responsibility for everything that happens in that organization. This is tough to do if people have the mentality of ‘that is not in my job description, I am just a receptionist and what else takes place here is none of my business.’

 

Where to get the book

 

Springer is the publisher. You can find the book on their website. Alternatively, you can visit Charles’s  website www.unmanagement.com

 

About Charles Ehin

 

CharlesEhinpic.jpgCharles Ehin is an American professor of Management at Westminster College. He is the former dean at the Gore School of Business. Charles is originally from Estonia. He fled from there in 1944 and eventually ended up in the United States in 1950. Charles has numerous degrees, including a PhD in business from the University of Oklahoma. He served 20 years in the US Air Force and was afterwards become involved in academic endeavors. For the last 20 years Charles has been researching outside the field of management, besides from keeping himself up to date.

 

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In today’s world, where the entire economy is interconnected, every day we hear there is an impact on the U.S. economy because of a slow-down either in Europe or in China. We hear about increasing raw material costs in the United States because of a certain deal in Australia, for example. In this environment it becomes obvious that it is very difficult to maintain competiveness and yet have all of your suppliers from one single country or a region.

 

 

Pros and cons of sourcing domestically versus internationally

 

There are a couple very strong advantages with domestic sourcing. First, you are all located within the same regulatory environment and same legal system. You also know that the products, which are sourced domestically, typically would comply with the same quality standards that you and your customers require. For example, sourcing products with certain EPA requirements from outside the US can be a major challenge. Yet, while there are advantages to sourcing products domestically, there are also significant disadvantages. The labor costs in the United States are obviously less competitive considering wages, cost of health care, etc. Also, resources may be concentrated in other countries, outside of the US.

 

There are also significant disadvantages to sourcing internationally. You are severely impacted by the adverse effects of currency movements. For example, over the last year, if buying products from Western Europe, product pricing could have suffered significant swings due to huge moves in Euro / Dollar exchange rate, resulted from European financial crisis. Similar effects could be seen a couple of years ago with sourcing from China.

 

In today’s environment you need to consider very carefully short term (6 months to 1 year) versus longer term (3 to 5 years) supply agreements. With the longer agreements, for anybody who is doing international sourcing, and nowadays even for domestic sourcing; one must consider various tools for mitigating adverse impacts of widely fluctuating raw material prices, or adverse effects of swings in currency valuations.

 

Such mechanisms could include utilization of different Price Indexing clauses in the agreements, clearly depicting upfront the price adjustments to be made due to fluctuations in certain relevant parameters. If you use a Price Indexing mechanism, trying to protect your downside, you should also consider that there is always the other side of the coin. You should always consider what if it works the exact opposite to your best interest, and, therefore, it moves in favor of your vendor. You always have to consider if you are willing to go for the status quo and live with a needlepoint between you and the vendor, using the Price Indexing mechanisms.

 

Recommendations

 

If you do international sourcing, it is important to consider the best diversification strategy between different regions in the world. For example, there was a trend in the economy starting about ten years ago whereby almost every company said, ‘Well, it’s so great to source products out of China,’ and they had a high concentration of vendors out of a single region, even out of just one single country like China. Over the same ten-year period, while enjoying the initial benefits, the same companies experienced a very adverse effect of that too. They also recognized the negative tradeoffs. One of them is that some of these products might not always adhere to the quality expectations of the U.S. market. The other is even more consequential: when the government of China makes a decision about changes in policies, such as a currency exchange rate, these decisions have deep implications on product pricing, often making these relations cost prohibitive. Another example of such policy affects: a couple of years ago, the Chinese government decided to adjust the VAT rebate levels for exporters out of China.

 

Some of those trends have adversely affected the price structures of most companies who were buying products from China. The products could raise ten, fifteen, twenty; some products I saw rising by as much as forty percent from the contracted prices.

 

For those who have international diversification, and have a certain balance between Asian vendors versus domestic versus Canadian versus West European, they obviously have an upper hand because they always can play one region against the other in terms of where to buy from. They can readjust the purchasing allocation in favor of regions, where the economic conditions are advantageous to their sourcing strategy.

 

Examples

 

A well known report on the company Agilent presented a case study in the Supply Chain newsletter and has been available online on the blogosphere. Agilent has a much diversified international presence, not just the supply chain, but most of their business activities go through international diversification. Another example could be companies like McDonald’s. What is so advantageous about what they are doing is diversifying not only the sourcing strategy, but also their retail presence. Wal-Mart appears to be going the same route. Once they built up a very good retail presence in the United States — they were some of the pioneers of diversifying sourcing outside of United States on a large scale — they started to take it to the next level. They realized much more advantages in creating a retail sales presence in the same areas where they have a concentration of their vendors.

 

What they actually accomplish by expending the revenue-generating sales activities within the same countries / regions from where they source products is the ability to mitigate adverse affects of some local economic changes. If they have a large concentration of vendors in India, associated with their cost expenditures, and at the same time develop a network of retail stores in India, associated with their revenue generation, then such conjunct strategy helps them greatly in offsetting any adverse effects, which they otherwise would have on the purchasing side alone.

 

About Alexandr Shulman

 

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Alexandr Shulman is a strategic thinker, business turn-around specialist, proactive sourcing / supply chain manager based in the Chicago area. He has roughly fifteen years of experience in supply chain, operations, and domestic and international sourcing. Before going into the corporate world, Alexandr had his own business, which he started while in college, and which grew to about 80 people on staff and seats on 8 futures exchanges.

 

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Peter Spence discusses his current research topic, focusing on describing the concept of what collaboration is; what collaborative organizational forms are; why they are vital to success in the global relational economy; briefly touching on the key elements of collaboration; links to negotiation and other emerging topics such as IC and Network analysis (some topics already covered in my previous posts including Mary Adams "Intangible Capital' and Verna Allee's VNA).

 

 

 

Peter is exploring the relation between negotiation training and negotiation development as a core organizational competency to facilitate or accelerate the concept of collaborative enterprises.  Starting with the concept of collaboration, and through the literature, Peter has drawn together a definition which is involving the conscious joint effort and cooperation by two or more parties who voluntarily pool their complementary expertise, perspectives, knowledge, skills and resources for the purpose of achieving a common goal or outcome that serves their individual interests, far better than what they could achieve alone.

 

The common thread with the different concepts of collaboration is that it involves people coming together, with a diverse background, expertise and resources and working to achieve a common goal that can produce outcomes bigger than any of them could produce alone.

 

The relevance of Peter's choice of focusing on collaboration is that we are seeing the emergence of collaborative enterprise, or collaborative organizations in the new relational and knowledge era. We have moved from the industrial era. The ballgame has changed. We have moved from the industrial era where hierarchical organizations have been the dominant organizational form. It has been an environment that has been stable enough and unchanging enough for the hierarchical organization to be suitable to that environment. It was predictable and stable enough that the organizations could develop, but unchanging enough so that they no longer need to evolve.

 

We have now moved across to the knowledge era and the relational era where hierarchical bureaucracies are no longer as relevant to the organizational environment. They are no longer aligned to the organizational environment. We are looking at the emergence of collaborative forms as being the new superior form of organizing. The reason behind this is that the collaborative organizations or collaborative forms are now becoming more aligned to the state of our complex environment where we are looking at fewer resources and more demands for more innovative products, better prices, just-in-time services, and instantaneous or immediate delivery of services.

 

Collaborative enterprises provide the vehicle or form that is more aligned, there is a smoother texture between the organizational form and the operating environment.

 

Why is the collaborative form so responsive?

 

It provides certain aspects or advantages for the new organization. It enables organizations to virtually scale. They can stay small and perform as large organizations. By doing this they retain their core signatory strengths. They outsource and link through partnerships to access more diverse skills, perspectives, knowledge, and resources that can solve a problem much better than what those organizations could ever do alone. You have more nimble organizations now that seem to be more competitive and perform much better than the larger hierarchical organizations possibly can do in the present environment.

 

We are looking at the collaborative forms which also provide the advantage of increasing power for those organizations through partnerships. You are developing coalition power, and connection power through collaboration. You also have access to knowledge and learning. There is more creativity and innovation. This is why we are looking at collaborative enterprises as communities of practice and learning organizations that provide the advantage of speed. This helps the organization be more responsive to the pace of change and the demands for innovative products in a timely fashion.

 

Collaborative networks provide access to external resources and information for the purpose of organizations to get ahead of the status quo. It provides the capacity to build strength and sets themselves apart from others. When looking at the flight of hierarchy from organizations now and with collaboration emerging as the superior form, we come across a variety of definitions for collaborative enterprises, such as virtual networks, self-managing teams, strategic alliances, and cooperative partnerships. The thread that pulls them together is that they have the ability to tap into these diverse resources and expertise to solve a problem much better than what they could achieve alone.

 

The collaborative enterprises really have to look at designing the structure that supports the collaborative processes so that you can bring together and harness multiple and diverse sectors of the community to address a much wider range of issues in a world that has few resources and increasing complexity and demands.

 

The Dark Side of Collaboration

 

You have the advantage of collaboration which provides speed, flexibility, the ability to adapt, respond and represent problems. However, with collaboration you have a darker side as well. The dark side is to apply the legacy of the old scientific management principles to these new ways of organizing or new organizational forms. As a result, we tend to see a lot of organizations being over managed and under-led. They lack the collaborative competencies to drive the new organizational forms.

 

They can become a cost sink if they don’t have the necessary collaborative competencies to manage the collaborative structure. These competencies include relational competencies, and negotiation competencies – as core organizational competencies.

 

The collaborative form is a social process that in essence is a negotiated order where people, organizations and diverse people in organizations, must negotiate their roles, responsibilities, resources, and their own interests to develop common interests and goals.

 

The challenge for the new organization is to develop the competencies that look at the key issues or elements that signal the health of collaborative enterprises. Through his research, Scott has come up with a number of those key elements or red flags for collaborative health.  They involve the history of working together, which are the heritage relationships. It also involves how well people work together, or if there are poor relationships, how that effects the collaborative enterprise and relationships, and ultimately the trust and ability for people or organizations to work together.

 

Mutual Concern - The other issue is mutual concern. Mutual concern is the mutual or collective interest of organizations. People come to an organization to satisfy their own self interests. From there you have teams or group interests. Then you require the organization to satisfy the organization’s interest. This involves the alignment of self interest to the super-ordinate interests. Thus there is mutual concern.

 

Commitment - is another issue, providing a sense of ownership for all involved in the decision making and planning. They are more committed to delivering a common purpose.

 

Role Clarity - This is a large challenge for collaborative organizations. It is necessary to negotiate roles so that each participant is quite clear on their particular roles. Also, goal clarity is needed, so they know where they are going.

 

Mutual Goals – If we have our own interests and we have collective interests, the issue is how to we develop a mutual goal or common purpose that can achieve our outcomes or serve our purpose better than we could do alone? This is a key challenge for an organization. When aligning the interests with the organization’s interests, and aligning personal objectives to the organization’s objectives, you tend to have others straying from the organization’s goal. Management then becomes like herding cats.

 

Connectedness – Building up the affiliation and participation for all involved. How do you connect with others and how do you engage them. How do you pick the right partners? Verna Allee has talked about Value Network Analysis. Any network analysis is a key to looking at the issue of connectedness as the health of the collaborative enterprise. How people connect, where the structural holes are in organizations, where the flow of value goes or where it is blocked, and how you can overcome those particular gaps.

 

Trust – is central to all the elements of collaboration. Trust is a lubricant that really brings people together and facilitates them working together. It shouldn’t be overlooked and is something that should be worked on in any collaborative enterprise.

 

Communication – Open communication, how the flow of communication occurs and how the organization is structured to facilitate communication. The culture of the organization and how it facilitates open communication.

 

Mutual Power – When you have these networked organizations you have a flatter structure and power is spread amongst individuals and organizations. There needs to be a balance of power. It is a power with, rather than a power over. The more we develop the power with, the stronger the organization becomes. That is a critical core advantage of collaborative enterprises. The coalition power, or the power that has developed with the organization.

 

Boundary Permeability – We are seeing a lot more blurring of boundary lines between organizations and between departments and groups within organizations. We see boundaries across nations as well. Any collaborative form must have the ability to bridge boundaries. There is more boundary permeability that facilitates connectedness, working together and bringing in diverse participants with the right resources at the right time.

 

Membership – should be based upon diversity. Individuals should really be selected based upon their ability to respond and also represent the problem or challenge or opportunity at hand that needs to be resolved. Diversity is a very big part of collaborative enterprises. It is an element that really contributes to the innovation and co-creation of knowledge and building up of value within collaborative enterprises.

 

Self Development – Each participant develops through their collaboration and strengthens their knowledge, skills and expertise through the enterprise. Their capacity to perform in the future is improved.

 

How do we get to these elements of the collaborative enterprise?

 

It comes back to the organization’s capacity to build the competencies needed to bring together those elements as a whole. This is linked to negotiation. Negotiation, and the theory of mutual gains negotiation, as well as beyond to collaborative negotiation, provides the opportunity to develop a number of these particular skills. How can we strengthen our history of working together or how we can repair poor relationships? How can we negotiate and align our interests with organizational interests? Commitment is involving others in the joint problem solving process of collaborative negotiation. How do we negotiate roles and responsibilities so that there is more clarity in those particular areas? How do we negotiate a common purpose? How do we connect through negotiation?

 

You will even be looking at the connected negotiator. We would be looking at the connectedness and how we are bringing the right partners together. Trust is also a big issue with negotiation, how we can develop a trust and on occasions developing swift trust in organizations, particularly when you have short-term project activities or problems to be resolved.

 

Communication is negotiation - Communication really is the negotiation meaning. The better we develop our negotiation competencies, the better we are at communicating.

 

Power - Is another issue of negotiation. How can we balance power through negotiation?

 

Diversity – Can lead to innovation, combing particular perspectives. There are also boundaries around identity issues. When you have diverse individuals coming together they would like to pursue their own self interests and goals. The idea is to use negotiation to bring them together so that there is less conflict in those particular interests and goals.Negotiation is absolutely vital to managing diversity within collaborative enterprises.

 

 

Conclusion

 

The issue of the linkage between the development of negotiation and the collaborative enterprises is managing diversity. Peter is looking more towards the development of negotiation competencies as a core organizational competency, as well as collaboration as a core organizational competency. This is not left to the development of individuals within the organization per se. Peter is looking at a system that could develop the organization’s core competencies.

 

Recently, a book came out by Hallam Movius and Lawrence Susski called Built to Win: Creating a World-class Negotiating Organization. This book provides some tips on how you can build negotiation as a core organizational competency. This book gets away from the small one off training exercises and looks at it as a long term learning process for organization – and this can also apply to collaborative enterprises.

 

 

About Peter Spence

 

Principal at Strategic Planning and Negotiation Services

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Peter Spence is the founding principal of Strategic Planning and Negotiation Services (SPANS), a specialist services firm providing advisement and training on negotiation theory, strategy and practice.  Peter has over 18 years experience in negotiation practice, consultation, research, development and delivery of training interventions across the diverse fields of crisis, commercial and social negotiations. He is the organisation’s lead negotiation consultant, specialist agent, coach and trainer.

 

Peter is also the CEO of a successful Not for Profit Primary Health Care organisation and is currently conducting research through Southern Cross University, Australia,  into the use of negotiation training as an accelerator of collaborative enterprise.

Peter has established the SPANS Negotiations Forum, a network group dedicated to forming a community of practice of international negotiation experts, organizations and learning institutions for the purpose of developing and sharing in the research, practice and theory of negotiation.  This global forum includes many leading international practitioners, researchers and teachers in the field of negotiation.

 

Contact Details:

 

12 Norfolk Crescent, Coffs Harbour 2450 NSW Australia

Tel: 61 266516167   MOB:  61 0457 941188

Email:  pmspence@bigpond.com

Website:  www.spans.com.au

 

 

What is the state of the Irish market and purchasing in your region?

 

The Irish market is a very uncertain one at present. It has gone from boom to very much bust in a matter of years. Unemployment has gone from relatively full employment to circa 14% unemployed (400,000+) in just over 3 years. On top of a global economic downturn which hurt a small open economy like Ireland the country also relied on continued tax returns from an over heated property sector, which has crashed. From being a net contributor to EU coffers, Ireland is now relying on IMF and EU bailouts. Taxation has increased and public sector spending is being slashed. Several banks have been privatised and there is little or no funds available for companies to borrow.  During the boom years prices for both goods/services and labour tripled and it was very much a sellers market. This has now turned on its head with drastically reduced salaries/wages in both the public and private sectors and it is now a buyers market. Cost control are the buzz words and cash is king. Suppliers are finding it difficult to get paid with credit lines being extended.

 

 

How do you recommend companies do purchasing in such an environment?

 

Companies and organisations in Ireland will never get a better chance to get the their cost base down in terms of both direct and indirect overheads. Its back to basics really. In terms of non-salary overheads (i.e. third party costs), companies should be reviewing their previous twelve months creditors ledger (last years spend) in conjunction with their proposed next twelve, twenty four months budgets (what they plan to spend). All supplier spends should be categorized in terms of what is being supplied (e.g. legal, facilities management, print, IT maintenance, management consultants, office services, etc.) with a view to benchmarking the prices paid where there is more than one supplier per category. Question whether supplier rationalisation would yield savings and tender to the market. Also be prepared to introduce more suppliers and increase competition. This all should be done while reviewing all spend from a risk and cost perspective (risk being if suppliers fail to deliver, will your company be able to function), cost being simply how much are companies paying for these goods and services. Purchasing should work as closely as possible with Operations, with both questioning the need and/or the quantum for each and every category currently being purchased. Thereby aligning current spends with what will be required. They should also be questioning do we need to do things the way we currently do them, can we do without or can we be smarter, more efficient. Any changes to internal operations should then be considered as to what impact they have on current suppliers. Do you need them or indeed should you be considering outsourcing more.

 

When reviewing current spends and operations, companies should consider the totality of the cost to their bottom line and not look at each category in isolation. Take print as an example (or specifically printing a brochure) particularly if they are multi-located. Categories of spend could include:

 

·        Internal marketing department

·        Design agency

·        Printer

·        Warehousing

·        Drawdown

·        Transport

·        Point of sale

·        Stock control

·        Obsolescence

·        Waste removal

 

 

Companies should invest in training their purchasing staff and/or utilise the services of professional purchasing agencies. Their return will be far greater as purchasing will have a concentrated focus just like every other internal department and not be an add on to other employees jobs.

 

Centralise purchasing with its remit to negotiate contracts and drive cost down. Give it targets to achieve. Set it achievable KPI’s, however ones that will stretch their capability and ingenuity.

 

 

Decentralise the administration of raising purchase orders to the point/location of drawdown.

 

 

Invest in new systems that give a fast RoI. An example would be web based purchasing systems to replace manual or out dated purchasing modules, that are either stand alone or that are easily integrated into larger ones such as SAP, Oracle, etc. Ease of use, real time comprehensive management information and low cost per user being key.

 

 

Set-up a supplier contract repository database whereby basic contract information is stored and readily available to the purchasing department so that it knows prices agreed, term of contract, renewal dates etc. Thus allowing for comprehensive supplier and contract management as well as scheduling workload.

 

 

Review all invoices on a monthly basis to ensure what was agreed is being paid for and that the prices agreed are the prices invoiced. If this proves onerous, pay an outside agency on a “no foal no fee basis” to do the review and be prepared to share any supplier paybacks.

 

 

 

Clearly some of the above pointers are dependent on scale, however a constant review of what spends have been made and what spend will be made are crucial for all companies.

 

 

Whilst I am recommending that all costs are reviewed and that companies get out there and re-negotiate their cost base I would sincerely ask that they consider the quality of the goods/services they have being receiving from their suppliers and not just terminate current contracts for a marginal return.

 

 

When will things likely change?

 

It is hard to see anything changing for at least eighteen months. A new Government is being elected and all sorts of promises are being made about how to get the country working again. The plain facts are is that the public purse is broke and with little or no lending from the banks, small to medium indigenous company confidence is low, subsequently their third party expenditure will be low. On the plus side Ireland has major international IT and Pharma companies producing product in Ireland. Additionally there is still on-going inward international company investment in Ireland. One of the main reasons for this is Ireland’s low corporation tax rate of 12.5% and skill base. They together with some of the worlds larger food companies (Irish owned) have increased exports year on year despite the recession. Also whilst there is a lot of emigration of our young talent, the country is still producing highly skilled and motivated workers who will, given the opportunity develop new ideas, companies and consequently wealth.

 

 

Who needs to know this?

 

Any company who is serious about getting their direct and indirect costs in better shape and improving their bottom line profit.

 

About Gavan

 

Photo Gavan.jpgGavan has 25 years purchasing experience in the services sector. Formerly Group Purchasing Manager of Allied Irish Banking Group and then Dunnes Stores (Ireland’s largest indigenous retail group). Co-founder, Co-owner and Managing Director of Purchasing Solutions. Set up in 1996 providing a comprehensive range of procurement services to both the public and private services sectors. Gavan specialises in developing purchasing strategies and re-aligning/developing purchasing functions within organisations as well as negotiating supplier contracts. Purchasing Solutions were the first company to provide a fully outsourced purchasing service in Ireland. Delivering bottom line profit and value for money to clients are key.

 

See Gavan's website http://www.purchasingsolutions.ie/

 

LinkedIn Profile

The following is an interview with Daniel Elizondo, a business consultant with experience in Finance, Procurement and Operations:

 


 

1. Have senior finance executives seen their typical responsibilities expand to take in aspects of procurement and supply chain management?

 

 

Definitively yes, the global corporation I worked for the past 7 years, had in practice a formal program to add financial expertise to the procurement team, including strategies, tools and resources to work in a very different way we know from our past experience. This practice was successful and significantly decreased production costs.

 

 

Every day, the different functions and key areas across the business units need additional financial understanding and a sharp handling of figures. Procurement is no longer an over the table give and take, as it once was. Now it is a more professional and deeply analytical function with a requirement to understand the market. It must be a force to support the operations and reduce costs. Procurement needs to understand operations, costs, financial figures and tools such as Net Present Value. They also need to know other sourcing methodologies with an understanding of working capital inventories and the financial administration of those operating assets.



2. Do you believe businesses require greater flexibility in their operations to reflect ongoing market changes?

 

 

Yes, I would say flexibility and greater capabilities to further push to innovate their offers to understand and add value to clients, and I am talking specific hard savings, additional revenues, impact to client’s bottom line, measured in USD, much beyond marginal, perceived, intrinsic, intangible values and other language used to replace or avoid the facts.

 

 

Smaller businesses will always act more rapidly than larger businesses. However, large business need to improve their flexibility by giving more empowerment to lower levels, allowing them to not only make mistakes but also to take quicker actions and understand the changing demands of the customers, as well as the dynamics of the supply market.



3. Should companies ensure finance functions are integrated across the organization to reflect the "volatile business environment"?

 

 

My interpretation of “volatile business environment” is “market fast changing needs”. If this is a valid interpretation, I would say not completely, or yes and no. Let me explain:

 

 

Yes, from the perspective of the financial processes function across the different business units, which require an ad hoc focus to their financial needs, always based on the financial policies and guidelines of the corporation.

 

 

No, from the perspective of the finance personnel present in the different business units without the broad knowledge of that particular business nature. They are unable to identify the practices, needs and inherent business economic risks of that business unit. i.e. different working capital needs, credit terms, capital structure, etc. In this sense, finance functions and support are no different than other key areas such as Human Resources, IT or Innovation.

 

 

The finance, business and money making parts of business should be breathed by every area and business unit, for which finance should provide strategic guidance and ensure support.

 

 

Conclusion

 

 

Daniel sees a growing trend for businesses to support their customers with very specific cost savings, not only industrial manufacturers but also consumer goods and services. There are many things companies should do to save time, cost and effort for their customers. In the industrial side of things this means involving not only with the procurement and operations people, but also to design new products and services to help them reduce

costs.

 

 

This is very important. There is no company that will say no when you go out there with an offer of saving a certain amount of money on some of their expenses. For example, with lighting you never go out and offer light bulbs. You are offering cost reductions and savings on your new energy devices. This is a simple example. Daniel has experience working in procurement where he and his team sold as procurement the idea to their suppliers of changing their processes and procedures. Some of them were very open and interested in thinking outside of the box. They were able to offer new products sold in new markets and in the end were very happy to have partnered with Daniel and his team because they were very demanding. This is the way companies should work today.

 

Some of the large corporations are understand this. However, we come back to the flexibility and the rapid adaptation to market needs. We all need to work to reduce costs and create new market opportunities for our clients/customers.

About Daniel Elizondo

 

danielpicture2.jpgDaniel is originally from Mexico where he did his formal studies in industrial engineering at one of the best schools.  He also obtained a masters  degree at a recognized university. He worked at several large companies in the Monterrey area. He has worked in industries including automotive parts, a joint-venture between a local group and larger organization. Within the automotive sector he had responsibility for Process Engineering and partially in Finance. Daniel was the corporate treasurer at Alfa which has divisions in steel, petrochemicals, food and other diversified companies. For a period of time he ventured on his own as an entrepreneur, before going to work for IMSA in Planning and Finance. He then moved to CEMEX, a company dedicated to cement and building materials. He worked in Planning and Operations for 7 years – being responsible for the aggregated business units on the west coast of Mexico. He then moved to Houston to work on global sourcing. Daniel also traveled extensively all over Europe, India and China.

 

Daniel is currently a business consultant focusing on his experience in Finance, Procurement and some Operations.

 

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Cash is Crucial to Supply Chains

 

Eugene Zimmerman believes everything comes down to cash flow, and for the most part, revolves around the financial aspects of supply chain. In other words, how many dollars are tied up in inventory? How much inventory do we really need? What are the costs and expenses associated with warehousing, distribution, transportation etc? "In years past," Eugene said, "there was less weight put on cash, but with credit being hard to come by, maybe not so much as it was a year ago, but nonetheless it has put a real premium on making sure you have cash.”

 

 

Awareness of Cash Flow

 

In Eugene Zimmermann's opinion, a heightened awareness of cash flow has led to better cash management. Instead of looking at pure profitability associated with a specific decision, we are giving more thought and consideration to the cash implications of those decisions, which is creating a healthier balance.

 

Another positive consequence of the recession, Eugene said, will be more streamlined networks, along with potentially shorter, more predictable, supply chains. "Maybe Asia is no longer the answer," he added, "I like the idea of bringing manufacturing closer to North America for the North American customer, and I think there’s a greater appreciation for all the costs associated with a long distance supply chain than maybe there was in the past.”

 

Growth is No Longer a Given

 

Regarding what we will have to learn to live without, Eugene Zimmermann gave a thought-provoking answer. "In the past," he said, "there was always this expectation, to one degree or another, that you can grow out of your problems, that growth will come, and that it will take care of the minutiae associated with excellence in a business." In Eugene's opinion, growth is no longer a given -- business has to be properly managed and supply chains have to operated correctly to generate expected profitability.

 

The idea that growth will somehow track with global economic prospect, or somehow even out, or become predictable, is no longer a good assumption. Eugene Zimmermann believes businesses need to focus on forecasting and demand management in order to deal with short term volatility.

 

Listening to Customers

 

During his days with Colorite Plastics, the largest manufacturer of garden hoses in the world, Eugene Zimmermann saw firsthand that shifting consumer preferences play into shifts in demand. "Consumers had an amazing knowledge of what garden hoses were made from, and had very specific preferences, even with regard to sustainability," he said. This is a perfect example of why forecasting and demand has become vital to every company's success, especially during an economic downturn.

 

Sustainability and Supply Chains

 

In addition to understanding demand, Eugene Zimmermann thinks it is essential to weave sustainability into the fabric of every organization and every supply chain, not unlike what the principles of quality management did for manufacturing some 20 years ago. "Every aspect of sustainability needs to be brought into our day-to-day supply chain thinking," he added.

 

About Eugene Zimmermann

 

geneportrait.jpg

 

Eugene Zimmermann owns the New Jersey-based consultancy, Zimmermann Management Solutions, and specializes in supply chain, sustainability, and business development. Prior to striking out on his own, Eugene was in the plastic processing business. More specifically, he was responsible for Colorite Plastics' consumer products division, which manufactures and markets garden hoses. He also spent 15 year with BASF Corporation -- also in the plastics business, where he was responsible for a North American business unit.

What is co-creation?

 

 

Co-creation is essentially the act where it is not just an organization that is creating the value for the company. It essentially is saying that we realize we cannot hire all of the best and brightest people in the world. There are just too many people out there. We need to start leveraging this ability to access the people in our environment and to come together and create something that is meaningful and mutually beneficial to both parties. It is the idea of Dell Idea Storm, who came out and said “share with us your experiences about our products” and “how can we make new products?” It is mutually beneficial because Dell gets an inside track on new product ideas and the customers get a chance to say “this is what I think is great”, “this is what I really want”, or “this is what I don’t like”.

 

 

How is co-creation applied?

 

It is essentially the idea where in any environment users or other actors come together with another party to co-create their value and create something that is mutually beneficial. The one constant you see about this is that the value is essentially only in existence when both parties are contributing or engaging.

 

Paul is in the user-driven innovation field where he looks at how companies are leveraging their customers and regular users to come up with new ideas, products and new ways of creating benefits for everyone. This field is pretty broad with many angles to it. In terms of supply chain, it plays a large role in configuring everything to be able to support this kind of work. Facebook is a great example of an organization that operates under a co-creation business model. Facebook as the company provides a platform while the users provide all the content and fun that makes what we call the Facebook experience. It is this experience that is creating co-created value. Facebook gets the benefits of being the number one website in the world and the users get a platform where they can share their social interactions with their friends, funny content, and keep up on news that is personally important to them.

 

Who can benefit from co-creation?

 

 

There are multiple ways you can look at this. Firstly, everyone can benefit one way or the other. Organizations certainly benefit from the economics side of it, the bottom line. They also see the intangible aspects, such as brand equity. They see improved customer or organizational relationships and long-term loyalty.

 

From the customer side, they are getting more personalized experience with their corporation. They are getting people that are trying to tailor to their particular interests.

 

Another side of things is the industries that can benefit from this. There is a long and wide range of industries that benefit. You have manufacturing and pharmaceutical companies that can benefit. For example, Proctor & Gamble has been doing this for years.  You also have the technology companies such as Facebook and Youtube that rely on content coming from users. There is pretty much no limit to who can benefit.

 

 

Why do we need to practice co-creation?

 

This is a question Paul came up with when working on his dissertation. He asked “what do we see here that is different in business today?” Part of this was “how do we look at the business model itself, the conception foundation for how an organization creates and captures value?” During the time Paul was doing his research he found that they saw that business models evolve. Gilmore and Pine wrote a great book about experienced-based economies where they outline the progression of the world’s overall economy. We saw a shift from an agricultural, to an industrial age, to a service and information based economy. Now we have shifted to an experienced-based economy. This is not to say these economies are fading away and disappearing. They are essentially adding depth to the world.

 

We now need to realize that it is not just about these tangible things that we sell or create with organizations. There are also intangible experiences get created to form bonds and relationships. It is important for us to practice this because it is a growing field that we see. Technology is essentially making the world smaller and more connected and is making us want to share and explore each other’s experiences.  It is important for us to understand how we actually do this in order to practice it properly.

 

 

Examples and references

 

The number one recommendation is a single author who is the founder of this field, C.K. Prahalad. Unfortunately he has past away, but his work is living on among many researchers around the world. He has written several books on co-created value. There is a lot of academic literature that is now moving forward in the Harvard Business Review for business audience members to understand how to apply co-created value and how to work out the processes, and the configuration of your organization to support it.

 

There are also many companies we see today that are operating under these types of business models. In fact, most social media companies operate under this environment. However, we see how some other types of companies are starting to tailor themselves a little bit. Dell and Starbucks are starting to shift into this type of environment where they are creating positive experiences for people. They are getting these experiences to be shared, in order to develop new ideas.

 

Barriers

 

The number one thing Paul has seen through his research is the idea of dialogue. It really is a one-to-one connection you are trying to create, meanwhile recognizing that you are operating in an environment where you as an organization are trying to communicate with many people. You are trying to balance this idea of a one-to-one relationship in a one to n environment. One of the biggest barriers you have is this idea of being able to successfully manage it, having the right resources in place that won’t get overwhelmed. You need to have the right technical infrastructure in place to be able to facilitate any types of interactions. You also need to make sure that the platform you develop to support these experiences evolves to meet your user’s needs. You are always changing the goal-line and have to keep moving forward. This is certainly a barrier because you need the right resources in place to keep that successful.

 

About Paul Di Gangi

 

digangi2.jpg

 

Paul Di Gangi is an assistant professor at Western Carolina University in the global management and strategy department. His PhD is in Information Systems from Florida State University where his research took the turn of looking at the intersection of digital networks and organizations. Paul primarily looks at organizational business models, user-driven innovation and he tries to understand how knowledge management occurs both within and across organizational boundaries.

 

 

 

Paul M. Di Gangi, Ph.D.

Assistant Professor
Global Management & Strategy Department
Western Carolina University
(web) - www.paulmdigangi.com
(twitter) - @pmdigangi

 

LinkedIN

Applied Reengineering for the 21st Century

 

 

 

Michael Preiss invokes the ideas of management and production visionaries Hammer, Champy and Demming to illustrate his views on business process design and improvement in the 21st Century.  He maintains that process is not enough in and of itself; it must be accompanied by sufficient resources and capable management. Only with the latter can business achieve competitive advantage.

 

 

 

Business processes do not occur in a vacuum. They’re supported and executed by an organization. Managers must understand the systemic nature of their organizations - how each thing affects the other.”

 

 

 

·       Business processes do not occur in a vacuum. Without the right management structure and the proper allocation of resources, successful deployment of processes, isn’t possible.

 

·        When the “reengineering” thought revolution occurred, those who understood it and were able to use it to improve their processes, certainly did realize a competitive advantage. Today, it’s a bit different.

 

·        If the individuals responsible for executing the processes are empowered and allowed to think for themselves, then capabilities that result in rewarding processes are possible.

 

 

 

Michael Preiss’ acute insights on enterprise process development and innovation are valuable regardless of industry or position in the supply chain, be in human or industrial.  When asked whether he believes that business processes are a source of competitive advantage, Preiss’ answer was equitable and discerning.  He invoked the work of business management visionaries, Hammer and Champy, who in the 1990s championed the concept of “reengineering,” which arose from the conviction that the contemporary business/ consumer paradigm was not known and predictable.  As such, the orthodox notion of competition being driven by price-setting was simply unrealistic.  Instead, the element of choice created an entirely new dynamic in the global market place.  That being the case, they advocated for a shift in the traditional business environment - from being task oriented to “process oriented.”

 

 

 

Preiss commemorates Hammer and Champy, explaining that their impact on business architecture, strategy and management was monumental.  “You could chop days, if not weeks off processes,” recalled Preiss.  When the “reengineering” thought revolution occurred, those who understood it and were able to use it to improve their processes, certainly did realize a competitive advantage. And those who had no idea what a process was were left in the dust. 

 

 

 

Today, says Preiss, it’s a bit different. It’s not so much the process that is a source of competitive advantage.  Competitive advantage is achieved with the application of the right technologies coupled with the right management structure that is able to appropriately facilitate the business processes.

 

 

 

Processes Require Capable Resources

 

 

 

Michael Preiss shares an anecdote of his experience working as a consultant to the CEO of an airport.  The client’s ambition was visionary: he wanted take their excess capacity, in terms of computer processing power, and put it to good use by supplying it to external customers.  Preiss and his team focused their attention on analyzing the processes that were in place and subsequently understanding the organizational and management structure, including the company’s vision.  They designed a set of processes, a business model, designed to facilitate strategic execution of their vision.

 

“However,” says Preiss, “while they had the technology and the vision, they lacked the management structure or capabilities within their organization - the talent - to successfully execute the strategy.” Preiss reiterates that it’s not always about having a sound process. Without the right resources required to execute the process, no matter how brilliant it might be, it won’t be able to come to fruition. 

 

 

 

Business Processes Do Not Occur In a Vaccum

 

 

 

Michael Preiss emphasizes, “Business processes do not occur in a vacuum. They’re supported and executed by an organization comprised of technology, people and an infrastructure.”  In order to have a successful enterprise, the organization itself must be flexible, but it’s even more important that the people within the organization understand the big picture, or how the organization functions. There should be visibility and they should know how they fit into and support the organization they are working within.  For that to happen, the right management structure is critical, says Preiss.

 

 

 

Preiss alludes to another of his favorite visionaries, William Edward Demming (1900 - 1993), whose 14 principles for effective management revolutionized production and business effectiveness throughout the 20th Century: “Deming was an unbelievable visionary who said that what management really needs to understand is variation and their people, and it goes without saying that they should know their business. From these things develop an organization and processes that are flexible enough to support successful deployment of business strategies,” says Preiss.

 

 

 

Preiss purports that if the individuals within the organization, the employees who are responsible for executing the process are empowered, a term which he recognizes enjoyed great popularity in the 90s, and they are allowed to think for themselves, then germane capabilities that result in rewarding processes are possible. He maintains that it’s of utmost importance that the management supports this.  All the people in the organization take in inputs, so they should each have a clear understanding of what they need to do their work, where to get it and even why it’s important. 

 

They should know what tools are available and what constraints are in place.  The management must be capable enough to minimize the constraints that are non-essential and those that deflect the team from accomplishing their goal, as well as truly understanding the infrastructure and why the processes are of value.  Preiss shares that he has experienced many occasions when the managers really didn’t understand the processes that they had implemented; they weren’t cross-functional but were instead still operating in silos.   “Managers must understand the systemic nature of their organizations - how each thing affects the other,” concludes Preiss.

 

 

About Michael Preiss

 

MichaelPreiss.jpgMichael Preiss is a seasoned professional in enterprise business process architecture, mapping and modeling, business simplification, and process design and improvement. He has consulted across several industries. Michael has two professional passions: the first is improving business performance by analyzing, addressing, and rectifying issues surrounding organizational structure, business processes and technologies; the second is innovation - establishing it and fostering it within companies large and small. He is currently a managing member for Clearstory, LLC, based in Atlanta. Clearstory specializes in management consulting for a variety of industries,  including process analysis and improvement and business modeling.

 

LinkedIn Profile

 

 

 

Brad Hollister, Co-Founder & Director of Business Development at Freight Access, Inc feels that the industry is really going through an exciting time with the introduction of new technologies, some of which have not been introduced to the transportation industry. It is an exciting time for technology to smooth out the way people do business now. Technology will help make their jobs and processes more efficient in the future.

 

 

What is Freight Procurement?

 

Freight procurement is the process of selecting a carrier to haul your freight. Obviously, anyone who has freight needs to hire a carrier to ship the freight.  Freight procurement can be discussed from the perspective of a shipper and transportation, as well as a broker side. In addition, it can be discussed from a manufacturing and distribution perspective.

 

In terms of the manufacturer’s and distribution company’s perspective, freight procurement involves selecting the right carrier to haul the freight. Typically, those carriers are selected based on a variety of criteria.  While price is important, service is also crucial. The wrong carrier or bad service can cost a shipper or manufacturer their customers. If freight isn’t delivered responsibly, it can be disastrous for the relationship.

 

Who is Responsible for Procuring Freight?

 

It depends on the size of the company. Larger companies will actually work their freight procurement through the purchasing department. Other companies will work it through the traffic department or even the loading dock. It really depends on the size of the company. However, what seldom happens is that the person within the company has all the pieces at his/her disposal to make the right decision.  This is where technology can come into play to help companies get their arms around what they are doing, as well as analyzing their needs into the future.

 

How is Freight Currently Procured?

 

Freight is typically procured through an annual quote, or request for pricing process. On an infrequent basis (annually or bi-annually), companies will send out a request for pricing for a period of time moving forward.  Oftentimes, Brad has seen two year pricing requests. What this means is that with fuel removed from the equation companies send out what their needs are forecasted to be going into the future. They send this to a lot of carriers in order to get a competitive bid back. This is sometimes done internally, but not typically done by traffic mangers because they have a lot on their plate getting orders out the door. However, consultants have helped companies to this over the last couple years on a more frequent basis.

 

Is this a Fair Process for the Carrier?

 

The carriers certainly look at this as almost a necessary evil. If they choose not to participate in the process for the request for pricing they really do not have a shot at that business. It does help them to take some time (typically 30-45 days), to evaluate how that new business fits into their operational and expansion plans. It really allows them to create pricing which fits their business. Carriers also know that the low price provider typically wins those lanes. This helps the carrier to know which lanes they want to become more competitive on and which ones in which they don’t.

 

It is difficult however, because under traditional Truckload and LTL pricing agreements there is no revenue structure pricing to the carrier. This means that with parcel you reach tiers and you discount changes based on the level of business you have offered to that carrier on a month or quarterly level. Carriers really are not guaranteed anything. They put the pricing out there with no commitment from the shipper. It becomes really difficult because if they are really aggressive but the volume isn’t there it really doesn’t make sense. Oftentimes carriers will pull the pricing from shippers that are not giving that carrier the freight they had implied.

 

Is an RFP the Best Option for the Shipper?

 

The RFP process really is the best way for shippers to evaluate all the different tariffs and carriers carriers all in one shot. It is really the most effective way they have right now to get a really good feeling for what the market has to offer in the form of contract pricing. It is the best option for the shippers as of right now.  However, if they could see the overall market at one glance and take advantage of market opportunities it would be more ideal. This is because to predict where the industry is going to be in the next 18-24 months is difficult. The shipper would actually be leaving money on the table by negotiating prices out that far.

 

What are some of the technological advances that will lead to a change in the way freight is procured in the future?

 

The reason RFP is the best process right now for procuring freight is because it is available in real-time. For example, if we look at a small carrier with 30-50 trucks it is almost impossible (from a practical perspective) to find out where those trucks are and when they are coming back empty for shippers. If the shipper had the ability to create a shipment and compare their existing pricing from carriers to the spot market, meaning if you had trucks going to Georgia in the springtime, you could probably get those for a lot less money compared to coming out of Georgia. It might make sense to deviate from your existing group of carriers because fruit season may have arrived and carriers know that their trucks are in high demand coming out of Georgia. They would actually reduce pricing going into Georgia where a shipper/manufacturer would have the ability to take advantage of that data available to them.

 

Bringing a real-time model to freight capacity, would not only help shippers to make spot decisions and better freight decisions based on carrier availability, but also helps carriers to better allocate their lanes and empty trucks so that they can introduce reduced pricing to those shippers as they become available. This is almost like bonus lanes. For example, in retail if there is a shirt on a rack that is not selling they put it on special so that the shirt will sell and they can move their inventory.

 

Brad sees a similar model coming to transportation. If carriers can get that information and if they are willing to negotiate certain lanes for the shippers that need those lanes, then it will help the carrier to make better decisions about each and every load that they take or make

 

About Brad Hollister

bradhollister.jpg

 

Brad Hollister has been in the transportation industry for most of his career. He has seen the business from the perspective of a carrier’s rep, which Brad thinks operates for the shipper because you are really fighting to understand the shipper’s perspective. As a carrier’s rep you take every issue to your management and executives in order to rectify and keep the customers. Being a carrier rep really helps one to understand the business from the shipper’s side. You understand the pains and struggles that they go through with issues that come up.  You also see and are responsible for driving profit from the  carrier’s side. Being a carrier’s rep helps you to understand 2 legs of the industry.

 

Brad was also very instrumental in running a freight brokerage company for a number of years. During this time he really got to see both the struggles and challenges that a freight broker goes through on a daily basis, as well as owner operators that are trying to drive business. Brad has seen all sides of the industry in regards to LTL and Truckload, Freight and Intermodal.

 

Brad on LinkedIN

The book is really about using simple logic and common sense and not to over analyze things. It is written from the perspective of decision makers, as well as students. Michael J. Stolarczyk, the author, calls the book a primer because it is about 250 pages of things that he created, wrote and talked about. The other half of the book is a glossary of terms which Michael has been putting together since around 2001-02. It is probably one of the most thorough glossaries of terms specific to the transportation and logistics industries that Michael has ever seen.  This is why Michael calls the book a primer because you can go to it to make decisions and it will help by giving guidance and insight. Rather than answering the questions for you, it actually develops more of a thought process and a way of attacking issues and dealing with things actively, versus trying to spoon feed you answers.

 

 

 

 

In the book Michael tackles issues ranging from how you can create more compatibility and collaboration with all parties involved in negotiations where you have a collaborative open atmosphere.  It covers how to avoid getting involved in zero-sum games when negotiating contracts.

 

What you are trying to do is to develop a collective, mutually beneficial
outcome for that negotiation so that each organization is successful. Collectively
you can grow your business and be efficient and profitable.

 

 

Over the course of Michael’s 27 years in the industry he has found it has been really fragmented towards zero-sum game thinking. You win the negotiation and bury your carrier, 3pl or intermodal organization to your own benefit, versus trying to develop a pricing structure that can grow and be profitable for both organizations. Michael talks about collaboration, sharing, creating an open source type of relationship.

 

He also talks about automation of warehouses and developing pick and travel methodologies within the four walls of a fulfillment or flow center. There are some insights and specific talking points on how to have better operations. Michael also discusses observations of what he believes over the years have been successful ways of attacking the supply chain. Instead of breaking the supply chain down and trying to put up walls between the different organizations (sourcing, marketing, transportation, ocean, domestic distribution, etc) that make supply chain decisions, Michael advocates the recognition that each of these organizations have different P&Ls, goals and objectives. A lot of times they are not on the same page. When you are dealing with an organization that is so fragmented, the fiscal impact of that supply chain does not really come together until you get to the C-level.  Usually it is a CFO or Chief Operating Officer that really has the complete view of the whole supply chain. The siloed and compartmentalized aspects of the supply chain cost companies more money when they don’t look at it holistically.

 

 

Looking into the Future

 

Cover_front_small.jpgMichael thinks that the biggest issue isn’t necessarily where a particular product or shipment is in the supply chain in a snap shot in time. What does it really tell you if your thousand cartons of t-shirts are in a Maersk box In the middle of the Pacific ocean? It is nice to know it is on the water. However, what impact does that have on your organization? It is much more important to connect that fiscally from the supply chain to the financial models that companies use to determine the total landed cost and the impact it has on the financial aspects of the business. It involves looking at the impact from the creation of the purchase order all the way to the point of purchase, which Michael calls PO to PoP (Purchase Order to Point of Purchase). It is very important that people start thinking about this in a more holistic manner versus compartmentalizing and going at it piece by piece.

 

 

Michael wrote the book over the course of the last 5 or 6 years.  It is partly an extension of a lot of his blog posts, articles and editorials that he produced for magazines and newspapers. He has shared a lot of the book content in front of clients and students. The target audience for this book are college students taking supply chain and logistics courses, new hires and people just getting into logistics and transportation, and senior executives looking for a fresh perspective on what they have been doing for years. The book aims to help these executives to know you can look at things from a different perspective and not have to have a revolution, but rather an evolution of change in your supply chain towards a more efficient, effective and profitable model.

 

 

Where to Purchase

 

Currently, the book is available on Amazon.com. The official release date has not designated yet. They are currently working on the Kindle version and the press release. The digital version will be ready in 3 to 4 weeks. The press release will then go out and the book will be available not only in digital form on Amazon, Kindle and iPad. Michael also hopes that there will be an opportunity from the wholesale/retail perspective to get it on the shelves of Barnes & Noble, Borders Books and University book stores.

 

 

Conclusion

 

The most important thing about the book is that it is not logistics for dummies. It is much more a guide which will provoke thought and sharing.  It will look at different ways of attacking the supply chain. There is no color by numbers or connect the dots with this book. It is about opening up your mind and looking at supply chain and logistics/transportation from a different perspective and to build dialogue. It will help you to build dialogue within your own organization and with your partners. The dialogue will you help you build consensus, collaboration and sharing and to use this open source network we have now through the Internet, social media and other platforms of communication that promote sharing and openness and willingness to mutually have profitability, versus a zero-sum game.  Michael hopes the book will open people’s minds to a new way of thinking which will be shared and be used to add future editions and develop further the glossary and dictionary with new terms and ideas.

 

 

 

About Michael

 

Michaelphoto.jpgIn December 2009, Michael J. Stolarczyk joined the team at Kontane Logistics in Charleston, SC, as President. Kontane Logistics is an industry leader in Third Party Logistics and operates in four locations within North and South Carolina.

 

Prior to joining Kontane Logistics Stolarczyk served as CEO of the Toledo-Lucas County Port Authority in Toledo, Ohio.  Founded in 1955, the TLCPA was the first port authority in Ohio and operates the Port of Toledo, Toledo Express Airport and Toledo Executive Airport.

 

From 2005--2009, Michael worked as Senior Director for Exel, a leader in supply chain management that provides customer-focused solutions to a wide range of manufacturing, retail, and consumer industries in over 500 sites in the Americas. Mike supported the strategic growth of Exel’s Retail customer roster. Prior to Exel, Michael founded FourPointStar (FPS - Ronin LLC) to establish a forum where people could stimulate collaboration and achievement.

 

Michael was with the A.P. Moller/Maersk Group from 1988 until 2004 and held various management positions within Maersk, ranging from Manager, International Accounts, with Maersk Hong Kong Limited, to Director, US Flag Liner Operations, for Maersk Line Limited, located in their Arlington, VA office.

 

In 2002, Michael’s efforts led to the organization’s quantum growth in Central Europe, and he was named to Fast Company magazine’s debut list of “Fast 50: Global Innovators Whose Achievements Helped Change Their Company or Society.”

 

 

Connect on LinkedIn

 

 

DM: Please provide a brief background of yourself, your role at your organization and core competencies.

KHB: I have been researching human interactions in the workplace since 1987, starting with a large-scale UK government research project and continuing via various other organizations.  I wrote a book in 2005 called "Human Interactions" that described what I believe to be the first complete theory of human work, called Human Interaction Management, or HIM for short.  Since then I have developed an associated methodology for business change, called Goal-Oriented Organization Design, or GOOD for short.

 

I have also been instrumental in the development of several software products, the latest being a Web application called HumanEdj, that lets you design and run simple Plans for complex human work.  HumanEdj is the flagship product of Role Modellers, a software vendor based in the UK, of which I am CTO.

DM: Do you believe business processes are a source of competitive advantage?

KHB: Broadly speaking, I think there are 2 kinds of business process.

 

There are processes that can be understood as a set of related tasks, where the structure is based around SIPOC - Suppliers use Inputs to Produce Outputs for Customers.  Examples of these processes include manufacturing, order fulfilment, logistics, finance, HR and so on.

 

Then there are processes that can be understood in terms of individual and shared goals, where the structure is based around the 5 principles of Human Interaction Management - effective teams, structured communication, use of knowledge, time management and dynamic planning.  Examples of these processes include R&D, marketing, complex sales, project management, M&A, and organizational change generally.

 

Both types of process are a source of competitive advantage.  However, the first type of process (task-based) is relatively easy to automate and improve, particularly since there are now mature software applications for ERP as well as for more specialized purposes, and if these don't meet your needs you can always design your own process applications using a BPM system.  So many organizations are reaching the same level of efficiency and effectiveness with task-based processes, which reduces the potential competitive advantage to be gained from this area.

 

The second type of process, goal-based, however, is less commonly automated and improved.  This is partly because the nature of such processes makes them less repeatable, but mainly because mainstream vendors of process software are not providing helpful approaches or solutions.  They have huge existing investments in applications based on the old flowchart and case management approaches.  So they are trying to improve these existing applications to support goal-based processes as well as task-based approaches, when what is really needed is a new set of features to support a completely different type of business process.

 

The problem is made worse by the huge complexity of mainstream software suites.  Both customers and even the analyst firms are overwhelmed by the size of the feature set, and overlook the basic requirements that are not being met by the software - for effective teams, structured communication, use of knowledge, time management and dynamic planning.

 

DM: How do you build a capability in process flexibility to maintain competitive advantage?

KHB: First you need to adopt a simple, universal business change methodology based on what I call Change Aims.  There are 4 Change Aims, which apply to any kind of organization and any kind of change:

 

1.       Ensure that work meets stakeholder needs

2.       Deliver results into a business-as-usual environment

3.       Maximize benefits from outcomes

4.       Minimize costs associated with delivery

 

These Change Aims give rise to 3 Stages (Design, Delivery and Optimization) in which a set of related Roles at Strategic and Executive level collaborate to produce a Process Architecture and Business Motivation Model, then engage with stakeholders to deliver an on-going programme of effective, continuous business change.

 

As part of this effort, you also need to design and implement business processes using a new approach.

 

It is no good trying to implementing collaborative human work processes as a hierarchy of tasks managed in command-and-control style.  Apart from anything else, this is unsuited to cross-boundary, decentralized collaboration - supply networks, joint ventures, partnerships, consortia, multi-department initiatives, multi-agency programmes, etc.

 

Similarly, it is also no good having ad-hoc communications, when what you need are persistent conversations associated with an overall goal, and shared between all parties with an interest in that goal, so that the power of collaborative effort is fully harnessed.

Processes must define how the information artefacts they create and use are shared and managed over time, so the true value created by knowledge work is leveraged.

 

Workers in a process must be assigned Roles with responsibilities, not just tasks, so that they have visibility of (and recognition for) the importance of their contribution to a team working towards an overall goal, and are fully motivated to give their best - and empowered to prioritize the different processes in which they are engaged.

 

Finally, a worker in a process may need to adjust the details of their task in order to perform it effectively - for instance, to add new documents or data relevant to the desired outcome, or even to change the desired outcome to what (in their judgement from the coal face) is really needed.

 

All this calls for a new approach to process management, to complement the existing approaches in use by most organizations today.

 

DM: How do you see the technology landscape changing to meet customer needs for process flexibility?

KHB: Just as there are 2 forms of business process, I think that organizations need 2 forms of business process software. These may or may not be delivered as part of a single platform.

 

One form of business process software is large and heavyweight, and allows organizations to design and implement repeatable, task-based processes with the aid of IT staff.

 

The other form of business process software is simple and non-technical, and allows skilled, experienced business people to design and implement collaborative Plans for goal-driven processes.

 

As I said before, the larger software vendors have not yet introduced effective support for goal-driven processes, or expressed the intention of doing so.  For now they are focused on enhancing their current application suites.  So I see the rise of a new generation of disruptive business process software applications from smaller vendors, providing simple tools that allow organizations to introduce dramatic business change very quickly and cheaply.

 

This is a normal cycle in the IT industry, and it usually ends with the large vendors buying the smaller, disruptive vendors and including their features into the monolithic application suites.  But this won’t happen for some time yet – perhaps years.  So for the meantime, if you want to make a step change in efficiency and effectiveness of human collaboration, and gain real competitive advantage via flexible business processes, you need to go to a smaller vendor that provides an innovative approach to goal-based processes.

 

 

DM: What is your experience in using business processes to deliver competitive advantage?

 

 

 

KHB: I’ve been working with organizations of all types, sizes and locations for many years to improve goal-based processes.  Some of these organizations have measured the results in great detail, and the typical outcome is this.  Using the ideas alone doubles productivity of knowledge workers.  Using the ideas plus the software quadruples productivity of knowledge workers.  On top of these efficiency improvements, there are also dramatic effectiveness improvements.

 

I’ll give you some examples from different ends of the spectrum.

 

A large engineering project to build a new and very complex type of air traffic control system introduced Human Interaction Management as a management approach, particularly with respect to detecting and repairing issues discovered during testing.  They measured the time taken to fix faults before and after, and found that the time halved after starting to use HIM.

 

Another example is a newsroom platform that used the HumanEdj software to allow media producers, creators, editors, commentators and engineers to collaborate in the delivery of video items.  They found that from the very first user trials, the time taken to produce videos went down to a quarter of what it was previously.

 

Other examples include Sun Microsystems, who had been struggling for months to deliver large-scale business change to their business support systems – they started using Human Interaction Management, and within 2 weeks had designed and implemented new processes across the company.  Similarly, non-technical business people in the UK National Health Service used the HumanEdj software to transform huge, complex flowcharts that no-one could understand, but were critical for their business, into simple, dynamic Plans that they could all start using right away.

 

 

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Keith Harrison-Broninski

CTO, Role Modellers

LinkedIN


The damaging effects of poor communication and lack of transparency

 

 

Marianne Withers, a consultant who, among other specialties, works to help companies move away from silo-based architectures. In this interview, she delves into the many reasons she believes today's companies are failing to communicate and collaborate, and what can be down to facilitate change.

 

 

 

* Marianne Withers has seen firsthand how people working within manufacturing companies that hold silo-based ideals tend to form their own "little power bases" within their silos -- working against each other in those departments even though they profess to be working together.

 

* According to Marianne, realizing innovation is all about leadership, the mechanics of how you run the company and the architectural design of the company.

 

* The most important step toward changing your company's organizational architecture is creating an environment of open and honest communication at all levels, but before that can be accomplished, you have must have complete buy-in from your executive level employees, your board and your investors.

 

 

 


 

Are New Organizational Structures Needed to Innovate in the Twenty-first Century?

 

In Marianne Withers' experience, there are many major manufacturing companies doing a superb job of modernizing organizational architectures and leveraging innovative tools that support growth, but there is also a large percentage of manufacturing companies that are still in the twentieth century. They are behind in many, many areas, Marianne said, including the architectural set-up of the company, which more often than not, tends to be silo-based. Lagging behind, Marianne intimated, has also made them inefficient, because they are also slow to adopt technical solutions.

 

 

Marianne sees a lot of medium-sized companies that could use a hand at the moment, but says they are extremely scared by documentation in the form of published research and studies forecasting their doom if they fail to subscribe to lean manufacturing, Six Sigma, Prince2 project management or other process improvement methodologies. Some of that fear, Marianne suggests, is relative to where people are based. In her last position, located in a region she described as "parochial," Marianne was told by a senior executive in the company, "Well, we’re not a big London-based company. You can’t treat people the same down here. It’s just a little old place, just outside a small town." Marianne doesn't see it like that. Instead, she believes that companies professing to be world-class organizations need to be proactive and implement new organizational structures and processes in order to move forward into the future.

 

 

What it Takes to Realize Innovation

 

Marianne Withers has nearly 20 years of experience with major outsource contact centre’s where she has found most people to be very open-minded and open to learning -- something she feels in vital to realizing innovation. "Because you work on behalf of clients, you're always looking for that new and bright special idea or gadget to be able to offer a client over another contact centre" According to Marianne, that experience teaches people to be very open to listening, and when you are listening, you begin to understand that you don't have all the answers.

 

 

As a consultant, Marianne is well-aware of the roadblocks that some people throw out when they have not learned the value of listening to new ideas. In one company, a director on the financial and supply chain side advised her that he already had all the answers to running the company's contact centre, despite the fact that she was a paid consultant brought onboard to improve it. People need to be far more open-minded, and less intimidated by individuals outside of their industry. These people can be extremely supportive, assisting in bringing in new ideas & methods, especially in the area of technology.

 

 

The investment required to keep manufacturing facilities at state-of-the-art levels, Marianne said, is absolutely massive, consequently far less emphasis is put on investing on the commercial side, such as sales, service centre’s and accounting, and that is where the technical abilities of many manufacturers is still in the twentieth century.

 

 

The problem with that is “no matter how good your product is, if you don’t have the people to sell and service it, it really doesn't matter how great your product is," Marianne said. "The opposite can be true as well, you can have a fantastic sales force and rubbish product." Regardless, both side should be viewed as equally important and Marianne believes manufacturing companies should be focused on creating equilibrium between departments, especially within the supply chain where collaboration is essential.

 

 

 

According to Marianne, realizing innovation is all about leadership, the mechanics of how you run the company, and the architectural design of the company. Companies need to be far more process-driven and creative when it comes to solving problems, but it should not be limited to the manufacturing side, it has to encompass all departments within an organization.

 

 

Marianne said she absolutely loved her time working with manufacturing companies, but was also saddened by the amount of people that were completely not interested in collaboration and even worse how many people were insular and only interested in what was happening in their department. She also believes that without better leadership those issues will become even more significant in the future. "It is imperative that you have a leader that inspires and believes in the power of bringing people together and who can change the ideals and values of the people within the organization. People who perceive silo-based organizations as the way to go," Marianne added," are often the people who are trying to build their own little empires and not actually looking for the greater good, which is about increasing your profitability, decreasing your costs and making the company great."

 

 

First Steps Toward Changing Organizational Architecture

 

In Marianne Withers' opinion, the most important step toward changing your company's organizational architecture is creating an environment of open and honest communication at all levels, but before that can be accomplished, you must have complete buy-in from your executive level employees, your board of directors and your investors. You really have to ask, do you believe in this change it and are you really willing to work this way? Everyone must understand that there will be times when executives must stand up and argue against the wants of the board and investors.

 

 

It can be very difficult when you have investors, Marianne said, obviously, they want their payback, but to be 100% driven by that pressure can be damaging. It also tends to foster an environment where the truth is not always clearly told to board members, investors and employees. Just in the last five years, Marianne has seen a trend toward information being meted out on a need to know basis.

 

In contrast, Marianne said she worked for an outsource contact centre that had broken away from the largest telemarketing company in the world to move forward with a clear philosophy of open communication, honesty and transparency in all matters, at all levels, from the cleaning staff to the newest agent to investors. "We were able to inspire the workforce, maybe incite them at times, to be passionate about it because there was truth and honesty throughout the whole company and everyone collaborated together -- we had quite a flat structure without silos and it really worked," Marianne explained "Everything worked for the common good – the organization, operations was the heart of the company, and every department worked to support each other to make sure we could do the one thing, offer our clients a journey of excellence and their return on their investment.

 

 

Fostering an environment of transparency means keeping your workforce informed and making sure they fully understand new initiatives and are not just plodding through their day, blindly going through the motions, for the sake of a paycheck. "There is a trend in the United Kingdom," Marianne said, "where people go to work because they want money, and that is the full extent of their motivation. They go in, they do their job, and they continuously moan, because there’s not that truth and honesty and that inspiration from the bosses."

 

 

Talking with people openly and honestly, and allowing them to step up and really perform, is a very simple step toward changing organizational architecture that companies can build on. "Do not just talk about empowering people" Marianne advises, "empower them. If you’re going to pay senior managers senior managers’ wages, then empower them to do their job. If they muck up, they muck up; they learn by it. What you don’t do is tie the hands of your senior managers." Marianne has seen the damage done when boards want so much control that management are no longer empowered to make decisions. The process of changing your company's organizational architecture really starts with changing the mindset of the board, who in Marianne's opinion, need to be more active in leading and inspiring.

 

 

Are New Business Models Needed?

 

Marianne Withers doesn't see the need for going back to the drawing board and creating new business models from scratch. Instead, she believes we need to take a step back, review all available methodologies, including very traditional methodologies, and then adapt the best ones to modern society. In terms of traditional methods, Marianne wonders what happened to the "natural inspirer" who was able to motivate and manage without vast amounts of research, philosophies, methodologies and technologies behind them.

 

 

Marianne also finds in silo-based organizations that HR has become the power base of the operations, dictating how the operations are run by using management’s lack of employee law knowledge to make policy for the company. The challenge here is that Marianne has seen a lack of this knowledge on boards as well, which is why certain policies get passed. Whereas they are not actual law and the rulings are quite grey. This causes challenges to the smooth running of the operations and suddenly causes simple situations to be blown out of proportion. Unfortunately in these types of organization you spend more time on these types of things than you do focusing on your companies business and giving the customer what they need.

 

 

Marianne appreciates the role of Human Resources and knows they play a very important role in every organization -- to advise and to facilitate as a support function, however in some companies human resources has overstepped its boundaries and is dictating how the entire operation is run. That is an area that Marianne believes should be examined, "It is an architectural structure that can be quite damaging to companies, and you find it in ones that are silo-based. You do not find it in business process-driven companies.

 

 

 

About Marianne Withers: Marianne is a highly motivated and inspirational leader with over 20 years of extensive contact center experience MarianneWithers.jpgwith expertise in outbound activity, strategic results, collaboration and innovation. In early 2010, Marianne launched The Expressive Management Company, a consultancy that specializes in honest, down to earth and practical support for streamlining operations and business processes, developing staff into high-performing and inspired people, maximizing sales revenue, decreasing costs and establishing contact center solutions.

 

In recent years, Marianne Withers has gravitated from consulting in the areas of leadership and planning and organization toward the area of collaboration, specifically helping companies move away from operating as silo-based organizations.

 

Marianne has seen firsthand how people working within manufacturing companies that hold silo-based ideals tend to form their own "little power bases" -- working against other people and departments even though they profess to be working together. The prophecy, she said, is about making their department great, and you find people do not talk about the collaborative ideal of making the company great.

 

 

Marianne Withers

Director/Consultant

The Expressive Management Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I recently spoke with Mike Serwetz, a change expert based in Hong Kong, about supply risk management in China/Asia. He thinks it is a good idea for companies to formalize the process and come up with some kind of ranking or rating including financial and political risk, as well as service risk (the risk that you won't get your goods in time or exactly as you ordered, with perfect quality per your standards.

 

 

Why is it a good idea to formalize the supply risk management process?

 

The world has become more complicated and more volatile. At this point, compared to 20 years ago, or even 5 years ago, (as Mike discussed in his article in Supply Chain Times), there are more risks. Why you need to formalize it is because the more risks there are the more complicated risk assessment becomes. There are at least 12 types of risk in supply chain management which Mike has discovered. You need a formal process to calculate the risk.

 

 

 

What risks do companies need to be aware of in China?

 

Political Risk - In China, as anywhere else, there are at least a dozen risks. The most prevalent is political risk. When Mike wrote the article he said the political risk in China is low. However, it has been widely speculated (and Mike thinks it may be true) that what is going on in Africa amplifies and is spreading political risk throughout Africa and to China. China is worrying that it will spread to China. Political risk just went up a notch.

 

Economic Risk – is not a particular risk in China because the country is in pretty good economic shape.

 

Exchange Rate Risk – is a significant risk in China. Everyone believes that the RMB will be appreciated gradually, so we know what to expect. However, if inflation gets out of control or the bubble starts to burst, as some economists have predicted, China may decide to rapidly appreciate the RMB, which would produce shocks around the world.

 

Finance Risk – As the RMB, labor and material costs appreciate in China companies will start to get into debt or go out of business. While China as a country does not face significant economic risk, individual companies do and will.

 

Compliance Risk – Is always a risk because the China labor law of 2008 is very strict. In order for companies to make money sometimes they think they have to work around the compliance. Not being diligent in your compliance assessment could be very embarrassing.

 

Sourcing Risks – When prices and costs are squeezed, companies in China, and everywhere else, are inclined to cheat.  This can include sub-contracting, using faulty materials, etc. This is not only in the technology industry. Tainted milk is an example.

 

Product Risk – Quality or safety of product is always a risk.

 

Intellectual Property Risk – Depending on your brand, China is famous for copying brands. While perhaps not on a large scale, Mike believes nothing is safe. Mike lived in Shanghai and would walk across a small foot bridge to get to the gym, where he saw every brand of socks that was made in China, on that footbridge.

 

Security Risk – Is not really a risk in China, or is a very small risk.

 

Logistics Risks – Mike has not seen any logistics risks, such as pilferage or hijacking.

 

Black Swan – Perhaps Egypt is the Black Swan for 2011. We always have to be aware that something unexpected happens.

 

 

 

Who needs to manage supply risk?

Mike believes that there should be one person with seniority to make the call and keep the research honest. This is normally managed by the people in charge of sourcing the product. However, Mike believes that this is incorrect because they need to get a product delivered and tend to not be as persistent or strict. This is because they have that ongoing need to have product. Mike proposes that what is needed is a high seniority individual, a czar, who is able to manage all of the assessment, make the decisions and keep the process going. This is not just for new factories or suppliers, but also for existing suppliers as well. It should be re-assessed periodically.

 

 

How do you manage risk?

 

It really depends on the company. Mike suggests you create a formula or algorithm for comparative risk. He doesn’t think you will ever find a situation in any kind of supply chain that is risk free. You have to take all of your suppliers and potential suppliers and create a comparative value system so that you know which supplier in which country is the highest and which is the lowest risk. Such a system can be simple, or mathematically complex.

 

 

About Mike Serwetz

 

mikeserwetz.jpg

 

Mike has been working in Asia market for more than 3 decades, He spent a lot of time in China. In particular, he taught in China and has been sourcing out of China for many years and has his own business in China. Mike has sourced from most countries in Asia. He has been in the supply chain business for a long time and has learned about political risk and other types of risk in his Masters degree program at Dominican University on Political and Economic Assessment.

 

 

 

 

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