Supply Chain Management

In an economic downturn the screws are tightening on suppliers - but is this short sighted? What happens as suppliers fold, inventories deplete and monopolies emerge in previously competitive supply markets?

Reflect on Sony's strategy:

From http://news.bbc.co.uk/2/hi/business/8060761.stm


Japanese electronics firm Sony plans to halve the number of its suppliers and reduce purchasing costs by 20% over two years, as part of restructuring plans.

Cutting procurement costs is aimed at saving 500bn yen ($5.3bn; £3.3bn).

The move comes on top of huge job losses and previously announced measures to trim 300bn yen of costs.

The firm posted its first annual loss in 14 years during the 12 months to March - a sign that consumers were tightening their belts.

As well as the economic downturn denting consumer spending, the fall in electronics prices has also hit firms such as Sony.

Falling prices

Until now suppliers have had separate contracts with Sony outlets.

But the firm aims to move to a centralised procurement system, to enable it to negotiate cheaper prices from suppliers.

The number of suppliers will fall from around 2,500 to 1,200 as part of the move.

"The prices of digital home appliances have been declining by 15% to 20% every year lately," said the firm's spokesperson Mami Imada.

"Unless we cut costs we cannot hope to survive the price competition."

The auto industry has lost $50bn since 2005 because of the poor supplier relationships - reflecting on poor, short sighted and misguided supplier management. Proctor & Gamble on the other hand are looking to generate 50% of their new product innovation from their suppliers.
How, with so many similar and compelling examples of the value of value network management, has US (and indeed global) industry imploded? Simple really - by screwing down prices paid to suppliers, extending payment terms and resourcing away from competent suppliers, there is such a lack of awareness that you need to understand your customers and drive value from the source of your supply chain onwards.

As GM CEO Rick Wagoner is asked to stand down by President Obama, where does this leave the auto giant?
Sadly, there has been compelling evidence for over a decade that the global auto industry is over capacity. Compounded by the fact that GM, Ford and Chrysler failed to reflect the trends in the industry for economic, beautiful and high tech vehicles, there seems to be very little that can be done without some very tough decisions:

1. Three auto makers is one too many. It looks like the President is slowly coming to the view that consolidation has to be achieved if the US is to retain an auto industry.

2. Expansion of early supplier involvement in design and innovation is critical to the success of the remaining OEMS

3. The impact of world class manufacturing and supply chain practices needs to be increased a pace - Korean and Japanese companies are demonstrating a passion for continuous improvement which really has not been grasped fully by American (and European) manufacturers.

The recent investigations by the British House of Commons into the Banking Sector crash has exposed the sheer greed and arrogance of the key players in the scandals - not least amongst them Fred Goodwin, of RBS. As the Observer newspaper reported, Goodwin's style of leadership was straight out of the classic 'Great Man' theory school of thought. His passion for instilling fear in some of the most experienced executives in the banking world and his joy at using ridicule to admonish any opposing views was legendary throughout the organization. Here's a recent quote that has been repeated widely in the business press about good ol' Sir Fred:

"a megalomaniac who cares more about size than shareholder value."

The unraveling of the economy is in large part due to the hubris of the Old Boys Club of 'inbreds' who have long dominated the financial world, yet this is what clearly brought ruin upon the International Banking Fraternity. So now maybe it's to take a leaf out of the Icelandic book:

"Iceland has turned to two women to rebuild its financial system after the banking empire built by its young, male business-schooled elite collapsed.
Elín Sigfúsdóttir and Birna Einarsdóttir are set to become chief executives of New Landsbanki and New Glitnir respectively, the nationalised banks created by the Icelandic government in the wake of the crisis.
One government minister said their appointments were an attempt to signal a new culture within the banking system."

This should be a lesson for all organizations - Bill George has written about the pervasive desire to maintain the macho culture in the Boardroom, one which in the US still sees the typical CEO as white, male and over 6'2" - it is time to look to alternative role models for leadership.

A good question, one would think. After all, surely the President of the USA has far more important issues to deal with than managing supply chains? Well, not surprisingly, the answer to the question above is - a heck of a lot!

The US Government spends around $450 bn a year (2008 estimate) and their expenditure is not without a share of errors, exploitation and fraud. Obama has promised to save at least 10% through better procurement. This, remember, is 11 years after Tony Blair became British Prime Minister with a similar promise and managed to lead radical change in the UK's public procurement (about which much has been written, some of it by me!!).

Obama is also aiming to hire and train more 'contract managers', improve the use of technology, limit the use of cost-plus deals, strengthen whistleblower laws and stop contractors with unpaid bills form bidding on Government contracts.

We have discussed here before the impact of public expenditure on the economy, both financially and socially. Obama seems determined to hail in a new era by putting Supply center stage.

Not a day too soon!!

"The European Commission has fined four car glass firms a total of more than 1.3bn euros ($1.6bn; £1bn) for running a cartel - its largest such fine.

The four companies are France's Saint-Gobain, the UK's Pilkington, Japan's Asahi, and Belgium's Soliver." (http://news.bbc.co.uk/1/hi/business/7725675.stm).

SCMI Advisory Board Member Dave Nelson shares his immense knowledge and wisdom of supply chain practices

What does the financial crisis mean for the real economy? Consider the source of money for a supply chain - many commentators state that' the only new money to enter the supply chain comes from the end customer'. This is patently untrue! Repeatedly we have been highlighting the importance of capital investment for supply chains. Investment in new plant, equipment, materials, research & development, suppliers, education etc. This is a critical factor in many supply chains. After all, how do new suppliers acquire the resources to be able to compete for business? How to manufacturers develop new products and invest in new facilities? How can any organization deal with the negative cash flow in the early stages of new product development?
What about managing negative cash cycles - ie shorter payment time to suppliers than payment from customers, high inventory rates?

All of these factors need to be considered in terms of organizations financing requirements. As the Washington Post pointed out only today, new vehicle development requires significant inflows of capital across the supply chain - particularly if the development includes new technologies like hybrid, hydrogen, electric and other fuel vehicles.

So the upshot of all this is that the 'real economy' - ie the creation of wealth rather than the manipulation and horsetrading of wealth - places a heavy reliance on the finance sector sustaining its ability to loan money and achieve realistic returns. Maybe its time to get 'real', face the fact that the economy does not grow at a compound double digit rate (despite the dreams of speculators and capitalists) and learn to live with realistic, reasonable normal profits.

Stunned. I guess that's the best word to describe reactions to the current financial crises unfurling across the globe. In the midst of all of the discussions about causes, prognoses and consequences it is surprising how little discussion is taking place about value creation. The strength of an economy is fundamentally founded on its wealth creation - of which financial investment is of course a major part - and supply chain managers are typically immersed directly in the activities of wealth creation:
Procurement accounts for anywhere from 20% - 90% of costs. How well that procurement is managed and most significantly where we chose to source have major ramifications. China and India have been the star children of the sourcing and outsourcing world for less than a decade and its becoming apparent that moves are afoot to rethink this. Mexico and South America are becoming far more desirable options due to proximity and capability. How long will it be before we see a swing in the China sourcing phenomenon? Is China another 'sub prime' bomb waiting to explode in the supply chain world? Should we be thinking more about the role of supply chains as instruments of economic (and social) policy? What are the stress points that are starting to show in our sourcing rampages eastwards?

An intriguing map of the global distribution of wealth across the years showing how significant various regions have been at various times in the last two millenia
http://www.bbc.co.uk/blogs/thereporters/markeaston/

SCMI is launching its benchmarking program into World Class supply and procurement. To find out more watch this interview with SCMI's visiting professor, Andrew Cox PhD:

http://streamer.sandiego.edu/Streamer/StreamPlayer.aspx?Id=511a04xavPq

The move to environmentally friendly cars continues - or at least a zero emmission car.

http://news.bbc.co.uk/1/hi/technology/7617972.stm

It is still not clear what the total environmental impact of electric cars will be - for example the carbon footprint of production and the impact of end of life recycling (http://greenliving.lovetoknow.com/Hybrid_Vehicles_Negative_Environmental_Impact and http://www.newcarpark.com/blog/?p=68)

During our courses in supply chain management we make every effort to 'bring alive' the importance and value of applying learning to real life. This is one piece of feedback from an MBA student:


"The materials that were presented during our GSBA 506 (Operations & Global Supply Chain Management) course in supply chain management, as well as the skills that we nurtured during the 4 months of your attention, have really begun to bear fruit. We are in the process of a healthcare system-wide electronic medical record (EMR) reformat and our hospital is the beta site. The alpha site discovered several unexpected challenges during their EMR launch, many due to inadequate attention to the processes by which an order goes from the physicians, thru clerks and nursing, to execution at the patient, lab, or other service level.

During our site information technology (IT) orientation and planning sessions, I took the liberty of sharing the process mapping case study that I did in 506 with the team here, demonstrating how one could identify all of the steps involved in what most would think is a fairly straightforward process of discharging a normal, uncomplicated Mom and her baby. It’s not that simple, as we found out. The IT were quite impressed with the Visio diagram and decided to use it as a template for the other process mapping that needed to be accomplished before we could load the EMR and begin to use it effectively. It should improve the EMR load and launch by reducing design errors up front, rather than having to address the consequences of errors in a madhouse fashion during the initial hours of the EMR launch.

Although I’ve said 506 was a great class, it’s always a lagniappe when a great learning experience is not only academically interesting but ALSO useful…!"

Allan T. Bombard, MD
Chief Medical Officer
Sharp Mary Birch Hospital

Latest journal publication from SCMI:
(by John Ramsay & Simon Croom)
http://dx.doi.org/10.1016/j.pursup.2008.04.001

Continuing the recognition that meat supply chains are the single largest contribution to global warming...

http://news.bbc.co.uk/1/hi/sci/tech/7600005.stm

http://news.bbc.co.uk/1/hi/business/7598306.stm

Where is your organization in its journey to world class performance? How good are your sourcing and procurement processes? Professor Andrew Cox, SCMI's distinguished visiting professor, will be holding a practitioner workshop on September 15th at USD with the express intent of guiding you on your journey.
You will have an opportunity to engage in a free benchmarking analysis based on Professor Cox's detailed study of global sourcing.


Click on the following link for more information:
http://www.sandiego.edu/business/centers/supply_chain_management/SCMI_practitioner_workshop_series.php

Managing potential hazards from toxigens in product supply chains

Discussion of some of the challenges in identifying and containing toxins in the supply chain from China

An interesting analysis by Dr Christian Hess (Warwick)
http://www2.warwick.ac.uk/newsandevents/icast/archive/s2week24/chinahess