Thursday, March 25, 2010

Putting the Chain Back into Supply Chain

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I was recently interviewed by Dustin Mattison, founder of Logipi, which is described on their website as “a place to find inspiration, ideas, opportunities and resources to help you create the change you want to see in your supply chain”.

The subject of the interview was, why silo-based thinking is at the root of many company's supply chain issues.

You can hear the actual interview below, or read the transcript of our conversation.

Vivek Sehgal On Putting the Chain Back into Supply Chain.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Wednesday, March 24, 2010

Is Technology Expendable?

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In my last post, I referenced several surveys and reports showing that a large number of companies reduced their spend on technology either through reducing workforce or capital investments during the last couple of years. AMR research showed 51% of the companies surveyed reduced technology headcount as a result of the recession.

That raises the question: Is technology expendable?

My view is that this is a short-sighted strategy for the companies and would backfire. In the recent years, technology has become like the basic infrastructure that enables all the processes and business functions that firms need to run. In most cases, technology enables their core business models – reducing costs through automation, consistent processes, increased efficiency, reliability, increased accuracy, and so on. Irrespective of the strategy pursued by a firm, it is the underlying technology that enables the capabilities on which the businesses depend for survival and growth. For example, none of the retailers can survive long if their point-of-sale (POS) systems were down for a day, or key warehouses were not able to receive or ship merchandise, or shipments were stranded due to an unavailable EDI gateway that blindsided their planners. The examples can go on. In the online world, the availability and performance requirements for the online retailers on cyber Mondays have become legendary.

But technology itself needs to be supported and managed. The fast pace of change of technology makes managing technology a core organizational skill. Managing technology is different from maintaining technology. A lot of firms plan their IT budgets in two categories, (1) budget to keep the lights on, and (2) new capital investments, training of IT resources, upgrades, etc. The focus of the first category is on maintaining the existing infrastructure, renewing software licenses, data center operations, etc. and the second category deals with new planned capital expenses on technology, training, and upgrades. It is generally the second category that gets cut when the times are tough. The fact is that it can be expensive to maintain a skilled IT workforce, ensure that their skills upgrade with the changes in technology, and that the infrastructure does not become obsolete.

So far, two key points:

  • Businesses depend on technology for their mere survival and existence.
  • The pace of change in technology requires that organizations learn how to manage technology effectively. This includes the technology and skills upgrades.

However, firms cutting on technology are only short changing themselves unless they really believe that in some magical future, they will be able to do away with technology completely! Pushing technology upgrades not only makes it more expensive to maintain the existing infrastructure (finding obsolete technology skills is an expensive game), but also makes it prone to failure increasing the risk of business discontinuity. It also reduces the process efficiencies and cost advantages as the competitors upgrade to newer, better technology. In short, it erodes all competitive advantages that the initial investment may have produced and eventually becomes a liability due to increased costs of maintenance, low flexibility, and low efficiency. The only way out is generally a wholesale transplant of new technology which causes huge and unmanageable change in the organization that few firms can deal with.

Many readers would recognize the symptoms in their own organizations where the firm implemented a favored technology and then declined to nurture and update it. A decade or two later, the technology dinosaur becomes too expensive to keep, too risky to change, and too inflexible to continue supporting the business requirements of the new times.

Solution? Have a technology renewal strategy and be disciplined about continuing investments. Byte-sized (the pun is intentional) change is generally much more manageable than the giga-saurs you will have on your hands without planning.

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Wednesday, March 3, 2010

Putting Your Money Where Your Mouth Is

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Here is a classic: we know the problem, we know the root cause, but we don’t want to do anything about it, and I am not even talking about our waist lines!

The current recession has definitely laid bare a lot of weaknesses in our supply chains and exposed opportunities where addressing these past weakness can lead to competitive advantages of the future. That should have galvanized us into action, however, the collective corporate short term fixation on Wall Street and the Next Quarter takes its toll and capital investments that could help are actually cut to project phantom profits and cash-flows! One of the companies I worked for was, in fact, so fixated on the Next Quarter that it re-planned all its IT projects every quarter – the teams were disbanded and brought together every quarter as the projects started, stopped, re-started or fell by the way-side. Not a very efficient way of doing business or investing capital, but who is watching? As long as the numbers are met for the Next Quarter, all is fine, right?

Here are some charts, firmly supporting the phenomenon:

1. While we recognize that fractured planning makes us less efficient, (Source: RSR research paper titled: Retail Merchandising: Buckling Down in a Tough Economy). The referenced paper shows that 47% of the companies identified “fractured planning processes make us less efficient” as a business challenge.

2. We also realize that existing technology is preventing us from moving forward with new solutions (see the second bar on chart), (Source: RSR research paper titled: Retail Merchandising: Buckling Down in a Tough Economy). The referenced paper shows that 39% identified “the existing technology/infrastructure is preventing us from moving forward with new solutions” as a major organizational inhibitor.

3. But when the going gets tough and budgets need to be cut, technology is the first to be dropped! The following table shows data from an AMR survey showing IT costs were cut during this recession across most industry vertical across all budget categories. Quoting from Lora Cecere’s article, “The Bottom Line: Although companies state that IT budgets are strategic, they became a cost to be managed when firms felt pressure from the recession.” (Source: AMR Research titled: The Impact of the Recession on IT Spending)


Tuesday, March 2, 2010

Who Needs a Hundred Varieties of Toothpaste?

In a story about the retailers’ efforts to optimize assortments, NRF reports that several retailers are reducing the number of SKUs they carry. This is expected to help trim the assortments and enhance the overall efficiency of operations including the shelf-space usage in the stores. The article mentions Wal-mart, CVS, Supervalu, and Kroger among retailers that are possibly starting a rationalization process for their assortments.

I believe this is long overdue. Think of all the products in categories like detergent, dish-washing, personal hygiene, cleaning supplies, breakfast cereal, bottled water and many more that are similar as in “utilitarian” products – there is so little differentiation among the competitive products that a little less variety is almost certain not to affect the retailer’s sales in any significant way. While brand-loyalty has historically contributed substantially to sales, it is losing its edge in the utilitarian segments. I believe this will continue because the underlying reason for the phenomenon is the overall quality improvements through standardized manufacturing practices and standardized inputs. Such standardization has been facilitated through mass-production and globalization of businesses that are becoming truly global in all respects: global customer base, global manufacturing facilities, global manufacturing standards, and stringent quality control processes that are very similar across most larger companies. The result is product homogenization: while the product positioning, packaging, advertising, and marketing practices are still developed for local audience, the products themselves are getting more and more homogeneous and un-differentiated.

Irrespective of the place or the manufacturer, the ingredients and the manufacturing processes for most of the world’s utilitarian products are consistent. It is not lost on the consumers that a lot of products sold under different brand names are actually manufactured in the same factory, on the same equipment, using the same ingredients, and so on. As consumer awareness grows, the branding will become less of a factor in making the buying decisions, except for few specific items that individual consumers may continue to prize due to personal preferences for flavors, fragrances, and other similar traits.

The growing popularity of the store brands in the last few years is the proof of the larger trend described above.

Brands, however, will not disappear. Stronger brands will survive and thrive, but the world may just not have the space for the “also-rans” any more.