May 29, 2009

Embracing Eco-effectiveness in the Supply Chain

Posted by Carlos Ortiz under Eco-effectiveness, supply chain | Tags: , , , |
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In the last few weeks, I’ve been working together with other Silicon Valley professionals, and under the leadership of John Swan from Global Green Village, a new special interest group that focuses on a 10,000 ft view of the sustaibale development movement and how it relates to businesses and the new job positions that will be required to run the new enterprises that must emerge if we want to have a sustainable future. The group is an amalgam of a wide array of professionals from every imaginable trade. And this extraordinary combination of talent is the only way that such an initiative can succeed, for there’s not a single, linear strategy that can make our businesses sustainable. Every part of an organization must contribute to the overarching goal of making products and delivering services in a way that not only reduces the impact on the environment, an strategy dubbed “eco-efficiency” that boasts the well known “reduce, reuse and recycle motto. The 21st century enterprise must focus it’s energy into creating products and processes that not only reduce materials utilization, but actually nurtures the environment. Instead of having a zero emission goal, we must focus on positive impact.

Millions of tons of materials are forever wasted in garbage dumps because once used, the vast majority of final products cannot be effectively disassembled and reprocessed into a brand new product of the same kind. When we recycle paper, the paper mill has to add fillers, chemicals and other products to compensate for the reduction in length (the source of strength) of the paper fibers that result from the milling and reprocessing, and after a few cycles, the degraded, more toxic material ends up in the dump anyway. In this case, a substitute might be the solution as the case may be with Melcher Media, which now uses a polymer that doesn’t degrade instead of paper, and once and if the book is not needed anymore, it can be fully reprocessed into the original polymer without further addition of toxic chemicals or fillers. The polymer in the book is not really recycled. It is the raw material for exactly the same product, therefore eliminating the environmental impact. The manufacturer does not need to source new virgin resins over and over again. The cycle is eco-effective instead of merely eco-efficient.

The Spend Management professional is at the core of this revolution in material substitution. Together with R&D, engineering, process redesign and management oversight, sourcing of these new raw materials is as important as the will to be more sustainable. Without support of a market savvy professional, the engineers and manufacturing folks may not have the time, connections or expertise to make a full research of the supply base. If the sourcing team has a good standing with their suppliers, the solution for some of the problems that arise during the creation of a revolutionary product may already be in the sights of a vendor with a similar vision, but with no clients willing to commit to a joint development.

This is a first glimpse of what I’m planning to write about in the next two weeks, and my focus will be on how to instill the eco-effective approach to new enterprises, who can be the leaders of the market place in the future. A company that will have the impact of Google, which started merely a decade ago, may already be out there. It’s founder can create a world leader in eco-efficiency now, even if it is still under the radar. Imagine the impact of such a company when it sells billions of dollars of eco-efficient products 10 years from now.

My next delivery will try to present several approaches to what can be done at the small enterprise supply chain to improve their road to eco-effectiveness and natural capitalism.

 

May 19, 2009

Cash is King: Lessons in cash conservation for companies big and small.

Posted by Carlos Ortiz under spend management | Tags: , , |
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Today, Michael Lamoreaux, A.K.A. “the doctor”, editor of the very insightful Sourcing Innovation blog, posted a review of an article originally published by the Supply Chain Management Review. In his analysis, he presents us with a wealth of information and recommendations to keep cash in tight control and incidentally touches some of the same points I made in my last two posts on Spend Management for start-ups here and here. More specifically, he summarizes some ten different tasks and strategies to get control over spending the hard earned cash. Start-ups can benefit immensely from reading either Michael’s blog or the original article.

Carlos Ortiz

 

May 18, 2009

Spend Management quick guide to start-ups. Part 2 of 2.

Posted by Carlos Ortiz under spend management | Tags: |
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Following to my Part 1 of my series on Start-ups, here are some suggestions on how to use Spend Management techniques and processes to help new companies reap the benefits of the latest practices. Spend Management is one part the mandatory holistic approach to making your business successful, and that approach is not less valid in start-ups. Resources are scarce, and here I explain some techniques to help you conserve them.

1.- Understand your spend.
See if the one or more of the following statements is true:
- I don’t know if I’m paying too much for rent, bandwidth, furniture third-party services, recruiting, etc. compared to what the market is offering.
- I don’t know the total cost of including a new employee in the payroll.
- My projected spend in some or all the spend categories is unknown
- I have never heard the term “strategic sourcing”
- I consistently spend more in services than what was originally budgeted.
- I don’t have time to track all the invoices and match them with the corresponding PO.

If you answer is yes to any one of these statements, then it is likely that you don’t have control of your spend. A relatively simple exercise listing all your invoices and organizing them by category and vendor, for a period of one year, will tell you a very interesting story. Compare total cost per vendor/spend category vs. the original budget. You’ll be surprised. Some categories you thought didn’t exist when you created your business plan are likely to be a significant portion of you total spend.

Equally important to know where the money was spent is where is it going to go. You can create what-if scenarios for low, medium or high volume sales and see what could be the future demands on your company resources. Build those scenarios in your contracts with vendors so you can get discounts on volume if your best estimate becomes a reality, or conversely, secure a price for a year or more if sales are sluggish.

2.- Time-to-market.
Your product needs to reach the market, but “boring” administrative tasks are using so much of you valuable time. Turns out that a lot of start up companies make the common mistake to underestimate the time commitment to make the business successful. You can save countless hours by having a clear strategy and process when it comes to purchasing. You can do one or several of the following:

- Hire a resource who solely focuses on purchasing and spend management. This person must be brought with compensation based on equity, so he or she shares the burden and the vision.
- Devise a spend management strategy that drives an efficient PROCESS. This is the key element of the entire initiative. If you don’t know how to do it, then hire an industry expert for a few weeks to help you, so you are ready faster than your competitors.
- Ask your vendors to show how fast they can implement, deploy or deliver their goods or services. The fastest one should get the deal, even if it is slightly more expensive than the best offer. In the end you save money.
- Look for risk-sharing partnerships with some strategic vendors. This may not be to the liking of the founders, but it can save a great deal of cash and time. Cisco may not want to partner with you, but a third-party reseller, being a smaller company, may be the perfect one to manage your server farm. You focus on programming, and they do their own thing with the servers.

Remember, the more time you have in your hands, more time you can dedicate to sell your idea or product.

3.- Strategic alignment
Your purchasing practice MUST be aligned with the overall company objective. For example, if your start-up will consume vast amounts of bandwidth, the focus should be in getting the best possible deal from a telecom vendor. You VC or angel investor may have contacts in the industry who can help you find the best deal. More importantly, make the local telecom vendor pool compete for your business. That is just one example. There other areas in which you can leverage your contacts to make the business more successful.

You can build your purchasing strategy by analyzing the following:

- List your current spend by category and make a projection for 6,9 and 12 months. This will tell you where your money will go and the areas in which you are likely to need help.
- Research the market for the top categories. Is time well invested and you may find vendors with better ideas that can help you save money.
- Define your procurement objective clearly. Is it time to market? Cost savings? If you know what you need, your purchases will have to comply with the vision and company strategy
- Devise metrics to track your goal attainment. No metric, no management.
- Implement a basic technology implementation roadmap for procurement. You may have a set of Excel spreadsheets to track everything, but at some point you will have to make the transition to a more robust platform. Be sure that when that transition comes, you have the right data to make the transition.

4.- Building your infrastructure for growth
Another common mistake is not to have the proper infrastructure in place. And by infrastructure I mean not only computers or office space. I ‘m talking about mail services, janitors, HVAC maintenance, telecom, security, recruiting, accounting, payroll, PR, investor relations, etc. Finding and implementing vendors in those areas can be overwhelming and distracting, but most if not all of them can be outsourced. With the right strategy you can build a pipeline of projects that identify the right vendors at the right price so they take over those tasks. Any investment in those outsourced services are money well invested and it is also the way big corporations manage their core businesses.

These are a few ideas on how, by implementing a Spend Management practice, you can save cash and time, the two most precious resources in your search for success.

 

May 12, 2009

Spend Management quick guide for start-ups. Part 1 of 2

Posted by Carlos Ortiz under spend management | Tags: |
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Start-ups face a unique set of challenges when it relates to the balancing of time and resource management. On one side, they are likely to be cash strapped and in a race to get their product or service to the market and generate cash flow. On the other, they need to manage their day-to-day operation, namely dealing with vendors, paying bills, meeting with VC firms and all the other ancillary tasks to run an operation.

The first part, getting a product or service to market, is their primary task and likely the main area of expertise of the founders and initial pool of employees. But sometimes this initial team lacks the resources or knowledge to make the day-to-day operation an efficient one. Among the administrative tasks that are usually neglected are the ones related to spend management. This articles focuses on the common mistakes made by small enterprises around spend management and some steps and techniques on how to avoid them. Also, we will make the point that a company that avoids those mistakes is in much better position to make a better impression to outside investors by showing it’s commitment to be the best-in-class in every area, including non-core activities, therefore rendering their business case a much more robust one.

Definition of Spend Management

Before we define the practice of Spend Management (or variations of the term) for the purposes of this article, let’s review what the leaders in the area have to say.

1.- Institute for Supply Management [ISM]
“ Supply Management is the identification, acquisition, access, positioning, and management of resources the organization needs or potentially needs in the attainment of its strategic objectives. Other key components of supply management are disposition, distribution, inventory control, logistics, materials management, packaging, product or service development, procurement, quality management, receiving, transportation and shipping, and warehousing.

2.- Ariba, Inc. Leader in Spend Management Solutions [Link]
“Spend Management aligns organizations, processes, and systems to analyze, source, contract, procure, pay, manage and continuously improve global supply for best-value performance in support of the strategic objectives of the business.”

3.- AMR Research
“Spend that is currently under control or management. Control includes the use of structured events (RFX, auctions), contract management, preferred suppliers with active supplier development programs, and spend analysis/visibility involving spend data management and the use of third-party content.” This definition was provided by Lora Cecere to Jason Busch of SpendMatters blog.

These definitions are substantially different, going from the strategic approach from the ISM to almost entirely tactical from Lora Cecere. I really like the one from the ISM, as it really puts into perspective the fact that all organizations must have a spend management practice in order to be successful, and that’s the one we are going to dissect.

With this definition cleared, now we can start to translate it into practical steps and techniques that a start-up can actually use in order to avoid waste and save scarce resources. Please check The Sourcing Post tomorrow for the second and final part in the series.

 

May 9, 2009

Venice taxis and suply chain bottlenecks: interesting comparison

Posted by Carlos Ortiz under supply chain
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If you like Venice (or want to go there) and you work in Supply Chain, you’d really like the blog post here

Short quote:

Keep it simple. Tribal knowledge tells you what your bottlenecks are. Focus on proactive measures that will ensure that you are ready when the capacity crunch comes.

 

May 9, 2009

The mythical “American Car”

Posted by Carlos Ortiz under supply chain
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Following to my article on Fiat’s next steps in the US, I read an article in The Wall Street Journal written by Matthew Slaughter in which he elaborates more on the subject of competitive supply chains, insourcing and comparative advantage in the US auto industry.

An abstract from Yale Global about the article is posted below:

Expecting American industry to be great at everything undercuts the notion of “comparative advantage”: that countries should manufacture and export those products for which they have an advantage relative to other countries, while importing the remainder of their needs. The US auto industry provides an apt example of comparative advantage and what it means to be an American product. Chrysler’s troubles were caused in part by its lack of global focus. Meanwhile, the foreign transplants have built a robust business in the US through insourcing – importing components while conducting research and development and manufacturing in the same market as the one into which one sells. Moreover, auto parts are typically produced globally and then assembled locally, so an “American” car is a misnomer. In the end, encouraging insourcing, and thereby furthering comparative advantage, is likely to improve economic conditions more than expecting or attempting to make American industry the best at everything – a project doomed to failure in any case. – YaleGlobal

The article is worth reading in it’s entirety.

 

May 8, 2009

The world economy is not the US economy only

Posted by Carlos Ortiz under economy | Tags: |
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In the Economix blog hosted at The New York Times, there is a very enlightening posting by Simon Johnson an entrepreneurship professor at M.I.T. in which he makes a very good point by saying that we shouldn’t focus all our attention in the US markets, as its GDP only accounts for less than 25% of the global output.

As he puts it, there are significant risks associated with the lack of action and market intervention in the EU. The fiscal expansion and bank bailouts now all over the news in the New World, are very timid on the other side of the pond.

And top Europeans are still at the denial game (yes, policy makers need to appear confident; but no one is inspired by the sight of heads in the sand). Despite serious problems in the banking systems of many European countries, the fall in global trade, and the general global move to lower spending, the commission is clinging to a forecast of basically zero growth in 2010 (more precisely, they predict a 0.1 percent fall).

This situation in reality is giving some emerging economies the chance to become more competitive. They are mid-sized, and their governments seem to be more aggressive in the steps they are taking to bolster their economies.

The danger, as Professor Johnson explains, is that the bigger economic blocks, threatened by this new competitiveness from outsiders, with increase protectionism and further slow the international trade. Hope it doesn’t happen.

 

May 6, 2009

Creative ways to correct US trade imbalances

Posted by Carlos Ortiz under economy | Tags: |
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In a post today in The Huffington Post, Ralph Gomory describes, among other things, some ways to correct the US trade imbalances. In his post, he outlines four different steps to align national and corporate goals in the US. Step 1 is “Balancing trade”. It is in that section of the post where he refers to some very interesting ways to accomplish it.

Excerpt:

Fortune magazine eloquently described the need for balanced trade and suggested an approach to obtaining it. Under the Buffet plan, exporters would receive certificates equal to the dollar value of the goods they export. Importers would need to buy these certificates to cover the dollar value of the goods they import. The certificates would be sold on an open market. This would force the value of imports to match the value of exports and, in contrast to quotas or tariffs, would not be aimed at particular countries or industries. This plan and some of its variants have been carefully studied (see forthcoming reports from the Economic Policy Institute) and it is now time to take this approach seriously.

The above comment is startling, because, as he mentions in his article afterwards, it can be considered protectionism. Clearly, is not easy to balance US trade deficit, and the solutions that are being proposed are starting to get unorthodox.

So, what do we do as Sourcing specialists? How do we manage our material and services flow from outside of the US when (and if) the government steps in to cap the outflows of cash? Are we developing internal or alternative sources? Can we develop those efficiently and profitably? What about US competitiveness? These are good questions that need to be answered during the debate about this issue, and our profession must contribute to it as the subject matter experts. After all, when the CEOs started to cut costs bowing to pressures from Wall Street, it was us, the sourcing guys, who helped accomplish it, and we are also the ones who clearly understand the challenges to reverse the move.

 

May 6, 2009

Fiat’s re-entry and why Brazil is poised to be the next big player in the US auto market

Posted by Carlos Ortiz under supply chain | Tags: , , |
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By now, we are only starting to see the implications of Fiat’s takeover of Chrysler. Today’s article in DealBook actually makes an analysis of the synergies and other stock price related issues for Fiat Auto (part of the Fiat SpA conglomerate) and it’s subsidiaries.

But what exactly is the impact of the merger for the auto industry supply chain once and if the merger is approved? Brand perception aside, Fiat is poised to have a very strong position in the small and medium size car segment, the one that now lures the more environmentally (if forcibly) conscious American consumer. We are not talking about some of the Fiat Auto brands such as Ferrari or Maserati. We all know those. We are talking about the Cinquecento or Fiat 500 and the likes. This is a VERY small car, and the consequences for the US automotive tier one vendors could be enormous.

First let’s start with some logic:

1.- We are still 18-24 months away from Fiat to be able to manufacture any vehicle in the US
2.- Fiat needs to start selling cars
3.- Therefore, the cars need to come from somewhere until they retool Chrysler’s facilities.

So, where will the cars come from? Obviously everybody thinks they will come from Italy, right? Well, not so fast. The answer may come from a sunnier, happier place: Brazil.

The auto market in Brazil is still growing, they are by now the sixth largest automobile market in the world with close to 2.4 million units produced in 2007 and a preliminary number from ANFAVEA [link in Portuguese], the auto lobby group in Brazil, that said sales increased to 2.8 million light vehicles in 2008, putting Brazil above Italy, France and the UK. I think I have made my point that Brazil is a serious contender in the auto industry.

How does Brazil fits into Fiat’s strategy? Well, Fiat contributed 743,000 vehicles, close to a quarter of the total produced (including exports) and it is also the market leader in internal sales. They accomplish this feat with only one [not a typo] manufacturing facility in the country.

Logistics and engineering from Brazil
So, Fiat has a gigantic manufacturing capability in Brazil, and because is much closer to the US, looks like a good launching platform for some new models into the US. Not a very good prospect for US based tier one vendors. One potential problem for Fiat would be what to do with some or all the Chrysler plants. They can not simply close them and import all cars, as it is politically (and presumably financially) impossible. But remember, Fiat needs to sell cars with their own brand relatively soon, so they will have to bring cars from somewhere. The cars coming from their plants in Europe are market ready for the EU, but not the US, so they will have to redesign their cars to comply with US regulations and safety standards.

At the same time, the Brazilian engineers are extremely competent in adapting foreign designs to their own market. Almost every car manufactured in Brazil has an original EU counterpart. But the EU versions are full of bells and whistles that are not marketable in Brazil because of the high cost. Therefore cars need to be substantially re-engineered to strip all the expensive features, leaving the car recognizable only in the exterior. It is this quick time-to-market that makes Brazil a very compelling launching platform for some of the models to be sold in the US. The automotive supply chain in Brazil is almost entirely focused on small cars and they make their profit out of very small margins, whereas the US counterparts are used to bigger, heavier components. The size issue is, in my opinion, the biggest hurdle US tier ones and twos face. They will have to compress their margins, on cheaper components (not lower quality, just smaller and lighter), so their total cash flow will be lower even if they sell the same number of units to Fiat.

The Challenge
So, how to make money with smaller, cheaper cars? Look at Fiat’s subsidiary in Brazil and all the other US brands subsidiaries around the world. They all sell small cars and make money and indeed are saving their US owners from having more dismal financial results. When the Big Three created their subsidiaries around the globe, they used to send their executives and engineers to train the locals. Now, the flow will reverse and the Brazilians are likely to go to Detroit to teach a lesson or two to the remaining workforce. How ironic.

 

May 4, 2009

ISM 2009: United Airlines implementing basic sourcing strategies

Posted by Carlos Ortiz under spend management | Tags: , |
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Following today’s coverage on the ISM 2009 Conference, I read a brief note at Purchasing.com that explains what United Airlines has been doing for the last two years to improve their sourcing practice. It boils down to this:

1.- Creation of multidisciplinary teams with people from sourcing, finance, commodity management and market experts, although they use some other nomenclature to define the roles.
2.- Communication strategy
3.- Clear definition of roles and responsibilities
4.- Standardization of sourcing process into four steps
5.- Supplier feedback

Well, turns out those are pretty basic steps to run a sourcing program at any company. The fact that United was not using that strategic approach suggests that companies are still a long way from having a fully implemented strategic sourcing practice.

On the other hand, we have to give credit to Grace Puma, United’s CPO who started the whole thing at United 2 years ago. I bet she was surprised to know that the most basic strategies and processes for strategic sourcing had not been common practice.

[Full article here]

 

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