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Supply chain strategy for small businesses

Focus on sales forecasts.

Now think about the definition of sales and operations planning (S&OP): “A process to develop tactical plans that provide management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of the supply chain. The process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing, and financial) into one integrated set of plans.” – Collaboration

Blog 15Bearing in mind as businesses grow, the ability to meet demand is a critical component of success. Consider the first definition of scalability from the APICS Dictionary, 15th Edition: “How effectively a company can grow its business in order to meet demand.” A key component of scalability is lean production practices, which help ensure that a company manages its resources and reduces waste in terms of material, time and overall costs. Lean practices boost efficiency and enable growing companies to accommodate growing production needs.

Small or large, companies must be scalable and able to forecast demand in a strategic and holistic manner in order to prepare themselves for future success.

Taking, for example, the 16-week rule one very important planning mantras I carry with me. Planning ahead is essential for success and to maximize those sales opportunities (yes we’re talking about that AGAIN), So it’s time to think summer in retail.

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Successful Women in Procurement and Supply Chain Share Career Advice

Procurement and supply chain remains a male-dominated profession. So I asked women holding mid-level to senior roles in this field for a few pieces of career advice for their fellow female procurement professionals. Here’s what they had to say.

Speak Up
“Make yourself heard! Don’t be afraid to speak up!” — Wendy L. Tate, associate professor of supply chain management at University of Tennessee

“Procurement professionals have heightened awareness about the power of transparency for ensuring a level playing field in the economics of contracting and purchasing. Why do we accept a lack of transparency in talent management practices? On this International Women’s Day let’s pledge to #BeBoldForChange and start speaking up about transparent and objective talent management practices in our companies. Companies win when 100% of the workforce competes on a level playing field.” — Elba Pareja-Gallagher, director of finance at UPS and founder of ShowMe50

“You do not need to hide your femininity. Use your female skills of empathy and emotion to become a leader. Don’t shake hands like a weak woman!” — Dawn Tiura, CEO of SIG

Network and Find Mentors
“Form relationships, seek mentors and offer yourself as a mentor to others. Build a broad spectrum of mentors by targeting both women and men, all levels of seniority, different job functions, internal and external. Mentors open the door to a tremendous amount of knowledge and multiply the size of your network.” — Christina Gill, manager of Eastern Hemisphere Global Supply Markets Group at Halliburton

“It’s all about the people. You can have the best ideas in the world, but if people don’t buy into them, nothing will materialize.” — Dawn Tiura

“Schedule time with others in the organization — you need mentors and sponsors that will help you be successful — go out and find them! Build a strong and highly connected network, particularly with other women in the field of supply chain. They will be very strong allies.” — Wendy Tate

“Share your learnings generously with all the women around you.” — Elba Pareja-Gallagher

Be a Voracious Learner
“Learn from your mistakes and move forward. Don’t beat yourself up on your mistakes, but rather use them as learning opportunities. Call everything a draft or a pilot. These two simple words open the door to helping you try new and innovative things. Something doesn’t work? Don’t sweat it — it was a pilot you were testing!” — Kate Vitasek, author and faculty member at University of Tennessee

“Like it or not, it’s still a man’s world. We need to get better at surviving and thriving. I recommend reading Shaunti Feldhahn’s book ‘The Male Factor.’ It is a well-researched book that examines the differences between men and women and how they play out in the workplace. Very insightful!” — Barbara Ardell, senior vice president at Paladin Associates

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Dawn Tiura’s current reading list

“Never stop learning. Read a good business book at least once a month.” — Dawn Tiura

Last but Not Least, Work Hard
“As someone who has held various supply chain or STEM positions since 1979, I believe there has never been a better time for women in supply-chain to excel and be recognized for their achievements. My recommendation is to accept the challenging assignments that others may not want; work diligently toward achieving substantive business results; effectively communicate these results to demonstrate your contributions to the organization.” — Sue Purdum, senior instructor of supply chain management at Pennsylvania State University

“I’ve spent a lot of my career doing basic operational blocking and tackling. Don’t try to skip that part because it seems unexciting — it’s what clears your way to be able to think about grand supply chain innovations.” — Shoshanah Cohen, author, and advisor on Target’s Supply Chain Council

“As a procurement professional, there are plenty of opportunities to bend rules and/or compromise values in order to meet a more favorable result. However, when you consistently operate with integrity in your sourcing process as well as your interactions with suppliers and stakeholders, it becomes a part of your personal brand that lives far beyond that moment. It builds trust in you as a professional and enables greater success.” — Kanita H. Brown, managing partner at K.H. Brown Solutions

“Have a positive forward-thinking attitude and approach. Don’t think of your job as your ‘job.’ Rather, come to work each day with the mindset to not only get your work done but also challenge the status quo and seek a better way to do your job.” — Kate Vitasek

 

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The power of successful supplier collaboration

Building on mature strategic sourcing practices can transform organizations beyond corporate borders and capture value

Most people learn the value of co-operation in the home, the schoolyard or on the sports field. Most companies recognize the need to promote cooperative and collaborative working in their organizations too, and many have made strenuous efforts to break down internal barriers and foster closer working relationships. As an increasing fraction of the value of products and services moves out into the extended supply chain, however, companies are finding it much harder to extend their collaborative processes across corporate boundaries.

Some companies have tried supplier collaboration with only limited success. Others believe they have run out of room in their collaborations. We believe that most companies can get more from supplier collaboration if they start again from first principles—that is, if they rethink the nature of their strategic supplier relationships.

We define supplier collaboration as the joint development of capabilities for both the customer and supplier for the purposes of reduced cost, process improvements, and innovation in products or services. In 2012, McKinsey surveyed more than 100 large global companies on supplier collaboration practices. The survey distinguished traditional sourcing tools (such as clean-sheet cost models) from strategic investments and long-term projects with suppliers for co-development.

The results were fascinating. Although over a third of the respondents said they collaborated with suppliers, fewer than 10 percent could demonstrate systematic efforts on supplier collaboration. More importantly, among those who did collaborate, the EBIT growth rate was double that of their peers.

PreviewImage_Exhibit_1

Do suppliers benefit from such relationships, too? Yes, they can. Their business is more stable, they become more cost-competitive, and they improve their core capabilities. The suppliers can then deploy these capabilities to win more business externally. In a 2010 survey of the auto industry, we found the suppliers that gave Toyota and BMW the highest cost reductions also rated the two OEMs as their best customers. That is the mutual benefit of long-term collaboration.

Our experience shows there are three keys to developing profitable supplier collaboration.

1. Build a foundation of internal collaboration before external collaboration

Before embarking on a new program that demands a significant amount of time and resources, it’s important to know if the company has the internal capabilities and strategy alignment to make the external collaboration a success. Under-investing in these internal activities is one of the top reasons supplier collaborations fail.

So how do you assess or determine whether your organization has the capabilities to make this kind of collaboration a success? First, consider the skills required for the particular type of collaboration desired (described in more detail in the next section). For example, do your buyers have a solid foundation in clean-sheet modeling and sourcing strategy development? Do you have access to internal expertise in lean, supply-chain management, and product development on what would become the supplier collaboration team? Only after you’ve addressed these needs would your organization be ready for supplier collaboration.

As an example, take a procurement function that is comprised primarily of tactical buyers who spend much of their day fulfilling orders. They may not have the expertise to identify joint cost-reduction opportunities or to work with suppliers to improve the product development processes. Organizations in this position are better served by investing in traditional sourcing and leadership capabilities first. Until this happens, suppliers have little incentive to try anything more ambitious.

But companies that have the fundamentals in place need to focus on more advanced, collaboration-specific skills, such as value-sharing mechanisms and developmental agreements. Value-sharing models need to be simple, and properly incentivize performance for both the customer and the supplier. Common incentives for suppliers range from extending contract length to splitting cost savings 50/50, negotiating a pre-determined benefit to the buyer (e.g., 5 percent cost reduction per year) with the rest going to the supplier, or to joint investment in capital projects for further capacity. Joint Developmental Agreements (JDAs), recommended in cases where IP (Intellectual Property) might be created, must clearly define the scope of the work, confidentiality obligations, intellectual property rights, exclusivity terms, and release criteria, to name a few.

Building momentum with small wins is important. Ultimately, though, supplier collaboration teams should work on large and ambitious projects for the maximum impact. To do so, the collaborating companies must align on which suppliers, products or service lines to invest in, and it’s important to do this with the input of relevant cross-functional leaders internally such as manufacturing, R&D, engineering, and product line leadership.

Together, you need to answer the following questions:

What business units, product or service lines should be prioritized based on factors that include potential profitability, urgency, risk, and crossfunctional leadership support?

  • Which suppliers are providing critical components or services?
  • Is the spending for prioritized products or service lines growing?
  • Is it specific to a particular geography?
  • Is the opportunity to reduce cost, improve performance, or conduct product innovation big enough to justify the resources required?
  • Will this help to gain a competitive advantage?

A large North American industrial equipment manufacturer wanted to unlock the potential of supplier collaboration. To determine which suppliers to invest in, it took a three-point approach.

First, the manufacturer ranked their suppliers’ strategic value, by mapping the importance of the products they supplied versus the ability to obtain them. Second, it reviewed each supplier’s performance versus expected capabilities. This helped the company to define what the supplier could bring to a developmental program. Finally, the manufacturer evaluated these results to determine which suppliers to partner with to increase collaboration (see Exhibit 2). A side benefit of this exercise was a clear understanding of the relative value (or lack thereof) of their different suppliers, leading to insights on which ones needed to be replaced, motivated, or rewarded.

PreviewImage_Exhibit_2

In this formative phase, you must clearly outline the goals of the program as well as the roles, responsibilities and time commitment of the teams. Business and functional leaders will need to provide support from the outset, and cross-functional leadership teams must be committed for the long haul.

2. Design the program to meet a specific business imperative

We have identified three types of supplier collaboration programs. Each meets different business objectives and requires varying levels of expertise to execute.

  • Collaboration for cost reduction focuses on cutting costs for both sides beyond traditional sourcing levers. Suppliers are treated as partners, not as cost centers, necessitating the development of long-term, trusting relationships. Some examples of how interactions change: negotiations are based on full transparency into costs, with healthy margins and growth guaranteed; specifications are jointly optimized to eliminate unnecessary features; and demand transparency is created based on production patterns to optimize inventories. This kind of cost-based program requires mature procurement competencies, but is also the least complex compared to other collaboration options. A company with no or minimal experience in supplier collaboration programs may choose to begin here and work its way up.
  • Collaboration for value beyond cost: this could be the right program for companies that want to improve safety or the quality of products, develop additional sources of supply for a new or capacity-constrained component, or work with a supplier on lean improvements. While these changes can and will reduce costs, the work is focused on value beyond purchase price, and requires a greater degree of cross-functional expertise to execute. One example would be an oil major company collaborating with an upstream drilling services provider to contain the cost and time of capital projects.In another case, a leading freight railroad had outsourced the repair of its railcars to a sole supplier. Despite high rates of idle time and waste, the supplier continued to win the annual contract. The railroad company wanted to partner with a competitive supplier who would also work with it to reduce the operational and capital costs that would eventually be charged back. The railroad approached multiple companies, including the incumbent, with the carrot being a long-term contract in exchange for competitive pricing as well as a collaboration program to improve the supplier’s operations. The result was a significantly more competitive bid price from the incumbent, and identification of 15 percent additional savings through joint lean initiatives focused on operational efficiency and capital cost reduction. Once the railroad mastered the basics of supplier collaboration, it embarked on supplier innovation, a more complex lever.
  • Collaboration for innovation is the practice of working with suppliers to improve the pace and quality of product or process innovation. It creates value in areas like design, speed-to-market, and consumer insights. This form of collaboration requires the most time, money, and trust; it also carries the most risk because of the experimental nature of developmental work and the need for more two-way trust than ever before. The two partners may have to negotiate sophisticated agreements on IP rights, licensing agreements, and warranties. The payoff, however, can be significant in the form of a better, more timely and competitive product (see example in Exhibit 3).
PreviewImage_Exhibit_3

In the case of the railroad, a new program was started to de-specify head-hardened rail steel with an existing supplier and design a new rail steel specification. The end result was tens of millions of dollars in value creation per year through better TCO (Total Cost of Ownership). In order to embark upon the project, the railroad company needed advanced skills.

3. Build transparency and trust

Transparency and trust are essential for sustained success. A survey of 35 strategic suppliers to a large, global medical device company dealing with quality and cost issues found the majority did not trust that their innovative solutions were consistently and seriously considered by the customer. They considered this a primary reason for poor collaboration. The survey signaled to the company that it needed to restart its relationships on the basis of transparency (e.g., more clear, two-way feedback), with the expectation that greater trust would follow.

Successfully creating transparency and trust, however, can deliver remarkable value. One company in the financial services used just this approach to address persistent poor performance by its network of litigation service providers. It did this by first changing the way it interacted with vendors, simplifying lines of communication and establishing regular weekly calls with them. Then it introduced a transparent vendor performance management system, tracking results and error rates, and discussing them with each vendor in monthly reviews. The company supported these efforts with changes in its own organization through the creation of dedicated teams for vendor performance management and collaboration.

Finally, the company modified its working processes in ways that addressed key pain points and allowed both it and its vendors to benefit. For example, it gave vendors power of attorney to sign documents on its behalf, reducing frustrating delays as documents were sent back and forth. It also changed the way work was allocated, so higher performing vendors got more, and it collaborated with its vendors to identify and eliminate unprofitable lines of work. The result of this effort was a startling shift in vendor performance. The cash recovered by litigation rose by nearly 80 percent, while the company found that it needed a third fewer staff to manage its vendors, and saved even more in filing fees and expenses. Even more importantly, the relationship between the company’s line teams and vendors was transformed, with free, open communication and a constant exchange of ideas.

Creating successful partnerships like this one is complicated, with a number of requirements. Some are preconditions that must be in place before the collaboration kicks off; others follow through the collaboration itself.

Preconditions: Write them down

  • Spell out the parties’ different commitments, including, at a minimum, capital expenditure and personnel (on both a leadership and working level)
  • Align to standard contract terms on the length of the agreement, renewal terms, and volume and price ranges
  • Specify the product range covered and the scope of the development effort. Options and agreements on the use of alternative suppliers and use of the capabilities developed by the supplier with any other customers must be explicit.
  • A value-sharing model must detail the targets of cooperation, defining the benefits and agreeing on how to share those benefits. Too many times the customer proposes a model that does not offer enough value, or the right value, to its suppliers, stalling the program before it even begins.

As an example, lithography equipment manufacturers for the semiconductor industry deal with extremely short product lifecycles, new technologies, and wildly fluctuating demand patterns. To incentivize suppliers to partner up with them, a leading lithography system manufacturer offered high margins (as a volatility buffer), equipment financing, and purchase guarantees with narrowing windows from systems to components. This value-sharing mechanism sustained the supply chain through the cycle, jointly reduced costs, dealt with wild swings in demand, and stabilized throughput and delivery. Both the customer and suppliers benefited.

Ongoing work through collaboration

These are matters that need to be co-developed and refreshed throughout the collaboration. For instance, supply chain management and operations teams must work out how to deal with exceptions to the agreement, such as through a joint review board. Similarly, for the collaboration to grow and sustain, there needs to be a mechanism to generate, evaluate and prioritize new ideas. If there is a foundation of trust and transparency, the collaboration will continue to grow.

* * *

The expression “win-win” is often overused. But highly effective collaborations between suppliers and purchasers are just that. The best result in competitive advantage for all players, and drive innovation and growth.

The authors would like to thank Frédéric Lefort, a principal in McKinsey’s Gothenburg office, and Lissy John, a consultant in the Washington DC office, for their contributions to our research efforts and to this article.

About the authors: JehanZeb Noor is an associate principal in McKinsey’s Chicago office, where Aurobind Satpathy is a director, Jeff Shulman is a principal in the Dallas office, and Jan Wüllenweber is a director in the Cologne office

By Jehanzeb Noor, Aurobind Satpathy, Jeff Shulman, and Jan Wüllenweber
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Jeff Bezos Has Lost $16 Billion Since Donald Trump Started Tweeting About Amazon

By BRAD TUTTLE

April 2, 2018

Amazon founder and CEO Jeff Bezos once offered up one of his rockets to shoot Donald Trump out into space. Over the past week, Bezos could be wishing that had actually happened—because tweets by President Trump bashing Amazon appear to be costing Bezos billions of dollars.

Bezos is the world’s richest man, with a net worth estimated over $100 billion since the start of the year. Bezos’s wealth is based largely on the price of Amazon stock, and as shares soared in early 2018 his fortune grew by more than $30 billion. As of Monday, March 26, Jeff Bezos’s net worth stood at nearly $130 billion, according to both Forbes and the Bloomberg Billionaire Index.

Yet one week—and four Amazon-related Trump tweets later — Bezos’s net worth is down to $114 billion, Forbes estimates. In a dismal day for stocks in general, Amazon shares dropped an especially steep 6% on Monday. Over the past week, Amazon’s stock price has dropped by around 10%, subtracting roughly $16 billion away from Bezos.

While it’s impossible to pinpoint the exact reason any individual stock or the broader stock market rises and falls, recent social media messages directed at Amazon by the “Tweeter in Chief” seem to be a factor. In a string of tweets, President Donald Trump has attacked Amazon and Bezos over the past week for paying too little in taxes and taking advantage of the postal service, among other things.

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AkzoNobel announces buyer for specialty chemicals business

AKZONOBEL is selling its specialty chemicals business to The Carlyle Group and Singapore’s sovereign wealth fund (GIC), as the Dutch major focusses on producing paints and coatings.

AkzoNobel announced it would sell its specialty chemicals business in April last year, after fighting off an unsolicited takeover for the full company from rival PPG Industries.

The deal for the specialty chemicals business, which makes a range of chemicals including salt, bleaching agents, and polymer additives, is worth €10.1bn (US$12.4bn) including debt.

The Carlyle Group and GIC won the business through an auction process, outbidding a number of rival private equity firms including Apollo Global Management and Hal Investments, reports The Financial Times. The deal is expected to be completed by the end of the year.

“Today is a key milestone in creating two focused, high-performing businesses to generate value for all stakeholders,” said Thierry Vanlancker, CEO AkzoNobel.

“Carlyle has significant experience in the chemicals industry and a proven track record when it comes to health, safety, innovation, and sustainability.”

Martin Sumner and Zeina Bain, managing directors at The Carlyle Group, said in a statement announcing the deal: “We are pleased to invest in the specialty chemicals business and proud to support a business with such a strong heritage. We are committed to growing the business, and building upon its innovation capability, high-quality workforce and asset base, as well as its world-class sustainability and environmental practices. We look forward to working with the management team to transition the business to a successful independent company.”

29th March 2018

Article by Adam Duckett

Editor, The Chemical Engineer