@ Supply Chain Management

I attended the Supply Chain Resilience for Competitive Advantage seminar by Professor Yossi Sheffi today. Some notes from that webinar:

1. Examples of disruptions that companies have faced and a firm’s reaction to them:
   • Disruption of the electronic supply Chain illustrated through the March 2000 Philips fire and the effect that it had on Nokia and Ericsson supply chains. More information about this story can be found here in one of my previous posts: Creating the Optimal Supply Chain – Review (Flexibility in the face of Disaster : Managing the risk of supply chain disruption).
   • Another case, UPF Thompson filed for bankruptcy and its effect on Land Rover because UPF was a sole supplier of chassis for Land Rover Discovery. Recounted here: Land Rover calls for legal change.
   • February 1997, The fire which disrupted the sole supply of proportional valves to Toyota (12 hours for all Toyota plants to come to a halt because of JIT model). All the other suppliers of Toyota raced against time to manufacture proportional valves for Toyota – two weeks to bring all Toyota plants back to round the clock operation. A good review of the disruption, recovery and participants can be found in this article: Exploring Knowledge Emergence: From chaos to organizational knowledge (Pg 9-10).
   • September 1999, Taiwan Earthquake disruption of semiconductor equipment manufacturers.
   • August 2001 dialysis filter deaths problem at Baxter
   • February 2001, Foot and Mouth disease in the UK. 6 million animals were killed but more importantly the UK govt. closed down tourism to UK countryside, the financial impact of which was much higher than the initial problem.
2. Why are some companies more resilient than others?
   • Culture
     • Continuous communication (informed employees, environment, status)
     • Distributed power – which is driving decision making to a lower level within the organization.
     • Passion for work and the mission
     • Deference to expertise
     • Conditioning for disruption
   • Culture Change
     • Safety
     • Quality
     • Many others (smoking, drinking-and-driving)
3. What kind of resiliency should one aim for in procurement?
   • If you have a single supplier – work towards a deeper supplier relationship, it has to be an investment.
   • If you want a shallow relationship – you need multiplier suppliers.
4. The development of and investment in Supply Chain resilience is very hard to justify because like insurance, it isn’t needed until is needed.

The part that Professor Sheffi didn’t get into was Competitive Advantage – perhaps because of the numerous disruptions in the webinar itself – Ahem!!. However, it is a barely hidden point, it can be inferred readily. But I don’t think that it is competitive advantage here but relative advantage and there is a crucial difference. Why is it relative advantage and not competitive advantage?

If you look at one of the examples above – Ericsson vs Nokia with respect to the Philips fire, better relationships with suppliers can be had easily if not within an organization context but at least in a process context (procurement process, if you’d like). There is no real barrier to copying such advantages and so it doesn’t rise to the level of a true competitive advantage. However, organizational culture is a different beast which can be a source of competitive advantage simply because the disruption example was in the context of procurement here. What if the disruption was in the context of assembly or transportation or even financing? Properly, organizational culture and its effect on supply chain resilience as well as competitive positioning is a good indicator of which firms will survive the inevitable hit just as national culture is a good indication of resilience in the face of adversity.

Disruption of the supply chain, as was presented in the webinar, can be cast into a quadrant based on High-Low Impact and High-Low probability, Similarly Relative Advantage can be cast into a quadrant against High-Low disruption of the supply chain. You may even go to the extent of scenario planning and training and that is better than not engaging in it but you have no way of knowing which part of the organization is going to be the leading edge as it encounters new adversity/disruption i.e. the first point of contact with the initial rumbling of a disruption which if not contained/dampened/prepared for will snowball into a wide-scale disruption. In this case, you need to fall back on the only real insurance policy there is – a team of talent properly tasked, engaged, authorized and networked.

One symptom of such organizations should be easy to identify and I must thank Professor Sheffi for highlighting it, in individuals – a character trait, in organizations – a cultural trait and in nations – a traditional trait. “Those who succeed are praised for their success but those who fail are not reprimanded for it. Failure becomes a point of reexamination and reflection.”

Now, take a step back – take a wide eyed view of events that transpire in your life, firm and nations. Resilience? Or are you being taken with the current?

More quickly that it began, the Banking crisis is over screams the headline from this Time article. You might as well believe it now that the experts journalists have declared it over:

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

Yes, those are pretty much all the actors in this saga. However, what the article fails to deliver is why despite identifying these actors, it doesn’t explain how the crisis has indeed passed i.e. it is high on events and actors but low on rationale – it reminds me of cherry picking the evidence. For example,

Wells Fargo (WFC) indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success. Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.

So where is this surging demand for mortgages coming from? Mortgage applications surge 30% and that’s just for the week of March 20. But,

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 32.2% to 1,159.4 for the week ended March 20. Refinancing accounted for 78.5% of all applications.

Now, putting just these two data points together, one would hazard a guess that a stabilization of home prices is not what this points to. What about housing inventory and also the prices of homes given the current conditions? You can get the data from the National Association of Realtors Statistics: Existing Home Sales and Sales prices of Existing Homes.

The inventory (in terms of months of supply of existing homes) is unchanged from 1 year ago and as we enter the season for home sales, we shall have to see how it goes.

However, what should be noted from the two tables above is that for virtually unchanged supply of homes, the average home prices have decreased 15.5% nationally. So what belies this sort of optimism? But Ian MacIntyre is talking about the crisis and not whether the residential real estate is about to improve. But what if this is but a temporary floor which soon gives way – wouldn’t the banks be back in the doghouse then? On a side note, perhaps, the best indicator of the fact (some time in the future) that the housing market has stabilized will be an onslaught of “How to get rich through foreclosures” schemes. I’m not trying to be funny here but honey to be had does bring bees.

So what does this have to do with the supply chain for crying out loud? Take a look at the consumer confidence which is at the lowest level since it was instituted as a measure.

The road to recovery looks like a long and winding one.

Supply Chain Resilience for Competitive Advantage is a free webinar being hosted by Professor Yossi Sheffi courtesy of Manufacturing Alumni.

The ability to bounce back from unexpected supply chain disruptions is the essence of “resilience”.  Resilience can be achieved by building in redundancy (e.g., in inventories, capacity, and suppliers), but such redundancies are expensive.  A more viable way of ensuring resilience is by building in flexibility into the supply chain.  The presentation will highlight the most effective ways of developing resilient supply chains and will explore how they can be used for day-to-day competitive advantage.

The talk will cover many of the topic and the examples described in Professor Sheffi’s award winning and bestselling book “The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage.” (MIT Press, 2005).

Topics discussed during this webinar will include:

• Supply chain management processes
• Building resilience
• Overcoming vulnerability
• Maintaining competitive advantage

This informative webinar will take place on Wednesday 21st April at 14:00 GMT. Yossi will present and discuss the themes of his recent publication

What is most interesting for me would be how Prof. Sheffi is going to link up resilience and competitive advantage – should be interesting. And it’s FREE.

The Treasury has at long last unveiled its plan to steady the battered financial sector. Who can really tell whether it will be successful but the plan itself has been battered in short order – it’s only been a few days but no one could pay me enough to be Tim Geithner’s seat right now. After reading and re-reading a number of pro and con articles, I can only wish the man well not because his plan is a good one but because he is a human being in a Treasury department that is empty at the highest levels – like someone thrown in the lead car of a roller coaster that has left base station while everyone acknowledges that the tracks are not yet complete.

A short summary on how this all came about:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

What is a plan? I mean, Why engage in planning at all? Let’s just roll with the punches and end up wherever we end up. Actually, that’s what happens in the real world but planning gives you an advantage i.e you have a chance to press towards a goal knowing what footholds are available, some idea of the strengths you bring to the fight and where some of the weaknesses are. But for that you have to have planned beforehand i.e. mapped out a baseline, run through some scenarios and know some fallback options.

So what is a plan?

Among other incarnations, it is a map of how you intend to get to a goal.

So what is the goal here- “the most important bar none short of selling your soul after a heart transplant” goal? To me, the goal is economic recovery. It is not saving the financial system or some or all players within it – they can save themselves. In so far as some of these financial players contribute to that economic recovery, we should be use them as crutches. It is not saving homeowners who took on crazy amounts of debt or those whose credit cards were means to an imaginary life or even survival. Or whatever else has already cracked or given way under this period of duress. The reason I say this is because even though we may not be able to comprehend it, this may only be the first wave with several more waves to follow the intensity of which we don’t know. Of course this depends on two things – an understanding of what else may give way and what we’ve already committed as actions through this first wave which may give us a foothold or may be a false floor. But in order for an economic recovery to be sustained, an intermediary financial market has to exist i.e. a functioning market that evaluates credit worthiness and supplies funding for requests from various participants.

In my opinion, there are two activities that a plan should support in its archetype – dampen the implosion and prime a recovery. If you were to survey the entire gamut of activities that you’ve heard about so far, what would you conclude – is the implosion being dampened, is a recovery being primed or is it just a fall back on an economic ideology or something else that could be classified as confusion? Now, confusion is a part and parcel of a fluid environment but one ought to take a step back and be able to find a bearing despite the confusion. Are you able to locate one over and above the vapidity of change? 

Most of the efforts so far (before this plan) is heavily tilted towards dampening the implosion with next to nothing about priming for a recovery (well, I don’t think that economic recovery stimulus bill does anything here – all the future collectible taxes that have been allocated as stimulus will course through the patient like a jolt when it hits. I guess one can expect a few quarters of sunshine if that (to take a metaphor to the macabre ) but I don’t think that one would conclude that because the patient momentarily rose into the air, that he was trying to sit up). Momentarily, it seems as if the implosion has slowed as large sums of money are pumped into the system but as you will discover reading further, we are dampening the implosion from one cause i.e. residential mortgages. There are other causes which are namely credit card debt, commercial mortgage default and last of all the leveraged buyouts of various entities.

So onto the plan. As you might have very well read before : Treasury proposes plan to purge “Toxic Assets”, the provided sample calculation should be sufficient to throw some light on the matter.

So as you might be able to see, the plan is problematic because it relies on the government ball parking the price of the securities (and through them the residential mortgages) The government does this in two steps: first through the leverage ratio and second by being very optimistic about the value of these mortgages such that the banks will be willing to sell them and private investors willing to partner with the government to buy them.

This is how Paul Krugman puts it, Despair over financial policy

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system – that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

He’s pointing to the same problem i.e. the government thinks that these residential mortgages are mispriced and therefore must believe that they’re passing on a great bargain to private investors. Here is a graph that helped me put things in perspective, it is also something that guided me in the past:

The above graph is simply a plot of Home prices divided by median family income for the United states over a little more than 4 decade period. Now, I am simple revert to the mean kind of guy unless there is some compelling reason to overshoot or undershoot. So do you see any compelling reason why we will not revert back to about 2.7 or even lower than that? 

This is a graph dated from January 2007 that gives a timeline of the various mortgage types that will undergo a reset at some point in the future. As you can see, we have passed the period of Subprime ARMs being reset (as of January 2007) but look at what’s coming up ahead? This is the reason why I believe that we’re through the first wave and you also begin to see why it is one of the important reasons why I think that the Fed wants to keep mortgage rates low (failing which, we start to drive more and more people off the cliff with the resets to come).

The outstanding issues that are yet to be considered are credit card debts, commercial real estate defaults and finally Leveraged Buyouts (LBOs) that were all the rage at the very end of this expansionary cycle. We’re beginning to see some of these issues surface here and there but I don’t think that we’ve seen the end of them.

As you might know, I am an IBMer now by way of acquisition of my erstwhile firm ILOG. In addition to reading The Supply-Based Advantage: How to Link Suppliers to Your Organization’s Corporate Strategy which was discussed in the last guest post – Supply Based Management in Tough Times, I am also reading All Customers Are Irrational: Understanding What They Think, What They Feel, and What Keeps Them Coming Back by William J. Cusick.

One of the opening insights that Bill presents in this book is the idea of Brand Promise. He talks about Brand Promise in the following way:

To be clear, when I say, "brand promise," I’m not asking about positioning, which is more a strategic discussion, wherein you map out the market position of you competitors and contemplate how you can carve out a position or spot in the market and in your propect’s mind. Determining your positioning is a key discussion in your company, but it is more cut and dried; it is purely a business consideration. Brand promise moves to a different, more emotional level. Positioning is really about pure strategy Brand promise is about an appeal to the customer.

and further,

We feel it’s absolutely critical to understand what it is that this particular company is promising to prospective and existing customers. What, in other words, are the customers’ expectation whey "buy" (whatever that might mean). What is the distinctive value proposition? Some might even describe it as the company’s soul. Surely a company that generates billions of dollars in revenues each year begins all work and initiatives from a common, consistent, and unique brand promise – a raison d’etre, if you will – right?

So I’ve been through the IBM orientation and having worked for IBM (my client) as a consultant before that – take a look at one of the latest ads that I’m sure that you’ve seen on the TV every now and then:

Then tell me, What is the Brand Promise here?

My answer:

Read the rest of this entry »

Supply Based Management is a new book by Stephen Rogers that I’m reading right now – a review to follow shortly. In the meantime, I have the pleasure of posting an excerpt by the author himself about supply based management in these difficult times.

SUPPLY-BASED MANAGEMENT IN TOUGH TIMES

In today’s deep recession, customer vulnerability and top line revenue declines need to set the tone for the actions that create advantage not merely survival.Cutting costs is vital to your competitiveness but the knee jerk reaction to squeeze suppliers, as much as you fear your customers will squeeze you, will not create a business model that rises above survival.