Kevin O'Marah

I was reading an investors newsletter this week which opened with the following synopsis:

“On Wednesday, September 1, the latest report on manufacturing showed strength, but another report on company hiring showed weakness. While the Institute for Supply Management (ISM) announced that U.S. manufacturing rose in August for the 13th consecutive month, the ADP National Employment Report posted an unnerving drop in private-sector employment.  Steve Blitz, senior economist with New York-based Majestic Research, said that taken together, the ISM and ADP numbers reflect a flat economy.”

Yes, the economy is flat, sort of, but that’s not the way it feels to most people.  Rather, these numbers reflect an economy in transition.  Manufacturing is up, but manufacturing employment is down.  Paradox? No.  More like a productivity miracle that has a dark side.  All you supply chain folks are accustomed to thinking in terms of improving efficiency every single year no matter what.  Certainly this applies to production line jobs as well as materials handling jobs, and of course, courtesy of the now mature ERP backbones we all have, middle management jobs too.  Businesses are hoarding cash, and although Challenger, Gray and Christmas  report that planned layoffs are lower than they’ve been for a long time, the net effect is 10% unemployment holding in the U.S. for another several years – at least if we measure it the traditional way.

Meanwhile, another Jobs report broke yesterday that points clearly to the way out of this mess.  This report was all about Steve Jobs and the new iPod.  Oh, and the $99 Apple TV; News so meaningful to the common man that it snagged a mention on the local Boston area oldies radio station between Led Zeppelin songs.  Apple continues to amaze with products we think are cool and a stock that has made at least some investors rich, and of course a supply chain ranked #1 for three years running in our annual Supply Chain Top 25.  For all the moaning about lost American competitiveness Silicon Valley remains the most important crucible of innovation and economic value creation in the world.  Apple, Google, Cisco, eBay, not to mention Oracle, HP, and Intel all within about 30 minutes of each other by car.

When I dig into the source of Apple’s magic I see a combination of things we like to think of as true value chain.  Among these are the obvious, including brilliant industrial design and Beatles-caliber image building.  Less obvious, but just as important is an approach to product innovation that encompasses supply chain strategy in ways that essentially cut off any kind of meaningful premium niche competition.  Their use of application specific standard products (tweaked catalog components) in the iPad, for instance draws huge intellectual energy from suppliers’ engineers dedicated to winning and holding Apple’s business.  This approach first delivers on a stack of hardware and software so holistically targeted at the consumer’s experience that Apple literally has a fan club.  It also so absorbs the best brains upstream in the electronics value chain that no one, not even a Ferrari-style high end niche product, can offer anything better (at least for that first, high-margin surge of consumer excitement).

For the Ready this means plenty of job opportunity ahead.  Apple itself has something like 1000 corporate job openings listed on its website right now – mostly in engineering and other brain intensive functions.  Outside of its own corporate hiring, Apple is also creating employment with its AppStore, a marketplace for the otherwise unemployed who are able to write and sell apps for the iPhone without ever leaving their homes.  This, strange as it may sound, is where the real job creation will occur – at home, in front of your computer, pounding away at your network looking for something people will pay you to do with your brain.  It may be copywriting, or tax preparation, or data analysis.  It may even be graphic design, or fantasy baseball, or fortune telling.  It is unlikely to involve decent pay for unskilled labor in a factory.

Challenger, Gray and Christmas’ August report also included data on 14,000+ jobs planned by companies for immediate hiring.  The number #1 sector:  Entertainment/Leisure with 4,612 planned hires.  Time to start dancing for your dinner.

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I had a chance to speak to Aegis Analytical’s CEO Bob Di Scipio recently and experienced a flashback to my days as a new analyst getting all worked up about the technology enabled breakthroughs happening deep in the supply chain.  Aegis sells a technology we at Gartner classify as Process Analytical Technology (PAT).  To quote my able colleague Simon Jacobson on what this means: (see Hype Cycle for Life Sciences, 2010) “PAT carries significant appeal for organizations seeking to eliminate error-prone manual activities, guesswork and variability from the production process, subsequently eliminating any likelihood of nonconforming products making their way into the supply chain”. 

Translation: PAT puts brains in the machine.  From a business value standpoint what this says is:

 “The ability to reliably produce to demand offers massive reductions in scrap and discards, on-hold inventory and finished goods inventory. This becomes significant when a single batch of product represents a multimillion-dollar revenue opportunity.”

So far, this is a typical analyst angle on technology being pitched to improve a business process.  The story gets more interesting however when you follow it down the rabbithole to a case studyhttp://my.gartner.com/portal/server.pt/gateway/PTARGS_0_1912388_353_260_3460702_43/http%3B/remoteapphost.gartner.com%3B8003/GartnerPortlets/docDisplay.do?function=printDocument&resId=1408213 written by another of our top analysts Wayne McDonnell, who spoke to no less an authority than Merck Serono’s EVP of Operations Dr. Hanns-Eberhard Erle about what all this really means to a 5Bn Euro manufacturer of lifesaving biopharmaceuticals.  Dr. Erle was looking for a system that “could collect, connect and analyze process data in both R&D and commercial manufacturing” so that new molecules could move more quickly and reliably from lab to plant and so that the plant could produce more and better batches with the same assets.  

Pulling up one more level, consider the articulated business benefits that this case points to.  First is “faster and more efficient tech transfer of processes from the pilot scale in R&D to commercial manufacturing”, something we capture in the notion of Time-to-Value – one of the highest order metrics considered on the DDVN dimension of Innovation Excellence.  Second is “10% to 15% improvement in productivity at the commercial manufacturing scale”, something we capture in Total Supply Chain Costs – one of the highest order metrics on the DDVN dimension of Operational Excellence.  The case goes on to point out process improvements that above all else mean Merck Serono is able to move to a steeper part of the learning curve as it drives from science to cure. 

In terms of money, this technology contributes to such huge impact gains as better returns on capital invested in R&D and in Property, Plant and Equipment. At the higher level where I like to look for breakthroughs that matter to society, this translates to more people getting affordable access to treatments that alleviate some of the suffering caused by cancer, neurodegenerative diseases and metabolic disorders. 

We published a book called “Supply Chain Saves the World” http://www.amazon.com/Supply-Chain-Saves-World-Research/dp/0978592808 back in 2006 which was all about how technologies like Aegis’ PAT offering were contributing to a global productivity miracle capable of literally solving world hunger.  Every time I trace a story like this from its root deep in the machinery of the global supply chain to its impact on the wider world I am energized anew about what we all do for a living.  It may be hard to explain at a cocktail party, but in your heart you know how big a deal it really is to put brains in the machine.

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I have been careful to describe the Supply Chain Top 25 as being about “demonstrated leadership” rather than any absolute benchmarking of on-time-delivery or efficiency.  As such, I’ve always pointed to visible leaders like Procter & Gamble, IBM, Samsung, and the like as deserving their rankings because of the new ideas and strategies they have brought to our discipline.  And yet, China for all its massive growth in manufacturing and supply chain over the past ten years has gotten little love in this discussion.  Our latest field study on supply chain organizations and budgets suggests folks like Lenovo, Foxconn, Haier, and their brethren need a closer look – at least they’re saying the right things.

Consider this question and the data we got in response:

Which of the following are your company’s top five supply chain priorities for the next 12 months?

Among 100 US supply chain executives asked 74% chose “reduce operational costs” among their top five and 29% chose it as #1.  Both were high scores among all countries surveyed (U.S., U.K., China, Germany, Brazil, Australia, Japan).  The 62 Chinese supply chain executives we surveyed chose “improve customer satisfaction” as their top priority overall.  Plus, for things we consider advanced like “increase market share”, “reduce supply chain risk”, and “respond to diversified customer demand” Chinese execs came out tops in terms of prioritizing these issues.  Whether everyone walks the talk is not perfectly clear, but the Chinese sure seem to know how to identify what we in the research world consider leadership.

Beyond these perception questions we collected harder data which also points to Chinese leadership in supply chain innovation.  The top supply chain executive in Chinese companies reports to the CEO or president 87% of the time while in the U.S. this is true only 61% of the time.  The median headcount for U.S. companies’ supply chain “center of excellence” is 11, whereas in China the COE median staff is 250.  Plus, the duties of a COE in China are dramatically more likely to include such things as Technology Enablement, Transformation and Change Management, and Process and Innovation.  It is a shame to see dedicated supply chain strategists clinging to the illusion that they can drive meaningful change from a COE with only a handful of people and no real organizational power.  In a Chinese company it looks like you’d have a few hundred souls to deploy on projects and direct access to top management as you fight the good fight.  In the U.S. you’re much more likely to be viewed a cost center and maybe even a frivolous luxury.  Ouch.

I probably shouldn’t be surprised be these findings.  Chinese manufacturing has cut its strategic teeth with such short lifecycle product categories as consumer electronics and apparel.  Many have won business by competing with western companies’ internally owned production facilities meaning they need to show an edge not only in cost but competence.  Microsoft’s Brian Tobey whose supply chain for Xbox and other consumer electronics product runs through China says he looks to suppliers first for engineering expertise, second for business savvy and only third, for lowest cost.  Is it possible that top strategists like Tobey and his peers in Beaverton, Palo Alto, and Waterloo have taught their Chinese counterparts a thing or two about what supply chain needs to bring to the party?  Sure looks that way.

As far as the Top 25 is concerned, it’s increasingly clear that demonstrated leadership, while still very much a feature of the best U.S. companies, is happening more pervasively in China than among the everyday folks back here in the States.  Remember, if you see yourself as a cost center senior management will too.  Not a much of a formula for job security, is it?

As we follow this field research with deeper more personal, one-on-one interviews I hope we’ll discover some new ideas and icons to look up to.  If anyone is interested in spending 30 minutes with me digging into these questions, I’d welcome the opportunity.

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I’ve been rough on GM often over the past few years and sometimes even spread the venom over the whole of Detroit (link: http://www.amrresearch.com/Content/View.aspx?pmillid=21088).  My complaint has rested on the idea that the Big Three practically defined the “push” model of supply chains starting with the famous quip attributed to Henry Ford (‘any color you want as long as its black’) and running up through such inside-out disasters as the fabled, failed Pontiac Aztec.  I have however given GM one big pat on the back and it was in response to a convincing insider interview I had with Jim Heaton, an auto industry lifer and old friend of AMR.  The conversation happened at least two years ago and it was all about the forthcoming Volt (link: http://www.amrresearch.com/content/view.aspx?compURI=tcm:7-38548&title=GM+Plugs+Into+Content+Economy#) – General Motors’ electric car.  Well, it’s here now not only does it look good, but it appears that GM, and Detroit in general, may have turned a corner.

Let’s start with the moment of truth – a consumer shopping for a new car.  Having just done this myself I am warm to the task and begin with whether or not I can bear being seen in the car.  Comparing the Volt to other electric vehicles and hybrids I’d say, yes, it looks pretty darn good.  If I care about fuel efficiency and greenness, which I do, the Volt deserves at least a tie with others pitching that angle.  For me, the deal breaking question ends up being range and here, the Volt pulls away.  Its range when fully charged and fueled is 340 miles – more than I currently get with my other car – and massively better than pure electric options like the Leaf from Nissan which claims only 100 miles on full charge and needs eight hours to recharge. 

The key to this vital advantage is proof to me that GM gets “demand-driven”.  The car uses an electric motor to do my first 40 miles for the equivalent of $1 a gallon plus a gasoline engine that gets 50 miles per gallon for the next 300 miles by essentially recharging the battery in flight.  Takeaway for the buyer:  this car can save me lots of money on gas and still handle unexpected errands that might add many miles to my driving day before I get a chance to recharge.  I am reminded of the quote I attributed to Heaton back in 2008: “what drivers want…what drivers want”.  GM is not just making a symbolic sustainability gesture here, but offering customers something truly new and better as it tries to change the industry’s competitive dynamic to save itself.

Taking a step back up the supply chain to production and sourcing, again I see the right things happening.  For instance, GM’s secret sauce (I am told) is its power management logic which is embedded in software that optimizes energy use across battery, engine, and native power creation from things like braking that traditionally waste energy.  This is the kind of innovation I have seen pioneered by people like General Electric in their locomotives business.  The competitive edge comes from intellectual property rather than procurement muscle. 

A demand-driven supply chain also takes into account demand shaping which says customer behavior is not strictly an exogenous variable, but something that can be affected by marketing decisions that are coordinated with production and sourcing.  GM only plans to build 11,000 vehicles in 2011 and another 30,000 in 2012.  One dealer interviewed by the New York Times said of this limited volume “we’ve already got more orders than we’ve got cars”.  This kind of limited availability release has worked for great demand creators like Apple and Nike, and fits well with the reality that wide adoption of electric vehicles will take time and lots of new infrastructure.  It is also no small thing that GM is tapping into a demand source in the form of government subsidies providing buyers a $7500 tax credit which acts as a discount bringing the effective sticker price into range for everyday consumers.  And let’s not underestimate the potential that feel-good stories about job creation in the heartland could add a patriotic edge in the US market.

It is often the near death experience that makes someone really change their ways, and this is no less true for companies than people.  GM certainly saw and stayed away from the light in 2009; perhaps this was the turning point.  For Detroit as a whole, the fact that Ford is also profitable means that maybe a bottom has been touched and hope is ready to rise again.

Check out the Volt.  At the very least, you’ll be distancing yourself from Rush Limbaugh (link: http://www.freep.com/article/20100729/BUSINESS01/7290436/Limbaugh-rips-GM-Chevy-Volt ).

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The following note was published over two years ago.  Looking at fresh data from our Supply Chain Organization and Budget Study, it appears most of the message remains on point.  Updating the details slightly, the question remains the same:  How does a Chief Supply Chain Officer deliver the breakthrough competitive advantage promised by technology?

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Back in 2000, the Chief Information Officer was king. IT and the Internet were transforming business, and CEOs were budgeting big dollars to hedge their bets in the mysterious new world of B2B and e-commerce. The CIO was holding the reins, plus managing hundreds of millions of dollars already committed to ERP systems. Back then, supply chain was little more than a specialty application to bolt on to the ERP backbone, targeted bluntly at cost reduction.

Ten years later most CIOs are under increasing pressure as a cost center, while supply chain executives are looked to for growth, agility, and strategic advantage. Expectations of senior management increasingly focus on supply chain to provide the edge in competitive battles.

From the Back Office to the Board Room

The parallels between a “Chief Supply Chain Officer” and the CIO are compelling. In the 1970s, data processing managers were all about box maintenance in the back room. By the early 1990s these guys had matured into VPs of MIS with a bigger scope and much more influence in the business. By 2000, the CIO had been elevated to a board-level job in many companies, wrestling with issues of global importance.

Meanwhile, supply chain in the 1980s was a servant of production, feeding the plant with materials on one end and shipping boxes on the other. This was a blue collar wage job (I myself was a shipper/receiver getting $4.50 an hour in 1980) with little, if any management-track potential. By 1990, the function was beginning to gain importance as directors of materials management started to influence engineering with smart ideas about better sourcing, and operations research folks started to affect asset utilization in plants and distribution networks with advanced math. Today, the head of supply chain, in most major manufacturers and retailers, is influencing margins, time to market, and customer retention with strategic capabilities that matter to investors.

This should be no surprise. Technology has broken the link between location and communication and allowed manufacturing, assembly, promotion, and service to draw on players around the world and around the clock. The good work of CIOs, in other words, has given us a world in which supply chain is consuming procurement, manufacturing, distribution, and even field service as one big process for customer fulfillment. Why do you think the Council of Logistics Management renamed itself the Council of Supply Chain Management Professionals http://cscmp.org/ and the Purchasing Management Association renamed itself the Institute for Supply Management? http://www.ism.ws/

Who has the Bigger Budget?

Think about budgets. According to our research, IT budgets typically represent anywhere between 2%-5% of revenue depending on industry. Meanwhile, supply chain management—encompassing direct materials sourcing, manufacturing operations, packaging, handling, and transport—is likely to account for as much as 20% of revenue including not only technology like order management systems or planning algorithms, but machinery, buildings, freight contracts, and more. Big money is spent each year in bets that merge good old fashioned industrial technology like conveyor belts and forklifts with information age technology like sensors, inventory tracking systems, and web order forms.

The underpinning movement here is one called out by Carlota Perez http://www.carlotaperez.org/ in her seminal book Technological Revolutions and Financial Capital. Her thesis is that history has seen a series of boom and bust cycles that coincide with the introduction of transformational new technologies. At first the new technology riles up investors, who pour money in faster than the general economy can absorb it. The ensuing bubble naturally bursts, but is followed by a period of wide adoption that shifts overall productivity to a new level across all sectors of the economy. This phase, which she calls the Golden Age, may be starting now.

Power with “Dotted line” authority

On one hand, supply chain looks ready to usurp all kinds of traditional functions from purchasing through shipping; but on the other, the very breadth of this span of control means that most real VPs of supply chain have hard line authority over only a portion of the process and must influence via dotted lines, the traditional owners of manufacturing or forecasting.

It is perhaps telling that supply chain folks love sales and operations planning so much. This discipline is the ultimate cross-functional exercise and one that positively craves good data and rigorous process.

If the days of big empire-like organizations are coming to an end it may be the most powerful influencer who rules the roost.

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The African Century

Ghana 2 – USA 1.  The score sent us packing from the World Cup recently but it points to a win that is much more important for anyone with the gumption to look at Africa as the growth engine of the 21^st century.  I’ve written about this before and heard plenty of skepticism from people who know the continent better than I do, yet I feel I must persist.  Why?  Because I see a convergence of consumerism, technology and history in the next decade producing a burst of creativity that could enrich millions of people.

A report I read recently by the McKinsey Global Institute blew me away with its analysis and (as always) convincingly sober breakdown of the opportunities awaiting business in Africa.  A few facts bear repeating including Africa’s overall economic growth, which at 4.9% per year from 2000-2008, is higher than Eastern Europe (4.8%), Latin America (4.0%), and the developed world (2.0%).  Also interesting is the sheer size of the opportunity which offers a billion people, a higher rate of urbanization than India and more cities of over 1 million inhabitants than the United States.  Contrary to conventional wisdom, McKinsey argues, Africa’s growth is not exclusively or even primarily about natural resources.  Their analysis predicts a consumer sector of almost $1.4T by 2020 – nearly three times the size of the resource sector or agriculture sector and six times the size of the infrastructure sector.  To the typical supply chain or technology professional these facts mean you’ve got some work ahead of you.

Over the past few years a number of Supply Chain Top 25 consumer goods companies have presented at our conferences on their efforts in Africa and each time I am moved by the ingenuity and authority brought to the challenge.  Coca Cola described the extraordinary distribution network it has built with South African Breweries to get product into every shabeen in the land.  Procter & Gamble spoke about its work with water purification systems to support consumers’ use of its baby care products.  And most recently, Colin Nelson of Unilever challenged the very idea of “emerging” markets, saying rather that these are simply markets with different characteristics.  The lesson I take from these stories is that good old fashioned consumer supply chains offer growth all around – for the big global brands who establish them, for the local supply bases that feed them, and for the capital goods and technology infrastructure vendors who make it all possible.  This consumer economy is the initial spark behind the convergence I believe is imminent.

Another critical component however is technology.  Africa has felt the shine of optimism before, including during the 1970’s when the oil boom followed a wave of independence from colonial masters.  One reason things might be different this time is information including both the presence of the internet and the explosion in mobile communications.  This factor changes the game for everything from price setting in local markets to job creation in an expanding services sector that will include call centers, design services and, ultimately a content industry that could bring some welcome variety to an increasingly stale menu of reality TV and cookie-cutter hip hop tunes.  I still recall enjoying a cold beer at a bar in Timbuktu where a cassette tape played in the background.  The music was unlike anything I had ever heard – little wonder since it was a local band’s garage tape.  Combine low cost electronics with high speed networks and a path becomes clear for African entrepreneurs to build lucrative businesses selling pure content to European or American entertainment conglomerates.

The last piece of the convergence is history.  To most readers of this column, Africa has always stood for famine, war and misery – a reasonable image to draw from 50 years of mostly bad news.  Of course, few of Africa’s nations have even seen that anniversary yet, so what may seem a series of intractable problems might really be growing pains.  How smooth, after all, were the first few decades of American expansion?  Viewed from London or Paris in 1830 the United States was little more than a resource economy bursting with violence and danger.  Perhaps most important historically speaking is the prospect for the first time in human history of, to quote Bob Marley, “one world, one love”.  Might we, with a Kenyan-American president of the United States and an African World Cup on ESPN finally be able to see each other as peers?  I believe it’s time.

A final consideration demands attention: Risk.  I recently met with the partners of a Congo diamond mining consortium who conceded that the project, while simple, was awash in risk of every kind.  Uncertainties introduced by intense corruption caused a major US consumer products company that I visited to withdraw from Nigeria completely, despite its huge population and oil-driven economy.  Crime in South Africa remains a deterrent for businesses looking to tap into its robust growth and advanced infrastructure.  The risks are real and simple optimism is no help.  But for people whose job is orchestrating global supply networks serving that moment of truth when a consumer pulls your product off the shelf, it’s all in a day’s work.  Just ask the Chinese.

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As always, the Top 25 kicks up some dust.  Plenty of people are happy with where they are, but let’s leave that aside for a moment and talk about the gripes.  First, a response to my column last week from a senior SC exec at a well known retailer really stung me.  The point was well taken because I had tagged “retailers in general” as falling in the Top 25 in 2011 because of their lack of demonstrated leadership.  I was basically wrong about this.  I have had too little personal contact with retail SC execs, which falsely led me to quip that they were too silent on the topic.  In practice, they do plenty including at events like RILA where innovations are shared and discussed. 

More to the point, recent data gathered in our Supply Chain Organization and Budget Study suggests that retailers are among the most innovative in their SC strategies and most aggressive with spans of control.  Retailer supply chain organizations more commonly own accountability for technology enablement and strategy than their counterparts in discrete or process manufacturing companies for instance.  They are also more likely to have a single integrated supply chain organization than the others.  Stay tuned for findings from this work later in the summer.

Another point that popped into my head when responding to this complaint was that retail may  be the most rapidly changing sector of all in terms of supply chain strategy – the influence of multi-channel shopping behavior and the prospect of deepening consumer engagement in the store promises huge change in supply chain for this sector.  Imagine the combination of smart phones communicating live with self-service kiosks and connected shelves during a shopping trip – its all happening now courtesy of folks like Samsung, NCR and Kraft – each of whom has shown me personally some interesting stuff.  Dealing with this wave of innovation is stretching the minds of retail supply chain people like no other sector at the moment.

So, my mistake.  sorry.

Another complaint is less legit, but worthy of response.  It basically says our Top 25 is too high tech heavy.  It is high tech heavy, but I argue that’s a product of the short product lifecycles typical in tech which translates to a steep learning curve.  Simply put, tech companies get to iterate their supply chain strategies more than other industries.  Its probably also fair to say tech companies have more of a life-or-death reality when it comes to supply chain performance.  Miss a new product launch and you might actually kill the business – ask mobile device makers about this reality.

A final beef I want to address is the question of voter validity.  It is clear that the methodology works to generate usable group intelligence, but the makeup of the group ends up being pretty critical.  Our group is still too US centric (80% North American) and may need more direction in terms of what “excellence” means when they set out to vote.  We’re working on both of these problems and absolutely want input from the community.  Next week I’ll be in Europe visiting with supply chain folks from the UK, Netherlands, Switzerland, Scandinavia and more.  I hope some of you will give me your business cards so we get your expertise and opinions baked into the analysis.  Hello Henkel, Sainsbury, Metro, BASF, Nestle, Philips…. 

One of the most serious adjustments we’re considering is asking peer voters for more specific views on the companies they select as leaders.  At a minimum, it seems reasonable to ask voters to grade their top choices against the two dimensions we most frequently analyze in detail – Operational Excellence and Innovation Excellence.  Each calls for some specific organizational capabilities, metrics and technology tools.  I hope we can begin to tap peer knowledge at this level of granularity to offer the community something everybody wants – lessons from leaders. 

Let me know what you think.

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