Old Strategies for Supply Chain Management

How things have changed in two decades. When SI started, the craze, and the right approach, was new strategies for supply chain management. But that was then, this is now. As we’ve regularly explained over the past few months now that globalization has gone, isolationism has returned, natural and man-made disruptions are on a level not seen in decades, if not a century,

That means that survival is dependent not on new strategies, but old strategies when trade was restricted, dangerous, and lengthy.

Long Term Partnerships

In a recent post we suggested it was once again time to bring back Keiretsu, which can be briefly described as a long continual business relationship, and, in one way or another, has been a significant force in the Japanese economy for over four decades and, despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan

Whether or not you adopt the Japanese philosophy, the key to success in this unstable economic environment with fragile supply chains is to form solid partnerships where both parties support each other through tough times. If you support the supplier as much as you want to support them, it is much more likely that you will be their customer of choice and when stocks are low, shipping options are few, and support is limited. That’s key — being the one that keeps going when all your competitors shut down.

Localization of Production and Near-Shoring of Inputs

Producing in country B that is halfway around the world for country C doesn’t make any sense in an age where shipping costs are rising rapidly, can triple to quintuple on every pandemic and/or seaway closing, and where raw material supplies can dry up over night. The key to success is buying, manufacturing, and selling as close to the destination country / region as possible.

It’s not twenty (20) years ago when shipping was stable and super cheap, unexpected supply chain interruptions were usually limited to natural disasters or unexpected man-made disasters (plant fires, mine collapses due to insufficient shoring, etc.), and it was much cheaper to mass produce in a single locale (i.e. China).

Now, shipping is unstable and super expensive (while crude oil from about 1985 to 2005, adjusted for inflation, ranged between $40 and $60 per barrel except for the occasional spike; for the past five years, it’s been $80 to $100, with the pandemic and Strait of Hormuz strikes bringing it to $110 to $120), interruptions are daily, and China, which is now 18% or so of global GDP thanks, primarily, to US and EU outsourcing (on the advice of the Big X consultancies, led by McKinsey), is not as cheap anymore). This means that, for North America, South American production is cheaper than China. (Why do you think Foxconn, famous for Apple product production and suicides, has at least five plants in Brazil?)

It’s true that some raw materials, like rare earths, will always have to come from China (especially if you’ve in a country sanctioning Russia), but it costs less and makes more sense to just buy the raw materials which can be shipped very compactly (and even by cargo plane if needed) than finished goods that are often 90% empty space (like appliances).

In other words, the days of centralization in manufacturing, as well as supply chains, is over!

Controlled Verticalization

These days all the techbros want to be railroad barrons and be super rich to the point that it would be impossible to spend all their money unless they started buying small countries. What they forget is that it wasn’t just monopolies, a lack of regulation, and zero worker rights (which the current US administration is doing it’s best to reinstate by rolling back human rights, regulations, and anti-trust laws as far back as they can as fast as they can in the hopes of bringing in a new Gilded Age [while forgetting what followed]), but super efficient execution from source to sink.

The barrons not only owned the most lucrative businesses (like the railroads), but also all the subsidiaries that made the parts, shipped the parts, mined the raw materials, and shipped the raw materials. With vertical integration, they could, and did, optimize every single step of the supply chain.

This means that if you want to succeed, you need to optimize your supply chain. While you may not be able to own every company in your supply chain (since some electronic products require 10,000 components), you could own, or at least own part of, key suppliers and/or your parent company could own your key suppliers and/or key transportation companies. Whatever is critical to your operations, can’t be easily replaced, and could bring down an entire product line (and even your business) if it could not be obtained, that’s what you need to own.

Abandonment of JIT

For years, when supply chains ran smooth, supply was assured, and costs were manageable, JIT was all the rage. When inventory costs were an average of 20% to 25% of the inventory value, reducing inventory made sense (to a point — we’d argue it was taken too far). But when production line shutdowns can cost millions, supply chain interruptions are coming regularly and remediation times can take weeks or months, and customer loyalty might be at an all time low thanks to rapid inflation and limited funds, lack of supply is much more costly than inventory, especially if the inventory is well managed.

With today’s multi-objective multi-scenario pareto forecasting models, demand over a reasonably sized time-window can be predicted to 98% accuracy for many categories, the chance of overstock can be minimized (while minimizing the size of stock-outs), and warehouse sizes and costs can be optimized as well. A slight increase in inventory cost prevents costly stock-outs and shut-downs, leading to lower operational costs overall.

Standardization of Technology

Right now, the average large enterprise has 1,000 or so SaaS apps on top of dozens of ERP instances across half a dozen major products. That’s not efficient — in fact, it’s the exact opposite. And it’s probably costing them at least 40% more than if they standardized on a single app for each function.

But it’s not just software you should standardize on — all forms of technology should be standardized. Production lines, equipment, and components used in your product lines should be standardized to the extent possible. Fleets should be standardized as well so you can standardize parts, training, and operations. The more you can standardize, the lower your overall costs will be.

An Updated Checklist for Major International Procurements

Twenty years ago we presented a slightly modified version of a great checklist by Mr Paul Emanuelli who presented key concepts for major procurements in the age of globalization and a movement by the mid-market to take advantage of the global sourcing opportunities big enterprise had been taking advantage of since the 80s. It wasn’t complete, but it was complete enough for an average organization and a great start.

But that was the age of globalization. Opening borders. Minimal conflicts. Reasonable levels of natural disasters. Efforts to ensure major maritime routes were not blocked by any disagreements or conflicts were made. Piracy was an issue, but alternate routes and good (military) security minimized impacts.

Now we’re in the age of isolationism. Borders are closing. Sanctions are restricting others. Conflicts and wars are breaking out with regional impacts. Major maritime routes are being blocked as a result of conflict, including the Red Sea and the Strait of Hormuz, putting trillions of dollars of trade at risk. Natural disasters, including droughts, are also limiting trade routes, including restricted passage through the Panama Canal due to water shortages. The rules have changed, and your Procurement (knowledge) needs to keep up.

This means two things:

1. Your Team Needs to Expand

When once upon a time you may have been able to get away with:

  • procurement lead
  • finance lead
  • legal counsel lead

Now you also need, at a minimum:

  • logistics lead
  • domain lead
  • (geopolitical) risk lead
  • compliance lead

These stakeholders will need to provide the following insight between them:

  • procurement: handles the details of the buy — cost vs expected return
  • logistics: handles the global supply chain – carriers, modes, import/export requirements, etc.
  • finance: handles the international economics — currency exchange, projections, international banking arrangements, tariff management and (VAT) reclamation
  • legal counsel: appropriate international legal frameworks, supplier home country law, local laws
  • domain lead: realistic supplier and product assessment vs. supplier claims
  • compliance lead: handles international compliance regulations — source country, intermediate transportation hubs, and local companies with respect to finished goods, raw materials, transport, and entities
  • (geopolitical) risk lead: keeps a handle on the international geopolitical conditions relative to the source country, destination country, and any intermediate countries the goods would have to pass through — and if they are likely to lead to sanctions, border closings, conflicts, wars or other situations that could prevent or significantly hinder trade

In other words, the analysis of a potential buy has become significantly more involved than it was 20 years ago, because it’s not just the buy, it’s the likelihood of supply assurance and affordability when exchange rates can fluctuate significantly almost over night or fuel, and thus carrier costs, can double or triple with almost no warning.

Once you’ve selected the team, you need to determine the extent of the project. Is it a sourcing project or a mega project. If you’re simply replacing a source of supply, and using a supplier in a region you’re already doing business in, it’s a project. If you’re looking for a source of supply for a new product or material, trying to enter a new country, and/or looking somewhere you don’t have a logistics network, it’s a mega-project. Just like a major technological project / system replacement, underestimating the effort involved is a recipe for disaster. Especially if the effort is not put in up front before a contract is signed and an issue crops up later.

This means that before the contract is signed, the following sub-projects need to be completed:

  • detailed product requirements assessment
  • detailed proposed supplier and product assessment
  • detailed proposed logistics / supply chain network
  • detailed legal frameworks review
  • detailed compliance and risk review
  • detailed business plan

Only then, can you move forward to:

  • contract framework
  • negotiations
  • final contract

International procurements are not as easy, or predictable, as they were 20 years ago. Now they’re mega-projects which require mega-effort to get right.

Why Your ProcureTech Initiative Will Fail … Part 2

We’ve written many series on best practice tech identification, tech selection, and tech implementation in the hopes of inverting the odds from an 80%+ chance of failure to an 80%+ chance of success, but given that failures are literally still happening on a daily basis, it seems that most people can’t be bothered to read best practice advice so today we’re going to flip the script and tell you all the reasons you’re going to fail and then you hope you go back and read the best practice advice we’ve freely given you (in series such as Successful Vendor Selection – The Series).

5. You Don’t Understand How To Select Proper Systems

As per our previous instalment, the answer is never to select the systems recommended by your favourite Big X consultancy whose recommendations are always in the mutual back-scratching club. With all the finders fees and recommendation fees built into the relationships, you’re paying multiples of what you should be for the tech even if the tech is appropriate. Typically the tech in the big vendors isn’t the best or most modern tech, and often the tech you fall back on only if you’re such a large enterprise that smaller vendors can’t serve you.

It’s not vendor size, Big X recommendation, marketing, or hype. And it’s never (Gen-) AI unless there’s no other solution. AI accelerates what you give it. And when you give it bad process, bad data, and bad instructions, you get an even worse result than what you have now. Until you’re best in class with last generation tech, you’re not even ready to consider AI.

The answer, as we’ve said before, is to find an independent consultant or consultant from a niche consultancy with no vendor relationships and no implementation team. The consultant/consultancies only line of business must be advisory, solution advisory, and project assurance — not implementation and integration and definitely not vendor partnerships. While the consultancies with the partnerships will tout the benefits and how they get (their customers) top tier support, first response, and the newest releases; that’s hype, not results. Results come from the systems that are right for you, not the systems right for the Big X consultancy.

Unless, of course, you are skilled enough to implement the best practice selection process yourself.

6. You Don’t Understand How Long It Will Take To Implement New Systems

A technology system implementation, replacement, or upgrade is an organizational mega-project in a mid-sized or larger organization. Even though SaaS vendors can partition a new instance in minutes, that’s not implementation, integration into your systems, incorporation into your daily processes, or institutionalization into your team’s routine. That all takes time. Lots of time — and a lot more time than your vendors will tell you. They know that you’ll be drawn to the proposal with the shortest implementation time so they will lie about how long it will really take and base their proposal on the theoretical minimum if everyone worked 12 hours a day, 7 days a week, and nothing ever, ever went wrong.

But we know the truth. Everything that can go wrong, will, to some degree. No one can dedicate as much time as the project plan says. All of the integrations will take longer than estimated. The data will be 10 times worse and 10 times as incomplete as was assumed, so there will be delays to clean the data and integrate external sources to buff it up. So things will drag out well beyond the proposal. Typically multiples.

That’s because no one will admit it’s a mega-project, and that’s why the technology project failure rate keeps increasing year-over-year despite being at an all time high of 88%+ in general, and 94% if Gen-AI. The reality is that mega-project success rates are 0.5%, as chronicled by Bent Flyvbjerg & Dan Gardner in How Big Things Get Done, where a study of over 16,000 projects across 136 countries going back to 1910 revealed the success rate. This is where technology project success rates are headed until everyone wakes up to the reality that they are dealing with mega projects and all AI does is speed up the failure.

7. You Don’t Understand How To Do Change Management

It’s not just implement the software, integrate the data feeds, flip the switch, and go. That’s a surefire guarantee for system avoidance and bypass.

Change management involves understanding how the processes are changing, what training the users will need, how best to go about it, how fast the switchover can actually happen, planning for, and managing all the non-technology details and implementing proper project assurance to make sure it actually happens. That last part is key — project assurance that starts before the first step of system implementation and continues until the adoption and usage hits the required targets — which will typically be months, if not years, after initial system implementation depending on the system. A few months for a dedicated solution or small suite, to a few years for an organization wide ERP or SCP for a large multi-national organization in dozens of countries.

8. You Don’t Know How To Recognize and Correct Issues To Avoid System Bypass

Just like no implementation will go according to plan (which is why over-optimistic schedules will never happen), no design will be as perfect as believed. Something critical will always be missed and multiple significant issues will crop up over time. The ability to recognize these issues quickly and do something about them before your employees start bypassing the system — because once they start, they won’t stop — the harder it will be to get them back on the system.

Let’s say you buy a new e-Procurement system designed to curb P-Card tail spend and allow the vast majority of spend to follow procedure, be tracked against budgets, and properly managed over time. Sounds great in theory, but lets say that any purchase not in the catalog requires an RFQ with at least 3 vendors, or a 3-way price comparison between 3 online vendors with a manager’s sign-off, which adds time and hassle for purchases that used to be one and done because the amounts were under thresholds, all of the options were always within a few % of each other, and saving $2 on a $100 purchase is NOT worth 15 minutes of an employee’s time who’s fully burdened cost is $100 an hour.

If you don’t pick up on this quickly, and let them one-and-done purchases under the old P-card amount through easy-peasy punch-out, they’ll go back to P-carding everything and if you take the P-card away, they’ll go back to the personal credit card and monthly expense report. You need to quickly figure out who is bypassing, why, and how you make the system easier to use than bypass.

Why Your ProcureTech Initiative Will Fail … Part 1

We’ve written many series on best practice tech identification, tech selection, and tech implementation in the hopes of inverting the odds from an 80%+ chance of failure to an 80%+ chance of success, but given that failures are literally still happening on a daily basis, it seems that most people can’t be bothered to read best practice advice so today we’re going to flip the script and tell you all the reasons you’re going to fail and then you hope you go back and read the best practice advice we’ve freely given you (in series such as Successful Vendor Selection – The Series).

1. You Don’t Understand Your True Needs

You’ve never done a full end-to-end process analysis on your organization, you don’t understand how inefficient your processes are, what processes you actually need, why you need them, and how much better you could be doing. You just know that the KPI metrics you are tracking are not on par with industry averages based on what your overpriced consultants are telling you, that your balance sheet isn’t as good as best in class, and that you need to do something … and that something is get a shiny new tech toy that the overpriced consultants will help you select by telling you who to invite to your RFP. (And you should know all the problems with this — they’ll only recommend the partners they have sycophant partnerships with, get referral and implementation fees from, and who will ensure that they remain your overpriced consultancy of choice.)

2. You Don’t Understand What You Already Have

Once you understand what the correct processes are, why, and where the automation points are, you need to revisit the systems you have to see where they can solve the problems. Chances are you have a number of suites, supply chain platforms, and ERPs with easy to implement plug-in modules that solve a lot of the problems you have without buying any new systems. And even if new systems might do it better, chances are the improvement won’t be worth the extra money, downtime, and change management — which will all cost you dearly. The reality is that if you can get an 80% solution today, with tools your people are already using, that’s much better than a potential 95% years in the future.

3. You Don’t Understand What Your Capabilities Actually Are

By this we don’t mean your process capabilities or technological capabilities, we mean your actual functional capabilities. Your domain knowledge, your ability to execute on that domain knowledge, and your natural efficiency. It’s pointless improving processes to apply more advanced techniques or employing modern technology to speed up processes when you’re not capable of managing those advanced processes or technology. If you employ processes and systems you’re not ready for, they won’t deliver any results while costing you millions of dollars in the system selection and implementation processes.

4. You Don’t Understand How Long It Will Take to Upgrade Your Capabilities

Even if you figure out you need to upgrade your skills and those of your team’s, even if you posses a fair degree of human intelligence, you don’t know how long it will take. It’s not just buying a knowledge dump from a consultancy or giving your team a 5-day crash course, because knowledge that is not applied is not retained. There’s a reason College and University courses give assignments and projects as well as exams — the more you apply, the more you retain. If the imparted knowledge is not applied, it will not be retained. Until your team can start applying, repetitively, the new knowledge in improved processes, they won’t retain it and they won’t advance. The best training will be a day or two a month over months, not a week. And that’s for stage 1. It will take years to get your team from average to mastery. We’ve known for decades that major transformation projects take 5 to 10 years, and that the average journey to best in class for the committed is 8 years. Technology doesn’t change that. The longer you choose to ignore this fact, the longer you will fail.

To be continued in Part 2.

The Procurement Knowledge Devolution

The internet was supposed to kick off the procurement knowledge revolution, allowing Procurement pros to quickly:

  • find out about best practices
  • get commodity and market pricing for products and services
  • build reasonable (should) cost models
  • find out about new suppliers, carriers, and consulting partners
  • research new products and services
  • hold truly global sourcing and procurement events in real time
  • effectively communicate with, manage, and develop suppliers
  • etc.

For twenty years, that’s what it was. Procurement departments who learned how to use the internet properly for research, deployed the right SaaS to support their processes, and identified the right data for their processes were successful in their endeavours.

But then came Gen-AI LLMs, chatbots were replaced with chat, j’ai pété‘s and clod‘s, and knowledge was replaced with whatever content the LLM generated. Maybe it was correct, maybe it was mostly correct, and maybe it was a 100% fabrication — a hallucination if you please. The problem with LLMs is that they are NOT intelligent. They are essentially super sophisticated multi-level cross-connected deep neural nets that go beyond classification to generation of responses built up from sub-responses built up from deep training on incredibly large data sets.

Therein lies all of the problems. It generates built on random probabilities. Those are dependent on what’s in the training data set, what questions were asked, what results are reinforced, and how it’s used. If the training data is bad and full of bad data and falsehoods, the chances of incorrect, and even dangerous, responses being generated are quite high. If the training was biased, the output is likely to be very biased. And if it’s not “trained to please”, the models are fundamentally designed to “learn to please”, so if computations that are a complete lie will increase utilization of, and faith in the model, that’s what will happen.

Moreover, every vendor is now believing the hype from the big LLM players, treating the technology as real Artificial Intelligence (when it should be called Artificial Idiocy), and trying to plug it in everywhere … promising that it will provide their clients with true natural language interfaces, agentic tech, and even BS AI Employees. Those who are adopting it are literally getting dumber by the day. Not only has the cognitive impairment, atrophy, and potential long-term decline from regular use been well documented, but the failure rate has been well documented as well with MIT and McKinsey studies demonstrating success rates of 5% and 6% successfully. Most pilots are being abandoned, sometimes before they even begin, because the tech isn’t even good enough to put into employee’s hands for the tasks the overpriced Big X consultancies claimed the LLMs would be perfect for.

Furthermore, even when organizations are smart enough to ignore Gen-AI, over-automating using the most advanced last-gen (A)RPA and AI technologies will still give Procurement teams a false sense of security and, due to their very low error rate, as time goes on, the team’s skills will go rusty and their ability to deal with true exceptions quickly disappear, especially as the old Pros (get forced to early) retire and the younglings have never dealt with exceptional situations.

The age of AI hype has ushered in a knowledge devolution faster than any age that has come before.

I hope the profession can survive it!