I have seldom utilized this blog to support political or legislative reform, but there are a few topics, such as the speculation of oil markets, that truly warrant discourse.  A little over a year ago, I penned a posting, Stop Oil Speculation- A call to Action. Now one year later, I will again rant for your attention in adding your voices to this critical issue. Apprantly the voice of twelve airline CEO’s and others was not enough.

A recent article in the Wall Street Journal, Traders Blamed for Oil Spike, (subscription may be required) notes what many in our community have been suspecting for quite some time, that financial speculators played a significant role in driving wild swings in global oil prices.  According to the WSJ article, The Commodities Futures Trading Commission (CFTC) plans to issue a report in August that will add fuel to the growing debate that large-scale financial hedging, involving hundreds of billions of dollars in contracts have well been driving market volatility.  The report is also expected to contain a much more detailed analysis of whether investors in contracts hold massive market positions tied to oil and other commodities.

Readers may well recall that it was last summer, when the price of crude oil dramatically spiked to the $140 per barrel range, driving unprecedented increases in transportation, diesel, aviation, and other petroleum based product costs, that I penned my call to action around oil speculation.  At that time, the U.S. airline industry was showing bold leadership in a call to action, and here we are, one year later with more potential evidence.

Of late, political and legislative leaders have been hearing direct feedback from their constituencies. In an op-ed piece published in the Wall Street Journal by French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown boldly indicated that governments need to act to curb volatile oil prices. “Governments can no longer stand idle. Volatility damages both consumers and producers. Those who rely on oil and have no substitutes readily available have been the victims of extreme price fluctuations beyond their control — and apparently beyond reason.”

Recent reports of an energy desk trader for Citigroup earning a $100 million dollar bonus for his efforts in driving market transactions are the clearest sign of outrageous speculation activity.

Proponents of oil speculation have the audacity to claim that commodity speculators and hedge funds have added liquidity to markets, and that price gyrations have occurred because of normal supply and demand forces in the market. 

I say bunk!

The argument that this is big government trying to manipulate an industry just doesn’t hold much water. Quite the opposite, how much free market is enough!

The supply chain community needs to join others in supporting regulation that limits massive and artificial speculation in commodity markets.  We have all observed the devastating effects of volatile oil on transportation and reliable supply of goods.

 I once again urge all readers to visit the Stop Oil Speculation web site, contact your legislative leaders and add your support for oil speculation reform.

Bob Ferrari

Over on the Evolving Excellence blog, Bill Waddell had a recent entry, Cash Is Right On The Money, that once again reminds us that many of today’s Lean process concepts alone, will not make any company into a world class performer without a corporate culture and management performance reward system that supports structural efficiency change. 

The posting references Cash Powell, a mentor of Mr. Waddell, who back in 2005, reflected on the then profitability challenges of General Motors, and how GM booked revenue based on production completion vs. retail sale, and thus finished goods inventory was not considered a measure of overall supply-chain or production efficiency.  Waddell goes on to point out: GM has done as much or more Lean stuff in their factories as anyone, and you all know the results.  Without a fundamental change in accounting, along with the management processes accounting drives such as performance metrics…, no company can be truly lean.”

This posting provided me another reminder that Lean-focused initiatives do not stand as the end-state goal. I’m also amazed in reading so many middle-management job postings that call for intimate knowledge or certification in lean methodologies, but hardly mention change management skills. Few senior management job descriptions call for a basic understanding of Lean methods and their applicability toward facilitating structural change.

An end-state goal is a vision and supporting operating objectives, embraced by the entire organization, seeking a positive change.  Lean methods are one of many tools that can be deployed to support a process.. As elegantly stated by Bill Waddell, no company is going to get long term Toyota-like results without the willingness to change overall thinking, or challenge the current way works gets done. Even Toyota, who is now challenged with suffering its first operating loss in corporate history knows enough to take a pause and re-examine strategic intent.

Bob Ferrari

Yesterday, SAP announced both its second quarter and first-half 2009 results, and in my view, paints a picture of more changes to come for this important vendor on the ERP landscape.

For the second quarter, while reporting a modest 6% decline in total revenue, software license revenues were down a rather significant 37% for the quarter, and for the first six months of 2009.  Net Income was down 4% for the quarter, a cumulative 12% thus far in the year. Operating margins actually improved 1.8 points for the first six months, which is noteworthy.

From my viewpoint as an industry observer, you’re going to hear and read about two different perspectives of SAP at this point.  From a financial results perspective, the company seems to be positively weathering the current global economic recession through its actions in controlling costs and spending.  That is obviously good for SAP. From a market strategy and product marketing perspective, there are, by my lens, troubling warning signs.  These are signs for which the SAP community should be watchful.

A look at revenue analysis over the first half of 2009 indicates that SAP is buffering the significant decline in software license revenues with both a 15 percent rise in support and 20 percent uplift in subscription and other revenues.  Thus, the previously announced across-the-board increases in support maintenance fees were well-timed for SAP. The cash position has more than doubled to $3. 4 billion Euros ($4.8 billion USD).  Days sales outstanding, a reflection of how timely customers are paying their invoices has increased from 71 days to 77 days thus far this year, which should be of concern to SAP’s executive management. 

In its business outlook for the remainder of the year, SAP is projecting a write-down of acquisition-related charges and deferred support revenue from the former acquisition of Business Objects, as well as provisioning a one-time $200 million euro restructuring charge to result in the reduction of positions.

What can we extract from all of this information?

First, the previous multi-year effort to transform applications to SAP’s NetWeaver platform and the current SAP marketing emphasis on enabling more responsive business performance through analytics has not as yet helped in boosting software license sales. In my attendance at the Annual SAP Sapphire conference in May, I observed the total domination of Business Objects marketing messaging and product briefings, with very little hyping of  SAP’s bread and butter ERP and Business Suite applications. In fact, I heard some speculation that SAP senior executives were contemplating a decision to cancel the Sapphire events all together.  Perhaps those effects are being reflected in lack of software license sales momentum.

While service and maintenance revenues are sustaining overall revenue performance thus far, much has been reported regarding SAP customer pushback on these increased maintenance fees, particularly since many SAP customers continue to be pressured to control IT related costs through this severe recessionary period. 

SAP has already reduced headcount by nearly 3000 people, with sales and marketing and professional services taking the brunt of the cuts to date. With additional reductions surely in the cards, what areas will SAP additionally cut?  I suspect that marketing will continue to be a prime target.

With an increased cash position, is SAP positioning for a period of decreased software license sales, additional acquisitions, or making the company more financially attractive to a suitor?

While I surely do not  portend to be an expert in all of these matters, my gut tells me that more significant changes are in the wind for SAP.

As an SAP customer, prospect, or competitor, you should be watchful for upcoming changes related to SAP.  These changes may present buying opportunities for SAP customers, since the company will need to increase software license sales.  If you are a competitor or SAP partner, be watchful, since the signs all point to change.

Bob Ferrari

I had the opportunity to provide background commentary for a recent article, Supply chain risk management: Beware these storm warning flags, written by Tom Stundza and published on Purchasing.com.

Supply chain risk is not just about the potential of supplier failure, and certainly not the sole responsibility of the procurement organization.  Supply chain risk management is now a cross-functional as well as a cross-business concern.

Have a read of Tom’s article and provide your own perspectives. If you want to discuss your specific needs and challenges in this area, send me an email.  The address is bferrari at blog1 dot com. You can also view our consulting web site under the link associated with my signature.

Are supply chain risk strategies viewed in these broader perspectives within your company or organization?

What do you view as the most significant obstacles to overcome?

 Bob Ferrari

An industry analyst, mentor and researcher whom I truly respect is Bob Parker, Group Vice President for IDC Industry Insights.  Bob authored a rather thought provoking article, Purchasing capacity, not products, in the Quarter 2 2009 edition of CSCMP Quarterly.  (CSCMP membership required for access).  I recommend Supply Chain Matters readers have a look at this article since it does provide some meaningful arguments regarding the use and benefits of capacity-driven planning.  Another summarized, and less restricted view of this article can be found in a posting on Supply Chain Digest.

The premise of Bob’s article is that in an era of evolving supply chain volatility and risk, manufacturing companies may find more benefit in reserving capacity (Capacity-Based Sourcing (CBS)) vs. the buying of individual parts.  Bob further points out that this concept has been discussed for some time, but is not widely implemented because few companies have been able to justify the tremendous effort that would be required to change from traditional practices to CBS.

I myself can attest to some of the history of CBS thinking.  In today’s era of predominantly outsourced manufacturing on a global basis, the stakes are far higher in getting the product or production forecast as accurate as possible.  But, most supply chain planning professionals are keenly aware that forecast accuracy is an elusive challenge.  As global product marketing manager for mySAP Supply Chain Management in 2003, I fielded a number of inquiries from SAP APO customers regarding how they could plan for capacity vs. parts.  Back then, there were very limited options for doing so within SAP.

In my view, the most important takeaway to Bob’s article is the section which outlines the various challenges that need to be overcome, and how supply chain groups can deal with these challenges.  Two of the most important challenges are addressing the need for changed skill sets and information systems support.  Convincing procurement professionals who’s world was about tactical, part-driven purchasing to transform themselves to “capabilities manager” does require change management concepts.  Skills in process-orientation and strategic buying are clearly different, but can be acquired.

In information systems, I’ve found that the web-centric applications that focus more on collaboration among a network of suppliers have more flexibility in supporting a CBS process.  Rather than a grounding in MRP parts explosion, these systems have, and readily deal with capacity or other planning factors.  If you are considering supporting a capacity-based planning process on your SAP platform, you can evaluate SAP Supply Network Collaboration as a tool.  In the area of non-ERP based applications, Kinaxis and Amitive have had experience in supporting capacity based planning across a network of contract manufacturers.

Bob Ferrari

Author’s Note: Kinaxis is one of the sponsors of the Supply Chain Matters blog.