The following posting can also be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

Supply chain professionals, like it or not, remain in an environment of high volatility.  Need some proof, consider the following…

A mere three months ago in December of 2009, I penned commentary on the Supply Chain Matters blog regarding the existence of euphoria among U.S. manufacturers.  At the time, a Washington Post article reported that the weak U.S. dollar was helping U.S. manufacturers to win back business previously lost to other global competitors.  This was certainly positive and uplifting news as these U.S. manufacturers approached 2010, but I stressed a cautionary note to the conclusions of this article.  While the economics of product cost, quality, inventory and logistics tradeoffs shifted more toward U.S. manufacturing sourcing, the political dynamics of today’s world economy must always be factored.

Last week, an article in the Financial Times (free sign-up preview account required) makes note that the recent fall in the value of the euro has given the eurozone economic recovery a new lease on life.  The article notes that German manufacturing output, thus far, in March has increased at the fastest pace since the mid-1990′s, and business confidence in Germany has jumped to its highest level in the past two years. Germany’s export orders are increasing at record speed, and the European composite purchasing manager index rose from 53.7 to 55.5 in February, its eighth consecutive monthly increase. The German global export manufacturing machine once again has been primed.

If you had read either of these press reports in isolation, or without context, the conclusions would in some cases influence senior managers to believe that a specific regional economy was on the road to post-recessionary recovery.  If both are placed in context of time, than perhaps the conclusion is that the geopolitical swings in currency rates are occurring at a much higher rate. The interplay of China, Germany and the U.S. economies are all swinging back and forth motion like a pendulum.

The reality for procurement sourcing and product planning teams is that global volatility is an unfortunate given in the current post-recessionary world of ongoing uncertainty. Reacting to current snapshots in time, driven by today’s rapid shifts in currency or energy markets will often change the economics of sourcing, and we need to be cautious about various options of response.   A sudden reaction to a currency or energy market shift in time may not prove to be prudent, since as we now can observe, today’s markets change rapidly. Conversely, not responding appropriately to a longer-tern structural economic shift could ultimately be financially costly.

In the long term, most manufacturers, large or small, are better off by being recognized for product and service innovation as opposed to being evaluated as the lowest-cost producer. Customers often want to establish long-term supplier relationship with innovative and value-added suppliers, suppliers that can be extensions of a long-term business relationship. These same customers, however, need to also navigate their business models to seek any means to drive more top line sales growth in 2010, and/or drive more procurement cost savings. Thus they will seek out an opportunistic relationship with this year’s lowest cost provider to exploit sales expansion plans or create product promotional opportunities in the market.

Given this commentary, you may well ask the obvious question; How will we sort out all of this uncertainty in our organization’s business planning?

My advice to is to invest in supply chain intelligence and advanced analytical capabilities, tools that focus on supporting more informed decisions that can have multiple alternatives or economic impacts. The new table stakes for firms is the need to quickly assess the impacts of rapid changes in markets and their implications to short and longer-term supply and demand plans. If a customer approaches your sales teams with an unplanned buy, how will your firm rapidly respond toward filling that requirement?  Conversely, if sudden changes in the economy cause a customer to cancel existing pipeline orders, what actions can be taken to buffer the financial impact of excess inventory or production capacity?

In an environment of volatility and rapid change, effective planning is more about the ability to quantify the impact of various changed business scenarios, rather than a summarization of what has occurred in the past.  Today, markets are changing very quickly and timely response capabilities are indeed what will differentiate the survivors.

Bob Ferrari

This is Gopi Krishnan from Infosys. As the supply chain practice lead and a regular blogger in our company blogsite, I really couldn’t pass off the opportunity to turn guest blogger for someone as passionately dedicated to the SCM cause as Bob Ferrari is. So, I thank Bob for the opportunity and would be writing a few words on a function way upstream in supply chain consciousness, viz., procurement.

Last month, one of my colleagues called me from Houston to bounce off some ideas on a procurement project he was working on for a large Oil Field Services company based there. There were optimization opportunities galore in their procurement universe – analytics, contracts, sourcing, invoicing, master data…the works. However, the questions he asked were centered on (a) where to start and (b) what to harmonize. I had a déjà vu moment as it suddenly took me back to the time as we were listening with our mouths wide open to the story of one of our banking customers were telling us about the 35+ systems they had solely for procurement purposes – in banks, as you would realize, all procurement is indirect and hence considered a cost-optimization opportunity.

On one hand,  ‘centralized procurement’  is a kind of an anathema to the business team bringing with it “big brother” visions while on the other, large organizations have fairly autonomous entities spread across countries and divisions. It’s the freedom and local decision making ability that got each of these entities where they are today, so how do we keep that spark burning while bringing in the overarching theme of implementing a corporate-level rule-set (or constitution, as some would put it!)? We would need to start with the humbling thought that some form of “center-led procurement” is the maximum we can push the system to accept gracefully and comply.

The typical way of starting off would be by doing a portfolio assessment of spend applications. I personally believe this is a must-do activity at some point as it gives an excellent birds-eye view on what’s going on in the organization from a deployment/user behavior point of view. However, this may not give a category level picture at all, any hopes of getting some form of spend classification has to come from the accounting heads maintained by the finance folks. My issue with stopping at application portfolio assessment is that there’s very little one can do in the short run without inflicting substantial change management (a.k.a significant end-user pain) especially for those users who are getting their systems sunset, however medieval or worse, paper-based their current processes may be.

A better way could be to accept that procurement may still happen in myriad ways and means across the organization and focus energies on building a spend analytics dashboard instead. Being a post-facto, back-end activity, this is clearly non-disruptive for the end-users. That said, it is going to expose the first major problem every organization innately knows, but doesn’t want to deal with – that of calling the same supplier by seven different names and the same item by twenty seven more. Again, due to country/departmental whims, having a unified master data model could be another humongous, multi-year, multi-million program. Assuming no dollars are going to flow there in the short run, we would need to tackle the data issue via a bit of manual analysis coupled with system-driven transformation logic before it gets into the dashboard.

Considering diverse source systems and their technological peculiarities, adding each of these sources into a single dashboard would pose unique challenges. But this can be a phased, multi-step process, celebrating success along the way upon each wave of expansion. There could be category based challenges also – ‘Invoices without POs’ for legal services may have a different attribute set compared to  ’consumption POs from multi-year contracts’  for cleaning services. There would be many more order specific nuances like preferred vendor agreements, payment penalty clauses for certain orders, RFP/contract-specific parameters that need to be vetted during receipts etc.

Once the dashboard is created, we can attack the upstream processes of sourcing and contracts in order to try and bring a modicum of standardization out there. Further improvements can happen if procurement category heads are aligned to accounting heads used in the financial systems and that would mean tightening up the receipt-invoice-settlement process, which is usually a shared responsibility of procurement and finance.

In all of this, the key words are ‘non-disruptive’ and  ’progressive elaboration’ through which we can finally get to realize the aspirational dream of a  ’self-funding procurement program’ . Along the way, if there are holy cows to be dispensed with (or slaughtered, if you insist!) in terms of sunsetting ancient applications, non-standard technologies and e-mail/paper/fax based ordering processes, so be it. Portfolio assessment followed by portfolio rationalization further followed by portfolio consolidation in the spend apps area would definitely have a drastic impact on maverick spend, but if you ask me, spend analytics might be a way to test the waters in terms of prioritizing execution strategies.

 Gopi Krishnan

Disclosure: Infosys is one of other financial sponsors of the Supply Chain Matters blog.

Today’s Financial Times featured a rather interesting article penned by Asia correspondent Tom Mitchell indicating some significant export trend data reported by the world’s largest apparel trade sourcing company, Li & Fung.  It indicates that the average price of Asian exports shipped by Li &Fung to its various retail customers fell by 9 percent in 2009, which was describe as unprecedented,  The company feels is a firm indicator that western retailers were trading down in their apparel sourcing decisions.  They also noted a noticeable shift in orders from relatively high cost production sites in the coastal southern region of China, to other competitive regions in Southeast Asia. A quote from William Fung, managing director notes that the prime beneficiary of this sourcing strategy shift was the country of Bangladesh. The company does note however that orders taken in last two to three months are at higher prices, which may be an early indicator of a more confident retail consumer. 

From my perspective, I would have to agree that once again Li & Fung has demonstrated its ability to adapt to a rather difficult business environment and still increase its margins.  That is a quite enviable capability to have in a traditionally low margin business environmemt.

You can view a video capsule of the article at the FT website.  (free preview account may be required)

Bob Ferrari

Loyal readers of the Supply Chain Matters blog are well aware of the alarming increase of incidents of supply chain disruption and risk.  A week does not go by without some incident occurring, and of late, the financial consequences are getting much higher. Supply chains involving food, pharmaceuticals and medicines have all been impacted. The companies impacted are ones we never would have imagined.  Brands such as Toyota and others, have been subject to the negative effects of a breakdown in product quality anywhere, including the lowest levels of the supply chain.

When I talk with firms about mitigation of supply chain risk, I address needs in two broad dimensions.  The first is having a process in place to identify the most important risks, along with a series of mitigation activities to respond and manage such risks from damaging the firm. The second is the leveraged use of technology to facilitate a broader collection of supply chain business intelligence, provide visibility to products flowing within the supply chain, or communicate mitigation information in a secure manner.  It is to the latter area that we continue our blog series featuring technology providers in the supply chain risk management area. 

Last week I had the opportunity to meet and discuss needs in supply chain risk management with the bulk of the executive team at Acsis, Inc, including its new CEO Gene Eubanks, Andre Pino CMO, and John DiPalo CTO.   Acsis technology supports supply chain traceability and visibility, with an emphasis on automating processes that include the need for individualized serialization of products.  The pharmaceutical industry is currently piloting the means to conform with future government mandates for drug visibility and control from production to distribution and consumption. Other industries subject to regulation and control are at various stages of piloting or implementing item level visibility and control. Acsis thus has an impressive listing of customers to include AstraZeneca, Bayer, BASF, Dupont, Johnson and Johnson, Pfizer, Hershey’s and others.  The Acsis VisiTrak technology provides pre-built and certified integration to SAP supply chain execution and factory intelligence applications, which helps in tackling needs in the timely extract and integration of various system transactional data.  From my discussion with the management team, they clearly understand user frustrations in unlocking information that is spread across various operational systems or between various partners within a supply chain.

In our recent guest posting, CSI-Supply Chain, Rich Sherman noted that although there are many different discrete process applications offered in the market today, there are very few choices in providing end-to-end supply chain visibility.  What is needed is an information consolidator that can support an intelligent supply network, one application that has the capability to identify, track, alert, and anticipate areas of risk.  My discussions with the Acsis team lead me to believe that they get this concept.  The key elements of a services oriented software architecture that leverages existing applications, abstraction, and interoperability are the foundation for VisiTrak.  While the company has more work to do, the foundation has been built.

 Bob Ferrari

Logility Inc. announced today that it had acquired inventory optimization vendor Optiant, Inc. for approximately $3.3 million in cash.

Before beginning Supply Chain Matters commentary on this announcement, this author needs to disclose some background.  I was the Vice President of Marketing and Business Strategy for Optiant two years ago, thus I have knowledge of the company’s legacy, technology and customer deployments. 

First, this acquisition is another sign that supply chain network design and inventory optimization technology are becoming important capabilities to have within a modern supply chain planning and analytical business process.  Other evidence to this trend occurred with IBM‘s previous acquisition of ILOG’s inventory optimization technology (the original Logic-Tools) and SAP‘s elevation of SmartOps being designated as SAP Enterprise Inventory Optimization.

Logility has found a bargain in this acquisition.  Optiant’s sophisticated multi-echelon inventory optimization technology has proven its value in many customer settings, and it would be hard to replicate the technology, and more importantly the reference customer base, at this purchase price.

The technology has also been testified by many of Optiant’s existing customers as user-friendly, which is a very important differentiator for this type of technology. Logility also inherits a stellar listing of installed based customers, including Black and Decker (now part of The Stanley Company), Hershey Foods, Hewlett Packard, Kraft, Nestle, Procter and Gamble, and others. Many of these customers found positive benefits in their implementation, and were reluctant to let their industry peers know how much money they had really saved.  These customers could further present some rather interesting cross-selling opportunities for Logility.

Optiant’s history is one reflecting problems with management turnover, consistency in strategic direction and sales execution.  The company’s original primary investor moved on after sinking considerable sums of money in the company, and of late, Supply Chain Ventures had been a primary banker of the company. Logility now has the opportunity to provide more consistency in direction and go-to-market strategy.

Logility has indicated that it will brand Optiant’s applications as Voyager Inventory Optimization within its existing Logility Voyager Solutions suite.  Thus, the prior Optiant technology will be offered on a standalone basis, which is a smart move for Logility. It will  provide Logility additional time to build integration among Inventory Optimization and other components of the Voyager suite.

Another important implication brought about by this acquisition is that inventory optimization technology can not only be available for large companies, but also mid-market manufacturers and retailers, as well.  The mid-market has been a key goal for Logility for many years.

Bottom-line, Logility has made what appears to be a smart move in its acquisition of supply chain network design and inventory optimization technology.  Last year, in its research report on the inventory optimization technology landscape, IDC Manufacturing Insights predicted that these technologies will morph into a broader category of supply chain analytic and what-if capabilities.  Logility must now build out the integrated components of this capability.

I, and I’m sure other ex-Optiant staffers are somewhat saddened to note the end of the Optiant name in the market. But just like any company with a troubled legacy, there is a need for others to navigate a new journey.

 Bob Ferrari