Today’s second “wacky Friday’ commentary concerns an Associated Press article that that is headlined, CEO pay exceeds pre-recession levels. The opening line is an eye grabber: “In the boardroom, it’s as if the Great Recession never happened.”

An analysis by the AP notes that the typical pay package for the head of a company in the Standard & Poor’s 500 was $9 million in 2010, 24 percent higher than 2009.

How many front-line production, procurement, product management or operations people were rewarded with over 20 percent wage increases?

Executives were showered with compensation of many types to include salaries, bonuses, stock grants, stock options and perks.  Keep in mind that many cases stock and options were granted during depressed times when the price of a company’s stock was at low levels. The article notes that typical cash bonuses given to a CEO were up 39 percent in 2010 to an average of $2 million.

Most interesting is that during this same period, corporate revenues grew about 12 percent, and we all know the story related to exploding profit margins.  The CEO strategies were consistent; dramatically cut costs, shed people and suppliers, and tap emerging markets for top line revenue growths. The fact that industry supply chains were called on to do more, deal with dramatically increased complexity and risk was just another threshold of expectation,  “That’s what we pay you for.”

Those workers lucky enough to hold on to their jobs were constantly driven to do more with less.

During the depths of the past financial crisis, many across traditional and social media decried the exorbitant pay of Wall Street executives. The audacity of these people!  We even had a government commission created to monitor and oversee salary and bonus excesses of the banking and financial services industry.

How short memories have become.

It seems that the problem of abuse and self-gratification has spread to other industries, and in our view, is not at all a good sign for the economy and for our social fabric.  The notion that we all sink or swim together, or a rising tide lifts all boats has been lost on many corporate boards.

I suppose it is just another ‘whacky Friday’ and this too will fade to just short-term memory loss.

We want even ask for reader comments.  Better to just have a beer and hug your loved ones.

Bob Ferrari

Last week I had the opportunity to be the master of ceremonies for the 2011 OpsInsight Leadership Forum, which was produced by Halcyon Business Advisors.  The conference provided a great line-up of speakers including AT&T, Aberdeen Group, Accenture, Cardinal Logistics, CCI, IBM, The Shingo Prize, McDonalds’s Corporation, Vecco International and Wal-Mart.  The executive level attendees represented a diverse group of industries with many different challenges.

In my conference opening, I observed that the continual challenges facing productions and operations management, namely more demanding customers, complex, globally stretched supply chains, rising labor costs and dramatic increases in disruption and risk events can each significantly impact the ability of any organization to compete.  My challenge to the attendees was to reflect on the fact that now more than ever before, capabilities for flexibility, agility and transformation are no longer optional for operations management, yet each brings its own unique challenges.

Many of the conference speakers reflected on these challenges and what was really interesting was that many speakers reinforced that technology and tools are not the real challenge but rather changing business and organizational culture tend to be most difficult for many operational focused teams.  The reasons are many.  Operations teams sometimes do not get the visibility or sensitivity that other business functions may garner.  Leadership and business structure also plays an important factor.

Some takeaways I noted from our speakers were:

• Operational excellence must be baked into the fabric of corporate culture and that begins with the leadership of top management.
• Supply chain and operational leaders need to be able to balance many different aspects of business process capability that include being adept at operational results linked to business strategy, standardization, consistency and tools.
• Little things can make a big difference.
• Leaders must see and acknowledge reality.

I attended one think tank session that brought home many if not all of these concepts.  The session was facilitated by Thomas M. Feeney, the President and CEO of SafeliteGroup with headquarters in Columbus Ohio.  For readers unfamiliar, Safelite Auto Glass is one of the leading providers of automobile glass repair and replacement in the U.S. with over 4 million customers.

It is not often that this author encounters what I would describe as a dynamic and inspirational CEO, and Mr. Feeney certainly filled those requirements in his beliefs, communication and articulation of leadership principles. How many CEO’s are you aware of who can sit down with a total group of strangers, without a script, and completely articulate the fabric and culture of the company, and field all questions related to that culture?

First and foremost, Feeney reinforced that changing culture starts at the top, and that any organization needs to motivate change from the basis of how people are hired and rewarded in their day-to-day jobs.  Safelite’s philosophy is to hire for social skills first, by seeking out people who are empathetic and helpful by nature.  Safelite’s people are measured on how they go the extra mile to resolve customer needs and Mr. Feeney personally contacts and praises employees when they go to extraordinary means to satisfy customers.  Safelite further believes that customers want to speak to real people, and thus all customer center calls are automated but rather answered by a live person in an average response time of 11 seconds. How refreshing is that! An Executive Services group, an elite team of 40 employees was also formed to proactively resolve more challenging service issues.

Safelite teams also embrace business social media techniques as a means for further reach out with customers, including the leveraged use of Facebook and Twitter, with proactive two-way communication with potential dis-satisfied customers. Feeney noted that he himself has contacted disgruntled or praising customers by use of his own social media accounts, and has fostered a culture that embraces these tools while including appropriate safeguards. He characterized social media as another means of customer reach and opportunity to effect a more positive customer engagement, even with a potential non-conforming service experience.

The results for Safelite have been extraordinary with customer loyalty metrics that outpace many well-known brands.  The company constantly measures its Net Promoter Score (NPS) and how that score impacts increased revenue and customer referrals.  Employees are constantly made aware of the NPS score and how their individual contributions affect the score.  As a result, in the last two years, Safelite’s revenues have increased 27 percent along with corresponding profits.

Safelite provided a great story and a superior demonstration of how corporate culture can impact operations excellence and how a CEO can be proud to speak and celebrate this excellence.

Today’s business world moves at a much higher cadence of change, with higher stakes.  It is often operations management that provides the means to delight customers, respond to ever changing product demand or overcome extraordinary events.  Now more than ever, operations has a broader role to play, beyond any four walls of a production or service facility.  Operations is the business, and must have the capabilities of agility, flexibility and transformation.

What is your view?

Are operational teams valued for the contribution they provide?

Are metrics and performance criteria designed to reinforce the traits described?

Bob Ferrari

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

As I pen this commentary our global community is approaching five days since the tragic earthquake and tsunami tragically occurred in Japan on Friday, March 11.  Compounding this unimaginable tragedy is widespread human tragedy and powerful images we may not soon forget. An evolving nuclear-related crisis involving four, and possibly six separate nuclear reactors located at the Fukushima power complex can add all sorts of other crisis implications. We should all take notice of the courage, resilience and resolve of the people of Japan as they deal with the aftereffects of this tragedy.  The word “resilient” is often an over used term but in the context of this ongoing tragedy, it takes on a new significance.

For expert community readers in semiconductor, high tech and consumer electronics value-chains, and perhaps others as well, the situation in Japan presents significant current and longer-term value-chain challenges as events continue to unfold.  Initial supplier assessments are still a work-in-progress, and further patience will be required, given the magnitude of this tragedy.  There are media and industry analyst reports already noting the potential implications on high-tech value-chains.

A Reuters news story notes that the prospects of prolonged supply disruptions, particularly in NAND flash memory, DRAM memory, Microcontrollers, LCD displays and other electronic components such as capacitors are already flaming spot market prices. Texas Instruments has warned that its two Japan based chip plants would be down until July, and is in the process of re-directing 60 percent of output to other sites.

Potential shortages of needed parts are a strong possibility. While value-chains generally have a few weeks of safety stock supplies, business continuity plans will need to concern themselves with different forms of scenarios, ranging from alternative suppliers, shifting production, or spot market buys. Already there is industry speculation that major supply influencers such as Apple, HP or others will fare better in this pending crisis because of inherent market buying influence among impacted suppliers.  The implication is that other buyers may be more impacted, perhaps having to tap secondary sources to make-up any future temporary supply shortages.

We at Supply Chain Matters would suggest that it is very important for planning and S&OP teams to focus on various aspects of scenario and contingency planning. Consider the following as three potential near-term assumptions:

The current situation in the impacted areas in northern Japan is described as a “logistical nightmare”.  Roads are blocked, port and air cargo facilities are severely damaged. As we observed in the earthquake that occurred in Haiti, the priority for transportation will initially focus on getting food, water, fuel to those impacted.  Concerning the evolving situation, one could further speculate that evacuation of large numbers of people may also become a transportation priority.  Thus it may be wise to assume that it may take additional time for transportation assets in northern and other parts of Japan to resume to normal status, and further transport delays should be factored into inventory and supply planning.

Due to the current loss of power generation capacity brought upon by these compounding catastrophes, most of Japan is operating under rolling blackout conditions.  The open question is how long this condition will continue, since many of the high tech production facilities need reliable and uniform power to sustain production levels. Thus, assumptions regarding normal shipping and fulfillment schedules of component or finished parts will remain uncertain, at least in the coming days. Plan accordingly, and conduct scenarios with conservative supplier output assumptions.

Moving to secondary markets as a means to buffer parts shortfalls may become a reality, especially if targeted secondary suppliers in China, Korea, and the U.S. are quickly sold-out of their available inventory or near-term capacity. If this becomes the scenario for your organization, teams should be very diligent to be on the lookout for counterfeit parts.  When markets are imbalanced, counterfeiting activities increase, especially in suspect countries.  Redouble your efforts for detecting non-conforming parts.

Community members, especially those residing in Japan and other high-tech manufacturing sectors may well have other recommendations or considerations and are welcomed to share them.

Many industry supply chains will again be challenged in the coming days and weeks.  Conducting assessments, planning for various scenarios and incorporating contingency plans for risk mitigation are important priorities at this point.

In the meantime, our hearts and sympathies continue to be focused on all the people and community members in Japan.

Bob Ferrari

ZD Net blogger Michael Krigsman penned a commentary on his IT Project Failures last week which our Supply Chain Matters readers should take the time to review.

Michael notes how the business failure of the UK’s largest auto glass replacement provider, Auto Windscreens, was publically attributed to a failure of an enterprise software implementation.  In his posting, Michael did a great job in social-media based background research, not only tracing certain facts, but also pointing out to his readers that sometimes, faulty IT projects mask other, more serious business issues in management and business process discipline.

This particular industry case study has some important supply chain business process overtones.  First, Auto Wndscreens can be termed to be a mid-market distributor and service company, where just-in-time inventory availability is a critical measure of business success. Too much inventory leads to cash flow problems while not having the correct inventory can lead to a lost sale. This can be a significant consideration for small and mid-sized companies where cash flow is a continuous challenge. In this particular situation, the IT system involved was related to overall inventory management. The primary question posed in IT Project Failures commentary is whether the IT application failure precipitate the business collapse or mask more serious, underlying management issues?

Somewhat coincidental, the Gartner First Thing Monday newsletter published today is a commentary, The Puzzling Myth of IT Failures, (subscriber sign-up required) authored by long-time AMR Research analyst Jim Shepherd. Shepherd’s argument is that a vast majority of ERP projects do not fail by any conventional definition, but because of unrealistic expectations of the buyers, as well as overhyped claims of the ERP technology providers.  The analogy drawn is that ERP is the equivalent for installing updated infrastructure, much like when we tend to renovate our homes or office facilities. “ERP should be viewed as the stable infrastructure that allows an organization to create and deploy the kind of innovation and differentiation that drives real business improvements,” Shepherd states.  His lament is that teams should “grow-up”, that nothing lives up to the salesperson’s claims.

My own view is that there is substance to the observation that IT projects can sometimes be the panacea for a flawed business process or non-responsive management processes.  Having worked for major ERP providers, I know that ERP salespeople are aggressive, and will do all that it takes to win the sale, including over-hyping the benefits. I quickly add however, that a solid management team fully understands the dance, and more importantly, fully understands their business processes, information needs and corporate culture.  Companies do not elect to buy infrastructure, the elect to buy innovation and competitiveness within their industry.  When considering the vast majority of mission-critical, supply chain related fulfillment processes, the stakes are even higher.

The takeaways from each of these commentaries is that supply chain teams need to constantly do their homework in continuously increasing their skills and awareness of information technology tools. More importantly, supply professionals need to demonstrate effective two-way communications and change management disciplines with all levels of management.

What is your view?   Do IT project failures mask underlying management and process issues?

Bob Ferrari

In the past two weeks we have penned two Supply Chain Matters commentaries that reflect on the challenge for re-invigorating manufacturing and supply chain jobs growth in the U.S.  These included a commentary on GE’s CEO Jeffrey Immelt being appointed to the new Presidential Commission on Jobs and Competitiveness, and a commentary reflecting on the recent state visit by China’s President Hu Jintao to Washington. In both commentaries, we pointed to the depth of the challenge, either in business or political terms, in fostering a concerted strategy for U.S. innovation and job growth in the midst of a growing global economy. We also noted that the political leaders, and multi-national corporations need to quickly move beyond the rhetoric and posturing to address some serious realities of why so many jobs have been lost and from where future job growth will come.  That would include some sacrifices for each stakeholder, a candid reality check relative to existing trade and IP protection policies.

There was a rather provocative article in the Wall Street Journal, U.S. Firms, China Are Locked In Major War Over Technology, penned by John Bussey. (paid subscription may be required)    The article’s conclusion is that a titanic battle is under way between U.S. business and China, one which is destined to dominate relations between both countries for years to come.  It notes that China’s legislative leaders have been rolling out an array of interlocking regulations targeted to make China a technology powerhouse by 2020.   The article makes reference to a U.S. Chamber of Commerce report: China’s Drive for ‘Indigenous Innovation, A Web of Industrial Policies, which has become rather important reading for many multi-national companies with hopes of continuing to tap China’s lucrative markets. The WSJ concludes its article with following statements: “ In the innovation race, China is thinking long term—and big. Its goal isn’t just to tinker with foreign technology.  It plans to supplant it.  As any competitor might.”

We would recommend that our readers, before internalizing the WSJ statements at face value, actually read the U.S. Chamber report, as we have.  The executive summary of the report makes a very important observation. It notes that many multi-national corporations are becoming ever increasingly dependent on their China revenues as contributions to profitability. They actually expect their own technology coming back in the hands of a Chinese competitor, and believe they have the strategic and management savvy to out maneuver these threats.  However, the Chamber report also points out that many single industry or single product companies could be destroyed in the process, and the end result could be a chilling effect on innovation from a global perspective.

The term context is a very powerful term, and has special meaning when it comes to the challenge of creating more U.S. manufacturing and associated supply chain jobs.  The context of jobs is a direct correlation to innovation and customer demand.  Create or foster a market, and innovative companies will come.

The objective of business is to make profits, pure and simple.  Robert Reich’s astute commentaries point this out.  The objective of policy makers and of governments is to foster and promote policies, incentives and frameworks that fuel national economic growth. That is what China is doing, and doing very well at that.  Businesses are currently creating and continuing to grow supply chains and job growth in emerging markets because of the compelling economics.

Some pundits argue that job growth stems from a positive sense of business confidence. The reality, at least from the lens of supply chain, is that job growth stems from economic incentives that reflect a market for products, the cost of materials and labor, and the overall cost of getting products shipped to markets and customers.

Creating U.S. manufacturing jobs and broadening the domestic supply base equates to legislative and business leaders putting their own economic interests aside and reflecting on the lack of an articulated strategic framework that will address America’s plan to win.

Reflect on those final lines of the Journal article. Thinking needs to be long term and what it takes to win in innovation and jobs.

Bob Ferrari

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

Last week, Supply Chain Matters commented on what is turning out to be one of the most troublesome supply chain challenges in 2011, namely the challenge of exploding inbound material costs. This challenge often points to the need for companies to either raise product prices, which could jeopardize momentum of product demand, or undertake further cost reductions to offset material costs increases.  Recent polls of supply chain professionals indicate that volatility of demand and rapidly changing business demand patterns are also a dominant challenge.  If reports of Q4 earnings are an indicator, both challenges are occurring simultaneously in multiple industry sectors, and the proper balancing of both will be the differentiator for those companies that succeed in this ‘new normal’ of business in 2011.

The challenge of rising input costs was specifically noted in both B2C and B2B industry sectors.  Procter and Gamble indicated that higher inbound costs will lower its annual earnings by about $1 billion, noting that commodity prices were 20 percent higher than a year ago.  As a result, P&G initiated a new round of internal cost cutting including the elimination of some manufacturing lines, and has not ruled out selective price increases for certain products.  Kimberly Clark, under pressure in rising commodity costs and also competition from private brands,  plans to sell, close or streamline six manufacturing facilities. Yet, the company admitted it may have cut production too deeply in Q4, giving up an estimated $20 million in profits. Industrials maker 3M is actually building inventories in expectation of continued booming export demand and a robust Q1.

The CFO of Ford Motor Company noted that the company expected to see additional pressure on commodity costs in 2011.  Ford reported that its average profit margin on each of its cars and trucks produced in North America was $1730, while profit margin per vehicle in Asia was a mere $97 on roughly 40% of North America’s output volume.  The implication is that while Asia demand is booming, in a market of high price sensitivity, the challenge to increase margins in the midst of such challenges will be a prime concern.  Meanwhile Volkswagen warned that a shortage of certain electronic components within its engines will force the company to halt production at two German factories this week.  German automakers have experienced extraordinary order rates primarily driven by demand in emerging markets.  The CEO of Daimler noted that suppliers are under quite a strain to keep up with demand, and everyone is struggling.  In December, the Vice President of Procurement for BMW North America noted that some of BMW’s suppliers cut too deeply during the recession, and now cannot keep pace with current demand.  Corning who had slashed inventories during the recession, struggled in 2010 to keep-up with auto maker demands for emission control filters, having to ship parts by air to China factories.

Caterpillar experienced a blowout Q4 due in part to the fact that exploding commodity costs have fueled mining companies to invest in additional equipment, while the increased boom in building and construction in emerging markets fuels the need for additional equipment.  While acknowledging that higher prices for metals and other materials were evident, the company did not see them as a significant challenge in 2011, primarily because of the increased efficiency of its internal manufacturing plants and external suppliers.  Last year, Caterpillar’s internal plants boosted shipments at the fastest rate in more than three decades. However the company has been shifting the sourcing of complex parts away from more costly regions, such as Japan, into China.

While Apple has done an extraordinary job in being able to respond to and sustain explosive shipping volumes for iPhones and iPads, other consumer electronics providers continue to struggle with the combined challenges of select component shortages brought about by explosive demand, and now, the threat of increased material and component costs impacting margins.

These combined challenges have not gone unnoticed, and the financial media and Wall Street have taken notice to both challenges, but in our view, haven’t connected the dots as yet.  Rising raw material and component costs prompt fears for maintaining rather healthy margins and healthy balance sheets.  Wall Street enjoys the benefits of exploding productivity as companies continue to get more done with less.  On the other hand, the visibility to the constraints of today’s extraordinarily lean supply chains continued to be noted. Unplanned or exception events, can cause either a lost opportunity on securing new business, or pay a penalty in increased costs to satisfy demands.

The real victims in 2011 may well be smaller suppliers who are caught in the vise of larger customers demanding additional cost and productivity concessions, or increased agility to respond to exploding growth opportunities in the emerging markets.  These same suppliers are squeezed by challenges to access additional capital financing and to invest in the business process and advanced technology tools that can provide broader supply chain visibility and responsiveness.

The two significant supply chain management challenges in 2011 of offsetting exploding material costs, while insuring the ability to be agile and responsive to more explosive demand coming from certain geographic regions, will no doubt cause some firms additional setbacks.  Cutting more costs internally while demanding a more agile and faster responding supply chain are mutually exclusive and conflicting goals.  This does not bode well for either North American based supply chains or smaller suppliers caught in the current squeeze.

Tough decisions are in store for the remainder of 2011.  Organizations that most need to invest in value-chain agility and responsiveness may find themselves prohibited from doing so by cost pressures.  The need for closer communication and coordinated strategy among procurement and broader supply chain management teams will be a fundamental challenge in 2011.

How is your organization addressing these two challenges?

Bob Ferrari

© Copyright 2011 The Ferrari Consulting and Research Group LLC