Coming back to the following article,  there are some key points that I don’t agree with this article. But still I wanted to share this good write-up with you. It is from McKinsey Quarterly as you get used to it. Keep reading and sharing more :)

To sustain wealth creation, developed nations must find ways to boost productivity; product and process innovation will be key.

Emerging markets are riding a virtuous growth cycle, propelled by larger and younger working populations. In the wealthy nations of the developed world, by contrast, low birthrates and graying workforces will make it enormously difficult to maintain what economist Adam Smith called “the natural progress of opulence.”

These countries’ best hope for keeping the wealth creation engine stoked is improved productivity—producing more with fewer workers. Paradoxically, doing that well across an economy is also the only way to generate lasting employment gains. In the United States, for example, every point of productivity-led GDP growth has historically generated an incremental 750,000 follow-on jobs.

The great tension here arises at the level of politics. Over time, the world’s rebalancing demands greater consumption and lower savings among the large developing countries, even as developed ones, the United States foremost among them, save, invest, and export more. Fostering policies that raise productivity, and avoiding or altering polices that impede it, will help ensure a smooth transition. Getting this wrong—failing to generate at least modest and broad-based continued income and employment gains in developed countries—raises the odds of a political backlash that will hurt the citizens of wealthy nations and of those moving up the wealth curve alike.

We call the productivity challenge an imperative because the need is so compelling. But to eke out even modest GDP increases, OECD nations must achieve nothing short of Herculean gains in productivity. In the 1970s, the United States could rely on a growing labor force to generate roughly 80 cents of every $1 gain in GDP. During the coming decade, assuming no dramatic increase in hours worked, that ratio will roughly invert: labor force gains will contribute less than 30 cents to each additional dollar of economic growth. To maintain a GDP growth rate of 2 to 3 percent a year, productivity gains will have to make up the other 70 percent.

The challenge is even greater in Western Europe, where no growth in the workforce is expected. Here, in other words, 100 percent of GDP growth must come from productivity gains. And in Japan, the hurdle is higher still: because of a shrinking labor force, each worker will have to increase output by 160 yen to generate an additional 100 yen of growth.

To complicate things further, we are seeing a growing talent mismatch. The Western economies have built a workforce optimized for mid-20th-century national industries, yet the jobs now being created are for 21st-century global ones—we need knowledge workers, not factory workers. And there just aren’t enough of the former. Anywhere. Companies across the globe consistently cite talent as their top constraint to growth.

In the United States, for example, 85 percent of the new jobs created in the past decade required complex knowledge skills: analyzing information, problem solving, rendering judgment, and thinking creatively. And with good reason: by a number of estimates, intellectual property, brand value, process know-how, and other manifestations of brain power generated more than 70 percent of all US market value created over the past three decades.

Western economies can do many things to change the equation. Deregulation has often raised productivity in the past and can continue to do so. Changing the boundaries around the work–life balance—encouraging people to stay in the workforce longer or increasing the numbers of hours worked each week—could add a few points of absolute growth too. Improving education is a no-brainer.

Businesses can and should advocate these and other policy changes that could have a long-term impact, such as easing immigration restrictions. But in the end, the real game changers will be breakthrough innovations created by companies: history shows that a majority of productivity growth—more than two-thirds—comes from product and process innovation.

The productivity economy will reward ‘do it smarter’ companies that build a better business model

Besides providing powerful incentives for companies to deliver their traditional products and services more efficiently, the new environment may make selling productivity—finding marketable ways to “do it smarter”—the most transformative business model of the next decade.

This push is bound to have a “no pain, no gain” dynamic. Innovation, by definition, is a disruptive process. Think about the book-publishing industry. Only two years after the release of the Kindle, Amazon.com now sells half of its books electronically for the titles it offers customers in both bound and digital formats. The Kindle is short-circuiting the entire physical supply chain, and Apple’s new iPad is sure to accelerate that process.

Something similar is shaking up the world of computing. It’s considered the poster child of productivity—and for good reason. But probe further and it’s not hard to find evidence of waste. Companies spend, on average, 5 to 10 percent of their total revenues on IT. Yet reliable estimates suggest that upward of 70 percent of server capacity goes unused—even more at midsize and small companies, since they can’t achieve scale. Advances in “cloud computing” (sharing computer resources remotely rather than storing software or data on a local server or PC) have vast potential to raise utilization rates and simultaneously help companies to increase their computing capacity, while slashing IT costs by 20 percent or more. Little wonder tech giants as divergent as Google, IBM, and India’s Wipro Technologies are investing furiously to win the battle for the cloud.

Health care is another arena where do-it-smarter businesses will thrive. On average, health care spending in OECD countries has outpaced GDP growth by nearly two percentage points a year, and even more in the United States. Still, in most countries, increased health care spending actually creates a productivity drag on the economy overall, because the sector has lagged behind in adopting productivity measures. (To take just one indicator, health care organizations spend, on average, only 20 percent of what financial-services companies do on IT.)

But multiple innovations promise to improve outcomes significantly while reducing costs. For example, some 75 percent of health care spending in many OECD countries pays for chronic-disease management. France Telecom’s Orange is partnering with health care providers to offer services that constantly monitor diabetics and cardiac patients remotely. Low-cost mobile-monitoring devices ensure better compliance with treatments and reduce the number of high-cost, life-threatening events. Germany’s T-Systems has linked up with the health insurance provider Barmer to provide mobile systems that track and monitor exercise patterns, so patients—and doctors—can monitor progress and reduce risk more effectively.

A raft of industries and services are poised to benefit from productivity improvements. Huge gains could be extracted just by applying the insights learned over the past 15 years in the most productive sectors, such as telecoms and financial services, to less productive ones, such as health care, education, and government.

The best companies will learn how to maximize returns from people who think for a living

Just as the early 20th century saw the development of management theory for improving the productivity of factory workers, the 21st century will see the evolution of myriad better techniques for managing people who think for a living.

The potential stakes are enormous. Companies that have higher concentrations of knowledge workers (above 35 percent of the workforce) create, on average, returns per employee three times higher than those of companies with fewer knowledge workers (20 percent or less of the workforce). Yet companies with more knowledge workers also show more variable returns: differences between competitors in the same industry with fewer knowledge workers.

Turning this gap into a key source of competitive advantage requires much more than reverting to the well-worn “attract, deploy, develop, and retain” talent wheel found in HR manuals everywhere. Yes, the road to success still starts with capturing more of the right talent. But to increase productivity dramatically, companies will then need to think aggressively about how to increase the pace of talent development, to deploy the best talent against the highest-value opportunities, and to improve the way such workers engage with their peers. Our analysis suggests that at many large multinationals, nearly half of all interactions between knowledge workers do not create the intended value—because people have to hunt for information, do not know where to find what they need, or get caught in the maws of inefficient bureaucracies.

Companies will need to reinvent work—what, where, when, how, who, and why

Companies such as Best Buy have increasingly recognized that work is not a place where you go but rather something you do. To get the most out of its corporate workforce, the company has adopted a “results-only work environment,” which gives workers big targets but lets them meet these goals any way they see fit. This approach has improved worker productivity by as much as 35 percent in departments that have deployed it.

Transforming process flows will also unlock new kinds of productivity. Companies such as Cisco and IBM are aggressively developing approaches—from social networks to videoconferencing—that tear down silos and reinvent how far-flung employees collaborate and exchange knowledge. What’s more, these approaches work: UK grocer Tesco, for example, saved up to 45 percent of the travel budgets of key departments by substituting videoconferencing for long-haul travel. The Hong Kong apparel supplier Li & Fung now uses videoconferencing to connect clothing designers with fabric and notions suppliers around the world, dramatically speeding the design process. That’s no mean feat for a company known for its ability to turn around “fast fashion” in weeks, not months.

Although the demand for knowledge workers is sure to grow, the supply will not. Governments aren’t moving fast enough to educate workers with the skills needed to meet the productivity imperative, and businesses can’t afford to wait. That means companies must get much more innovative at sourcing talent, whether by tapping global labor markets, building part-time workforces, or making better use of older workers. Firms also will need to rethink work progressions in a world with much flatter age pyramids—young workers no longer outnumber old ones, which has been the premise for role advancement in most companies for decades. BMW has experimented with auto production lines geared for older workers. Retailers such as CVS and Home Depot are pioneering “snowbird” programs, which let retirees go to warm climates in the winter and to work in stores there, returning to their original stores in the summer.

Information streams are the infinite by-product of a knowledge economy—the best companies will turn this free good into gold

A final productivity driver will be something businesses are creating in digital bucket loads: information. Although the volume of data created is expected to increase fivefold over the next five years, best-guess estimates suggest that less than 10 percent of the information created is meaningfully organized or deployed. That number will only shrink as the rate of information production goes up.

Enter business analytics software, which increasingly allows companies to make sense of data “noise”—helping them “de-average” data to eliminate waste, more closely target customers, and identify new opportunities. In general, companies that are aggressive adopters of business analytics are proving twice as good at predicting outcomes and three times as good at predicting risk as those that aren’t.

The Swiss telecom operator Cablecom, for example, reduced customer churn nearly tenfold through the better use of customer information. Both Amazon and Google have developed predictive models that use enormous amounts of data to figure out what products customers might like, based on past searches and clicks. IBM, Microsoft, Oracle, and SAP have spent a combined $15 billion in the past several years snapping up companies that develop software for advanced data analytics. Expect a host of new offerings that help turn information into gold.

Soon, Web 3.0 technologies—which create “smart” data, or data that can be combined intelligently with other data, mostly without direct human involvement—should extend the power of information even further. We fully expect Web 3.0 to begin disrupting information networks within the decade.

In short, companies that deploy technology more successfully to get more from the higher-quality knowledge employees they attract will gain large business model advantages—and drive substantial growth and productivity gains.

(Source: McKinsey Quarterly)

One of the most important questions facing leaders is when they should trust their gut instincts—an issue explored in a dialogue between Nobel laureate Daniel Kahneman and psychologist Gary Klein titled “Strategic decisions: When can you trust your gut?” published by McKinsey Quarterly in March 2010. Our work on flawed decisions suggests that leaders cannot prevent gut instinct from influencing their judgments. What they can do is identify situations where it is likely to be biased and then strengthen the decision process to reduce the resulting risk.

Our gut intuition accesses our accumulated experiences in a synthesized way, so that we can form judgments and take action without any logical, conscious consideration. Think about how we react when we inadvertently drive across the center line in a road or see a car start to pull out of a side turn unexpectedly. Our bodies are jolted alert, and we turn the steering wheel well before we have had time to think about what the appropriate reaction should be.

The brain appears to work in a similar way when we make more leisurely decisions. In fact, the latest findings in decision neuroscience suggest that our judgments are initiated by the unconscious weighing of emotional tags associated with our memories rather than by the conscious weighing of rational pros and cons: we start to feel something—often even before we are conscious of havingthought anything. As a highly cerebral academic colleague recently commented, “I can’t see a logical flaw in what you are saying, but it gives me a queasy feeling in my stomach.”

Given the powerful influence of positive and negative emotions on our unconscious, it is tempting to argue that leaders should never trust their gut: they should make decisions based solely on objective, logical analysis. But this advice overlooks the fact that we can’t get away from the influence of our gut instincts. They influence the way we frame a situation. They influence the options we choose to analyze. They cause us to consult some people and pay less attention to others. They encourage us to collect more data in one area but not in another. They influence the amount of time and effort we put into decisions. In other words, they infiltrate our decision making even when we are trying to be analytical and rational.

This means that to protect decisions against bias, we first need to know when we can trust our gut feelings, confident that they are drawing on appropriate experiences and emotions. There are four tests.

1. The familiarity test: Have we frequently experienced identical or similar situations?

Familiarity is important because our subconscious works on pattern recognition. If we have plenty of appropriate memories to scan, our judgment is likely to be sound; chess masters can make good chess moves in as few as six seconds. “Appropriate” is the key word here because many disastrous decisions have been based on experiences that turned out to be misleading—for instance, the decision General Matthew Broderick, an official of the US Department of Homeland Security, made on August 29, 2005, to delay initiating the Federal response following Hurricane Katrina.

The way to judge appropriate familiarity is by examining the main uncertainties in a situation—do we have sufficient experience to make sound judgments about them? The main uncertainties facing Broderick were about whether the levees had been breached and how much danger people faced in New Orleans. Unfortunately, his previous experience with hurricanes was in cities above sea level. His learned response, of waiting for “ground truth,” proved disastrous.

Gary Klein’s premortem technique, a way of identifying why a project could fail, helps surface these uncertainties. But we can also just develop a list of uncertainties and assess whether we have sufficient experience to judge them well.

2. The feedback test: Did we get reliable feedback in past situations?

Previous experience is useful to us only if we learned the right lessons. At the time we make a decision, our brains tag it with a positive emotion—recording it as a good judgment. Hence, without reliable feedback, our emotional tags can tell us that our past judgments were good, even though an objective assessment would record them as bad. For example, if we change jobs before the impact of a judgment is clear or if we have people filtering the information we receive and protecting us from bad news, we may not get the feedback we need. It is for this reason that “yes men” around leaders are so pernicious: they often eliminate the feedback process so important to the development of appropriate emotional tags.

3. The measured-emotions test: Are the emotions we have experienced in similar or related situations measured?

All memories come with emotional tags, but some are more highly charged than others. If a situation brings to mind highly charged emotions, these can unbalance our judgment. Knowing from personal experience that dogs can bite is different from having a traumatic childhood experience with dogs. The first will help you interact with dogs. The second can make you afraid of even the friendliest dog.

A board chairman, for example, had personally lost a significant amount of money with a previous company when doing business in Russia. This traumatic experience made him wary of a proposal for a major Russian expansion in his new company. But he also realized that the experience could be biasing his judgment. He felt obliged to share his concerns but then asked the rest of the board to make the final decision.

4. The independence test: Are we likely to be influenced by any inappropriate personal interests or attachments?

If we are trying to decide between two office locations for an organization, one of which is much more personally convenient, we should be cautious. Our subconscious will have more positive emotional tags for the more convenient location. It is for this reason that it is standard practice to ask board members with personal interests in a particular decision to leave the meeting or to refrain from voting. Also for this reason, we enjoy the quip “turkeys will not vote for Christmas.”

A similar logic applies to personal attachments. When auditors, for example, were asked to demonstrate to a Harvard professor that their professional training enabled them to be objective in arriving at an audit opinion, regardless of the nature of the relationship they had with a company, they demonstrated the opposite.

If a situation fails even one of these four tests, we need to strengthen the decision process to reduce the risk of a bad outcome. There are usually three ways of doing this—stronger governance, additional experience and data, or more dialogue and challenge. Often, strong governance, in the form of a boss who can overrule a judgment, is the best safeguard. But a strong governance process can be hard to set up and expensive to maintain (think of the US Senate or a typical corporate board). So it is normally cheaper to look for safeguards based on experience and data or on dialogue and challenge.

In the 1990s, for example, Jack Welch knew he would face some tough decisions about how to exploit the Internet, so he chose experience as a solution to the biases he might have. He hired a personal Internet mentor who was more than 25 years his junior and encouraged his top managers to do the same. Warren Buffett recommends extra challenge as a solution to biases that arise during acquisitions. Whenever a company is paying part of the price with shares, he proposes using an “adviser against the deal,” who would be compensated well only if it did not go through.

There are no universal safeguards. Premortems help surface uncertainties, but they do not protect against self-interest. Additional data can challenge assumptions but will not help a decision maker who is influenced by a strong emotional experience. If we are to make better decisions, we need to be thoughtful both about why our gut instincts might let us down and what the best safeguard is in each situation. We should never ignore our gut. But we should know when to rely on it and when to safeguard against it.

(Source: McKinsey Quarterly)

Like a lot of people who follow business like they follow sports, I’m interested in questions like whether the materials handling industry is up or down, whether business is getting better, holding steady or falling behind. I’m also curious about what our readers – our advertisers’ customers – are thinking and doing.

Over the last couple of weeks, I’ve been talking to analysts about what they’re seeing in the supply chain technology markets they cover, RFID, voice and warehouse management (WMS) and transportation management (TMS) systems. I’ll be writing more about supply chain management software in the July issue when we present our annual look at the top 20 providers of supply chain management software. Here’s what I found.

RFID: When I talked to Drew Nathanson, director of research operations for VDC Research Group, he was downright excited about the results of a recent survey of RFID users. In a nutshell, he told me, Tier I companies say their planned spending on RFID in 2010 is up by 200% over their planned spending in 2009, with an average planned spend of about $3.5 million. Is it a fluke? Nathanson says no. Those same companies are planning to increase their spend on RFID by 96% in 2011 over 2010. The reason for this jump, Nathanson said, is that companies are finally confident that they are going to get real results from projects they have been piloting for the last three or four years. They’re ready to ramp up and roll out. “Companies that have been using 250,000 tags a year are about to use millions of tags a year,” Nathanson told me. As word about success among the early adopters spreads, Nathanson expects to see other companies implementing RFID to keep up. “Around 2012, you’ll see a rapid increase in new RFID users,” he said. “And by 2015, existing accounts will only represent about 30% of the market.” RFID is finally becoming commercialized.

TMS: The market for transportation management systems has clearly been impacted by the recession, said Adrian Gonzalez, a director at ARC Advisory Group. Now, ARC did not quantify the market in 2008, so the comparison is 2009 against 2007. “When you compare TMS to other applications we cover, it outperformed,” Gonzalez said. “But it could not escape the recession.” What’s more, Gonzalez expects the TMS market to return to growth in the second half of 2010 and show compound annual growth of 5.4% over the next five years. That’s a lot lower than the double digit growth rates TMS had been posting, but I know any number of companies that would kill for 5% compounded annual growth. Heck, at NA2010, I talked to a rack manufacturer who told me she would have killed for just a 20% decline! Why is TMS holding up? Gonzalez believes it’s because transportation is still a big spend for most companies, and TMS can help a company reduce its costs or hold the line while increasing growth. The bigger news: The market for TMS in a traditional licensed model is flat at best; the market for TMS in a Software as a Service model is growing by double digits. This is still an emerging story but companies replacing their TMS systems are taking a hard look at cloud computing.

WMS: The warehouse management system market is still a $1 billion market, said Steve Banker, service director, ARC Advisory Group, but it was hardest hit among these three core applications. Banker has not finalized his analysis of 2009, but he’s predicting a double digit decline in sales. Why the big drop? Personally, I think it’s a combination of factors. A WMS is typically a 10 to 15 year investment; just as end users are getting more mileage out of their lift trucks and conveyor systems in this recession, they’re probably thinking twice about upgrading or replacing a WMS system unless they have to. And, the retail market is in the tank. Retail DC projects accounted for a lot of the growth in all of the segments of the materials handling market for a few years there. Last, WMS is the most mature of the three technologies I’ve looked at recently; with a larger install base of WMS users than TMS and RFID user, there are fewer opportunities for new customers and a significant portion of the base upgraded their WMS before the recession to accommodate new channels of sales like e-commerce. Does a WMS deliver real results? Absolutely. But I think many users are going to try to make due for now.

Voice: I don’t know of any analyst that quantifies the market for voice recognition technology in the supply chain. In part, I believe that’s because voice is sold by so many different players. Vocollect and Voxware are the top dogs among players that just do voice; but voice hardware and systems are also offered by the mobile computing and automatic identification leaders like Motorola, Intermec and LXE; by supply chain software providers like Aldata; by systems integrators like Intelligrated, Dematic and Numina Group; and by other voice specialists like Lucas and Datria. It’s just harder to get a handle around the size of the market. That said, at least based on the DC’s I’m writing about at Modern, voice, along with pick-to-light, are the technologies to watch. I think Vocollect is on to something when they talk about the voice enabled DC as the wave of the future.

(Source: Modern Materials Handling)

The study, Lessons Learned from the Global Recession, found that most of the 350 manufacturing and service companies surveyed now believe there will be a significant upturn in demand from their customer base as well as a significant increase in company profitability over the next few years.

However, PRTM warned: “This widespread optimism may be premature. Our findings indicate that many companies lack the capabilities critical for meeting growing demand or for managing an increasingly complex and global supply chain. Driven by short-term exigencies, many companies did not strengthen critical capabilities during the recession. Only a small percentage truly improved supply chain flexibility and processes needed both to capture an increase in demand and to better manage high volatility.”

The five trends identified by the study are:

1: Supply chain volatility and uncertainty have permanently increased
Market transparency and greater price sensitivity have led to lower customer loyalty. Product commoditisation reduces true differentiation in the consumer and business-to- business environments.

2: Securing growth requires truly global customer and supplier networks
Future market growth depends on international customers and customised products. Increased supply chain globalisation and complexity need to be managed effectively.

3: Market dynamics demand regional, cost-optimised supply chain configurations
Customer requirements and competitors necessitate regionally tailored supply chains and product offerings. End-to-end supply chain cost optimisation will be critical.

4: Risk management involves the end-to-end supply chain
Risk and opportunity management should span the entire supply chain—from demand planning to expansion of manufacturing capacity—and should include the supply chains of key partners.

5: Existing supply chain organisation are not truly integrated and empowered
The supply chain organisation needs to be treated as a single integrated organisation. To be effective, significant improvements require support across all supply chain functions.

The survey found that many participants were driven by short-term exigencies and did not strengthen critical capabilities during the recession.

Gordon Colborn, director, PRTM’s Global Supply Chain Innovation practice, said: “Only a small percentage truly improved supply chain flexibility and the processes needed both to capture an increase in demand and to better manage volatility.

More than 85 per cent of companies expect the complexity of their supply chains to grow significantly by 2012, due to the challenges of expanding services to new global customers—their primary source of revenue growth. Specifically, more than three-quarters of respondents expect an increase in the number of international customer locations; more than two-thirds expect a higher number of product variations will be required to fulfil local customer expectations and to counter shrinking revenues.

Colborn said serving customers in an increasingly complex global environment extends the risk management challenge across the entire supply chain. “Dealing with cost pressures of their own, many companies have increased efforts in asset management and have shifted supply chain risks upstream to their suppliers.”

It came as no surprise that between 65 and 75 per cent of survey participants now listed end-to-end supply chain practices like advanced inventory management or improved delivery to customers at the top of their management agendas, he said.

The study sets out a five point agenda for chief operating officers over the next two years:

1. Improve customer access and accuracy of supply chain planning

2. Increase upstream and downstream supply chain flexibility

3. Focus on total supply chain cost engineering

4. Implement end-to-end supply chain risk management

5. Integrate and empower supply chain organisation

Ultimately, the report said: “The main challenge for many companies is not to redefine their organisation models, but to transition and manage the organisational change. To make a truly empowered supply chain organisation work, companies first must determine what their target models should look like and persuade senior management to make the required changes. To make an integrated supply chain work, it is essential to train and acquire top talent with end-to-end supply chain knowledge.”

(Source: SupplyChainStandard.com)

As high-tech supply chains increase in complexity, they become harder to manage. Collaboration between OEMs, suppliers, and retailers is the answer.

The supply chains of high-tech companies are globe-spanning marvels. Over the past 20 years, looking for ready sources of components, lower-priced labor, and talented designers and engineers, these companies have ranged throughout the world. In a highly competitive and fast-moving marketplace, they have sought to maximize their strengths and flexibility as products change rapidly and prices continue to fall.

But the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks, and eliminating waste from duplicative efforts is an ongoing challenge. As product life cycles shrink, we see inventory buildups in the supply chains of some companies, while others cope with rising distribution costs, on-time delivery problems, or delays in getting new products to market.

In fact, high-tech companies have let complexity undermine collaboration in their supply chains: they aren’t working as closely as they could with their supply chain partners—sharing information or streamlining processes—to smooth out volatility and eliminate waste. This failure is surprising. The high-tech industry creates products that promote collaboration, openness, and efficiency. We all know stories about companies in other industries such as retail and consumer-packaged goods that have improved their operations significantly by using technology to collaborate more closely with suppliers—yet high-tech companies have been slow to follow. For a host of reasons rooted in the way they are organized and compete, their executives have been less than enthusiastic about pursuing the benefits of collaboration with their supply chain partners.

This lack of enthusiasm is fast becoming more costly for OEMs. Even as product life cycles shrink, consumers are demanding products with new features (such as mobility, greater storage, and more memory) that make products ever more complex. As this complexity increases, it will become harder to manage supply networks, opportunities will be missed, and supply chain costs will rise. The path to improvement, we suggest, lies in better collaboration with suppliers. To achieve it, companies should address their internal challenges and then deal with key stress points that strain supplier relations.

Roadblocks to Better Collaboration

Closer collaboration in the high-tech industry is an elusive goal. Difficulties arise from the specific nature of high-tech competition and markets, from cultural barriers, and from organizational flaws. In our work with clients, we find that problems in four areas often prevent successful supply chain collaboration. Managers must understand them more fully to diminish their impact.

Partner Complexity and Churn

High-tech OEMs need hundreds of components from a broad range of global suppliers, which themselves lie at the center of even farther-flung supply chains comprising second-tier companies that make subcomponents. Products generally have short life spans. One mobile-phone maker, for instance, typically uses more than 20 components from tier-one suppliers alone for products with a life cycle of only nine months. There’s a very small window to make crucial decisions about a product’s design, price, quality, and features, as well as to choose the right array of suppliers. Since everything must happen quickly, building deeper collaboration and partner loyalty become secondary considerations. What’s more, supply chain partners often change as product designs and specifications evolve, so collaborative efforts often fail to survive from one model to the next.

Silos and forecasts

OEMs in many industries organize themselves around functional units. But in high technology (and other assembly industries), units such as manufacturing, sales and marketing, and product development often send conflicting forecasts of demand and production to their partners. Not surprising, supply chain responses are often based on guesswork, and forward planning is difficult. In one variation of this problem, OEM sales reps provide “lowball” estimates of demand rather than a truer picture, so they can more easily beat internal goals. Alternatively, when components are in short supply, forecasts by manufacturing functions often are overly optimistic in a play to maximize the allocation of scarce products from suppliers.

Poor Quality of Data

OEM forecasts often aren’t granular enough to be useful to supply chain partners. Typically, OEMs set broad targets across a number of product lines rather than provide details on expected unit sales for specific products. That combined with rapid product obsolescence makes getting a fix on true demand difficult. Furthermore, the IT systems that capture data across supply networks often are incompatible, thereby walling off vital information and making information-based collaboration a struggle. The mobile-phone industry provides a notable example of poor data: OEM forecasts of consumer demand, provided only four months out from delivery dates, often misstate actual demand by 400 percent.

The Mistrust Spiral

Given the intense and unpredictable nature of competition, high-tech executives often believe that they must guard information on their business plans and processes closely. This perceived need for confidentiality—OEMs reason that since their suppliers provide parts to competing OEMs, shared data isn’t secure—directly affects suppliers. The mistrust extends to ODMs (original design manufacturers) as well, which are also considered risky, since they work with the OEMs’ competitors, and even to retailers that distribute those competitors’ products. If OEMs do provide data, it’s often inaccurate. This lack of transparency makes the OEMs’ projections less than believable to suppliers, which then compensate by scaling production downward. That causes additional problems if demand is unusually strong.

Building Bridges Across the Supply Chain

Solving these problems is a two-step undertaking in which companies must first change their internal processes and then reach outside the organization to partners. A single approach usually won’t resolve all supply chain impediments: if an OEM has a number of channels for distributing its products and many upstream or downstream partners, it should try a range of collaboration strategies. In some cases “anticollaboration,” with little sharing of information, may actually be a legitimate approach. For example, Apple partners closely with its upstream suppliers to increase access to top product design talent. But the company is wary when it deals with retailers, because it aims for tight control over all aspects of product launches and fears that information may leak into the market in advance.

Breaking Down Silos

To improve the information flow to supply chain partners, an OEM’s leaders need to enforce transparency and collaboration within their own functional arenas. As OEMs set internal forecasts for demand and production, they need to have a clear understanding of how conflicting and confusing data affect partners. Incentives must dovetail with the needs of the supply chain rather than simply further internal goals. A leading manufacturer of flash memory tackled these issues by creating a sales and operations planning (S&OP) team that united stakeholders from marketing, supply chain operations, finance, and other areas. In mandatory monthly meetings, the group hammered out a single, company-wide demand forecast and made data available across the supply network, using simple IT systems. The team ended practices such as allowing executives to adjust production plans and forecasts to meet financial and bonus targets. Senior management raised this new effort’s profile by including discussions about S&OP on the agenda of monthly staff meetings. Greater collaboration and transparency improved the accuracy of the company’s demand forecasts by 40 to 60 percent, which in turn led to gains across the supply chain. Over six months, on-time deliveries rose 30 percent and inventory costs fell 20 percent.

Improving Trust

More information can be shared with supply chain partners, but that calls for new thinking. Often, operational details (such as point-of-sale information, customer forecasts, the location and size of inventories, and production capacity) are readily available, but lack of trust undermines an open exchange. In one instance, the supply chain partners of a global networking OEM perennially doubted the reliability of its forecasts—doubts that led to production and delivery delays. Seeking improvements, senior executives from the OEM and suppliers established a framework for collaboration. They determined which types of information could be shared and which (for instance, pricing) were too sensitive and thus had to be left outside the agreement. The OEM then created a central data repository using basic spreadsheet technology that gave both suppliers and the OEM’s functions the same access to data. After four months, the suppliers’ confidence in the OEM’s numbers improved, encouraging forward planning and ending bursts of last-minute production. Inventories dropped by 45 percent, and the cycle time from order to shipment by 70 percent.

Sharing Assets

OEMs and their partners often operate separate distribution networks with overlapping inventory hubs and logistics systems. Simplifying and consolidating these networks can reduce complexity, shave costs, and strengthen partner relationships. A consumer electronics OEM and a large retailer, for instance, each maintained separate product warehouses and distribution systems, in part because neither had sufficient visibility into the workings of its partner’s operations. Leaders at the two companies agreed to overhaul this setup by giving the OEM full responsibility for managing store inventories. The OEM, which in the past had relied on incomplete and less-than-current information from the retailer, gained direct access to store sales data. In effect, the OEM’s supply chain extended directly to the stores, and the retailer could eliminate its redundant distribution facilities. With better information, the supply chain could adjust more swiftly to variations in consumer demand. The availability of products at retail stores improved by 70 percent, and overall supply chain inventories declined by 20 percent. This type of asset sharing is easier to implement for OEMs and retailers but can also be pushed further up the chain to include OEM suppliers.

Joint Product Development and Risk Sharing

Short product cycles make a certain amount of supplier turnover inevitable, but high-tech companies can solidify their relationships by jointly developing products with their partners and by sharing risks. Such product collaboration needs to go beyond what is now standard: outsourcing of designs to ODMs. Instead, when an OEM’s engineers design key components, they should work with key suppliers from the outset. Suppliers and OEMs may even jointly own pieces of intellectual property. This type of arrangement gives OEMs access to skills they may not have in-house and allows them to leverage scarce engineering talent. It can also reduce time to market for new products. Suppliers benefit from assured demand and the chance to develop specialized expertise.

In the tech industry, new-product introductions are frequent and inherently risky. The risks are often borne disproportionately, with certain supply chain partners providing most or all of a heavy investment. Some partners with a lower risk tolerance may be hesitant to spend. Apple, for instance, faced such a situation when it worked on its iPod supply chain in 2005. Apple’s major worry was uncertainty over supplies, since industry demand at the time was strong. Few suppliers were willing to make sizable investments just to meet Apple’s needs. Apple reduced the risks by providing up-front payments to partners such as Micron, Samsung, and Hynix.

While fostering collaboration is in the interest of all supply chain participants, creating the internal and then external conditions for change will take time. Most OEMs will first need to launch discussions on the scope and speed of new collaborative efforts and think carefully about which companies will be their closest partners. At the outset, the most suitable ones are major suppliers, for the economics create natural bonds.

Early successes that set the stage for further progress help senior executives think about the longer term. The partners should understand that even if they begin with an appropriate model, they will need to change it, both to build on success and to counter the moves of competitors.

(Source: McKinsey Quarterly)

Growing companies not only have the ability to capitalise on their strengths and minimise their weaknesses, but also attract better people to work for them. Equally, they are well placed to forge productive partnerships with other enterprises.

However, many ambitious, medium-sized companies especially in distribution, manufacturing and retail, with designs on stepping up a weight are challenged on how best to go about it. Often the entrepreneurial spirit means smaller businesses are hard working, efficient and focused; but at the same time reluctant to take a long view on key issues. Growing pains can severely cramp their style.

Mergers and acquisitions

Companies can grow organically through increased sales or via moves into new markets. They can also expand by means of acquisitions. The arrival of international companies in the UK, for instance, has made mergers and acquisitions a hot topic; consolidation is taking place at a phenomenal rate. These incomers are looking to acquire market share by taking over existing players.

However, successful acquisitions depend on integrating processes and systems to deliver on operational improvements and improving inventory control and cash flow as quickly as possible. From a cost synergies perspective, organisations have several options. You can replace existing systems and start again, pick one system and dispense with the others or you can keep all the systems and stick some glue in between them. Do not overlook training in this area, which needs to be standardised if you are to see a return on investment.

It makes sense to outsource anything that is not a core competence of the business. A surprising number of activities can be outsourced including manufacturing, transport, warehouses and information technology (IT). But outsourcing does not have to be wholesale, it can be selective.

In IT, for example, a company could choose to own its own software and hardware and outsource the running of the systems. This may apply to all or just part of the IT service, according to whether the IT is core to the business or could benefit from being outsourced to professionals. It is an attractive option when acquisitions make it difficult to manage increased numbers of systems in-house.

Many companies are looking to gain increased competitiveness from outsourcing. They hope to save on staff and other costs, to enable better informed management decisions based on more accurate and timely data, to improve customer service through reduced stockouts or by providing faster turnaround time on orders and so on.

Whatever the motivation, it is critical that managers configure their supply chain for growth. And that is not just a matter of cementing a few low cost sourcing arrangements in the Far East: that is not a differentiator. You need to look beyond just finding the cheapest sources of supply to work with different sorts of suppliers. It may be that more expensive producers closer to home are better able to supply quality products in a timely fashion. Overseas sourcing is not just a matter of keeping your costs down but also of keeping your supply chain as flexible as possible. You want to work with suppliers that add value to the supply chain.

The increased number of trading partners both upstream and downstream increases complexity. When you have to deal with large numbers of companies issues of quality, inventory management and compliance come to the fore.

With bigger size go bigger responsibilities: risk management is a key issue for anyone looking for a seat at the top table. There have been several recent examples of supply problems that have called for prompt action.

Dealing with problems

Last year Cadbury Schweppes, for instance, had to recall some of its confectionary lines after a salmonella contamination scare. More recently, petrol laced with silicon had Tesco and other fuel retailers moving quickly to repair the damage it had apparently caused to customers’ cars and to the retailers’reputations.

As risks such as these multiply in a more international and interconnected business environment, boards of directors must draw up contingency plans for product recalls and other eventualities. Once overseas networks are part of the mix, recovering from health scares, product recalls and other supply chain disruptions becomes a lot more complicated.

Environmental issues are another area that growing businesses must put high up their agendas. Regulation and compliance regimes backed by targets and legal sanctions are set to affect a wide area of business activity across the world. The situation is similar to the tightening of health and safety regulations a few years ago which prompted companies to act at a senior level to avoid falling foul of the law. Now the main environmental issue is global warming and the need to mimise your carbon footprint by making premises energy efficient and working to eliminate waste, for example, by ensuring that trucks do not run half empty or that resources are not squandered by trying to make home deliveries when customers are not in.

There are public relations advantages in working with ethical suppliers. One of the Grand Prix racing teams is trying to build a green racing car by using suppliers who conform to environmental best practice. Mid size companies will have to reconfigure their supply schedules and distribution networks to take account of the new climate of regulation.

But the supply chain is not just about heading off trouble. It can be an important positive element in successfully entering new markets.

The lesson of globalisation is that no enterprise can afford to stand still, growth is a business imperative. With competition taking an increasingly international turn size does matter and small is no longer as beautiful as it once was.

(Source: SupplyChainStandard.com)

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