EcoNet

As anyone who has led a corporate wide Supply Chain initiative knows the technology is the easy part, the hard part is the change management.  Modern corporations reflect many of the same dysfunctions we see today in our gridlocked government.  The inability of organizations to turn Supply Chain Excellence rhetoric into real action is evident in many large companies.  That is not to say that departmental Key Performance Indicators (KPI’s) are not being met but that the overall effectiveness of a companies end-to-end supply chain still leaves much to be desired especially from a customer, shareholder and employee point of view.

Supply Chains that seek to  transform themselves and become world class require a great deal of internal alignment among individuals, organizations and metrics.  Unfortunately, companies are not wired well to achieve such cross functional success.  Metrics are often too narrowly focused and executive goals actually encourage departments not to collaborate when it impacts their reward system.

A Manufacturing VP gets rewarded when his or her unit costs go down.  Since capital equipment utilization plays such a large part in this KPI it is not surprising that long production runs are favored over smaller batch sizes that more closely reflect what the market wants.  The Procurement VP, on the other hand, gets rewarded on cost reductions which translates into buying more of the cheapest parts that can effect quality, manufacturing and customer satisfaction.  The Sales VP gets bonuses based on top line revenue growth and is cheered-on when making bullish forecasts. Add it all up and it is no wonder we have such schizophrenic supply chains that “bob and weave” between too much and not enough supply.

Enter the new Supply Chain guy or gal who was hired to bring it all together and take a fresh look at the problem.  After the polite introductions, the listening tours and the unanimous agreement that the Supply Chain is broken and must be fixed the real work begins.  The most critical success factor is now how does the organization perceive the Supply Chain organization and to whom does it report to?  Many companies hire someone to “study the problem and work with the stakeholders” to develop  a common plan.  Unless the Supply Chain Exec reports either to the CEO or COO this approach is bound to fail to meet expectations.  Like governments there are simply too many special interests who have mutually exclusive goals and performance metrics to overcome the passive resistance that is sure to follow.  The Manufacturing VP will agree we need to be more responsive to the customer and would be willing to run smaller batch sizes if the forecasts were more accurate.  The Sales VP would be willing to forecast less defensively if Manufacturing were more responsive..  If you have kids, you get it… it is always someone else..

Most companies simply lack the vision and courage to re-invent themselves to become a customer demand driven Supply Chain.  In fact, most Supply Chain organizations report into Operations and many into the Materials organization which implies it is viewed as an inbound raw material availability problem not an enterprise execution one at all.  This is a clear sign that senior management does not take Supply Chain seriously as a business model success factor.  It is no wonder that the last half of the 1990′s we saw inventory turns go backwards for many global companies as they stretched their supply lines further and further across the globe.  Even after implementing Vendor Managed Inventory and making suppliers carry much of the costs they still find themselves with a glut of finish goods scattered all over the world chasing customer demand.

Why does this happen?  Why do we spend millions of dollars on departmental software only to end up with more efficient departmental silos? The answer lies in the fundamental misalignment of our organizations to serve functional cost goals and the corrosive effect of executive bonuses to produce short term quarterly results.

Just like Washington, it becomes a game of chicken to see who will fail first while protecting ones turf, position, influence and payout while the customer is left wondering why it is so hard to get their needs met?

Which leads me to the “Green” part of this problem.  First we all, we know our Supply Chains are at risk of huge increases in energy prices when the recession ends.  We know that we are using oil much faster than we are finding  large new reserves and that China, India and Brazil are creating a huge new middle class that will compete for this diminishing supply.  We know that we are incredibly dependent on oil (>60%) from foreign sources that are either unstable states or really don’t like us at all.  (Some even use our money to fund terrorism!)  We know that we are pumping more and more CO2 into the atmosphere and it is a green house gas that warms the planet. We know that critical resources like copper and rare earth metals are becoming more and more scare.  We also know that our manufacturing and consumer waste causes pollution that have indirect costs on health that will no longer be just “externalized” for free.  The SEC ruled this week that all corporations must now spell out their environmental risks that could impact financial performance.  This includes costs due to cap and trade legislation, EPA rulings, or State or Local laws requiring pollution abatement.

If we know all this why do we hear so much about “doubt, skepticism and mistrust”?  Why are we not focused on solving these problems that will impact corporations and individuals alike?  Could it simply be that consequences of these problems are beyond the horizon of the short term impact on turf, position and payout?

What do you think?

I recently attended the Aberdeen’s CPO Summit meeting with some the top Chief Procurement Officers in the country and now understand why we are always fighting the last war.

The speaking agenda was packed with aging ex-CPO’s from companies whose glory has long since faded.  Companies like Sears and Chrysler whose products and services are so unexceptional that they have nearly lost all relevance in the marketplace today.  In the case of Chrysler they weren’t even “too big to fail” but just a place that employed a lot of hardworking people who we need to keep working to prevent wrecking the economy even further.

Listening to these ex-CPO war stories made me think that this position is so ill equipped to lead an organization to their next new market that they are actually placing their companies at great risk.  I had a chance to talk to some very bright CPO’s who clearly had an abundance of people skills, ability to spot excess costs and negotiate for win/win outcomes but they lacked imagination and insight into what is about to become the largest opportuntiy on their horizon: the emergence of a new energy driven economy as the next “Internet” scale business innovation.

I was curious why the dominant topic seemed to be how to reduce indirect purchasing costs.  You know, how to buy office supplies and janitorial services cheaper.  I was surprised that Sustainability was not even on their radar.  Even worse, many talked openly how they felt Global Warming was not a problem that they thought much about and they suspected it was just a fad.  It occurred to me that this profession is so preoccupied looking backwards analyzing “spent money” they can’t envision how to save money in the future.

I was surprised that not one of these high powered CPO’s thought that energy prices would rise again once the recession ends or that they will have to pay more for diminishing supplies of key raw materials like rare earth metals, lithium batteries,  precious metals such as platinum or silver.  Instead they were laser focused on travel spending, services and printing costs.

Message to the CEO: Don’t hand the binoculars to these guys.  They can only tell you where you have already been.

The trouble with “Green Business” is that it conjures up images of a movement without shedding much light on how focusing operations on sustainability leads to greater corporate profitability. While it is understandable that Marketing departments are excited about being viewed as “green“, from an operations point of view, it doesn’t really help the business understand how it should respond to green consumer preferences or pending environmental legislation (see  Joel Makower’s “Why Doesn’t Green = Better?“).

Consumers are becoming increasingly aware of the environmental impacts of the products and services they choose, in fact, studies have shown that about 10% of customers today are willing to pay a little more for a “green” product while 25% of them couldn’t care less.  From a Marketing perspective, however, the real prize is the remaining 65% of consumers who have yet to make up their minds. If building brand value is all about associating your products to newly identified needs and wants then it is especially true if the next generation of consumers choices differ from those of their parents.  Savvy companies like Walmart view their customers in generational terms and know they must remain relevant on the environment and sustainability.  They understand that young people today have a keen awareness of pollution, population growth, and resource depletion and the few lectures that parents do get from their children are all around recycling and energy use.  If the environment and sustainability become intergenerational issues than we better get used to “green” marketing.

What about “green” operations, or more precisely Eco-Operations; haven’t we been doing Lean manufacturing for years and why isn’t that enough?  It is true that Lean and Total Quality efforts of the past were very effective at eliminating waste but are not necessarily well calibrated to reduce future risks and costs in a resource constrained world. Lean manufacturing will tell you a great deal of how your current activities generate waste but won’t tell you much about how the cost of energy will impact you in the future and what you should be doing about it today.  Lean will not shed much light on the cost of carbon or how it could ripple throughout the economy due to regulatory legislation. “Green Business” is then really about the sustainability of your operations, your supply chain and ultimately your products impact on the planet.

It is clear now that environmental regulations and their costs will only increase, whether from straight carbon taxes or more stringent limitations on the use of hazardous materials. In addition, resource limitations, whether of fuels or other raw materials, will also likely lead to cost increases in the future. Though many of these costs will be borne directly by suppliers rather than brand owners, they will eventually be passed on throughout the network resulting in higher-priced products. As costs rise, companies’ imperatives to heed and improve their environmental records will move from idealism and marketing strategy to a more straightforward economic concerns. The quest for profits will ultimately drive sustainability.