Toyota's Supply Chain: the Bigger they are...

...the Harder they fall.  One wonders whether this truism applies to Toyota, the world's number 1 automaker.  For decades Toyota has been a paragon of manufacturing and supply chain excellence.  Quality as a cost saver rather than an added expense was an epic lesson for operations people around the world.  Lean production techniques and inventory minimization has transformed the ideal of a factory.  Keiretsu supplier relationships pioneered supply chain collaboration.  But,...

What's going on lately?  Losses last year were eye opening.  Leadership uncertainty shook confidence.  Now suddenly, quality and even safety are in question with the latest hair-raising story of gas pedals that stick illustrated in the macabre image of a Lexus sailing through the air over a California freeway at 120 mph before killing a cop in San Diego.  The recall affects a whopping 3.8 million vehicles which ought to test Toyota's famous service supply chain to the max.

In our annual Supply Chain Top 25, Toyota is a fixture.  This year however, they were only ranked 10th, down from 5th two years ago and 7th last year.  They have been carried by opinions with both Peer and AMR voters giving them more credit than their financials (ROA 5.1%, Inventory Turns 11.2, Growth 11.7%) indicate they deserve.  The question I have looking ahead to 2010's Top 25 is whether Toyota's past glories will again overwhelm their current woes.  Considering how many companies I know of whose supply chains are better than our ranking says (Caterpillar #47, Dow #43, General Mills #50, Honda #30) I hope the answer is no.

Sustainable Supply Chains and the Post-Industrial World

I had an interesting conversation yesterday with a supply chain executive from one of the big Hollywood Studios about sustainability strategies in their industry.  Yes, they got the memo that Wal-Mart is gearing up to demand environmental and social impact information on labels (a few years from now).  And, of course they understand the benefits of slimming down packaging (30% weight reduction for DVD packaging already achieved).  And, as for water or other resource implications in the production process for DVD's, that gets done upstream by replicators who burn and these discs in the first place. 

Net: not much of a sustainability story here - or is there?

I asked about burn on demand capabilities along the lines of the Blockbuster video kiosks that NCR is making now.  The answer is yes, that's just getting started.  In terms of sustainability, each burn-on-demand DVD keeps about 1 pound of carbon out of the atmosphere.  Benefits also naturally accrue in terms of inventory not held, shipments not paid for, and sales not missed.  This business model is capable of delivering $20+ worth of consumer value at virtually zero environmental cost.  The digital supply chain for DVDs offers hope that many supply chains might in time morph into hybridized physical/digital delivery systems in which the physical work (atoms) can be separated from the pure intellectual property work (electrons) to give us revenue growth on ever slimmer tangible platforms.

Of course, such an idea depends on a major overhaul of our physical infrastructure towards an increasingly localized final assembly stage at which the software is loaded before the consumer walks away.  Although this is obvious for entertainment products it is possible to imagine how it translates to other industries.  Take life sciences for instance, where diagnoses and conceivably even lab tests could be conducted remotely with patient (or sample) condition transmitted electronically to specialists for analysis.  Maybe it can work in automobiles where options like GPS navigation or fuel optimzation technology could be enabled at the dealership or even at home via bluetooth connections.  Is it possible for supermarkets to offer mix-on-site food, beverage or health and beauty products in reusable containers?  Yes it is.  Each of these ideas however, requires a whole bunch of new equipment and processes to get anywhere near viability.

The big idea is to realize that future generations will spend most of their disposable income and time consuming ideas, rather than commodities.  If our supply chains are still oriented to the delivery of stuff by truckload we'll end up making less money and a bigger mess. 

Recovery Rising: Why and How

Latest numbers out of Europe show growth in manufacturing, so says the euro-version of the Purchasing Managers Index.  Obviously, stock markets are moving haltingly forward suggesting investors see an upside in corporate profits.  The question is why and how is this recovery happening and what should supply chain executives do to prepare themselves and their companies to ride the wave upward rather than be pounded into the sand.

One reason why is $2 trillion in governement stimulus spending.  Complexities aside, the most obvious place government can spend (other than handouts) is on infrastructure.  In the US, roads, ports, telecoms networks, hospitals, schools, etc., all have a crumbling vibe about them.  We built this stuff during our glory days when Detroit ruled the world and Camelot made DC the center of the thinking man's universe.  Now (connect through JFK or LAX for the guided tour) we have a bit of a third-world feel to what was once a glorious, epic backdrop to our post WWII sense of purpose.  Europe of course, is far more at home with the idea of government-led infrastructure buildouts, both recent and historical, and is benefiting as we speak.  The lesson should be obvious - find a way to contribute to the rebuilding effort and join in the fun.

The types of infrastructure up for a refresh are many and varied.  High tech companies can expect massive spending on data centers and communications networks.  Building supplies and mechanical equipment makers will be busy laying new foundations and repaving roads.  Commodities suppliers should see strong demand both for virgin materials and for recaptured waste.  An energy overhaul is getting underway also, just as the western world's aircraft fleet screams for wholesale replacement.  Coming on the heels of a crushing recession and financial scare, such rebuilding is more urgent than ever. 

The new news is that virtually none of our tried and true approaches to business and supply chain will work in this emerging economy.  Europe's good news points in the right direction.  Supply chains in Europe are oriented more to maintenance of human welfare rather than production of goods.  Infrastructure built to serve such a mandate - whether created by sustainability concerns or just a lack of space - is essentially closed loop.  This means take back facilities are just as important as distribution systems and multi-media customer service systems are just as important as sales.  Recovery will depend on thinking of supply chains as built on an infrastructure intended to conserve resources more than simply harness them.

For now, that mindset positions companies to get some of this government spending.  Next year and beyond, it will allow competition on terms that consumers, regulators, and ultimately investors are going to demand.  In the longer run it also includes looking to the developing world as a huge demand stream for stuff we have come to take for granted in the West and North.  Tapping these markets will require the same philosophy of infrastructure rebuild now dominating our recovery efforts.  The nucleus of it for supply chain strategists is a shift in mentality from operations designed for production to operations designed for maintenance.  See this principle taking root at companies like General Electric, Johnson Controls, and Unilever and one begins to see the recovery is already well underway.

Lean and green: sustainability and the healthcare value chain

First off, sorry for the six week hiatus - not exactly blog protocol, I know, but alot has been happening back here on earth keeping me away from the blogosphere. 

Earth, by the way, is the theme of this post and increasingly of all things supply chain.  Saving the planet, once strictly the province of dreamers and long-hairs, is now agenda item #1 for most operations professionals as energy, waste, water and human impacts are now seen to align almost perfectly with cost containment.  The Financial Times yesterday ran a piece on GlaxoSmithKline's efforts to reduce waste in its manufacturing process.  Believe it or not, the starting point was a 100-to-1 waste-to-product ratio, meaning 100 pounds of intermediate stuff including solvents and other processing ingredients are needed to make one pound of active pharmaceutical ingredient - industry speak for useful stuff.  The company has already made massive strides from the 100:1 starting point, currently hitting close to 50:1 and is ready to go public with goals to get to 30:1 by 2015.

The takeaway for me crystallizes what we were talking about last week at our massively sold out mini-conferences in Boston - namely that supply chain can, and will, save the world.  350 supply chain people from two apparently different worlds sat on opposite sides of a Westin ballroom dividing wall to discuss on one side, how Sustainability in the Global Supply Chain was really a proxy for efficiency, and on the other side, how supply chain principles can solve the cost problem in the Healthcare Value Chain.  This GSK story brings it all into crisp focus.  If waste can be cut this dramatically, with such simple lean production principles how much more can be achieved when all the pieces start to align like they have in so many other industries?

Supply chain people tend to give a quizzical look when the sustainability topic lands on their agenda.  Avoid unnecessary shipping?  Eliminate scrap in production?  Minimize energy bills?  Such things are so obvious to supply chain people they tend to wonder if this is all some kind of trick question.  It is not.  It really is this easy. 

Dueling Benefits: Safety vs. Efficiency

This morning I saw a TV news item on the push to outlaw in-cab computers for truck drivers out of safety concerns due to distracted drivers.  My first thought: ridiculous!

These guys are professionals, and I would wager, are far less likely to have a stupid accident due to distraction than a 17 year old texting as he drives through town.  The numbers should be available though, so my hunch isn't worth much. 

What is worth something however, is the value we all enjoy when our national trucking system is equipped with communications and analytical tools that make it more efficient.  Truck accounts for nearly a third of domestic freight ton miles (1.3 trillion in 2005) and is a monster consumer of fuel and generator of GHG emissions.  Logistics optimization, which depends on computers and communication, is regularly delivering hundreds of basis points of efficiency in terms of miles travelled, diesel burnt, and carbon released into the atmosphere. 

Considering that the latest climate change models just unveiled at Oxford University this week show temperature increases are happening faster than previously thought - 4 degrees by 2060 - I'd rather trust a trucker to keep his rig on the road than risk messing with mother nature.

Please leave this silly safety gimmick off the agenda.

Green IT is a Red Herring

For all the noise we hear about green IT you'd think the whole climate change problem is just a few sustainable data centers away from resolution.  Google "Green IT" and get over 6 million hits - Google "Green Manufacturing" and you get only 209,000 hits.  Is Green IT really 30 times more relevant to saving the planet than green manufacturing?  Hardly, considering that Industrial greenhouse gas emissions are worth 27.3% of total in the US right now while the totality of computing and communications adds up to maybe 3%.  And this is in a country which has essentially outsourced all of our dirtiest work to China, Mexico and other developing countries. 

How much help is green IT when the Chinese are burning brown coal to fire steel, glass and cement production?  Virtually not at all.

And consider the underlying drivers of green IT.  Microelectronics technology is all about reducing the power consumption of chips because it makes for longer battery life in portable devices and less heat generation to give us even faster processing with the big stuff.  Not much need for a "save the planet" itch to keep the tech industry chasing energy efficiency.

So why all the hype about green IT?  Is it because the IT sector lives for (and on) hype?  I think so.  The big tech vendors have big marketing arms and they certainly know how to spot and foster a wave of excitement in the marketplace.  It feels like a win-win.  Reduce energy consumption (which we were doing anyway) and take credit for keeping sea levels in check!  Irresistable.  And yet,nonsense.

I wouldn't care if the topic didn't confuse the bigger issue which is getting at sustainability in the global supply chain.  Plants and distribution networks generate the big emissions - between them accounting for over 60% of the US total and far more in the rest of the world.  I will feel alot better when Green Manufacturing has 30 times the buzz of Green IT.

Chinese Emissions Flat by 2050? I hope so!

The FT has a short front page story today quoting Su Wei of China's National Development and Reform Commission saying "China's emissions will not continue to rise beyond 2050".

This remarkably unambitious goal is a sandbaggers delight.  Forget about the science of climate change - I can only hope this timeframe does not include triggering anything biblical - the net of this is most unimpressive.  The global thermodynamic model I cited a few weeks back projects China's primary energy consumption will be flat by 2030 or so (see No Way Around Carbon in the Supply Chain, July 28, 2009).  If all of our efforts to sequester, remove or otherwise avoid carbon emissions accomplish nothing at all China can still hit this target with ease.  Include any kind of energy efficient buildings controls, manufacturing, and distibution technologies and flattening of emissions looks available even sooner.

I get why China doesn't want to agree to any formal emissions ceilings.  And by December when the Copenhagen summit focuses attention on the question, there is no way China could entertain anything but gentle hints of support for the global carbon cutting game.  The sad thing is that this resistance looks to be based less on what is technically possible than it is on the "you did it, now its our turn" logic that the developing world throws back on northern greens when we moan about rainforests and acid rain.  In other words, a technically credible save-the-world mission risks getting politicked off the agenda because some feel its their "turn" to pollute. 

China could, and should, learn from our mistakes.  Case in point is the leapfrogging in communications technology in the emerging economies.  These countries didn't rebuild our old copper twisted pair telecoms infrastructure, instead they jumped straight to modern mobile telephony.  China should do the same with their energy, manufacturing and distribution infrastructure.  Companies like Johnson Controls, ABB, General Electric and Siemens are ready to go with carbon-stingy technologies in all these areas.  And let's not forget who China's biggest customer is - the American consumer as represented by Wal-Mart's supply chain team.  We are looking for carbon footprints and although these will be a challenge to measure, they are coming.

Let's hope this is just sandbagging after all.

Healthcare Hydra - Insurance is the Heart of the Problem

As Obama and company tussle with the beast of healthcare reform I am reminded of the myth of the Hydra who grows three new heads each time one is cut off.  Each piece of the administration's plan as summarized on the OMB website sounds benign and all is well-intended, but the sum total looks like a loser.  Why?  Because none of the points in the plan can do any real good alone and nowhere is there an attack on he heart of the problem, which I think is the private insurance industry.

Let me confess up front that I don't really understand the economics of healthcare well enough to be certain of anything here, but it seems no one else does either, so....

The insurance industry does one really big thing that runis everything: they distort the demand signal that all value chains need to improve over time.  Take, for contrast, the consumer products value chain in which Wal-Mart passes perfect demand signal clarity back to, for instance Procter & Gamble, who then bounces it back to Dow Chemical.  For twenty years at least this dynamic has improved productivity annually by somewhere between 5-10%.  Grocery products have been essentially deflationary for a generation while healthcare has been a runaway train of waste and cost increases.

My insurance company is not something I choose or perceptibly pay for.  My employer does, but not really with an eye to efficiency or efficacy so much as pain reduction.  I do need to use healthcare services often enough (kids and all that) but never have any sense of how the cost connects to the benefit.  Clearly, the providers I interact with also see no link between demand and supply - just a stream of to-do's punctuated with arcane and obtuse record keeping requirements that very obviously add expense while ironically deleting value. 

To cap it all off, I get (hard copy via snail mail) "Explanation of Benefits" letters that pile up until my poor wife has to allocate four hours every couple of weeks to fight through the Stalinesque bureaucracy behind something I have already paid for.  How can any of this help drug makers, medical devices manufacturers or anyone else in the chain learn from the greatest teacher of all (the marketplace) where their efforts are working?  It cannot.  The demand signal is so distorted that something outrageous like 60 million CAT scans are done every year in this country of 300 million people. 

The nut of the problem may lie in the very name of the industry playing villain in this drama - INSURANCE.  The idea of insurance is pooling of risk.  We all pay up front to be protected should something cataclysmic happen.  It seems to work fine for property & casualty, but not here because most of the $2 Trillion spent each year is on regular stuff that just keeps coming, and because when something really big does happen insurance companies fall back on all that paperwork to actually bail on the promise of insurance. 

They don't actually insure us at all.  They take our money up front and then hassle both us and the doctors all year long as we use what we have already paid for.  And they charge us for the costs of providing this hassle.  Great deal, huh.

So, what to do?  I guess the best thing would be an option that lets me or my employer say **** you to the ripoffs they peddle.  This means I would like a government provided healthcare insurance option.  Especially one that lets me buy cataclysmic coverage at an actuarially valid price without the added expense of thousands of useless employees generating paperwork every time I get stitches.  This also means I'd like to be able to buy a la carte from well managed hospital systems like Sisters of Mercy in Missouri and Arkansas.  And one thing I definitely want is the ability to get as much as possible of my normal day-to-day healthcare from CVS who is always right around the corner and who has plenty of experience doing what I applaud Wal-Mart, P&G and Dow for - running a world class supply chain.

Obama can't win this war by chopping off heads like "dissemination of information on effective medical interventions" or "reducing itemized deductions for people earning over $250K".  Such things do nothing to harness the wisdom of the market because they don't connect demand signals to the supply chain. 

Remember, the real healthcare crisis is essentially about efficiency, not fairness.  No one is happy.  The answer lies not in redistributing pain but in eliminating it.  Consumer products, high tech, even industrial products have been driving down costs for many years while innovating constantly.  Demand signals have driven it.  Let's get the insurance companies out of the way and maybe we'll be able to do the same thing in healthcare

No Way Around Carbon in the Supply Chain

Today's Financial Times has a piece by Joshua Chaffin that details the story on carbon capture and storage (CCS) which is a new technology for cleaning coal fire emissions so thoroughly that the CO2 can be used in softdrinks.  The article plows diligently through the thicket of conditions that need to be met before CCS might become a widespread reality concluding that commercially viable offerings could be ready by 2020. 

At first pass, this sounds like it's too far away for supply chain people to worry about (except for those working for Siemens, Hitachi or Alstom who will end up building these systems).  But upon further reading I begin to see the urgency.  The European Union's emissions trading system currently prices carbon at 15 Euros per tonne.  At 30 Euros per tonne it becomes "economical" for utilities or other big power generators to pursue CCS, according to Siemens Energy Fossil Power Generation CEO.  Not far to go, considering the recession dampened price is likely to rise soon enough. 

Stephen Stokes' (here at AMR) analysis of mandatory GHG reporting expected from the US' EPA points out that only a small fraction of companies will be compelled to report initially, but that this too will increase over time as thresholds come down from 25,000 tonnes per year.  And regardless of when your plants or DC's start to need reporting, the upstream industries that feed us with plastics, paper, metals and more will look to pass their costs on in the supply chain, meaning sourcing and network decisions must consider carbon costs.  That is starting now - just ask Hara or ClearStandards at SAP.

The final knot I saw in Chaffin's article (whether fossil fuels will dominate for years to come) shows how emotion and politics could make a difference.  Greenpeace apparently "remain wary of CCS and its corporate patrons".  Why?  Sometimes I wonder whether the old-school environmentalists really want to solve the problem at a global level rather than just keep on doing the whole protest gig.  Conspiracy buffs might cherish the notion that big oil is all about keeping us addicted to fossil fuels, retarding our move to renewables, but history suggests that we're already on a path to fixing things the old-fashioned way - with economics and technology taking turns driving the bus.  I attended a session at MIT a year ago in which Gian Paolo Beretta presented research showing the learning curve for thermodynamic efficiency over a centuries long time horizon

The tight fit led Beretta to conclude we'll end up solving our energy problems, as we always have.  Oh and by the way, the fuels we'll end up using way out into the 22nd century include lots and lots of coal.

 

The net for supply chain strategists is that carbon costs must be part of your plan.  Accounting for carbon or any other GHG will become essential soon.  Choosing suppliers, especially where they are physically or technically integrated into your internal operations, should already consider carbon costs that will soon be passed on.  Messaging to customers will need to stay one step ahead of the public's understanding of Green - see Wal-Mart and green labeling in last week's post.

Too many companies are still doing sustainability like a high school yearbook, with a collection of cuddly gestures comprising environmental stewardship.  The real job has already started and its going to be a bear for any company that hasn't started to work sustainability as an operations issue rather than a PR sideshow.

Notice, by the way, that I haven't even mentioned global warming until now. 

Playing Hot Potato with Carbon in the Global Supply Chain

Hilary Clinton's visit to India included a sturdy rebuff from Environment Minister Jairam Ramesh on the idea of accepting specific targets for carbon emissions.  His point, which sure sounds fair from the perspective of a developing nation working its way up the food chain, is that emissions, especially per capita are much lower in India than in the west.  Why should countries like India, China and Brazil be restrained from playing the same cards we did during our conquest of the west?  Sort of like loggers in the Amazon calling double standard when tree huggers from California or England press to save the rainforest.

The issue supply chain people need to think about is how all this will play out in a global sourcing and manufacturing strategy.  India recoils at the idea of carbon tarriffs slapped onto goods shipped from Indian factories to western markets.  And that's largely for low energy intensive stuff like textiles and light manufacturing.  Think how the Chinese will react to this with all their booming steel mills.  Realistically though, this is may be an effective means of pricing carbon emissions in a way that invokes market pressure to make change happen.  So, do you go ahead with that plant expansion in China?  Depends how long they can hold out against the diplomatic pressure.

The same type of guessing game applies to supplier development initiatives.  Just as some big western brands got burned by sweatshop labor upstream in their supply chains, so too could they pay in profits for a sudden shift in attitudes about embedded carbon in stuff made halfway around the world in dirty plants.  We surveyed over 300 companies on the topic of embedded carbon recently and found that by 2010 the top environmental initiative is greenhouse gas emissions.  While I love the sentiment here, I think most folks have no idea how hard this will be.  Done wrong, this could easily mean pushing the mess further up the supply chain where prying eyes can't easily see it.  Kind of like a big dirty game of hot potato.

The lesson most supply chain people have already learned about global sourcing and manufacturing is that true cost competitiveness comes not from cutting corners or gaming the system but from designing in robustness from the start.  Whack a supplier unfairly for short term concessions and they either go out of business leaving you hanging, or whack you back when they can.  Skirt regulations by moving to a friendly jurisdiction and you risk a consumer backlash or political graft.  Hide the truth and be scandalized when it comes out. 

Carbon emissions (and plenty of other environmental impacts) are soon to be priced in to the final offer presented to consumers.  India, China and Brazil may resist targets and tarriffs but the problem won't go away.  Supply chain strategists can game the timing of these new embedded costs, but they can't avoid them forever. 

Unlike a hot potato which eventually cools down, this problem is only getting hotter.  Don't get caught holding it.

Wal-Mart's Green Ratings: Supply Chain Finally Beats Marketing

Wal-Mart's blockbuster announcement - featured front page in today's WSJ - that ALL suppliers will eventually need to provide environmental impact labeling for ALL of their products means Sustainable Supply Chain is moving ahead of symbolic marketing in the quest to save the planet.  The Awareness mission which has fed so many activists for so long is over.  We are sold!  Now its time to really do something.

Wal-Mart is the original driving force in supply chain's transformation from factory centric push to demand centric pull and, over the past twenty years, has generated massive efficiency across the economy.  This green labeling move says that same force is about to be applied to saving the planet.  The real effect here will be to shift the focus away from messaging about green (greenwashing is the nasty way to say it) to measuring green.  This is great news for supply chain people and everyone who supplies them with information systems, plant automation systems, and logistics services.

Paper or plastic? 

We are working on an analysis right now that attempts to estimate carbon footprints for different materials that can be substituted in packaging applications.  The first finding is one that I heard from some ultra-smart supply folks in Cincinnati two years ago:  This is WAY too complex to honestly an accurately do at a SKU level.  Imagine a spreadsheet with 70 connected calculation sheets and dozens of assumptions throughout.  Each algorithm involves at least some guesswork.  And complexity is just the tip of the iceberg.  The potential for manipulation and flat out lying is huge.  Green labeling is a great idea, but it will need a foundation of data that does not exist yet.

Sustainable Sourcing, Sustainable Manufacturing, and Sustainable Logistics are each five years from ready in terms of measurement.  Even in Europe where I recently scoured a Tesco looking for green labeling the availability of data is virtually nil.  Wal-Mart might be just the gorilla we all need to take this game away from marketing and put it where it belongs: in the Supply Chain.

Sustainable Logistics Starts with the Obvious: Fuel Efficiency

From Awareness to Execution

Sustainability is finally moving from its Awareness phase as dominated by the likes of Greenpeace and into its Execution phase where real people in real jobs will have to regularly manage environmental impacts.  In a recent comprehensive study of sustainable transportation management only 6% of 158 companies surveyed said that they had no initiatives underway at all.  Of the remaining 94% who did, almost half described their efforts as evolving.  It seems pretty clear that Awareness is no longer a challenge.

 

In the Execution phase ownership of sustainability will increasingly shift away from its direct-to-CEO status and back into operations where the work gets done.  One of the most obvious places to look first is in Sustainable Logistics because cutting carbon emissions here aligns almost perfectly with cutting costs (a principle we have been tracking for 6 years now).

 

Costs, Fuel, and Carbon Move as One

Our recent field survey turned up some encouraging results for companies targeting Sustainable Logistics.  We asked what measures were taken to support sustainable transportation management.  The two which had by far the most impact were “Improved Equipment Servicing” (27% said this was most impactful) and “Active Monitoring of Speed” (again, 27% chose this as tops).  For a topic that has generated so much passion, these seem like pretty mundane findings.  That is the good news.

 

Ironically, this same survey found that respondents felt the biggest obstacle to making their transportation more sustainable was “Additional Costs of Sustainability Initiatives”, not culture or process ownership or anything else.  Considering that the top two measures for better sustainability are simply equipment maintenance and speed monitoring and the number one reason overall to do anything in the first place is cost savings (49% chose this as a top reason), one wonders whether people are over-thinking the whole thing.  Is it possible that the Awareness phase is now doing more harm than good?

 

Don’t Overthink It, For Now

Sustainable Logistics, at least for now, does not mean converting your big rigs to run on canola oil.  The best thing is also the simplest thing – reduce fuel use, and do so with every tool you already have from route optimization software to yard management.  Data from this survey finds transportation costs average 4.5-6% of revenue.  Efficient fuel use can cut into this figure and drop dollars straight to the profit line, while also cutting emissions.

 

Next generation Sustainable Logistics is likely to encompass returns supply chains and packaging or materials handling redesigns and more.  These will certainly require capital investment and some fairly complex systems analysis.  They also may demand a still larger role for third party logistics specialists like ModusLink, Menlo Worldwide, Maersk, and Ryder who have the skills and business models to support cutting edge work here. 

 

Until then, just do what you did last summer: avoid stopping at the gas station.

 

 

What's Missing from The Supply Chain Top 25?

Customer service metrics, that's what.  I had a pretty pointed email from Scott Brown at Plexus the other day offering a suggestion for addressing this gap.  He wrote:

"As a last step require each company that has a shot to make the top 25 to provide you with OTD data to customer request dates, for some minimum level of their total sales. If they do not or cannot do so, they are dropped from the top twenty five. We need to stop perpetuating and enabling large organizations that are the 800 pound gorillas in their market from getting away with poor service. What you do when you leave out customer service is enable this behavior. If a company can't provide this data they have no business being called a "Top 25" supply chain organization as they are failing to capture a key component of supply chain performance."

I agree with Scott's points and respect the position he is coming from here.  Debra Hofman and I discussed this idea, and while it has quite a few mechanical problems in execution, its something I'd like to consider including in future years. 

We have always known about this gap and tried lots of ways to fix it, most of which fail on data availability or consistency grounds.  Voluntary OTD reporting however might work precisely because it is so simple.  Scott's proposal will seem to the typical F500 company unrealistic given the wide variety of businesses most comprise, not to mention the slipperiness of the definition of OTD.  At its simplest however, the idea has merit.  A published figure, however heavily caveated, provides customers and the market in general with a starting point to judge whether the service level they experience is good, bad or indifferent.  Any incentive to report an unrealistically high OTD figure will be dampened by the torrent of calls from customers whose reality is worse.  Any incentive to sandbag the number is offset by the damage done to the Top 25 composite score.  Over time, most will find accurate self-reporting serves them besth.

In practice, I know the challenges involved in doing this may overwhelm even the best of intentions, and as such, we probably won't see anything like this for a while.  In principle, however, I like the idea and am curious how others feel about it.  Please let us know.

Best Supply Chain University Programs - No Ivy

My colleague David Aquino has just published a study of the best University Supply Chain programs in the U.S. and while I really respect the rigor of the methodology I wish my school, Stanford, had made the list.  More pointedly, where are the traditional top-tier MBA programs in this analysis? 

The research was driven by AMR member companies who are looking for an upgrade in the sophistication of the new hires they get from university programs.  It was fair and complete, considering both recruiters' views and university program depth and breadth.  The top handful were Penn State, Michigan State, and Georgia Tech.  The only school whose MBA program regularly features among the top few in US News annual ranking and also made our list was MIT. 

Where is Harvard?  What about Wharton?  The funny thing is that these top name MBA's end up teaching much of what we at AMR have in mind when we talk about Supply Chain.  In fact, our official name for the service most people join is the "Value Chain Advisory Service".  The term "Value Chain" describes what we research better than "supply chain" but legacy and budgets prevent us from migrating the semantics.  Michael Porter at Harvard is probably the world's leading thinker on the topic of Value Chains and Hau Lee at Stanford may be the top academic worldwide on the general topic of supply chain.  Maybe the discipline is being covered, but in stealth mode.

My father-in-law, an ex-Morgan Stanley investment banker, always says we should change the term "supply chain" to something with more sizzle.  I'd love to but don't want to get stuck selling to an amorphous, budgetless concept when there are plenty of real VP of Supply Chain folks out there who need independent advice.  The loop will close as old-school operations research and logistics climb up a level to merge with more general business disciplines like new product development and launch or customer fulfillment.  Clearly, the Big Ten is doing its part (see also Wisconsin, Michigan, and Ohio State) to bring technical training into the world of business education.  Maybe the Ivy League will deign to follow by scaling up its interest level in these essential disciplines. 

Meanwhile, I'll be keeping an eye out for my friends at Stanford.

Engine of Recovery: the Third World

Last Thursday the New York Times Business Section featured a piece entitled "Developing Markets in Bloom Again" which reported stock markets in India, Brazil and China up by 64%, 41%, and 37% respectively over the past three months.  The article's premise was "the recovery of the global economy is at hand and being led by the developing world".  I couldn't agree more.

At our conference in Scottsdale ten days ago we focused on the need for business across industries to understand where and how their global supply chain strategy impacts and is impacted by the special challenges of managing intellectual property.  Clearly there is something to this idea since the event sold out despite the rotten economy and widespread travel bans.  Candidly, however, I have to admit we're no more certain of how to make money in the Content Economy now than we were before the conference.  So where's the growth engine that digs us out of the current recession?   

The conundrum goes like this:  we all know higher value work is based on intellectual value add and we all hope there will be profits in building IP empires.  Unfortunately, today's pricing and IP protection models are so weak that pure IP players like media and entertainment are getting killed.  We also wonder how the developing world can keep up if such work is education intensive and dependent on a highly evolved consumer economy infrastructure.  Meanwhile, consumer demand in the US and Europe looks unlikely to ever return to its credit drenched ways of 200X.  Sounds like a Catch 22 - can't move on to the post industrial economy because our profit engines are designed for the old days.

Perhaps the answer lies simply in serving the basic needs of the populations of India, China, Brazil and the like.  Take IP that is market ready including brands and formulas, life science patents, manufacturing technologies and so on, package and price it for low income consumers and seek growth in markets that are not saturated.  Bring back consumer demand data to reenergize the IP portfolio and include it in the next round of innovation.  Lather, rinse, repeat.

Developing world economies are recovering now because they have demand, and increasingly, the means to serve it.  Exports are not the engine they once were because we in the US can skip the new toys.  None of this is a mystery to some of the mega-brands we look up to like GlaxoSmithKline, Procter & Gamble or Caterpillar.  They see the opportunity and are preparing to tap it.  A global recovery will blossom if the infrastructure serving this massive consumer population moves up the priority list. 

With any luck, the brain intensive work of the new Content Economy will grow alongside this build out as established 20th century IP empires find new partners and customers in the developing world.  To repeat a phrase from our opening video at last week's conference "the modern fascination with media is built on manufacturing".  Let's build the foundation and start the engines running again.

Taming Complexity in the Global Supply Chain: HP's Story

HP manages one of the most complex and truly global supply chains out there. The $118B company serves nearly every country in the world manufacturing and sourcing from every corner. And at the heart of that is Tony Prophet, senior vice president of HP's $57B Personal Services Group (PSG--which includes PCs, notebooks, and procurement for all HP).

A few years ago, the computer industry was labeled a commodity, with manufacturers making the same things and indistinguishable from each other. But the truth is the industry is just the opposite. While everyone may be building a computer out of the same parts, and most are doing it through a mix of owned and contract manufacturing, how well they create a brand identity around those products makes all the difference.

Delivering on Brand Promise in a Content Economy: Kraft Foods

Kraft Foods is a $42B consumer goods company with nearly 60 brands with such household names as Oreo, Oscar Mayer, A1, and Ritz. For Kraft, today's realities have created a unique opportunity to reinvent its supply chain around a faster and more responsive supply chain that hooks directly into the content economy.

"It's becoming increasingly difficult to reach consumers in the digital world," Phillipe Lambotte, senior vice president of customer service and logistics at Kraft told the audience. "You have to go where consumers are. You can' expect them to come to your website."

To reach those consumers, Kraft has branched out with distribution of a magazine ("Food and Family'); Facebook, where it's site links into recipe sharing among other users of the social networking site; and launching the Kraft Cooking Challenge on YouTube, in which 52 million people have shared or viewed videos about cooking with Kraft products.

"The new generation now wants to give you information on how they experience your brand," Mr. Lambotte said. "You need to pick up on that data and translate it back."

But translating it back requires a new way of thinking about supply chain.

Manufacturing in the Content Economy: Samsung's Challenge

Samsung Electronics seems far removed from the content economy, but it's anything but. Content is invading nearly every aspect of products and manufacturing these days. As a maker of mobile phones, televisions, camcorders, Blu-Ray players, appliances and other electronic devices, Samsung is dependent on its products not just playing the content flowing through the global economy, but enhancing it for the consumer wherever possible.

"All of us fear being commoditized," Omar Khan said. Mr. Khan is the senior vice president of strategy, product management, and customer service at Samsung Telecommunications America. He followed former Disney CEO Michael Eisner with his keynote at AMR Research's Supply Chain Executive Conference today.

"Whatever it is we do, it has become a level playing field for everyone. When a company like Google or Apple can make a cellphone, it's changed. They aren't companies that are creating hardware, they are creating the content that creates those devices, which are then manufactured by someone else in Taiwan. Our challenge, all of us, is how do we innovate and make money doing it so we don't become commoditized?"

So what is a manufacturer like Samsung's role in the global content economy? Create products that enrich end-consumer experiences.

Welcome to the Content Economy

AMR Research kicked off its 2009 Supply Chain Executive Conference, last night, with the unveiling of our 2009 Supply Chain Top 25. You won't find a whole lot of surprises on this year's list with just some small movement among most of the companies on the list.

Today's events kick off our theme "Captains of the Content Economy," with a keynote by Michael Eisner, former CEO of Disney. We've talked for awhile about how the world economy is shifting to one based on intellectual property, ideas and art, rather than one based on metal and oil. This IP flows throughout the supply chain, but not just in one direction. We'll also talk about how IP flows backwards. How consumer demand signals flows back through the supply chain so players throughout the value chain can respond to that demand. Consider the life science industry: If a new drug helps a patient who owns those results? The discovery process that occurs at the tail end when science is supposed to solve the problem, that IP flowing back through the chain helps all involved.Throughout the day we'll have updates here from our keynote speakers as they talk about how content isn't just words on a page; it's the science that goes into creating pharmaceuticals and the brand and technology companies like Nike have built into their product and value. We'll hear from representatives from companies like Samsung, Kraft, Hewlett-Packard, Intel, Wal-Mart, Endo Pharmacueticals and Generics, Zappos, and more about how they are all welding the digital and physical supply chains to captain the content economy.

First, Mr. Eisner's thoughts.

Disney has been at the forefront of the content economy throughout its existence. And it hasn't always been easy. Mr. Eisner said the secret is to be creative as you possibly can within a box of financially responsible contraints. "I don't have a business degree, I was an English major so I approached the job with creativity in mind. I discovered IP work can be done in a fantastic manner if you put financial contraints on yourself. In that (financial) box, you can bounce around, you can do a lot of stuff, but when you bounce up against the box irresponsibily, red flags go up," Mr. Eisner said, adding that financial contraints without creativity will never move a company forward.

Illustrating his point was the film Raiders of the Lost Ark. "When the movie script went around no one wanted to touch it. The first scene read like the most expensive movie ever made, with that rock rolling down. You had George Lucas who had just made the Star Wars movies and you had Steven Spielberg who made 1942, which went way over budget. I said to them can meet to discuss creativity in the financial box? Steven said he can make it for $18M, which was impossible. He said, 'I can make a movie at any price, it's you idiots who give me too much money. You tell me my financial restraints and I'll work in them.' And he did. Creativity under financial contraints can come from anywhere. And its that kind of creativity that can build brand."

In fact, one of the most memorable scenes in the movie is when Indy, tired of fighting sword-weilding bad guys, just pulls out his gun and shoots him. The original script called for a long drawn out fight, but with star Harrison Ford not feeling well, and a chance to creatively save money, the scene was shortened to what we see today.

Mr. Eisner said leaders in the content economy can also never rest. Brand growth and management is a never-ending task. It's also a balancing act, figuring out what promotes the brand and what might hurt it. Mr. Eisner grappled with these issues immediately after taking the lead at Disney. The brand was suffering, there was no consistency, and it was stuck in a rut. So his company looked into new avenues, specifically ABC Capital Cities. "We bought it for the most money anyone had ever paid for an aquisition and I was aquisition adverse, I hadn't done any aquisitions," Mr. Eisner said. "We bought it because of a single brand everyone had underestimated and that brand is ESPN. Inside that brand those guys in Bristol, CT, were thinking about that brand and what makes it work. And ESPN, today, is worth more than what was paid for all of ABC Capital Cities." 

But it can't end there, particularly when times are bad like now. "When you've inherited a brand or created a brand, you can never rest. There are a lot of people who want to give up on excellence just to maintain in an economy like this. But you can't. Not doing anything is even a bigger mistake than doing something that brings the brand down."

Brand consistency and management is the other part of the puzzle, and sometimes the best thing a leader can do is see to detail. "I had the image of being a micromanager, but if senior management bends over ot pick up a piece of paper, everyone bends over to pick up a piece of paper. If senior management takes an interest in the smalllest division of a company, the people in that division get excited. You can't micromanage a company of 120,000 employees, but you can inspire and pay attention to detail." Mr. Eisner said that attention to detail can make the difference and help you set the tone for excellence that your employees can then follow.

To make the point, he related the image of the George Serat painting "A Sunday Afternoon on the Island of La Grande Jatte."

Up close, it's a collection of dots:

But from far back, a full image emerges:

And so it is with business. "The value of your brand is made up of a million dots of success," Mr. Eisner said. You can't mess up just one dot, but you can only have success by making sure all those dots are working together to create the overall brand value.

Getting that value also requires brand consistency. When Mr. Eisner took the reins at Disney, there was very little brand consistency outside of the US. This was of particular problem with voice translations. In Italy, Huey, Dewey, and Louis were all voiced by the same person, with little differentiation, and in another location Mickey Mouse was voiced by an action star, which made little sense. Mr. Eisner created a voice committee to ensure brand consistency around the world. One of the first results of this new global brand management was The Lion King film. Mr. Eisner played a clip of the opening song from the film in which translations flowed seamlessly into each other as if voiced in different languages by the same singer, even though they were all different people. "Instead of just shipping it off and letting whatever happened happened, which is what it was like, we took control of our global content."

These days Mr. Eisner is dealing with a completely different aspect of the content economy: handling other's IP. Mr. Eisner bought the baseball card and candy company (Bazooka Joe, ring pops. etc.), Topps. But the NFL, Major League Baseball, and others own much of that IP, with Topps just presenting. "I realized how great it is when you own the IP," Mr. Eisner said, saying that now his mission is to create value where someone else owns the IP, an issue many companies in the value chain face. Topps is doing that with such innovation as baseball cards that, when held up to a computer webcam, create a 3D image that moves on the screen. "We're trying to make something so good that they have to relicense us."Topps is also trying to create its own IP, capitalizing on the Bazooka Joe brand and establishing more value in the confection business that includes Bazooka Joe gum, Ring Pops, and other such candies. The company is doing this by taking advantage of viral nature of the Internet, producing original Internet films for a fraction of money that promote the products.

Next up, we'll have Omar Khan, senior vice president of strategy, product management and customer services at Samsung Electronics, with the keynote "Digital Meets Physical: New Realities in the Content Supply Chain."

The Obama Effect

We had a research leadership meeting the other day, and, in response to a request from Safeway, decided to outline a set of questions surrounding the implications of President Obama's ambitious policies for supply chain professionals.  The outline, which is shown below, unedited, will be followed in time with answers drawing from our best analysts and from field research among our members.  For now, I want to put it out there and ask any readers with opinions or insights to contribute at will. 

The times, they are a-changing and we'd better think broadly about what it all means.

                                               

The Obama Effect

 Trillions of dollars of new federally driven spending will pour forth over the next four plus years as expansionary policies coupled with ambitious structural changes combine to forever alter the dynamics of the US and world economy.  This overview will break down the Obama-effect into five buckets of activity which will each drive many billions in revenue across industries and will, in the process, change forever the competitive playing field for companies.

 

Infrastructure 

The big spend: Roads, bridges, pipelines, rail, ports, waterways, government and public facilities of all kinds are in line for a refresh.  How much money will be spent and by which purchasing authorities?  When will these projects happen and what criteria will govern selection of contractors and vendors?  Who stands to win?

 

The new network:  When the big build-out is complete how different will the supply chain be?  Will new markets be accessible that were not before?  Will new alliances emerge in a post-industrial US economy that change the way logistics is handled?  Will global sourcing and manufacturing be easier, harder or just different?

 

The new rules:  Following a generational public investment new rules can be expected to govern use, maintenance, and financing of our public infrastructure.  What reporting and transaction requirements might this mean for supply chains?  Will new standards accompany access to and use of infrastructure?  Which will be mandated and which will emerge as market standards?

 

Energy

The big spend:  The Smart Grid concept implies a massive, and integrated system of energy technology, generation, and transmission.  Where and when will the money be spent and who will decide?  Which technology and engineering standards will emerge and will these be based on science, politics, money or all three?  Who will win the most business and control the platform for the future?  What related spending outside of the Grid will matter – insulation, local power generation, batteries – and how will these evolve?

 

The new network:  Assuming the Smart Grid comes anywhere near its potential, what are the implications for business?  As consumers of energy, will business have new options for locations of its operations?  Will energy sources be impacted enough to reduce oil price volatility thus dampening its effect on costs and profits?  Will certain kinds of businesses be in position to generate positive net energy and how will this be managed as part of the supply chain?

 

The new rules: Again, new rules can be expected to govern use, maintenance, and financing of our energy system.  What reporting and transaction requirements might this mean for supply chains?  Will new markets emerge that price and move energy?  Where will supply chain investments be possible that are net contributors to the energy system, and also synergistic with core operations?

 

Healthcare

The big spend:  The scale of mess in our national healthcare system dwarfs even energy and infrastructure in terms of money needed.  Up front overhaul costs for new information systems, upgrades and expansions of hospital and other care giving facilities as well as establishment of payment systems outside the unsuccessful private insurance industry will mean many billions in project work.  Who wins this business and how?  Looking ahead, healthcare, more so than energy and infrastructure, will demand massive ongoing spending.  Who can offer enough efficacy with efficiency to establish lasting positions of power in the ultimate system and how do they prove their merits now to secure these positions?

 

The new network:  How different will the ultimate system of healthcare be?  Will big private drug or grocery retail participate and if so how?  Will patients/consumers buy more online and if so, how will deliveries happen?  What role will be played by public health providers?  Will preventive medicine or holistic care emerge and if so, what products and services will thrive?  How personalized will medicine become and what degree of custom delivery will the supply chain need to provide?  How will medical science be impacted by the emergence of “downstream data” akin to the Wal-Mart’s effect on consumer product industries?

 

The new rules:  If universal healthcare makes even a partial impact on

US 

policy, how will government regulations expand to handle new accountabilities?  Given dramatically deeper digital health records, what privacy and/or ownership issues arise around patient outcomes?  What regulatory burden can be expected for new drugs, devices, and other innovations?  How will dispensation rules evolve if retail becomes an important part of the healthcare value chain? 

 

Education

The big spend:  Although probably significantly smaller than the amounts spent on energy, healthcare and infrastructure Obama has been vocal about the need to improve education in the

US

The highest leverage investment potential in this realm revolves around better exploitation of information technology.  Upgrades to communications networks, archiving systems, interactive learning and testing all offer potential to accelerate and democratize learning.  Where and how will these investments be made?  What software and/or content will be needed here and how will hardware evolve to accommodate it?

 The new network:  A US education system evolved enough to deeply exploit the efficiencies of the digital supply chain means new business opportunities for consumer companies of many kinds.  How will companies be allowed to use this platform to influence consumers, especially children?  What content or media services could piggy back on this education network and will these help school districts offset costs?  Will the network extend to the home and what will this make possible?

 

The new rules:  Digital education systems will have multiple constituents governing their use.  What will school administrators allow?  Will federal standards apply and if so, how?  Will independent or consumer based watchdog groups emerge and how will they affect exploitation of this consumer channel?

 

Defense

The big spend:  National defense is always a big spend, but with shifting geopolitical threats the new administration is preparing to change our basic strategy.  In part this includes wider diplomacy with hostile regimes, and in part it means preparedness for new types of military threat.  What weaponry accompanies these new strategies?  Does it mean more or less consortium-type defense contracting?  Will provisioning military personnel change and if so how?  Are there changes in the balance of spending between armaments and information technology and if so, who wins?

 

The new network:  What will the new military look like and how will its ongoing support requirements change?  What new levels of technical proficiency will be expected of soldiers and staff and how will this be maintained?  Where and how will US military operations overseas need support from private suppliers and how will this be maintained?

 

The new rules:  Are changes in military strategy likely to change rules for procurement and contract compliance?  Will smaller companies be more or less able to compete for military contracts?  What rules will govern use of foreign companies further up the supply chain?

 

Conclusion

The election of Barack Obama, coincident as it was with the worst financial and economic crisis in the US since the 1930’s, means change on a large scale is expected and desired by most Americans.  The administration is pushing faster and more successfully than many observers had thought possible to instantiate this change.  If trends continue, the implications for business in general and supply chain strategy in particular are far greater than just a few new regulations.  Change across the five dimensions outlined above could be multiplicative with new dynamics in infrastructure affecting defense and energy or new forces in healthcare affecting education, and vice-versa.  Business as usual is unlikely to keep many companies competitive in this new world.

735 Idle Ships Off Singapore: The Economy of Abundance

Yesterday's NYTimes has an article about the massive amount of ocean shipping capacity sitting idle off Singapore.  Apparently daily rates for a bulk freighter are down from $300,000 last summer to $10,000 earlier this year.  The cause is a massive drop off in global trade (23% down for China from last year).  The ships' Captains are supposedly waiting for orders to go collect stuff from Chinese ports as soon as demand picks up again.  They will have a long wait.

Forget about whether credit loosens up again, or stock markets rebound, the thing that will hinder any return to our gluttonous ways is what I have in the past called our new Economy of Abundance.  The idea is that productivity growth worldwide is far faster than population growth leading at some point (I think before 2050) to a world with essentially no scarcity for any manufactured goods.  This thesis is why I like to believe Supply Chain can Save the World.

Realistically we'll probably see plenty of renewed demand for stuff (some of it junk, some not) as the US economy perks up, but we will never again see the surging McMansion-fest that has kept so many factories humming in southern Asia.  Between a sustainability itch we seem compelled to scratch and an obvious need to save and invest more than we borrow and consume, Americans will soon cease to be the wide-eyed fetishists the rest of the world believes us to be.

The good news for all these empty ships is that they can go anywhere, including Lagos Nigeria, Santos Brazil, or Kolkata India all of whom serve hundreds of millions of consumers still eager for some affordable shoes, appliances and prosthetics. 

China's IP Crimes Come Back to Haunt Them

Our quarterly risk data is in again and the topic of intellectual property risk continues to grow as a concern for supply chain strategists looking to China for sourcing and manufacturing.  Not only was IP infringement risk highest by a mile in China vs. other geographies, but it was also the highest rated risk proportionally among all 15 risks studied.  For perspective, 59% of supply chain executives surveyed said China was tops for IP risk against the second worst IP infringer, India, who was cited by 8% of respondents.  In fact, the number two overall vote getter for IP risk was the control answer "Not a risk in any region" which got 16% of the votes.

This time we dug a little deeper to see what companies are doing to limit their IP exposure.  The top response by a wide margin (33% vs next highest at 19%) was "We in-source sensitive components & processes to protect IP".  We have been tracking the move back from China to near or on-shore production and sourcing and this new data says global supply chain strategists increasingly look to China for commodity manufacturing only.  This is not what Beijing wants to see as it tightens labor regulations and tunes exchange rates in an effort to move up the value chain and away from its "cheap labor" brand.

 

I had an inquiry recently from a big retailer whose China supplier was pushing for price increases based on "skyrocketing" labor costs.  This big buyer won't pay these higher costs without some increase in value.  Meanwhile, our data says manufacturers are explicitly going the other way because they are tired of getting ripped off in brands, patents and other IP.  To quote this buyer "there's always another China" meaning, low cost labor options abound.  If the IP problem isn't addressed, China's long march to economic power will grind to a halt in the mud of distrust.

Thumbs Up to Smurfit & Stone's Little Green Step Forward

Out here at the end of the supply chain consumers like me are trying to be green.  One virtuous practice I perform is breaking down corrugated cardboard boxes to make the recycling pickup easier.  A longstanding bitch I have with my dear friends in the global supply chain is overpackaging - a reality that is most noticeable at box breakdown time.  

This weekend I enjoyed a new, simpler box from Amazon (these arrive at my house almost daily) that, lo and behold, had no tape across the seams!  Why do I love this?  First it's easier to flatten, reducing the chance of vandalism-inducing aggravation.  Second, it means no decision about whether I should peel off the plastic tape to eliminate impurities later in the recycling pr ocess.  Third, it offers the option of using flattened cardboard in the fireplace without spewing toxins out onto the kids. 

I looked on the bottom of this box and saw Smurfit & Stone's Tennessee plant was the source of this simpler, better, and probably cheaper packaging solution.  Thanks to you and to Amazon for a small, but correct step in the right direction.

IT is Shaking up the Educational Supply Chain Too

Last week I met a fellow named Ross Mitchell who had just won a major decision by the Massachusetts Supreme Court allowing him to sit for the Massachusetts Bar exam, despite having attended law school at an institution not approved by the ABA (American Bar Association).  The decision was a big deal because the unapproved law school in question was Concord Law School, a completely online school owned by none other than Kaplan Inc., who in turn is owned by the Washington Post.  Although the ruling had a couple of caveats, the net effect was to open the gates for students to take online education all the way to the goal line, in this case, admission to the Massachusetts Bar.

With the Boston Globe about to hit a wall and both education and healthcare costs growing faster than people can believe the ray of hope once again is Information Technology.  Newspaper print editions' poor economics is partly due to a cumbersome physical supply chain and partly to hugely ineffective broadcast advertising methods.  In education and healthcare similar problems arise from mass production methods applied to what are inevitably highly customized goods.  The key is personalization without the attendant high costs of a one-on-one tutor or live in nurse.  In newspapers, perhaps the answer is what I have come to use instead of even the New York Times, which is a Blackberry account with the Washington Post.  Personalized information delivery (including the round-trip kind that goes back to a teacher for grading) may break the high-cost-delivery death grip that is ruining knowledge based sectors of the economy.

If the Massachusetts Bar will accept students trained online then the hurdle to gain entrance to these fields just got cleaner.  The exam is no easier, but preparing for it is now alot less expensive.  Digital supply chain grafted onto physical supply chain promises more such forward leaps in efficiency.

Stolen IP in China: The Piper will get Paid

As everyone knows, and as our quarterly supply chain risk data proves, China is a den of thieves as far as IP is concerned.  Today's New York Times has a lengthy and prominent article on brand piracy in Shenzhen's cell phone industry.  The practice of making and selling black market phones is so rampant that 20% of all those sold in China are thought to be knockoffs.  The explanation of how this happens is candidly offered by a sales manager at Triquint Semiconductor who makes components for the industry:

"Five years ago there were no counterfeit phones.  You needed a design house.  You needed software guys.  You needed hardware design.  But now a company with five guys can do it.  Within 100 miles of here you can find all your suppliers."

What has bugged me is the audacity and criminality of the Government who happily looks the other way as expensively developed technologies, industrial designs, and brands are flat out stolen.  One Vassar professor is even quoted in the story spinning this scandal as a virtue:

"Chinese grass-roots companies are actually very innovative.  Its not so much technology as how they form supply chains and how rapidly they react to new trends".  Charming - reminds me of Napster as seen through the eyes of the music industry, or the go-getters out cutting down teak trees in Malaysia.  There is a reason we call it piracy.

But rest easy, poetic justice is coming to the rescue.  Remember the $1Trillion or so of dollar denominated debt held by the Chinese?  Well, after we print the trillion extra dollars it will take to undo our credit-sparked economic crisis those debts will be alot less expensive (to us) in real terms.  Think of it as a $500 billion bill being stuck on Beijing to pay us back for all the money that should have been made by Microsoft, Apple, Paramount, and Nike for their IP. 

The Piper will be paid. 

My Exploding Brain and the Growth Platform that only Apple Gets

OK.  I write lots of impassioned stuff about the need to master the content economy and the mega-growth platform of intellectual property.  Today my brain nearly exploded as I read the New York Times pages B2 and B3.  On B2 Treasury secretary Tim Geithner is quoted saying:

"Never before in modern times has so much of the world been simultaneously hit by a confluence of economic and financial turmoil such as we are now living through"

It is the epic shift promised in Naisbitt's Megatrends back in 1982, but now the earth is finally cracking.  The UAW meanwhile guts what is left of Detroit by looting the quake damaged house of Chrysler instead of preparing anyone for the real struggle to come.

Over on page B3 however the sun shines brightly on Apple. So brightly in fact, that its reflected moonglow is enough to hoist the old Ma Bell (now AT&T) out of a terminal land-line decline.  The App Store has just sold its 1 BILLIONTH download, and analyst A.M. Saconaghi at Sanford Bernstein cited as most impressive of all the company's 36.4% gross margin for the quarter.

The quote that caught my eye on page B3 was Apple COO Tim Cook (a supply chain guy from way back) dismissing netbooks:

"When I look at what is being sold in the netbook space today, I see cramped keyboards, terrible software, junky hardware, very small screens, and just not a consumer experience that we would put the Mac brand on, quite frankly".

For those who believe in demand driven supply networks as AMR has researched it for the past five+ years this single quote says it all - sourcing strategies, design strategies, branding and content strategies, all hooked to the engine of consumer experience.  Stop focusing on what your industry can't do and ask yourself, how should our demand driven supply network change to harness the engine of consumer experience?  Harley-Davidson does it well enough that people literally tattoo the brand on their bodies.  Procter & Gamble does it with human biology and the promise of youth.  BASF does it with chemistry that improves the finish of a snowbaord.

The exact wrong way is what Chrysler is doing - fighting over who gets screwed worst.

The Women of Supply Chain

I was just reading Lora Cecere's most recent piece on arsonists in the supply chain and thought - wow, great piece.  First off Lora takes some hard macro data about how deep the dropoff has been in demand to set the stage for what supply chain strategists must do. Second, she maps a set of prescriptive actions that are realistic against the old three-circle DDSN model.  Finally, she reminds us that leaders are those who handle these times well and then titillates the ambitious supply chain pro with future business school cases chronicling their courage and wisdom.  Compelling, quick, and doable.  Nice.

An hour earlier I was working through some issues on the topic of supply chain risk with Noha Tohamy.  This material has been researched quarterly with an intensive field study of risk in the global supply chain and how businesses deal with it.  In addition to being worthy of features both by Reuters and BusinessWeek, this research is providing valuable information on country and region specific worries from oil prices to IP risk.  Again, the work is compelling and timely.

This morning I worked through the first full system runs of our annual Supply Chain Top 25 with Debra Hofman, measurement genius and architect of the modern Top 25 analysis.  The key to this effort is measurement discipline all the way from sniffing out Peer voters with dubious credentials to correcting for statistical bias with scaled scores and smoothing averages.  It works because it is true and competitive people like those who run the world's supply chains appreciate an honest yardstick against which to judge themselves.  No question this is compelling and, arguably, timeless.

Where is the common thread?  Funny how the lead thinker in each case is a woman.  I am prepared to believe its just coincidence, but it does make you wonder.  What do you think?

Consolidation and Death: Where is Supply Chain Collaboration?

A decade ago the idea of collaboration was emerging as a breakthrough approach to efficiency beyond the factory.  The B2B air in the internet bubble came from notions like "Collaborative Commerce" coined by Gartner which implied that electronic connectivity would miraculously spur cooperation between businesses.  We thought it might be a bit more complicated, as the chart below shows. 

What we have since seen is that cooperation takes alot more than just setting up EDI, reverse auctions, or visualization.  It takes trust, which apparently is still in short supply.

Consider the following:

AMR is putting together an event at our spring conference in Scottsdale that will bring manufacturers together with retailers for a "knowledge cafe" to get supply chain folks from both sides to meet, greet, and learn to help each other.  Despite the efforts of one of our most influential analysts, Lora Cecere, and recruiting by information service giant IRI, we're finding retailers reluctant to come fearing they'll give more than they get.

On Tuesday an innocuous article in the Financial Times included the quote "Consolidation among suppliers will accelerate significantly" from the head of purchasing at BMW.  Others in the article included Continental, Siemens, and Daimler all of whom are cutting supplier bases by up to 50%.  The rest of the article is pretty much summarized in the title "Germany's large industrials wield axe to supply chains".  Is this the legacy of e-procurement? 

Just yesterday I spent five hours with Yossi Sheffi and some of the bright minds at MIT's Center for Transportation and Logistics wrestling supply network strategy questions with one of the world's most respected manufacturers (name withheld).  One key takeaway for me was the hard reality that retailers' readiness to jointly work with suppliers for mutual gain is limited both by willingness and competence.  We can build it, but will they come?

The question to supply chain strategists is this: when will we stop fighting over the pie and learn to make it bigger?  Sadly, it seems the gospel of our economic life remains competition rather than cooperation.  Everyone knows that huge gains can be made in efficiency if true and complete information were available up and down the supply chain.  Yet, we don't do it. 

The chart above was drawn nine years ago in anticipation of breakthrough productivity gains across the economy driven by bilateral relationships (meaning win-win) between trading partners.  2010 is almost upon us and we seem to still be on the flat part of the curve.  If there is to be a breakthrough it will take some leadership from sourcing people willing to pay more for something better rather than less for the same old thing.  Until we see that, consolidation and death will dominate the news.

Reminder - Supply Chain Top 25 voting is now underway.  Voters can still register at http://www.amrresearch.com/SupplyChainTop25/default.aspx

The Next Big Land Rush: Believe or Not, Its Knowledge Management

This sounds silly for anyone who has ever been involved in the typical hapless library exercise of a digital “knowledge management” initiative.  The lasting image for most of these efforts is of a black hole - everything goes in, nothing comes out.  But get ready for a change of tune.

The root of this is an exploding need among all players up and down the global supply chain to harness and leverage their intellectual property without giving up control or worse, having it hijacked and used against them.  An example is the kind of engineering intensive knowledge stored in the heads of thousands of soon-to-retire manufacturing process guys in the chemicals industry.  I talked to ExxonMobil about this and found they’re keen to solve it before the IP ends up sitting on a beach in Florida somewhere.  At the exact opposite end of the spectrum is the issue of managing IP for a company like Hasbro.  They have pure entertainment images that will manifest as profitable toys like Barbie, unless someone raids the files and dumps a load of cheap counterfeit knockoffs onto the market.

How do you capture, catalog, update, distribute, and otherwise collaborate on knowledge (i.e., IP) when it ranges from expertise to trademarks?  It turns out practically every technology vendor category has an answer for you.  Collaboration vendors from little guys like Jive to big guys like OpenText have a story.  B2B and EDI guys like Sterling Commerce, GXS, and Inovis are part of the puzzle.  PLM guys like Dassault, PTC or Siemens are certainly in the mix.  Digital Rights Management vendors have been thought of largely in terms of media and entertainment uses, but players like Adobe, EMC, and even Oracle (with its Stellent property) deserve a look on this front.  Plus the security vendors like Symantec, EMC and RSA need to be considered.  And finally, all the platform guys figure into the equation - IBM, Microsoft, and Oracle all appear across the board with “solutions” in each of these categories.

The net of it all is that manufacturers and retailers across sectors will absolutely need to handle the question of how IP works its way around the global supply chain.  One worry: letting Microsoft Sharepoint creep in as the defacto standard for management of IP in interenterprise collaboration.  Its so easy to set up and start using… it naturally links to your most familiar workspace, namely Excel, PowerPoint, and the rest of MSOffice.  But where is the control and scalability?  I’m not saying Microsoft can’t do it, just that renegade groups of employees doing it on their own will almost definitely end up making a mess, and possibly and expensive one.

Missing from the list of vendors with a solid pitch here is SAP.  The ERP backbone of choice for so many companies may have a stranglehold on transactions, but they lack punch when it comes to interenterprise collaboration, relying on partners like Seeburger and Crossgate.  This may seem a sideshow in Walldorf, but every industry is beginning to see the value of stuff that is presently flying around the digital supply chain, largely unsupervised.

I’d love to hear ideas on how best to map out a strategy for this problem.

Supply Chain Top 25: You Decide

We publish the AMR Supply Chain Top 25 annually, and have since 2004.  People follow it because it forces the discussion of who runs the best supply chain by focusing on big, familiar companies we all know.  The methodology is not only open to all but subject to change based on input from those who follow the list and its evolution over time.

What few seem to really grasp is how powerful the Peer Opinion vote is to the outcome. We weight the overall score 60% on financials, yes, but the variance in voter totals between companies who are demonstrating leadership and those who are not is huge.  Of about 230 companies in the total universe most get at least some votes, but the big vote getters - and you know who they are - tower over the rest.

This means simply that voting for companies you think have demonstrated leadership makes a massive difference to the outcome.  Registration for Supply Chain Top 25 Peer Voters is open now. For folks who think consumer brands get more votes than they deserve, vote for the industrials.  I for instance, think its crazy that Caterpillar has never made the list.  The same can be said of BASF, Dow Chemical or Flextronics. 

We are opening the voter website in just over a week.  As of now we have over 200 registered voters, representing one vote per company.  The visibility the Top 25 has built over the years now includes features in Business Week, Financial Times, Forbes, CNBC and translations into 17 languages.  The final rankings will be released as part of our Conference at the Phoenician Resort in Scottsdale AZ on the night of May 27.  If you want to impact the rankings for 2009, the time is now. 

Sun and IBM Breaking Up: Who Wins?

The news today about IBM and Sun possibly going separate ways leaves a door open for others to dodge what could have been a pretty blockbuster combination.  I remember back in late 90's how cool Java was and what it meant for Sun.  Unfortunately, the heavily engineer-driven culture at Sun kept what could have been a dominant computing pioneer from realizing its potential.  IBM, meanwhile learned the lesson of having business process and financial discipline govern ideas to make sure they are realized.  Sun still has some brilliant engineers and IBM certainly has a handle on how to build an integrated global supply chain.  The coolness of Java, plus a $3B+ R&D organization, and a hub of talent in the vital San Francisco bay area makes Sun a plum for someone like IBM.

If the breakup holds who wins?  How about Hewlett Packard.  Not only is H-P a titan on the scale of IBM (actually bigger), it is also great at running an integrated global supply chain (see Tony Prophet of H-P explain what they do at our upcoming conference) and positioned to do alot with Java and the R&D pool by applying it to a huge range of consumer and business computing applications.  A similar argument can easily be made for Cisco Systems.

If cooler heads prevail the IBM-Sun combo will go ahead.  There wasn't much keeping the two sides apart over the weekend and the logic of the deal for IBM includes a lot of potential benefit for IBM customers looking for better systems links - a solid stream of profit opportunity that Big Blue has to like.

Metro and the Digital Download Race

I spoke at a conference in London this week and had a question from Mark Halper with Manufacturing Executive magazine about how companies other than Apple could play in the content economy. I rattled off my favorite examples of content as brand for CPG companies, content as patented science for pharmaceuticals, and content as engineering technology for chemicals companies. Where I have tended to feel a little thin, however, is in examples of content businesses and supply chain strategies for retailers. 

Conveniently, upon my return to the United States I was greeted by a little item in the New York Times about the innovative and respected German retailer Metro, who is acquiring London-based 24-7 Entertainment. 24-7 was founded in 2000 to handle downloads of digital content like music, films, and ringtones. According to the article, 24-7 managed 93 million downloads last year in Europe, trailing only market leader iTunes. Apparently, the plan is to manage it all as part of a wider consumer electronics retailing chain (Saturn and Media Markt). 

The emerging picture is one of a retail shopping environment facilitating shopper choice and presumably whetting consumer demand, but shorn of some (eventually much) of its inventory. Physical supply chains built to ship CDs and DVDs become obsolete. Soon to follow will be much of the physical chain supporting consumer electronics SKUs, whose variation can be burned in at the retail shop rather than built in somewhere upstream in a factory.

How fast can retailers learn the new rules of layering consumer-friendly features onto in-store items with digital-only SKU variants? Metro will be one standard to watch. Another angle is to ask whether they’ll learn it fast enough to keep up not only with the likes of Apple, but also Nokia whose 2006 acquisition of Loudeye lets it take cash from consumers after they’ve left the store.

The race is really on now. My guess is that it will move faster than many in the physical supply chain community can imagine.

The Global Supply Chain: Accelerating Recession and Recovery

I’ve been on the road for the past week and a half, but last Friday I had an interesting e-mail conversation with Jim Shepherd, an SVP at AMR Research, on the how the global supply chain affected the downturn, and will hopefully positively affect a quicker recovery in manufacturing.  Jim and Tony Friscia, AMR Research’s CEO, are going to write further on this topic in the coming weeks (I’ll post a link to it when it’s published), but I thought I’d share with you our email conversation below.

Jim Shepherd:
I have been reading lots of articles these days about the rapid decline in industrial output. The basic thrust is that this is a global disaster and the drop in manufacturing is unlike anything seen since the Great Depression, etc. Here is an example of the graphics used:

When I look at these graphs, I tend to see a very different picture. It seems to me that we are seeing modern supply chain management at work. For the first time in history the global network of retailers, wholesalers, manufacturers, and raw materials providers were able to rapidly sense and respond to a decline in demand. The initial drop in consumer spending was caused by a combination of the bursting of the housing bubble and the banking crisis, but the global supply chain reacted almost instantaneously. This actually appears to have occurred on a pretty orderly basis, without massive inventory buildups or long signal delays that might have caused downstream suppliers to keep producing unneeded goods. It would be interesting to know what the time lag was between Best Buy selling fewer plasma TVs and the drop in production of components in China, but I’ll bet it was a matter of days. 

We finally have a situation where the majority of companies in the supply chain have processes, information systems, trained professionals, and trading partner communications that allow the global supply chain to respond to change with astounding speed. The reduction in demand was unexpected and faster than anyone had ever anticipated, but manufacturing, with a few notable exceptions like the auto industry, was equal to the task. The bad news is that this reaction speed and global connectivity has also meant that the recession spread from Wall Street to the rest of the world is 30 days instead of the multi-year rolling recessions that we have seen in the past.

I think it is an opportunity to celebrate the progress we have made in supply chain management technique and technology, and I also think that it bodes very well for the industry’s ability to rapidly recover when demand returns. We might want to examine the sequence of events involved in restarting of the global supply chain and consider how it might work and how fast it can happen.

Kevin O’Marah:
It’s a good thought. I certainly agree with the premise. In today’s New York Times, there is a long article about the huge decline in manufacturing worldwide.

On one level, it demonstrates as you say that the global supply chain has reacted very quickly to demand drop-off. To your Best Buy question, I was in Asia last fall with a supplier when they told me they were already well into plans to cut production, and had in fact shut off Circuit City well before they declared bankruptcy. The demand signal was heard loud and clear.

The follow-up questions are all about what everyone does now that our manufacturing sector has in fact delivered this economy of abundance—so rich that we demand no new stuff at all. 

I think two answers are ready. One is to apply this magnificently efficient global supply chain to the problem of feeding and clothing the poor. Developing world demand is where we can find customers. With our brilliant efficiency, we should be able to price low enough to begin making a difference. The other is finding ways to embed information in our manufactured products to add consumer value without adding material. This is the theme of the conference. I marvel at the pace of change, but am ever hopeful that we are perfectly well equipped to respond.  Supply chain can save the world.

 

Supply Chain Can’t Save the World If It’s Not Allowed to Serve the World

I’ve said that supply chain is the answer to some of our really deep problems like environmental sustainability, affordable healthcare provisioning, and developing world welfare. Today, with a total freeze on world consumer demand, this is more important than ever. All of which makes the rise of protectionism pretty scary. 

Mexico is essential to our economy, and I would argue demand for consumer products in Mexico is one potential out for growth-starved companies here in the United States. We may be protecting some jobs with this kind of policy, but we are jeopardizing a far bigger prize—renewed global demand for everything.

I support almost the entire Obama administration budget because I see real growth in spending for stuff from servers to insulation. And although I know it means a huge ding on the long-term value of the dollar, I’m OK with it because we need demand now, and, we have needed some of these basic investments for years. Sadly, I worry that Michigan’s support for Obama in the election now means he owes organized labor a favor. Saving GM is dubious enough, but letting protectionist sentiment take root might end up undoing everything. After all, it’s the GLOBAL supply chain that works miracles of productivity, not thousands of local supply chains. Didn’t we learn this lesson back in the 30’s?

JCI in the Driver's Seat

Despite the dismal state of the auto industry, here’s a story about how Johnson Controls Inc. (JCI) is still innovating, trying to revolutionize the plug-in hybrid car market. One of the reasons JCI consistently makes our Supply Chain Top 25 (No. 23 in 2008), while many of its OEM clients do not and none of its supplier competitors do, is that JCI isn’t content to sit around and wait for the car makers to dictate its business. It’s willing to take the lead and define its own market by looking beyond its direct customers (the OEMs) and to the consumers themselves. This is also part of the larger intellectual property in the supply chain puzzle we’ll be discussing at our spring Supply Chain Conference. In the difficult automotive industry, JCI represents how every member of the supply chain can play a vital role in the flow of ideas through the supply chain.

Supply Chain Degree Programs: What Works?

I wrote a piece the other day about where the jobs will be in 2010. It ended up being the most-read article on the University of Massachusetts’ LinkedIn site (much to my surprise since I didn’t post it there). I guess looking for work is top of mind these days.

The funny thing is that we are told constantly by our friends in supply chain organizations at the big F1000 companies that finding, developing, and retaining supply chain talent is a major challenge. For all the fear in today’s economy, I think too much focus falls on the supposedly “good manufacturing jobs” we are losing. Squaring this disconnect boils down to redefining what the work looks like. Gone is the dehumanizing assembly line job; on the rise are the problem-solving, idea-generating, and connection-building jobs.

If you happen to be a hyper-creative RISD grad like Shepard Fairey, the future is all hope for you. But what about the typical engineer, MBA, or APICS-certified materials manager? No worries: Opportunities are there for people who master not just the skills of sourcing, operations, and logistics, but also the broader business context around it—i.e., the problem-solving, idea-generating, and connection-building stuff like new product launch, customer fulfillment, and after-sales service. At the risk of sounding consultant cheesy, one might even call it value chain.

Too many universities, however, are coming to this wider picture slowly. Lots of schools are ramping up supply chain programs, conferring degrees at undergrad and graduate levels, but many seem overweight in certain areas at the expense of others, and few really link supply chain back to product innovation. Make no mistake, solid (preferably certified) expertise in classic operations skillsets is essential, but your earning power comes from building on rather than just mastering the foundation.

I had the good luck to learn at the feet of three academic geniuses: Bill Lovejoy in Operations, Seenu Srinivasan in Marketing, and Dave Beach in Mechanical Engineering. These three professors at Stanford created a course called “Integrated Design, Manufacturing, and Marketing,” which had more influence on me than anything I have ever studied. The course was (sadly) discontinued and Lovejoy fled to Michigan, but the seed was sown.

Looking around, I wonder which schools today offer the ambitious young supply chain professional the best start. I have seen great things being done at the University of Wisconsin’s Grainger Center, and I still think Stanford probably owns the top talent in the world with Hau Lee. My colleague David Aquino just launched a survey on supply chain talent and university success stories. If you have some ideas about where he should look, please fill out the survey or leave a comment here for me.

Where the Jobs are At: 2010

If 2008 is the year we hit the wall, then 2010 is the year we start to show our resilience and see the light at the end of the tunnel. The big hook in Thomas Friedman’s March 7th column is all about how much junk we have built, bought, and thrown away in an extended surge of unsustainable growth. 

AMR Research has been studying this topic on three big dimensions since about 2000. The three all fall under the big title of Supply Chain Saves the World, and for those who enjoyed “The World is Flat,” the links back to strategies for global supply chain management are not just obvious—they are compelling.

First, we say supply chain is the discipline that most directly affects environmental sustainability. Every factory pumping out stuff; every truck, boat, or airplane delivering stuff; even every farm, forest, or mine that gives us the raw materials for all this stuff; are managed by supply chain professionals. The average asset productivity gain per year across the global supply chain is about 10%. This discipline, applied to packaging simplification, scrap reduction, energy recapture, and material reuse can, and with the right consumer leadership will, deliver a sustainable planet.

Second, we say that supply chain is also the answer to world hunger. The same efficiency gains described above apply to making markets like Nigeria, Pakistan, and Brazil attractive to business. A recent detailed study by IBM found that the best supply chains (those in our Supply Chain Top 25) consistently view emerging markets overwhelmingly in terms of new customers rather than new sources of cheap supply. This philosophy, especially when accompanied by real respect, will raise welfare around the world.

Third, we argue that supply chain is the discipline that will fix the healthcare problem. For three years running we have assembled leaders from drug, device, distributor, and provider organizations in Boston to dig into field research on the potential efficiency and efficacy gains of applying “demand-driven” (customer-oriented) supply chain practices to this troubled sector. The finding again is that 10% per year productivity improvements are within reach. If we can adapt the lessons learned in consumer goods to healthcare we will solve the problem.

So what about the light at the end of the tunnel? I argue it’s already visible and lies in learning, both as individuals and as a society, to create value in the most carbon neutral, globally sustainable industry available: pure ideas. The notion is that a “Content Economy” has been born, and like the tiny mammals that got their start alongside dinosaurs, the jobs, businesses, and markets emerging now will proliferate and thrive. I expect that a generation from now most people will work in pure information jobs. The good news—back to Friedman’s piece—is that these jobs consume virtually no energy, involve cutting no trees, and require dispatching no trucks.

There will come a time when, like agriculture before it, the industrial age fades from the foreground to its eventual supporting role in the world economy. Essential, yes, but certainly not the backbone of a healthy, happy human population. By 2010 this should be obvious, and to the relief of stock markets around the world, will be something investors can bet on.

Cydia and Apple: Lawsuits Will Be a Sideshow

Today’s Wall Street Journal has a big article about a new renegade competitor that is challenging Apple’s App Store and in the process whetting the appetites of IP lawyers. With all due respect to the legal eagles involved, technology and the global supply chain should make this debate moot.

The deal is this: Cydia’s founder is an application developer who, like many, doesn’t see himself as an enemy of the cool company of Cupertino. He does, however, want to have other app developers able to get to market and get paid for their IP. Apple, however, stands to lose some pretty serious margin contribution (30% commission on estimated 2009 sales of $800M, according to Piper Jaffray) and, arguably, a degree of control over the cherished User Experience. The legal issue is that Cydia’s apps work only on “jailbroken” iPhones, a process (or crime) that involves installing software written to modify the operation of the device. Cydia’s founder, Jay Freeman, claims 1.7 million iPhones have installed this software to date. Apple, understandably, sees a copyright infringement. Lawyers see an irresistibly interesting case pitting the little, ironically named Freeman, against the sinister controlling monopoly—almost like the famous 1984 Apple Super Bowl ad being shown in reverse.

The interesting thing for technology and supply chain folks, however, has less to do with the potential precedent-setting debate surrounding this matter than with the design, production, and distribution strategies that a smart company like Apple can come up with to put the issue to bed. Apple is number 1 in our Supply Chain Top 25 (by the way, supply chain professionals are welcome to vote in our 2009 Supply Chain Top 25), and not because of their lean or six sigma discipline. The secret sauce is in how industrial design, software design, and electronic design weave together into an irresistible whole. In recent years, Apple has added another layer to its supply chain innovation—retailing. The Apple stores, not to mention the AT&T distribution deal for iPhones, puts this once totally vertically-integrated computer manufacturer squarely in the business of relating to consumers all the way from concept to profit.

Defending the App Store will ultimately depend more on technical and business decisions made in component supplier collaboration, retail promotion, and technical support systems than decisions in the courtroom. Good lawyers will buy time to let Apple’s strategists work out the best way to protect its cash relationships with consumers. Hopefully, this will also allow creative types like Mr. Freeman to get paid for their creative work. But as the music industry learned the hard way with Napster, IP law is not enough to protect a business—physical supply chains must be part of instantiating control.

Categorizing Content in the Supply Chain

The Intellectual Property theme for our upcoming supply chain conference is generating an explosion of ideas, but an even bigger explosion of questions. Everyone, it seems, gets the basic idea that content, or IP, is important to their supply chain strategy, but often has trouble linking their version of the issue to the most obvious content types like iTunes or the New York Times. My colleague Jim Murphy and I took a crack at breaking this problem down. Here’s a first pass:
 
“Content” breaks up into different categories that behave differently:
 
Downstreaming Content:
Entertainment
News
Tradeable Business Information
 
Upstreaming Content:
Consumer Demand Data
Patient Health Data
Industrial Operational Data
 
Embedded Content:
Patented Science or Technology
Trademarked Branding
Fashion & Design
 
There are probably other kinds, but each of these nine behaves differently depending on source, use, and access characteristics. Each also has combinatorial requirements, for instance: iTunes + iPod = value.
 

Tesco's US Fresh & Easy Launch Not so Easy

I lived in England for four years and was very impressed by the basic Tesco supermarket offering. Lessons learned with Tesco's Fresh & Easy launch in the US suggest the perennial Supply Chain Top 25 grocer is not quite as smart as we think. Our shopping patterns in the US are affected by lots of big obvious stuff, like bigger houses, cars and parking lots; all of which reward price-conscious shopping. The loyalty I had to my local Tesco in London or Oxford was as much proximity as excellence. The value I remember was basic: good prices plus outstanding store operations and selection, something I enjoy today in my Westwood Massachusetts Roche Brothers. Credit Tesco with one big thing though: it gets out and experiments, and in the process learns how the retail supply chain is changing. Don’t forget, most who tried broke their pick on home grocery delivery, while Tesco did not. I guess everyone is fallible.

The head of our Retail practice, Mike Griswold, will have more what went wrong with Tesco's US launch in the next Chain Reaction newsletter (subscribe here).

Atoms and Ideas: Supply Chains Adapt to Make Money from IP

A recent BusinessWeek article caught my eye as we plan for our upcoming conference on intellectual property, or content, and the global supply chain.  As I seem to see on a daily basis, almost all industries are struggling with the business models welding content and product together to make money.

The end of the DVD gravy train highlighted in the recent BusinessWeek article comes as no surprise.  But its legacy should be more than just a now drying-up profit stream.  One of the lessons Disney learned through the supply chain efforts of its Buena Vista Home Entertainment group was how to feed retail.  Since those guys had to master how to replenish giants like Wal-Mart and Best Buy with product that saw 70% of lifetime sales within the first two weeks of release, they got good at forecasting and supply response.  This is nothing especially new to the likes of P&G or Kraft, but a pretty useful lesson for Hollywood.  Disney’s plight should be less serious than most in Hollywood, precisely because they have a bunch of ways to monetize content – theme parks, toys, and other physical media.  Learning what to sell, at what price, and how is still plenty tricky, but expertise in fulfilling the way consumers have come to expect will be an advantage.

As to the other end of the spectrum, credit Paramount with experimenting in the inevitable, economically inverted world of the purely digital supply chain.  Maybe necessity is the mother of invention for this slightly more classic entertainment pure play.  My guess is that we’ll see plenty of hurt along the way as all content industries play trial and error with the pure content pricing puzzle.  Even Paramount and the other entertainment big guys should be able to take lessons from companies like Disney, Apple, Harley Davidson, or Under Armour who essentially mix content into the product and still get paid.  Atoms plus ideas could hold the key.

If you're interested in reading more about my thoughts on the content economy, check out this column I wrote last week.

The Dawning of a New Economy: Nokia Makes Another Move

The timing of this week’s Chain Reaction column (subscribe here) couldn’t have been better. After discussing the dawning of a new economy based on intellectual property, we now get news Nokia is moving further into that realm, opening an app and ringtone store. We've wrote awhile ago about Nokia's moves in this direction, increasingly competing with Apple. I, for one, am excited about this new move, not only because it shows continued progress toward a future global supply chain strategy that is more about ideas than merely handling material, but because it represents one clear path out of the demand-freeze now gripping the global economy.

Today’s Washington Post led with an article about the still worsening economy. The quote that caught my eye was; "Manufacturing, construction, financial services, non-financial, retail—wherever you look, you see a complete collapse in demand," said Julian Callow, an economist at Barclays Capital in London. "It really is like the floor has come out of confidence in global economic demand."

We have no demand because the traditional engine of growth, the American consumer, is sated. These pure content businesses can buck this trend because they are uniquely able to set prices at zero and still not lose money. Suppose Nokia or Apple decides to spur sales by running a promotion selling apps for a few cents. Do they lose money? Only to the extent that they pay royalties. Absent any production or shipping costs these sales are zero marginal cost. Plus, admit it, when you see ads on TV for Apple’s apps you are tempted, no?

As we showed in this week’s Chain Reaction, the best thing is that creation of these apps does not require any of the normal 20th century business infrastructure. Clever people, tinkering away at their desks is all it takes. Lots of people out there have time to get into this game now. It may be a slow, halting start, but the growth engine is here.

Let us know here your thoughts about the ideas in this week’s column and Nokia’s move.

Peanut Recall and Supply Chain Worries: China as Bad Guy (again); HP as Good Guy

As the Peanut Corp. of America scandal rolls on a new bit of information has thickened the plot: Chinese organic peanuts may have been the source of another Salmonella outbreak at PCA back in 2006. The last post I made on this topic was about food safety and brand reputation risk.  Now that China is part of the story we have a full blown worst practice example of stupidity in the global supply chain.

Taking the wrong risks, and losing

AMR Research's quarterly Supply Chain Risk data came back just last week (we’ll be publishing a full report later this month, but here's a look at last quarter's data). A preliminary look into the new data shows that when asked “What is the primary risk associated with sourcing and manufacturing in China?” 136 companies surveyed said:

• Product quality/safety/fear of contamination--45%
• Rising material costs--10%
• Rising environmental compliance costs--10%
• Rising labor costs--9%
• Political unrest--9%
• Other--14%

For comparison, consider the top supply chain risks associated with manufacturing and sourcing in the US. The top three are:

• Lower consumer spending-- 49%
• Volatile energy costs-- 41%
• Regulatory compliance--35%

China-sourcing may have given us low, low prices, but we are finally beginning to see the many hidden costs of this approach.  A year ago when oil starting going up, we saw wave 1 of the hidden costs of globalization as transportation suddenly began eating up profits. In wave 2, which is now coming clear, the hidden cost of poor product quality is beginning to bite.  I predict wave 3 will be fuller realization of the cost of stolen or damaged intellectual property; we’ll see that next year as pirated content, counterfeit brands, and hijacked patents slashes earnings.

Let’s just hope the really big one never crashes: Wave 4 could be an angry mob of citizens disenchanted with the boom that left them behind. The China meltdown I predicted following the Olympics may not have materialized yet, but disgruntled workers are already starting to stir with factories shutting down without warning. I wonder how sanguine they and other “low-cost” country populations will be after five or six quarters of serious global recession. In fact, C.J. Wehlage, who leads our high-tech industry practice, thinks companies should be planning exit strategies in this down economy.

Sourcing with Respect; Selling with Integrity: HP gets it, PCA doesn’t

We have a long way to go in working with our fellow humans around the world as the global supply chain links us all together. Sourcing with respect and selling with integrity are disciplines we had better master if the potential power of the supply chain is going to do us any good.  For an example of how to do it right look at Hewlett Packard, which has sourcing policies that have long been ahead of the pack and whose global sales footprint shows an appreciation of local style that works. In fact, the company's program manager for supply chain and social responsibility, Bonnie Nixon-Gardiner, is a role model for those dealing with these issues. Ms. Nixon-Gardner and I both spoke at last year's Stanford University's Responsible Supply Chain Conference (here is this year's agenda).

Bringing it back to peanuts, the guys in Georgia with the salmonella factory did both of these things exactly wrong:  Shipping peanuts 12,000 miles from poor China to a plant in the heart of America’s peanut fields to save a buck, and then knowingly shipping tainted product to customers in the USA to make a buck.  We reap what we sow.

Video: Kevin O'Marah's Interview with Dana Stiffler

Intel, Blip.tv, and GM: The New World of Work in the Content Economy

The story of our wacky upside down economy plays out in three columns spanning page 2B and 2C of USA Today (Feb 11, 1009). It tells me that the next generation of work may feel more like play.

First, I see that Intel plans to spend $7B on its next generation of equipment for 32 nanometer technology. Not many new jobs created, but lots of money being spent and, more important, another upgrade to the foundation technology of the Content Economy. Typical Intel: miles ahead of others strategically, technologically, and financially. I know something about Intel’s approach to the global supply chain, and let me assure you, it is onto something big. The core of it is an even more powerful and ubiquitous digital processing capability that will permeate all elements of our lives.

But it doesn't end there. Read through the jump for more.

Peanut Recall: Another Supply Chain Risk to Consider

The big story on food safety—USA Today has it on page 1, above the fold—reminds us again that supply chain risk is a multi-headed beast. That Peanut Corp. of America knowingly shipped contaminated product is criminal, but the wider issue for business is how this incident affects brand value.

My colleague Lora Cecere, who is probably the world’s leading expert on the food supply chain, recently wrote about this issue:

"The safety valve of today’s system is a recall; but when it comes to food safety, a recall is ineffective. Last year, there were 15 major food recalls in the United States. When a recall happens, only 40% of the product can be recovered and the recall reduces the shareholder value of the producing company by 7%. The write-offs are also substantial: the average cost of a write-off is $20 million and 14% of companies have write-offs in excess of $50 million. And, when a category has a recall, 57% of consumers stop buying the affected product."

More on how important the supply chain is to brand integrity after the jump.

Apple without Jobs – No Problem for at Least the Near Future

PC magazine just posted a thoughtful article by Tim Bajarin that says Apple’s idea pipeline is far from empty and that Steve Jobs’ absence should not mean an end anytime soon to its track record of breakthrough products.

We have more on why after the jump.

ISM: Recession or Recovery

Today’s release of the ISM manufacturing figures shows continued contraction, which is little surprise; but on a positive note, the top-line figure (PMI) rose a bit from last month to end at 35.6. While this is still very low by historical standards, the pace of layoffs through January had me worrying we might see a PMI below 30 for only the second time in history. 

Clearly the numbers indicate recession is still on. But a few more respondents surveyed in January said they saw an increase than in December, which has to be positive. If the bottom is finally revealing itself then supply chain professionals can begin to think about strategies for recovery and climb out. Some companies should be well positioned given their existing investments in supply chain agility—Procter & Gamble has a stronger foundation than most in its industry, and General Mills is another with markets less recession sensitive than many and where investments in IT have positioned its supply chain for quick recovery.

However, before I get too carried away looking on the bright side, it’s worth remembering that in 1982 the PMI stayed in the 30’s for the entire year, meaning two-thirds of those surveyed saw decline all year long. The lesson: 1982 was part of an epic shift away from traditional manufacturing and a period in which the term “Rust Belt” came into the lexicon. If, as I fear is true, the current economy is showing similar signs of a wholesale structural shift toward new industries (I expect the information-based industries to emerge as future employment engines) then we could be in for a long, slow, painful shift.

A Whole New Supply Chain

"We’re in the middle of a period that I refer to as a period of 'combinatorial innovation.' So if you look historically, you’ll find periods in history where there would be the availability of different component parts that innovators could combine or recombine to create new inventions. In the 1800s, it was interchangeable parts. In 1920, it was electronics. In the 1970s, it was integrated circuits.

Now what we see is a period where you have Internet components, where you have software, protocols, languages, and capabilities to combine these component parts in ways that create totally new innovations. The great thing about the current period is that component parts are all bits. That means you never run out of them. You can reproduce them, you can duplicate them, you can spread them around the world, and you can have thousands and tens of thousands of innovators combining or recombining the same component parts to create new innovation. So there’s no shortage. There are no inventory delays. It’s a situation where the components are available for everyone, and so we get this tremendous burst of innovation that we’re seeing."—Hal Varian, professor of information sciences, business, and economics at the University of California at Berkeley and Google’s chief economist, McKinsey Quarterly, January 2009.

This interview caught my eye because we are hosting a conference this spring on how companies build, monetize, and protect intellectual property in the global supply chain and too many supply chain folks still seem baffled by how to approach this issue. Mr. Varian points out the most important thing supply chain professionals need to understand if they want their operations to succeed: today’s combinatorial innovation is happening with bits – the physically non-existent components that add up to intellectual property. I touched on these issues in the latest Chain Reaction newsletter (subscribe here).

To supply chain people this means that any asset you manage which can be rendered as pure information–artwork for branding, formulas for food or medicine production, engineering data for complex assemblies like aircraft–can take advantage of the unlimited availability, reproducibility, and distribution of these IP components.

We have good news and bad news after the jump.

Bravo Intel

We wanted to give Intel kudos for a recent round of investments by its venture capital arm. Intel Capital is investing $23M in three Indian companies (individual amounts were not disclosed):