Someone asked me this question on a popular social platform. The subtext was this:
What kind of discount do you think they’ve negotiated with the major carriers (UPS, FedEx, USPS, etc.)?
I have over 12 years of operational experience and 23 years of commercial negotiation experience with freight companies on large scale global freight operations.
Even though I have no direct experience with Amazon’s freight operations (and I would not reveal any inside information, even if I did) I think I am well qualified to answer this question.
Based on my review of Amazon’s cost reports, I would first question the full details of $28 Billion freight spend. My gut feel is that all of it may not be freight bill for external freight vendors such as UPS, FedEx or USPS etc.
Moving on, irrespective of the
As such, Amazon would start with a massive advantage in the price negotiations with the vendors. There are two questions here:
1. How big? And,
2. How well Amazon uses this advantage?
Let’s start with the second question first – because I have worked with many companies who had a similar massive advtange where they formed bulk of the trade on some lanes and yet did not know how to negotiate and control freight well enough.
What went wrong?
In many cases the same company has 20 or more divisions each with its shipping department – negotiating with the same vendor on the same lane. In most cases the vendors pitched their best salesmen while the buyers thought of freight as a fixed cost (an after thought).
The net result? They were paying the retail! Or, close. Worse still, they did not know the difference. I will skip a lot of other bad news, except for the worst one – they were signing contracts which were largely one sided (favouring the freight vendors). And, as usual the contracts make all the difference in any transaction.
So how well does Amazon perform on this front?
An external point of view is that it performs very well. What is my evidence? Read these articles to get a sense:
There are many others in the same vein. Sure it is a political hot potato now, but the facts of the case are still quite clear. Amazon is using every advantage it can. And, quite well.
Let’s spend some time on the first question.
How big is the advantage?
Everyone knows that the full truck, full plane, or full ship, or full shopping centre is very lucrative proposition for the vendor. Any operation close to its peak volume is at its most productive.
Think of what kind of rent subsidies do the anchor tenants enjoy in shopping centres, and in commercial buildings?
What kind of deals do Take-or-Pay (ToP) buyers enjoy on LNG trains where investment in each train exceeds several billions of dollars. There are countless such examples in the realms of supply chains – ranging from explosives to chemicals to gases to property to FMCG etc.
Almost all commercial operations have a bulk buyer who enjoys significant cost advantage over the retail buyers.
How do you model the advantage? How do you model the industry cost curve and pick your vendors? How do you negotiate your advantage?
All this is an art – which cannot be summarised in a few pages. You have to live it all day, every day, for years to master the art.
In a future post I will reveal Amazon’s achilles’ heel, which none of the big box retailers have yet identified, and which would level the playing field for them.
People often wonder where the best opportunities for start-ups are. Supply Chain Security space is getting a lot of attention in this regard.
In fact, just today someone asked me on a popular platform about opportunities for start-ups in Supply Chain Security space . They wonder whether these were more in software, or consulting arena.
Here is my view:
It would be neither of those two. Rather it will be a combination of hardware and software – initial application know-how will have to come from the user side.
Let me explain.
Post-2001 (911) the world of supply chain security has changed dramatically. The regulatory environment has evolved dramatically (as we explain in my report Global Supply Chain Group’s SUPPLY CHAIN SECURITY REPORT). But that is not the only change. Almost everything – customer innocence, political and cultural norms, technology and particularly technology – has evolved dramatically as is explained in this report.
Most importantly – the threat perception has evolved considerably. Look at the diagram below which summarises the supply chain threats over the decades:
So far, this is common sense representation of common knowledge. What is not common knowledge is how technology has evolved in response to these trends.
There are at least 6 technological streams which find applications in supply chain security. You will find them in the report, or in this survey on supply chain security – Supply Chain Security Survey
But the most interesting insight in the report is that almost all the opportunities offered are in combinations of hardware, software and some know-how in the application.
That is not to say that pure-play companies do not exist. In fact, many companies have evolved to products with a considerable component of application know-how. In mature products that is always going to be the case.
But, for a start-up, a combination of hardware, software and some application know-how is the best bet
I need to tell a true story which is about 16 years old.
Jon had just left the secure world of a senior role in a multi-billion dollar global corporation to accept the role of the CEO in a mid-size family-owned company. He had always been a go-getter, who had progressed fast in his previous roles.
He always showed impatience with the bureaucracy endemic in such large
So, I was not surprised when announced his plans to take command of the mid-size Australian company. Because he was not very close to me, I was a bit surprised when he sought me out, saying that he might contact me for a project once he was settled in his new role.
True to his word, and style, he did not let the dust settle before he called me up and requested a meeting. He gave me some details of the situation, and asked for a proposal to revamp the procurement department – which he saw as the weakest link.
Because the story is old, I can share some contextual information while changing other details. The company itself has been sold multiple times since; none of the information is confidential or identifiable.
Jon explained to me that he was the first external CEO in the business – which had so far been run by the founder. The company had been reasonably successful in the mining
Jon, being the go-getter, was just the right man for the job. He was promised total autonomy by the founder/ past CEO – who had stepped back to the role of the Chairman.
In my first meeting with the Chairman, I found him to be an extremely astute man, who had built a strong company through difficult circumstances. Granted that the recent boom had made things easy for the industry, he was not the kind of man who could easily relinquish control.
It will take a long narrative to describe exact details of the project, and these are not even relevant. Suffice it to say that Jon, who had taken his bosses assurance of total autonomy on face value, found it very hard to operate the company as a CEO.
Almost all the crew was used to go to a single man for every decision. For the past 25 years in the company, all decisions were made by a single man – the founder.
Despite the appointment of the new CEO, this continued to happen in our transformation project, as well as in the business-as-usual operations.
It became amply clear to us that our project proposal terms were unlikely to be honoured. There was no way to get the co-operation from the management team because everyone was afraid of what the procurement data might reveal about the past and present.
We requested a meeting with Jon and expressed an inability to continue with the project under the circumstances. He apologised to me about misreading the situation and putting us in very difficult circumstances.
The Chairman thanked us profusely for showing the direction to ‘his’ team and after getting
However, more ominously, within weeks, it was clear to Jon that he had jumped from a chiller to a freezer. Within weeks he moved on to a new role as the CEO of a different, more progressive, company.
I will talk about how the story ended later on in this article. Here, I want to come to the main point of this article.
There are many similar situations when you MUST not hire management consultants because it will only waste time and money.
In my last article titled – “How To Get The Most Out Of Your Management Consultants While Spending The Least On Them?” – I wrote
The Quality of Your Management Consultants Will Decide The Heights You Eventually Climb To
A number of people wrote back, objecting to the presumption that every situation is amenable to getting management consultants.
While I did not say any such thing, when I thought about the topic, I recalled this story.
Leading from it, I can think of other situations where we did not start a project just because the person leading the project was really not in control.
This can happen due to title inflation in some countries where people get titles without commensurate powers and abilities.
In many Asian countries, family owned corporations continue to be run by the family members, despite there being a whole cadre of professional managers in place.
It is very interesting to watch the dynamics of these organisations in practice. The problem arises when many foreigners are misled by titles, not too dissimilar to the rare Australian situation quoted above.
Unions are a fact of life in almost all big corporations – and they have a role to play in balancing the scales.
Yet, in some circumstances, they acquire so much power that any positive change is impossible. I quote one such very personal story in this article.
The point is simple – if the management is totally powerless against the unions they should not substitute analysis for action by carrying out one management consulting project after another.
That would be just throwing good money after bad.
If you adhere to these simple rules of the thumb then I can truly say that:
Coming back to the story that started this article:
The company went through two more CEOs, and an industry-wide government inquiry before the chairman finally relinquished control of the operation. At this point, the company was a popular target for take-over.
Start of the year is always a memorable occasion – full of joy and hope. It is also the time for new intentions, new hopes, and new habits.
Like many families, we use the end of the year break to set the tone for the coming year – individually, and as a family.
That is the best way I know of sustaining momentum in Global Supply Chain Group for the last 20 years, as well as for physical, intellectual and skills development of three young boys growing up in a culture of entitlement.
One of my sons, who is studying a very tough engineering course at a highly competitive university made an extremely good point in a conversation with me. We were discussing how we can both achieve a breakthrough far above what we achieved last year – he in his study results, and I in my golf results.
The reason it is worth repeating here is because we have both gone though a year of effort to achieve these respective breakthroughs, with not enough success.
We were reviewing our methods and efforts from last year when he commented that if do the same things, in the same way, all we can get is the same result.
My thoughts immediately turned a number of my clients, who always complain that they have tried everything to get a breakthrough in their supply chain and business, and gotten little results.
Exactly the same situation is applicable there. I summarise the situation in the following diagram:
Now that he has made this observation, we are slightly further ahead on the curve in the last 4 days. We know that we need better methods, not just work harder.
But now comes the hard part – I am not a golf expert, and he is not an engineering expert. In fact, I touched my first golf club only after the age of 35 or so. To find methods that will take my golf handicap from 13 to 4 is not easy.
It is not that there are not enough people each with their own methods. It is just that I don’t know which one of them will work for me. That applies to a regular golf-pro lesson too – I tried those one year.
I want to solicit the help of my well-wishers, so they can suggest some methods that might work. I have to find my own way through a maze of methods to choose the ones most likely to work for me.
Then I have to apply the chosen method – till it is clear that they are effective, or not. Then, I have to incorporate them in my
My sons’ challenges are even bigger. Luckily, I am not studying engineering in UNSW, or for HSC in a selective school. Yet, I am sure they will measure up to their own challenges. That is the nature of these things.
There were only 24 hours left. Tomorrow the board would pull the plug on the project which had continued for well over 3 years. The total costs as per internal calculations had run into hundreds of millions of dollars.
External consultants reckoned that when you included the costs of internal resources seconded to the project from rest of the organisation, and other costs buried elsewhere in P&L’s the real total was at least double of that.
However, the project had built a momentum of its own. No one was willing to point at the elephant in the room, let alone to lead it out. Careers were at risk. Good careers – built over several years.
I will talk about the outcomes later in this piece. Before, I do that I want to spend some time talking about how did the company arrive here?
How did so many competent people miss obvious and easy signs that the project was not on track. More importantly, where did it all go off the rails?
Of course, I have covered these, and other similar questions in my book OUTSOURCING 3.0, and in my blogs and videos. The book, in particular, carries a very comprehensive model and diagnostic tool kit, which is value for money.
In this piece, I want to focus on only a few key points. And, I want to frame it as a positive affirmation of key things that would build momentum towards success.
Three kind of congruence is important:
In the case quoted above, while minor lapses occurred in all three, several major gaps very readily apparent in #2. It appeared as if IT team was working in total isolation from the Supply Chain and Business Transformation team – though their projects were closely linked.
Short term, tactical thinking – predominantly related to cost savings and control issues and considerations tend to dominate. It is quite easy to lose track of the big picture in the process. All the initial discussions and dreams of gaining competitive advantage are thrown out of the window at the first opportunity.
Then, what is the point in spending all the money? The project appeared like a lot of effort, just to stay in the same place.
This takes more than a flight of fancy. A lot of things will change when one thing changes. You cannot ever do enough of visualisation and preparation. Every time you do this exercise, you will discover some more things that need to change in parts of the processes, infrastructure, skill sets, SOPs, contracts, warehouses, etc. Change it.
That brings me to my last point. All this difficult work is highly specialised; it also takes considerable time and money. It needs skills rarely found inside organisations, or even in IT service providers.
While it is well known that most IT projects run into time and money problems, the scope adjustment problem is less well articulated. Yet, taken together, these can wreck havoc on your business outcomes.
The above graphic – taken from my book OUTSOURCING 3.0 sums up the situation nicely.
In the case study quoted at the start of this post, the outcomes were a lot different than what was expected by the majority. The board made a bold decision and pulled the plug on the project in the middle. That single decision most likely saved the company in the long run. They could have saved a lot more money if, at the outset, they are created governance structure to ensure just a few key points. After all, prevention is better than cure.
“What is success? How do you define it in your current role?”
It was a simple question.
I asked this question of the room in general. I expected multiple replies from the all the executives in the room.
Then, I realised that none would be forthcoming.
A number of cultural factors were at play. The boss was in the room. No one wanted to be seen to be on the wrong track.
I had only 45 minutes to deliver some breakthrough insights to the group. Many people had flown in for the one day conference from distant locations.
My help had been enlisted by the ‘boss’ to get his team to lift the game. I better deliver what I had signed up for.
I had prepared my keynote presentation. The facts, the figures, the frameworks all stacked up. It could all be neatly delivered – well enough to justify my fees for the speech.
But, the audience were simply too ‘disengaged’ due to presence of the ‘boss’. Obviously, I was not fully aware of this dynamic – or, I would have thought twice about the engagement. Life is too short to take assignments with no probability of success.
Yet, there is always a way to succeed in every situation. Especially, if we think broad and deep.
But, the time was running out. I had to think quick. I had to think on my feet. Was it possible to send the ‘boss’ out of the room?
Would it have been possible to negotiate that he stay out of the room in the first place? No.
Then, it would be impossible to send the ‘boss’ out of the room.
Then, what else could be done? What was the right way to proceed?
I decided to change tack on a short notice.
I asked the audience to divide themselves into groups of 8 individuals and introduced a simple supply chain game. I improvised some gaming aids.
The rules were very simple to understand the execute. Each group was to play the game three times, and note down the results.
I asked for volunteers to come up and share their experiences from the game. There were many enthusiastic volunteers. They even linked the learnings to their work. They saw things that no one else did. Their were ecstatic by the end of the gaming session – and not just from the games.
I asked three group leaders, with one key point each, to stay on the stage. They expanded on their key points. They talked about why these points were important to their business. They talked about what changes could be made to the business from next day itself. They were enthusiastic, knowledgeable and on the right track. They started making points that linked up with my presentation.
I flicked my presentation to the last slide – where these same three points summarised the entire presentation.
The group leaders had already delivered what I had signed up to do. There was a thundering applause from rest of the audience.
Recently, the value of trust in supply chain was brought home to me in a graphic manner. An owner of a medium sized business (who was trying to be one of our well-wishers) showed me (and one of our new recruits in sales management department) the way they were using dummy websites to generate leads for their business. He also mentioned that nowadays this is a very common practice to create dummy websites, even dummy companies and fake addresses for the sheer ease of doing so and anticipated potential benefits.
He wanted to encourage us to do the same thing. We listened to him politely, thanked him for his opinion, and refused to go down that path.
He was firmly in the camp of people believing that you have to fake it till you make it.
Obviously there is a huge contingent of people who follow this philosophy. To justify themselves they often quote Richard Branson saying this:
I don’t know if this phrase was truly said by the man himself. However I would feel a little bit uneasy if pilots in their airlines adopted this mantra. It basically means that they accept the job as a pilot hoping to figure out how it works later, meanwhile they are going to fake it till they make it.
I know I have carried the example to an extreme, and pilots do need certification before anyone offers them a job as such.
However, I am also aware that there are more subtle considerations such as aircraft types, routes and even airport characteristics where most pilots will not accept command of an aircraft till they know for sure they can do the job.
Like them, I am firmly in the camp which says ‘make it real and keep it real.’ The risks are far too high; and the numerous opportunities to train and learn without exposing your passengers (or business network partners) to the unnecessary risks make it almost callous to do otherwise.
Yet, many people persist.
This belief – fake it, till you make it – is usually based on the assumption that nobody will offer you a job if you’re perceived as not qualified for it.
On the contrary, you are the best person to judge whether you are truly competent enough to take on a job. At the same time, with the job offers comes the responsibility of choosing, whether to accept it, or not; the responsibility of evaluating your own skills, experience and competence for this particular job.
Unfortunately, there are far too many people forsaking this responsibility that can only apply at a personal level.
That is also the reason why there is a lot of trust deficit in the business world.
If you are faking it, your reader, your audience, your client, your customer will most likely know that you’re faking it. It is just a matter of time.
Whether you are a motor mechanic who’s faking the knowledge of the type of motor that you’re repairing or you’re a heart surgeon or any job in between. Faking it is definitely not going to make you happier or more successful for the simple reason that your customer will always be uneasy with you. Furthermore, in your heart you will always know that you are faking it, which is not the best thing for your self-confidence and self-respect.
Supply chain management is not a unique field which requires a large amount of trust between people to collaborate. In fact, trust is a fundamental requirement for all collaboration, cooperation and joint activities between human beings.
It becomes even more significant in supply chain management where it is both individual trust and institutional trust.
Why is trust so important anyway?
There is an important reason why I mention it.
As supply chains become more and more sophisticated, as they become more entangled and evolve into business networks, the need for trust within the supply chains becomes more and more intense.
Let’s take a specific example to make this generic statement more real.
Suppose you are a soft drink manufacturer, and the suppliers of empty cans has a captive plant right next to your bottling plant, you have a good chance of hearing about their business ups and downs and know well in time about events that might affect your supply. Now just substitute this captive supplier of packaging by a bunch of suppliers half way around the earth who might have significant cost advantage (because of manufacturing cost, for instance), and see how important it will be for you to keep open clear lines of communication in order to run your business smoothly and efficiently.
Companies typically want to engage with supply chain partners who will be able to deliver on what they promise, barring a totally unanticipated event. If your business network partners are not fakes themselves, most likely they will not engage with you further when they find out that you’re faking it.
Although trust in supply chain management is a very popular topic, it is evident that establishing trust within the business network can be very challenging. It takes time, patience and effort of each and every supply chain partner. It can be even more difficult to maintain trust over time. As the concept of trust is rather abstract, it is also hard to measure. At the same time, despite all the difficulties and efforts you can be sure that developing trust with your suppliers and customers is worth the efforts.
So what is trust and what are the components of it?
How to make sure that there is enough trust between you and your supply chain partners?
Is it always worth the investment of your time and effort?
Is there such thing as too much trust within the business network?
First of all, trust in supply chain management, as in any other cooperation between people, includes numerous factors.
You should maintain good communication at all times between you and your partners. Communication also means honesty and openness. Fairness and loyalty can also be very helpful in establishing trust. Another integral part is the competence and your openness about whether you are qualified for this particular job or not. This kind of relationship requires goodwill and willingness not to exploit your partner’s vulnerabilities. This is even more important because of the confidential information which is shared between supply chain partners and with management consultants.
My colleague, who was at the meeting mentioned at the start of this article, wondered aloud about the advisability of trying to create some websites to generate additional leads for our training business.
And my answer was an unequivocal “no”.
The reason was very simple.
I like to make it real – and keep it real.
I gave my colleague an example of the difference between level of trust required for a pharmacist, a general practitioner and an open-heart surgeon.
When you go and buy a medicine from a pharmacy, you do need a certain amount of trust. You need to be confident that the pharmacist will indeed give you the formulation that the doctor has prescribed. You need to be sure that it is pure, unadulterated and sold at the market price.
However the level of trust required from a general practitioner is much higher. Because you will have to literally remove your clothes in front of him. In this case you need the confidence that your general practitioner is able to examine you, to find out what was wrong.
This trust requirement further multiplies when we are talking about a heart surgeon. You need to be completely sure of your heart surgeon as you need to entrust him your own body, because he will be actually cutting you open and looking literally at your heart. Imagine a heart surgeon who lives with the philosophy mentioned earlier.
In the situation where people need to share confidential information, where the profitability of your business depends largely on the competence and honesty of someone else, it is critical to make efforts in order to develop trust. A low level of trust in this case may give a bit more independence and space at first but later on it will definitely result in lower productivity and profitability in supply chain.
Management consultants by their nature need to establish a very firm bond of trust with their customers. The clients need to be able to entrust them with a lot of confidential data and information as well as their innermost strategies so that management consultants could work successfully and effectively.
To be able to establish this kind of firm bond of trust you have to make sure that there is no possibility that your customer misunderstands any of your marketing messages. You should be unambiguous about your market position. It takes us to the next point.
It is always better to say clearly and honestly if the required skills or competences for a particular project are not within your company’s skillsets.
Let me make it real with another example. Very often when we formulate segmented supply chain strategies for our clients’ business, we need to understand the customer segmentation criteria. As part of that activity we need market research data, which is obviously outside the competency set of our business. I am very clear with my clients when such situations arise. I also say that I am in a position to recommend a few good market research firms, if necessary, but customers are welcome to choose any others that they want to use so long as the required segmentation data is available at the end of the exercise.
Sophisticated clients always appreciate a consulting company which is honest about where their competency starts and where it ends. On the other hand there are consulting firms who pretend that they are able to magically do everything.
In most cases they end up doing nothing well enough, and in the long term they usually lose not only the trust of their clients, but also their own self-respect.
Looking beyond management consulting, as mentioned before, trust is important for collaboration between supply chain partners. When you are working with your supply chain partners – suppliers and customers – in innovation, in order to create new products faster, in enhancing the profitability and reducing the cash-to-cash cycle, you know that relying on fakes will only come back and bite you at the worst possible time.
Typically deep understanding of customer segments is required to be able to configure a segmented supply chain so that the end-to-end business strategy is in coherence. This activity obviously requires an immense amount of trust running all the way through the entire business network.
However, similar to the example comparing a pharmacist, a general practitioner and a heart surgeon, the required trust will always depend on the situation and on the level of collaboration that we need from each participant within the 5-STAR Business Network.
Yesterday (on 2nd November 2017) I happened to briefly glance at the Australian Financial Review – the key finance newspaper in this country while I was waiting in the lobby for a meeting. No more do I subscribe to this newspaper, because it appears to be growing more and more out of touch with business reality, and becoming more a shill for vendors with deep advertising budgets, and small brains. Its content in terns of financial and economic news is excellent, but somehow the journalists seems to miss the major shift in the business models to B2B Networks.
Yesterday’s newspaper seemed to be predominantly dedicated to a conference on e-commerce related subjects. I do not remember the specific topic of the conference, and it does not even matter because the entire debate was centered around Amazon’s entry into Australian market place, and the threat it poses to the Australian retailers and businesses.
Indeed, the organisers, and the newspaper, had identified the burning issue of the day for Australian businesses. Looking at the issues, I almost thought of subscribing to the newspaper again.
But a little more unpacking of the pages revealed that almost all the solutions on offer were marketing and sales related, or new age technology related.
What people forget is that Amazon’s success is even more dependent on its incredible supply chain.
Fighting this successful behemoth without an equally effective supply chain is akin to deciding to fight against nuclear missiles with swords.
Most people still do not even know what supply chain really means. If you doubt me – just watch the short (1.5 minutes) video below, and conduct the experiment with 10 people you know:
Lest I leave you with a wrong conclusion, I am not deriding marketing and technology solutions, because they do have a place in the overall campaign. But, if you get an impression from the newspaper (or the conference that seemed to dominate yesterday’s paper) that somehow you are going to outmarket Amazon just using such solutions – you better think again.
Nothing beats a carefully crafted supply chain strategy, executed with precision and flexibility – especially for business transformations in dire circumstances. This point cannot be emphasised enough.
I have written extensively in many other blog posts on how to do just that – all you have to do is explore a bit in the categories and tags on the right of this page. Some of the titles from over the year are in the image on top of this page.
For real leaders, who want to make substantial and deep positive impact – I do recommend my book The 5-STAR Business Networks.
If you have the budget, it is also worthwhile asking for a workshop based on the same material – but we only have limited slots, and already have a big backlog for that.
I have been asked this question a lot on Quora, as well in my board and other speeches. A lot of supply chain commentary is becoming too technical and mysterious. Supply Chain Software sellers have a vested interest in creating the mystique – similar to what McKinsey used to do about 20 years ago. But Supply Chain Management (SCM) need not be mysterious. Remember, if someone cannot explain it easily enough – they do not understand it well enough. The purpose of one of my books – Unchain Your Corporation – was precisely this – to demystify the supply chains. This books is written for layperson, can be read in 2–3 hours, and had more than 200 stories and anecdotes to help the readers use complex concepts. At its core, SCM is just about two things – integration, and optimisation. Integration of various functions (purchasing, production, logistics, inventory management, finance, sales) within a company. And, Integration of of various companies that form a supply chain together to serve an end consumer. Optimisation – is the art of getting the best results from the same inputs. You will be surprised to know that most GPS software do not even give you the optimum route even if they have real-time traffic information. The key to testing optimisation is by doing the same exercise manually and comparing against the results of the software. There are clearly degrees of Integration and Optimisation. Higher levels of Integration and/or Optimisation will lead to higher level of efficacy in supply chains. See the figure below – that comes from one of my board speeches:
If you supply chain consultants are not telling you these two simple truths, then all the talk of automation, big data software and driverless vehicles is a pipedream without a purpose. And, if your Supply Chain MBA is not teaching you these two basics then you might have wasted 2 years and thousands of dollars. Here is why… …Everything else in supply chain stands on those two foundations. Your supply chain relationships are part of integration effort, and automation is part of optimisation effort.
In this article I want to focus on the second biggest mistake companies make during business transformations.
In case you are wondering why I am focusing on the second biggest mistake rather than the biggest one – it is because I have already written a blog post on that topic last week. Here is the link to it.
But the second biggest mistake is even more common and well known.
Yet it is so common that it worth spending half an hour writing a blog post about it. Even if 10 business transformations are put back on track after reading this blogpost – it would have done its job. After all each derailed business transformation is a huge waste of human effort and ingenuity.
So, what are the cliches that are used to describe this second mistake. I am sure everyone is familiar with these:
Putting the Horse Before the Cart.
Confusing the Cause with Effect.
Post Hoc Fallacy
A theoretical discussion of human fallacies is out of scope of this blogpost. You can read more about these here.
In many cases these IT upgrades take a life of their own and business objectives of the transformation projects start taking a back seat to these technological considerations.
In my book UNCHAIN YOUR CORPORATIONS I have given more than 20 examples of this phenomenon, in various contexts. Below I quote from the book:
Modern supply chains collect information at each node of the network. This rich data is methodically analyzed to optimize demand, supply, inventory, costs and service levels to create the best profit results. Not many people know this art – while there might be many pretenders.
The next component in business transformations is the informational part of the business network, which is strongly bounded by its IT systems. A word of caution, though, IT should always be viewed as a means to an end rather than the end in itself. In other words, systems are implemented to facilitate information exchange that is conducive to business transformation.
In the project we were working on, the challenge was indeed, moving the system from the regional to the global structure. Apart from having islands of data to consolidate, the company also found themselves dissatisfied with a system that met only 70% of its needs.
Even though you may be tempted by flexibility as it offers more room for maneuver in the future, every additional bit of flexibility breeds corresponding complexity.
To get a more realistic picture of the complexity, type “supply chain software” into Google and you will get more than 75 million results. How do you know which one is the right one? Though many of them will pretend that they can, there is not a single piece of software that can do everything that you require from a supply chain software solution.
Plethora of tools are available – each with its own peculiarities and limitations. Old ERP type systems can lead your operations into a big hole from which it will take years to emerge. Furthermore, each tool is most suitable for certain situations, and unsuitable for other situations. You need the ability get the right tools – just the ones that suit your situation – and combine them well.
I have dedicated a whole chapter to IT systems in my book The 5-Star Business Network and here I would like to focus only on a few key things. To get this component right, you also need to see things through the eyes of the system provider. It is a delicate dance between rigid functionality and flexible business outcome.
How do you choose the right software for, say forecasting, from among more than 2,500 such systems? How do you link this system to the other systems it needs to work closely with – say inventory management software? How do you pick the right inventory management software from among more than 2,000 systems that claim to do more or less the same thing? Do you go for a single solution that is about 50%-60% right, at best – or do you go for a best-of-breed solution that can cover more than 85% of your need, if you do it properly? All these are very complex questions to answer.
Figure below, taken from my book The 5-Star Business Network, illustrates just some of the ways a business can falter along their road to using IT for business transformation.
FIGURE: PROBLEMS WITH USING INFORMATION TECHNOLOGY FOR BUSINESS TRANSFORMATIONS
Then you configure the pieces to form an integrated system, that meets your rapidly changing needs in a business transformation.
We need to revisit the strategic component, to examine the level of disconnect between the corporate strategy and the IT capabilities and carefully find tools that fill that gap.
In the past, it might have been the case that corporate strategies were made up in the air, then supply chain strategies were formed by people down in the warehouses based on their own assumptions about what the business wanted to achieve, and the IT staff work in their own cubicles to provide systems based on poorly articulated needs.
If the above example of three isolated types of strategies resonates with your personal experience, you would also concur that despite numerous vocal calls for enterprise-wide collaboration, people still continue to work in silos. This is equal to saying many companies are still staying at Supply Chain 0.0 while others are moving towards 1.0 or 2.0 or, even mastering Supply Chain 3.0.
Figure – The process and service component
As you can see from Figure above, which shows typical processes in a supply chain 1.0, there are four levels that need to be weaved into a cohesive whole. Typically, there can be missing links between processes – vertically, or even horizontally.
Even worse, for instance, a delivery scheduler may not know how his work output related to that of his next cubicle neighbor – the customer forecast expert.
During a transformation, processes and services may get streamlined, re-aligned or even created from scratch to accommodate change. That is why it is pivotal to keep in mind how they all fit together by devising a visual presentation such as the pyramid diagram above.
I was having a conversation with one of the senior executives responsible for business transformation in a large-sized industrial company with operations and plants across the developed world. This particular person had come from one of the top tier global consulting houses and obviously was very well versed in the hypothesis-driven problem-solving approach, which both he and I had learned in our formative years in top tier consulting houses. He was adamant that this approach would be enough to carry out a large-scale supply chain transformation in his business. Hence, he was very skeptical about the supply chain methodologies that we were espousing.
In his mind, he could derive the same results from the first principles using his hypothesis-driven approach. And I was patiently explaining to him the difference between going back to the first principles to create a new approach, and deploying a tried and tested approach for supply chain transformations which had the benefit of having adapted the same hypothesis-driven approach.
So I gave him an example of the early stage motorcars where people were still using solid rubber tires and a number of fittings which were a carry-over from the days of horse buggies. Of course, if he had the luxury of time and budget to make all the mistakes there were, he could probably recreate a modern-day motorcar, going through all the stages of evolution. He was smarter than most of the population, so he could perhaps complete the task in 20% of the time that it took for the actual evolution to take place and perhaps, at 20% of the budget. Yet, if a modern-day motorcar was already developed, wouldn’t he be better off testing if it suited his purpose and adapting it for his use?
Obviously, on one hand, you can become too rigid and attached to the process itself. On the other hand, robust processes, based on experience from a number of similar business transformations in the past, are far more useful than some skeptics envisage.
After all, who would you like to be your guide for a climb – a person who can theoretically show you a path through a map of a mountain, or a person who has actually traversed that particular journey several times before, and knows all the pitfalls along the road?
Now let us talk about the “service” bit in the process and service component.
One of the hangovers from the last century industrial organizations which never ceases to surprise me in a modern-day organization, is the importance attached to a product in comparison to the importance attached to service by the company.
What do I mean by that?
The service might be just fitting the product, or providing the right information about the product, or helping customers choose the right product for their needs.
To give you an example, if you are a customer of a motorcar company like Ford or General Motors and you are looking for a particular part, you will be amazed to know how many different possibilities there are of fitting the right part for the purpose. You will then need to discuss your particular needs with someone called a Parts Interpreter in order to pick a suitable part for your motorcar. It is a very specialized job and invaluable service provided by the car industry to its customers. It is the service that makes the cost of parts more expensive than the base cost of manufacturing and selling that part.
In almost every project we have done, when we calculated the overall cost-to-serve, it is very clear that the product component of the cost was supplemented by the service component of the cost, which was quite substantial to start with, and getting higher progressively.
In other words, the overall cost-to-serve is made up of cost of product plus cost of service, each a fairly significant component of the overall cost-to-serve. Then why do companies keep ignoring the cost of service or treat it as a minor hassle, rather than manage it as an overall part of the full cost equation?
Hence, service is merely an after-thought, even though the cost of service might, in many cases, be higher than the cost of product.
That is the reason why a cost-to-serve analysis is an eye-opener for senior management teams or for boards of directors, when an overall cost breakdown is laid out, clearly showing that cost of product is far less than the cost of service. Suddenly, the entire orientation of the management changes towards managing the service component much more efficiently and effectively than they have ever done in the past.
We have noticed that tendency in airlines, in the automotive industry, the mining industry and in many other industries.
Similar to the informational component, companies are increasingly discovering their ability to cherry-pick service providers that deal with different service modules. Before this can happen, service components must be broken up into geographical, asset based and activity based components to discover and engage best service provider for each module. This is known as modularization.
Then, service modules are homogenized in order to create and manage parallel interactions with several service providers at same time. The cherry-picking or commoditization of service modules enables you to configure a best-of-breed customized business-to-business network that would be impossible to emulate for your competitors, and provide flexibility, cost advantage and risk mitigation to your company.
Sure you will need the right tools, and deploy them rightly – that is important. But much more important is why you are deploying them, and are you getting the right results from them?