Category Archives: In The Press

Not your average product recall: improving retail safety

The safety expectations placed on suppliers in China are vastly different from those in the west. The growth of Internet giant, Alibaba has seen a new wave of  ‘made in China’ products reach the US, but are they safe?

Buckyballs craze - banned in the US

Buckyballs sweep the US

In 2009 a new toy stormed the US market. Buckyballs – tiny, highly magnetic spheres constructed of rare earth metals were a runaway success and registered $40 million dollars in sales over their first four years.

However, the same magnetic attraction that made the balls so much fun to play with, also made them incredibly dangerous if they wound up inside the human body. Despite only being marketed to adults, the small, candy like appearance of the product meant they had a habit of turning up in the digestive tracts of young children.

In his blog, Gastroenterologist Byran Vartabendian, gave the following horrifying rundown of what happens when the balls are accidentally swallowed.

“When two are ingested they have a way of finding one another. When they catch a loop of intestine, the pressure leads to loss of blood supply, tissue rot, perforation and potentially death.”

It was estimated that between 2009 and 2011, 1700 children passed through US emergency wards after having ingested the high-powered magnet.

In 2014 – the U.S. Consumer Product Safety Commission (CPSC), a US federal agency established to stop hazardous products entering US homes – recalled the product, claiming a ‘substantial risk of injury and death to children and teenagers’.

While this ruling signalled the end for Buckyballs (a then multi-million dollar product), its five years of success and profitability had inspired a number of competitors to emerge. Many of these competitors were selling the same dangerous product direct to US consumers through the Chinese online retail platform Alibaba.

Not your average product recall

This disparate, multinational supply chain presented a significant challenge for the CPSC.

In the past the agency would have simply issued a recall, shut down warehouses and monitored local stores to ensure no substitute products appeared.

Today however, the supply market for the high-powered magnets (as well as thousands of other toys) stretches well beyond US toy stores. The proliferation of online shopping has meant that controlling the purchase point of these products has become infinitely more difficult to manage. The CPSC’s chairman Elliot F. Kaye highlighted this recently when he said:

“Long gone are the days when we could pull stuff off of shelves,”

“We anticipate the next frontier will be outside of US borders.”

Working together for Product Safety

In response to this new challenge, the CPSC has announced a partnership with Alibaba. The agreement, the first of its kind between the CPSC and a foreign owned website, will see the two organisations collaborate to limit the movement of hazardous toys into the US.

The CPSC has given Alibaba a list of 15 Chinese produced products (including Buckyballs) that have been recalled from US shelves and requested that retailers on the e-commerce platform cease selling these goods directly to customers in the United States.

At the time of writing Alibaba was yet to detail how it planned to carry out the promises it has made to the CPSC, but a spokesman from the online retailer did state the company’s intention to:

“work (sic) collaboratively with the chairman and his team to do everything possible to protect consumers.” 

2014 was huge for Alibaba in the US

This commitment to product safety from Alibaba comes at a time when the firm is making significant headway into the US market and arguably represents the company’s dedication to ongoing success in western markets.

In 2014 the online platform became one of the world’s most valuable companies and its owner instantly garnered the title of China’s richest man – after it raised $25 billion USD in its US IPO.

In September of 2014 the company had an estimated market cap of $215 billion USD, a valuation outshone in the tech space only by Apple, Google and Microsoft.

As well as its success on the US stock exchange, Alibaba opened 11 Main – its first website dedicated to US consumers in July of 2014.

Is its size a hindrance to growth?

The greatest challenge for Alibaba’s plans to smoothly and safely transition into western markets is the sheer size of its vast online marketplace.

Alibaba is not only the world’s largest e-commerce marketplace, but it is also the fastest growing. The company has hundreds of millions of users, hosts, and merchants.

This immense size, combined with the fact that Alibaba doesn’t actually own any of the products being sold on its website, makes it nearly impossible to ensure product safety measures are anything but reactive.

A Sea of Counterfeits

This sort of criticism is not new for Alibaba. As recently as last year the company’s inability to effectively control the standards of its sellers came under fire. This time for the way counterfeit or ‘fake’ products sold by its merchants had been managed.

Haydn Simpson – a product director at counterfeit-tracker NetNames, claims his clients (mostly well known international brands), estimate that 20 per cent to 80 per cent of the products listed on Taobao (an Alibaba owned site) with their nametag are in-fact fakes.

In response to these claims, Alibaba last year spent more than $160 million USD attempting to remove fakes from its website. However even the briefest look on the platform shows that this initiative was entirely fruitless and counterfeit products can still easily be found on the website.

So how then is the CPSC – a US federal agency with a 2014-operating budget of $117 million USD, supposed to ensure product safety in this vast marketplace?

One thing is for sure, if they plan on tackling the problem15 products at a time, they’ve got a long road ahead of them.

How to use Big Data to inform your commodity strategies

Have you ever wondered what all the fuss about this thing call “Big Data” is all about?  Of course we all have access to spend data don’t we?  So why are people getting themselves in such a lather about the whole Big Data thing?

The importance of Big Data

WARNING: ONCE YOU’VE PLUNGED INTO YOUR BIG DATA YOU MIGHT NEVER COME UP FOR AIR!

Well first of all I need to share my guilty secret with you.  Big Data is addictive.  We’re lucky to have the national procurement information hub, which we lovingly call Spikes after it’s creator Spikes Cavell, to play with up here in Scottish public procurement.  Rather than being prickly and difficult to love, Spikes is cuddly and warm.

Plunging in can tell me about my spend, what category I spent it on, whether there was a contract for that spend, whether the suppliers were local, whether they were small, whether they were from the region… and on and on.  Knowing that you can find out all this stuff can leave you craving for the next Big Data hit.  Be careful, the addiction is frightening!

Next up is the fascination with the data.  Once you plunge in you can drill down and the fascination builds.  OK so we spend 5 per cent on a particular category like building supplies; who was that with, what type of products did we buy (we have classification codes on Spikes to help us there), how many invoices did we pay, which department was buying that?  Then off you go to find the line item detail from your purchasing system.  “I need to find out more… and more…and more” It can be as captivating as watching Professor Brian Cox explaining the Wonders of the Universe this plunging into Big Data thing.

Having all that Big Data also really helps on a practical level.  We use it to inform our commodity strategies.  We recently did some research to identify what we’d spent with suppliers of security systems.  Knowing what we’d bought helped us drill down into line item detail and then forecast what we needed to buy.  This was really powerful when it came to developing a strategy to secure a great contract going forward.  Forecasting based on our Big Data something we really need to do more of.

Big Data can ask us some difficult questions.  If 34 per cent of our spend is on construction then why are we focussing all our contract management effort on something else?  Why do we pay over 10,000 invoices a year to our catering suppliers?  Is there a better P2P process we could put in place to save both sides costs?

In this age of infographics and instant reporting Big Data is just what we need to help us present information to our senior management teams, operational managers, Boards or, in our case in public procurement, our elected councillors or Government Ministers.  It’s not good enough these days to say we don’t know the key procurement metrics for our organisation.

So all in all Big Data has the power to suck you in, pull you under and never let you go.  There’s so much potential, there’s so much we can find out.  The key is to make sure you have a plan to get out of Big Data and TAKE ACTION on what you find out today.

So come on, share with me the times when you’ve taken the plunge into Big Data!  Did you find your way out?  What tales can you tell of good savings and great outcomes?

Oil’s dropped, when will my flights get cheaper?

Oil is at $47 a barrel, shouldn’t we all be flying for less?

To answer this question I’d like to roll back the clock to 2012; a slimmer, less grey-haired version of me was working as a Procurement Specialist and had been tasked with renegotiating air travel, a category admittedly I knew little about…

Oil’s dropped, when will my flights get cheaper?

After perusing an article in the Economist magazine on the way to work detailing the falling price of oil and its impact on the economy, I foolishly assumed my upcoming contract negotiation would be a breeze.

I’d done my research. I knew that jet fuel accounted for between 30-50 per cent of an airline’s operating expenditure. So it stood to reason that if the price of this commodity fell, so too would airfares. I started doing some rudimentary savings calculations in my head and readied myself for a round of congratulatory high-fives.

Not so fast…

As it turns out, the link between oil prices and airfares is a little stickier than I first thought. The following points provide some background into why:

Airlines are now reluctant towards unchecked growth

In the past, airlines have seen lower fuel costs as an opportunity to increase their fleet, boost the number of routes they service and to reduce ticket prices.

While these knee jerk responses to low fuel costs made airlines money in the short term, as oil prices started to climb again, many firms were burnt (often to the point of no return) by the investments they made.

As one industry expert put it: “there are a lot of decisions that make sense at $80 a barrel that simply don’t add up at $100 a barrel.”

Having learnt from their past mistakes, airlines are now far more disciplined in their approach to capacity growth.

Jet fuel pricing is managed on a long-term basis

Whether it is locking in long term pricing agreements, or creating business strategies that are based on high oil prices, airline operating models are no longer designed to offer fare reductions every time the price of oil drops.

John Heimlich, the Vice President and Chief Economist of trade group Airlines for America, suggested in a recent conference call that the primary objective for airlines is to secure long term financial health and to implement measures that will help weather the next recession. He noted that spot discounting of fares would not aid in this endeavour.

In response to calls that the falling oil price should signal a period of discounted air travel John clever stated. 

“We don’t really hear people clamouring for lower prices of cheeseburgers when the price of beef comes down or lower prices of iPhones when the price of semiconductors go down.”

Not all costs are variable

Many consumers (and mainstream media outlets) assume that if oil prices fall by 50 per cent, so too should the cost of flying. This logic flies in the face of the most basic procurement theories, fixed vs. variable costs.

It’s true that fuel is, to some degree, a variable cost (see previous point). However, the majority of an airline’s operating expenditure is tied to costs that do not fluctuate with the price of fuel (wages, planes, airport taxes, food, etc.). This means that only a small percentage of a ticket’s price is subject to change based on oil price fluctuations.

Demand remains high

Airlines simply don’t need to reduce prices when demand levels are as high as they are.

An IATA (International Air Transport Association) press release published on January 8th indicated a 6 per cent growth in total passenger kilometres (a demand indicator used in the airline industry) for the month of November; similar figures have been recorded throughout 2014.

If flights are full at current prices, where is motivation for airlines discount fares?

The comments of American Airlines President, Scott Kirby, not only sum up this sentiment, but also make sound economic sense.

“Air travel remains a great bargain. We’ll continue to keep it a great bargain for customers. But in a strong demand environment, we don’t have plans to go off and just proactively cut fares.”

The airlines need to cash in

The airline industry has always been a tough place to make a buck. Warren Buffet articulated the cutthroat nature of the airlines when he famously stated:

“How do you become a millionaire? Make a billion dollars and then buy an airline.”

Airline bosses know that tough times will again befall the industry, so many are seeing the current boon in profitability as opportunity to prepare for the tough times that lie ahead. The following quote from B. Ben Baldanza, CEO, President, and Director of Spirit Airlines highlights this point.

“Lower fuel prices create a little bit of tailwind in the margin right now, which is good for us and probably good for the industry. But as long as demand stays strong, as we see it right now, we believe that, that (sic) we’ll take good advantage of that in the pricing environment as well.”

Well there you have it. While airfares may indeed decrease over the coming months, be prepared to discover (like I did) that they may not move as much as you initially thought. So you just might have to find another way to earn that high five from your boss. Here’s a hint to get you started.

2014 a year to forget for McDonalds Japan

From the Great Fries Shortage to McNugget-Gate – 2014 was a tough procurement year for McDonalds Japan.

McDonalds has had a turbulent time in Japan

Food rationing, emergency airlifts, contaminated meat scandals and cultural insensitivities. It sounds more like a review of a military organisation’s supply chain operations than that of a global fast food giant. However, as hard as it is to believe, these events all occurred in the supply chain of McDonalds Japan in 2014.

Procurement’s Butterfly Effect

The inherent relationship between external market forces and procurement performance was once again exemplified over the December holiday period as McDonald’s Japanese supply chain descended into crisis.

The issue began on the US west coast where 20,000 dockworkers have been locked in protracted contract negotiations since July of last year. Operators at the affected Pacific Coast ports have accused the dockworkers of deliberately slowing work in order to impact the turnaround times of ships.

In keeping with butterfly effect, this lethargy at the ports sent waves across the Pacific, waves that crashed into the supply chain of McDonalds Japan.

Delays at the ports caused shipping times for US produced french fries, destined for Japan, to stretch from two weeks out to more than four. This slippage caused a major shortage of the popular side dish in Japan, a country that imports more $330M USD of American potato products a year.

The sheer volume of potatoes required to services Japan’s insatiable appetite for fast food, combined with McDonald’s complex internal procurement arrangements, meant it was difficult for the company to quickly find alternative suppliers to cover this shortcoming.

The magnitude and impact of this series of events only becomes apparent when you consider that McDonalds Japan sources 100 per cent of its fries from the US.

By mid-December the impact of the delayed shipments started to be felt at McDonalds outlets across Japan with the New York Times announcing that the country had “entered the great French fry shortage of 2014”.

Drastic Times Call for Drastic Measures

In a move normally reserved for times of war or natural disaster, McDonald’s was forced to implement a rationing strategy to manage the distribution of its dwindling supply of fries.

In order to avoid “running out of fries” during the December/January holiday period, customers at McDonald’s 3135 Japanese outlets were limited to only small serves of French fries.

A note on the company’s website stated:

“Because we are currently having difficulty stably procuring McDonald’s French fries, we are offering them in the small size only,”

To sure up supply, McDonald’s took the drastic step of airlifting 1,000 tones of frozen processed potatoes into Japan. The firm has also established a longer-term solution that sees shipments of fries being dispatched from US east coast while the west coast labour discussions continue.

Fortunately for the fans of the golden arches, these measures enabled McDonald’s outlets in Japan to once again offer all three sizes of fries from January 5 onwards, signalling the end of a three-week period of rationing.

2014 a year to forget for McDonalds Japan

The Christmas fries shortage has rounded out a terrible year for the firm’s Japanese procurement operations. In July the organization faced an even more serious supply chain issue when it was found that expired meat (procured from Chinese supplier Shanghai Husi Food) had found its way into the production of the company’s popular Chicken McNugget product.

Despite the best efforts of one Kanagawa Prefecture store manager, who told his staff to bow more deeply than usual to customers who bought chicken products, concerns over the safety of McDonald’s food led to a 17.4 per cent drop in same-store sales during the month of July. Similar drops in sales were recorded for the proceeding months.

The crisis could have been better managed

The way the in which ‘McNugget-Gate’ (as it was so dubbed) was handled by management at McDonald’s has also drawn stern criticism in Japan. The President of FamilyMart, a leading convenience store in Japan that also held contracts with the disgraced Chinese supplier, made an apology to customers immediately after the contaminated meat story broke.

An apology from McDonalds President and CEO, Sarah Casanova, was not received until a week after the story broke and even then, was only delivered in response to a question posed at a scheduled earnings announcement.

 

Casanova was further criticized and accused of being insensitive to Japanese corporate practices when she portrayed her firm as a victim of the crisis rather than taking responsibility for the errors that had occurred in her company’s supply chain.

Brand and bottom line both take a hit

As well as impacting the firm’s brand image in Japan, it appears 2014’s supply chain slip ups will have a marked and lasting impact on the company’s financial performance.

On December 8th (prior to the rationing program) the company released a statement claiming Asia/Pacific, Middle East and Africa sales were again down for the month of November, directly referencing “the ongoing impact of the supplier issue on performance in Japan and China”.

What can we learn from all this?

From a procurement point of view, there is a great deal to take away from McDonald’s recent shortcomings. The impact that external market forces can have on a procurement team’s ability to secure supply, the risk of overreliance on single geographies and the fact that a company’s image can be tainted (pun intended) by the actions of its suppliers jump immediately to mind.

Fortunately for Japanese french fry fans, the rationing is now over, Big Macs will once again be accompanied by a sufficient supply of American fried potatoes and fast food dining in Japan can return to normal.

I bet the McDonalds procurement team is hoping for the same.

What are the burning issues affecting retailers in 2015?

Black Friday was arguably an important time for retailers, but what about the fragile post-Christmas when retailers are more at risk?

What risks do retailers face in 2015?

In retrospect it looks like Black Friday gave many high street retailers a much-needed shot in the arm. The last ONS retail sales report highlighted overall sales in November rose by 5.6 per cent and online sales increased by 12.9 per cent compared to the year previously. With the post-Christmas period expected to be a fragile time for the retail sector, as rents become due, for many companies it will be make or break.

With this is mind we’ll begin with some sobering words from the tail-end of 2014 courtesy of Dan Wagner, veteran retail expert and CEO of Powa Technologies: “It is apparent for me from the sharp rise in sales from Black Friday and Cyber Monday that retailers have been caught napping and many now have left it too late to respond to the rapid changes in consumer behaviour.”

“Consumers are driving this change and retailers need to review and innovate based on consumer behaviour – but the reality is that they have not innovated fast enough. These retailers are fighting for their own survival… In my view, changes in business rates alone are not going to be enough to halt the tide in the demise of those retailers that have failed to evolve. The post-Christmas period will be a bigger blood-bath than last year, and for some retailers, it is already too late.” 

In addition Nick Miller – Head of FMCG, writes: “As the festive season creeps closer, organisations, especially those operating within the FMCG sector, are ramping up their supply chain processes in order to cope with the influx in demand. Supply chains are pushed to the extreme limits and retailers are all too aware of the fact that getting it wrong at Christmas is the cause of many retail casualties.”

Crucially, Nick’s wasn’t issued on the eve of Christmas 2014… instead, an entire twelve months prior.

So what does this tell us? The same issues – year in, year out… Only some would argue that for every year that goes by, the stakes only get higher. Indeed, it seems some of the UK’s biggest retail powerhouses have been left licking their wounds after an especially vicious winter.

We’ve heard that Tesco, Sainsbury’s, and Marks & Spencer have all experienced struggles of their own in the post-Christmas period.

Although Sainsbury’s announced a 1.7 per cent fall in like-for-like sales over Christmas, the grocer had actually matched the same volume of sales as the previous year – except this time around (and perhaps crucially) the prices were lower. This is the first time in more than a decade it has experienced such a loss over the festive period.

Meanwhile Marks & Spencer has reported its 14th consecutive drop in clothing sales – a fall of 5.8 per cent during the third quarter. Online sales were also down 5.9 per cent, despite the introduction of a revamped website – a crucial entry point that should have borne fruit for the retailer.

Neil Saunders – Managing Director of retail research agency Columino commented: “This Christmas online was a critical channel for growth, accounting for a higher proportion of sales than ever before.”

He continued: “Unfortunately, M&S’s logistical problems meant that it could not properly enjoy the fruits of this growth.”

Year-on-year sales over at Tesco were down just 0.3 per cent – or up 0.1 per cent if fuel was factored in. But this hasn’t been enough to save it from a somewhat bleak aftermath, with bosses saying they will shutter 43 unprofitable stores across the UK.

Tesco’s plans for 49 ‘very large’ stores that had provisionally been given the go-ahead have been scrapped.

RetailWeek is also reporting that Tesco boss Dave Lewis is expected to scrap the system of rebates and penalty fees the supermarket forces on suppliers and instead focus on a scheme based on sales volume alone.

What do you make of all of this – if it’s happening to the UK’s most powerful retailers then surely no one is safe?

Procurement: time to move through the gears?

That is the question that Deloitte’s 2014 Global CPO Survey posed…

Results from Deloitte’s 2014 Global CPO Survey

Something of a annual staple, the Deloitte Global CPO Survey report reflects the views of 239 chief procurement officers and company directors from 25 countries around the world.

Of those CPOs polled, almost six in ten think their existing teams lack the necessary skills to successfully deliver their organisation’s procurement strategies. The skills most lacking? “Leadership, influence, communication and relationship building.”

To further exacerbate matters 57 per cent also have issues with their own processes and technologies. Not an altogether pretty picture is it?

Happier news comes out of the UK with Deloitte chief economist Ian Stewart suggesting the fair isle will enjoy decent growth through 2015:

“Chief financial officers expect 2015 to be a year of investment and of recovering real earnings… Going into each year, from 2008 to 2013, finance chiefs’ main concern was the state of the UK economy. Now the risks are seen as lying elsewhere.”

Paul Feechan, office senior partner at Deloitte in Newcastle expanded on these ‘risks’ and provided some context: “The central challenges facing the UK’s largest companies as they enter 2015 are policy uncertainty at home and economic and geopolitical risks overseas. Rising levels of uncertainty have caused a weakening of corporate risk appetite which, nonetheless, remains well above the long-term average.”

Indeed, out of the respondents one in four CPOs felt threatened by geopolitical risks (citing recent events across the Middle East and in the Ukraine).

These risks are felt the world over… The Financial Times invites top economists to weigh-in once a year with their thoughts on the year ahead. Looking towards 2015, a majority of its respondents indicated that the threat from political uncertainty would likely affect business and in-turn consumer confidence.

But 2015 won’t be all doom and gloom: “Corporates believe that the long consumer squeeze has ended” – so says Paul Feechan, Senior Partner at Deloitte LLP.

“CFOs expect 2015 to be a year of investment and of recovering real earnings in the UK. Corporate and consumer spending look set to lend the UK economy important support, suggesting the UK will post decent growth through 2015.”

Feechan concluded: “CFOs are also predicting a buoyant year for business investment, with an average growth of 9 per cent forecast for 2015. Following growth of 8 per cent in 2014, this would put the UK at the top of the league for investment growth in the major industrialised nations and, if realised, will take the share of UK GDP accounted for by business investment to a 15-year high by the end of 2015.”

James Gregson, UK head of sourcing and procurement at Deloitte, said:

“The businesses they [CPOs] are serving are changing. Expectations are rising year on year and relatively small-sized procurement functions with a traditional set of skills are no longer the panacea answer to serving that broader agenda.”

“We are seeing a greater level of specialist skills being created in procurement functions. Rather than a very dominant category management structure, which has been the main quest over the last 10 to 15 years, I think people are starting to challenge the category management organisation and look for specialist skills in certain areas, and looking at partnering with other organisations or looking at shared services that can deliver these things more quickly.”

Gregson further commented: “Traditional blocks around category management are no longer the organisation structure of norm.”

And as for procurement ‘moving through the gears’ – Gregson offered:

“What is clear is this whole principle of procurement having to go through the gears, creating different means of delivering the value proposition. That multitude of different levers they are having to pull, the agendas they have to serve is putting a huge strain on the traditional procurement organisation.”

What of these so-called ‘procurement levers’? Those polled cited the following areas as attracting the most interest:

  • Consolidating spend – 40 per cent
  • Increasing competition – 37 per cent
  • Increasing the level of supplier collaboration – 34 per cent
  • Restructuring existing relationships – 34 per cent

You can view the full report here http://www2.deloitte.com/uk/en/pages/operations/articles/cpo-survey.html

Rakuten, Alibaba and Amazon: the battle of the electronic storefront

Will logistics issues and complications in the supply chain derail the great pretender(s) ascent to Amazon’s throne? 

Alibaba_Corp

It’s been a good year for founder of the Chinese e-storefront Alibaba – Jack Ma. Ma made more money than anyone on 2014’s rich list – his wealth increased by a colossal 173 per cent ($18.5b) to a total of $29.2b.

But if it intends to break out of China and rival Amazon’s market dominance, are there any obstacles likely to hinder its progress?

Forbes analysts have been looking forward and make the following estimates: “Alibaba’s top-line to expand rapidly driven by enormous growth on its Chinese retail marketplaces.”

It continues: “We estimate China’s Internet penetration rate to surge from around 50% currently to over 65% in the long-run. Additionally, we forecast the number of online shoppers in the country to expand from 302 million in 2013 to more than 700 million by the end of our forecast period. This demand will be buoyed by ease of shopping online, heavy discounting, secure payment mechanisms, fast delivery methods, and an increase in disposable income in the country.” 

Another interesting point to note: “Alibaba does not have to invest as heavily in warehousing and distribution centers unlike other pure-play online retailers which own inventory such as Amazon.”

Amazon vs Alibaba vs Rakuten

Elsewhere, Industry Week commented:

“The jury is still out as to how aggressively Alibaba can move into the US market, largely due to the fulfilment and customer satisfaction footholds held by Amazon and other e-retailers: such as Wayfair. This is not to mention the e-commerce channels of traditional brick-and-mortar companies: such as Macy’s and Walmart.”

“Essentially Alibaba’s role is to coordinate track-and-trace logistics, giving coordinate information for delivery, tendering the funders and clearing it – much like what Amazon does when they sell goods for a third party. Much of Alibaba’s huge share of the market in China is within rural communities, where they don ‘t have to deliver goods within a day or two. They’ll need to establish partnerships with carriers, affiliates and more infrastructure here in the US.”

Industry Week noted that logistics handlers such as UPS and FedEx are unlikely to afford Alibaba the same price breaks it gives to those with established relationships (like Amazon for instance). Someone would need to pay the freight costs – therefore that loss will ultimately either lie with Alibaba, or perhaps go back to the manufacturer. Either way, it’s not an ideal scenario.

rakutenEcosystem

But it’s not just Alibaba that has its sights on Amazon’s throne, Japanese giants Rakuten certainly have grand designs…

Here CB Insights shines a light on Rakuten, and analysed the marketplace’s previous investments:

“Since 2009, over 50% of all acquisitions have been within the eCommerce space, however it has been pushing the firm into other areas. Acquisitions not directly in the eCommerce industry taxonomy included the Alpha Direct Services for supply chain & logistics, and cloud-based technology for on-demand video services (Wuaki.tv). It also gained a network of fulfillment centers in the US.”

Interestingly over a five-year period Rakuten has made no less than nine acquisitions in the eCommerce sphere – spread across eight different countries.

Those of particular note included:

  • In the US: Buy.com (California) and PopShops (Washington)
  • Tarad.com (Thailand)
  • Play.com (UK)
  • PriceMinister (France)

If what they say about competition is true – in that it’s healthy, then these developments must come as welcome news to the multitude of manufacturers, suppliers, importers and exporters for whom such storefronts work hard to attract and make part of their success.

How do your products define your purchasing behaviour?

Jacques Adriaansen, ‎co-founder of Every Angle, explains the importance of tailoring your purchasing strategy to get the best possible results.

The phrase ‘horses for courses’ is one that’s well worn, but it’s nonetheless particularly applicable for those looking to develop a robust purchasing strategy.

 How do your products define your purchasing behaviour?

Let’s be clear about this – getting your purchasing strategy right is an important part of the operational processes undertaken by any organisation, and yet it seems to be one that many devote an insufficient amount of time to. Too many organisations seem content to fall back on a ”one size fits all” approach, leading to them paying over the odds and having insufficient supplies in place when they are most needed as a result.

So what’s the answer?

The truth is that when people think of purchasing, they often think of hard, tense negotiation and bartering as an integral part of the process. It’s a huge misconception, and one that can lead to significant problems further down the line. The key thing to remember is that it can be just as important to tailor your approach in purchasing as it is in other walks of life. For example, just as it wouldn’t be appropriate to turn up to a gala dinner event dressed in a t-shirt, shorts and sandals, you wouldn’t necessarily think of entering a period of intense negotiation with a supplier over the price of a pack of staples!

Clearly, there’s little risk in not getting staples or nuts and bolts in on time

Broadly speaking, there are four different types of product to consider when identifying a purchasing strategy. Each of these product types requires different behaviours when it comes to the procurement process, based on balancing cost against risk. Firstly, you have products that are easily available and which a great deal of money is spent, due to large volumes and/or high purchase prices. A good example of this might be standard sheet metal, which can be bought at various suppliers. Because this product type has such a relatively high cost associated to it, it puts those in charge of purchasing decisions in a strong position to negotiate. The fact that they are so easy to obtain means that there is very little risk involved in doing so, which means that these products will always be heavily negotiated as part of the purchasing process.

Secondly, there are products, like the staples mentioned earlier or standard nuts and bolts, which are cheap and easy to obtain. Clearly, there’s little risk in not getting staples or nuts and bolts in on time, but the cost is so low that it would be a waste of time to negotiate it. Thirdly, are high impact products, like very specific engines used by machine builders or upper quality lithography lenses for computer chips production. High impact products are only available from a select few suppliers, but which, if you do not have the products available, could significantly harm your ability to perform as a business. In this case, both the cost and associated risks involved are high, which means that the balance of power lies with the supplier. What’s needed, as a result, is a more collaborative, considered approach to purchasing, with limited negotiation and a focus on ensuring that the product is available for you to use when you need it.

Finally, there are very niche products that, although cheap, can only be supplied by one or two experts. A part for an important piece of machinery that helps your factory to operate is a good example of this. These products need to be ‘buffered’. What this means is that it helps to ensure that there is always a supply in stock, as the consequences of, say, your factory having to close because you have to wait for a new part to arrive don’t bear thinking about!

Because this product is so important, and relatively inexpensive, you once again see very little in the way of negotiation. I once had a customer that couldn’t ship a very expensive machine, because purchasing decision makers had blocked one specific part that was needed for it to work. The reason: the supplier of that specific part had increased the sales price of his product by 50 per cent, without contacting them! The new price of the material was a mere US$ 7.50!

These four different product types, and the costs and risks associated with them have to be factored into any purchasing decision. It’s a model that is well known in purchasing circles, and which was first devised by Peter Kraljic, who suggested that a purchasing strategy can only be effective if each of these elements is closely examined. Although Kraljic’s model was originally conceived by Kraljic for purchasing, it can also be successfully applied to managing logistical and production processes (consider determining production series volumes, for instance).

However, although the model acts as a good guideline for decision-making in operational processes, it’s important to remember that there are no hard and fast rules. Before making any decision, you will also need to consider all other necessary information, such as the anticipated sales, prices and other factors that could influence it.

So how do you make the best choices as to the right purchasing approach for you? Perhaps the best way to achieve this is by first asking yourself what you want to achieve, and then considering how you want to achieve it. Clearly, some products will always be in high demand, while others will be in lower demand, but require a different level of negotiation. The important thing is to modify and adapt your purchasing behaviour in line with your desired outcome. By selecting the right horse for the right course, you can guarantee that your purchasing strategy is successful – and improve your business performance as a result!

Where next for the automation revolution?

This is a guest post by Sandeep Kumar, Vice President at ITC Infotech and Head of the Business Consulting Group.

The increasing automation of the supply chain has become a major talking point in recent years as technology continues to play a pivotal role in the way operations are run.

Supply chain automation

The buzz is easy to understand – automation enables businesses to address the need to scale their operations without having to add to their workforce, with a more streamlined, flexible and efficient operation that drastically reduces errors.

Although it continues to dominate headlines today, the supply chain technology revolution actually started in the early 1980s with the advent of powerful computing models in MRP and MRP II. This later evolved into the next generation supply chain software that helped bring in advanced planning and optimisation capabilities as well as strong functional automation of warehouses and factories. The equation has been shifting ever  since then, with newer technology becoming more affordable, the cost benefits of tool driven automation became extremely attractive and application of smart tools came to be realised as a critical competitive advantage.

Many geo-political events and technology breakthroughs have contributed to this trend. The oil crisis of the 70’s triggered multiple innovations in cost reduction and efficiency, and the opening up of China and the Far East in the 80s made the making and selling of products across different continents not only possible, but cost effective. The end of the Cold-War and increase in globalisation led to rampant consumerism in the 90s – driving product proliferation, miniaturisation and reduction of life cycles, digitisation of information exchange , and increasingly stringent statutory requirements for safety and ethical practices.

The forces of globalisation have continued to drive newer themes which dominate the agenda today, such as the globalised supply chain, cost and profitability improvement, value chain integration, integrated planning and optimisation, global supply chain analytics and more. Technology has helped shape business evolution at each step.

In essence, what we see today is the supply chain being more and more digitalised and therefore more intelligent. By setting up a centralised supply chain analytics centre, for instance, businesses can benefit from processes like demand forecasting, replenishment planning, inventory analytics and sales and operations planning support in a shared services model. In this way, they can extend the benefits of standardised processes and analytics across multiple business divisions without having to increase human resources.

The impact of growing automation in supply chains has been widespread across industries. Among those most affected by transformation in supply chains are high tech OEMs and consumer electronics OEMs. These are largely sectors where cost efficiencies are paramount and technology adaptation is helping to lower the cost of product operations, and this demand has made them the pioneers in adopting new advanced capabilities that disrupt the supply chain models.

In these sectors, functions such as designing, sourcing and distribution have gone through transformational change. Companies like Cisco, for example, operate a business model that uses technology as a powerful integrator of supply chains. The automotive, aerospace and industrial manufacturing industries have also undergone similar transformation.

This evolution does not come without challenges.

In addition, the CPG, fashion apparel and retail industries are good examples of how global supply chain models bring together raw materials and ingredients from across the world, before products are manufactured and then distributed to global markets. Wal-Mart’s Retail Link, for instance is a great case of how a retailer manages its huge supplier base through a supply chain Information portal.

This evolution does not come without challenges. In this case, the challenge lies primarily in staying ahead of the curve. Early adopters of supply chain risk management like Cisco and Ericsson, for example, have been pushed into investing in such capabilities based on environmental factors putting their supply chains at risk. Wal-Mart and Lego are other examples where supply chain sustainability and codes of conduct are being put in place as a consequence of management not being live to bad supplier practices.

Another concern has been the decreasing relevance of human labour in the face of growing automation. Although, it is clear that this transformation does impact manual work content by changing the way certain tasks are performed, arguing that it subsequently leads to the removal of people from supply chains would be quite an overstatement.

Sandeep KumarWhat however needs to be reinstated is that despite the rapid technological developments, humans have always and will continue to be the drivers of these processes. Even though specific roles will keep changing, supply chains will continue to depend on technology-savvy people. Supply chain technology is moving human tasks from more repetitive data entry and crunching tasks to more intelligent supply chain decision making, enabled by smart data and technology support.

This is an interesting time for supply chains as a series of innovations and technological shifts such as mobility and the rise of digital commerce will drive further change in the coming years. Supply chain risk management, sustainability, global integrated planning capabilities, and the use of instrumented intelligence are becoming key areas of interest that will help increase in-process visibility and enable the quicker business turn around on key operations. Fast-paced change in this area means there is plenty of space for players to claim the “pioneer status”. Businesses that want to succeed and reap the benefits of supply chain automation need to be forward-looking and brave enough to take the extra step ahead of their competitors.

Three key insights on the importance of SRM

Apple and General Motors are two massively successful American enterprises with rich yet starkly contrasting histories.

Founded in 1976, Apple has exceeded a market capitalisation of $700B and has ascended to become the most valuable company in the world.  After leading global vehicle sales for 77 consecutive years in 2007, GM filed for bankruptcy in 2009 and recently slipped to the position of the world’s third largest automaker.

What we can learn from SRM practices

Both organisations wield a significant amount of influence in their industries.  Each of them are making news headlines for their supplier relationship management (SRM) practices.

Here are three key insights that we can garner from these two extremely high-profile cases. 

  1. SRM cultures are built top-down

Apple CEO Tim Cook succeeded Steve Jobs in 2011 from his role of COO, which included oversight of the Global Procurement organisation.  Industry accounts portray Cook as master negotiator who knows how to develop and drive supplier relationships based on long-term potential and risk.

For example, Cook disagreed with Steve Jobs in 2011 when Jobs insisted on suing Samsung, who is both a major supplier and competitor to Apple.  Shrewd but sensible, Cook saw the big picture and the importance of the Samsung relationship to the iPhone business.

In the GTAT case, Apple’s approach is a bit curious given how it aggressively structured the deal in the face of what in hindsight was major supplier risk.  One perspective is that it was effective negotiation that protected their interests and secured exclusive rights to sapphire technology.  Another view is that the contract does not reflect the tone of a strategic co-investment arrangement for a scarce technology and billions of iPhone 6 revenue at stake.

Whether you agree or not with Apple’s approach to GTAT, there is little doubt that the SRM culture that Cook has built is a competitive advantage for Apple.  Apple’s sustained business growth and its constant flux of product innovation could not have been achieved otherwise.

Delphi was a division of GM until 1999, when GM spun them off and the relationship has been heavily strained since.  The facts coming out of the ignition switch case paint a fairly dismal picture of GM SRM’s tactics.  Top execs have admitted that suppliers “don’t really believe” in GM resulting in a competitive disadvantage.  GM has been ranked by its suppliers over the years as the worst automaker to deal with, according to an annual survey.

Dealing with the aftermath of a long-standing adversarial SRM culture, CEO Mary Barra proclaimed that building supplier relationships is among her top priorities.  Barra has just appointed a new CPO, a former Delphi executive aptly enough, who will be faced with the challenge of driving a transformation of SRM practices from top to bottom.

These stories remind us how critical it is for CPO’s to embed a SRM culture with the overarching long-term business strategy.  Despite the GTAT setback, Apple has a SRM culture that has fuelled its business growth.  GM’s exec have been unable to build an effective SRM culture, which has resulted in a decline in business performance and major reputational damage.

  1. Effective SRM practices consider external stakeholders

The crux of the GTAT-Apple deal was that Apple would loan the supplier $578m to build and operate furnaces at an Apple-owned facility in Mesa, Arizona.  This was to be a huge win for not only the local community there, but also a lift to Apple’s efforts to demonstrate that they could create jobs in the USA.

When the deal imploded, Apple closed the site resulting in over 600 jobs lost to the local community.  Apple has renewed its commitment to the town by setting plans to re-purpose the former GTAT facility.

GM has a wide array of constituents and stakeholders to answer to regarding its dealings with Delphi.  The Attorney General of Arizona has filed a $3B lawsuit for the families of victims of the faulty ignition switches.  Surely, there are more to come.

Building an SRM plan is primarily focused on delivering solutions that meet customer needs, but it does not end there.  Procurement managers must be keenly aware of risks to the external stakeholder environment, which should be carefully identified with business partners such as Legal, HR, Public Relations and others.

  1. Demand for strong procurement executives will rise 

Procurement practitioners have reason to be encouraged by the visibility that these stories bring to the function.  The public scrutiny that Apple and GM are facing with their SRM practices exemplify how strong procurement leadership can make a profound impact on the success of large multinational enterprises.

Top execs will be looking for CPO’s that can build and sustain a culture in which the value potential of effectively managed supplier relationships can be fully realised.  The mission of the progressive CPO will include transforming procurement into an organisation of forward-thinking, relationship-savvy business strategists that have deep understanding of the external environment.

Finally, properly incentivising the new procurement organisation to live the values of its SRM culture will be paramount.  CPO’s will be focused on expanding traditional procurement metrics to include broader KPI’s in the areas of product innovation, market share and customer satisfaction.