Revolution of Expectations in China (and everywhere else)

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In an earlier blog (What do Google, Coke, China and Katrina Have in Common? 3/25/10), I emphasized that the typical Supply Chain risks are the tip of the iceberg when looking to do business in “low cost” countries.  A recent AP article (Companies brace for end of cheap made-in-China era, 6/7/10) re-emphasized the point.  AP reported on the number of companies that are finding it increasingly advantageous to shift production of everything from Frisbees to books to iPads from their traditional Chinese bases to lower cost locales.  One of the major reasons cited is that workers in China are growing more aware of their power and, as a result, strikes and other actions are forcing companies to increase wages dramatically.  The impact of China’s “revolution of rising expectations” is particularly strong when combined with the growing cost of shipping and fuel.

The article cited three responses to the challenges companies are facing:

  • Move to less developed areas of China
  • Move to other low cost countries
  • Bring operations back to the States

One of the key factors that any company reevaluating its “China strategy” should consider is that the issues being raised in China are predictable and inevitable.  One of the most frequently overlooked risks in low-cost country sourcing is the risk that wages will rise with the expectations of workers.  As the AP article detailed, workers in the most developed areas of China no longer share the same values as their parents.  Their goal is not to create a nest egg that will allow them to return to a rural village and live in comfort when they reach retirement.  Today’s workers want more now and they want to continue their more varied and expensive life style when they retire.

Guess what?  The only way for that to happen is for wages to go up and for such “Western” benefits as company-provided retirement, health insurance, shorter hours, and longer vacations to become available.  How does that impact the three potential responses listed above?

Moving to other, less developed areas of China seems attractive in the short run but is likely to provide no more than temporary relief.  It doesn’t take a crystal ball to see that the window of opportunity there will not remain open long.  The workers in Western China are no more likely to retain their current level of expectations than workers in the current hot beds for foreign manufacturing.  Expectations always rise and companies always find that they have to meet those expectations in order to avoid major disruptions in their operations.

What about moving to other low cost countries that currently have a better (lower) wage structure?  While there is, again, the opportunity for short term cost reductions, the revolution of rising expectations is, as mentioned, inevitable and predictable.  It can only be delayed and then not for long.  In the past, the length of time from tapping a low-cost labor force until the workers sought a bigger piece of the pie was measured in generations. (Think of America’s Industrial Revolution and how long it was fueled by low cost immigrant labor before unionization took hold and changed the balance of power.)  Today, the combination of global information flow and the numerous examples of what can constitute the “good life” for wage earners have significantly reduced the time lag between industrialization and the emergence of a new level of expectations.  It doesn’t much matter which low-cost area you go to because the revolution will hit sooner rather than later. Does that mean that bringing operations back to the U.S. is the best option?  Maybe, “Yes”; maybe, “No”.

The revolution of rising expectations is not the only issue eroding margins in China.  As I detailed in another blog, (Does it matter if a 600 lb. Gorilla is Chinese or American? 4/15/10) one of the most often overlooked risks is that of shifting government policy.  In China, the end of tax incentives is combining with rising expectations and emerging monetary policy to create a “perfect storm” that may swamp many companies’ profits in a sea of unanticipated cost.  What happens to the cost analyses if, for example, the U.S. undertakes significant immigration reform and actually puts teeth into the rules that prohibit hiring undocumented aliens?  In that scenario, minimum wages could well become an anachronism as the power of workers in the market-place supplants the power of the government to establish the least a company can pay in order to fill its less desirable positions.  Similar impacts to the cost equation could result from implementation of  Cap and Trade, Pay as You Go spending, or any of a number of other proposals that rise and fall in favor in response to the ever-shifting political landscape.

The bottom line?  Companies need to take much more proactive, critical and detailed looks at their options.  They also need to continuously monitor and attempt to anticipate changes in social, political, and cultural variables that impact cost directly or indirectly.  As I have suggested before, Scenario Planning, Value Analysis, and other such tools are critical.  Most importantly, leaders have to realize that they can no longer make decisions based on traditional cost analyses.  Indeed, the items that typically show up in an analysis of Cost of Goods Sold may be the least important factors to consider because they are often reflections of decisions made in areas that are far beyond those that impact COGS.  The challenge is that most of the decision factors that will make the difference in the future are neither well-understood by businesses nor are they easily quantifiable.  The winning companies in the coming decade will be those that come closest to developing that understanding and learning how to deal with ambiguity without turning decision-making over to a roulette wheel.

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Safety vs. Cost Savings – What am I missing?

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There was an article in the Chicago Tribune on Sunday,  American Airlines fuels a debate by Jon Hilkevitch and Julie Johnson, discussing American Airlines aggressive move to cut costs by reducing the amount of reserve fuel carried on commercial flights.  Traditionally, this is a decision made by the flight’s captain and the dispatcher.  American, however, is proposing to rely on a sophisticated database to make that decision which will result in significant cost savings for the airline BUT at increased risk.   Pilots are both furious and concerned.

There is an ongoing debate between the pilots and American as to how much reserve fuel is really necessary.  No one is concerned that the fuel conservation effort will cause an aircraft to run out of fuel mid-air but it could require tapping into the reserve which pilots feel should never be touched (except in emergencies).  While an aircraft will not run out of fuel, it may need to divert a flight which is both inconvenient and increases the safety concerns for the flight. “With diversions, the complexity of operations goes through the roof.”

With all the negative press both Toyota (haven’t heard much about them since BP stepped into the limelight) and BP received because of speculation that cost cutting was valued over safety, you would hope that American would be smarter.   What am I missing?

This case is yet another example of “faulty regulation” – see Why Risk Assessment Matters by Lowell Yarusso, PhD, in Risk & Insurance Magazine, whereby American Airlines  is willing to relax it’s own prudent internal controls to save a few dollars.  As BP learned – the hard way, it will take only one accident that can be attributed to American’s fuel conservation effort for any cost savings and even their entire Market Cap to be wiped out in an instant.

In addition, we have been discussing in previous blogs the need for companies to refocus on value to the customer.  As a frequent flier, I can live with no blankets, paying for food and even paying for my carry-on luggage.  But saving a few pennies on airfare because less emergency fuel is available for an “emergency” seems crazy to me.

Whoever is in charge of “cost costing” at American Airlines (and I hope in this case it is NOT the Strategic Sourcing organization) really needs to listen to their most critical stakeholders – the flight captain and the passengers who will always trade cost savings for safety.  As a passenger, while I value an on-time flight at a reasonable price, I place more value on getting there in one piece.

A refocus on value, as opposed to cost, can actually help companies redefine the market they are a part of, BUT more importantly redefine their place in that market.  Go Value!!!!!

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The Value of Having a Chief Value Officer

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Chief Value Officer (CVO) and Supply Chain Management

What if each company had a head of “Value Creation and Management?”  Perhaps it would be a senior level executive with a title something like “Chief Value Officer” (CVO).  What might such an individual be tasked to accomplish, and how would this individual work with a Supply Chain to achieve greater value for an organization?  The concept of a CVO isn’t a new one, and the concept has been discussed and promoted by firms such as Deloitte for certain professional service firms, such as accounting firms.  But what if large manufacturing and other types of firms had someone with such a title?

We’ve written about value in these blog posts before.  Strategic Sourcing certainly needs to become more focused on achieving true value rather than simply price or cost reduction if it is to continue as a viable key business process in the future.  And achieving the most effective business results in all areas is likely to require organizations to take a new look at how they define goals and strategies and processes in the future.  The old rules of continually squeezing more dollars out of processes and relationships with suppliers and customers in order to meet short term business needs just don’t cut it anymore.  Collaborative approaches to generating value for all participants in a supply chain will become the norm rather than the exception in future years.

A Chief Value Officer would be responsible for ensuring that all business processes and organizational entities are focused on a single company-wide goal, the creation and maximization of value.  That includes the Supply Chain as well as the Strategic Sourcing process and organization.  The CVO would, based on inputs from various stakeholders, determine the definition of value in the organization, create single value goals for the company/organization, and work with each organizational group to develop goals and strategies that will lead to effective value enhancement results.  The CVO would be the focal point for value and would have specific value increase targets that are quantifiable, measurable, and easily understood by other stakeholders.

The impact on Strategic Sourcing would be profound.  With so many Sourcing programs and projects becoming little more than cost reduction exercises focused on generating cash for the current year, the creation of a value officer in the company could be the impetus for transformation of Strategic Sourcing from a cost reduction process to a true value adding strategic process.  If the Sourcing head understands that the program must achieve results that are consistent with the company’s value goals, then the Sourcing strategies developed will be more likely to be value based, i.e., more collaborative, more long term, more focused on leading stakeholders to achieve success in their piece of the Supply Chain.

The starting point would be a greater focus on defining who the customers are, internal and external, and then defining what real value means to each category of customer.  Value is what drives Supply Chain requirements, after all.  Value is what also determines a company’s pricing strategy, since the only thing a customer can use to justify a price is how much value has been received.  It’s not about a supplier’s costs or about meeting basic service requirements, or about providing a certain level of quality.  It’s about that intangible sense a customer has that what has been purchased from a supplier, whether a product or service, will make them more successful in their own businesses.

When a company determines that it will be measured on criteria beyond basic service and quality considerations, the strategic possibilities expand enormously.  If the goal is to be viewed as a premier leader in the market in innovation, creativity, knowledge, passion, or any of the other “value” related characteristics that employees in the new value focused organization will need to have, then value based strategies will follow.  Each of these characteristics is a component of certain advanced supplier/customer relationships, such as long term value based relationships where the key suppliers become part of the supply chain of the customer, and they participate in early product development programs as well as in customer research, manufacturing improvements, and supply chain streamlining.

The nature of core employee competencies will change as well.  No longer will performance of Supply Chain employees be measured based on some mechanical output measure.  Instead, less tangible measures such as the above, which measure individual character and approach to work, will increasingly become part of the recruiting process and the performance evaluation process for Supply Chain and Strategic Sourcing personnel.

Having a focal point for value in a company is an idea that needs to be turned into a reality.  A CVO can be the catalyst to achieve the transformation of Strategic Sourcing from its current cost focused mentality to a true value creating process.

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The Bagel Problem – Supply Chain Management 101

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Just a Bagel?

Isn’t it nice when you arrive at work and find that one of your fellow employees took it upon themselves to treat the rest of the office with bagels or some other form of breakfast treat?  It makes you feel as if that Monday, when you’re running late and leaving the house without breakfast, really isn’t that bad.  Why do the bagels only come on certain days…special days?  Can’t every day be “bagel day?”  How hard could it be to make that happen?  We just need one person to pick up the bagels each day, right?

That’s what I thought.

My second day as an intern at The Mpower Group was when I was asked to find a “bagel solution.”  I honestly didn’t even know what this meant.  The bagels were getting here every Monday, Wednesday, and Friday, so what is the problem?  I realized the bagels were not arriving consistently at the same time.  Sometimes they would be here by 7am with the first person, but often not until 9am.  Sometimes two people would bring in bagels, and every-so-often no one would bring bagels.  The process needed a little more structure.  This way, the bagels would arrive at the right time every other day.  I developed a flow chart of the process and procedure in purchasing the bagels and getting them to the office.  Little did I know this was only the tip of the iceberg.  I was about to experience supply chain management 101.  Who knew it could be so complicated!

I started devising alternative solutions because the bagels were still not arriving at the desired time.  Employees were getting frustrated when the question “Who is picking up the bagels?” continued to circle around the office.  I tried setting up catering accounts with Einstein Bros. and Panera Bread to have the bagels delivered every Monday, Wednesday, and Friday.  This ensured freshness and no one from the office was responsible for picking them up.  The only downfall:  $50.00 minimum per catering order…that’s approximately 4 bagels per day for an office of 10.  I knew this solution was too good to be true!

I began thinking more strategically and approached this “bagel solution” as if it was a real supply chain problem…The Mpower Group way.

First, I communicated the desire for a new process and developed interview questions for each TMG employee.  These questions included:

  • Who eats bagels in the office?
  • How many per person?
  • What kinds of bagels are preferred?
  • What are the preferred cream cheese flavors?

After collecting this data, I asked for feedback on current process (i.e. what is currently working and what is currently not working.)  I then assessed the possible supply bases (including Dunkin’ Donuts, Einstein Bros., and Panera Bread) to make sure I was accommodating all employees’ needs as much as possible.  I then separated individual wants and needs to confirm that our priorities were straight throughout the development of this new process.

After making the executive decision to develop a standing order with Einstein Bros., our baker’s dozen, with all of our favorite bagels and cream cheese spreads, is waiting for pick-up at 7am every Monday-Wednesday-Friday; Sliced and ready to be consumed!

After figuring out the proper procurement and logistics for this process, the next items to be considered in this supply chain include storage, inventory, and maintenance.  I devised an easy-to-read flow chart (ordered by time) to organize the different responsibilities each TMG employee holds in this new process.  The responsibilities include:

  • Setting up the bagel station by a certain time
  • Clearing the station by a certain time
  • Marking the cream cheese with a date so that we know how fresh it is
  • Placing the bagels in sealed containers
  • Taking inventory of plates and knives
  • Discarding the bagels & cream cheese

So long as responsibilities are being handled properly, we will have the cleanest bagel station, along with the freshest bagels and cream cheese.

After considering storage, inventory, and maintenance, I found it important to have a process/solution measurement.  With this, I can receive feedback from all employees in regards to the new bagel process solution.  Every week, I have the opportunity to call Einstein Bros. and adjust my standing order to accommodate to the employees’ needs.  At the end of the summer, when I return to school, I will transition the monitoring and supply chain management tasks to another TMG employee.

Since my focus is to make this process simple for each bagel consumer, I took morning trends into consideration and thought about something other than bagels for a moment.  Why should the employees of this office have to walk into a different room in order to get their morning coffee?  They should be able to pour their coffee at the same time their bagel is toasting.  With this, I developed a coffee station right next to the newly developed bagel station.  This simplifies the morning processes and lessens the traffic within the office.

This project took a great investment in time, feedback, trial & error, and multiple attempts towards success.  Realizing that there was truly a glitch in the morning process’ supply chain was the first major step in developing an efficient and effective solution.  The main criteria for success included executing the new process under proper supply chain management after it had been developed.

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Get Fit! Thoughts on Reinvigorating Your Career

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Getting Fit!

Many of my friends work out several times a week. My son, age 22, has taken up running five mornings a week. They are getting fit.  There are many types of fitness. They are getting physically fit, but what about career fitness?

As I consult with companies, I meet with employees who are bored, dissatisfied and generally unengaged in what they are doing. They lost interest in their job, department or even the company. They lost their passion, their mojo.

So how do you rev up your passion for the job, department and company? That is where career fitness comes in. Career fitness is very similar to physical fitness. It’s about gaining energy, health, enthusiasm, and empowerment for your own career. Thankfully, there is no gym, profuse sweating, or cardio involved. Although it does require thought, planning and taking action.

So how do I become a career athlete? In the “old” days companies laid out development plans for the employee, sent you to classes and conferences in exotic destinations. Most firms have done away with that in cost cutting measures. If these options are available to you, lucky you! Be sure to take advantage of them.

For those of us living on the other side of the fence, where cost cutting has occurred, I do have some ideas. Give these suggestions some thought, make a plan, and take action. Take time to record your progress.

  1. Find your passion. What made you chose your line of work? What interested you in the education you have? What made you love it? If you are not passionate about your work, check out local community services, not-for-profits, and associations. Volunteer your talent so you can contribute to someone else’s future and your own.
  2. Refresh and expand your skills. You want to be knowledgeable about your field’s current trends. Use the web to research workshops. Have you checked out webinars or online classes? Even if your firm will not cover the cost, invest in yourself. There are inexpensive classes to help you build skills, making you more valuable to your current employer and more marketable to future employers. Look for recommended reading lists, not just in your field, but in business trends. Use the local library to check these books out.
  3. Broaden your business experience pushing yourself outside your comfort zone so you can work in the widest possible range of situations and circumstances. Work on a cross-functional team or move into another business function. If you have always sourced for manufacturing, check out business services. Go to work for the parent or sister company. Take on a stretch assignment to broaden your skills. Stretching is part of fitness.
  4. Grow and nurture your network internally within your organization and externally. Join a professional network and attend regularly. Get involved in a professional organization. Maybe even take on a leadership role.
  5. Be a mentor to someone starting out. Find a mentor for yourself. Ask your boss and other colleagues for feedback, advice and ideas.
  6. Be sure to pace yourself with downtime and vacation so you can preserve and reinforce your enthusiasm and commitment to doing your best job.

I hope you have found these tips helpful in revving up your career fitness. Once you recapture your passion, optimism will follow.

If you have other suggestions for readers of this blog, please leave a comment.  I’m sure others will appreciate it!

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