Enterra Insights

Should You Become an Entrepreneur?

John Seely Brown, the former chief scientist at Xerox Corp. and former director of the Xerox Palo Alto Research Center (PARC), wrote a short article about people who found themselves unemployed taking advantage of the "opportunity" to restart their lives as entrepreneurs ["Use Pink Slips to Pursue Your Real Passions," Bloomberg BusinessWeek, 5 August 2010] He wrote:

"With the unemployment rate apparently stuck near double digits, more people seem to be choosing a passion over a steady paycheck. Rather than waiting for companies to open up their payrolls, these people are taking matters into their own hands and defining their own jobs, going online to find each other, leverage each other’s capabilities and services, and learn faster by working together. That is a big risk, but these people realize that they’ll be far happier if they can find something they love doing and figure out creative ways to make a living from it. Focusing on work that offers greater meaning makes it easier to withstand the perils and roadblocks they will face as they leave the corporate fold."

Although the focus of Brown's article is using social networks to foster start-ups, he is undoubtedly touching emotional buttons for would-be entrepreneurs. His article begs the question: "Should you become an entrepreneur?" Successful entrepreneurs tout the satisfaction they gain from being their own boss and seeing their ideas blossom. Not all entrepreneurs, however, are successful. Many of those who are successful fail to mention the financial and emotional tolls that are often paid along the way. I'd wager that the biggest concern most entrepreneurs face is financial security. Entrepreneurial enterprises often carry a heavy financial burden ["Becoming the Boss Can Cost Plenty," by Sarah Needleman, Wall Street Journal, 1 August 2010]. Needleman reports:

"When starting a business on a tight budget, a single spending gaffe can spell disaster. For this reason, experts in entrepreneurship recommend taking precautions, such as doing research to identify potential hidden fees, focusing only on necessities and setting aside emergency funds."

Needleman provides accounts of entrepreneurs who made investments in web sites, trade groups, marketing materials, and elaborate kick-off parties and who all came to regret spending too lavishly. She continues:

"In other cases, rookie business owners say they made spending snafus because they underestimated how much critical items would cost. For example, before opening Calisto's Sweet Treats Bakery in Southington, Conn., ... business partners Michael Cirrito and Giancarlo Garcia-Zimmitti figured they'd need to set aside at most $1,800 a month for food expenses. ... Their approximation was off by a whopping 100%. We're struggling,' says Mr. Cirrito, a former chef for a casino who turned to entrepreneurship after his work hours were cut in half last year. Had he and his partner examined what they truly needed to spend to get their business started, Mr. Cirrito says they would've held off opening their doors until they'd gathered more start-up capital. Tom Kruczek, executive director of the Falcone Center for Entrepreneurship at Syracuse University, says a common reason why first-time entrepreneurs mismanage their start-up budget is that they let their emotions get in the way of rational thinking. 'They want to be successful so badly that in their haste they end up spending money in the wrong places,' he says. ... In late 2007, Taylor Senatore and Jennifer Frank withdrew most of their personal savings—a combined $250,000—to launch California Wine Merchants in New York. ... But Mr. Senatore and Ms. Frank didn't realize that the property they rented came with special restrictions for turning the raw space into a retail store. As a result, they ended up spending 80% of their budget on construction costs alone. ... Failing to read the fine print of their storefront's lease meant they needed to take out second mortgages on each of their homes to be able to keep their dream alive. 'As a new business owner, you're excited,' says Mr. Senatore. 'But the mistake we made threw off everything for us.'"

I'm certainly not trying to dampen anyone's desire to become an entrepreneur. As a realist, I simply want people to enter the fray with their eyes wide open to the challenges ahead. If you take John Seely Brown's advice and see a pink slip as an opportunity, you need to make sure that your plans are well-grounded and that you are not simply moving forward out of desperation. "Being an entrepreneur isn’t easy," writes Rajiv Dingra, the young founder and CEO of WATConsult, a social media agency in India. "Many become one briefly and then revert to the fixed monthly pay package of a secured job. Reports show that most entrepreneurs are over the age of 30." ["Are You an Early Bird Entrepreneur?" Wall Street Journal, 3 August 2010]. Although he is correct that most entrepreneurs are over 30, with employment prospects coming out of college looking pretty grim, I suspect that the number of under 30 entrepreneurs is going to increase. Dingra explores what it takes to be an "early bird entrepreneur." He writes:

"Entrepreneurship is tough. It’s like a puzzle with too many unanswered questions. It’s also a huge risk as people who work for you depend on you for their livelihood. It involves a lot of stress. Competition, market conditions and other non-controllable factors will affect what you do. As an 'early bird' entrepreneur, you have some advantages over others on all these potential hurdles.

1. Age on your side. having age and energy on your side is great. It will help to save time and do more in the same time as your competitor. Yes, due to lack of experience your quality of work may not be as high but experience is built by experiencing more, isn’t it?
2. Ignorance can be bliss. At an early stage it’s difficult to pick right from wrong and that actually is a great thing. If the founder of Facebook or Google went to investors or anyone in the know of digital media in U.S. and asked them if their new ideas for social networking or search engines would expand to global dominance, the answer would have been a big, 'NO!' or 'Seems very difficult.' Ignorance, or the ability to try things without planning and analyzing on whether they will work, actually helps you become a discoverer rather than a planner. As they say, if you don’t set sail you won’t get anywhere.
3. Greatness NOT money is powerful. If you strive for greatness, to change the world or to make a difference, it’s very likely that you will end up making a lot of money. This is because doing something for a goal beyond money will inspire you to do it with utmost passion irrespective of the results or hindrances on the monetary front. And as an early bird you can afford to indulge in ventures that excite you regardless of their monetary benefit and thereby create things of value
4. Early to rise is early to achieve. I’m a firm believer in being early to rise in life. Though it’s never too late to do anything, the earlier you are, the easier it is for you to work your way through a learning curve and figure out what you really want to do. There is more room for mistakes and thereby a greater learning opportunity as well. All of it will only make you a better entrepreneur."

Those traits may be advantages, but they won't overcome a bad business plan, poor judgment, or lack of sufficient funding. An article in the Wall Street Journal, adapted from the book The Wall Street Journal Complete Small Business Guidebook by Colleen DeBaise (Three Rivers Press, Dec. 29, 2009), provides some better advice on how to decide whether or not you should try and become your own boss. The article notes that "starting a business is a lot like becoming a parent. Not only do you have to prepare for your start-up emotionally and financially, but you have to be committed to its constant needs until it’s mature enough to hum along on its own. And even then (much like a child) it will always need you in some capacity, no matter how old it gets." The article continues by providing "five questions to ask before you start your own business":

"1. Am I passionate about my product or service? Let’s face it: the start-up phase is stressful. You will find yourself questioning whether you’ve made the right decision, especially when the hours are long and the initial profits (if any) are lean. As the business owner, you’re also chief salesperson for your company. Your enthusiasm for your product or service— whether it’s hand-knit sweaters or top-notch tax preparation— is often the difference that hooks customers, lands deals and attracts investors. It’s unwise to start down the path of entrepreneurship unless you’ve got a zeal that will get you through rough patches and keep you interested long after the initial enthusiasm has faded.

"2. What is my tolerance for risk? Whether it’s quitting your day job or signing a lease on a new space, nothing about starting a business is for the faint of heart. Just ask Ina Garten, who bought a specialty-foods store called The Barefoot Contessa in East Hampton, New York, in 1978 and has since branched out into cookbooks, television and a line of products. Garten tells aspiring entrepreneurs that you have to 'be willing to jump off the cliff and figure out how to fly on the way down.' Even with enough passion to launch a thousand ventures, you could find any number of circumstances hastening your failure: a location that turns out to be less than ideal, a problem with city or state zoning boards or a kink in the supply chain that can’t easily be ironed out. There’s no guarantee of success, or even a steady paycheck. If you’re risk-averse, entrepreneurship probably isn’t the right path for you.

"3. Am I good at making decisions? No one else is going to make them for you when you own your own business. Consider how you might handle these early decisions: Do I work from home or do I lease office space? Do I hire employees? Do I pursue high-end clients or sell to the masses? Do I incorporate? Do I advertise? Do I borrow money from friends or family? Do I use my entire savings? Keep in mind that the decision-making process only gets more complicated as time goes on, once you have employees or clients depending on you. The choices you make can lead to success or downfall, so you must feel confident in your ability to make the right call.

"4. Am I willing to take on numerous responsibilities? While a corporate employee focuses on a special skill or role within the larger corporation, a business owner must contribute everything to the business. Solo entrepreneurs in particular must be versatile and play a number of roles, from chief salesperson and bookkeeper to head marketer and bill collector. If juggling many roles doesn’t suit you, entrepreneurship probably won’t, either. The recent economic downturn has made it more important than ever for business owners to have a good working knowledge of their companies’ finances. While you will undoubtedly learn much on this topic from getting your hands dirty, the more knowledge you have in advance, the better prepared you’ll be.

"5. Will I be able to avoid burnout? Working seven days a week, losing touch with friends, abandoning old hobbies and interests and not making time for loved ones can quickly lead to burnout in the midst of starting up— and ultimately to business failure. That’s what happened to James Zimbardi, an entrepreneur in Orlando, Florida, who says he didn’t know any better when he started his first company in 1997 and worked as hard as possible, for as long as possible, until his creativity, enthusiasm and energy were sapped. By 2002, he was a broken man— the business took a downturn, and so did his personal life. Now Zimbardi is at work on his second company, Allgen Financial Services, and sticking to better habits to maintain work/life balance, such as not working on Sundays, making time for hobbies such as sailing and salsa dancing, and building close ties with other business owners through a faith-based support network."

Those are good questions to start with, but there are dozens of other questions surrounding your ideas and your business plans that need to be answered as well. What DeBaise's questions will do, if you are honest with yourself, is give you some insight into whether you have the right personality and emotional make-up to become an entrepreneur. If you do, then as the article concludes, "If you think you have what it takes, go for it."

Rethinking Supply Chains

I've written a number of posts over the past few years about the importance of breaking down silos of activity and information that inevitably emerge in large organizations. Breaking down silos requires better sharing of information and better alignment of intra-division goals. According to Lora Cecere, this kind of horizontal thinking also needs to be applied to the supply chain ["Make Money. Turn your Supply Chain on its Ear. Go HORIZONTAL!" Supply Chain Shaman, 21 July 2010]. Before telling readers how they can think horizontally about their supply chain operations, she reminds them why they must start to think differently. She writes:

"Need money? The common answer is to squeeze supply. For many companies, the supply chain is the de facto bank for the company. Through functional excellence and continuous improvement programs, companies generated cash to fuel growth. Supply chain became the place to go get cash. However, after years of harvesting the low-hanging fruit, the savings are getting tougher. For many, the well is effectively dry. Yes, companies can still wring pennies from their functional excellence programs; but they want bigger savings. To gain these, they need a new approach. They need to turn the supply chain over, lay it horizontally, and ask a different set of questions."

Lora is repeating what I've heard from a lot of supply chain gurus, squeezing more money out of the supply chain is getting tougher. So what does Lora mean when she says that companies need to turn their supply chain on its ear? "The advice," she writes, "is counter-intuitive. For many, it is illogical; but it works." She recommends four steps. The first step is thinking about the supply chain using a different perspective. She explains:

"Start by turning the Supply Chain on its Ear: ... Focus on the design of horizontal processes from the outside-in. Horizontal processes include margin management, contract management, demand shaping programs, working capital management, Sales and Operations Planning (S&OP), supplier development, and new product launch. Ask how to align these processes cross-functionally to gain greater value in the value chain. Ask what is possible? How many value chains there are, and what drives value in each?"

Long-time readers of this blog know that I'm a fan of cross-sectoral approaches to problem-solving. Getting people not normally concerned with supply chain matters involved in a more significant way can help shift a company's perspective. It also helps when implementing Lora's second recommendation.

"Align goals: The next step is to step back and align metrics. Ask yourself the question ... 'If we reward sales on volume, marketing on market share, finance on minimal budget variance, manufacturing on asset utilization, and sourcing on the lowest cost of materials, will we ever achieve the lowest total cost?' The answer is no. Inherently, only 20% of companies measure and make trade-offs on TOTAL costs. Most measure functional costs with little power to trade-off costs across the vertical silos of source, make, deliver and sell. Have a laser focus on total costs, and taking the waste out of horizontal processes. Look at what drives variability and manual intervention in these horizontal processes and look at alignment of goals cross-functionally against what drives value against the business strategy."

From Lora's comments, you can see why "silo thinking" develops so easily and how it can be detrimental to a company's bottom line. For more on this topic, read my post entitled The Curse of Silo Thinking. By applying an integrated approach to supply chain management, silo thinking is avoided and the big picture comes more clearly into view. Lora's next recommendation is to pay attention to that big picture; because the overall picture is more important than the elements from which it is composed. She writes:

"Train for the Decathlon: In a Decathlon, there are ten events. The winner is judged by total performance, not by a single score in a single event. Because the athlete must do well in the four runs and six field events, he has little opportunity to perfect any one event. A decathlete trying to improve performance in one specific event is likely to deteriorate in another, because the physical demands of the various events are conflicting. His training is necessarily different as he strives to improve all techniques, gain strength without losing speed, and acquire the stamina to perform through a competition that lasts anywhere from 4 to 12 hours per day. In short, he trains to raise performance making trade-offs with the end in mind. A supply chain is like a decathlon. Companies need to do well in source, make, deliver, sell, innovation, customer service, order-to-cash, procure-to-pay, inventory management, and sustainability. The company that can both lower total costs and drive innovation is good at trade-offs. They understand that to win the race, that they may score 2nd or 3rd in these individual competitions to win the total score. And, that they will lose if they try to be the best in every event. As an analyst, I have participated in over 50 benchmarking exercises which taught me first hand that the company that tries to be the lowest cost in all functions ends up with higher total costs. (I know that this is counter-intuitive, but it is true.) Like the decathalon, the supply chain scoreboard is arbitrary. It must be determined. With a focus on horizontal processes, teams find that they must better define the goal. They need a scoreboard that rewards trade-offs. This raises the issue of 'What is supply chain excellence?' What drives value in our value chain? The answer is not so facile."

Encouraging executives (who have been trained to maximize the metrics in their own areas of expertise) to begin thinking in terms of trade-offs may be the most difficult hurdle to jump (to continue Lora's track and field analogy). Their fear will be that their personal performance will continue to be judged by old metrics and not by the company's improved overall performance. CEOs must not only motivate individuals to think differently they must convince them that learning to make trade-offs will bring personal rewards. Finally, Lora recommends that a company begin the process of thinking horizontally by asking a lot of questions. She explains:

"Ask the Right Questions: As companies move from a laser focus on functional excellence to value chain management, there is a radical shift in what matters. Traditionally, the supply chain has been focused on:

• Right product, right place, right time
• On-time and in-full shipments
• The integrated end-to-end supply chain
• Lowest costs

"As companies design horizontal systems, they find that these are not sufficient. These focus areas need to be redefined based on answering a higher-set of questions:

• What does global mean? What should be global and what should be regional in source, make, deliver, and sell processes?
• How many supply chains are there? And, what defines value for each?
• What does customer service mean? How do we define it to best support value-based outcomes?
• How do we best sense, shape and orchestrate demand? And, minimize the bullwhip affect?

"Ask the tough questions. Put your supply chain on its ear. Change the focus from vertical to horizontal processes. I have seen the evidence, but I now feel even more strongly that there is gold there. Go get it! There are just TOO few ways to prime the pump to drive break through ideas these days."

When Lora writes that she has "seen the evidence," she means that she has watched companies follow her advice and significantly improve their bottom lines. One company followed her advice and saved "[$]1 million on an operating budget of [$]15 million." Another company "designed horizontal processes from the outside-in [and] ... saved 18% of their operating budget." It's always a good idea to start any change process by asking a number of pointed questions -- including questions about the assumptions that have been used to make decisions in the past. Steve Banker also recommends asking questions before implementing supply chain solutions ["Questions You Should Ask Before Implementing a Supply Chain Solution", Logistics Viewpoints, 26 July 2010]. He writes:

"Before you implement a supply chain planning or execution solution, you should talk to other companies that have implemented the solution (ideally, about 20 companies), as well as consultants and analysts familiar with the technology. If you are a busy executive and don’t have the time to conduct these interviews, someone on your staff can execute this research or you can hire an outside firm like ARC to do it.

"The specific questions you should ask depend partly on the type of solution you are implementing. But in general, here are some of the questions that I ask when I conduct these kinds of projects:

• SCOPE: What was the scope of the implementation? For example, if this was a warehouse management system implementation, how many facilities did you implement? If not all warehouses, which warehouses and why? How complex are your warehouses?
• PROCESS: What was your process before you implemented? How did your processes change after the implementation?
• PARTNERS: Which software vendor did you select? Which consulting or implementation partner? Why did you select them? Who else did you consider? Were you happy with these partners? Why or why not? If things went badly, was it partially your fault? Is there anyone on the vendor’s or consultant’s implementation team you would specifically recommend?
• COSTS: What did the software cost? The associated hardware? The cost of the implementation? Other costs?
• BENEFITS: What financial and nonfinancial benefits did you receive? Were there any unexpected benefits? How long did it take to implement? After going live, what was your payback period?
• PEOPLE: Does the solution require super users or users with special training? What kinds of background/training make for the best users? Are you going to need to let some people go and hire others better suited to use this application? What sorts of change management issues did you experience? Were there any cross functional issues?
• ADVICE: What would you do differently if you were to do the implementation over again? What advice would you give to others considering this kind of implementation? How can someone get the most out of a system like this on an ongoing basis?

"Implementing a supply chain system is a lot like boating. There can be hidden shoals; conducting interviews with those in the know is how you build your depth chart."

In answering those and similar questions, take Lora's advice and involve individuals from across the organization. Think horizontally and eliminate silos. In closing, I'd like to congratulate Conair Corporation for receiving an Outstanding Achievement Award in Supply Chain Excellence at the annual Consumer Goods Technology (CGT) Business & Technology Leadership Conference held earlier this week. This prestigious award is presented annually to three consumer goods firms that demonstrate outstanding achievement in executing supply chain improvements. Conair received the runner-up award and was honored for its participation in the development and implementation of the Enterra Supply Chain Assurance Platform™ (ESCAPE™). In his acceptance speech, Jon Harding, Conair's Global CIO, stated:

“We at Conair are honored to accept this award and certainly to be recognized in this category. It would be remiss of me not to point out all of the team members who supported this effort. John Mayorek, people from our compliance management team, and, most importantly, our software development partners Enterra Solutions. This system is considered innovative because Enterra Solutions has this proprietary, rules-based technology that senses changes in data, applies rules, and identifies conflicts with our supply chain partners. It is definitely helping us partner with our retailer customers as well as improving our productivity. This is the first of a series of predictive, analytic products that we are working on with Enterra. Finally, the good news is that these applications are actually available to all consumer goods manufacturers. Enterra Solutions is selling these as software-as-a-service offerings – so please see Enterra Solutions.”

I am grateful for Jon's kind words and Enterra Solutions continue to work with Conair to expand the ESCAPE suite in order to help clients optimize their supply chains.

PRTM Identifies Five Supply Chain Challenges

A study by PRTM Management Consultants titled Lessons Learned from the Global Recession identifies five key challenges that manufacturing and service companies will face over the next several years ["PRTM study highlights five key supply chain challenges," SupplyChainStandard.com, 22 June 2010]. According to authors of the study "many companies lack the capabilities critical for meeting growing demand or for managing an increasingly complex and global supply chain." The five trends identified by the study are:

1: Supply chain volatility and uncertainty have permanently increased
Market transparency and greater price sensitivity have led to lower customer loyalty. Product commoditisation reduces true differentiation in the consumer and business-to- business environments.

2: Securing growth requires truly global customer and supplier networks
Future market growth depends on international customers and customised products. Increased supply chain globalisation and complexity need to be managed effectively.

3: Market dynamics demand regional, cost-optimised supply chain configurations
Customer requirements and competitors necessitate regionally tailored supply chains and product offerings. End-to-end supply chain cost optimisation will be critical.

4: Risk management involves the end-to-end supply chain
Risk and opportunity management should span the entire supply chain—from demand planning to expansion of manufacturing capacity—and should include the supply chains of key partners.

5: Existing supply chain organisation are not truly integrated and empowered
The supply chain organisation needs to be treated as a single integrated organisation. To be effective, significant improvements require support across all supply chain functions.

A senior IBM consultant, who writes a blog entitled @ Supply Chain Management, penned a series of posts discussing these challenges [PRTM Study: Five Key Supply Chain Challenges – Challenge 1, PRTM Study: Five Key Supply Chain Challenges – Challenges 2 & 3, and PRTM Study: Five Key Supply Chain Challenges – Challenges 4 & 5]. Here's what he writes about the first challenge -- Supply chain volatility and uncertainty have permanently increased:

"So what is the situation with supply chain volatility and uncertainty?

Survey results clearly show that concerns about continued demand volatility hamper companies’ ability to effectively manage supply chains in an upturn. In fact, three-fourths of respondents consider demand and supply volatility and poor forecast accuracy to be the biggest roadblocks they currently face. Volatility concerns were not assuaged during the recession, nor have most companies successfully implemented strategies for managing volatility in the years ahead. Recent shortages, such as those in electronic components and selected raw materials, indicate that many companies do not have the flexibility to meet an increasingly volatile demand. The rapid ramp up or ramp down of capacities seems to be a big challenge for many study participants.

"The biggest roadblocks faced by respondents are demand and supply volatility and poor forecast accuracy. But surely, one is the cause of the other and this can only be exacerbated in a global supply chain with long manufacturing and transportation lead times. Does not poor forecasting of demand beget supply volatility whereas demand volatility is a function of the economic cycle? Now, when both situations occur simultaneously, then it is quite believable that firms are in for a rough time. The actions that respondents plan to take doesn’t make much sense to me – they don’t hurt but more importantly, they don’t help. The action items can be broken down as follows:

The best-performing companies have already taken steps to improve supply chain response time and visibility across all supply chain partners.

"I believe this is the key to cutting down volatility – reducing the supply chain response time and if no reduction is possible, then at least making certain of it. Both the magnitude and variation of supply chain response time create uncertainty (and consequently volatility).

Others plan to implement new strategies within the next two years. Companies are focusing primarily on deepening collaboration with key customers to reduce unanticipated changes in demand.

"I believe that this is a no-go. Key customers themselves face volatility and therefore partnering with customers to reduce one’s own volatility is unlikely to bear fruit unless the key customer’s customers are not creating volatility. The first point above i.e. reducing supply chain response time is the more important factor.

Half of participants plan to implement joint 'real-time' planning with their key customers by 2012, and nearly half plan to develop processes for improved demand sensing—that is, understanding the market rate of demand in real time, rather than having to wait for after-the-fact reporting.

"Again, real-time planning is quite useless when you cannot obtain real-time response. You can create a plan as soon as a trend/micro trend is recognized but if you cannot create a response to it, then you’re just printing numbers."

The IBM consultant makes a good point about the importance of being able to respond to demand. Supply chain analyst Lora Cecere believes that we are heading towards a future in which demand-driven supply chains will provide a significant competitive advantage for manufacturers that can master them. She agrees that volatility can best be addressed by collecting better data and collecting it faster. She writes:

"The issue is that 99% of companies have no demand visibility. They cannot see. Orders are not a good reflection of demand. So the supply-centered processes of source, make and deliver focus on lean, while the sales and marketing processes induce more variability. I find that it spins the organization out of control. What to do? Focus on the design of value." ["Lean Bigot and Proud," Supply Chain Shaman, 24 September 2010]

The IBM consultant next turns his attention to the second challenge -- Securing growth requires truly global customer and supplier networks:

"Most survey participants expect that future business growth will come primarily from new international customers and products that are customized to meet their needs. As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012.

"This I don’t understand – where are the respondents coming from? If business growth is going to come primarily from new international customers, what does that mean other than the fact that overseas growth is going to be met largely by overseas means of production. In that case, the complexity in the supply chain decreases not increases. The control of the supply chain from overseers stateside is going to be more difficult but why must it be controlled from far away?

"Nearly 30% of respondents expect the number of manufacturing facilities to decline until 2012, which reflects the expectation that their companies will increase outsourcing to external partners. Similarly, a nearly 30% decline in the number of strategic suppliers indicates that many companies expect to further consolidate their supplier bases. In general, companies in North America and Europe will consolidate their manufacturing and distribution footprint, while companies in Asia will further expand their entire supply chain network.

"I don’t really understand this challenge at all. In fact, it is an observation that the trend of offshoring and outsourcing is going to continue, perhaps, even increase. The first stage of outsourcing and offshoring was primarily driven by the need to improve profit margins vis a vis the consumer in the developed world (who was for quite a period on a debt fueled binge). Today, that consumer in the developed world is all but tapped out – well, the answer to that is the consumer overseas whose consumption habits have yet to be tapped to the fullest potential."

It's easy to understand why this was raised as a challenge by respondents. As I noted in a previous post, ninety-six percent of the world's consumers live outside the U.S. Just because overseas customers are primarily going to be serviced by overseas production facilities doesn't necessarily mean that supply chain challenges are going to be reduced. Many companies are finding that delivering their products to the world's poorest people requires quite a bit of ingenuity in order to meet the "last mile" challenge. The IBM consultant next addresses the third challenge -- Market dynamics demand regional, cost-optimized supply chain configurations:

"Survey respondents seem confident that they will be able to deliver substantial gross margin improvements over the next two years. As was the case during the downturn, gains will not come from price increases, but from further reductions of end-to-end supply chain costs.

"Unfortunately, few firms will confess that this is not a strategy of their choosing but one of the times imposed on them i.e. there is very little by way of pricing power to be had and therefore it is time to resort to the strong arm tactics of squeezing out your suppliers. ... The odd thing about ... challenges (2 and 3) is that they are seemingly at odds with each other. The modern supply chain is not as regional as it is global. Perhaps, the implication is that it is directed at emerging markets rather than developed ones, the growth in the supply chain has regional constraints on its mind rather than global ones. That does leave the global supply chains originating state side in a nice pickle. No? In conclusion, there is one observation here and one challenge. The observation (emanating from Challenge 2) is that offshoring and outsourcing are set to continue for different reasons and possibly at an increased pace. In fact, I would think that this is the decade when a number of corporations are going to become transnational. The challenge for the supply chain is that it is going to become decentralized in a big way – regional markets, regional supply chains. I’ve frequently said on this blog that these global supply chains don’t have to exist and it looks like that this prediction is beginning to come to pass."

In a number of past posts, I have stated my belief that regionalization within the larger framework of globalization is going to increase. One of the reasons that I believe that this is going to be the case is that companies will see the advantages of regionalized supply chains -- just as the IBM consultant claims. The challenge for many globally-integrated enterprises will be to manage these regional supply chains within their larger supply chain system. Next the consultant discusses the fourth challenge -- Risk Management Involves the End-to-End Supply Chain:

"Risk management, to me it seems, has grown by leaps and bounds since the financial crisis – finding applicability everywhere and dare I say rightly so.

"During the global financial crisis, many companies operated with the fear that suppliers would be forced into default, cutting off critical sources of components and increasing the cost of introducing alternative suppliers.

"Yet, the following observation flies in the face of the purported effort to manage risks within the supply chain.

"Dealing with cost pressures of their own, many customers have increased their efforts in asset management and have started shifting supply chain risks upstream to their suppliers.

"Is this managing risk or passing the buck? Isn’t the end result of this that the supply chain risks are passed back to the production point? The purpose of inventory within the supply chain is to buffer variability that occurs. In the case of offshored/outsource supply chains, significantly greater amounts of inventory is required to buffer variability because of the longer lead times. Shifting supply chain risks upstream just means that the lead times that are currently experienced (which are long) are about to get longer. You’re about to enter the twilight zone – of worsening lead times that is. Why? Variability in lead times, require greater amounts of inventory to cover it but the greater requirement for inventory is what causes the worsening lead time in the first place. If this is true, then the consequent observation (a few quarters down the road) will be that offshored/outsourced production centers are buzzing to the brim but there [are] all sort[s] of snafus in the supply chain downstream from the production point. And that is the consequence of passing the risk instead of managing it. C’mon folks – If you’ve committed to the long lead time supply chain, inventory is a fact of life. Maybe, the fact of life. If the volatility of demand from the consumer (straining under the economic headline of the day, week or month) is getting to you, the response cannot be to cut inventory because that is the only thing that is keeping the risk of supply chain disruption at bay. Interesting times indeed!!!"

It is understandable why manufacturers and retailers would rather have someone else bear the costs of maintaining inventory (hence, the drive to shift supply chain risks upstream), but I think the blogger is correct that this will probably increase rather than decrease risks -- especially if a real-time supply chain risk management system is not in place. For more on this topic, read my post entitled Supply Chain Risk Management. The IBM consultant has little to say about the final challenge -- Existing Supply Chain Organizations are not truly Integrated and Empowered. In fact, he concludes with this statement: "Yeah, and which organization is truly integrated and empowered? Thankfully, we have work to do just because of this facet of organizational gaps." In other words, the lack of integration is good for IBM's consulting business. IBM's CEO, Sam Palmisano, believes that future belongs to globally integrated enterprises. He has been promoting that topic for the last four years (see my post entitled Globalization and Resilient Enterprises).

The study makes it clear that supply chain executives see lots of challenges facing them. Unfortunately, challenges are always easier to see than the solutions that can address them. It's a bit distressing to see that respondents believe that corporate profitability is going to rely heavily on reducing end-to-end supply chain costs. Some supply chain analysts, like Bob Ferrari, worry that cost-cutting measures may have already gone too far and are making supply chains less rather than more resilient.

Supply Chain Digest Highlights the Enterra Supply Chain Assurance Platform™ (ESCAPE™)

Last month I posted a blog about the 2010 CSCMP annual conference held in San Diego at which I served as a member of a panel that was moderated by nationally-recognized supply chain technology expert Lora Cecere [2010 Council of Supply Chain Management Professionals (CSCMP) Annual Conference]. In that post, I noted that the Enterra Supply Chain Assurance Platform™ (ESCAPE™) was featured as one of two innovative technologies that are dynamically changing the supply chain technology landscape. The editorial staff of Supply Chain Digest took notice of that panel and published an article about the work Enterra Solutions has done with Conair Corporation. The article's sub-title reads: "New Proactive Monitoring System Lets Small Appliances Giant be Aware of 'Shipments at Risk' of Compliance Violations" ["Supply Chain News: Conair Fights Back in Retail Chargeback War," 19 October 2010]. As one might imagine, I'm delighted that Enterra's supply chain solutions are getting such positive feedback. The article begins:

"As any consumer goods manufacturer knows, so-called 'retail chargebacks' incurred for violation of any of dozens of 'compliance' requirements from a given retailer can result in substantial hits to the bottom line. The challenge of complying with those constantly changing rules and battling the sometimes erroneous charges has left many manufacturers viewing even high levels of such retail penalties as just a cost of doing business. Whether it is for generating chargeback revenue, reducing supply chain variance, or some combination of both, retailers for a number of years have had advanced technology from companies such as Compliance Networks to help them identify and document products and receipts that fail to me their compliance requirements. Technology support on the vendor side has generally been limited to distribution center execution, with capabilities in some leading Warehouse Management Systems (WMS) that aim to ensure retailer compliance in such areas as carton labeling, advanced ship notice (ASN) generation, pallet building, manifests, and transportation routing. But not everyone has those types of WMS capabilities, and even if they do, they usually do not address many other areas of chargeback potential, especially around ship and delivery due dates, and percent of the purchase order fulfilled."

That was the state of things when Enterra Solutions started working with Conair. Especially important in this effort were John Mayorek, Conair's Senior Vice President of Operations, and his compliance team. John took part in an Enterra-sponsored webinar that helped introduce ESCAPE earlier this year. To read more about the webinar, or to find a link where you can listen to it in its entirety, see my post entitled Reducing Retailer Compliance Penalties. That post focused on an article published by Consumer Goods Technology, the company that hosted the webinar.

The Supply Chain Digest article continues:

"The status quo in compliance penalties was something Conair, the maker of the legendary hair dryers as well as owners of such brands as [Cuisinart], Waring and Travel Smart, decided it could not accept any longer. According to Conair Global CIO Jon Harding, Conair had developed pretty good processes for managing retail compliance, including having a small department with staffers whose job it is find the chargebacks, see whether in Conair's opinion they were justified, and fight back with the retailers as required. 'We were diligently challenging those fines,' Harding said, 'but we had to get more proactive in heading the challenges off.' Technology, he believed, would be the key. We were looking for something that would keep up to date with retailer rule sets, and really predict against those rule sets what orders and shipments were at risk of not shipping on time or had other aspects to them that people had to deal with pretty much today,' Harding said."

Harding delivered those remarks via video at the CSCMP conference noted above. If you want to hear all of Jon's remarks, you will find a link to the video in the post mentioned above. The article concludes:

"Harding said Conair wound up defining the objective as building an 'at risk' capability that would provide visibility to logistics and customer service about emerging compliance risks. Conair wound up turning to Enterra, an existing technology provider that had rules-engine capabilities. Conair worked with Enterra to build a proactive compliance monitor such as Harding envisioned. That system included going out to the web sites of Conair's retail customers daily and 'web scraping' any changes to those requirements and updating the compliance rules monitor as appropriate. Though the project is still in its early stages, Harding says the 'business result has been very encouraging.' He adds that 'We now have the ability to respond quickly to at risk orders. The shipping department is becoming more comfortable with that process.' He said that Conair can also now respond more quickly to any chargebacks that are levied because all the data related to that incident is stored in one place. Harding added that 'Going forward, we expect to see significant reductions in chargebacks levied and reduce overhead costs in our efforts to respond to those charges.' With such a proactive system, Harding says, 'You no longer have to just accept chargebacks as a cost of doing business.'"

Enterra continues to work with Conair and is expanding the number of modules available in the ESCAPE suite. ESCAPE's Retailer Compliance Module has three components: Proactive, Immediate (At-Risk), and Reactive (as described below). The newest module Enterra is working on is called the Pre-Inventory Prediction Inventory Module (also described below).

The PIP Module, which will be available in the first quarter of 2011. In addition, several other modules are already in work that we hope to introduce next year. For more information about ESCAPE, call 571.336.0072 or email info@enterrasolutions.com.

Lake Kivu: Exploiting One of Africa's Exploding Lakes

Three lakes in Africa (Lake Monoun, Lake Nyos, and Lake Kivu) are infamous for being subject to limnic eruptions. A limnic eruption, sometimes called lake overturn, is a natural disaster during which carbon dioxide (CO2) suddenly erupts from deep lake water. These eruptions suffocate wildlife, livestock and humans. There have been two such eruptions in the last 30 years. The first disaster, which killed 37 people, took place during the night of 15 August and the morning of 16 August 1984 in and around Lake Monoun. Because limnic disasters are rare, the cause of the deaths was at first shrouded in mystery. The mystery was solved two years later when a much larger limnic eruption took place in Lake Nyos. In that disaster, some 1.6 million tons of CO2 was released in deadly cloud. Evidence showed that "the gas spilled over the northern lip of the lake into a valley running roughly east-west from Cha to Subum, and then rushed down two valleys branching off it to the north, displacing all the air and suffocating some 1,700 people within 25 kilometres (16 mi) of the lake, mostly rural villagers, as well as 3,500 livestock." ["Lake Nyos," Wikipedia].

Unlike the earlier tragedy at Lake Monoun, the disaster at Lake Nyos made headlines around the world. Pictures, like the attached image, documented the disaster that left people and livestock littered across an otherwise undamaged landscape. Having two such events linked so closely together is surprising since scientists have determined that such events normally cause "living creatures in the lake[s] to go extinct approximately every thousand years."

Despite the rarity of limnic eruptions, governments were eager to find a way to prevent such disasters from reoccurring. Accordingly, "scientists spent the next decade trying to figure out a way to safely release the gas before disaster struck again. They eventually settled on a plan to sink a 5 1/2-inch diameter tube down more than 600 feet, to just above the floor of [Lake Nyos]. Then when some of the water from the bottom was up to the top of the tube, it would rise high enough in the tube for the CO2 to come out of solution and form bubbles, which would cause it to shoot out the top of the tube, blasting water and gas more than 150 feet into the sky. Once it got started, the siphon effect would cause the reaction to continue indefinitely, or at least until the CO2 ran out. A prototype was installed and tested in 1995, and after it proved to be safe, a permanent tube was installed in 2001." ["Lake Nyos--The Deadly Limnic Eruption"] According to the article (written in 2006), the tube is working but at least an additional five tubes are needed to reduce the levels of carbon dioxide to safe levels. A similar tube was installed in Lake Monoun in 2004, but an additional tube is also needed there. A quick search of the Web didn't turn up any evidence that the additional tubes have been installed.

"Following the Lake Nyos tragedy, scientists investigated other African lakes to see if a similar phenomenon could happen elsewhere. Lake Kivu in Rwanda, [3,000] times larger than Lake Nyos, was also found to be supersaturated, and geologists found evidence for outgassing events around the lake about every thousand years." ["Lake Nyos," Wikipedia] Lake Kivu, unlike the other two exploding lakes, contains methane deposits as well as carbon dioxide deposits. These methane deposits can be exploited as fuel. According to Wikipedia, Lake Kivu contains "approximately 55 billion cubic metres (72 billion cubic yards) of dissolved methane gas at a depth of 300 metres (1,000 ft). Until 2004, extraction of the gas was done on a small scale, with the extracted gas being used to run boilers at a brewery, the Bralirwa brewery in Gisenyi." The article went on to say:

"As far as large-scale exploitation of this resource is concerned, the Rwandan government is in negotiations with a number of parties to produce methane from the lake. Extraction is said to be cost-effective and simple because once the gas-rich water is pumped up, the dissolved gases (primarily carbon dioxide, hydrogen sulphide and methane) begin to bubble out as the water pressure gets lower. This project is expected to increase Rwanda's energy generation capability by as much as 20 times and will enable Rwanda to sell electricity to neighboring African countries."

I provide that background as segue to an article brought to my attention by its author, Ann Delphus, a reporter for Invention & Technology News. She apparently did a Web search that turned up a number of posts I have written about alternative energy, development, and Rwanda. She thought I might be interested in sharing an article she wrote that involves all of those subjects entitled "It’s Win-Win: Methane Pumped From African 'Exploding' Lake Will Fuel Electric Plant; Gas Removal May Avert Catastrophic Death Toll" [18 October 2010]. In her article, she writes:

"About two million people live in the valley surrounding beautiful Lake Kivu in east central Africa, and some of them – or all of them – could be killed by it almost instantly. That is the concern of some scientists who have studied Lake Kivu as well as two other lakes that have already experienced a gas eruption. Ironically, it is Lake Kivu's deep-water reservoir of dissolved methane gas that will soon be the catalyst for positive change, as the big news in Rwanda now is that an American company, ContourGlobal, will soon be extracting 6.4 million standard cubic feet of methane per day from the lake to fuel an electrical plant it will build in the picturesque lakeshore town of Kibuye."

To bring home how massive a tragedy a limnic explosion in Lake Kivu could be, Delphus notes that two million people represent "roughly the population of Kansas City and its suburbs or the entire Orlando metropolitan area." She continues:

"Theoretically, if even half of the lake basin's current population were to perish after a limnic eruption – one million people in the Lake Kivu basin instead of two million – it would rank in the top three most deadly natural disasters in all of recorded history, the other two being floods in China."

Delphus goes on to discuss the work of Dr. George Kling of the University of Michigan, an expert on the exploding lakes. She continues:

"Since the Nyos eruption, Dr. Kling and other scientists have focused their attention on Lake Kivu, which ... contains 350 times the amount of gas [found in Lake Nyos]. Scientists have estimated that the volume of gases has increased as much as 30 percent in just the past 30 years. Fossil evidence has revealed several incidences of massive biological extinctions in the course of thousands of years, leading scientists to believe that this has happened before and will happen again ... unless, of course, mankind intercedes. That's where New York-based ContourGlobal, its investment partner Reservoir Capital Group, and its engineering partner Antares Offshore come into the picture."

Residents in the Lake Kivu area seem to have caught a break. Since the methane is exploitable, extracting it from the lake will reduce the risks of a limnic explosion while making a profit for ContourGlobal and its partners. Delphus explains how the deal was put together.

"ContourGlobal, through its new subsidiary, Kivuwatt Ltd., secured a 25-year agreement with the government of Rwanda to extract methane from Lake Kivu and to then sell the electricity it makes back to Rwanda's power agency, Electrogaz. Phase one of the project – a floating barge, gas separation equipment, and a power plant – are now in the process of being assembled and [are] scheduled to be completed by this time next year. After approximately six months, ContourGlobal KivuWatt would most likely proceed with Phase two, the addition of three more gas extraction platforms to bring the electric power plant to its full capacity of 100 megawatts. Bill Fox, P.E., who is the project manager for KivuWatt, notes that it is the methane gas dissolved in the depths of the lake that is considered to be more unstable and therefore most troublesome with respect to preventing a lake turnover. The gas separation technology they will use is not new by any means – it is very similar to the process used in the oil and gas industry. However, it has been uniquely adapted for the proportions of methane and carbon dioxide that are dissolved in the depths of Lake Kivu."

In past posts, I have noted that companies working in developing states need to be able to adapt to local conditions in order to succeed. That is apparently the business philosophy ContourGlobal uses in its emerging market work. Delphus explains:

"Mr. Fox describes ContourGlobal as an energy company that operates in niche markets, preferring projects with a favorable impact on the environment. The company looks to adapt technology for its own purposes, as it has done in working closely with engineers at Houston-based Antares Offshore, the company it hired to design the platform-based gas separation equipment for the Kivuwatt project. According to Mr. Fox, the barge and separation vessel will be moored 13 kilometers from shore, and, like an energy company that taps an underwater oil reservoir from a platform, what travels up the vertical pipe (called a riser) is a mixture of oil, natural gas, water, etc. The KivuWatt barge will have four risers produced of rigid, high density polyethylene (HDPE) that will reach a depth in the lake of 355 meters. Mr. Fox explains that the huge water pressure that deep in the lake will help propel the gas-laden water upward in the riser, and as the water travels upward, it will experience what he calls 'gas lift' as the methane and CO2 begin to be released from solution and will rush upward as a mixture of water and gas bubbles. The long, tubular separation vessel beneath the barge will work like a propane tank, he says, and the engineers who designed the setup have calculated that the de-gassification 'sweet spot' for the depth of the separation vessel is 20 meters below the barge and water surface. At that particular depth and pressure, there will be an optimization of the separation of methane and CO2 from the water. Between 75 and 85 percent of the methane will be released from the water and it will continue to rise up to where it will travel across to the power plant in one flexible reinforced thermoplastic pipeline (RTP). This horizontal pipeline will be suspended 10 meters below the water's surface, tethered to the lakebed by concrete anchors and marked by buoys. The de-gassed water, carbon dioxide, and the significantly smaller amount of methane will be piped back downward to a depth of 240 meters and safely discharged in a stratum of the lake that sits above the deep, gas-laden resource zone."

My suspicion is that ContourGlobal is returning the carbon dioxide into the lake in order to lower the greenhouse gas emissions of their project. A better solution, however, would be one in which the CO2 was put to some useful purpose while being rendered harmless. According to Delphus, that possibility still exists. She continues:

"According to Mr. Fox, Lake Kivu is a 'slower-responding lake' compared to the two lakes in Cameroon that experienced limnic eruptions in the 1980s. While KivaWatt's phase one operation does not vent or disperse the accumulation of CO2 from Lake Kivu, he would not rule out the possibility that it could be a component of the second phase installation. Ideally, Mr. Fox would like to see the CO2 captured and put to some use."

If contour global can figure out a way to make money capturing the CO2, it could prove to be a boon for Cameroon residents living near the other two exploding lakes. As noted above, they are still waiting for help in solving their gas build-up challenge. If ContourGlobal's plans are fully implemented, the electricity produced will be a tremendous lift for the region's economy. Even before the electricity starts flowing, however, the project has already had a positive economic impact. Delphus explains:

"Logistically, the barge itself is now being built at the shore by a prominent Kenyan civil engineering and transportation firm and is expected to be completed in April 2011. ... KivuWatt is also carefully timing the completion of the electric power plant to coincide with the first gas arriving on shore to avoid unnecessary, duplicate plant startup costs. All together, this venture is projected to require an investment of up to $325 million. By some estimates, the methane resources could supply Rwanda's energy needs for 400 years. Lake Kivu is, to a significant degree, a renewable resource. The carbon dioxide collects at the bottom of the lake as it bubbles up from molten rock deposits below the lake bed. Bacteria in the water convert the CO2 to methane."

Before continuing, I must admit that Delphus' description of how the methane is produced in Lake Kivu through microbial reduction of the volcanic CO2 started me wondering why bacteria couldn't be introduced into the other two exploding lakes so that methane could be produced and exploited there. I'm sure that I'm not the first person to have wondered about this and my guess is that the process either takes a long time (i.e., too long to get a return on investment) or that environmental conditions are unsatisfactory for such a process to work. Delphus continues her discussion concerning Lake Kivu:

"The entire region is known as Africa's Great Rift Valley, and it is a center of volcanic activity, including Mt.Nyiragongo near Goma, the capital of the North Kivu province (DRC). One British newspaper, in a feature story on Lake Kivu's deadly gases, reported that a Swiss study found that the CO2 concentration in Lake Kivu rose 10 percent between 1974 and 2004, while the methane concentration rose 15 to 20 percent. Experts believe the methane created each year would fuel a 100-megawatt electrical plant. The capital investment in developing Lake Kivu as an energy source represents very good news for Rwanda, which has long been starved for energy. Even though only five percent of the population has electricity at this time, the country's power provider, Electrogaz, can't supply the full demand of 55 megawatts and must import about 13 percent of its electricity. When the full 100-megawatt capacity of the methane-fueled generators of KivuWatt are online, Rwanda expects to have a surplus of electrical power that it could export to neighboring Uganda. Plentiful, economical electricity is expected to not only fuel business and industry as well as raise the standard of living, it should prevent further deforestation of the land as people refrain from gathering wood to be used for fuel."

In past posts concerning Rwanda, I have noted that the country's president, Paul Kagame, is determined to move his country's economy forward as quickly as possible. Although critics worry about the political climate Kagame has created, few of them doubt his sincerity about wanting his country to be prosperous and economically stable. Delphus concludes:

"Sub-Saharan Africa is, in general, an economically challenged part of the world. With the influx of investments of technology such as what has been developed by Antares Offshore on behalf of ContourGlobal, Rwanda may be just a couple of years away from beginning a societal transformation that access to affordable electrical power could produce. A venture like this is not without risks, however. Several projects have been initiated, but only one was operating last year. In 2008, another company's platform sank just as it was ready to start production. Some scientists warn that tampering with the lake's gases might in itself trigger a disaster. Mr. Fox notes that there have been volcanic eruptions with no adverse effects, and the engineering team worked diligently to meet all guidelines and to address any concerns. As for the opinion of the public of the construction of the methane equipment and the power plant, 'they seem to be looking forward to it,' says Mr. Fox. Indeed. Even the tourist reviews depict beautiful Rwanda in upbeat tones, calling it "brimming with optimism."

To read more about the region, read my post entitled The Plight and Hope of East Africa. As most development analysts will tell you, access to reliable and affordable electrical power is absolutely essential for economic progress. If ContourGlobal is successful in its efforts, the new power plant will be a win for everybody in the region.

China and the Rare Earths Conundrum

There have been a number of articles written over the past few months discussing China's stranglehold on the rare earth market. For more background on this subject, read my post entitled The Future of Rare Minerals. One recent article comes from Nobel laureate Paul Krugman ["Rare and Foolish," New York Times, 17 October 2010]. He writes:

"[In September] a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw materials. And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go. I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation."

My colleague Tom Barnett sees the same circumstances surrounding rare earths as Krugman; but he is not quite as alarmist over their long-term consequences. In a recent post on the subject entitled China's alleged control of the rare earth materials, Tom wrote:

"[The Financial Times published a] story on how [the] 'US is scrambling to resume production of raw materials vital for defence equipment and green technology in response to rising fears about Chinese domination of the sector.' The point to be clear on: China dominates current production of rare earths (95-plus percent) but in no way has a dominant supply/reserve position. The world has simply allowed China to achieve its dominant production position by abandoning their own mining efforts. Why? Very expensive and very environmentally damaging. Rare earths are a collection of 17 metallic elements with similar chemical make-up. They present unique magnetic and optical properties that make them highly useful for miniaturization, lasers and energy efficiency. There are considered strategic because of their applications in high-tech industries, to include weaponry. No one much cared about China's domination of production, until the South China Sea dust-up with Japan led China to allegedly slow exports to Japan (not entirely clear what happen[ed], but impressions were made). China has also recently signaled that it will cutback on exports to make sure it has enough for its own burgeoning domestic demand. Now, according to the article, we've got people in Congress dreaming of US self-sufficiency on this score, which will be--like most things in this globalized economy--virtually impossible to achieve. Long ago, the US was the dominant global producer, but we abandoned the effort due to environmental and cost realities. [The] article says the last US mine closed in 2002 and is looking for $500m to reopen. Those guys should send a thank-you letter to Beijing, because I'm betting they'll get their investment soon. Obviously, if the material is considered strategic, there's good logic for mining at multiple sources. I would consider this a reasonable space for cooperation with long-time allies so that we're not all doing this in the most expensive manner possible."

Krugman notes that "until the mid-1980s the United States dominated production" of rare earths. Then in the early 1990s, "Deng Xiaoping, the architect of China’s economic transformation," declared, "There is oil in the Middle East; there is rare earth in China." He then set China on a course to exploit those resources. Krugman reports that "China has about a third of the world’s rare earth deposits." That is a significant amount; but, as Tom points out, hardly a monopoly. Krugman continues:

"This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry. ... Policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China. The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants."

Krugman agrees with Tom that efforts to break China's monopolistic position need to be global and coordinated. He recommends:

"The world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: 'urban mining,' a k a recycling of rare earths and other materials from used electronic devices."

A U.S. House of Representatives defense panel is pushing for legislation that would provide $70 million to the Department of Defense for research into how the United States could reestablish rare earth production over the next five years ["Bill Allots $70M for R&D on Rare Earth Mineral Production," by John T. Bennett, Defense News, 27 September 2010]. In commenting on the push to reestablish U.S. production, Daniel Dombrey reports that the Department of Energy is supposed work closely with the Department of Defense ["'Rare earths' fears spur US review," Financial Times, 26 September 2010]. Dombrey reports:

"The Department of Energy is to set out a strategy to increase US production, find substitute materials and use rare earths more efficiently. The Pentagon will complete a study of the US military’s dependency on the materials. ... The challenges are steep. A report by the Government Accountability Office said in April that rebuilding the US’s supply chain for rare earths could take up to 15 years and would require patents held by foreign companies. ... 'Diverse global supply chains are important for any critical materials, including rare earths – recent incidents underscore this,' said David Sandalow, the assistant secretary at the energy department who outlined the push for a new US strategy. Brett Lambert, an industrial policy director at the Pentagon, added that his department had a dedicated team working on rare earths and planned to issue a comprehensive review in October. He said the US remained confident that its forces 'have access to any and all materials necessary', while recognising 'the importance some of these elements have for both our supply chain and certain military systems'. Although rare earths are not in fact rare, their extraction is difficult and can often be environmentally hazardous."

The U.S. company that looks poised to benefit most from China's actions is Molycorp Inc., whose "New York Stock Exchange-listed shares have surged from the $14 IPO price in August, to $34.26 on [19 October]." ["U.S. Rare-Earth Miner Downplays China Worries," by James T. Areddy, Wall Street Journal, 21 October 2010]. Areddy reports:

"The chief executive of Molycorp Inc., the primary U.S. rare-earth producer, played down worries that Beijing is abusing its near monopoly in the global supply of the metals, but said that China's strategy of limiting exports underscores the need for alternative suppliers. ... Mark A. Smith, chief executive officer of Colorado-based Molycorp—whose stock price has more than doubled since an August initial public offering amid the concerns around supply shortages—said in an interview ... he sees China taking commendable steps to reorganize an industry that supplies high-technology companies with critical elements. For several years, he said, China has systematically reduced exports in recognition of its own growing demand and to regulate sometimes chaotic production and trading. 'I really admire what they are trying to do to correct the industry as a whole,' Mr. Smith said, also citing Beijing's crackdowns on smuggling and measures in recent years to close some of the most polluting producers."

I'm not surprised that Molycorp's CEO finds China's actions commendable. As long as China continues to reduce exports, his company's valuation should continue to climb. As Areddy notes, "Molycorp is ramping up again and hopes to begin mining next year to produce 20,000 metric tons of rare-earth oxides by late 2012. In fact, Molycorp expects to emerge as one of China's largest competitors." Mr. Smith's comments followed on the heels of a new Chinese announcement that is going "to cut rare earths export quotas next year by up to 30 percent to conserve supplies." ["China to reduce rare earths exports," Associated Press, Washington Post, 19 October 2010]. Areddy continues:

"In recent weeks, Molycorp's Mr. Smith said he has heard from some Japan-based buyers of difficulty importing rare earth. He said Molycorp, which also distributes, has so far had no trouble importing from China but intends to step up its monitoring of the trade. The current environment, Mr. Smith said, provides 'a lot of short-term benefits,' but said that based on his almost 25 years in the industry, he believes that sustainability of the rare-earth industry might depend on coordination between policy makers and producers in the U.S., Japan, Australia and China."

Japan has reacted to China's latest threats by stating it will fund research leading to the development of "substitutes for [rare earth] use in high-technology products." ["Japan reacts to China’s ban on rare earth," by Mure Dickie, Financial Times, 29 September 2010]. Dickie continues:

"Banri Kaieda, [Japan's] minister of state, ... noted that Japan had been ill-prepared for what he called the 'surprise attack' of Chinese export curbs. '[It seems] there's a need to put effort into developing substitute products,' that could play the same role as rare earths in high-tech products, he added. Tokyo would also look to develop alternative sources of supply for rare earths, Mr Kaieda said. ... Mr Kaieda’s comments highlight the risk for China that international views it is willing to use exports as leverage in a diplomatic dispute could end up undermining its dominance of the rare earth market."

Japan is also looking to capitalize on "urban mining" by recycling metals found in scrap electronics ["Japan Recycles Minerals From Used Electronics," by Hiroko Tabuchi, New York Times, 4 October 2010]. Tabuchi reports:

"Two decades after global competition drove the mines in this corner of Japan to extinction, Kosaka is again abuzz with talk of new riches. The treasures are not copper or coal. They are rare-earth elements and other minerals that are crucial to many Japanese technologies and have so far come almost exclusively from China, the global leader in rare earth mining. ... This town’s hopes for a mining comeback lie not underground, but in what Japan refers to as urban mining — recycling the valuable metals and minerals from the country’s huge stockpiles of used electronics like cellphones and computers."

Concern over China's monopoly may prove to be a big boon for electronics recycling. Until now, much of that recycling has been done under dangerous conditions in developing countries. Tabuchi continues:

"In Kosaka, Dowa Holdings, the company that mined here for over a century, has built a recycling plant whose 200-foot-tall furnace renders old electronics parts into a molten stew from which valuable metals and other minerals can be extracted. The salvaged parts come from around Japan and overseas, including the United States. Besides gold, Dowa’s subsidiary, Kosaka Smelting and Refining, has so far successfully reclaimed rare metals like indium, used in liquid-crystal display screens, and antimony, used in silicon wafers for semiconductors. The company is trying to develop ways to reclaim the harder-to-mine minerals included among the rare earths — like neodymium, a vital element in industrial batteries used in electric motors, and dysprosium, used in laser materials."

Tabuchi indicates that "used electronics in Japan hold an estimated 300,000 tons of rare earths." I daresay that most developed countries have a stockpile of used electronics that contain similar amounts of rare earths. China has recently backed off of its tough stand. In early October while on a visit to Europe, Chinese Premier Wen Jiabao stated that China would not use its monopoly on rare earths as a bargaining chip ["Premier: China won't block rare earth exports," by Elaine Kurtenbach, Washington Post, 8 October 2010]. Unfortunately for Chinese leaders and businessmen, past actions speak a lot louder than promising words. Kurtenbach reports:

"Japan's Cabinet ... approved new funding for securing rare earths as part of 5.05 trillion yen ($61 billion) in new economic stimulus. Concerns over the issue are prompting a resumption of some projects in the U.S. and Australia that had been postponed for years due to competition from cheap Chinese suppliers."

Kurtenbach also reported that a new find of rare earth reserves has been found in China's Henan province. Even with this new discovery, it is estimated that China's rare earth reserves will only last 15 to 20 years at current production levels. As Tom pointed out in his post, 70 percent of the globe's rare earth reserves are found outside of China. The fact that China monopolizes production still provides China with an economic edge it is trying to exploit ["China Dangles Rare-Earth Resources to Lure Investment," by Yajun Zhang, Wall Street Journal, 15 August 2010]. Zhang reports:

"China is cautiously using rare-earth resources as bait for foreign investment that could bring in sophisticated technologies that it needs. Industry and government officials have begun talking about a Chinese government plan to offer access to its rare-earth resources ... to get companies including electronics manufacturers and auto makers to set up rare-earth-processing plants in China. ... China bans foreign companies from investing in rare-earth mining, but has allowed foreigners to enter processing joint ventures with Chinese businesses."

China is not backing down on the actions it is taking. Earlier this week, China "denied that it is violating World Trade Organisation rules in its strongest statement since the US announced an investigation last week into Beijing’s rare earths and green technology policies." ["China defends policy on rare earths," by Leslie Hook and Mure Dickie, Financial Times, 20 October 2010] Hook and Dickie continue:

"The New York Times reported on Wednesday that China had halted rare earths shipments to Europe and the US. China’s exports of rare earths oxides to the US are extremely small as the US has no capacity for rare earths refining but nonetheless the New York Times article about halted shipments is certain to raise the temperature in Washington."

In the long run, aggressive Chinese actions concerning access to rare earths will probably hurt China more than its competitors. In the short-term, however, China looks to obtain the greatest possible benefit it can from its rare earth reserves. Supply chain analyst Adrian Gonzalez warns that there is "a very real supply chain risk for high-tech and other companies that depend on these materials for their products." ["Supply Chain Risks: China Rare Earth Minerals and Currency Wars," Logistics Viewpoints, 20 October 2010]. He continues:

"China is to rare earths as Saudi Arabia is to oil, and several wars have been fought over the latter. And as with oil, the only way to effectively reduce this risk is to develop alternate sources of supply—preferably domestic—and to eliminate the use of these minerals from products, which would require scientific breakthroughs and innovations in materials science and product design. Unfortunately, both of these approaches are very long term solutions, so we’re left with politicians and diplomats to resolve this issue and prevent it from escalating."

Although I don't see a rare earth conflict emerging any time soon, Gonzalez is correct to point out supply chain risks exist whenever there is a monopoly that controls the supply of any resource. The search for substitutes for rare earths is likely to continue, but information age technologies will ensure that suppliers of rare earth minerals will have a ready market for decades to come. That is why I agree with Tom that "there's good logic for mining at multiple sources" and that there is "reasonable space for cooperation with long-time allies so that we're not [creating new sources of supply] in the most expensive manner possible." Rare earths may not be all that rare, but sensible policies often are.

Luring Customers in the Information Age

In several past posts, I've noted how on-line sales have affected the future of traditional brick-and-mortar stores. Bookstores have perhaps been the hardest hit. The electronics sector has also been hit with stores like CompUSA having gone out of business. All of this is making store executives rethink the strategies they use to lure customers through their doors. Advertising has been a staple strategy for centuries. How stores advertise, however, has changed dramatically -- ask the editor of any newspaper or magazine. The latest advertising gimmick draws from technologies that have only recently become available ["Luring Shoppers to Stores," by Emily Steel, Wall Street Journal, 26 August 2010]. Steel reports:

"It's Steven Spielberg's futuristic 'Minority Report' come to life. Marketing companies are experimenting with a new wave of digital technologies to pitch to consumers while they shop: interactive dressing-room mirrors, kiosks with virtual customer-service representatives, and shopping carts and digital scanners that offer personalized discounts. These futuristic technologies are among the interactive tools on display at Interpublic Group of Cos.' new retail center at the advertising company's Media Lab in Los Angeles. There, Interpublic is testing innovative ways for marketers to connect with customers as part of an effort to better understand what makes consumers buy and to encourage companies to rethink their approaches to the role of the retail store."

Steel emphasizes some of the points I made above. She continues:

"Retailers are grappling with lackluster sales and consumers who are dissatisfied with the store experience as online shopping with its related interactivity becomes mainstream. Shopper satisfaction at retail stores is declining up to 15% a year, according to an ongoing IPG Media Lab study of more than 10,000 North American shoppers. Online shopping gives buyers lots of information to guide their purchases. And consumers want detailed product data, reviews from previous buyers, related recipes for food products, health and nutrition information, and more, says John Ross, president of Shopper Sciences, which is part of IPG's Mediabrands unit. 'The role the store is playing is changing,' says Mr. Ross, who was previously chief marketing officer at Home Depot. 'Shoppers are walking up with a different set of expectations.' Some retailers have started testing basic versions of the new technologies. J. C. Penney has a 'FindMore' fixture at select stores. The size of a door frame, it comes with a 52-inch touch screen that lets consumers see the retailer's full range of merchandise. Consumers can email data about an item to themselves or a friend or scan a bar code to learn more about a product and get recommendations, such as tops and accessories that match a pair of pants."

I don't think that it surprises anyone that stores like J.C. Penny would be trying some of these new technologies. Steel notes that even supermarkets are jumping on the bandwagon to individualize the shopping experience. She explains:

"Stop & Shop Supermarket is testing handheld scanners in 289 stores that show customers personalized discounts as they shop. The offers are based on such factors as shopping history and just-purchased items. The scanner also lets consumers place deli orders and check out faster."

In a previous post [Walmart Isn't Resting on Past Success], I noted that Sam's Club is also experimenting with providing unique incentives to individual customers ["Sam’s Club Personalizes Discounts for Buyers," by Andrew Martin, New York Times, 31 May 2010]. Steel focuses on some of the more exotic technologies that are emerging. She continues:

"IPG's retail lab offers a window into what the future could hold. Among the new technologies on display is a device that transforms the front window of a store into a giant touch screen. Instead of looking at a static mannequin, consumers can interact with the screen to select outfits for an avatar. Meanwhile, kiosks allow a customer to chat with a virtual sales associate who can provide advice on such topics as how to install a new flat-screen television. Another device is a mirror that enables a shopper to scan a dress and then project that clothing onto her body before going to the dressing room. She can also tap the mirror to view different colors, find matching shoes and send the image to her Facebook profile. Specialty retailer The Limited is considering installing interactive mirrors in some of its stores in the next six months, says Chief Executive Linda Heasley. The technology will help consumers match styles or even warn that two pieces of clothing don't match. ... Earlier this month, electronics retailer Best Buy announced plans to start an experiment at 257 of its stores involving a mobile application called Shopkick. Consumers who download it onto their mobile phones get rewards when they visit the store."

Macy's is not relying on technology to draw in customers; rather, it is trying to tailor what it offers in its stores to the tastes of local customers ["Atlanta Hats? Seattle Socks? Macy’s Goes Local," by Stephanie Clifford, New York Times, 02 October 2010]. Reporting from Atlanta, Clifford explains:

"Long before it was renamed Macy's, the department store of choice here was Rich’s. Opening just after the Civil War, it drew generations of Atlantans with its coconut cake and the Pink Pig, a Christmastime children’s train. Now, after years of ownership by New York-based Macy’s, the old Rich’s stores are feeling a bit more like Atlanta again. The generic display near an entrance at the Cumberland Mall store, for example, has been replaced with a rack of white satin suits — yes, even in October. 'We have a lot of mega-churches here in Atlanta, and for first Sunday, the mothers of the church wear white all year long,' said Terry McDonald, a human resources manager for Macy’s Cumberland and surrounding stores, referring to a church service held once every month. After decades of acquiring, consolidating and centralizing, the department store chain is rediscovering — and financially exploiting — its multiple local roots, advancing a trend that is quickly being adopted by other retailers like Saks Fifth Avenue and Best Buy. It is a lesson many companies overlooked in the last 30 years as they rolled smaller stores into huge national brands, and headquarters mandated what the outlets in Biloxi or Boise should sell. But years of economic turmoil for the retail industry have helped refresh memories. While many national retailers continue to see sales declines in a sour economy, Macy’s says its first full year of 'going local' has helped increase sales significantly and 'lifted the entire Macy’s performance,' according to its chairman and chief executive, Terry J. Lundgren. Macy’s is on track to add $1 billion in sales in 2010 from stores open more than a year, he said. The retailer had $23.5 billion in sales in 2009."

Admittedly, a 4.25 percent increase in revenue is a pretty good result considering the economic doldrums being felt by many other retailers. Steel reports that "localization is not just about turning back the clock. When many of the regional chains were at their height, shoppers tended to be middle-class white women. Now, they often are not." She continues:

"In Bellevue, Wash., for example, fewer than 4 percent of residents were Asian in 1980, when the Macy’s store there was a Bon Marché. The most recent Census Bureau survey showed the Asian population in Bellevue was 23.2 percent, attributable in part to the tech explosion in the area. So the Bellevue Macy’s has added more extra small and small sizes — including size 0s in women’s clothing and 36 in men’s suits. And it got rid of its big and tall section. It also changed the jewelry selection to appeal to the tastes of Indian customers — more gold and precious gems and less silver — and doubled its sock department because of the many Microsoft visitors who travel and apparently forget their socks."

For companies looking to sell their products globally, there are lessons to be learned from the Macy's experience. The better your understanding of the environment and/or the culture you are trying to expand into the better your chances of succeeding. Dan Brutto, president of UPS's international division, recommends, "Get help—and read business cards" ["How to Grow Your Business Globally," Bloomberg BusinessWeek, 24 August 2010]. He continues:

"This year's UPS Business Monitor United States, an annual survey of U.S. small and midsize business exporters with fewer than 500 employees, found that one-third of respondents cited cultural or language barriers as the reason why they didn't follow up on an international sales lead. Small businesses that were new to exporting said that their limited knowledge of the marketplace in foreign countries constituted one of their biggest barriers to overseas expansion."

Brutto admits to having made his share of social faux pas over the years and claims he has "learned from (and eventually laughed at) these mistakes." If you want to attract customers to products and services, you have to realize, Brutto writes, that "ninety-six percent of the world's consumers live outside the U.S., so failing to export today may mean you'll have to play catch-up later." He then provides some good advice:

Do your homework. ... In addition to doing market research, executives at small businesses that succeed in new markets gain a basic understanding of common business etiquette by visiting the country where they intend to do business and by working with organizations that know the market firsthand, such as chambers of commerce. No matter how prepared a business might be, an etiquette faux pas or two is inevitable. Learn from mistakes. ...

Relationships are everything. Outside the U.S., cultivating business relationships is essential. This is especially true in China, Vietnam, Brazil, Poland, and other emerging markets. ... The U.S. Commercial Service (USCS), the trade arm of the U.S. government, is an excellent resource to help businesses find distributors and partners and secure the right introductions. After introductions are made, you must cultivate relationships with business partners. ... In addition to building relationships with business partners, it's critical to get to know other exporters. By networking with peers, you learn a lot from each others' experiences. ...

Slow down. U.S. businesses must adapt to a slower pace of business elsewhere. ...

There's a lot in a name. Starting out on the right foot in a new market means knowing the proper way to address your colleagues. In China and Vietnam, for example, surnames come first and job titles such as "Director" are important. ... When it comes to business cards, it's customary in many countries, including India and China, to read the business card. Don't just put it away immediately. It's also seen as a sign of respect to have the information on one side of your business card printed in the native language of the company you're visiting.

English spoken here. Many small and midsized businesses cut their exporting teeth in markets where English is a primary language, such as the U.K., India, or closer-to-home Canada. ... New exporters should consider starting in Canada, the U.S.'s largest trading partner—and the first non-U.S. market in which UPS did business. Canada has common business practices, a common language, and a great infrastructure for doing business.

Show you're in for the long haul. Nothing is more off-putting in a new business relationship than indicating you're looking for a fast return on investment. Many small and midsized businesses mistakenly think that fast-growth markets mean they're certain to make a quick buck. It takes time to establish a presence in another market, and your colleagues and partners expect a long-term commitment.

One size never fits all. Businesses must understand that every country has its own customs and etiquette rules; what works in one market won't necessarily work in another. In such countries as India, which has 29 states and multiple cultures, a regional strategy and approach are critical.

Negotiations everywhere will be different. In India, you should avoid saying 'no' in business discussions because it's considered rude. In China, it would be a mistake to take the word 'yes' literally. Chinese executives frequently say 'yes' and nod during conversations, often merely to show that they are paying attention to what you are saying, not necessarily agreeing with it."

Brutto's recommendations are echoed in an article by Emma Jacobs ["Navigating cultural difference, Financial Times, 20 July 2010]. She writes:

"Celebration of a country’s difference runs counter to the notion that the world is becoming culturally homogenised through the spread of the internet, the internationalisation of business and the development of a cadre of high-flying MBAs that appear to speak the same business language. Such a belief can fool managers into believing cultural differences do not matter, according to Paul Bennett, chief creative officer and managing partner at Ideo, a global innovation and design consultancy. In fact, he says, global companies must understand different cultures and turn that to business advantage: 'It’s the understanding of the subtleties that are important.' As Maarten Nijhoff Asser, consultant at Trompenaars Hampden-Turner, which advises companies on cross-cultural challenges, says: 'If your strategy is just growth without thinking about adapting to local markets, then you are just the Royal Bank of Scotland and you will falter. Too many companies don’t listen. It can be long-winded, but it is ultimately more successful.' All companies, says Andrew Kakabadse, professor of international management development at Cranfield School of Management, have done localisation 'badly at some point'. The key to making it work is 'clarity of strategy', which is formed 'when a company interrogates itself about what it’s really good at', he says."

Jacobs points to MacDonald's as being one company that has done well at localizing its offerings. She writes:

"From the beginning of its development in the US, to its spread in Europe and, more recently, India and China, the company has targeted a variety of products at consumers in different markets. Key to its successful localisation have been research and investment in products adapted to local tastes. Big Macs were never going to succeed in India, where 80 per cent of people do not eat beef. But the company did not treat the country as a single market, and conducted in-depth analysis in several states. So, when McDonald’s opened a restaurant in Gujarat, where most citizens are vegetarian, it offered vegetarian burgers and other Indian dishes, such as samosas. In New Delhi, however, McDonald’s introduced meat burgers for non-beef eaters – such as the Maharaja Mac with lamb or chicken. The company has also made an effort to recruit local managers, for example establishing joint ventures with two local entrepreneurs in New Delhi who were selected to manage the fast-food restaurant. According to a 2007 article in the Journal of Business Case Studies by Bahaudin Mujtaba and Bina Patel, of Nova Southeastern University, this strategic move helped the company negotiate Indian bureaucracy."

It obviously is a lot easier for a fast-food chain to understand local tastes than it is for a company selling widgets. Although most analysts agree that companies generally need to understand the culture into which they are selling, there are exceptions. Jacobs explains:

"Prof Kakabadse says this is a reversal of the old strategy of 'think global, act local'. Now, it is 'think local, then act global'. So, rather than companies customising products to a local market, the focus should be to start with the local products and then try to leverage them globally. But not all global companies need to adapt to different cultures. Apple sells the same iPad in Tokyo as in Toronto. Rather than localisation, it competes on pace of innovation, says Mr Nijhoff Asser. 'HSBC, Ryanair and Apple’s top teams have asked themselves what makes their companies better than anyone else. HSBC looked at its 19th-century origins when it was operating in Hong Kong and Shanghai and serviced the local needs,' he says. But, he adds, Ryanair does not worry about adapting its product to local markets. Its competitiveness lies in price: 'Whether you decide to differentiate your market is entirely dependent on your product.'"

Individualization, the topic with which I started this post, is simply the extreme extension of localization. New technologies are what permits individualization. Localization relies more on knowledge than technology, but technology can often help you apply that knowledge better. For people who worry that globalization is homogenizing the world, the fact that large companies are adapting to culture rather than the other way around should provide a bit of comfort.

A Few Thoughts on Order Management

In blog she wrote while with AMR Research, Lora Cecere talked about the vision of Brad Blizzard, Senior Director of Logistics at Colgate ["Brad Has A Dream," Connecting the Dots, 30 October 2009]. Brad's vision is revealed in the form of a question. It goes like this:

"Retailers want us to deliver trucks more frequently; and at the same time, they want us to reduce greenhouse emissions. They want to order by product category and flow it through their warehouse. As a result, we are either shipping more trucks with less product or facing greater stock-outs. Each of us have warehouses in Chicago, Atlanta, Dallas, Newark, and Los Angeles, why can we not work together to meet these needs?"

In order to achieve Brad's dream, Cecere claims that "we need to redesign order management. It is a stumbling block to making Brad's idea a reality." She reports, "The average order reflects a demand lag of 14 days from a customer purchasing a product at the shelf to the consumer products company receiving an order. As a result, ... the order signal lags true demand replenishment needs." She continues:

"To make Brad's vision a reality there needs to be more discipline in the order process. Order management is not simple. There are many ways to take an order, and consumer goods companies are struggling with how to consistently take and respond to orders. In the research, we find that order lead time is variable based on how orders are accepted (e.g., phone, fax, B2B, VMI, etc.) and that only 20% of companies have a good handle on how they prioritize which orders get which products. ... So, while I think that Brad is on the right track, and his ideas make sense, to make it work will require a redesign of order management."

Brad's and Lora's viewed order management from the manufacturer's perspective. Guneet Paintal, Principal Consultant, Enterprise Solutions - Supply Chain Management at Infosys Technologies, provides a look at order management from the retailer's perspective ["Retail Customer Order Management Blog Series: Part 1 - An Introduction," Supply Chain Management, 1 February 2010]. He writes:

"My focus is not to describe the traditional order management process typically associated with a single channel (i.e., the steps required for managing the lifecycle of an online order or a retail replenishment order), but instead highlight the cross channel benefits and challenges of managing a customer order from a retail stores perspective. Cross channel or multi-channel retailing at its most basic consists of retailers & customers interacting over multiple channels to find, decide on and transact products and services. The conventional sales channels include the online channel, ordering over a phone or simply walking into a nearby store to pick up the product. A customer is engaged in a cross channel experience if he browses say for an LCD TV online and goes to a store next door to buy it. He could also be browsing a mail order catalog after which he goes online and orders the product from say a BestBuy.com. After receiving the TV, he may try it in the privacy of his home and if he does not like the picture or the sound, he may choose to drive to the nearest store to return or exchange it. More and more customers consider this a natural and intuitive process to find, evaluate and buy their products. This ‘natural’ behavior of the consumer is however exposing the chinks within the processes of the traditional store or even pure plays online retailers."

If retailers don't have a good handle on order management, you can understand the frustration that suppliers and distributors have since they often rely on point of sales data to help them forecast sales, distribution schedules, and production cycles. Paintal continues:

"While it is understood by retailers and retail practitioners that online sales are growing at a fast clip, there is a much more limited understanding of the fact that as customers are exposed to a multitude of channels they expect these cross channel experiences to be seamless. Recent consumer behavior studies have shown that more than 50% of consumers researched a product online and purchased it offline thus influencing in-store sales. ... Other reports are predicting that the number of cross channel shoppers will increase significantly in the next few years. It has thus become a business imperative for retailers to do some internal soul searching to assess their cross channel capabilities, identify gaps and put together plans to enhance or transform them."

Paintal focuses in on retail cross channel capabilities because he believes they represent the cutting edge of retailing. He continues:

"As the name implies cross channel capabilities analysis is a rather ambitious concept that encapsulates all the functions and capabilities required by a retail organization to enable a seamless experience for customers irrespective of the channel through which they interact. ... Let us begin by going back to my example of a customer Joe Shmoe walking into an electronics store to buy a TV. He would try to locate the relevant 'video' section of the store and start browsing there. He would browse through the various TV models and sizes based on various factors such as size of his living room, his perception of the brands available based on recommendations and reviews of friends and experts, the capabilities of the TV, the price range and so on. He probably consults with a knowledgeable sales associate to fill in the gaps of his understanding. This would be classified as the 'Find and Decide' stage of his decision making process. Based on all these factors, he chooses a TV to buy. He now starts thinking of how he can get such a large TV back to his home and whether he would be able to setup such a complicated piece of equipment on his own. The sales associate reassures him that a delivery truck would deliver it to his home the next day. If required he would be accompanied by somebody who will install the TV and walk Joe through the process of using it. He then walks to the nearest register with the details of the TV he wants to buy. He asks questions about what kind of warranties and return policies exist for his expensive investment and decides to buy an extra 3 years of protection. He pays for the TV, the delivery & installation the warranty and taxes using a combination of a gift card he got for Christmas and a credit card. He thus completes the 'Buy' phase of his traditional retail store buying experience."

From a customer standpoint, things seemed to go well for Joe. Paintal wants to see how things went from the retailer's perspective. He writes:

"To enable easy and intuitive Find and Decide, the store must stock a large variety of TVs. It must provide a large amount of information about these TVs and make sure this information is easily accessible and understandable to their customers. This function is typically provided by an item or merchandise management system. The store must have sufficient quantity of each TV displayed so that when a customer decides to buy one, they can walk out with one. This thus is an availability function managed by the inventory systems. In order to ensure that a large product gets to a customer's home on time, the store must have a fulfillment and delivery system. This must not only take care of the tangible products bought by the customer but also the scheduling and delivery of intangible services such as installation and warranty support. When the customer wishes to pay, the payment tendering (POS) and accounting systems need to support the many means by which a customer chooses to pay for his purchases. Also if in the future, Joe wants to return his TV, the returns management system must be able to pull up his original sale transaction, return the product and refund Joe the amount he paid for the TV. The above describes the microcosm of customer and retailer interactions within the traditional store buying environment. Now imagine that the store runs out of the specific TV, Joe has so painstakingly decided to buy. This then is the point where our story of Retail Customer Order Management begins."

It is also the nexus of manufacturer/distributor/retailer collaboration. Paintal continues his story in a second post entitled Retail Customer Order Management Blog Series: Part 2 – The Retail Order. [15 February 2010] He writes:

"The ultimate objective of the retailer is to provide an environment and processes which facilitate the customer in buying products they want (i.e., convert the need or intent to buy into a sale). Product availability is one of the key drivers for making this happen. However the supply chain mantra of keeping it 'lean and mean' implies that ensuring product availability is always a balancing act where the retailer juggles with the conflicting principles of lowering inventory carrying costs while preventing loss of sales due to unavailability of stock."

To read more about the built-in tensions currently found between lean supply chains and flexible supply chains, read my post entitled Flexible and Lean Supply Chains. Paintal continues:

"In such circumstances many retailers are looking to leverage their inventory as efficiently as possible. As the traditional brick and mortar retailers have experimented with the online model, they are using the learning’s from that process to improve their traditional store selling models. They have realized that in case of stock out situations in the store, if they can reassure the customer that the product would be delivered to them in a timely and low cost manner, they would most likely not lose the sale. This then leads to the retailers attempting to offer different means of fulfillment from within the store."

To read about how Nordstrom is dealing with this challenge, read my post entitled Supply Chain Helps Nordstrom's Bottom Line. Paintal continues:

"[Attempting to offer different means of fulfillment from within the store] started with merchandise locate systems which helped a sales associate determine if a certain product was available in the backroom or another store in the neighborhood. They could then pull the product from the back room or ask the customers to drive to the nearby store and pickup the item. With improving systems and visibility to available inventory, this feature was enhanced to lookup availability in warehouses and shipping/delivering the product from the warehouse to the customer. With the explosion of choice in product categories such as books, movies, music etc, the online concept of 'endless aisles' became very relevant. Now the retailers wanted to offer the same variety and choice in a store environment without holding large amounts of stock which it would otherwise entail. The first stage of implementing this in the stores was based on pragmatic decisions of costs - since the online channel already had the mechanisms in place to manage these endless aisles, why not bring the web into the store and so emerged the 'kiosk'. This started off with basic desktops and later standalone kiosks in the stores which allowed the customer to browse the retailer's website and get products delivered to their homes through UPS or FedEx."

Although merging virtual endless aisles with brick and mortar sales is tempting (and working for Nordstrom), Paintal indicates that it also has "disadvantages in today’s highly competitive retail environment." He explains:

"More profitable product categories such as furniture, large electronics and appliances cannot be kept in large quantities in the store and also cannot just be shipped using UPS. They not only require specialized delivery but also installations and setup. Retailers are also looking for high margin revenue streams from the selling of services. There is an increased emphasis on selling a complete package or project which includes consulting services, installation & setup, maintenance services in addition to the delivery of products. These services require different operational models which involve scheduling appointments and then executing on them through service & capacity management, in home payment options etc. Also as retailers target small and medium sized businesses, the interaction model required does not match that for traditional B2B or B2C customers. It lies somewhere in between where a small business owner may go into the store and buy 10 laptops and an annual maintenance plan. He wants to be treated like a business with special pricing and benefits but cannot justify the retailer dedicating a separate channel and disproportionate resources for his volume of business. This convergence of new opportunities within the store environment is really challenging the traditional store systems. As these opportunities and challenges have emerged at different points in time, they have led to a multitude of stop gap processes and systems which provide a fractured & often time broken customer experience."

With all of the processes involved in order fulfillment, customers' needs can often be lost in the maze. Paintal is not surprised because "one of the major reasons the store's organization is still struggling with [cross channel sales] is the inherent lack of understanding of the differences between their core cash and carry fulfillment model and the order based fulfillment model." He explains:

"The cash and carry model is based on the here and now - pay for the product and walk away with it. This has and will remain very successful for a large part of the stores core business but it also leads to an inherent bias. Every interaction with the customer is looked at from a transaction by transaction basis and the life of each transaction is very short ranging from a few minutes to a few hours. On the other hand, an order is a promise of services performed which ranges from days to weeks or even months. Look at each of the scenarios described above. All of them involve a promise which is not fulfilled immediately but extends over a period of time. The question which arises now is - how does viewing a customer interaction as an order vs. a transaction help the retailer provide a better customer experience? The order as a construct has been around for many years especially in the online and catalog businesses. An order has a well defined lifecycle from its creation to its fulfillment. One customer order can enable the shipment of multiple products at different points in time from different partners which include warehouses, vendors, stores and wholesalers. An order can be the single source of truth about fulfillment statuses for both the customer and the retailer. An order can handle fulfillment of services which require scheduling and capacity handling. An order has an inherent work flow which helps orchestrate and streamline the very complex tasks required over an extended period of time to satisfy a highly discerning customer. At this point somebody may justifiably ask as to why the store's organization has not embraced this concept wholeheartedly? The answer lies in my earlier assertion that stores have a 'here and now' mindset and when you try to force fit an order into that mindset, you find many challenges."

Order management should be invisible to customers. Rod Martinez believes that if you are "asking customers to do business with you based on processes defined by your systems rather than the way they want to do business with you" it may be costing you revenue ["Are Your Order Management Systems Disappointing Your Customers?" Logistics Viewpoints, 15 July 2010]. He writes:

"As the economy improves, the top priority of many organizations will be improving the customer experience to win new customers and enhance existing relationships. The main thing people will remember about your company is how easy you are to do business with. Having the right solutions in place will allow your company to differentiate itself in the marketplace. Customers are demanding more choice in products, how they purchase those products and how their orders are fulfilled. If your order management systems cannot adapt to these customer-driven changes, you risk losing the brand loyalty that has taken so long for you to establish. Having customers define the way they interact and conduct business with your company is an entirely different business paradigm – a customer-centric paradigm."

In posts about demand driven supply chains, Lora Cecere has also noted that customer-centric paradigms will likely define the future. Martinez continues:

"Many companies have resorted to implementing manual internal processes to meet customer requirements because they lack the systems to automate their order lifecycle. For instance, a company with multiple divisions will often take an order and then manually split the order and send the segmented orders to appropriate divisions for fulfillment and invoicing. Or worse, they make the customer place multiple orders, one with each division. This stop-gap approach does not scale, increases the time to fulfill the order and introduces the likelihood of errors. It prevents the customer from seeing complete order information via the website and forces them to interact with multiple CSRs and/or web portals in order to conduct business with the company. The alternative is to have the customer call into one location and have the CSR use multiple systems to check availability, place orders, check status, and initiate returns, and manually provide a consolidated view to the customer. This is costly for the company and offers a poor customer experience. So, you must ask yourself, is it difficult to make changes to your current business processes in order to support your ever-changing customer demands? How easy is it to find the status of a complex order for your customer? How easy is it to add additional participants and/or steps in the fulfillment process without having to make code changes? Most systems lack the flexibility to support these changes and need to evolve or be replaced with new systems that can provide the experience customers expect."

By now it should be apparent that order management is going to remain painful for everyone in the supply chain from manufacturers to consumers until automation and collaboration are greatly improved. The more real-time the information the better. Martinez concludes:

"If your company needs to make this shift and gain additional flexibility, here are some of the attributes you should you look for in a solution:

• Extend across your total enterprise, and all of your enterprise applications, to aggregate/consolidate the information into a central repository for consistent promising, order status and alerts to your customer.
• Are intelligent enough to determine the optimal fulfillment option for each line on the order based on business rules that are important to the organization.
• Allow users to quickly configure business processes utilizing a graphical business process modeler that integrates event management.
• Can be implemented on-premise, or if IT resources are a concern, on-demand for fast implementations and quick ROI.

... It’s time to take a transformational approach to order management, replacing inflexible systems with new agile, flexible solutions that will make it easy for customers to do business with you. The results will differentiate you in the market and will positively affect your brand loyalty."

You can see why Brad Blizzard's dream is a difficult one to achieve. It is a vision that requires close collaboration from all stakeholders in the supply chain. Technologies are just now emerging that permit this vision to become a reality. Ironically, when the order management process is fully mastered, customers will probably be oblivious to the tremendous amount of effort it takes to make their experience pleasurable and effortless.

Update on Masdar City

Back in early 2009, I wrote a post about the zero-carbon city that was being planned in the United Arab Emirates (Abu Dhabi's Masdar Plan). Despite the global recession (which hit Dubai particularly hard), Abu Dhabi pressed forward with the planned city. The recession has, however, had an impact. The project is being scaled back and will no longer begin life as a carbon-neutral city ["Abu Dhabi's Green Energy Showpiece City Won't Be Carbon Neutral at First," by Ayesha Daya, Bloomberg, 10 October 2010]. Daya reports:

"Masdar, the Abu Dhabi government- backed renewable energy company, abandoned plans for Masdar City to be carbon-neutral from the start and delayed the city’s first phase by two years to 2015. The project will be completed between 2020 and 2025, the company said in an e-mailed statement today. 'While still aiming to eventually be powered 100 percent by renewable energy, Masdar City will no longer rely solely on on-site clean energy sources,' the company said. 'The purchase of renewable energy from off-site locations may also be utilized as energy demands increase over the project’s lifetime.' Founded in 2006, Masdar City is the showpiece of Abu Dhabi’s pursuit of alternative energy. The $22 billion venture, which includes a research university, was reviewed this year after the financial crisis caused spending reductions."

One of the renewable energy technologies that will be used in Masdar City is a "micro-concentrated solar power systems, or MicroCSP" manufactured by the Hawaii-based solar energy company Sopogy Inc. ["Hawaii Solar Firm to Supply Equipment to Sustainable-City Project in Abu Dhabi," The Solar Home & Business Journal, 17 October 2010]. According to the article, the MicroCSP, which "uses mirrors to concentrate the sun’s energy on a receiver tube, heating a recirculating heat-transfer fluid within the system," will be used to power an air conditioning system called an "absorption chiller." The article reports that absorption chillers are "used in many parts of the world for cooling from waste heat sources."

A more comprehensive update on Masdar City was recently published in a New York Times' article ["In Arabian Desert, a Sustainable City Rises," by Nicolai Ouroussoff, 26 September 2010]. Ouroussoff reports:

"Back in 2007, when the government here announced its plan for 'the world’s first zero-carbon city' on the outskirts of Abu Dhabi, many Westerners dismissed it as a gimmick — a faddish follow-up to neighboring Dubai’s half-mile-high tower in the desert and archipelago of man-made islands in the shape of palm trees. Designed by Foster & Partners, a firm known for feats of technological wizardry, the city, called Masdar, would be a perfect square, nearly a mile on each side, raised on a 23-foot-high base to capture desert breezes. Beneath its labyrinth of pedestrian streets, a fleet of driverless electric cars would navigate silently through dimly lit tunnels. The project conjured both a walled medieval fortress and an upgraded version of the Magic Kingdom’s Tomorrowland. Well, those early assessments turned out to be wrong. By this past week, as people began moving into the first section of the project to be completed — a 3 ½-acre zone surrounding a sustainability-oriented research institute — it was clear that Masdar is something more daring and more noxious."

You might wonder why Ouroussoff would use such a charged term like "noxious"; especially since he lauds Norman Foster, Foster & Partners principal partner for blending "high-tech design and ancient construction practices into an intriguing model for a sustainable community" and for devising "an alluring social vision, in which local tradition and the drive toward modernization are no longer in conflict." What's noxious about that you might ask? Ouroussoff is apparently put off by the "gated-community mentality" reflected in Masdar City's design -- a trend, he believes, "that has been spreading like a cancer around the globe for decades." He continues:

"Its utopian purity, and its isolation from the life of the real city next door, are grounded in the belief — accepted by most people today, it seems — that the only way to create a truly harmonious community, green or otherwise, is to cut it off from the world at large."

I believe that Ouroussoff is a bit too harsh in his criticism. As I wrote in my previous post about the city, "Perhaps the most exciting part of the plan is that the proposed city will serve as a large-scale testbed for innovative ideas." Like any good experiment, it must take place under controlled conditions. If you cannot control most of the variables, you can't really experiment to any great effect. Masdar is a grand experiment being conducted on a grand scale. As the architectural critic for the New York Times, I guess Ouroussoff doesn't feel like he's doing his job if he isn't criticizing. He continues:

"Mr. Foster is the right man for this kind of job. A lifelong tech buff who collaborated with Buckminster Fuller, he talks about architecture in terms of high performance, as if his buildings were sports cars. And to some extent his single-minded focus on the craft of architecture — its technological and material aspects — has been a convenient way of avoiding trickier discussions about its social impact. ... Not that Mr. Foster doesn’t have ideals. At Masdar, one aim was to create an alternative to the ugliness and inefficiency of the sort of development — suburban villas slathered in superficial Islamic-style décor, gargantuan air-conditioned malls — that has been eating away the fabric of Middle Eastern cities for decades. He began with a meticulous study of old Arab settlements, including the ancient citadel of Aleppo in Syria and the mud-brick apartment towers of Shibam in Yemen, which date from the 16th century. 'The point,' he said in an interview in New York, 'was to go back and understand the fundamentals,' how these communities had been made livable in a region where the air can feel as hot as 150 degrees. Among the findings his office made was that settlements were often built on high ground, not only for defensive reasons but also to take advantage of the stronger winds. Some also used tall, hollow 'wind towers' to funnel air down to street level. And the narrowness of the streets — which were almost always at an angle to the sun’s east-west trajectory, to maximize shade — accelerated airflow through the city. With the help of environmental consultants, Mr. Foster’s team estimated that by combining such approaches, they could make Masdar feel as much as 70 degrees cooler. In so doing, they could more than halve the amount of electricity needed to run the city. Of the power that is used, 90 percent is expected to be solar, and the rest generated by incinerating waste (which produces far less carbon than piling it up in dumps). The city itself will be treated as a kind of continuing experiment, with researchers and engineers regularly analyzing its performance, fine-tuning as they go along."

Ouroussoff next turns his attention to a subject that plagues most cities -- transportation. At a time when China and India are rapidly increasing the number of vehicles on their roadways, Masdar's streets will be free of vehicles powered by combustion-engines. He explains:

"Mr. Foster’s most radical move was the way he dealt with one of the most vexing urban design challenges of the past century: what to do with the car. Not only did he close Masdar entirely to combustion-engine vehicles, he buried their replacement — his network of electric cars — underneath the city. Then, to further reinforce the purity of his vision, he located almost all of the heavy-duty service functions — a 54-acre photovoltaic field and incineration and water treatment plants — outside the city. The result, Mr. Foster acknowledged, feels a bit like Disneyland. 'Disneyland is attractive because all the service is below ground,' he said. 'We do the same here — it is literally a walled city. Traditional cars are stopped at the edges.'"

According to Bloomberg's Ayesha Daya in the article cited at the beginning of this post, "Masdar is also scaling back the Personal Rapid Transport system consisting of electric driverless vehicles known as pods. ... The company will test alternative vehicle technologies instead."

As I noted in my earlier post, "Ironically, if successful, the city may become a tourist attraction and, if that is taken into consideration, travel to and from the city could dramatically increase its carbon footprint. For that reason, I suspect that visitors might be restricted." Ouroussoff reports that there is "a garage just underneath the city’s edge" where traditional vehicles are parked and visitors enter the complex. He continues:

"Stepping out of this space into one of the 'Personal Rapid Transit' stations brings to mind the sets designed by Harry Lange for '2001: A Space Odyssey.' You are in a large, dark hall facing a row of white, pod-shaped cars lined up in rectangular glass bays. (The cars’ design was based on Buckminster Fuller’s proposal for a compact urban vehicle, the D-45, which helps explain their softly contoured, timelessly futuristic silhouettes.) Daylight spills down a rough concrete wall behind them, hinting at the life above. The first 13 cars of a proposed fleet of hundreds were being tested the day I visited, but as soon as the system is up, within a few weeks, a user will be able to step into a car and choose a destination on an LCD screen. The car will then silently pull into traffic, seeming to drive itself. (There are no cables or rails.) It’s only as people arrive at their destination that they will become aware of the degree to which everything has been engineered for high-function, low-consumption performance. The station’s elevators have been tucked discreetly out of sight to encourage use of a concrete staircase that corkscrews to the surface. And on reaching the streets — which were pretty breezy the day I visited — the only way to get around is on foot. (This is not only a matter of sustainability; Mr. Foster’s on-site partner, Austin Relton, told me that obesity has become a significant health issue in this part of the Arab world, largely because almost everyone drives to avoid the heat.)"

Up to this point, Ouroussoff hasn't mentioned the research facility that has always been planned as the heart of Masdar City. As I wrote in my previous post, "The Masdar Initiative is following a strategy that has been used successfully by many universities. It is going to establish a research institute to develop environmental technologies and a complementary 'investment arm' to implement and exploit them. The unique twist added by the Masdar Initiative is the 'eco-city' that will be home to these organizations. Masdar's managers want to create an academic institution that rivals the Massachusetts Institute of Technology (MIT) and then surround it with 'a global manufacturing hub for technologies such as solar power and desalination, and a city of 40,000 people with no greenhouse-gas emissions and no waste—all while turning a profit.' Although the government of Abu Dhabi is putting up $15 billion in venture capital, it expects the investment arm and the city to be profitable." Ouroussoff finally mentions the Masdar Institute of Science and Technology (MIST) when he describes the buildings that will house it.

"The buildings that have gone up so far come in two contrasting styles. Laboratories devoted to developing new forms of sustainable energy and affiliated with the Massachusetts Institute of Technology are housed in big concrete structures that are clad in pillowlike panels of ethylene-tetrafluoroethylene, a super-strong translucent plastic that has become fashionable in contemporary architecture circles for its sleek look and durability. Inside, big open floor slabs are designed for maximum flexibility. The residential buildings, which for now will mostly house professors, students and their families, use a more traditional architectural vocabulary. To conform to Middle Eastern standards of privacy, Mr. Foster came up with an undulating facade of concrete latticework based on the mashrabiya screens common in the region. The latticework blocks direct sunlight and screens interiors from view, while the curves make for angled views to the outside, so that apartment dwellers never look directly into the windows of facing buildings. Such concerns are also reflected in the layout of the neighborhood. Like many Middle Eastern university campuses, it is segregated by sex, with women and families living at one end and single men at the other. Each end has a small public plaza, which acts as its social heart."

As a city dweller himself, Ouroussoff "wonders, despite the technical brilliance and the sensitivity to local norms, how a project like Masdar can ever attain the richness and texture of a real city." It will certainly never reflect the diversity of a New York City, the cultural depth of a Paris, or quaintness of an Oxford; but, I suspect that Masdar will take on its own unique character once people start inhabiting the city in larger numbers. Ouroussoff concludes:

"Eventually, a light-rail system will connect it to Abu Dhabi, and street life will undoubtedly get livelier as the daytime population grows to a projected 90,000. (Although construction on a second, larger phase has already begun, the government-run developer, the Abu Dhabi Future Energy Company, refuses to give a completion date for the city, saying only that it will grow at its own pace.) But the decision of who gets to live and work in Masdar, as in any large-scale development, will be outside the architect’s control. That will be decided by the landlord, in this case, the government. And even if it were to become a perfect little urban melting pot, Masdar would have only limited relevance to the world most people live in. Mr. Foster’s inspired synthesis of ancient and new technologies could well have applications elsewhere; it should be looked at closely by other architects. But no one would argue that a city of a few million or more can be organized with such precision, and his fantasy world is only possible as a meticulously planned community, built from the ground up and of modest size. What Masdar really represents, in fact, is the crystallization of another global phenomenon: the growing division of the world into refined, high-end enclaves and vast formless ghettos where issues like sustainability have little immediate relevance. That’s obviously not how Mr. Foster sees it. He said the city was intended to house a cross-section of society, from students to service workers. 'It is not about social exclusion,' he added. And yet Masdar seems like the fulfillment of that idea. Ever since the notion that thoughtful planning could improve the lot of humankind died out, sometime in the 1970s, both the megarich and the educated middle classes have increasingly found solace by walling themselves off inside a variety of mini-utopias. This has involved not only the proliferation of suburban gated communities, but also the transformation of city centers in places like Paris and New York into playgrounds for tourists and the rich. Masdar is the culmination of this trend: a self-sufficient society, lifted on a pedestal and outside the reach of most of the world’s citizens."

Al Jazeera recently published a video that gives you a good idea of what the first buildings in Masdar City look like.

I concluded my previous post about Masdar with these thoughts: "It will probably take a decade or more for us to learn whether or not this grand experiment pays real dividends. But there is an urgency, even in these bad economic times, that compels research and development efforts. I suspect that the Masdar project will produce valuable research and that it will begin trickling out over the next few years. It would be great if some true breakthroughs were discovered and developed. If they aren't, it won't be for lack of trying." I'm not as concerned about the gated community aspect of Masdar as Ouroussoff, although I agree with him that Masdar does not represent the future of urban communities. Few urban areas are ever planned to the degree to which Masdar has been planned and even fewer communities will be able to find the capital for such designer cities. Technological innovations, however, will hopefully flow from its controlled environment that will help real urban areas meet real emerging challenges in significant ways.

Critical Infrastructure and Worms

Perhaps you have been following the story about "computer systems at Iran's first nuclear-power plant [that] have been infected with a potent worm capable of taking over their control systems" ["Computer Worm Hits Iran Power Plant," by Siobahn Gorman, Wall Street Journal, 26 September 2010]. It is a cautionary tale full of twists and intrigues. Gorman reports:

"The development further fueled suspicions that the [so-called Stuxnet] worm, which was discovered in July and has disproportionately hit facilities in Iran, was designed to attack Iranian nuclear facilities. 'Studies conducted show some personal computers of the Bushehr nuclear-power plant workers are infected with the virus,' the facility's project manager, Mahmoud Jafari, told Iran's official Islamic Republic News Agency. He said the virus hasn't caused major damage and won't affect the scheduled completion of the plant. ... James Lewis, a cybersecurity specialist at the Center for Strategic and International Studies in Washington, said that while it isn't clear whether Iran was specifically targeted by the Stuxnet worm, leading suspects in mounting such an attack would include Israel, the U.S., and the U.K. In addition, Russia, France and Germany also would have the capability to conduct this type of attack, said Mr. Lewis, who frequently advises the Obama administration. 'Bushehr is a good target' to be compromised, he said. 'The Iranians should be worried.'"

Before returning to the "suspects" in this case, let's focus on the worm itself. Gorman continues:

"Stuxnet has affected a broad range of targets. Researchers at the U.S. computer-security company Symantec Corp. found that about 60% of the Stuxnet infections have hit computer systems in Iran, with many systems in Indonesia and India also affected. There have been no reports of infections in the U.S. The U.S. Department of Homeland Security has been studying the worm since July, and in its tests so far hasn't seen the worm actually manipulate or destroy a computer control system, said Sean McGurk, who heads the department's control systems program, at a briefing Friday. The worm has targeted the Siemens industrial control systems that are used in Iranian and other countries' facilities by exploiting a security gap in Microsoft Windows. Siemens AG and Microsoft Corp. have issued patches to close that gap."

Gorman reports that, if not eliminated, "the worm is capable of reprogramming the systems controlling the [Iranian nuclear] plant." According to John Markoff, "Computer security specialists have speculated that once inside the factory and within the software that controls equipment, the worm [could reprogram] centrifuges made by a specific company, Siemens, to make them fail in a way that would be virtually undetectable.] He goes on to note that the Stuxnet worm is at once both sophisticated and amateurish ["A Silent Attack, but Not a Subtle One," New York Times, 27 September 2010]. He continues:

"The most striking aspect of the fast-spreading malicious computer program — which has turned up in industrial programs around the world and which Iran said had appeared in the computers of workers in its nuclear project — may not have been how sophisticated it was, but rather how sloppy its creators were in letting a specifically aimed attack scatter randomly around the globe. The malware was so skillfully designed that computer security specialists who have examined it were almost certain it had been created by a government and is a prime example of clandestine digital warfare. While there have been suspicions of other government uses of computer worms and viruses, Stuxnet is the first to go after industrial systems. But unlike those other attacks, this bit of malware did not stay invisible. If Stuxnet is the latest example of what a government organization can do, it contains some glaring shortcomings. The program was splattered on thousands of computer systems around the world, and much of its impact has been on those systems, rather than on what appears to have been its intended target, Iranian equipment. Computer security specialists are also puzzled by why it was created to spread so widely."

Markoff reports that the Stuxnet worm is not the first malware aimed at critical infrastructure. He explains:

"Security specialists contrast Stuxnet with an intrusion discovered in the Greek cellphone network in March 2005. It also displayed a level of skill that only the intelligence agency of some foreign power would have. A two-year investigation by the Greek government found an extremely sophisticated Trojan horse program that had been hidden by someone who was able to modify and then insert 29 secret programs into each of four telephone switching computers. The spy system came apart only when a software upgrade provided by the manufacturer led to some text messages, sent from the system of another cellphone operator, being undelivered. The level of skill needed to pull off the operation and the targets strongly indicated that the culprit was a government. An even more remarkable set of events surrounded the 2007 Israeli Air Force attack on what was suspected of being a Syrian nuclear reactor under construction. Accounts of the event initially indicated that sophisticated jamming technology had been used to blind the radar so Israeli aircraft went unnoticed. In May 2008, however, a report in an American technical publication, IEEE Spectrum, cited a European industry source as raising the possibility that the Israelis had used a built-in kill switch to shut down the radar. A former member of the United States intelligence community said that the attack had been the work of Israel’s equivalent of America’s National Security Agency, known as Unit 8200. But if the attack was based on a worm or a virus, there was never a smoking gun like Stuxnet."

That's a good segue back to the list of suspect governments that might have created the worm. The United States is on that list because it has championed the opposition to Iran's growing nuclear ambitions. Gorman reports, however, that "the U.S. would be a less likely suspect because it uses offensive cyberoperations infrequently and usually only under specific circumstances when officials are confident the operation will affect only its target, current and former U.S. officials said. It has opted against cyberattack proposals when the effect was unpredictable, as it did when it considered then rejected the possibility of a cyberattack on Iraq's financial system before the 2003 invasion." Gorman continues:

"U.S. officials have said they are alarmed by the worm's emergence because it represents the first publicly acknowledged set of attacks targeting computer -control systems. It is a very sophisticated worm, having has the capability also to steal data about a system and adapt on its own to evade detection. 'It's almost like what we did in the aviation world, where we started with rudimentary manned vehicles dropping bombs out the window,' said a U.S. military official. 'Now we're using unmanned aerial vehicles [like drones]. It's almost like the war on the net has done the same thing.'"

Gorman noted that the United Kingdom was also a suspect government, but I'm assuming it is not a serious contender for many of the same reasons that the U.S. is being given a pass. That leaves only Israel. Here's where the story gets intriguing ["In a Computer Worm, a Possible Biblical Clue," by John Markoff and David E. Sanger, New York Times, 30 September 2010]. They report:

"Deep inside the computer worm that some specialists suspect is aimed at slowing Iran’s race for a nuclear weapon lies what could be a fleeting reference to the Book of Esther, the Old Testament tale in which the Jews pre-empt a Persian plot to destroy them. That use of the word 'Myrtus' — which can be read as an allusion to Esther — to name a file inside the code is one of several murky clues that have emerged as computer experts try to trace the origin and purpose of the rogue Stuxnet program, which seeks out a specific kind of command module for industrial equipment. Not surprisingly, the Israelis are not saying whether Stuxnet has any connection to the secretive cyberwar unit it has built inside Israel’s intelligence service. ... In interviews in several countries, experts in both cyberwar and nuclear enrichment technology say the Stuxnet mystery may never be solved. There are many competing explanations for myrtus, which could simply signify myrtle, a plant important to many cultures in the region. But some security experts see the reference as a signature allusion to Esther, a clear warning in a mounting technological and psychological battle as Israel and its allies try to breach Tehran’s most heavily guarded project. Others doubt the Israelis were involved and say the word could have been inserted as deliberate misinformation, to implicate Israel. ... There are many reasons to suspect Israel’s involvement in Stuxnet. Intelligence is the single largest section of its military and the unit devoted to signal, electronic and computer network intelligence, known as Unit 8200, is the largest group within intelligence."

Markoff and Sanger report that "Ralph Langner, a German computer security consultant ... was the first independent expert to assert that the malware had been 'weaponized' and designed to attack the Iranian centrifuge array." They also report that "it was Mr. Langner who first noted that Myrtus is an allusion to the Hebrew word for Esther. The Book of Esther tells the story of a Persian plot against the Jews, who attacked their enemies pre-emptively." They continue:

"Carol Newsom, an Old Testament scholar at Emory University, confirmed the linguistic connection between the plant family and the Old Testament figure, noting that Queen Esther’s original name in Hebrew was Hadassah, which is similar to the Hebrew word for myrtle. Perhaps, she said, 'someone was making a learned cross-linguistic wordplay.' But other Israeli experts said they doubted Israel’s involvement. Shai Blitzblau, the technical director and head of the computer warfare laboratory at Maglan, an Israeli company specializing in information security, said he was 'convinced that Israel had nothing to do with Stuxnet.' 'We did a complete simulation of it and we sliced the code to its deepest level,' he said. 'We have studied its protocols and functionality. Our two main suspects for this are high-level industrial espionage against Siemens and a kind of academic experiment.' Mr. Blitzblau noted that the worm hit India, Indonesia and Russia before it hit Iran, though the worm has been found disproportionately in Iranian computers. He also noted that the Stuxnet worm has no code that reports back the results of the infection it creates. Presumably, a good intelligence agency would like to trace its work."

Experts may never be able to finger the real culprit who created the Stuxnet worm, but for me the bottom line is that this episode underscores the fact that concerns over coded Trojan Horses is not just grist for conspiracy theorists. The Economist believes that the Stuxnet worm could represent a turning point in cyberwar ["The meaning of Stuxnet," 30 September 2010]. It writes:

"This is ... a new kind of cyber-attack. Unlike the efforts to disrupt internet access in Estonia or Georgia (blamed on Russia), or the attacks to break into American systems to steal secrets (blamed on China), this was a weapon aimed at a specific target—it has been called a 'cyber-missile'. One or more governments (the prime suspects are Israel and America) were probably behind it. After years of speculation about the potential for this sort of attack, Stuxnet is a worked example of cyberwar’s potential—and its limitations. Much of the discussion of cyberwar has focused on the potential for a 'digital Pearl Harbour', in which a country’s power grids and other critical infrastructure are disabled by attackers. Many such systems are isolated from the internet for security reasons. Stuxnet, which exploits flaws in Microsoft Windows to spread on to stand-alone systems via USB memory sticks, shows they are more vulnerable than most people thought. The outbreak emphasises the importance of securing industrial-control systems properly, with both software (open-source code can be more easily checked for security holes) and appropriate policies (banning the use of memory sticks). 'Smart' electricity grids, which couple critical infrastructure to the internet, must be secured carefully. Stuxnet is also illuminating in another way: it reveals the potential for cyber-weapons that target specific systems, rather than simply trying to cause as much mayhem as possible. It infected several plants in Germany, for example, but did no harm because they were not the target it was looking for. Such specificity, along with the deniability and difficulty of tracing a cyber-weapon, has obvious appeal to governments that would like to disable a particular target while avoiding a direct military attack—and firms interested in sabotaging their rivals. But the worm also highlights the limitations of cyber-attacks. ... The attack will only have delayed Iran’s nuclear programme: it will not have shut it down altogether. Whoever is behind Stuxnet may feel that a delay is better than nothing. But a cyber-attack is no substitute for a physical attack. The former would take weeks to recover from; the latter, years."

The magazine concludes that cyberwar is here to stay, "Get used to it." Since the global economy remains susceptible to virtual attacks in sectors like energy, finance, and transportation, countries and companies must be more vigilant. Bruce Schneier got it right when he wrote, "The mantra of any good security engineer is: 'Security is a not a product, but a process.'" The weakest link in that process continues to be the human operator.