Enterra Insights

On the Bandwagon: Supply Chain Orchestration

Bill McBeath, from ChainLink Research, asserts, "For many industries and companies, merely managing their own immediate suppliers is no longer sufficient. Someone has to step in and coordinate key activities across the supply chain." ["2011 Supply Chain Orchestration: Part One," 1 February 2011] McBeath labels companies that "are managing multiple tiers of their supply chain ... Supply Chain Orchestrators." These orchestrators manage "their suppliers' suppliers and further upstream suppliers" in an effort "to ensure supply continuity, social compliance, and to gain competitive advantage." McBeath continues:

"These Supply Chain Orchestrators tend to be brand owners whose reputation and competitiveness are on the line based on the performance and actions of the whole chain. They are the ones who have the power to influence and direct the whole chain."

McBeath's last point is important. Not every company has enough "power" that it can "influence and direct the whole chain." Simple logic informs us that an orchestra can only follow one conductor at a time and that the supply chains can only be orchestrated by one dominant stakeholder at a time. McBeath points out that "multi-tier relationships can take different forms." He describes a few:

• "Selecting Suppliers Across Multiple Tiers ('Configuring the Chain')—In some cases, the quality of a particular component or assembly is so critical, that the OEM not only selects their immediate tier 1 supplier, but also actively influences or actually selects tier 2, 3, or 4 suppliers for specific very critical materials and components. In addition, we are seeing more 'project-based supply chains,' especially in apparel, where an OEM creates a concept for the next fashion season then proceeds to select all of the players in the chain to deliver that concept; all the way back to selecting the right farms growing exactly the right cotton they need for this shirt, the mills that are best at weaving that type of cotton, and the cutter that is best with that cloth, etc. Logistics costs and location become part of the decision making process as well. Often these supply chains are assembled on a project-by-project basis.


• "Buying on Behalf of Multiple Tiers—This is where an OEM buys materials for one or more of their suppliers. In some cases, an OEM is buying on behalf of one or more of its contract manufacturers either because the OEM has better purchasing and negotiating power, or because they want to ensure continuity of supply, or want to ensure transparency of pricing (i.e. avoid excessive markups by their contract manufacturer) or a combination of these factors. A rather different variation is where an OEM buys a specific material (e.g. steel) for their entire supply chain. In this case the aggregate multi-tier material requirements (not just for their own manufacturing operations, but also for their suppliers and whole chain) flows through a purchasing platform run by the OEM. This allows much stronger purchasing power than is possible by each small shop in the chain, and allows for consolidation of material specifications. This approach has been adopted in certain sectors (e.g. automotive).


• "Education and Process Improvements Across Tiers—Some companies invest in strategic relationships not only with key direct suppliers, but in some cases with a few critical tier 2 or 3 suppliers, helping those suppliers learn about and implement process improvements such as 6-sigma or lean initiatives.


• "Compliance Programs and Audits—Increasingly, brand owners and retailers are being held responsible for what happens throughout their supply chain, either by law or by the court of public opinion. This compels them to take a much more active role in making sure all the players throughout their supply chain are acting responsibly. It is much harder now for the brand owner to get away with saying 'I didn't know' or 'that's not my factory, not my responsibility.'


• "Multi-Tier Supply Chain Risk Management—Many companies have some form of risk management program with their immediate suppliers to keep tabs on risks related to supplier financial viability, weather and geopolitical risks, sole sourcing risks, etc. Some OEMs have learned the hard way that they also need to pay attention to risks and constraints further upstream in their supply chain. A disruption at the supplier’s supplier can have a severe impact. The fact that some of these disruptions also affect a company's competitors does not diminish the importance of managing these risks, as one firm may gain a large competitive advantage if they manage those risks better than the competition."

In the second installment of his series on supply chain orchestration, McBeath discusses the second type of multi-tier relationship discussed above -- "Buying on Behalf of Multiple Tiers." He concludes:

"Buying across multiple tiers consolidates spend[ing], allows better optimization of inventory and transportation, reduces payment for credit risk, and exposes how efficient each supplier is at the value add processing."

In the third installment of this series, McBeath describes how Ford Motor Company attempts "to get vertical integration benefits from a multi-tier supply chain - specifically, how they buy steel on behalf of their entire supply chain." In the final installment, he continues his discussion about Ford's supply chain and discusses how the company is able to use its "multi-tier platform to rationalize the specifications for the steel that is bought across [its] supply chain, and how that helps [it] to consolidate spend[ing], make better use of inventory, and provide more flexibility." He concludes:

"Today, Ford directs more than $4 billion of steel annually across a network of 1,000+ users from 400+ entities, operating out of 500+ locations. [It] collaborate[s] with [its] suppliers to manage over 100,000 parts, materials, and part-to-material relationships. The investment, process changes, and effort required to run this vast multi-tier procurement network has been substantial, but well worth the payback. Most companies do not play the dominant ‘anchor tenant’ role in their supply chain. But for large OEMs or key players in a supply chain, especially in industries with large volumes of commodities spend spread out across multiple tiers, a networked multi-tier procurement approach can have enormous benefits."

Jane Barrett, Managing Vice President at Gartner, says that supply chain orchestrators sit at the top (Stage 4) of "Gartner's four-stage maturity model." ["The Secret Sauce to Supply Chain Orchestration," Supply Chain Brain, 11 May 2011] She claims that not many companies can be called orchestrators. "In fact," she writes, "what we see most often is pockets of Stage 4 excellence." She continues:

"Let's delve into this term 'orchestration' and see what it really means in [the] supply chain. According to dictionary.com, 'orchestrate' means 'to arrange or manipulate, especially by means of clever or thorough planning or maneuvering.' Freedictionary.com defines it as '[arranging or controlling] the elements of, as to achieve a desired overall effect.' Synonyms include organize, coordinate, facilitate, plan, mastermind, harmonize, symphonize, integrate, compose, balance and unity. However, most companies are still in Stage 2, and the realization of these characteristics is still only aspirational."

For those unfamiliar with Gartner's Maturity Model, the below figure provides a good explanation of the four stages (click to enlarge).

Barrett notes that Stage 4 "orchestration describes a value-driven organization that is consciously excellent." This excellence is derived "from advanced capabilities in information management, demand sensing and shaping, cost-to-serve analysis, end-to-end segmentation, simulation and analytics. It requires strong collaboration internally and externally." In other words, you can't leapfrog Stage 3 (Collaboration) into Stage 4 (Orchestration). Collaboration precedes orchestration. To read more about supply chain collaboration, see my posts entitled Supply Chain Collaboration and IBM's Top Five Supply Chain Challenges. Barrett continues:

"Every successful company has multiple projects on the go to achieve these capabilities, but most can't get out of Stage 2. So, what's the secret sauce for the leaders? What do the best in our Supply Chain Top 25 ranking do to keep them there year after year? It may sound like 'same old, same old,' but the success of moving up the maturity curve and sustaining those capabilities boils down to these three factors:

• Having the right organizational design and talent
• Having the right culture and governance that manages change
• Having the capability to continuously enhance processes and the enabling technology to support good decision making, or what we call becoming consciously excellent"

If you are curious as to who made Gartner's Supply Chain Top 25, here's the list: 1) Apple; 2) Procter & Gamble; 3) Cisco Systems; 4) Wal-Mart Stores; 5) Dell; 6) Pepsico; 7) Samsung; 8) IBM; 9) Research in Motion; 10) Amazon.com; 11) McDonald's; 12) Microsoft; 13) The Coca-Cola Company; 14) Johnson & Johnson; 15) Hewlett-Packard; 16) Nike; 17) Colgate-Palmolive; 18) Intel; 19) Nokia; 20) Tesco; 21) Unilever; 22) Lockheed Martin; 23) Inditex; 24) Best Buy; 25) Schlumberger. Barrett insists, "Investing in a culture that embraces change is paramount when creating a supply chain organization that can orchestrate and is resilient." She then provides a list of things that "the best continuously do":

"• Embrace outside-in thinking, and learn from those that have cultures that constantly challenge, question and push the envelope of the status quo embedded in their DNA. These companies invest in people focused solely on this — on centers of excellence (COEs) or strategy groups. These people don't have other 'day jobs.' ...

"• Invest in training and supply chain capabilities, continuously raising the bar on talent, process integration and technology enablement. Change backed by clear strategy that's backed by deep analysis is easier to drive. ...

"• Empowerment is key. Consider this seemingly simple but hugely impactful change: A very successful distributor had strict rules, which are typical in its industry, for changing inventory policies. However, when the recession hit in 2009, this cumbersome process created a bottleneck. The distributor empowered lower levels to make quick decisions on inventory, which served it well through the downturn and when the economy picked up.

"• Define the vision, and give people stretch goals to help them get there. The vision must look beyond the norm, embrace out-of-the-box thinking and rewrite the rules of traditional best practices, if needed. It must be enabled by a well-defined burning platform, compelling vision and a road map. However, organizations must have the capacity to change — vision without the capacity and a road map is signing people up for frustration and burnout."

Although each of those corporate characteristics is important, many top supply chain analysts believe that the first characteristic (i.e., embracing outside-in thinking) is the key to achieving Stage 4 orchestration. Barrett provides "two final thoughts — the first for companies in Stage 1 or Stage 2 that are still focused on supply chain excellence, and the next for the more mature." Here is her recommendation for Stage 1 or 2 companies:

"If your focus is still just supply chain, that's a problem. You need an executive-led, value chain transformation program in place to break out of those inward-looking shackles and start driving value. Value is joint value and outcome-driven — consider profitable perfect orders for trading partners versus the traditional on-time, in-full delivery metric."

To underscore the need for companies to expand their vision beyond the supply chain, Gartner analysts refer to the end-state as Demand-Driven Value Networks. I believe the term "supply chain" is too ingrained our business culture to be easily displaced, but Barrett's point is a good one. In a previous post, I argued that supply chain professionals need to have seat at the table in the highest levels of corporate decision-making. I think that is what Barrett means when she asserts that companies need "an executive-led, value chain transformation program." Finally, below is her recommendation for "more mature" companies:

"For the leaders mastering value chain transformation, what's beyond orchestration? If orchestration implies the coordination, harmonization and arrangement by the mastermind — the orchestrator of the enterprise — then surely what comes next in our intricate global environment is the need to do this across multiple networks and enterprises in a way that's overlapping, but synchronized. So, for those of you who have Stage 4/orchestrate capabilities or vision, is choreography the next level of capability to which you should aspire? Do your planning capabilities really allow you to choreograph your global network?"

I believe Barrett is talking about what IBM's Sam Palmisano calls a "globally integrated enterprise." For more on that subject, read my posts entitled Globalization and Resilient Enterprises, IBM's Globally Integrated Enterprise, and More on Globally Integrated Enterprises. If maturing to Stage 3 (collaboration) and Stage 4 (orchestration) was easy, there wouldn't be so many companies stuck in Stages 1 and 2. Barrett implies that in order to cross the divide companies must transform rather than evolve. For me, transformation implies a more difficult and rapid change than evolution. Supply chain analysts are well aware of the pain that transformation can cause companies; but, they obviously believe in the old sports axiom "no pain, no gain."

Memorial Day 2011

Each year America celebrates the start of the summer season by remembering those who have fallen during the conflicts in which it has engaged. Unfortunately, each year there are more men and women to remember. As I noted in past posts, the day was officially proclaimed on 5 May 1868 by General John Logan, national commander of the Grand Army of the Republic, in his General Order No. 11, and was first observed on 30 May 1868, when flowers were placed on the graves of Union and Confederate soldiers at Arlington National Cemetery. Each year ceremonies remembering fallen soldiers, sailors, Marines, and airmen are held around the world in places where they fought and died. One such ceremony takes place in a small English village in Devonshire called Dunkeswell. There, in a lovely little Anglican church built in 1868, a memorial service is held and wreaths are laid in front of plaques honoring those who died while serving at the small airfield just outside of town. The attached image was taken of the Church of Saint Nicolas back in 1944. Yesterday marked the 66th service honoring the war dead.

The airfield was built during the Second World War (from 1941 to 1943) for the British Royal Air Force and named RAF Dunkeswell. According to Wikipedia, "the station was originally planned as a RAF Fighter Command, then a RAF Coastal Command airfield, but was transferred for use by American units. It was first used by the American United States Army Air Force Antisubmarine Command 479th Antisubmarine Group as a base of operations to fly antisubmarine missions over the Bay of Biscay using specialized B-24 Liberator bombers from August until November 1943. In November the United States Army Air Force turned over the antisubmarine mission to the United States Navy and its Liberators were reassigned to Navy Patrol Bomber Squadron VPB-103, Fleet Air Wing 7, which continued aerial antisubmarine operations from the station. This was the first United States Navy unit to train with the RAF, later followed by VB-105 and VB-110. The Naval antisubmarine squadrons moved to RAF Upottery in November 1944. With the departure of the Americans, the RAF used the airfield from August 1945 to April 1946 for ferrying aircraft to the Middle East by 16 Ferry Unit, RAF Transport Command. After September 1946 the station was put on care and maintenance status until the end of 1948, when it was sold by the Ministry of Defence."

In addition to the annual memorial service, there is a Dunkeswell Memorial Museum whose motto is: "Many returned home, some stayed forever, none will be forgotten." The museum "is dedicated to all the Veterans of United States Fleet Air Wing 7 and RAF personnel who served on the only American Navy air base commissioned on UK soil during World War II." RAF Dunkeswell may well have ended up as an obscure footnote in history had it not been for one of the men whose name can be found on the plaque at the back of the town's church. That man was Lieutenant Joseph P. Kennedy, Jr., USN, older brother of President John F. Kennedy. The following information about Lt. Kennedy comes from a biographical sketch found on the website of The Joseph P. Kennedy, Jr., Foundation:

"Joseph P. Kennedy, Jr., ... attended Harvard Law School, but left before his final year to volunteer as a Navy flier. Awarded his wings in May 1942, he flew Caribbean patrols and in September 1943 was sent to England with the first naval squadron to fly B-24's with the British Naval Command. His military service, which ended with his death on August 12, 1944, was described as follows by his brother, John F. Kennedy:

'His squadron, flying in the bitter winter over the Bay of Biscay, suffered heavy casualties, and by the time Joe had completed his designated number of missions in May, he had lost his former co-pilot and a number of close friends. Joe refused his proffered leave and persuaded his crew to remain on for D-day. They flew frequently during June and July, and at the end of July they were given another opportunity to go home. He felt it unfair to ask his crew to stay on longer, and they returned to the United States. He remained. For he had heard of a new and special assignment for which volunteers had been requested which would require another month of the most dangerous type of flying. ... It may be felt, perhaps, that Joe should not have pushed his luck so far and should have accepted his leave and come home. But two facts must be borne in mind. First, at the time of his death, he had completed probably more combat missions in heavy bombers than any other pilot of his rank in the Navy and therefore was preeminently qualified, and secondly, as he told a friend early in August, he considered the odds at least fifty-fifty, and Joe never asked for any better odds than that.'

"The Secret mission on which he lost his life was described by a fellow officer after it was declassified:

'Joe, regarded as an experienced Patrol Plane Commander, and a fellow-officer, an expert in radio control projects, was to take a 'drone' Liberator bomber loaded with 21,170 pounds of high explosives into the air and to stay with it until two 'mother' planes had achieved complete radio control over the 'drone.' They were then to bail out over England; the 'drone,' under the control of the 'mother' planes, was to proceed on the mission which was to culminate in a crash-dive on the target, a V-2 rocket launching site in Normandy. The airplane ... was in flight with routine checking of the radio controls proceeding satisfactorily, when at 6:20 p.m. on August 12, 1944, two explosions blasted the 'drone' resulting in the death of its two pilots. No final conclusions as to the cause of the explosions has ever been reached.'

"Joe was posthumously awarded the Navy Cross ... and also the Air Medal ... In 1946 a destroyer, the USS Joseph P. Kennedy, Jr., destroyer No. 850, was launched at the Fore River shipyards as the Navy's final tribute to a gallant officer and his heroic devotion to duty."

Lt. Kennedy was among the Second World War's most noted casualties; but, he is mourned neither more nor less than others who died in the service of their country. We cannot sufficiently honor their sacrifice. We can only carry on the effort to secure the liberty and peace for which they died. The late President Ronald Reagan once said, "A people free to choose will always choose peace." The greatest Memorial Day tribute we could give fallen heroes is a world at peace. Unfortunately, that day looks far off and remains more of a hope than a possibility.

Shiver Me Timbers -- A New Age of Piracy

Less than a decade ago Jack Martin, a private agent who worked for insurance companies and banks to recover stolen and hijacked ships and cargoes, wrote, "Maritime piracy is a threat neither to the USA nor to vital shipping lanes. ... The publicity surrounding maritime piracy has exaggerated its importance and distracted attention from the underlying problem of malpractice in shipping. ... Although not everyone in shipping is guilty of exploiting the situation, malpractice is not confined to ship owners but extends throughout shipping, through agents, brokers, ship registries, finance and insurance." ["Maritime Piracy, Fraud and Smuggling in Asia Pacific," draft paper, 27 June 2003] I suspect that fraud and malpractice are still major sources of losses for insurance companies and banks. Piracy, however, is now also making its mark. Vijay Sakhuja agrees with Martin that maritime theft and fraud do pose a serious challenge to the world's maritime supply lines ["Security threats and challenges to maritime supply chains," United Nations Institute for Disarmament Research, 2010]. He also adds piracy, terrorism, illegal drug trafficking, gun-running, human smuggling, fraud, illegal fishing and pollution to the list of things that can disrupt maritime supply lines.

When Martin wrote that piracy wasn't a big deal back in the early 2000s, he was correct. Sakhuja reports that in 2006 the International Maritime Bureau (IMB) reported just 20 piracy issues around Somalia and the Gulf of Aden. By 2008, however, the IMB reported a five-fold increase to 111 attacks. By 2009, the number of attacks had jumped 196 attacks on shipping with 46 vessels being hijacked and 857 crew members being taken hostage. "Despite an international effort to ensure safe passage through the world’s most treacherous waters," writes J. David Goodman, "pirates escalated their attacks in 2010 for the fourth straight year, striking more ships and taking more hostages last year than in any year on record, according to an annual report on piracy." ["Piracy Reached Record Level in 2010, Monitors Say," The New York Times, 18 January 2011] Last year, according the IMB, 445 ships were attacked, 53 ships were hijacked, 1,181 people were taken hostage and 8 were killed. A new age of piracy has begun. Sakhuja writes:

"Pirates have been active in Asia (South China Sea, South-East Asia and South Asia), the Persian Gulf, Africa (the Horn of Africa and the west coast), the Caribbean and Latin America. In recent times South-East Asian waters, particularly the Straits of Malacca, and the Gulf of Aden in East Africa have been the hot spots of sea piracy and attracted international attention."

Of those areas of activity, Goodman reports "the most dangerous waters remain those off the coast of Somalia. Ninety percent of ship seizures occurred there last year, and at year's end at least 28 vessels bearing 638 hostages were still being held for ransom." In a comprehensive article on Somali pirates, Robert Young Pelton asserts that the reason piracy is on the rise is because it is so lucrative. "Piracy is a crime," he writes, "but it is above all a business, and right now it's a high-volume one." ["Somali Pirates' Rich Returns," Bloomberg BusinessWeek, 12 May 2011] He continues:

"Business is booming, in part, because ransoms keep getting larger. On Apr. 7, Intertanko, an organization of independent tanker owners, reportedly paid $13.5 million for the release of its Very Large Crude Carrier Irene SL, topped up with 1.8 million barrels of Kuwaiti crude. The $200 million worth of oil didn't interest the hijackers. Instead, they used the 1,000-foot-long tanker as a destroyer-class warship. European Union Naval Force, or EU Navfor, which tracks piracy from its U.K. headquarters, reported that the Irene SL pulled up alongside freighters as pirates fired down on their victims from the castle-like heights of the tanker's hull. To score their $13.5 million payout, the pirates held the Irene SL's 25-man crew for 58 days. That two-month investment netted them a 26,900 percent return on estimated expenses of $50,000."

Pelton's article is fascinating ead and I recommend reading it in its entirety. It is also accompanied by some terrific graphics, like the 12-steps Somali pirates use from capture to payment and a 2011 piracy map. As I have noted in the past, Somalia is the poster child for failed states. The world knows that Somalia is a problem, but their seems to be little will to do anything about it. "[Mohammed Abdulahi Omar Asharq, foreign minister in Somalia's transitional government,] said ... he doubted the international community had the will to tackle piracy and said his country's people felt 'abandoned' by the world." ["World 'Abandoned' Somalia," by Angus McDowall, The Wall Street Journal, 18 April 2011] McDowall continues his report:

"Speaking in Dubai at an antipiracy conference [Asharq] ... rebuked foreign companies for paying ransoms to pirates, averaging $4 million a hijacked ship, which means piracy 'is getting worse.' 'The Somali government rejects in the strongest possible terms the payment of ransoms,' he said. ... He said it was 'morally indefensible' that the world had only responded to the threat of piracy with containment while taking more robust action in other countries that posed a threat to stability."

The "containment" policy discussed by Asharq involves an international naval presence in the Gulf of Aden, between the Horn of Africa and the Arabian Peninsula. According to Goodman, "The number of attacks there were cut in half, to 53 last year from 117 in 2009. The number of successful hijackings also dropped, to 15 from 20 in 2009." Navy flag officers from participating nations "point to the deployment as a promising example of international cooperation. Although there is no one overall commander, international efforts are coordinated through monthly meetings and a secure Internet chat room." ["More than piracy drives naval buildup," by Peter Apps, Washington Post, 24 October 2010] Apps continues:

"Some complain that some of the emerging navies are too focused on safeguarding national shipping and could be used more effectively if coordination were better. Most emerging nations concentrate on escorting ships with their national flag, though India is particularly keen to stress that it has escorted vessels of all nationalities. ... Overall, shippers say the naval buildup is good news. ... But some see the rush of warships to the region - which largely began in 2008 after the hijacking of a Saudi oil tanker and a Ukrainian ship carrying military tanks - as partly fueled by a growing international rivalry. 'I don't think it necessarily has to be one or the other,' said the Naval War College's Gvosdev. 'It can be both.' ... For those concerned by rising international tensions over currencies, commodities and cyber-warfare, Indian Ocean rivalries could be another potential flash point."

As counterintuitive as it may seem to some, fighting pirates at sea is not the place to attack the problem. The oceans are too large and the ships patrolling them are too few. Goodman concludes:

"But with dozens of naval ships, including those from the United States, patrolling the gulf, many pirates appear to have simply gone elsewhere, extending their reach hundreds of miles from shore into the Indian Ocean and as far south as the Mozambique Channel, and menacing ships across an unprecedented expanse of water, according to the maritime bureau. In many cases, shipping companies have made the cold calculation that hijackings — even those that result in millions of dollars paid in ransom — are rare enough to be considered a cost of doing business. Higher ransoms, in turn, allow pirates to purchase better equipment and pay more effective recruits. 'Success begets success,' said Nikolas K. Gvosdev, professor of national security studies at the United States Naval War College. ... Captain [Pottengal Mukundan, director of the IMB], praised the efforts of the navy patrols but said governments need to refocus on getting some administrative structure in Somalia. 'Unless that improves,' he said, 'no matter what we do at sea to contain the problem, nothing will happen.'"

Vice Admiral Mark Fox, commander of the U.S. Navy's Bahrain-based Central Command fleet, believes that "the U.S. and its allies should put more pressure on Somali pirates on shore, before they reach commercial ships off the Somali coast." ["Admiral calls for counterterror approach to piracy," by Lolita C. Baldor, Associated Press, Boston Globe, 26 January 2011] According to a blogger who calls himself Moby-Dick, "Piracy in the Indian Ocean has now become the single greatest threat to the movement of goods internationally. It costs the world between US $7 billion and US $12 billion dollars per year." ["Billions of dollars lost through piracy in Indian Ocean," International Maritime Forum, 5 May 2011]. The best estimates that I have seen place losses last year at around $8 billion.

In addition to paying ransoms, insurers have increasingly urged shipping companies to invest in preventive measures to protect ships ["The Arms Race Against the Pirates," by Ira Boudway, Bloomberg BusinessWeek, 21 April 2011] Boudway writes:

"To deal with this 21st century version of an ancient threat, ship owners, often at the behest of their insurers, have resorted to tactics old and new—from razor wire, fire hoses, and safe rooms to long-range acoustic devices, laser dazzlers, and, most recently, armed guards. They have little choice: While international naval forces have stepped up their patrols—creating an Internationally Recommended Transit Corridor through the Gulf of Aden in 2009—pirates have responded by widening the scope of their operations, launching their skiffs from mother ships far out at sea as well as from the coast. As a result, the shipping industry has largely been left to fend for itself in some 2.8 million square miles of ocean. 'The Indian Ocean is basically the rawest Wild West,' says John S. Burnett of Maritime & Underwater Security Consultants (MUSC) in London."

Just like settlers urged the U.S. Government to send in marshals and troops to tame the Wild West, ship owners are now urging governments to clean up the piracy problem ["Shipping Companies Urge Governments to Tackle Piracy," by Neena Rai, The Wall Street Journal, 9 May 2011]. Rai reports:

"Ship owners are stepping up pressure on governments world-wide to take a stronger role in policing the waters off Somalia and prosecuting hijackers, saying lax enforcement is encouraging attacks and helping pirates extend their operations farther into the Indian Ocean. ... 'National governments hold the key to resolving this crisis. Their brief to the naval forces has, in most cases, been simply to deter and disrupt unless it involves a national interest,' said Graham Westgarth, president of Teekay Marine Services, a unit of Teekay Corp., the world's largest owner of medium-sized crude oil tankers. 'Prosecution is vital. Even when caught red-handed by naval forces, 80% of pirates are released again to attack,' Mr. Westgarth adds, citing figures compiled by the International Association of Independent Tanker Owners, or Intertanko."

Losses due to hijacking and ransom payments are not the only costs being added to the supply chain. Rai explains:

"Ship owners also say that the threat of piracy has increased voyage times, as ships use safer, but significantly longer, routes. About 40% of the world's oil supply is shipped through the Indian Ocean, an area where Somali pirates are dramatically increasing their presence. 'Vessels now sail from the Arabian Gulf, then very close to coast of India before they go around Africa,' said Richard Arnesen, Head of Tankers at Oslo-based oil shipping broker Imarex Asa. 'It's adding an extra four to five days in voyage times, but it's safer than sailing straight down the Indian Ocean,' he said."

Increased costs are also being passed along to customers in the form of surcharges ["Piracy Spurs Maersk to Raise Fee," by Flemming Emil Hansen, The Wall Street Journal, 9 May 2011]. Hansen reports:

"Reflecting higher costs stemming from a jump in piracy off the Somali coast, A.P. Moller-Maersk AS raised its emergency-risk surcharge. Maersk's container-freight division increased the fee on each 40-foot container shipped through risky waters to $200–$500 from $100–$400, to pass on some of the company's rising costs to customers, said Erik Rabjerg Nielsen, the division's head of daily operations. He estimated that Maersk's antipiracy costs will rise to $200 million this year from $100 million last year as ships are forced to sail faster and longer to prevent hijackings and crews receive doubled salaries as compensation for the added work."

Maersk's Rabjerg Nielsen stated the obvious when he said, "Piracy is bad for the shipping industry [and] it's bad for global trade." There is no romance associated with this latest age of piracy. Disney will never open a theme-park attraction or make a family movie about the exploits of today's pirates. Although few people seem willing to admit it, the only way to rid the world of today's pirates is to mount land-based operations against them. Politicians in Somalia have said they would welcome such operations.

Manufacturing and the Supply Chain

In his famous book entitled Pilgrim's Progress published in 1678, John Bunyan wrote about a swamp of despair that he described as "a very miry slough that was in the midst of the plain. ... The name of the slough was 'Despond.'" Fast forward a third of a millennium and you find another John writing, "For years, the U.S. manufacturing sector seems to have been sliding into the Slough of Despond. Companies have been eagerly outsourcing to lower-cost venues such as China, India and Mexico. And with the production go jobs." ["Will Costs Drive Firms Home?" by John Bussey, The Wall Street Journal, 5 May 2011]. In Bunyan's book, people who fell into the swamp "wallowed for a time, being grievously bedaubed with the dirt ... and ... because of the burden ... began to sink in the mire." Bussey believes there might be a way out of the slough for American manufacturers. He writes:

"A combination of forces—rapidly rising labor rates abroad, loftier materials and shipping costs, deep-discount tax incentives from U.S. states—are changing some of the calculations by which companies decide to move production abroad, or even keep what's there now."

Before discussing the "combination of forces" that could bring manufacturing jobs by to the U.S., Bussey reminds us that some manufacturing has never left. He writes:

"Employment at manufacturing companies in the U.S. may have dropped over the last 40 years. But those companies have gotten a lot more productive, and manufacturing output has actually risen. Companies are making — in the U.S. — more than double what they did four decades ago."

He also notes that even though there may be forces pushing manufacturing back to U.S. shores, the manufacturing that returns will most likely produce products for domestic consumption. Hal Sirkin of the Boston Consulting Group "is increasingly likely to suggest [to his clients that] they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast." ["Moving back to America," The Economist, 12 May 2011] The same forces that make it sensible to manufacture goods closer to home make it sensible to manufacture goods closer to foreign consumers as well. As The Economist wrote, "Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest." I have argued for some time that this type of regionalization within globalization's broader framework is likely to increase. This really shouldn't be too surprising. Professor Pankaj Ghemawat of IESE Business School in Spain notes that "less than 1% of all American companies have any foreign operations" and "exports are equivalent to only 20% of global GDP." ["The case against globaloney," The Economist, 26 April 2011]. What are the "forces at work" that Bussey believes are so potent? The first force is rising global wages. He writes:

"Wage rates are soaring in China as the market for skilled workers tightens and the previously mute labor movement finds its voice and agitates for higher salaries. This is cutting into the cost advantage that cheap Chinese labor provided U.S. manufacturers. In many sectors, annual wage growth is running at 15% or more. And in higher value sectors, Chinese managers are earning as much as their Western counterparts."

I wrote a post on this subject a little less than a year entitled The "China Price" Continues to Rise. Labor unrest and suicides at the Chinese corporate giant Foxconn prompted me to write that post. Last November Financial Times' columnist David Pilling added his views on the subject ["Foxconn’s milestone for a rising China price," 17 November 2011]. Pilling wrote:

"One post-Foxconn trend tentatively surfacing is a greater tolerance for unions by Chinese authorities that have long been nervous about organised labour. ... That, plus demographic changes, should mean a sustained period of higher wage inflation. ... A secondary consequence could thus be a spillover of higher wages into neighbouring countries. Again, there are signs this may already be happening. ... A third post-Foxconn effect could be the most profound of all. If wages in China – and elsewhere in Asia – continue to rise, so will the prices of finished goods. ... That would both reduce the purchasing power of American and European consumers and increase the buying power of Chinese workers. In short, it would set the scene for the rebalancing that everyone has been screaming for – only it would come via higher wages rather than a higher exchange rate."

Bussey reports that Christian Murck, president of the American Chamber of Commerce in China, told a gathering of corporate and trade officials in Washington, "China's low-wage advantage will disappear over the next five years." As a result of the rising "China Price," Murck claimed, "Supply chains are already being disrupted." Another force that could bring some manufacturing back to the U.S. discussed by Bussey is inflation. He writes:

"The tab for energy, raw materials, real estate, shipping. All are on the rise, rapidly boosting the cost of doing business abroad. U.S. states, meanwhile, panicked as they are by the loss of jobs and their worsening budgets, are hanging out the 'Open for Business' shingle. While many semiconductor companies have expanded production abroad (Intel, which has big operations in the U.S. and around the world, has invested in new chip-making and assembly plants in Vietnam and China), Globalfoundries Inc., a spinoff of Advanced Micro Devices, is setting up a new shop in Malta —that would be Malta, NY."

Bussey reports that some manufacturers have few alternatives beyond manufacturing goods in China or the U.S. because they are the only countries with the required supply base, shipping infrastructure, and skilled labor pool necessary to support a sophisticated supply chain. Bussey, like The Economist, also interviewed Harold Sirkin. He writes:

"Harold Sirkin, senior partner at Boston Consulting Group, says, ... 'China has been the default' for production. ... 'We began hearing from our clients three years ago about problems getting the right labor pool and at the right costs.' If current trends continue, 'sometime around 2015 it will make more sense to put the incremental plant in the U.S. as opposed to China,' he contends. Why not just shift that production to Vietnam, India or another low-cost locale? Companies often discover that few other locations have the supply base, shipping infrastructure, and skilled labor to pull off what China does."

I first started writing about the importance of domestic manufacturing almost three years ago in a post entitled Reviving U.S. Manufacturing. My latest blog on the subject, entitled Can Developed Countries Increase Manufacturing?, was posted in April of this year. What will changes in the manufacturing landscape mean for the supply chain? According to the NAIOP Research Foundation, "global shifts in manufacturing, consumption trends and international competition ... will shape the future of goods movement and the demand for warehouse and distribution space." ["Report Examines Effect of Global Manufacturing, Consumption on Growth of U.S. Ports and Distribution," Supply Chain Brain, 15 November 2010] The report notes that manufacturers often seek manufacturing sites with low work wages and benefits. Often these sites add extra distance to the supply chain and create challenges "including efforts to deliver parts for production and the delivery of the finished product." In addition, the extra distance makes "it more difficult to retain predictability in the supply chain." Finally, the report asserts that "managing the longer and more complex supply chain adds expense, which must be tracked to make sure it does not erase lower-cost labor benefits."

When it comes to consumption trends, the report estimates "that in 2025, India and China will account for nearly 25 percent to 40 percent of the total world demand for goods and services." This demand, of course, is tied to higher wages and workers having more discretionary money to spend on such things "as clothing, food, automobiles, phones and pharmaceuticals." The report notes that "a new and expanding global middle class ... will have a dramatic impact on the site selection process for the manufacturing facilities and distribution centers supporting the flow of goods between global production centers and consumers." That assessment agrees with my, Bussey's, and The Economist's assessment that manufacturing goods close to the market in which they will be sold makes sound economic sense.

When it comes to competition, the report notes that this year "China is expected to out-produce the United States for the first time, producing $1.87bn in goods output while the United States is expected to produce $1.71bn in goods output." Does that mean that the U.S. is facing a future in which it can't compete? The answer is an ambiguous, probably not. As I pointed out in another post, Rana Foroohar reports:

"Innovation, not how cheap or expensive labor is, [is what] determines whether a country will be successful in manufacturing. Contrary to conventional wisdom, manufacturing has not become a race to the bottom. That's why the U.S. still ranks as the fourth-most competitive nation after China, India, and South Korea, despite vastly higher labor costs. Germany, Japan, and Singapore also hold positions in the top 10. The skill levels of their workers more than offset their costs (U.S. workers are twice as productive as those in the next 10 leading manufacturing economies). Skills are particularly critical in the lucrative high-end manufacturing sector, which accounts for about half of all new innovation within an economy." ["How to Build Again," Newsweek, 10 July 2010]

A sliver of good news for Americans is the fact that "traditional 'rust belt' states have seen the largest gains in American manufacturing jobs over the past year." ["America’s 'rust belt' states lead recovery," by Ed Crooks, Financial Times, 1 May 2011]. The Economist reports that the Boston Consulting Group "predicts a “manufacturing renaissance” in America"; but the magazine's staff remains skeptical. Nevertheless, it concludes, "Companies are thinking in more sophisticated ways about their supply chains. Bosses no longer assume that they should always make things in the country with the lowest wages. Increasingly, it makes sense to make things in a variety of places, including America." Does that mean a lot of new manufacturing jobs are going to become available? Peter Coy writes:

"A renaissance in U.S. manufacturing output does not necessarily imply a hiring binge; efficient companies might just do more with fewer people. In fact, manufacturing employment has risen only 2 percent from its recent low, while the Federal Reserve's index of manufacturing production is up 13 percent. That's unfortunate because factory jobs pay better than most careers that are open to people without college degrees." ["The Case for Making It in the USA," Bloomberg BusinessWeek, 5 May 2011]

The bottom line is that American can compete with the world, but it has to be smart about how it goes about it. Inevitably there are going to be shifts in the supply chain. Smart companies are going look beyond day-to-day operations so that they can understand what changes are taking place and anticipate how their business might have to change as a result. If they don't anticipate and proactively deal with change, they may well find themselves stuck in Slough of Despond.

"Barcodes" get New Life

Rachel Beck writes, "It used to be that the only time you'd notice a bar code was at a store, maybe when a cashier scanned your groceries. But lately bar codes are showing up in more places around town — and getting more sophisticated." ["Bar codes get around town and get more useful," The Houston Chronicle, 7 June 2011] Many of us remember the days before barcodes, when each item had to be hand-labeled with a little sticker. Each time the price of the item changed, a new label had to be attached. When barcodes came along, they didn't immediately gain wide acceptance. The editorial staff at Supply Chain Digest reminds us, "There was a time when bar coding was very hard." ["A Retro View - the Ten Commandments of Bar Coding," 1 December 2010]. They write:

"As strange as it may seem for today's generation, in the early days of bar coding (1980s and through much of the 1990s), the technology had many pit falls and companies often ran into many problems with bar code quality, scannability, label appropriateness and other issues that caused real problems with their ability to consistently read bar code symbols correctly. ... Today, improvements in printer and scanner quality and capabilities, and knowledge about bar code media and related issues, have in general made the technical performance problems a rare issue."

The term "barcode" will likely remain a part of our vernacular even though scannable images are rapidly transforming from the straight-line pattern that gave them their name. A similar phenomenon was experienced in golf. Players called their clubs "fairway woods" long after they had transitioned to metal construction. Beck explains:

"You might have seen one cousin of the traditional bar code: Known as a QR code, this jumble of little squares randomly arranged within a larger square is popping up on everything from bus stop billboards to restaurant windows. If you spot one and snap it with your cell phone camera, the device can show you a website, photo or video related to the advertiser."

Beck assumes, of course, that you are using a smartphone rather than a simple cellphone with a camera. To get the most out of quick response (QR) codes, you need to be linked to the World Wide Web. Traditional barcodes serve much more modest purposes. As Beck explains, "The bar code on your box of cookies encodes a string of numbers horizontally that a bar code reader matches with information from a central database. That's how the supermarket scanner identifies the product you're buying." QR codes have much more ambitious goals in mind. Beck reports that the QR code has been around since the 1990s when it was released by "Japanese scanning equipment maker Denso Wave Inc." She also notes that early "attempts to get consumers to scan bar codes that link with the Web didn't get much traction." She continues:

"What has changed now, though, is that consumers are increasingly engaging with their mobile devices for more than making phone calls, texts and checking e-mails. And smart phones can easily download scanning applications that make it possible for product codes to leap from store shelves to the wider world."

The reason that QR (or similar) codes will likely surpass the ubiquity of barcodes is because "they can include much more information in a smaller space, and some of them can tell the scanning app on your phone all it needs to know about which website or video to pull up, without needing to consult a database." In addition, the global market for smartphones is predicted to outpace the market for regular cellphones. Mike Abramsky and Paul Treiber, from RBC Dominion Securities Inc., believe that this growth will be "driven by four key factors: 1) disruptive innovations in mobile software and hardware; 2) rising consumer/business demand for mobile data (messaging, browsing, applications); 3) faster wireless networks; and 4) mass market Smartphone and data pricing." ["Sizing the Global Smartphone Market," 12 November 2008] The usefulness of QR codes will increase along with smartphone penetration rates. All of this may happen faster than most people anticipate. According to Juniper Research, "Mobile phones are set to replace physical travel tickets in most European countries and other major parts of the world by as early as 2015." ["Mobile phones to replace tickets by 2015: Research," by Rahul Gupta, The Mobile Indian, 3 May 2011]. Beck reports that it is "unclear how many of these codes are out there, but potentially billions could be created." One relative of the QR code doesn't need a smartphone to be useful. Beck explains:

"Since March, movie ticket site Fandango has allowed some filmgoers to get tickets on their phones in the form of similar-looking 'Datamatrix' codes. The on-screen code is then scanned at the theater. Users don't need to have smart phones for this to work."

Perhaps the biggest challenge with image codes on cellphones is that they are difficult to scan. Finger smudges and scratches can make them unreadable to scanners. Presumably these challenges will eventually be overcome. All of these new developments may sound like the death of old barcodes, but don't write their eulogy just yet. Beck reports that a company called "stickybits" is trying to breath new life into traditional barcodes. She reports:

"Stickybits encourages consumers to download a cell phone application that lets them link videos, music and pictures to everyday bar codes like the one on a can of soda. ... Using a phone running Google Inc.'s Android operating software, I scanned the bar code on a bottle of moisturizer on my desk and used my phone keypad to add a silly message: 'Yay, moisturizer!' Later, when I scanned the code on the same bottle, the phone showed that someone in Atlanta had scanned another bottle of the same product (which would have the same bar code), and augmented my message with a picture of her presumably well-moisturized left hand. Sure, there's no huge point to this, beyond whimsy and the chance to trumpet your opinion about a product. However, stickybits envisions that businesses would pay the company to use its service to create large numbers of codes with specialized content. Billy Chasen, stickybits' founder, says the idea arose because he wanted to use phones to bridge the gap between the digital and physical worlds and let people see what others are thinking about objects. Chasen says stickybits decided to make use of the traditional bar codes because people are familiar with them. Even so, stickybits' app will work with QR codes as well."

Helen Leggatt claims that QR codes are "the next 'big thing'." ["QR Code use up 1200% in six months," BizReport, 10 February 2011]. In a later article, Leggatt reports that "increased use has been driven by high profile marketing campaigns along with a rise in smartphone adoption." ["Conde-Nast uses 2D barcodes to allow readers to 'Like' advertisers," BizReport, 2 May 2011] She reports that "QR Codes are now being scanned more than 1D barcodes for the first time since the second quarter of 2010." If you are interested in learning about how "small businesses may be able to use [QR codes] to sell things," Jonathan Blum provides some good information in an article entitle "Roundup: QR Code Tools," Entrepreneur, 19 April 2011].

Turning from the consumer side of barcodes to the supply side, Cognex, a company that designs and manufactures machine vision systems, believes that "the high volume and frequency of orders placed over the Internet combined with a multitude of available products from retailers make automated scanning at logistics centers more important than ever." ["Image-based Barcode Readers Transforming the Logistics Industry," Modern Materials Handling, 28 March 2011]. The company claims that its image-based systems can outperform more traditional laser-based scanner systems. It explains:

"Laser systems provide high read rates with good-quality printed barcodes when labels are undamaged, but they have difficulty reading codes under less than ideal conditions. Image-based readers can provide improved read rates, but their cost and complexity have limited their use to high-volume distribution centers ... until now. A new generation of image-based readers is poised to revolutionize the market, offering sufficient speed at a price point equal to or lower than that of laser-based alternatives."

Cognex has been joined by SICK, a company that manufactures sensors, safety systems, machine vision, and automatic identification products for factory and logistics automation, as a supplier of image-based systems. Because bar and QR codes are cheap to include on products, they are likely to be around for a long time. With new apps being created every day that permit people use technology in ways unimagined even five years ago, I suspect that new uses for bar and QR codes will also come along. The codes are all about creating data -- useful data that can be used to make supply chains more transparent and the customer experience better.

The Japanese Crisis and Supply Chain Risk Management

As the Japanese begin to rebuild areas devastated by earthquakes and the tsunami, supply chain analysts continue to examine the consequences of supply chain disruptions that resulted from those devastating events. For example, Bob Ferrari wrote, "The after-effects of the earthquake in Japan will have far reaching impacts on multiple industry and global value-chains." ["The Aftereffects of the Japan Disaster- Reflections on the Strategic Business Implications," Supply Chain Matters, 15 April 2011] Ferrari continues:

"The Japan event will ultimately seed a number of significant watershed changes for industry supply chain strategies and capabilities going forward. The open question is how significant and how deep. ... Jason Busch of Spend Matters called attention to a Paul Martyn, commentary published on Forbes.com that noted an estimate that it would be 9 to 12 months before production can return to pre-disaster levels. That seems to be a reasonable general estimate and there certainly could be some outlier exceptions, particularly in electronics and automotive sectors. In his commentary, Martyn predicts three major shifts as a result of this crisis:

"1. A lessoning of the rigidity of zero inventory policy that many companies have been following these past few years.

"2. The entry of new players takes advantage of the crisis to seize new revenue opportunities.

"3. Bullish upside for U.S. and perhaps North American based manufacturers that stand to gain in the short-term as alternative suppliers.

"Regarding point three, Jason Busch opines that then again, U.S. manufacturers may once again be unable to respond to the new business opportunities because of a lack of required capabilities in key people skills such as machining, welding, design and other specialized manufacturing. Needs for updated capital equipment are also expressed."

Busch may be correct when he asserts that there are not enough skilled workers for U.S. companies to take advantage of opportunities that may come their way. James R. Hagerty reports, "U.S. manufacturing companies, long known for layoffs and shipping jobs overseas, now find themselves in a very different position: scrambling for scarce talent at home." ["Help Wanted on Factory Floor," The Wall Street Journal, 6 May 2011] Ferrari concludes his post with this prediction: "When the dust [from this crisis] finally settles, ... the very foundations of procurement and outsourcing strategies [will be challenged] which will cause product development, strategic sourcing and supply chain management teams to reassess their policies and processes in product and component sourcing." Bill McBeath, from ChainLink Research, asserts, "Considering how devastating disruptions can be to the brand, shareholder value, competitiveness, and a firm's ability to trade, we continue to assert that building a resilient supply chain is one of the most important assets and competitive foundations that a company can develop." ["2011 Supply Chain Risk Survey Results: Part One," 3 May 2011]

If the Japanese crisis is going to have the profound effect predicted by Ferrari and "building a resilient supply chain" is as critical as McBeath claims, how are businesses responding? According to McBeath, supply chain resilience is still not a priority. He continues:

"The devastating 2011 Japanese tsunami was a wakeup call for many companies. Even many of those not immediately affected have been rattled by the events. ... Unfortunately, we have seen over and over that for most companies the memory of this will fade, and the executive team's attention will be consumed by other matters that are deemed higher priority. This is understandable, because top executives' metrics, compensation, and the firm's stock price are usually not impacted much (or at all) by the company's level of supply chain resilience ... until after a disruption occurs. Our past research has shown that executives' tolerance for risks tends to be quite a bit higher than many of us would consider reasonable. In late March and early April 2011, in the wake of the Japanese tsunami, we conducted a survey about supply chain risk. Our survey found that supply chain resilience tended to be reviewed and managed 'down in the trenches' by the people with immediate responsibility for operational functions, as well as by the head of those functional units, such as the VP supply chain. ... Review by executives in charge of the business unit or by corporate executives is considerably less common. ... This shows that for about 80% of companies, supply chain resilience is not yet a priority at the executive level, except for those executives directly responsible for supply chain functions."

Gary S. Lynch, Marsh Inc.'s supply chain risk management expert, claims that even companies that have a disaster mitigation plan or a continuity of operations plan on the shelf it isn't really a plan if it's not exercised. ["Wake Up Call," Industry Today, 30 March 2011] He writes:

"This is the moment of truth. Did or would your organization's continuity plan effectively address business disruptions resulting from the confluence of the Japanese earthquake, tsunami, and radiation events? Did the volcanic eruption in Iceland put the brakes on your business because of inadequate or incomplete planning? For most organizations impacted by these events, typical business continuity planning was inadequate. When attempting to address business recovery and supply chain flows, most organizations failed."

Why did these plans fail? During interviews with company executives, Lynch was told "that not only were their recovery plans incomplete or inadequate, but they also were not aligned with, nor reflected, the needs of a globally interconnected and interdependent organization and economy." He claims the greatest shortcoming of most recovery plans was that they "fell short when considering key interdependencies." For example, Lynch says that "events in Japan displaced and/or destroyed the die casts – critical molds for the large scale and precision creation of critical components. The casting equipment and metal dies are an essential element in the mass manufacturing of intricate metal parts." This planning shortfall, Lynch claims, is the result of complacency and a willingness to accept the bare minimum when it comes to planning. He continues:

"Some might claim success because they have a plan in a binder on the shelf, or they've checked all the boxes to comply with good business continuity management standards. Often these efforts simply bolster a thinly veiled attitude of complacency. To achieve true resiliency in today's interdependent and continuously changing world, traditional continuity planning needs to be re-engineered or 'blown up.' Managing resiliency today is as much about avoiding or minimizing exposure to risk as it is expediting recovery or adjusting to events. Over the last several years, many organizations have focused on optimizing efficiency but not resiliency, which was completed as a separate and disconnected effort. Concurrently optimizing resiliency and efficiency requires discipline, analytics, decision modeling, and the involvement of a broad cross-section of business, technology, and operation leaders both inside and outside the organization."

Lynch goes on to provide some good advice about how to start over crafting a meaningful and resilient recovery plan for your company. He asserts that "black swan" events are now so common -- "Christchurch (earthquake), Brisbane (floods), Iceland (volcano), New Orleans (hurricane) and Japan (earthquake, tidal wave and nuclear disaster)" -- that they should no longer be placed in the "highly improbable" category. He then provides some recommendations for improving resiliency. He writes:

"Strategies for managing continuity and providing greater resiliency can be divided into four categories:

• Insurance driven/asset-based programs


• Compliance driven/functional-based programs


• Threat driven/event-based programs


• Value driven/flow-based programs

"The first three categories represent the majority of today's practices. They take into consideration only a small portion of exposure, and risk investments are typically aligned by a physical resource (a plant, for instance). Insurance-driven continuity typically does not take into account non-physical damage perils such as the failure of a supplier or of the public infrastructure. The fourth category signals a rapidly emerging and business-aligned trend. It represents an integrated, end-to-end view of the extended supply chain (beyond the boundaries of the physical organization) that is viewed in the context of a given product, product category, or product family. Industries embracing this value-based strategy include those with the most highly complex and advanced supply chains, such as automotive and high-tech manufacturing. The strategy begins with a clear articulation of the market and product/service families or categories that are of greatest organizational value: i.e., revenue, strategic, liquidity, brand, and/or compliance. For example, the auto manufacturer might identify the pickup product line to be sold in the Chinese market as its number-one value driver. Essentially, the organization must ask: If all of our capabilities were destroyed and we were starting from scratch, which market and associated products/services would we build out first? Once the priority is articulated, the value/supply network can be mapped."

This approach is very similar my company's Enterprise Resilience Management Methodology™ (ERMM). It is essential to know what assets and processes are the most critical for your company. Having identified the most critical characteristics of your company, Lynch then states that you can intelligently select the best "risk mitigation and financing options" which "would include—but not be limited to—diversification, buffering, repurposing or substitution, segmenting and inventory allocation, internal alternate sourcing, multi-sourcing, insurance, or even exiting the business." His last recommendation is that company's recognize "that supply chain optimization involves resiliency optimization." He concludes:

"If we accept that the 'disruptive economy' is the new norm—and we acknowledge that catastrophic events can occur anywhere in business networks and supply chains—then we need definitive responses to a list of remaining questions. In this way, the resiliency objective remains in sharp focus. Those remaining questions include:

• "Are we—in conjunction with our partners—continuously evaluating, evolving, and improving the resiliency programs that support value-creating activities as determined by stakeholders (investors, customers, etc.)?


• "How do we monitor volatility in our organization in relation to stakeholder behaviors, SPOFs, and supply chain interdependencies? What levels of volatility are acceptable? When do we react?


• "What are the complete sets of resources (labor, technology, physical assets, relationships, and processes) needed upstream and downstream to deliver each product/service family to the market? Have we mapped the extended supply chain?


• "Are we collecting business intelligence about our SPOFs, including the maximum financial, brand, strategic, compliance, liquidity, and asset impact at each point?


• "Are the people, infrastructure, and suppliers that we depend on managing their market, financial, operational, and behavioral risk, at a minimum, to our expectations?


• "Are we real-time monitoring the most critical supply chain dependencies for value-creation activities?


• "Have we created decision models that support resiliency options at the time of the event?


• "Have we created a collective culture along our supply chains that is risk conscious, intelligent, and motivated?

"With discipline, analytics, decision modeling, and the involvement of a broad cross-section of business, technology and operation leaders in and outside the organization, we can answer these questions and optimize the resiliency of our organizations."

Malory Davies, editor of Supply Chain Standard, takes a contrary view to those expressed above. ["Supply chain resilience: common sense or waste of money?" 3 May 2011] He writes:

"You've probably noticed already, but there is something of an argument going on in the investment community about the supply chain lessons to be learnt from the Great East Japan Earthquake, as it is now being described. The impact of the earthquake and ensuing tsunami on supply chains around the world has been widely reported and analysed. Where the disagreement arises is over what is the correct lesson to be learnt from it. One view is that companies need to look again at the resilience of global supply chains and reduce their reliance on single source suppliers. The corollary to this is that making the changes that such a reassessment would indicate would result in new business investment fuelling further economic growth. It almost makes it sound as though you have a duty to the global economy to invest in changing your supply chain. And some commentators are predicting big changes in sourcing patterns over the next four or five years with some companies shifting up to a third of their production away from low-cost economies to somewhere closer to home. The other side of the argument is that to change now would be an admission of failure. Making major changes to supply chains would simply swallow up money that could be invested more profitably elsewhere in the business. My view is that it would be foolish to bet the business on a supply chain which has demonstrable weaknesses."

Davies admits he doesn't know which view will win out and neither do I. I suspect that the answer to the question "Is supply chain resilience: common sense or waste of money?" is: it depends. If your company can absorb disruptions and survive, then spending too much time or money developing and testing recovery and continuity of operations plans may be a waste of money. If your company can't absorb disruptions without significant costs, you would be foolish not to spend the time and money to prevent or mitigate disruptions. With volcanic eruptions in Iceland once again causing concern, I'm sure this is a topic that I'll be addressing again.

More Thoughts on Social Media's Impact on Supply Chains

Following the publication of two posts about the relationship between social media and the supply chain [Social Media and the Supply Chain and More on Social Media and the Supply Chain], I was contacted by Michael Koploy, an ERP Market Analyst for Software Advice, who directed me to a blog on the same subject that has been subsequently published on one of their sites. The post, written by Luciano Cunha, Global Industry Director for To-Increase, Inc., is entitled: "What Does Social Media Mean to Your Supply Chain?" [27 April 2011] Cunha begins his post by asking, "If social media is powerful enough to tighten the bonds between brands and consumers, is it powerful enough to tighten each link in your supply chain?" As I noted in the last of my posts on this subject, many analysts are skeptical that "social media is powerful enough to tighten bonds between brands and consumers." Skepticism aside, Cunha notes that "most of us are connected customers, having forged deep relationships with the brands of our choice." Social media is supposed to enhance the "connected experience." He continues, "From the perspective of the supply chain professional, the Connected Experience puts us one step closer to answering the most ubiquitous question of all: what do my customers want to buy?" Figuring out how to use social media to answer that question has not proven to be simple. Cunha continues:

"The absolute real-time nature that is inherent in social media can act as a blessing and a curse for professionals overseeing a supply chain. In one sense, access to real-time data can help supply chains run ultra lean – as proper analysis can lead to producing just enough product to meet consumer demand. For example, imagine you could predict the percentage of customers that were interested in purchasing black sneakers versus brown sneakers. This would empower you to stock your shelves with only the most necessary quantity of each style."

Cunha doesn't say which social media gives you that kind of cognitive data, he simply asserts, "With the real-time capabilities built into Enterprise Resource Planning (ERP) software – especially ERP software outfitted with Customer Relationship Management (CRM) features – retailers are able to make these types of strategic predictions." I'm not sure we're there yet. I do agree with Cunha that "it was not uncommon over this past holiday season to see retailers analyzing customer data pulled from social media." But from what I gather, most of that analysis involved listening to what customers using social media networks were saying about products or company reputation. Eric Bradlow, a professor at the University of Pennsylvania's Wharton School, believes that "listening" remains the principal value of social media sites. Point of sale data is still the best source for what people are actually buying. Cunha does admit that there are problems with relying on social media to make forecasts. He writes, "There exists two giant paradoxes built into two assumptions." Those assumptions are:

• Real-time data is always an accurate indicator
• A large percentage of your customers are actively interacting with your brand in social media

Does any company really believe those assumptions are true? I'd be surprised. Cunha calls the first of the paradoxes associated with these assumptions "The Real-Time Paradox." He writes:

"Think for a moment about the notion of 'real-time.' How often are the real-time decisions in sync with final purchasing choices? For instance, imagine a customer expressed interest in the aforementioned pair of black sneakers through online activity (e.g., either by 'liking' or Tweeting about them). If you aggregate this data quickly and combine it with similar insights from other social media channels, it would make sense to predict an increased demand in black sneakers. But imagine that this interest in black sneakers is based on little more than the excitement of the new product. In other words, there is a strong correlation in social interest for a new product, but not a shared correlation in buying behavior."

I agree that there is probably a correlation disconnect between what is sifted from social media sites and purchasing behavior. Cunha notes that is it one thing to act quickly to produce a pair of black sneakers and quite a different matter to produce a black automobile based solely on social media chatter. As he writes, "The risks of more expensive stops along the supply chain quickly grow." Cunha calls the other paradox related to assumptions listed above "The China Paradox." He writes:

"Earlier this year, analytics firm ForeSee Results found that social media is driving just 5% of visitors to retail websites. But across the world in China – recently named by CNBC as the world's hottest emerging retail market – an Internet population of 404 million trusts brand information from social media three times more than from an acquaintance's recommendation (per 2010 Global Web Index data, cited by Ogilvy's Andrea Fenn). In Fenn's article, 'Social Media & China: Why & How,' Fenn cites China as a fertile social ground that is already being capitalized on by brands. To succeed in this social landscape, brands must adapt to certain peculiarities of the Chinese Internet culture. Not only does this include heavy use of 'Made In China' social destinations, but also western social networks such as Twitter and Facebook. This helps to sum up what I refer to as the China Paradox. While named for this market, it is defined more by questions that can affect us as we seek to operate a lean supply chain:

• "Is our customer data segmented appropriately across all markets to ensure one large faction is not skewing our data?
• 'Have the peculiarities of any given culture been taken into account prior to any decisions being made?
• 'Is Software Our Solution?
• "Is ERP software a solution to these paradoxes?"

Over time the assumption from which this paradox is drawn (i.e., a large percentage of your customers are actively interacting with your brand in social media) may become more true (or more like the Chinese). I suspect that future generations in most developed and emerging market states will be more involved with social media than some older generations are today. Until that day arrives, social media will likely have value as a source of reputation, a good customer service opportunity, and an interactive way to reward loyal customers. It probably won't be the headwater of a demand driven supply chain. Cunha continues:

"When you integrate social media analytics into your supply chain strategy, think of the data as an accumulation of individuals instead of a singular group. Consider the demographics of your social media data, and think about how you will monetize your inferences. In doing so, you will be in a better position to see the benchmarks being established, especially as they relate to correlations between social activity and your bottom-line. For example, by spending time investigating your data, you may find that an increase in social activity pertaining to black sneakers only results in increased buying activity during fall, and primarily on the East Coast. Even more interestingly, some research has found an increase in social activity is followed by sudden spikes in buying activity three months down the line. This may indicate that a small, yet influential, group of followers buy early, and then encourage the purchasing decisions of their social networks. Analyzing data through this type of lens can help encourage a new level of strategy in our supply chain decisions."

Cunha concludes, correctly I think, that "software will never be the stand-alone savior that helps us capture the power of social media, any more than social media itself is the stand-alone savior for operating a lean supply chain." So what is the next step? He recommends, "using cultural, historical, and sales data, along with social media" when making forecasts. This combination, he argues, "holds the potential to connect brands and consumers more tightly than before. And of course, inherent in this tighter connection, will be a leaner and more profitable supply chain."

Ashly Li agrees that "directly copying/using existing social media such as Facebook and Twitter will only result in more problems (some can be very serious) than benefits." ["Do Not Copy. Be Inspired. Social Media and Supply Chain Management." Spend Radar, 7 April 2011] Does that mean she sees no value in social media for the supply chain? I'll let her answer that question:

"Rather than weighing the pros and cons of social media, I have been thinking about how we can absorb the value of social media and also fix the problems with it to make it a solution. How about we get inspired from social media and create our own SCM tool resolution? Please let me call the tool 'corporate social media' for here and for now. So, what is the biggest challenge in today's supply chain management? Higher and higher level of complexity causes lower and lower level of visibility and speed. Agreed? And why is social media so popular and necessary in the explosion of information society today? One major reason is that it allows information to flow and spread at the fastest speed ever. Does it sound like something we have been longing for in supply chain management? Duh!"

You have to admit that Li might be on to something. Are there challenges? Of course there are. Li points out, for example, that some supply chain professionals "argue that most of the time one certain step or process in the supply chain is better not seen by people who do not need or have to know." Seeing that as a challenge rather than a game stopper, Li writes, "So let's ... make rules and procedures of 'who, why and what' should know, just like other documentations in well-managed companies." Sounds a lot like attributes-bases access control (ABAC). In previous posts that have discussed sensitive information sharing using ABAC, I wrote:

"The goal of an Attribute-Based Access Control framework is to provide a community the ability to manage secure information and resource exchange while instilling confidence among information owners that only authorized users can access appropriate data and information. Role-based access control (RBAC) functions accomplish this today for stand-alone systems and enterprises but do not scale for enterprise and multi-party communities that need to share real-time data at a granular level (e.g., individual document) and/or under specific conditions. ABAC frameworks deal with both granularity and scalability challenges and are able to address dynamic situations. Because information owners retain control over access to their information, authority is inherently distributed and managed. ABAC, however, provides a means for information granting authority to determine and specify who gets access and when. As a result, while control policies are centralized, decentralized resource owners retain fine-grained control of their own information."

Li goes on to describe how she would use her "corporate social media tool" for supply chain management. It's a different twist than Cunha takes because it connects to supply chain stakeholders rather than to consumers. Both uses of social media have a place in the future of the supply chain and smart people are currently working out how best to use both social media platforms and data. I'm certain that more will be written about this topic as the challenges become more apparent and solutions to those challenges are proposed. Stay tuned.

Ocean Carriers and Ports Forecast Bright Future

A little over a year ago, with the world starting to emerge from the Great Recession, supply chain analyst Bob Ferrari wrote:

"Shipping delays of three to four weeks have been common, and shippers have become increasingly frustrated with ocean carrier service levels. The picture seems to be one where the ocean carriers want to defy the notion that the customer should be the focal point in determining acceptable service levels. Another concern ... is that some U.S. ports lack the capacity to handle larger outbound shipping activity, having instead placed a primary focus on servicing large volumes of imported container laden volumes. The picture is one where severe drops in global trade destined to U.S. and European ports has caused ocean carriers to not only severely idle fleet capacity, but also slow down the cruising speeds in existing ships in order to save on fuel." ["Service Level Erosions in Ocean Transport- Have supplier relationships broken down?, Supply Chain Matters, 12 March 2010]

Ferrari highlighted three challenges that continue to face the maritime industry, namely: ship and container capacity, port capacity, and rising fuel costs. Although ocean carrier customer service was the focus of his post, Ferrari did note that the three challenges had an impact on customer service. Over the following months, the customer service situation didn't improve. In July, Stephanie Clifford reported, "Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year's freight rates — in some cases, the highest rates in five years. And still, many are getting merchandise weeks late." ["Retailers Pay More to Get Cargo (No Guarantee)," The New York Times, 26 July 2010] Clifford points to the same causes for poor customer service as Ferrari, she continues:

"The problems stem from 2009, when stores slashed inventory. With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009, according to AXS-Alphaliner, an industry consultant. Carriers also moved to 'slow steaming,' traveling at slower and more fuel-efficient speeds, while the companies producing containers, the typically 20- or 40-foot boxes in which most consumer companies ship goods, essentially stopped making them."

Jump ahead nine months to March 2011. Bruce Bernard reported that the container shortage had not eased ["Carriers Face Renewed Container Shortage," The Journal of Commerce, 8 March 2011]. Bernard reported:

"Ocean carriers face a shortage of containers in the coming months as production of boxes lags growing cargo capacity, according to Alphaliner. The box-inventory-to-vessel capacity ratio will drop to 1.99 by the end of the year from 2.03 in 2010, the Paris-based analyst forecasts. This is the lowest ratio on record and compares with the capacity ratio of 2.99 boxes per slot in 2000."

Bernard, like Ferrari a year earlier, reported that "back haul shippers from the U.S. and Europe will be hit hardest by the box shortage." And like Clifford, Bernard reports that container shortages "will drive up freight rates, mirroring the situation last summer when lines responded to a dearth of equipment by imposing peak season surcharges of up to $750 per 20-foot container on the Asia-Europe trade." All this is bad news for shippers and importers, but not so bad news for ocean carriers and ports that are enjoying increasing business. Bernard reports that efforts are being made to reduce the container shortage. He concludes:

"The box-to-slot ratio has been shrinking gradually over the past decade, partly reflecting the more efficient management of equipment by container lines, according to Alphaliner. Over the past decade the global inventory of containers grew 6.9 percent annually while the container ship fleet increased 11.1 percent per year. ... The acute shortage of containers, particularly on routes from Asia to Europe, as global traffic rebounded prompted Maersk Line to start manufacturing new containers and re-activate laid up vessels to reposition empty boxes. The imbalance has stabilized since July [2010], according to Alphaliner, as container manufacturers resumed production and carriers halted the scrapping of older equipment. ... The industry has to adapt — through faster turnaround of equipment, improved upkeep on old containers and extending the lifespan of boxes, Alphaliner said."

Do current efforts mean that the situation is likely to improve over the coming months and years? Not according to the editorial staff at Supply Chain Digest which predicts that demand will continue to outstrip capacity ["Looking Ahead, Drewry Says Large Gap Coming Between Ocean Shipping Demand and Capacity," 16 March 2011] The article reports:

"While some believe in 2011 that the leverage will swing back to shippers and importers after ocean carriers enjoyed generally banner bottom lines in 2010, 2013 looks to be another great year for carriers as demand growth will outstrip capacity additions by a near record margin. Shippers be warned. According to analysts at Drewry Shipping Consultants, that change in supply-demand balance will naturally also lead to a strong growth in ocean shipping rates, which it expects to rise 10% in 2013. This is despite the fact that many ocean carriers have aggressively starting to add capacity back, after significant cut backs during the economic downturn."

The article goes on to note "that capacity addition is led by ocean shipping giant Maersk, who recently announced it was upping the megaship ante and then some when it recently announced that it had placed an order for 10 new cargo ships capable of handling 18,000 twenty-foot-equivalent units (TEUs)." To learn more about Maersk's new megaship, the Triple E, read my post entitled Shipping Industry Update: Going Big and Going Green. Despite the fact that Maersk is supposed to start receiving these behemoths in 2013, "Drewry says the tide will turn that year strongly in the carriers' favor." Maersk Container Shipping CEO Eivind Kolding believes that between now and 2013 cargo rates will stabilize if not decline. The SCD staff explains why:

"Kolding ... believes this year will be a better one for shippers in terms of rates, predicting that prices will fall this year compared with 2010 as new tonnage enters the market and takes a few months to absorb. 'We'll have reasonable rate levels throughout the year, but with a difficult start and a pickup in mid-2011,' he told Bloomberg."

The analysts at Drewry, however, believe that stabilized prices won't last. The article continues:

"Container capacity will advance 8.2% in 2011, the same as in 2010, before growth slows to 6.5% in 2012, Drewry predicts. But ocean carriers are remaining cautious versus the years before the recession began. Ship orders have dropped for the past three years and currently stand at 452, down from a peak of 1,245 in January 2008, according to Lloyds Register-Fairplay data. Drewry predicts however that demand for container transport will increase 9% in 2013, while carrier capacity will grow by just 6.4%. Over the last decade a 2.6 percentage-point difference between demand and capacity growth would rank after only 2010, when shipping rebounded from the recession, and 2004, when Chinese exports surged."

The analysts predict that the gap between supply and demand will result in rates going "up at least 10%" in 2013. Drewry's Philip Damas told the SCD staff, "It should be a great year for container lines." The SCD staff quickly noted that what is good news for carriers will only "add transport cost pressure on shippers and importers." The article does note that Drewry's forecasts are not unanimously accepted. "An executive at one large shipper told Bloomberg he thinks the Maersk strategy may actually lead to lower rates." With surging oil prices significantly increasing transportation costs and slowing down economies, the executive may just be correct. We'll just have to wait and see what unfolds. The only dark spot on the horizon for ocean carriers is that the European Commission is investigating some of them for antitrust violations ["Shipping Lines Are Raided in Antitrust Investigation," by John W. Miller, The Wall Street Journal, 18 May 2011] Miller reports, "The raids followed an investigation of how container shipping prices rose in 2009 even as demand dropped and industry capacity expanded." Carriers that were targeted for investigation included, "Denmark's A.P. Moeller-Maersk A/S, the world biggest container carrier by volume; No. 2 CMA-CGM SA of France; and No. 4 Hapag-Lloyd AG of Germany."

The middlemen between ocean carriers and shippers/importers are the ports. Ports on the U.S. West and Gulf Coasts believe, despite facing some challenges, that the future looks bright ["CEOs at Ports of Houston and Seattle Bullish on Future, But See Challenges," Supply Chain Brain, 3 May 2011]. The article reports:

"The CEOs of the ports of Houston and Seattle are bullish on the future of their regions and their ports, though for different reasons. Population growth in the U.S. Southwest and an expanded Panama Canal will drive new business to the Port of Houston, says CEO Alec Dreyer, while Port of Seattle CEO Tay Yoshitani sees proximity to Asia and a strong sustainability program as growth drivers for his Pacific Northwest gateway. Yoshitani also points to momentum, with the Port of Seattle coming off a very strong year in 2010. 'We posted a 35-percent increase in business over 2009,' he says. 'A lot of that growth was organic, but we also gained market share. We were very pleased with those numbers.' Dreyer points to the Port of Houston's location in a rapidly growing state and region. 'From the Port of Houston, you can reach anywhere in the heartland of America within one or two days by truck,' says Dreyer. Equally important is additional traffic that will move through the Panama Canal when a new set of locks is completed in 2014. 'Today 20 percent of our traffic goes through the canal, and we think that will easily double over the next five to 10 years,' says Dreyer."

West Coast port operators concede that that when the new Panama Canal locks are completed they are likely to suffer a drop in activity. They are optimistic, however, that they will recover from the drop. As Yoshitani told Supply Chain Brain Staff members, "In the long run, though, I think there will be capacity constraints for all U.S. ports. I don't know how long it will take, but there will come a time – not so far in the future – when shippers will be happy that they have options on all coasts." Yoshitani's optimism is mirrored in a report issued by the NAIOP Research Foundation ["Report Examines Effect of Global Manufacturing, Consumption on Growth of U.S. Ports and Distribution," Supply Chain Brain, 15 November 2010]. According to the report, "much of [the shift of 'transfer' cargo involved in] all-water services from western ports to eastern ports has already occurred." The report concludes, "New ships that carry larger loads of cargo will have a more dramatic impact on the eastern ports, as ships with only regional capacity will be segregated from those with the necessary infrastructure to support the larger ships and will move goods efficiently and competitively both on a regional and national platform." This assessment agrees with Yoshitani's:

"Capacity constraints and insufficient infrastructure are challenges facing all port directors, Yoshitani says. 'Infrastructure for all freight modes is something that has been neglected by the federal government for years,' he says. 'This has to change.' Dreyer agrees. 'We can't just focus on the seaside infrastructure,' he says. 'We have to deal with the landside infrastructure that backstops the investments we make.'"

To learn more about what major U.S. ports are doing to improve their infrastructure, read my post entitled Ports Vie for Increased Market Share. I believe that Yoshitani's assessment that capacity constraints are coming is correct. In order to address these constraints, ports and other inter-modal transportation stakeholders must continue to improve efficiency to keep goods flowing. At the same time, they must ensure that arriving containers are safe for transshipment. These are not easy challenges to overcome. Fortunately, there are companies like mine that are working with port operators to make their operations more safe and efficient. Without an efficient supply chain and supporting infrastructure, America's economic recovery will be hard to maintain.

Ethically Speaking

Do ethics matter in business? The obvious (and correct) answer is: "Of course they do." A good follow-up question, then, is: "What are ethics?" An article in the journal Issues in Ethics, developed by Manuel Velasquez, Claire Andre, Thomas Shanks, S.J., and Michael J. Meyer, reports that "some years ago, sociologist Raymond Baumhart asked business people, 'What does ethics mean to you?'" ["What is Ethics?" IIE V1 N1, Fall 1987, Revised 2010] Their responses are probably similar to responses you would receive if you polled a number of business executives today. "Among their replies were the following":

"'Ethics has to do with what my feelings tell me is right or wrong.'
"'Ethics has to do with my religious beliefs.'
"'Being ethical is doing what the law requires.'
"'Ethics consists of the standards of behavior our society accepts.'
"'I don't know what the word means.'"

The authors note, "These replies might be typical of our own. The meaning of 'ethics' is hard to pin down, and the views many people have about ethics are shaky." If we want people to act ethically (in business, politics, or any other sector of human activity), we don't want them to have "shaky" views on the subject. The problem, according to Velasquez and his colleagues, is that "many people tend to equate ethics with their feelings." They insist, "Being ethical is clearly not a matter of following one's feelings. A person following his or her feelings may recoil from doing what is right. In fact, feelings frequently deviate from what is ethical." This assertion is one I will return to later.

Velasquez and his colleagues go on to explain a few other things that ethics are not. For example, they are not based in religion. Atheists need to be as ethical as believers. Ethics are not the same "as following the law." People can do some pretty unethical things while staying within the letter of the law (they point out, for example, that slavery was once legal). They continue:

"Finally, being ethical is not the same as doing 'whatever society accepts.' In any society, most people accept standards that are, in fact, ethical. But standards of behavior in society can deviate from what is ethical. An entire society can become ethically corrupt. Nazi Germany is a good example of a morally corrupt society. Moreover, if being ethical were doing 'whatever society accepts,' then to find out what is ethical, one would have to find out what society accepts. ... But no one ever tries to decide an ethical issue by doing a survey. Further, the lack of social consensus on many issues makes it impossible to equate ethics with whatever society accepts. ... If being ethical were doing whatever society accepts, one would have to find an agreement on issues which does not, in fact, exist."

Of course, explaining what ethics are not gets us no closer to explaining what ethics are. Fortunately, Velasquez and his colleagues do not leave us hanging. They continue:

"Ethics is two things. First, ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethics, for example, refers to those standards that impose the reasonable obligations to refrain from rape, stealing, murder, assault, slander, and fraud. Ethical standards also include those that enjoin virtues of honesty, compassion, and loyalty. And, ethical standards include standards relating to rights, such as the right to life, the right to freedom from injury, and the right to privacy. Such standards are adequate standards of ethics because they are supported by consistent and well-founded reasons. Secondly, ethics refers to the study and development of one's ethical standards. As mentioned above, feelings, laws, and social norms can deviate from what is ethical. So it is necessary to constantly examine one's standards to ensure that they are reasonable and well-founded. Ethics also means, then, the continuous effort of studying our own moral beliefs and our moral conduct, and striving to ensure that we, and the institutions we help to shape, live up to standards that are reasonable and solidly-based."

Since this is a corporate blog, I want to discuss ethics in the business setting. Professor Mary Gentile, director of the Giving Voice To Values curriculum at Babson College, indicates that she once wondered whether there was such a thing as business ethics. ["Ethics teaching asks the wrong questions," Financial Times, 13 September 2010] She writes:

"A few years ago, I suffered a crisis of faith. After working in the field of business ethics at Harvard Business School and later as a consultant on global MBA education, I began to wonder if it was even ethical to try to teach the subject. I laboured to persuade faculty to raise the topic, but then, the conversation typically went as follows: some students argued we should all 'do the right thing'. These individuals typically broke into two groups: those who were saying what they thought was expected and those who really wanted to believe they could be ethical business people. And then there was another group who felt the class was an exercise in political correctness. What did it have to do with learning how to be successful? They were cynical and sometimes slightly resentful; what right did a business school have to be preaching at them? Given this particular recipe, coupled with faculty who understandably did not want to argue that students behave in a naively self-destructive fashion, the ethics discussion was less than empowering. Classes were typically based on thorny ethical dilemmas: the ones we termed 'right versus right' discussions, although they often amounted to more of a search for the lesser evil. Students who argued for 'ethical' positions would often appear to be less sophisticated; the way to demonstrate you were worldly wise was to argue that the competitive marketplace did not allow for self-serving morality, or even more cleverly, that it was wrong to behave in such a selfish way, putting one's own conscience over the good of the enterprise and shareholders. It seemed that despite faculty's good intentions, these conversations were something of a charade and I questioned the whole endeavour."

It is easy to see how one could start questioning the value of ethics if all you ever focus on are "right versus right" discussions. Searching for the lesser evil in morally ambivalent situations is never going to give students a sense of what is right and what is wrong. Armed with some basic standards, I suspect that most people will do their best to work through the tough cases. Without such standards, they appeared to be unprepared to deal with situations where clear ethical breaches are being made. Gentile continues:

"I realised that the MBA graduates pictured in handcuffs were typically those who had been engaged in more clear-cut offences; rather than right versus right scenarios, their offences were not only unethical but illegal. And I wondered if our focus on distinguishing right from wrong was actually creating a kind of 'school for scandal'. Students were practising the very rationalisations that led them to question whether values-driven behaviour was even possible or right in the first place. It was this kind of thinking that later led some of their number into such deep litigious waters. Were we asking the wrong questions? Shouldn't we invite students to think about how to do what was ethical and legal, rather than whether it was possible (or profitable) to do so? What if we looked at what had worked in the past for those individuals who had found ways to voice their values in the workplace? And what if we asked students to develop action plans and 'scripts' for what they would say and do when they encountered the very predictable pressures to behave unethically?"

All parents eventually learn that the best thing they can do for their children is teach them correct principles and then hope they use them to guide their behavior throughout the rest of their lives. Gentile eventually came to the realization that a similar direction was also the best one for educators to take with their students as well. She concludes:

"We could then tell them to practice these scripts with each other – not as adversarial role play but as peer coaching exercises. Students would prove their sophistication with the most feasible arguments and methods to do the seemingly impossible, that is behave in accordance with their highest values in the workplace. Just think what might have happened at BP if individuals there not only knew what the right thing to do was (we know there was more than one engineer who tried to speak up about safety violations), but also knew how to do so effectively. This idea is not rocket science. It amounts to educators asking students and business leaders asking employees to bring their insights, their critical thinking and innovative ideas to the task of getting the right thing done. We know that the heroes of business history comprise individuals who made 'do-able' what previously seemed impossible. Let's invite students to apply that same passion and entrepreneurial spirit to building a values-driven economy."

If all business schools would take this approach to teaching ethics, a generation or two from now we might find a more ethical global business climate. To learn more about today's global business climate, read my post entitled Corruption Around the World. Since the Corruption Perceptions Index was published last year, not much has changed. The Organization for Economic Cooperation and Development recently reported "that only five of the 38 nations that have committed to stamp out bribery of foreign officials imposed penalties during 2010." ["Few Nations Are Punishing Bribery," by Paul Hannon, The Wall Street Journal, 21 April 2011] Will the business world ever be ethically perfect -- of course not. Even business people with sterling reputations like Warren Buffet can find themselves unwittingly caught in ethical dilemmas ["Stumbling Into Bad Behavior," by Max H. Bazerman and Ann E. Tenbrunsel, The New York Times, 20 April 2011]. Bazerman, a professor of business administration at Harvard, and Tenbrunsel, a professor of management at the University of Notre Dame, write:

"It's easy to look at big names like Warren E. Buffett, and big companies like Ernst and Young, and be judgmental. Of course they overlooked ethical lapses. Why wouldn't they? That's business. Regulators, prosecutors and journalists tend to focus on corruption caused by willful actions or ignorance. But in our research, and in the work of other scholars who study the psychology of behavioral ethics, we have found that much unethical conduct that goes on, whether in social life or work life, happens because people are unconsciously fooling themselves. They overlook transgressions — bending a rule to help a colleague, overlooking information that might damage the reputation of a client — because it is in their interest to do so."

Do such ethical transgressions make a person evil? Do people committing them see themselves as unethical? Bazerman and Tenbrunsel assert, "When we fail to notice that a decision has an ethical component, we are able to behave unethically while maintaining a positive self-image. No wonder, then, that our research shows that people consistently believe themselves to be more ethical than they are." They appear to be agreeing with Gentile that helping make people more aware of what constitutes ethical behavior in a positive way could help create a less corrupt business environment. Unfortunately, I'm not holding my breath that it will happen any time soon. Bazerman and Tenbrunsel believe that conflicts of interest are behind most of the business world's "unintentional" as well as "intentional" acts of unethical behavior. They conclude:

"Our legal system often focuses on whether unethical behavior represents 'willful misconduct' or 'gross negligence.' Typically people are only held accountable if their unethical decisions appear to have been intentional — and of course, if they consciously make such decisions, they should be. But unintentional influences on unethical behavior can have equally damaging outcomes. Our confidence in our own integrity is frequently overrated. Good people unknowingly contribute to unethical actions, so reforms need to address the often hidden influences on our behavior. Auditors should only audit; they should not be allowed to sell other services or profit from pleasing their customers. Similarly, if we want credit-rating agencies to be objective, they need to keep an appropriate distance from the issuers of the securities they assess. True reform needs to go beyond fines and disclosures; if we are to truly eliminate conflicts of interest we must understand the psychology behind them."

Philosophers and theologians will forever debate whether humankind's nature is basically bad or good. My suspicion is that where you sit in that debate determines much of your thinking about how ethics are taught (or even if it is an appropriate subject for business schools). As an optimist, I fall into the camp that says people need to be exposed to the subject. I like Professor Gentile's approach. On the other hand, as a realist, I want legislators to enact and regulators to enforce laws dealing with unethical behavior. We need both carrots and sticks in order to protect society as a whole. The late Nobel Prize laureate Albert Camus once said, "A man without ethics is a wild beast loosed upon this world." It's time to tame the beast.

Learning from Failure

Yesterday's post discussed Why Start-ups Fail. Quotes about overcoming failure may be as numerous as quotes on any motivational topic. A sampling of such quotes include:

• "The greatest barrier to success is the fear of failure." (Sven Goran Eriksson)
• "Fear of failure must never be a reason not to try something." (Frederick Smith)
• "There are no failures - just experiences and your reactions to them." (Tom Krause)
• "There are no secrets to success. It is the result of preparation, hard work, and learning from failure." (Colin Powell)
• "Success builds character, failure reveals it." (Dave Checketts)"
• "Try and fail, but don't fail to try." (Stephen Kaggwa)
• "I didn't fail the test, I just found 100 ways to do it wrong." (Benjamin Franklin)

Despite such encouragement, the fear of failure still holds sway in the hearts and minds of many individuals and undergirds many organizational cultures. Overcoming that fear is critical if progress is to be made. Most, if not every, successful entrepreneur has experienced his or her share of failures. That is because most great entrepreneurs are risk takers. Entrepreneur Luke Johnson believes that even people who are by nature risk takers can suffer regrets resulting from failure ["The past is paralysing, face the future," Financial Times, 19 April 2011]. He writes:

"Regret can be a terrible addiction. Those who suffer from it so often become bitter and full of self-pity. It is an emotion that serious entrepreneurs cannot afford: they must keep pressing onwards and should not look back with remorse, dwelling on errors of long ago. As Alexander Graham Bell, inventor of the telephone, said: 'When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.' Entrepreneurs must learn to manage the conflict between constant experimentation –- which means lots of painful mistakes –- and a fear of failure, which can lead to paralysis."

If "regret of the past" is stamped one side of "looking back" coin, Johnson reminds us that the flipside of the coin bears the imprint of another impediment to progress -- relishing past glories. He writes, "Likewise, past glory can be a killer." He concludes his column this way:

"By all means treasure experience, and learn from your blunders. But don't wallow in nostalgia, pining for what might have been. Rather, go ahead and seize the day no matter what. I have little time for those who say: I wish I had started my own business. My only response is: so do it now."

While Johnson's advice is aimed at individual entrepreneurs, a column in The Economist on overcoming failure is aimed at companies. It claims that "companies have a great deal to learn from failure -- provided they manage it successfully." ["Fail often, fail well," 14 April 2011] The article begins:

"Business writers have always worshipped at the altar of success. Tom Peters turned himself into a superstar with 'In Search of Excellence'. Stephen Covey has sold more than 15m copies of 'The 7 Habits of Highly Effective People'. Malcolm Gladwell cleverly subtitled his third book, 'Outliers', 'The Story of Success'. This success-fetish makes the latest management fashion all the more remarkable. The April issue of the Harvard Business Review is devoted to failure, featuring among other contributors A.G. Lafley, a successful ex-boss of Procter & Gamble (P&G), proclaiming that 'we learn much more from failure than we do from success.' The current British edition of Wired magazine has 'Fail! Fast. Then succeed. What European business needs to learn from Silicon Valley' on its cover. IDEO, a consultancy, has coined the slogan 'Fail often in order to succeed sooner'."

Some of those headlines reflect the sentiments found in the quotations with which I began this post. Even though they encourage us, they remind us that overcoming fear is a difficult thing to do. The article continues:

"There are good reasons for the failure fashion. Success and failure are not polar opposites: you often need to endure the second to enjoy the first. Failure can indeed be a better teacher than success. It can also be a sign of creativity. The best way to avoid short-term failure is to keep churning out the same old products, though in the long term this may spell your doom. Businesses cannot invent the future—their own future—without taking risks."

Another way of looking at risk and failure comes from the naval arena. During times of conflict, a ship transiting dangerous waters needs to be on high alert -- prepared to challenge an attack from any quarter. The ship's vigilance is augmented by sensors like radar and sonar that can be tuned to various levels of sensitivity. Set the sensitivity too high and you may miss a stealthy aircraft or quiet submarine as it closes in. Set the sensitivity too low and you may be flooded with so many false targets that a real enemy might be fatally lost among clutter. As a result, sensor operators look for the sweet spot that permits a small number of false targets (i.e., failures) but not so many that the ship's personnel are too overwhelmed to respond to them. By permitting an acceptable level of false targets, the ship is better prepared to respond when actual danger does emerge. Companies too often set their sensitivity to failure so high that real opportunities are missed. The article continues:

"Entrepreneurs have always understood this. Thomas Edison performed 9,000 experiments before coming up with a successful version of the light bulb. Students of entrepreneurship talk about the J-curve of returns: the failures come early and often and the successes take time. America has proved to be more entrepreneurial than Europe in large part because it has embraced a culture of 'failing forward' as a common tech-industry phrase puts it: in Germany bankruptcy can end your business career whereas in Silicon Valley it is almost a badge of honour. A more tolerant attitude to failure can also help companies to avoid destruction. When Alan Mulally became boss of an ailing Ford Motor Company in 2006 one of the first things he did was demand that his executives own up to their failures. He asked managers to colour-code their progress reports—ranging from green for good to red for trouble. At one early meeting he expressed astonishment at being confronted by a sea of green, even though the company had lost several billion dollars in the previous year. Ford's recovery began only when he got his managers to admit that things weren't entirely green."

The managers' initial responses at Ford are completely understandable. No one likes to admit they failed. They fear that admitting failure will result in their dismissal. Entrepreneurs working for themselves face no such concern. I suspect that Ford charts only started to change colors when Alan Mulally convinced managers that they had a better chance of being dismissed for prevarication than for failure. Lessons from failure can only be learned in an organization whose culture is risk tolerant. The article implies that either tolerance for failure is on the rise or business competence is on the decline. It continues:

"Failure is ... becoming more common. John Hagel, of Deloitte's Centre for the Edge (which advises bosses on technology), calculates that the average time a company spends in the S&P 500 index has declined from 75 years in 1937 to about 15 years today. Up to 90% of new businesses fail shortly after being founded. Venture-capital firms are lucky if 20% of their investments pay off. Pharmaceutical companies research hundreds of molecular groups before coming up with a marketable drug. Less than 2% of films account for 80% of box-office returns."

Albert Einstein is widely credited with defining insanity as "doing the same thing over and over again and expecting different results." Obviously failing over and over again and learning nothing from such failures would be considered a form of insanity. As the article states, "Simply 'embracing' failure would be as silly as ignoring it." It continues:

"Companies need to learn how to manage [failure]. Amy Edmondson of Harvard Business School argues that the first thing they must do is distinguish between productive and unproductive failures. There is nothing to be gained from tolerating defects on the production line or mistakes in the operating theatre. This might sound like an obvious distinction. But it is one that some of the best minds in business have failed to make. James McNerney, a former boss of 3M, a manufacturer, damaged the company's innovation engine by trying to apply six-sigma principles (which are intended to reduce errors on production lines) to the entire company, including the research laboratories. It is only a matter of time before a boss, hypnotised by all the current talk of 'rampant experimentation', makes the opposite mistake."

If a seasoned executive like McNerney had a difficult time seeing the difference between and good and bad failures, one can understand why fostering risk tolerance in organizations is so difficult. The article notes that one way to foster such a culture is to immunize the organization through a series of small bets. It explains:

"Companies must ... recognise the virtues of failing small and failing fast. Peter Sims likens this to placing 'Little Bets', in a new book of that title. Chris Rock, one of the world's most successful comedians, tries out his ideas in small venues, often bombing and always junking more material than he saves. Jeff Bezos, the boss of Amazon, compares his company's strategy to planting seeds, or 'going down blind alleys'. One of those blind alleys, letting small shops sell books on the company's website, now accounts for a third of its sales."

The advantage of placing small bets is obvious -- you're not going to lose the farm if you fail. The article claims that there are other "ways that companies can limit the downside of failure." It continues:

"Mr Sims emphasises the importance of testing ideas on consumers using rough-and-ready prototypes: they will be more willing to give honest opinions on something that is clearly an early-stage mock-up than on something that looks like the finished product. Chris Zook, of Bain & Company, a consultancy, urges companies to keep potential failures close to their core business—perhaps by introducing existing products into new markets or new products into familiar markets. Rita Gunther McGrath of Columbia Business School suggests that companies should guard against 'confirmation bias' by giving one team member the job of looking for flaws."

No one, of course, is arguing that individuals or organizations should set out to fail. That would be stupid. Failures will happen -- you don't have to go looking for them. But as the article states, "There is no point in failing fast if you fail to learn from your mistakes." It concludes:

"Companies are trying hard to get better at this. India's Tata group awards an annual prize for the best failed idea. Intuit, in software, and Eli Lilly, in pharmaceuticals, have both taken to holding 'failure parties'. P&G encourages employees to talk about their failures as well as their successes during performance reviews. But the higher up in the company, the bigger the egos and the greater the reluctance to admit to really big failings rather than minor ones. Bosses should remember how often failure paves the way for success: Henry Ford got nowhere with his first two attempts to start a car company, but that did not stop him."

Another important thing to remember is that you can learn from others' mistakes not just your own. For more on that subject, read my posts entitled Entrepreneurism: Learning from Others' Mistakes as well as yesterday's post entitled Why Start-ups Fail.