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23 posts from August 2011

August 31, 2011

Service-Oriented Architecture and Event-Driven Warehouse Management

One of the earliest blogs I posted was about service-oriented architecture (SOA) [Great Article on Service-Oriented Architecture]. I published it after having met with Accenture CTO, Donald Rippert, who, the day before, had published an op-ed piece in the Financial Times ["The building blocks of a simpler future are in place," by Donald J. Rippert, 10 May 2006] In that article, Rippert wrote:

"Imagine a future where IT systems are not created by computer analysts speaking the languages of Java and C but instead by business managers speaking the languages of supply chain, customer service or product development. It is a future made possible by Service Oriented Architecture (SOA) -- an evolution in the way enterprise IT systems can be built . ... Today, businesses either build and maintain custom applications (such as invoice processing or personnel systems) at great cost, or they conform their business processes and organisation to pre-packaged software applications. Both of these approaches have helped automate business processes but have become operationally and intellectually threadbare in recent years."

Remember, Rippert was calling "intellectually threadbare" many of the systems we still see in place today -- five years later. He continued:

"The usually pejorative phrase 'legacy system' was coined to describe old, custom applications that have grown hard to maintain and almost impossible to replace, whereas packaged software brings its own set of challenges since modifying it to meet the needs of a particular business is expensive and risky. ... With an SOA, business applications are constructed of independent, reusable, interoperable services that can be reconfigured without vast amounts of technical labour. ... The fundamental building blocks of an SOA are web services. ... An SOA is a collection of web services brought together to accomplish business tasks (checking a customer's credit, for example, or generating an invoice). ... Because these services are accessed through a standard, they provide unprecedented flexibility: business processes can be added or altered quickly; software applications can be integrated easily."

Rippert wrote this before the term "cloud computing" became widely accepted in the IT world. Even though cloud computing is better understood than it was back in 2006, some companies have been reluctant to embrace it. That, however, is another story. Rippert concluded his piece this way:

"Because the services can interact with systems outside a single organisation, they provide the ability for companies to collaborate with customers and suppliers. And because services are simpler than hard-wired applications, they lower maintenance costs. ... Heard it all before? You probably have. People have been talking about taking the programmer out of programming for decades. So what is different now? In a word, standards are what set SOA apart from previous generations of integration technologies, which were largely proprietary to each vendor. The standards behind SOA have been around in some form for a few years, but they are just reaching maturity. ... Perhaps the most compelling impact of SOA is how it stands to rewrite the rules on IT governance and organisational structure. In most organisations, IT managers tend to be linked with the specific applications they support. Because SOA delivers the promise of solutions that transcend lines of businesses -- and the organisations themselves -- IT managers, newly decoupled from applications they manage, will have a broader view of the potential they can deliver. Once IT speaks the same language as business, it will be primed to design services that help companies bring distinctive capabilities, products and services to market quickly."

Five years on, IT is now speaking the same language as business. It's an exciting time to be involved in supply chain optimization. The editorial staff at Supply Chain Digest also believes that service-oriented architecture is a game changer. It writes, "Service oriented architecture can enable a Warehouse Management System to act more like a proxy DC supervisor." ["The Emerging Event-Driven WMS Model," 8 December 2010]. The SCD staffers continue:

"Service Oriented Architecture, or SOA, is changing the way a Warehouse Management System (WMS) will run, offering users new levels of efficiency through increased system intelligence. Though the topic of SOA often puts operations managers to sleep the reality is an SOA-based WMS, if properly developed, can result in a system that is based on thousands of discrete pieces of functionality or services, rather than different specific applications (receiving, putaway, etc.) that may be linked but that must behave in limited and usually inflexible ways. With SOA, these capabilities can be linked together to create a more flexible and intelligent WMS, one that can react to events in the DC to further optimize distribution performance."

SCD staffers write about "increased system intelligence." I like to think about such frameworks as "sense, think/learn, and act" systems. Warehouse management is an ideal fit for such a system. The article explains why:

"In distribution and broader logistics operations, processes involve nothing more than a sequence of events, decisions and actions. These events can be normal, expected, predictable -- but at times they can be unusual, unexpected, variable, or random. Using the event-driven WMS model, it is the occurrence of specific events, rather than application code, that triggers functionality and subsequent action. For example, consider a cross dock application, as illustrated in the figures below. Let's suppose that an inbound shipment was planned for cross docking, but at unload time the outbound door or trailer is not yet available. In a traditional system, this would likely require several manual decisions and processing –- a supervisor observing the lack of the available door, [directs] dock workers to put the inbound goods in a temporary staging location, additional directions [are required] when the door becomes available to start loading the outbound truck, all these activities primarily conducted outside the logistics system itself."

A distribution center equipped with an SOA-based Warehouse Management System can let the system make many of the routine, event-driven decisions that must be made -- freeing the supervisor to deal with other pressing challenges. The article continues:

"The event-driven system approaches this situation in an entirely different way (see graphic below). The WMS scans the dock environment when the inbound truck arrives and recognizes the outbound trailer is not yet available, triggering system direction (via handheld terminal or workstation) to move the goods to an available staging area. In the middle of this process, when the event of the outbound door becoming available occurs, the system recognizes this changing condition and both directs goods from the truck into the outbound trailer, as well as creates tasks to move the staged goods. This is a fundamentally different way of handing WMS system development, and has enormous potential benefits for improving efficiencies and optimizing logistics flows."

Event_Driven_WMS

Enterra Solutions' Supply Chain Optimization Platform uses Complex Event Processing in its sense, think/learn, and act framework; so you can understand why I'm such a proponent of these kinds of systems. The article admits that "there are many existing functional parallels to this cross docking example" and it also admits that results can be achieved other ways. But, SCD staffers insist, none of the other methods are as robust. They explain:

"For example, in many systems when an order picker is unable to pick an item due to a discrepancy between what the WMS system thinks is the inventory quantity in a location and what the operator finds, that 'event' will trigger a task to do a cycle count of the location. However, to achieve this effect, the WMS provider must hard code this logic into the picking application. If there are multiple scenarios that could trigger a cycle count, this functionality is achieved by replicating the logic in different application areas, and/or writing a long series of 'if/then' statements into a specific piece of code. This significantly limits flexibility to make future changes, and is an approach that can be used for a relatively small number of event-action sequences. In the true event-driven approach, the cycle count function is not tied to a specific piece of application code, but is linked to or triggered by any number of different events. It is independent of a specific hard-coded application, and therefore can be easily augmented or changed based on new processing requirements. This flexibility makes it easy to craft event-driven processing in an unlimited number of logistics scenarios."

In a number of past posts, I've discussed how supply chain analysts believe that system flexibility is one of the characteristics that is going to differentiate great supply chains from good ones. As the above example demonstrates, an SOA-based WMS is inherently more flexible than other types of systems. To further make their point, SCD staffers provide "other examples of the way an event driven-system might intelligently handle specific exceptions or conditions in the logistics flow." They write:

"The system could look forward into downstream packing and consolidation areas for congestion, and reroute or delay releasing work until the 'event' of a work area freeing up occurs. Perhaps the DC is using an automated material handling system, and a photo eye on the conveyor becomes blocked or disabled. The WMS recognizes this unexpected event, triggering the use of alternate paths along the system, or a more manual mode of order consolidation. At a broader logistics system level, the 'event' of an exception notification from a truckload or LTL carrier that a shipment is going to be late might trigger that a small quantity of the item be picked and shipped via overnight to ensure the customer has enough of the needed item until the scheduled shipment arrives. This dynamic Event-Decision-Action model, conforming so naturally to the way logistics functions really operate, is possible with the event-driven logistics system because it occurs without any specific logistics application program getting involved. The event-driven approach in turn is really dependent on an SOA-based WMS architecture to enable it."

It simply makes good sense to allow an intelligent system to make routine decisions about common problems. The SCD staffers assert, "This event-driven model will also improve the ability of the WMS to work with different sorts of DC automation systems, and increasingly allow the WMS to act like a 'proxy supervisor' that monitors and manages what is happening in the DC at even greater levels than today's vary sophisticated WMS solutions." They point out that the more information a system obtains the smarter the decisions it can make. They explain:

"As adoption of RFID continues, the event-driven approach becomes even more important, as the WMS must react to RFID reads wherever that are encountered, rather than to expected bar code scans within a specific application. SOA may be mostly in the realm of the IT wizards, but it has already changed how WMS and other logistics applications are deployed and used today – and will have an even more profound impact in the coming years. Logistics managers need to get at least a little smart about SOA and what it can do for them in WMS."

Great articles like the ones written by Donald Rippert the Supply Chain Digest editorial staff go a long ways towards making logistics managers smarter about service-oriented architectures and sense-think/learn-act systems.

August 30, 2011

Globalization, Trust, and the Supply Chain

Charles Mann, author of the new book 1493: Uncovering the New World Columbus Created, recently wrote an op-ed piece in the Wall Street Journal about globalization. ["The Real Story of Globalization," 6 August 2011] He began his article this way:

"In the great tropical harbor of Manila Bay, two groups of men warily approach each other, their hands poised above their weapons. Cold-eyed, globe-trotting traders, they are from opposite ends of the earth: Spain and China. The Spaniards have a big cache of silver, mined in the Americas by Indian and African slaves; the Chinese bring a selection of fine silk and porcelain, materials created by advanced processes unknown in Europe. It is the summer of 1571, and this swap of silk for silver—the beginning of an exchange in Manila that would last for almost 250 years—marks the opening salvo in what we now call globalization. It was the first time that Europe, Asia and the Americas were bound together in a single economic network."

The rest of Mann's article is about how invasive species, carried in the ships and cargo that circled the globe, changed the face of the world forever. Mann explains:

"The silk would cause a sensation in Spain, as the silver would in China. But the crowds that greeted the returning ships had no idea what they were truly carrying. We usually describe globalization in purely economic terms, but it is also a biological phenomenon. Researchers increasingly think that the most important cargo on these early transoceanic voyages was not silk and silver but an unruly menagerie of plants and animals, many of them accidental stowaways. In the sweep of history, it is this biological side of globalization that may well have the greater impact on the fate of the world's people and nations."

It's a fascinating article and well worth reading in its entirety. The biodiversity generated by globalization, however, is not what this post is about. This is a post about trust. Trade has always been about trust. The Spanish and Chinese tradesmen, who "warily approach[ed] each other, their hands poised above their weapons," weren't trusting because they had no relationship. Trust must be earned and that normally takes time. Tim Cummins, founder of IACCM, reports, that trust seems to be eroding rather than strengthening and, surprisingly, he blames globalization for trust's decline. ["Loss Of Trust Carries A Heavy Price – But How Heavy?" Commitment Matters, 16 December 2010] Cummins writes:

"According to a report for the World Economic Forum, levels of trust have fallen by 44% in the last 10 years. Whether or not we can rely on the precise statistic, the underlying message is important for anyone engaged in the world of contracting and relationship management. Trust is commonly understood to be fundamental to the health and sustainability of relationships. Its erosion therefore has significant consequences, many of which are in fact already evident in our daily work. Globalization has been the key factor in the decline of trust."

That's a bold claim. Cummins, however, goes on to offer some of the reasons he believes it is true. We'll get to those reasons momentarily. Commenting on Cummins post, Steve Hall, a senior staff writer for Procurement Leaders, writes, "Sometimes it might seem like stats and graphs might be the best way of understanding a foreign supply market, but let's not be mistaken, for procurement trust is [a] hugely important issue and one that requires you to look a little deeper." ["Global sourcing is about trust, not just statistics," ProcurementBlog, 20 January 2011] Let's examine Cummins' reasons for believing that globalization has eroded trust. His first reason involves familiarity. If "familiarity breeds contempt," Cummins asserts that lack of familiarity breeds mistrust. He writes:

"As we work increasingly with new and unfamiliar companies and trading partners, often spanning jurisdictional, cultural and linguistic barriers, a sense of caution is inevitable and trust is a casualty."

Having had some souring experiences of my own working overseas, I know exactly what Cummins is talking about. I believe, however, that widespread corruption and an absence of the rule of law are what breed mistrust rather than "cultural and linguistic barriers." If you can't trust the law to enforce contracts, you have good reason to be cautious. Globalization exposes companies to trade with countries in which the rule of law is applied unevenly (or sometimes ignored altogether); but you can't blame globalization for internal national politics. I agree more fully with Cummins' second reason for declining mistrust. He writes:

"The networked world has disrupted traditional methods of doing business – in particular, face-to-face meetings are far less common. Many relationships are 'virtual' and lack the forms of bonding that are essential to establishing trust."

In a recent blog, Jonah Lehrer wrote, "There is good reason to question whether any new technology ... can effectively imitate our face-to-face interactions. There's a long history of such claims, and none of them has panned out." ["Social Networks Can't Replace Socializing," Wall Street Journal Head Case, 6 August 2011] He explains:

"First there was the telephone, which was supposed to reduce demand for communication in person. The same was said of faxes and then email. In the late 1990s, when dot-com fever was at its peak, many technology enthusiasts predicted that cities would soon become obsolete, since we no longer needed to share sidewalks and cafes. Cheap bandwidth would mean the end of expensive office space. But the data show that the opposite has occurred: Cities and face-to-face interaction have become even more valuable. As Edward Glaeser, an economist at Harvard, notes in his recent book 'The Triumph of the City,' business travel has dramatically increased since the invention of email. Attendance at business conferences has spiked since the invention of video-conferencing. Businesses still pay hefty rents to be downtown. A similar lesson emerges from a recent study led by Isaac Kohane, a researcher at Harvard Medical School. After analyzing more than 35,000 different peer-reviewed papers and mapping the location of every co-author, he found that scientists located closer together produced papers of significantly higher quality, at least as measured by the number of subsequent citations. In fact, the best research was consistently done when scientists were working within roughly 30 feet of each other—that is, when they didn't need to interact via screens."

Although I agree with Cummins that the lack of face-to-face transactions can erode trust, it's hard to lay blame solely at globalization's feet. Technology and rising travel costs have contributed to the increase in virtual meetings. If you really want to point the finger of blame at someone, point it at the terrorists who have made security screenings so onerous that they have sapped the joy from travel. Cummins next reason for declining trust involves culture. He writes:

"It is widely understood that different cultures operate at different levels of innate trust. For example, Scandinavia is a high-trust region; the United States and Latin America are not. The dominance of US corporations and contractual models in driving international trade has undermined more trusting, relationship based models. 'The transaction' has replaced 'the relationship'."

Cummins is correct that the days when a man's word was as good as his bond are gone forever. For that, you can thank unscrupulous businessmen who fostered corporate scandals at Enron, WorldCom, Tyco and other companies. Ronald Reagan, speaking about arms negotiations with the Soviets, famously said, "Trust but verify." That's pretty good advice in today's business world. Cummins final reason for the decline of global trust does connect more closely to globalization -- the search for the lowest price. He writes:

"Within business, a core reason for the explosion of international commerce has been the incessant hunt for the lowest price. Relational loyalties have been sacrificed in the search for perceived savings. Among the consequences of this loss of trust has been the rise of the importance of the contract and formalized contract and performance management."

Globalization has indeed been an enabling factor in this search. Commenting on this subject, Hall writes, "Frequently, the reason to go overseas is that it's cheap. But that shouldn’t mean that contracts and the general interface with suppliers isn't given the due attention." I've been saying for some time, however, that the consequences of this search for low prices is going to be mitigated as regionalization within the broader scope of globalization gains more traction. This regionalization will result from several factors, including high fuel costs, rising international wages, and pressure to create jobs.

Although I might argue with Cummins about whether blame for declining trust should be laid at solely at globalization's doorstep, I agree with him that declining trust is a matter of global concern. He continues:

"During these 10 years, we have witnessed a drive for more and more precision over commitments and their measurement, accompanied by a steady increase in focus on 'penalty terms' – or the consequences of failure. Negotiations have become dominated by the allocation of liabilities and indemnities; battles over intellectual property rights, data protection and confidentiality. All principles of 'my word is my bond' appear to have been abandoned in the interests of low prices and the destruction of loyalty. It is right to believe that many traditional relationships were too comfortable and had become inefficient. But it is also very clear that this pursuit of low prices has brought with it enormous additional costs and overheads. ... And while [finance executives] sustain this behaviour, calls from other senior executives for 'more collaboration' and 'improved relationships' will continue to be frustrated."

In other words, Cummins believes the business world has gone emotionally cold. It's now -- dare I say -- all business. Since Enterra Solutions started offering supply chain optimization solutions, I have become more aware of the dizzying array of compliance penalties that undoubtedly strain relations between manufacturers and retailers. Our solutions try to alert clients to potential problems so that they can work with one another to solve them before they result in penalties or empty shelves. This kind of collaboration should help develop relationships rather than continue down the chilly path of confrontation. I agree with Cummins and Hall that trust is about building relationships. Hall writes:

"Taking risk out of global sourcing is also an exercise in supplier relationship management and simply put, it isn't always done well. I'd argue that understanding what it takes to build trust with overseas business contacts is at just as valuable as having every scrap of economic and financial data. And clearly, if failing trust is a consequence of globalisation then that's still a lesson that requires a great deal of attention."

For his part, Cummins concludes:

"The erosion of trust is not inevitable; it is a corporate choice whether or not to build sustainable relationships with its key customers and suppliers. But so far as I know, we do not have the economic data to demonstrate the relative value of trusting versus untrusting trading relationships. Isn't it time for commercial experts to explore these impacts and to provide insights to the best performing contract and relationship models?"

Back in 1571 when the Spaniards met the Chinese in the Philippines, trust really wasn't much in play. They were meeting face-to-face with goods (and weapons) in hand. They didn't have to sign contracts or make promises. They simply had to exchange goods. As trading increased, so did its complexity and the increased requirement for trusting one another. I suspect that the reported 44 percent decline in trust is more subjective than objective; but, it doesn't really matter. For most people, perception is reality. If the perceived level of trust has declined, for all intents and purposes, it has actually declined. Over the past five years I've written over a half-a-dozen blogs focused on the importance of trust. Over the past five hundred years, I don't think its importance has diminished. That's why I agree with Cummins that loss of trust carries a heavy price.

August 29, 2011

Black Swans, Dark Clouds, and Silver Linings

Russ Banham writes, "Thanks to the global financial meltdown, we now know what a 'black swan' is. But do we know from which direction the next one will swim into view, and what to do when it does?" ["Disaster Averted?" CFO Magazine, 1 April 2011] The term "black swan" is now commonly used in the business world. It came into common usage thanks to Nassim Nicholas Taleb, author of the book entitled Black Swan. Banham provides his definition of the term:

"Black swans are, of course, those highly improbable but painfully consequential events that strike from the blue — or from the streets of Cairo, or from an offshore oil rig, or from a poorly designed car part. They can destroy a company's reputation, cripple its financial performance, and perhaps even kill it outright. Because they are rare and almost impossible to predict, black-swan events tend to fall outside the scope of most companies' risk-management programs (assuming a company has such a program at all)."

In a previous post, I noted that Ann Grackin, from ChainLink Research, insists that just because some events are rare it doesn't mean that we can't or shouldn't forecast them. That may sound oxymoronic, but Grackin writes, "Creating a resilient enterprise is critical to customer protection and employee welfare, as well as securing the financial viability of the company. Yet many firms think that since rare events are unpredictable, then there is no sense in doing much about them other than 'risk transfer' (purchasing a risk product, if one is available, such as product liability, property and casualty and so on). ... Modelers and forecasters look through a faulty lens; they discount these events because they are rare." ["Black Swan? Hardly! Revolutions and Tsunamis Come and Go!" 5 April 2011]

Drawing from Taleb's work, Grackin goes on to argue that forecasts can take into account rare events using history and a little common sense as a guide. She concludes:

"Crying out 'Black Swans' may be chic, but many of those who do may not understand Mr. Taleb. He challenges the notion that these are random and therefore unpredictable events, so we can't plan and predict better to avoid being impacted. His perspective is that they are not as random as you think and that a lot of common sense—and evidence in plain sight—would lead people to more enlightened behaviors and preventions."

I agree with Grackin. We know that bad things can and will happen. For example, hurricanes, like Irene, that run furiously up the East Coast of the United States into New England are rare, but not unprecedented. The recent Virginia-centered earthquake is another rare, but not unprecedented, occurrence. Events, like hurricanes, earthquakes, tornadoes, and flooding, can affect all commercial sectors in an affected area. We also know that each industry sector has some unique "bad things" that can affect business. Although I agree with Banham that we don't know the specifics about these events, for planning purposes, generalities are as good as specifics. Clearly, Banham and Grackin believe that lack of specific information is no excuse for not doing some planning and preparation in advance -- because bad things do happen.

The Great Recession continues to cast a dark cloud over the economy; however, as the old adage goes, "Every cloud has a silver lining." So what is the silver lining of this particularly dark cloud? According to Banham, the good news is that there's been so much bad news that Enterprise Risk Management may take off. He writes:

"Hope springs eternal for the proponents of enterprise risk management (ERM), a 10-year-old integrated approach to managing a broad spectrum of risks. A recent spate of black-swan events, combined with an equally long list of regulatory imperatives, will now, they say, spur widespread uptake of ERM. ERM is, above all, a strategy for overcoming the once-common siloed approach to risk management in which different people within a company focused on different kinds of risk, with little to no interaction between them. In contrast, ERM offers a 'holistic methodology' for identifying, assessing, quantifying, and addressing strategic, operational, market, financial, and human risks in order to optimize the risk-return profile."

I couldn't agree more with Banham's point about the unsoundness of taking a siloed approach to risk management. In a recent post, I wrote, "Segmenting risk management rather than addressing it holistically is like trying to keep water out of a boat filled with holes." [Supply Chain Risks: Who's in Charge and What are They Looking At?] Banham claims there are three trends "converging that may, in fact, propel ERM to a new level of acceptance and maturity: corporate boards are under regulatory pressure to address risk management explicitly; proponents of ERM are making progress in having it acknowledged as a best practice for overall risk management; and new technologies are enhancing companies' ability to evaluate, measure, and prioritize risks, and to test and report on their potential impact." Banham continues:

"For large companies, there is little choice. 'There is enhanced [regulatory] scrutiny of how organizations manage risk,' says Henry Ristuccia, a partner with Deloitte & Touche and U.S. leader of Deloitte's governance and risk-management practice. 'Sitting by idly is not a solution.' That scrutiny takes many forms. The Dodd-Frank Wall Street Reform and Consumer Protection Act establishes new requirements for board risk oversight and reporting. Rating agencies, led by Standard & Poor's, now factor ERM criteria for financial and nonfinancial entities into the ratings process. The Committee of Sponsoring Organizations (COSO) rolled out COSO II (referred to by many as 'COSO ERM') in 2004 to establish requirements for risk identification, management, and reporting. And the Securities and Exchange Commission has sharpened its stance on risk management, creating a division in 2009 to, in part, create what Ristuccia describes as 'new requirements for enhanced proxy disclosure on how a board is executing its fiduciary responsibility for risk oversight.' All this activity should not escape the attention of CFOs, because, as Ristuccia notes, 'while more companies are now appointing chief risk officers, many don't have that position, and therefore responsibility for risk management ends up with the board and the CFO.'"

To learn why some analysts believe that defaulting to the CFO is a bad idea, read my post about "Who's in Charge" mentioned above. Returning to the subject of Black Swans, Harold L. Sirkin, a Chicago-based senior partner of The Boston Consulting Group, believes that companies can prepare for such events. ["How to Prepare Your Supply Chain for the Unthinkable," HBR Blog Network, 28 March 2011] He writes:

"Companies are always shocked when low-probability events such as an earthquake or a tsunami disrupt their supply chains ... because of two fallacies. One is the mistaken belief that no corporation can prepare for such events; they can't even be predicted. ... The other is the persistent feeling that supply chains represent a cost. Most companies focus on minimizing costs rather than maximizing flexibility, which would entail making large investments in supply chains."

Had Sirkin made that last remark in a keynote address at a supply chain professionals' conference, I'm sure he would have received a standing ovation. Sirkin's remarks, however, are aimed at CEOs. He asserts, "CEOs can take several measures to tackle the Black Swans that may affect their supply chains." His first recommendation is: "Be prepared to react." He explains:

"Could anyone have anticipated a 9.0 earthquake, a tsunami, and a nuclear power plant crisis? The question is irrelevant. Companies don't have to anticipate such events; they only have to be prepared to respond to them. They can ensure that by:

"Diversifying supply bases. It isn't enough to have several suppliers if they're all clustered in the same country or region. For example, many US companies depend on China as a supply base. What would happen to their costs if the renminbi's value rises overnight from RMB 6.5 to RMB 4.5 to the US dollar? How would they cope if the price of oil quickly jumped to $150 per barrel? Companies have to develop suppliers in different places — some close to home, some further away.

"Locking up supplies. Companies must lock up supplies the moment a low-probability event occurs. As soon as the earthquake hit Japan, a few smart companies placed large orders with suppliers outside that country and rerouted materials, so they could continue supplying products to customers. When shortages persist, only their competitors will pay the price."

Sirkin's next recommendation is to invest in flexibility. As I have noted in past posts, lean supply chains may save money, but they are also brittle -- and brittle things can break. Sirkin writes:

"Companies keep costs down by building supply chains that generate economies of scale. That was effective when companies made products in their home markets using locally produced components. Supply chains now span the globe. Japan, for example, produces approximately 40% of the world's electronic components including parts and materials for semiconductors, computers, automobiles, radios, telephones, and other communications equipment. Companies need to create dynamic supply networks that can adjust rapidly to sudden changes. They can do that by:

"Producing locally. Scale generates economies, but companies often find they have to make costly tradeoffs when they consolidate manufacturing units. A large consumer products company thought it could reduce costs by setting up a few regional manufacturing hubs rather than numerous local ones, for instance. It discovered that although costs did fall, the delivered price to customers rose. Local manufacturing had enabled the company to tailor products and to shift production from one facility to another when commodity prices differed or demand shifted.

"Variabilizing costs. Companies can lower their fixed costs and increase those that fluctuate with the market. One way of doing that is to outsource production. Many vendors, who apportion fixed costs among different companies, charge on a per unit basis. Alternately, companies can sign short-term contracts that carry few obligations. Variabilizing costs requires constant management attention as well as flexible suppliers. The advantage is that it gives companies more maneuvering room to buy, sell, or cancel orders as needs and costs change. The disadvantage is that they will have to pay market prices for fuel, raw materials, and components."

Sirkin concludes, "Static supply chains may save companies some money, but they have hidden costs that rise precipitously when unforeseen events occur. The Japanese crisis should convince executives that they can manage risk best by creating dynamic supply chains." Adrian Gonzalez believes that when it comes to dealing with Black Swans companies can create their own luck. ["Supply Chain Resiliency: Make Your Own Luck," Logistics Viewpoints, 20 April 2011] He writes:

"If you weren't significantly impacted by the Japan earthquake, or any other recent supply chain disruption, was it luck or preparation? ... [I'm] reminded ... of the book 'The Luck Factor' by Dr. Richard Wiseman, a psychologist based at the University of Hertfordshire in the UK. In a 2003 article published in Fast Company, Dr. Wiseman was interviewed by Daniel H. Pink (a best-selling author himself) about the book and his research findings related to luck. Here is an excerpt of their conversation that caught my attention:

"Isn't there a distinction between chance and luck?

"There's a big distinction. Chance events are like winning the lottery. They're events over which we have no control, other than buying a ticket. They don't consistently happen to the same person. They may be formative events in people's lives, but they're not frequent. When people say that they consistently experience good fortune, I think that, by definition, it has to be because of something they are doing [emphasis mine].

"In other words, they make their own luck.

"That's right. What I'm arguing is that we have far more control over events than we thought previously. You might say, 'Fifty percent of my life is due to chance events.' No, it's not. Maybe 10% is. That other 40% that you think you’re having no influence over at all is actually defined by the way you think.

"More than likely, if you've emerged relatively unscathed from a supply chain disruption, it’s because you’ve taken action ahead of time to eliminate the risk, minimize the impact, or ensure a rapid and effective response. ... The bottom line: Luck happens or you make it happen. Supply chain leaders should always opt for the latter."

I believe that all of the experts cited above would agree with Gonzalez that companies that make determined preparations for dealing with disasters are improving their chances that fortune will smile upon them when Black Swans occur. In other words, instead of looking for silver linings, start sewing a few for yourself.

August 26, 2011

The Holes in Globalization's Fabric

Overall globalization has been a good thing for the world. Millions (if not billions) of people have emerged from poverty's grasp as globalization washed over the shores of the better part of the world during the last several decades. Admittedly, globalization's effects have varied by region and state. Along with winners globalization has created some losers. As a result, globalization's fabric has become threadbare in spots. Jeffrey Sachs, a well-known advocate for the underprivileged and director of The Earth Institute at Columbia University, points out, for example, that unskilled labor in developed countries like the United States has been hit hard by the consequences of globalization. ["Tripped up by globalisation," Financial Times, 18 August 2011] Sachs insists, "The path to recovery now lies ... in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy."

For the most part, I agree with that prescription. The problem, of course, is that the remedy obviously requires government support and, if you hadn't noticed, Washington isn't in a mood to support much of anything. When the U.S emerged from the heartache, suffering, and unemployment of past depressions and recessions, it found that it had new infrastructure on which to build a stronger economy. The roads, bridges, and other infrastructure projects built during the Great Depression helped support the war economy and post-war transition. The freeway system built following the Second World War laid the foundation for greatly increased interstate commerce. The Internet that was strengthened during the dot.com era left the country in a better position to emerge from the dot.com bust. There is no such legacy emerging from the Great Recession. Republicans and Democrats alike have failed to demonstrate leadership when it comes to creating jobs or building infrastructure upon which a sound recovery can be based. As Sachs notes, "the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment."

Although I agree with Sachs on the basic thrust of what is required to bring real recovery to the U.S. economy, we differ in some particulars. Sachs, for one thing, believes corporations should be taxed more heavily. I fear that would only make matters worse since corporations would likely send more of their money to tax havens overseas. Clearly, tax revenues need to increase and government spending needs to be reeled in if basic government needs and essential social services are going to be provided; but the best way to increase tax revenues is to put people back to work. Corporations that create jobs should be rewarded for their efforts rather than be penalized. I've argued since the beginning of the recession that more needed to be done to encourage entrepreneurs to start businesses and hire employees. Unfortunately, it looks like politicians are more interested in pointing fingers of blame at each other than they are about trying to work together to stimulate job creation. Getting off the soapbox, let me return to the subject of globalization.

Sachs also asserts, "Export-led growth is the other under-explored channel of recovery." I'm not sure that it is an under-explored topic. During his State of the Union address, President Barack Obama stated, "To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 -– because the more we export, the more jobs we create here at home." To learn more about efforts to increase exports, read my post entitled Small Businesses and Globalization. To some extent those efforts have been working. Harold L. Sirkin, a Chicago-based senior partner of The Boston Consulting Group, reports, "U.S. exports increased more than 20 percent, according to the Census Bureau, and some 85 percent of those exports were manufactured goods." ["Made in the USA—and China," Bloomberg BusinessWeek, 5 August 2011] He muses, "If I had told you in the summer of 2009 that America's long-suffering manufacturing industries would lead the lackluster recovery from the Great Recession, you probably would have wondered what I was reading — or smoking. I would have been correct, however."

There are mixed views about whether U.S. manufacturing can really make a rebound. But there is a lot more optimism today than there has been in a long time. If manufacturing does return in any significant way to the U.S., the jobs created will be much different than those that were lost to globalization. Perry Sainati, founder and president, Belden Inc., writes, "I take a backseat to no one when it comes to appreciating the role that manufacturing plays in this country's economy. But then again, anyone who believes that a pronounced uptick in this country's manufacturing output will immediately translate into a full-scale spike in job growth just doesn't understand the fundamentals of manufacturing." ["Your Grandfather's Manufacturing Jobs 'Ain't Comin' Back'," Industry Week, 7 July 2011] He explains:

"U.S. manufacturing these days is in the midst of a remarkable three-year recovery because for three years running manufacturing has not been about job growth. It's been about automation. It's been about process improvement. It's been about productivity. And it's been about quality. In fact, it's been about reinventing the very process by which durable and disposable goods get manufactured. What's more, it's been about streamlining our factories to the point that they're now among the most efficient in the world. That's why America's manufacturing sector has achieved such a dramatic turnaround, and that's why our economy is slowly but surely working its way down the long road to recovery."

Sainati apparently agrees with Sachs that yesterday's factory workers must be retrained to meet the demands of today's job market. He concludes:

"[The types of manufacturing jobs that once defined the American workforce] are gone. What's more, as Bruce Springsteen once sang, 'they ain't comin' back.' That's not to say, of course, that manufacturing growth will not continue to translate into meaningful job growth -- and meaningful careers -- in this country. Because it will. It's just that it won't translate into the massive quantities of jobs people still want to believe are possible. Nor will it translate into the kind of low-skilled jobs that once defined the assembly line dynamic. In this day and age, companies like mine simply cannot afford to pay top dollar for workers whose skill sets do not extend beyond the ability to spot weld a piece of metal or maybe torque down a bolt or two. Today's lean manufacturing companies are looking for skilled workers who think like engineers and who bring to the job each day a broad knowledge of product design and product development. Today, small, independent businessmen like myself are not so much looking for manufacturing cogs as we are manufacturing assets; people whose skills are essential to the process of designing, prototyping and manufacturing products for market. America's economic future will remain forever linked to our ability to manufacture quality goods. But the minute we start focusing more on this country's ability to manufacture jobs than we do our ability to manufacture things is the minute we step out onto what promises to be a very slippery slope."

Sainati is correct. Germany has weathered the recession pretty well because it continues to manufacture goods that others want. As result, Germany's unemployment rate has been relatively low. To read more on that subject, see my post entitled Entrepreneurs, Medium-Sized Companies, and the Global Supply Chain. Sirkin points out in his article that manufacturing -- once seen as a zero-sum game -- is no longer perceived as an us versus them scenario. He writes, "The good news about U.S. manufacturing is no fluke. For [numerous] reasons, ... the manufacturing renaissance should continue for years to come." Sirkin, however, warns that his optimism "does not mean it will be smooth sailing." Sirkin, like most analysts, sees rising labor costs in China and understands that the advantage of manufacturing overseas quickly dissipates once wages converge. He writes:

"With the value of the yuan continuing to increase, the total cost advantage will drop to single digits after businesses factor in inventory and shipping costs—with productivity-adjusted labor costs effectively converging by 2015 or so. This will make states such as Alabama, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Texas—with their competitive wages and flexible work rules—increasingly attractive as low-priced manufacturing hubs for the North American market. In fact, these states are becoming some of the cheapest locations in the developed world for manufacturing. That's why European companies such as Volkswagen are building plants there. For some companies, the economics already have reached the tipping point. ... The bottom line is clear. With rapidly rising wages in China, critical shortages of skilled workers in many of China’s lower-cost regions, and the higher productivity of U.S. workers, many companies are finding that it makes sense to manufacture goods for America in America."

Sirkin isn't trying to make a case for manufacturing either in China or in the U.S. Depending on circumstances, he insists that companies may want to consider doing both. He offers three rules of thumb to use when making the decision about where to manufacture your goods:

"First, don't write off China as a highly desirable manufacturing location. While more goods sold in the U.S. will be 'Made in the USA,' China—as the largest and fastest-growing developing economy in the world, with a rapidly growing middle class and a population more than four times America's—will remain a top overseas market and a key manufacturing location. Although other low-cost countries, such as Vietnam, Thailand, Cambodia, and Indonesia, will attract some manufacturing from companies seeking wage rates lower than China's, these countries lack the supply base, infrastructure, and labor skills to absorb much of China’s manufacturing. So don't even consider abandoning China. The new paradigm will be to manufacture in China and the U.S., not either/or. It's all about where to put the next plant. China-based plants will be busy serving China and other export markets. The U.S. may prove the best place for the next plant to serve the North American market."

Over the past several years, I've argued that we would start to see more regionalization within the larger context of globalization. Analysts like Sirkin only serve to convince me that the trend will emerge sooner rather than later. He continues with his second rule of thumb:

"Second, differentiate between product lines. Executives also need to understand that many products intended for the U.S. market should still be sourced from China. Products that require less labor and are created in modest volume—especially heavy expensive-to-shop products, such as household appliances and construction equipment—become strong candidates to shift to U.S. production. Labor-intensive products made in high volume, such as textiles and apparel, remain strong candidates for manufacturing overseas."

In other words, Sirkin agrees with Sainati that the old "labor-intensive" jobs that require unskilled labor aren't coming home. It's time to rev up those re-training programs. Sirkin's final rule of thumb discusses total costs. He writes:

"Third, consider total cost. Some executives make the mistake of comparing 'average' labor costs for Chinese production workers with those in the U.S. But averages can deceive. Although wages remain much lower in China, they don't reflect the full cost of doing business or range of decisions that companies have to make. Executives planning a new factory in China to make products for sale in the U.S. need to look at all the expenses. They are likely to find that, for many goods, China's cost advantage will shrink too much to bother with—and that's before taking into account the added expense, time, and complexity of long-distance management, logistics, and quality control."

Sirkin concludes, "Those who have been writing U.S. manufacturing's obituary need to recall Mark Twain’s famous 'last' words: 'The report of my death was an exaggeration.'" Supply chain analyst Bob Ferrari adds a nice side note to the discussion of manufacturing and jobs creation. He writes:

"[If] modern manufacturing process is all about doing more with less -- less time, [material] and labor -- ... readers may ask -- where, if anywhere does job growth come from? According to [General Electric CEO Jeff] Immelt, it comes from the supporting supply chain. Large manufacturers such as GE have placed ever more dependency on networks of suppliers. GE's Greenville South Carolina plant relies on 16 Tier One suppliers, Immelt's ratio is that for every employee at the factory, there are 8 jobs in the supply chain, because smaller suppliers lack the scale and resources to invest at the same level as global manufacturing OEM's." ["More Debates and Discussion on U.S. Manufacturing Competitiveness," Supply Chain Matters, 29 July 2011]

That is a pretty significant (and, I'm betting, often overlooked) statistic. The bottom line is that every manufacturing job we can create in America is a big plus for the economy.

There's one last argument I'd like to explore before leaving the subject of business and globalization. A recent report claims, "Strong multinationals seem less healthy than successful companies that stick closer to home." ["Understanding your 'globalization penalty'," by Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, McKinsey Quarterly, July 2011] Dewhurst and his colleagues write:

"Global reach seems to threaten the underlying health of far-flung organizations, even highly successful ones. In particular, we have found that high-performing global companies consistently score lower than more locally focused ones on several critical dimensions of organizational health—direction setting, coordination and control, innovation, and external orientation—that we have been studying at hundreds of companies over the past decade. Understanding this threat, and its causes, is a first step toward diminishing its impact."

One way of interpreting the McKinsey analysts' findings is that companies are better off manufacturing at home and exporting abroad. If, however, maintaining extended supply chains and overseas manufacturing plants are imperatives, you might want to rethink how businesses can be more regionalized to reduce the "globalization penalty." Dewhurst and company conclude, "Since even leading multinationals appear to suffer this globalization penalty, the importance of addressing it will only grow larger in the years ahead. For more and more companies, the globalization imperative is intensifying, and that could present additional organizational and leadership challenges that are not yet fully understood." The bottom line is that I'm still a big supporter of globalization; but, where holes are beginning to appear in its fabric, we need to start thinking about how to mend them.

August 25, 2011

Surmounting the Last Mile Challenge in Urban Areas, Part 2: Small and Clean Vehicles

Yesterday, I discussed a couple of pipe systems whose creators envision using to move freight underground to help relieve street congestion. Today, I want to move above ground. I want to discuss some solutions to the urban "last mile" delivery challenge that have a greater likelihood of being widely implemented. As I noted in yesterday's post, older cities often have narrow and/or crowded streets that are difficult to navigate. Stop a full-size truck to make a delivery on one of these streets and traffic necessarily comes to a halt. Even in newer mega-cities with wider streets, the amount traffic makes navigating and parking large vehicles a challenge. In addition, as large, internal combustion engine-powered vehicles idle in heavy traffic, they add to the pollution that can make urban life hazardous and unpleasant. The obvious solutions, of course, are to make vehicles smaller and cleaner. That is exactly what the designers of the vehicles I'll discuss today have done.

One of the early entrants into the fray was Modec, who built "the first zero emission van that is comparable in economy and performance to diesel equivalents." ["New high performance, zero emission commercial vehicle," by Michael Hanlon, Gizmag, 23 March 2006]. The Modec van had a range of up to 120 miles could reach a top speed of 50 mph carrying a load of up to two tons. "And with only threeModec-Parliment-3a moving parts in the electric motor instead of more than 300 in a typical diesel van engine, there [was] less to go wrong." Although, Modec never became a household name "its silent electric vans are a fairly common sight in London and are used by many well known companies such as Tesco, UPS and FedEx." Unfortunately, the company didn't survive and shut its doors earlier this year ["Modec, EV van maker, finally shut down," Zero Emission Motoring, 1 April 2011] Although Modec's vans successfully plied the streets of London, they would still be too big for some tight streets there and elsewhere.

In 2008, PSA Peugeot Citroën and fuel cell specialist Intelligent Energy introduced a smaller van, the H2Origin demonstrator vehicle. ["H2Origin demonstrator vehicle achieves 300km range," by Noel McKeegan, Gizmag, 22 April 2008]. McKeegan reported:

"A three year collaborative research project by PSA Peugeot Citroën and fuel cell specialist Intelligent Energy has born fruit in the form of the H2Origin demonstrator vehicle, aH2Origin battery-electric vehicle that uses a specially designed hydrogen fuel cell to triple its range to an impressive 300km (186 miles). The hydrogen storage system developed for the zero-emission demonstrator vehicle, which is based on the Peugeot Partner Origin van, is compact enough to squeeze under the bonnet and utilizes a swappable storage rack of compressed hydrogen tanks that slide out the rear, by-passing the need for a conventional fuel station and therefore simplifying the infrastructure needed to make hydrogen-powered vehicles a commercial reality."

I couldn't find any follow-on articles that would lead me to believe that the H2Origin has been put into production. However, its size, zero-emission propulsion, and swappable storage rack capability makes this concept standout. According to the article, "The fuel cell units have a lifetime of 5,000 hours, or about five years based on an average use of three hours per day." Delivery vehicles, of course, are going to be used more (probably a lot more) than three hours per day. I suspect one reason that the H2Origin has not caught on is because fuel cell technology hasn't caught on. Hybrid and all-electric vehicles appear to be the direction that most companies are taking.

In 2009, Mitsubishi unveiled its i-MiEV CARGO as a concept vehicle. MiEV stands for Mitsubishi innovative Electric Vehicle and the CARGO is only one of the vehicles in that line. ["Mitsubishi i-MiEV CARGO and PX-MiEV Plug-in hybrid crossover concepts," Gizmag, 1 October 2009]. The article reported, "The CARGO in particular looks like it will fill an immediate need for emission-free delivery vehicles in the world's most congested cities." Although Mitsubishi was reportedly "accepting pre-orders for delivery in April 2010," the latest article I could find still listed the CARGO as a concept vehicle. ["Mitsubishi i-MiEV Cargo," House of Japan, 12 June 2011] That article reported:

"Derived from the production i-MiEV, this concept maximises the outstanding environmental performance and economic efficiency characteristics that define the EV and at the same time adds a generous amount of rear free space to extend the range of usesMitsubishi-imievcargo to which it can be put by corporate users and self-employed operators in particular. The rear space features space-efficient cubic dimensions to allow the user to exercise their imagination fully in adapting it for whatever use he/she chooses. The result is a concept for an EV that meets user needs for a variety of situations: from business use, where maximum payload space is required, to leisure and other individual owner uses. Measuring 1350 mm wide by 1180 mm deep and 1100 mm high and having a flat floor, the cube-shaped luggage compartment at the rear of the vehicle allows every inch of available space to be utilised. The height of the compartment floor has been designed to facilitate loading and unloading of luggage and make it more user-friendly."

Another company that has made a splash with an all-electric commercial vehicle is Ford. ["Ford unveils long awaited 2011 Transit Connect Electric van," by Mick Webb, Gizmag, 18 February 2010] Webb reported:

"The Ford Motor Company['s] ... all-electric light duty commercial vehicle is the first in Ford's accelerated electrified vehicle plan. ... Ford developed the all electric van inFord transit-connect partnership with Azure Dynamics using Azure's Force Drive battery electric powertrain and Johnson Controls-Safts lithium-ion battery technology. ... The Transit Connect Electric van is expected to have a top speed of 75mph and a targeted range of up to 80 miles on a full charge. Owners of the vehicle will be able to recharge either at standard 120V outlets or at a 240V charge station installed at the user's giving a full charge in six to eight hours, with a transportable cord enabling charging at either. ... Ford says the Transit Connect Electric is ideal for fleet owners with well defined routes that travel predictable distances and have access to a central recharging location. The company goes on to say that aside from having the advantage of a lower cost of operation, the vehicles also offer lower maintenance costs over the life of the unit with fewer moving parts, as well as doing away with oil changes and tunes ups."

The Transit Connect Electric van is now in production and recently completed an Eco Rally in the UK that tested the limits of its range. ["Transit Connect Electric vans complete 75-mile Oxford to London Eco Rally," by Eric Loveday, autobloggreen, 5 August 2011]. Mercedes-Benz has also introduced an all-electric cargo van for urban use called the Vito. ["Mercedes shows pre-production electric Vito Van," Gizmag, 13 February 2010] The article reports:

"During 2010, more than 100 Mercedes-Benz Vito vans [were] delivered to 20 customers, primarily fleet operators and public institutions wishing to transport items inMercedes-vito-electric environmentally sensitive zones with zero emissions, including no CO2 emissions, and low noise. Deployment scenarios therefore typically involve short distances and making many stops in urban areas. Production of a further 2000 vehicles is planned in the next phase. The drive configuration is designed solely to run on battery power and thus dispenses with the powertrain intended for combustion engines. A battery featuring powerful lithium-ion technology supplies energy to the Vito. ... The Vito's range averages 130 km but can be considerably higher given an appropriate driving style. ... Performance is oriented around customer requirements: an electronically limited top speed of 80 km/h is designed to meet ... customers’ transportation needs in and around urban areas."

One company taking the hybrid route is Bright Automotive. ["The appropriately named Bright IDEA hybrid delivery van," by Ben Coxworth, Gizmag, 30 January 2010] Coxworth reports:

"Bright Automotive is a product of the Colorado-based green think-tank, the Rocky Mountain Institute. They launched in January 2008, and by the following May, wereIdea-0 unveiling the IDEA to the world at the Electric Vehicle Symposium in Norway. The vehicle was designed with input from corporate clients, who dictated what they wanted in the way of comfort, utility and efficiency. The IDEA has a claimed 40-mile all-electric range, and gets nearly 40mpg in standard hybrid mode. This is thanks in part to its lightweight, aluminum/composite construction. By Bright's calculations, clients will save $US.18 per mile and 1,500 gallons of fuel per year, over gas vehicles. On a larger scale, a fleet of 250,000 IDEAS should save 30 million tons of CO2 and 2.8 billion gallons of fuel over their 150,000-mile life cycle. The IDEA has more to offer than fuel-efficiency. For starters, its front passenger seat converts into an office that includes a laptop/work surface, file storage, and an electronics charging center. It also has an interactive touchscreen console, and an integrated structural bulkhead, to keep the cargo in the back where it belongs. Most of the materials used in its interior are either recycled, recyclable, or come from natural, renewable sources."

Although the IDEA is not yet in production, the company announced earlier this year that it was hiring 200 employees "in Southeast Michigan in 2011 to help make the Idea plug-in hybrid van a reality." ["Great IDEA! Bright Automotive looking for 200 new employees," by Sebastian Blanco, Autobloggreen, 4 Janaury 2011].

When streets are too narrow for even the smallest of vans, the best solution might be a scooter. Honda and Vectrix both offer such vehicles. Honda's scooter is called the Gyro. ["Honda's 50cc three-wheeled Gyro cargo scooter," Gizmag, 8 December 2009] The article reports:

"Honda's three-wheeled Gyro, [is] a Japanese-only delivery scooter with two wheels at theHondas-gyro-three-wheeled-scooter-3 back that tilts. ... Honda's three-wheeled Gyro can be purchased naked or fully enclosed and is designed like a cab-chassis utility, to be fitted with an aftermarket rear section suitable for your line of business. To say they are the most common road vehicle in Tokyo, the world's largest and most congested urban area, is no exaggeration. The frugal 50cc engine enjoys a tax break in Japan, and in a city where vehicles rarely get near the speed limits, is more than powerful enough to get the job done. Equally interesting is the array of boxes built onto the platform, some of which offer enough carrying capacity to fit a small third world country. It's a monumental sales success in Japan and has been produced in one form or another for 28 years, with the actual Gyro model now in production for 27 years."

Surprisingly, the article reports that the design for the Gyro is actually British and was "first marketed as the BSA Ariel 3 in 1970. The company fell apart soon after that and it was subsequently licensed to Honda." As successful as it has been, I won't be surprised if it eventually gets marketed globally. Costing less than $3500, I suspect it would be profit-maker. While Honda's Gyro uses a conventional internal combustion engine, Vectrix's Maxi-Scooter is an electric vehicle. ["Vectrix Electric Maxi-Scooter three-wheeler prototype," by Michael Hanlon, Gizmag, 16 November 2006] Hanlon reports:

"While the established players in the scooter game have shown concept machinery in the fuel cell, electric and hybrid genres, there's one European company that has been quietly going about the business of designing and building a viable electric maxi-scooter withVectrix Maxi-Scooter performance roughly equivalent to a 400cc conventional internal combustion engined mount – Vectrix. The Vectrix maxi-scooter is 100% emission free, has a top speed of 62 mph and runs for up to 68 miles on a single 2-hour charge from a standard electricity socket. Combined with low running costs, minimal maintenance, ease of operation, and generous storage, the Vectrix maxi-scooter is the world's first practical zero-emission two-wheel vehicle. ... The great news is that Vectrix recently purchased the EV rights to the innovative Vespa three wheeled carving scooter. ... The variable front suspension provides stability at low speeds and excellent handling at higher speeds. The 3-wheel scooter is extremely versatile and will be popular with local businesses and with consumers with limited riding experience as well as being ideal as a delivery vehicle and council/police mount."

The last mile in most supply chains is the most difficult to master. Some of these innovative vehicles may help make that challenge a bit easier.

August 24, 2011

Surmounting the Last Mile Delivery Challenge is Urban Areas, Part 1: Pipe Dreams

Delivering goods to final destinations (i.e., the "last mile" challenge) remains problematic for freight haulers in many urban environments. Towns and cities whose histories span millennia often have narrow streets unsuited for regular delivery vehicles. Many are also overcrowded with vehicles that cause traffic jams and pollute the air. Over the past decade, a number of novel (and sometimes quirky) ideas for urban and remote delivery have surfaced. What started me thinking about the last mile challenge was an article in The Economist that talked about the potential usefulness of pipes for moving packages in urban areas. ["Put that in your pipe and poke it," 6 January 2011] The article explains:

"Enthusiasts of the digital economy sometimes forget that bits are not everything. However important information is in transforming business, most of what is actually bought and sold is still physical goods, and those goods need to be delivered to the customer. Unlike information technology, though, freight transport has not evolved much during the past few decades. It takes only a few seconds to choose and buy something from an online store, but several days for it then to reach the purchaser. That process also burns oil, contributes to traffic jams and makes the planet's atmosphere a little warmer by releasing carbon dioxide. Freight transport could thus use some fresh ideas. Or at least a new version of an old idea. And that is exactly what Franco Cotana, an engineering physicist at the University of Perugia, in Italy, has in mind. He proposes to revive, with a modern twist, an extinct technology called the pneumatic pipe."

Some bank drive-through portals (at least in the U.S.) still use pneumatic tubes into which customers slip containers holding their deposit or withdrawal requests. Up until the late 1950s some department stores and factories used similar systems to carry items (like cash and notes) from place to place within large buildings. Pneumatic tubes are still around, but they are nowhere near as ubiquitous as they were early last century. The article continues:

"In the late 19th and early 20th century, underground tubes were used in many cities to speed up the transport of mail between post offices and government buildings. Letters were put into capsules, the capsules into the tubes, and compressed air was then used to push the capsules from one station to the next. It was not uncommon at the time to think that pneumatic post of this sort would develop into a wide network, like telephony or electricity. In 1900 Charles Emory Smith, then postmaster-general of the United States, wrote that by the end of the decade he expected the 'extension of the pneumatic tube system to every house, thus insuring the immediate delivery of mail as soon as it arrives in the city'. The reason this never happened, Dr Cotana observes, is that air compressors are expensive to operate and maintain, and the energy they produce dissipates quickly, so capsules can cover only short distances. But technology now exists to overcome those limitations."

The technology to which Dr. Cotana refers does not involve improved air compressors (they are still expensive to operate and maintain); rather, Cotana is referring to an entirely different technology -- magnetic levitation. The article explains:

"Pipenet, a system Dr Cotana patented in 2003 and has been developing since then, is based on a network of metal pipes about 60cm (two feet) in diameter. Instead of air pressure, it uses magnetic fields. These fields, generated by devices called linear synchronous motors, both levitate the capsules and propel them forward. The capsules are routed through the network by radio transponders incorporated within them. At each bifurcation of the pipe, the transponder communicates the capsule's destination and the magnets pull it to the left or the right, as appropriate. Air pumps are involved, but their role is limited to creating a partial vacuum in the pipes in order to reduce resistance to the capsules' movement. This way, Dr Cotana calculates, capsules carrying up to 50kg of goods could travel at up to 1,500kph — so you could be wearing a pair of jeans or taking photographs with a new camera only a couple of hours after placing your order."

I think that a 1500 kph (772 mph) journey through a pipe qualifies as a wild ride! Admit it, the idea is intriguing. Goods could be stored in warehouses far from crowded city centers and rushed quickly to stores where the goods could be delivered. The one drawback, as you might expect, is cost. According to the article, the cost could "be kept below €2.5m per kilometre ($5m per mile)" if "the tubes could use existing rights of way alongside roads and railways." As the article concludes, "Whether that is cheap enough for the system to be viable remains to be seen." Apparently, this is not simply a pipedream(pardon the pun). The article reports that Cotana's team has "completed a feasibility study for a pipeline network in Perugia, a medieval city whose narrow, steep streets make existing means of goods delivery particularly inefficient. This study suggests the system would repay the cost of building it within seven years." The article further reports that the Chinese are showing interest in the system.

Professor Cotana's team is not the only group looking to use pipes to carry freight. Designer Phillip Hermes recommends using sewerage systems for transporting goods. ["Robotic Moles deliver goods through the sewers," by Darren Quick, Gizmag, 4 August 2009] Quick reports:

"Although the first sewers date back to ancient times, concerns about public health in the 19th century saw many cities construct extensive underground sewer systems to help control outbreaks of disease. Some of these sewers evolved from open drains along the center of streets that were covered to provide, not only cleaner, but also wider and therefore less crowded streets. Now designer Phillip Hermes has come up with a concept that could also reduce traffic congestion on crowded city roads by turning the sewerage system into a system for transporting goods."

Although I'm unaware of any cities seriously considering implementing this concept, it has been well thought out. Quick explains:

"Hermes' idea ... is called the Urban Mole. It consists of a small transportation unit – the Mole – which can be filled with goods and sent from a packing-station, post-office, orUrban-mole private building with an advanced sewer-connection. It might not sound hygienic, but the Mole itself would travel along a rail positioned at the top of the sewer pipe to reduce the chances of contamination. Each Mole is also hermetically sealed and features a round shape with a surface that draws on the lotus-effect to repel water and make cleaning easier. Electricity to drive the electric motor of each Mole is supplied by the rails. Since the sewer system is structured like a road network where more traffic means the bigger the pipe, the Mole would depend on the larger pipes, which run under busy streets. For this reason you wouldn't expect to wait at your toilet bowl for a delivery, instead you would need to go to the nearest 'Molestation', which would consist of a special port that ensures customers only come into contact with the Mole's interior instead of the outer shell."

According to Quick, the "Mole" would probably carry less Cotana's mag-lev system because it "is a little bigger than an average shoebox." Whereas Cotana's system could be used by brick-and-mortar stores to access inventory at warehouses, Hermes' system would more likely be used for transporting goods ordered on-line. "Hermes foresees a future where running out of a vital ingredient while cooking could be solved by placing an order and heading to the nearest MoleStation for a delivery that would take less than 10 minutes instead of requiring a half-hour drive cross town."

Hermes' system should be less expensive to build than Cotana's because it would use existing pipes; however, Cotana's system would likely prove more efficient and versatile. Either system would help improve traffic congestion in crowded urban environments. The ideal implementation, of course, would be in areas where the pipe infrastructure could be installed along with other new construction. Both pipe systems would require the cooperation (and probably financial support) of governments. Unfortunately, in the current economic environment, such support is unlikely to emerge.

Tomorrow I'll discuss some of the ground transportation vehicles that are being designed for use in urban areas.

August 23, 2011

Supply Chain Risks: Who's in Charge and What are They Looking At?

Bill McBeath, chief research officer at ChainLink Research, has stated, "Most companies fail to take a holistic approach to supply chain risk management. Individual functions do address some of their own risks in isolation, but typically there is no high-level executive with the charter and power to create and drive an integrated approach to managing supply chain risk." ["Is Anyone in Charge – Who’s Managing the Risks?" SupplyChainBrain, 10 February 2011] Supply chain analyst Bob Ferrari agrees with McBeath. He writes, "Companies discover too-late that supply chain risk exists in many areas, and no one function has the empowerment to address systemic issues of quality and adequate controls." ["Controlling Supply Chain and Quality Risks: Who? What? When?" Supply Chain Matters, 5 November 2010] The point that McBeath and Ferrari are making is that segmenting risk management rather than addressing it holistically is like trying to keep water out of a boat filled with holes.

Ferrari believes that an executive needs to be empowered to oversee traditional risk management tasks as well as trying to prevent "contamination and breakdowns in production and distribution quality standards." Over the years, Ferrari writes that he has provided "ample evidence of a discernable trend of breakdowns in quality and supply chain risk management." These breakdowns risk lives, corporate reputations, and can even result in company failure. Ferrari concludes, "Firms need to wake-up and heighten awareness to quality, supply chain risk identification and mitigation." Continuing his discussion about who should be in charge of risk management, McBeath writes:

"Who is responsible for managing supply chain risk in the enterprise? Many companies don't have a good answer. The responsibility is typically split between several roles:

"• Risk Managers—Often companies have a risk manager, but frequently that person's focus is on managing insurance: ensuring that company is adequately covered and taking steps to control premiums.

"• Sourcing and Procurement Personnel—They are generally responsible for managing suppliers performance. For mature sourcing organizations, this includes assessing risk during supplier selection and during the period of performance. But this is often confined to checking financial viability of the supplier and trying to limit sole-sourcing situations. Rarely does it include a more holistic approach to risk that would encompass things like the business continuity readiness of the supplier or the location of the suppliers plants or who the supplier might be outsourcing to.

"• Business Continuity Manager—This is often an IT-centric function that focuses on keeping information systems up and running. It also can include disaster recovery plans for the various facilities and functions within the company, such as manufacturing, distribution, call center, etc.

"• Supply Chain Planning—In long-term planning (network design) and short-term planning (inventory planning), some thought is given to the risks as part of the overall planning process.

"• Logistics and Transportation—Usually seeks some diversity in carriers and routes and may or may not have backup plans in place.

"So risk management is taking place in pockets. But do these functions coordinate their risk analysis and mitigation into a holistic plan? Rarely. And do they consider the risk going back several tiers into the supply chain, which is becoming more and more important? Almost never."

Considering all that is at stake, the picture McBeath paints is pretty bleak. As I noted above, the segmentation of risk management leaves holes (sometimes gaping ones) in corporate risk management activity. For example, who, in McBeath's list of people concerned with risk management activities, would be responsible for corporate reputation or the emergence of counterfeit supplies and goods? According to Janice Abel, "Counterfeiting is a growing and pervasive problem across all industries." ["Protecting Your Supply Chain from Counterfeit Products," Logistics Viewpoints, 17 January 2011] She continues:

"In the electronics, consumer products, food, pharmaceutical, medical devices, aerospace, defense, and automotive industries it is particularly frightening because it threatens consumer health and safety, as well as corporate profits and brand equity. Counterfeiting is increasing worldwide, with counterfeiters using increasingly more sophisticated techniques and consumers purchasing more goods online. The value of counterfeit products was expected to reach $1 trillion globally in 2010, according to the International Chamber of Commerce and World Customs Organization."

Abel asserts that the "use of Anti-Counterfeiting and Brand Protection (ABP) technologies and methodologies is especially important for manufacturers if counterfeit versions of their products could pose a risk to consumer health or safety; compromise brand equity; result in lost revenues; or increase their liability risks." That is why it is critical to have an empowered executive who can take a holistic view of risk management. Abel concludes, "It is very difficult for legitimate manufacturers to keep pace with the increasingly sophisticated techniques and methodologies counterfeiters are employing." Even in traditional risk areas, the more complex supply chains become the more challenges a risk manager faces. One tool in a risk manager's kit is forecasting; but, as I have noted in previous posts, forecasting that only extrapolates the past into the future or is done unevenly or infrequently isn't up to the task. Steve Banker compares such forecasting efforts to the thoughts of a turkey prior to Thanksgiving. Up to the appointed day of slaughter, the turkey has things really good and, based on past experience, he could predict that things would remain that way. Banker writes, "We can learn a lot from the past, but perhaps not as much as we think. [The turkey] would attest to that, if he was still around." ["Turkeys, Forecasting, and Supply Chain Risk Management," Logistics Viewpoints, 2 August 2010] Banker continues:

"All forecasts are thrown out the window when ... catastrophic events occur. That is why companies should apply supply chain risk management to product forecasts and not just to factories, suppliers, and IT systems."

While I agree with Banker, good product forecasting has proved elusive. For more on that topic read my poste entitled You Can Almost Hear the Bullwhip Effect Cracking. Banker concludes, "The key point is that by having proactive plans companies can react more quickly to these kinds [of] forecast error events. Having the plan in place prevents companies from dithering and can save (or make) them a whole lot of money. This kind of planning can separate turkeys slotted for slaughter from eagles prepared to soar." How many times over the past year have you heard differing forecasts about the economic recovery? Unfortunately, the U.S. remains in an economic malaise. As a result, some companies remain at risk of folding. If one or more of those at-risk companies are your suppliers, you could have a problem.

Hans-Kristian Bryn and Michael Denton, consultants at Oliver Wyman, claim that "companies still face much supply chain and bottom line risk from suppliers struggling to keep out of bankruptcy court or failing all together." ["In Dynamic Economic Times, Do we Need Predictive Tools to Better Highlight Supplier Financial and Operational Risk?" Supply Chain Digest, 9 November 2010] As a result, they "argue a new approach needs to be taken to address and predict potential supplier financial and operational failure." The new approach is needed, they claim, because "supply chain risks have moved from the province of engineers into the realm of chief financial officers and treasurers." I think that McBeath and Ferrari would argue that supply risks have moved from the province of engineers into the province of everyone -- which is why someone needs to be in charge. McBeath concludes:

"Sure, we have a few Chief Risk Officers in place, but that is the exception rather than the rule, and even then you have to wonder how much clout they really hold in the organization. Until supply chain risk management becomes high on the CEO's agenda, this situation is unlikely to change. Research has shown that when there is a major disruption to a company's supply chain, their stock typically falls between 25 percent and 30 percent relative to the market (and it stays there for at least 12 months). That fact has not been enough to get the attention of the CEO. Not until the markets start explicitly pricing the stock (up or down), based on a company's level of supply chain resilience, do we expect the current approaches to risk management to change significantly."

McBeath agrees with Bryn and Denton that at-risk suppliers remain a challenge; but, he also believes that the risk may be a wake-up call for CEOs who are "worried about trying to know which of their suppliers will survive or not." As a result, he writes, "The economic downturn was actually somewhat good for the risk management business." He believes that CEOs won't really turn their attention to risk management, however, until after they re-establish their businesses on a growth vector.

August 22, 2011

Entrepreneurs: Hares versus Tortoises

British entrepreneur Luke Johnson writes, "I used to think Mark Zuckerberg's achievement with Facebook was a fabulous inspiration to entrepreneurs everywhere. Now I’m not so sure." ["Zuckerberg wannabes squander careers," Financial Times, 26 July 2011] With all of the negative press that Zuckerberg has received following the release the movie The Social Network and continued lawsuits concerning Facebook's founding, you might think that Johnson is disappointed with Zuckerberg's ethical failings. He assures us that he is not. Instead, he writes that he is concerned that Zuckerberg "sets an example of meteoric success that virtually no one else will ever be able to repeat." You might be asking yourself, "What's wrong with aspiring to great success?" It's not the dreams of success about which Johnson is concerned. He just wants to inject a bit of reality into those dreams. He continues:

"Wannabes are trying to copy him, and consequently squandering their careers on false hopes. I have lost count of the number of business plans I've seen from 'digital pioneers' who want to build the next Facebook or suchlike. They are full of extraordinary upward projections of income, mind-boggling growth assumptions, spectacular valuations and heroic demands from backers. I put them all in the shredder. As Samuel Johnson put it: Almost every man wastes part of his life in attempts to display qualities which he does not possess, and to gain applause which he cannot keep.'"

There have been other "mind-boggling" successes, like Microsoft, Google, and Amazon, but they grew at a slower (if still amazing pace). But even adding in companies that have sparked new industries and anchored new fortunes, the numbers are still relatively small. Johnson is basically saying, "Get real." If meteoric success comes it comes; but, don't base your business plan on it. He continues:

"The truth is that no other company has ever expanded like Facebook. The vast majority of start-ups do not raise formal venture capital – they fund their operations via family and friends, bank debt, savings, angel investors and supplier credit. This is the real world of new business, rather than the near-fantasy land of Silicon Valley. Moreover, every VC portfolio is littered with dozens of flops and write-offs – the clones of Twitter, LinkedIn and Zynga that no one talks about. Besides, while I encourage youngsters to become their own boss, most winners are actually in their 30s or 40s by the time they make it. Experience counts when it comes to management – even VCs know this. To expect to hit the big time just out of university is to court disappointment."

That's the real point that Johnson is trying to make -- don't dream so big that your disappointment sours  your entrepreneurial ambitions. He wants entrepreneurs to succeed. The world needs entrepreneurs, but it needs them to succeed. Losing hope because big dreams fail to materialize would be a great waste of creativity and enthusiasm. Johnson continues:

"This illusion of instant technology wealth is relatively new. Thomas Edison and other inventors took years to establish fortunes – and many, like John Logie Baird and Charles Goodyear, never did. But for virtually the first time in the history of capitalism, the internet bubble permitted early-stage companies with no tangible assets to raise significant capital based on a plan – but without property, franchises, revenues, patents and certainly no profits. Astonishing winners such as Google and Amazon distorted the financial world, by demonstrating that enormous amounts of money could be made even though there appeared to be no proven business model. But they did not really change the rules: they were the exceptions."

There's nothing wrong with dreaming big if those dreams are accompanied by hard work, a sound business plan, and a lot of patience. Johnson explains:

"My experience is that companies generally take from five to 10 years to break through. Those enterprises that are doomed will fall by the wayside in this period – only the viable ones remain. These are the enduring undertakings that are self-sustaining and have potential. They are led by determined founders who are persistent and who have invariably matured over the life of their creation. The best businesses are not built to sell in a hurry. I am innately suspicious of proprietors who focus from the beginning on an indecently swift exit. I like projects that will last, that can generate cash to pay dividends as a form of financial return, and where the owners are not obsessed exclusively about making a quick capital gain for the financiers. I prefer managers who concentrate on customers, competitors and beating this year's budget. These are the underpinnings of a genuine commercial venture."

Business is business. Get the business fundamentals correct and your chances of succeeding go way up. Get them wrong and your aspirations will end up in the trash bin of broken dreams. Johnson concludes:

"The romantic mythology of a student starting a business on a laptop needs adjusting. Most companies service mundane requirements, quite possibly business applications rather than sexy consumer projects like Facebook. And many companies will be lifestyle businesses, while hardly any will be record-busters. But that doesn’t make them any less valid or worthwhile to the founder. Warp speed businesses that rise in vertiginous fashion usually decline in a similar manner. The web encourages many entrants, but also seemingly unassailable monopolies – until they are not. For online users are fickle: look at the collapse of social networks MySpace and Bebo."

Hugo Greenhalgh agrees completely with Johnson's arguments. "Entrepreneurs forging ahead withTortoisehare expansion plans," he writes, "might want to scale back their ambitions in favour of slower but more sustainable growth if they want their companies to survive long term." ["Slow growth is key, says research," Financial Times, 1 August 2011] Greenhalgh reports that "SAP UK & Ireland and Delta Economics found that just 47 per cent of the Fast Track 100 list of fast-growing enterprises from 2000-01 are still in business today." So much for the hares. Greenhalgh continues:

"The fast Track 100, published each December in the Sunday Times, focuses specifically on small and medium-sized enterprises with high rates of growth. Software group SAP, which commissioned the study from Delta, noted that, overall, one in five companies to have appeared in the Fast Track list is no longer in business. Just under half (44 per cent) of these went into administration, with a third having been acquired. John Antunes, director of SME at SAP UK & Ireland, described the high-growth companies on the list as 'vitamin shots for the economy'. He added: 'In our experience of working with high-growth small and medium-sized companies, many of them hit a wall where they need a more grown-up approach to how they manage their businesses. Often it's not just about selling more or having an amazing idea that flies, but also about running your business better, more consistently and more transparently.'"

By now I'm hoping that you understand that entrepreneurship requires both good ideas and sound business practices. Dreamers and visionaries (if they don't possess the skills themselves) need to find business-savvy partners if they want to see their dreams sustained. Microsoft founders Paul Allen and Bill Gates come to mind as the kind of partnership needed in the beginning. Greenhalgh continues:

"Rebecca Harding, chief executive of Delta Economics, which specialises in studies of entrepreneurial behaviour, said one of the most common pitfalls for a growing business was taking on too much debt too quickly. She said: 'If you are a company that has experienced very rapid growth, there is a chance that you will look at overleveraging and taking financial risks to scale up very quickly. It is about not growing too fast too quickly, but making that growth sustainable.' Guy Rigby, head of entrepreneurs at Smith & Williamson, the accountancy and investment management group, said good management was needed as high-growth companies can experience 'painful stresses and strains'. He added: 'Fast-growth businesses create excitement and euphoria, but they often succumb to unseen risks and events. Don't let your business run away from you by expanding too fast.'"

Succeeding ethically in the business world requires self-constraint, clear-headedness, and a basic understanding of finances. It is understandable how unjustified exuberance can lead an entrepreneur into making poor business decisions; however, it is unforgiveable when such decisions prove fatal for the company. Greenhalgh believes that most entrepreneurs understand that "Zuckerberg stories" are rare (even if they harbor dreams of becoming like him). He concludes:

"Entrepreneurs themselves said they favoured slow growth over rapid expansion. Chris Arnold, creative partner at Creative Orchestra, an Anglo-Spanish ad agency, said: 'Slow growth is better for quality-based businesses. It allows you to hire the right people, maintain the ethos and tune the business as you progress.' His comments were echoed by Andrew Skipwith, founder and chief executive of Ratedpeople.com, an online directory of tradesmen and -women. He said: 'Of course high growth is what we all aim for, but it's a question of striking the right balance. We have a focus on the quality of growth, not just the headline numbers.'"

I'm glad that Greenhalgh stressed the importance of hiring the right people "for quality-based businesses." Fast growth often leads to desperation as deadlines near and projects fall behind. Acting out of desperation seldom brings desired results. Aesop had it right millennia ago, "Slow and steady wins the race."

August 19, 2011

Playing (and Working) Out of the Box

A year ago I posted a two-part series about a so-called "creativity crisis" in America. In Part 1 of the series, I focused on an article by Po Bronson and Ashley Merryman in which they reported that "for the first time, research shows that American creativity is declining" ["The Creativity Crisis," Newsweek, 10 July 2010] In that article, Bronson and Merryman wrote about the differences between Intelligence Quotients (IQ) and Creativity Quotients (CQ). They went on to report that children who scored well on CQ tests generally proved to be creative throughout their lives. In fact, "the correlation to lifetime creative accomplishment was more than three times stronger for childhood creativity than childhood IQ." The tests used to evaluate creativity were designed by Professor E. Paul Torrance back in the 1950s. Bronson and Merryman drew the conclusion that "American creativity scores are falling" from work conducted by "Kyung Hee Kim at the College of William & Mary," who has analyzed "almost 300,000 Torrance scores of children and adults. Kim found creativity scores had been steadily rising, just like IQ scores, until 1990. Since then, creativity scores have consistently inched downward."

In a more recent article, Sue Shellenbarger also looks at Professor Kim's work and asks, "What Makes Kids Creative?" ["A Box? Or a Spaceship? What Makes Kids Creative," Wall Street Journal, 15 December 2010] Shellenbarger begins her article with the story of a little boy who, when asked to create a board game he could play with his friends, mentally froze. He repeatedly told his teacher, "I can't think of anything." Other children in the class had no difficulty creating games they could play. Why some people are creative and others aren't still remains a bit of mystery. Shellenbarger writes:

"The Torrance tests have been used in the U.S. and abroad for decades and are often used in schools to determine which children are admitted to gifted programs. The test is considered a reliable indicator of divergent thinking—the ability to generate many different, new and appropriate ideas, says James C. Kaufman, an associate professor of psychology at California State University, San Bernadino, and an author on creativity. However, he says it falls short in measuring other dimensions of creativity, such as the ability to put these ideas to work to make new and useful products. Researchers believe growth in the time kids spend on computers and watching TV, plus a trend in schools toward rote learning and standardized testing, are crowding out the less structured activities that foster creativity. Mark Runco, a professor of creative studies and gifted education at the University of Georgia, says students have as much creative potential as ever, but he would give U.S. elementary, middle and high schools 'a 'D' at best' on encouraging them. 'We're doing a very poor job, especially before college, with recognizing and supporting creativity,' he says."

In Part 2 of the series mentioned above, I discussed some of the techniques that people have come up with to help us increase our natural creative capabilities. Shellenbarger continues her article by describing techniques being used to foster creativity. She writes:

"Many parents are stepping into the breach by nurturing their kids' creative skills. They are challenging them to generate new ideas or encouraging them to notice problems in the world around them and research possible solutions. By tolerating 'wrong' answers or allowing their children to live in a fantasy world for a while, parents can put off the emphasis on skill-building and achievement, researchers say. In the past, researchers thought of creativity as the ability to generate lots of new ideas. But in recent years, experts have begun assigning equal importance to learning how to pick the best ideas and solve specific problems, often by working in teams."

As I have written before, the myth of the lone genius persists despite the fact that most creativity gurus now believe that team efforts generate the most creative solutions to problems -- more on that later. Shellenbarger continues:

"Some parents are signing their children up for programs designed to foster creativity. One such program, Destination ImagiNation, Cherry Hill, N.J., is an educational nonprofit that involves nearly 100,000 students in annual competitions. Volunteer coaches guide teams of up to seven kids, grouped by age from kindergarten through college, who work together after school to come up with creative solutions. They're given projects like designing weight-bearing structures from foil, wood and glue, solving a community problem or, for small children, creating a play about bugs to show how they interact with nature and animals. Similar programs include Odyssey of the Mind, Sewell, N.J., and Future Problem-Solving Program International, Melbourne, Fla."

If parents can't afford to send their children to organized programs (or if such programs are not available near them), Shellenbarger says there a number of things they can do at home as well. She explains:

"To nurture creative skills at home, parents can invite children to come up with possible solutions for everyday problems, and listen to their ideas with respect, says Don Treffinger, president of the Center for Creative Learning, a Sarasota, Fla., consulting group. A child who notices that an ailing neighbor is snowed in might shovel her sidewalks, for example. A child who is troubled by photos of Haitian disaster victims might donate allowance money to a relief fund. Asking open-ended questions and showing interest in answers can help. ... Parents also need to refrain from judging kids' ideas, even if they seem crazy or naive."

Much of the advice given above is the same advice given to parents who want to foster entrepreneurial skills in their children. For more on that subject, read my post entitled Raising Entrepreneurs. Shellenbarger continues:

"It is best to avoid paying too much attention to the outcome of kids' creative efforts, says Dr. Kaufman, the professor. 'The more emphasis put on the final product—"It's so beautiful I'm going to frame it and tell my friends about it,"' he says, the greater is 'the risk that the kid is going to do pictures for the praise, and not for the enjoyment.' Instead, emphasize effort over results. ... Raising a creative child can be taxing. Such kids tend to have above-average 'spontaneity, boldness, courage, freedom and expressiveness,' Dr. Kim says. So they sometimes behave like little anarchists. Parents can explain when it is OK to be whimsical, and when they have to toe the line, Dr. Kaufman says."

What if you're a business executive with employees rather than a parent with children in whom you want to foster creativity? Is it too late? Probably not. As Shellenbarger reported above, "Experts have begun assigning equal importance to learning how to pick the best ideas and solve specific problems, often by working in teams." Business executives, according McKinsey & Company analysts Marla M. Capozzi, Renée Dye, and Amy Howe, can also foster team creativity. ["Sparking creativity in teams: An executive's guide," McKinsey Quarterly, April 2011] They write:

"Although creativity is often considered a trait of the privileged few, any individual or team can become more creative—better able to generate the breakthroughs that stimulate growth and performance. In fact, our experience with hundreds of corporate teams, ranging from experienced C-level executives to entry-level customer service reps, suggests that companies can use relatively simple techniques to boost the creative output of employees at any level."

Fortunately, they don't leave you in the dark about what those "relatively simple techniques" entail. I fully agree with what they write next:

"The key is to focus on perception, which leading neuroscientists, such as Emory University's Gregory Berns, find is intrinsically linked to creativity in the human brain. To perceive things differently, Berns maintains, we must bombard our brains with things it has never encountered. This kind of novelty is vital because the brain has evolved for efficiency and routinely takes perceptual shortcuts to save energy; perceiving information in the usual way requires little of it. Only by forcing our brains to recategorize information and move beyond our habitual thinking patterns can we begin to imagine truly novel alternatives."

Most creativity gurus talk about perspective rather than perception, but the principle is the same -- you want people to look at challenges differently. Capozzi, Dye, and Howe go on to discuss four practical ways that executives can help teams gain new perspectives or perceptions about the challenges before them. They are: immersion, overcoming orthodoxy, analogies, and constraints. On the subject of immersion, they write:

"Would-be innovators need to break free of preexisting views. Unfortunately, the human mind is surprisingly adroit at supporting its deep-seated ways of viewing the world while sifting out evidence to the contrary. Indeed, academic research suggests that even when presented with overwhelming facts, many people (including well-educated ones) simply won't abandon their deeply held opinions. The antidote is personal experience: seeing and experiencing something firsthand can shake people up in ways that abstract discussions around conference room tables can't. It's therefore extremely valuable to start creativity-building exercises or idea generation efforts outside the office, by engineering personal experiences that directly confront the participants' implicit or explicit assumptions."

The innovative folks at IDEO call this taking the "deep dive." Capozzi, Dye, and Howe provide recommendations on how to begin. They write:

"For executives who want to start bolstering their own creative-thinking abilities—or those of a group—we suggest activities such as:

  • "Go through the process of purchasing your own product or service—as a real consumer would—and record the experience. Include photos if you can.
  • "Visit the stores or operations of other companies (including competitors) as a customer would and compare them with the same experiences at your own company.
  • "Conduct online research and gather information about one of your products or services (or those of a competitor) as any ordinary customer would. Try reaching out to your company with a specific product- or service-related question.
  • "Observe and talk to real consumers in the places where they purchase and use your products to see what offerings accompany yours, what alternatives consumers consider, and how long they take to decide."

Those are all excellent suggestions. To get a better idea of how IDEO conducts a deep dive, watch the video in my post entitled Outsourcing Institutional Innovation. On the subject of overcoming orthodoxy, Capozzi and company write:

"Exploring deep-rooted company (or even industry) orthodoxies is another way to jolt your brain out of the familiar in an idea generation session, a team meeting, or simply a contemplative moment alone at your desk. All organizations have conventional wisdom about 'the way we do things,' unchallenged assumptions about what customers want, or supposedly essential elements of strategy that are rarely if ever questioned. By identifying and then systematically challenging such core beliefs, companies can not only improve their ability to embrace new ideas but also get a jump on the competition."

Perhaps the one common denominator found in all creative people and teams is their willingness to challenge assumptions and test orthodoxies. Capozzi and her colleagues suggest some questions that can be used to start the process. They write:

"Executives looking to liberate their creative instincts by exploring company orthodoxies can begin by asking questions about customers, industry norms, and even business models—and then systematically challenging the answers. For example:

  • "What business are we in?
  • "What level of customer service do people expect?
  • "What would customers never be willing to pay for?
  • "What channel strategy is essential to us?"

The next topic covered by Capozzi, Dye, and Howe is the use of analogies to stir creative juices. They write:

"In testing and observing 3,000 executives over a six-year period, professors Clayton Christensen, Jeffrey Dyer, and Hal Gregersen, in a Harvard Business Review article, noted five important 'discovery' skills for innovators: associating, questioning, observing, experimenting, and networking. The most powerful overall driver of innovation was associating—making connections across 'seemingly unrelated questions, problems, or ideas.' Our own experience confirms the power of associations. We've found a straightforward, accessible way to begin harnessing it: using analogies. As we've seen, by forcing comparisons between one company and a second, seemingly unrelated one, teams make considerable creative progress, particularly in situations requiring greenfield ideas. We're not suggesting that you emulate other organizations—a recipe for disappointment. Rather, this approach is about using other companies to stir your imagination."

In my experience, people adept at using analogies are great communicators. They are the people that can help others understand complex ideas in a meaningful way. If you are putting together a team and know someone who uses analogies well, put them on the team. They will prove to be an invaluable asset. If you don't have such a person, Capozzi and her colleagues believe you can help generate your own analogies. They explain:

"Draft a list of questions such as the ones below and use them as a starting point for discussion.

  • "How would Google manage our data?
  • "How might Disney engage with our consumers?
  • "How could Southwest Airlines cut our costs?
  • "How would Zara redesign our supply chain?
  • "How would Starwood Hotels design our customer loyalty program?"

The final subject covered by Capozzi, Dye, and Howe is creating constraints. They write:

"Another simple tactic you can use to encourage creativity is to impose artificial constraints on your business model. This move injects some much-needed 'stark necessity' into an otherwise low-risk exercise. Imposing constraints to spark innovation may seem counterintuitive—isn't the idea to explore 'white spaces' and 'blue oceans'? Yet without some old-fashioned forcing mechanisms, many would-be creative thinkers spin their wheels aimlessly or never leave their intellectual comfort zones."

Ernest (Lord) Rutherford, the atomic scientist, once famously said, "We have no money, therefore we must think." Putting constraints (artificial or real) on a discussion does exactly what Lord Rutherford indicated it would do -- it makes us think. Once again Capozzi and her colleagues offer some questions that can be used to foster the "thinking" environment you desire. They write:

"Start by asking participants to imagine a world where they must function with severe limits—for instance, these:

  • "You can interact with your customers only online.
  • "You can serve only one consumer segment.
  • "You have to move from B2C to B2B or vice versa.
  • "The price of your product is cut in half.
  • "Your largest channel disappears overnight.
  • "You must charge a fivefold price premium for your product.
  • "You have to offer your value proposition with a partner company."

By creating such constraints, you might be able to kill a sacred cow or two that have been holding your business back and stifling creativity and innovation. Capozzi, Dye, and Howe conclude:

"Creativity is not a trait reserved for the lucky few. By immersing your people in unexpected environments, confronting ingrained orthodoxies, using analogies, and challenging your organization to overcome difficult constraints, you can dramatically boost their creative output—and your own."

Those are all excellent suggestions -- for business executives and parents. In the current stagnant economy, we need to remind ourselves that creativity and innovation are required to break free of the malaise and put the U.S. back on the road to prosperity.

August 18, 2011

IBM Recommends New Rules for Supply Chain Management

IBM analyst Karen Butner writes, "The complexities of today's economic environment and ever-expanding global supply chains mandate new guidelines for peak performance. Volatile global market conditions and customer demand variability require optimal supply chain configurations to synchronize supply and demand. But lack of visibility into the myriad information sources inhibits supply chain response to these unpredictable swings. Those companies looking to outperform their peers in the hyper-competitive marketplace will need to adopt new guidelines to restore supply chain stability and create enterprise value." ["New rules for a new decade," IBM Institute for Business Value, November 2010] You have to admit that Butner packed a lot terms into a very small space -- terms like: peak performance; customer demand variability; optimal supply chain configurations; synchronization; and visibility. Her purpose was not to overwhelm us with jargon but to underscore the complexity found in today's business landscape.

Butner indicates that new rules are needed to master this landscape. She claims that such rules will "restore supply stability and create enterprise value." That may be true; however, what new rules really need to do is help make sense of the complexity (i.e., allow technology to help simplify the complexity so that leaders can make better-informed decisions). Butner identifies three challenges that could be called "The Big Three Vs": Visibility, Volatility, and Value. Of the first, she writes:

"Volatility: Fluctuation in customer demand has been the leading challenge confronted by supply chain executives. Added to demand variances are increasing customer requirements for sustainable products and services, as well as heightened expectations for responsiveness, uncompromising quality and low cost. At the same time, though, supply chain managers are encountering poor quality and reliability performance from suppliers, which, along with logistics constraints and bottlenecks, hampers delivery performance and customer service levels. And, as more companies continue to globalize their operations and enter emerging markets, these issues may have no quick solution, as operations will become increasingly dependent upon a growing number of customers, suppliers, regulators and markets."

Volatility is a big problem. Customer demand volatility can result in the Bullwhip Effect that exacerbates the problem (for more on this subject, read my post entitled You Can Almost Hear the Bullwhip Effect Cracking). One source of volatility that Butner didn't mention was commodity price volatility. Prices of everything from oil to sugar are creating challenges for supply chain professionals. Concerning visibility, Butner writes:

"Visibility: As the number of supply chain partners increases, the need for accurate, time-sensitive information becomes more acute. But lack of collaboration and integration between supply chain and product development partners continues to be a major concern. Product lifecycle traceability in consumer products, pharmaceuticals and other industries is a growing requirement. Yet, despite continued technological enhancements, lack of visibility to worldwide, timely information to make in-stream decisions remains a significant issue. The bottom line is that the requirements for increased visibility require the dexterity to make fast decisions in response to constantly changing market conditions."

Everyone seems to agree that visibility and collaboration are going to be increasingly important differentiators for the best companies. As visibility and collaboration increase, so does complexity. Reservoirs of data become oceans of data. All that data is worthless if it can't be analyzed, assessed, and turned into actionable knowledge. That gets back to my point about the importance of technology in helping reduce complexity. Of course, actionable intelligence is no good if you don't have the capability to act upon it. That is why corporate alignment, synchronization, and demand-driven capabilities are also receiving more attention nowadays. Concerning value Butner writes:

"Value: There is, and seemingly always has been, constant pressure for supply chain management and operations to create enterprise value. End-to-end supply chain cost and pipeline inventory optimization are predominant challenges, as well as the means for protecting margin and decreasing working capital. Securing and deploying the right talent and skills for global operations remains a critical concern. The talent vacuum is most acutely felt in emerging markets, with nearly nine out of ten executives citing this as a challenge. The business risks associated with insufficient leadership talent is exposed in decreased cost efficiencies, inventory deployment, and in managing regional and local operations with partners. Managing risks and disruptions with global partners at each node is increasingly important. As supply chains become more complex and interdependent, managers must find a way to offset growing complexity with increased flexibility."

It appears that Butner agrees with Karin L. Bursa, Vice President of Marketing at Logility, who insists that companies need to give equal attention to people, process and technology. ["A Foundation for Successful S&OP," Supply Chain Digest, 10 February 2011]. She writes, "This trio of people, process and technology, is the foundation for success." Butner offers up three new rules she believes help address the three challenges discussed above. Those rules are:

"1. Know the customer as well as yourself. Smooth volatility with predictive demand. Predict demand and be in a position to react to demand variability with rapid response and allocation of all global resources.

"2. See what others do not. Unveil visibility with collaborative insight. Collaborate with visibility to events, with suppliers, service providers and customers in an open, action-oriented environment.

"3. Exploit global efficiencies. Enhance value with dynamic optimization. Optimize pipeline inventory, the global supply chain network and cost structures. Create cost-efficient sustainable products and practices while hedging risks with partners."

Rule number one -- knowing your customer as well as yourself -- is much easier said than done. Even with the mountains of point of sale data that is now available manufacturers and retailers still find themselves second guessing and sometimes making terrible forecasting mistakes. In my post on the Bullwhip Effect mentioned above, I cited an observation from a Financial Times report that stated:

"Producers of almost everything were left stranded when the global downturn took hold and retailers ran down inventories. On the way back up, the restocking of goods was so dramatic that most economists excluded the effect from their analysis, lest it skew the results. ... Such violent swings encourage the 'bullwhip effect'. This frustrating phenomenon occurs when falling customer demand prompts retailers to under-order so as to reduce their inventories. In turn, wholesalers under-order even further to reduce theirs and the effect amplifies up the supply chain until suppliers experience stock-outs – and then over-order in response. The effect can ripple up and down the supply chain many times. The whip may now be cracking on the downside." ["Inventories: the bullwhip effect," 31 July 2011]

Whether your customer is a retailer or the ultimate consumer, it appears that getting to know them remains a daunting challenge. That is why Butner's second new rule that involves collaboration is so important. Peter Knapp, president of international logistics services at Jacobson Companies, told staffers at SupplyChainBrain that "collaboration means creating cooperation by working with customers in an open manner and sharing information in a proactive way." ["How Collaboration Drives Supply Chain Reliability," 24 June 2011] This kind of collaboration "leads to operational excellence and reliability ... because when both providers and customers understand supply chain events, they are able to work together to achieve the best possible results." The article continues:

"'In a collaborative and reliable environment, customers never have to ask about what is going on in the supply chain,' Knapp says. 'They always have information and updates available.' Equally important, he says, is ensuring that employees view the customer as a collaborative partner and understand that they are not offering a commodity service. 'We believe that the future of our business is in open and true collaboration with our customers, and our customers appreciate that,' he says. A robust technology platform is essential to support this approach, Knapp says. 'Collaborative and reliable supply chains require optimization on a continual basis to be able to deliver at the right time,' he says. Jacobson also uses optimization to help determine the best mode for each shipment. 'With oil getting more expensive, industry is striving for this kind of optimized solution, but it is actually quite a hard task. An ability to manage information is key and creates the efficiency and reliability we are looking to provide.' ... 'Acquiring even the best software is not enough,' he says. 'You need to have the capacity and knowledge to manage the software and to tailor it for customers.'"

Butner's third rule -- exploiting global efficiencies -- is also not as easy as it sounds. A recent article in the McKinsey Quarterly indicates companies pay a price for globalizing. It concludes: "Strong multinationals seem less healthy than successful companies that stick closer to home." ["Understanding your 'globalization penalty'," by Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, July 2011] That's a topic worthy of a separate post. Although there are efficiencies to be found in the global supply chain, many analysts have pointed out that the longer the supply chain is the more complexities it involves. If reducing supply chain complexity is important, shortening supply chains is one way to do it.

Butner rightfully points out that companies vary in their abilities to implement these new rules. She breaks companies down into three groups (based on 664 supply chain organizations that participated in an IBM survey). Those groups are: operators, planners, and visionaries. She defines "operators" this way:

"Operators: Representing 187 companies, Operators' strategies reflect 'back to the basics' with investments in warehouse management, transportation management, manufacturing execution systems and data management. They concentrate on cost reduction initiatives, process improvements and information linkages with key suppliers and logistics providers."

Although she doesn't vilify operators, Butner doesn't praise them either. Her underlying concern seems to be that operators are concerned with supply chain efficiencies and are setting themselves up for future supply chain disruptions because they are not future-focused. They live in the here and now. The next group -- planners -- does a bit better. Butner writes:

"Planners: Planners represented the largest group, 417, across a wide range of industries, geographies and company sizes. Their strategies and initiatives characterize planning (network analysis, enterprise sales and operations planning (S&OP), partner integration, performance scorecards) and operational efficiencies (outsourcing non-core functions, cost containment/reduction programs and inventory optimization at critical control points)."

You can tell that Butner believes that planners do better than operators; but, she saves her most glowing description for the visionaries. She writes:

"Visionaries: Only 60 companies fall into this elite group, representing high technology/ electronics, telecommunications, consumer products, life sciences/pharmaceuticals, retail and industrial manufacturing. These enterprises operate in multiple regions of the world, with well over half having sales of more than US$10 billion. Their focused strategies and initiatives include supply chain visibility with partner collaboration, business intelligence and analytics, risk management, optimization of networks, cost structures and inventory, and customer demand management with networked S&OP."

I would venture to guess that IBM's CEO Sam Palmisano would call these visionary companies "globally integrated enterprises" -- a term he introduced half a decade ago. As a company advances from operator to visionary, Butner believes that visibility improves, volatility decreases, and value is enhanced. Moving up that chain is neither easy nor inexpensive. Butner obviously believes, however, that the rewards waiting at the end of the journey are worth the effort and cost.