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22 posts from July 2012

July 31, 2012

Supply Chain Segmentation: One Size Does Not Fit All

Last October, Dan Gilmore, Editor in Chief of Supply Chain Digest, asked, "How Many Supply Chains Do You Need?" [14 October 2011]. Gilmore's follow-up question was, "Is it time to start chopping your supply chain up?" His short answer, "Perhaps so." He penned his article because there has been "a lot of emphasis lately on 'segmenting supply chains,' or some related concept." That led to a third question, "What does that mean?" He explains:

"Pretty simply, it means that a company rarely has just a single supply chain - even though it may think it does. Rather, a company has multiple supply chains based on a variety of mostly customer-driven factors, and that supply chain organizations must define and execute those different supply chains in different ways, logically enough."

Supply chain segmentation is particularly appropriate for multinational corporations that sell regionally. Robert J. Bowman, managing editor of SupplyChainBrain, writes, "Companies dream of one cohesive supply chain that can harmonize information and business processes worldwide. But what if your customers' needs in regional markets are so different as to make that dream impossible?" ["For Pharma, One Supply Chain Doesn’t Fit All," 2 July 2012] Some analysts believe that segmenting supply chains can reduce supply complexity. I'm not sure Bowman agrees -- at least for the pharmaceutical industry. He indicates supply chain segmentation is more of a burden because in that sector each country deals with drugs differently. For example, he writes, "Say you're an American traveling in Germany, and you drop your iPhone and crack the screen. You can quickly remedy the problem by going to any local Apple Store, because the product is the same in all markets. Now try filling your American-issued prescription for Lipitor, one of Pfizer's biggest-selling products, at a German pharmacy. You won't get a single pill until you've seen a doctor and fulfilled that country's regulatory requirements." Fortunately, most companies don't face quite that extreme level of regulation. Nevertheless, some amount of supply chain segmentation may still make sense. Gilmore continues his discussion of the topic by reviewing some of the current views concerning segmentation. He writes:

"'Segmenting supply chains' is currently a major area of research and analysis from Gartner. Dr. David Simchi-Levi of MIT focused a good portion of his excellent book Operations Rules on the subject. A ... key element of Dell's supply chain transformation over the past two years was segmenting its supply chain to meet the different market needs of its traditional make-to-order supply chain and its much newer retail store channel market. ... In 1997, Marshall Fisher of the Wharton Business School wrote an article for Harvard Business Review on What is the Right Supply Chain for Your Product? He said that 'The first step in devising an effective supply-chain strategy is therefore to consider the nature of the demand for the products one's company supplies. ... I have found that if one classifies products on the basis of their demand patterns, they fall into one of two categories: they are either primarily functional or primarily innovative. And each category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain.' In the early 2000s, the consultants at AT Kearney wrote a white paper called How Many Supply Chains do You Need? ... In that white paper, Kearney noted that while most recognize the different supply chain needs of different industry sectors (say grocery versus apparel), many individual companies fail to recognize they have such differences within the different products and markets they have within their own enterprises. Kearney added that 'choosing the right chain for the right business requires strategically thinking about how your business operates and what your company needs, which includes how many supply chains it takes to serve your customers.' But from that point until fairly recently, the subject seems to have somewhat disappeared from the overall supply chain dialog, only to resurface more recently."

Gilmore believes that the concept may have been ahead of its time when first introduced (because, as supply chains have become more complex, the need for segmentation has increased). On the other hand, he writes, the technology to support implementation may not have been available. "While the concept was valid," Gilmore writes, "technology just wasn't ready to well support its execution." He continues:

"The bottom line is that there is a growing consensus from the pundits that a 'one size fits all' supply chain won't cut it anymore. And I agree. In Operations Rules, Simchi-Levi noted that common segmentation attributes include customer value proposition (e.g., value versus innovation, similar in a sense to Fisher's perspective), market channels, product characteristics such a demand uncertainty and logistics costs, and more. Among many other considerations, Simchi-Levi observed that perhaps the key decision that needs to be made based on those attributes is whether to construct an individual supply chain using a 'push' strategy, a 'pull' strategy,' or hybrid push-pull approach. Gartner's Matt Davis, who worked at Dell before moving to Gartner, ... [asserts] that different market segments tend to value either cost, responsiveness / speed, or level of service / agility, and that supply chains should often be segmented accordingly. Key there he said is differentiating performance metrics: if you build a supply chain focused on agility for one group of customers, you can't expect the same type of cost performance for a supply chain that is built primarily to minimize cost. An iron law of supply chain is that such trade-offs can't be eliminated. I will agree many companies forget this."

It's clear from Gilmore's discussion that companies need to determine the optimal goal of a supply chain before they can determine whether they need to segment it. For example, Jim Cafone, Pfizer's vice president of supply chain network services, told Bowman that Pfizer is developing a hybrid strategy. "Pfizer is tooling up for 'hyper-segmentation' on the customer side," he said, "while continuing to streamline and centralize processes further up the supply chain. The ultimate goal, he said, is 'true demand sensing.' Which, for a highly regulated, multibillion-dollar pharma company with a universe of external partners, is a lot easier said than done." Gilmore continues his discussion.

"Then there is the perspective of Dr. John Gattorna, based in both Australia and the UK, who also argued in his book Dynamic Supply Chains that customers and hence supply chains should be segmented based on what they value from you as a supplier, but with a unique twist. He identified four 'metatypes' for such a segmentation based on a customer's buying behaviors. That includes some notion of how much different segments are interested in collaborating: (1) Continuous Replenishment: Predictable demand, a lot of collaboration; (2) Lean: Focus on supply chain efficiency; (3) Agile: Pull-oriented supply chains to meet unpredictable demand; (4) Fully Flexible: Sort of an agile supply chain on steroids; some maintenance and repair operations come to mind. What somewhat differentiates Gattorna's view is that he notes that a given customer may have several of these buying behaviors operating at once, complicating matters for suppliers, and that a customer's needs for a given product may change over time - in fact likely will."

Mickey North Rizza, a Gartner Supply Chain Research analyst, told the SupplyChainBrain editorial staff, "Creating real differentiated supply base value starts with supplier segmentation." ["Create Differentiating Value in the Supply Network Through Supplier Segmentation," 22 March 2012] The article continues:

"Gartner Supply Chain Research finds a detailed analysis and a segmented approach to your supply base is an important aspect of building a resilient and secure supply chain while reducing complexity. Supplier segmentation is a critical and necessary tool for visibility; it provides a standardized simplified foundational approach for supplier relationship management. To deliver real differentiated value, these aspects must be considered in supplier segmentation:

"• Not all suppliers are created equal. Supplier segmentation provides a methodology and fundamental advantage to organize the supply base and the supplier information. It provides a common language for procurement to manage suppliers globally.

"• Technology is nascent answering the call for supplier segmentation visibility. Spend analysis tools provide visibility to identify the large-volume-spend suppliers. However there is currently no technology tool that brings in the additional supplier attributes and information that provide strategic value, such as scale; unique components, features and/or functionality; supplier/buyer power; and geographic location to markets, or high risk.

"• Supplier relationships and the resulting supplier contracts must be aligned to supply chain types. Using a low-volume / high-mix supplier for a high-volume supply chain will only create frustration for the customers, buyers and suppliers. Creating supplier value requires a focus on optimizing the trade-offs of delivering unique customer value, low price, faster speed to market, and enhanced differentiation and services.

"• Supplier segmentation is not a rigid siloed business process done every few years. The high-tech, consumer products and retail verticals find supplier segmentation must be done every 6 months to ensure sourcing strategies stay current and are aligned with their market expectations.

"• Recognize that the basic supplier segmentation types of transactional, commodity, strategy and bottleneck suppliers are just a baseline. Real advantage is achieved when the supplier segmentation baseline is compared to the supplier's demand characteristics that they need to execute against (i.e., low price, cycle time, personalization, etc.). This advanced segmentation then aligns the sourcing and supplier relationship management strategy accordingly.

"• Creating a supplier segmentation framework that delivers differentiating value requires a long-term strategic organization direction and outlook. Utilizing a sole-source and bottleneck supplier that provides unique product functionality can bring real market value for the customers, buyer and supplier in the short term. However, the ability to create additional sources of supply for these unique items while satisfying increased market demands requires a supplier segmentation framework to manage this shifting supply base. Innovation, strategic advantage, joint profitability and market share opportunities can be uncovered with a strategic long-term approach."

After having surveyed the literature, Gilmore returns to his original conclusion, "One size very rarely fits all; different customers or products clearly do have different supply chain success requirements." Obviously, all of the considerations that must be taken into account before one decides how to segment a supply chain can't be discussed in a single blog post; however, the considerations discussed above can start you thinking about whether supply chain segmentation could benefit your organization.

July 30, 2012

Chasing China's Consumers

"I keep stumbling across unswerving predictions that the future belongs to China," writes Philip Stephens. ["The great middle class power grab," Financial Times, 26 April 2012] Stephens isn't referring to China's growing political clout or its military might. He's talking about China's middle class consumers who, along with other emerging global middle class consumers, are starting to wield "transformative power." Stephens reports, "Within 20 years or so a world that is now predominantly poor will be mostly middle class." What will be transformative about the emerging middle class, Stephens claims, is that "the way most new global actors behave will be steered by an unprecedented redistribution of power from rulers to ruled." People with a little extra money in their pockets and a little extra time on their hands inevitably chafe at being ruled by autocrats. They want the freedom to spend their extra cash on both products and experiences free of most government interference.

Stephens admits that "the precise definition" of what constitutes a member of the middle class is illusive. "The ISS measure of what constitutes middle class," he writes, "counts the number of people with between $10 and $100 a day in disposable income. Others set the bar higher, with a starting point of daily expenditure of $15 or so. By western standards even that figure is very low – but then think of how many people survive on $1 a day. The important thing is that even the most conservative assumptions point to an irrevocable redistribution of economic power." The reason that the global middle class will become so powerful is because their numbers will be so large. Stephens explains:

"The raw numbers are set out in a compelling report – Global Trends 2030 – ... published by the Paris-based European Union Institute for Security Studies. On current trends, it says, the ranks of the global middle class will swell from about 2bn today to 3.2bn by 2020 and 4.9bn by 2030 – the last of those numbers out of a total world population of just above 8bn. Put another way, for the first time in human history more people will be middle class than poor."

A good number of those people, of course, are going to be living in China. Stephens reports, "China already has upwards of 160m middle class consumers, a number second only to the US. But they represent only about 12 per cent of the Chinese population. By 2030, the ISS projects, the proportion may be 74 per cent." As a result, it is not surprise that manufacturers and retailers are desirous of tapping that population as a source of growth. Laurie Burkitt and Bob Davis insist, however, that "western companies have misjudged Chinese shoppers' priorities and clumsily tried to export U.S.-style stores." ["Chasing China's Shoppers," Wall Street Journal, 14 June 2012] Burkitt and Davis agree with Stephens that "the potential buying power of China's middle class is vast." They also note that China's leaders are as interested in getting the emerging class to become consumers as western companies. They explain:

"With export markets weakening in Europe and the U.S., economists say, Beijing needs to lift spending by its own middle class or risk that growth will slow sharply. Steady middle-class growth also could help China's trading partners, bolstering a market for computers, cars and trendy clothing, as well as for commodities such as copper, oil and cotton. China already is the world's largest market for some middle-class emblems, including cars, personal computers and smartphones. And multinational companies show no signs of taking their feet off the gas. Whirlpool Corp. plans to boost distribution of fridges, washing machines and other appliances to China's inland cities. Coca-Cola Co. plans to invest $4 billion over the next three years."

What makes chasing China's consumers so difficult, say Burkitt and Davis, is that "Chinese consumers are different." They explain:

"For one thing, they are poorer. Median household income in Chinese cities was about $13,400 in 2010, according to Moody's Analytics, about a quarter the U.S. figure. The Chinese middle class also is at a different stage of development. Many Chinese want appliances and basic TV sets to fill their first apartments. Chinese on average also save more than 30% of household income, vastly more than Americans, and rarely use credit cards. And many Chinese shoppers expect to haggle over prices—a foreign concept for the U.S. company."

Jason Chow indicates that another reason that Chinese consumers are different is that they "are brand-obsessed when they do their shopping, though not in the way some might expect." ["China's Promiscuous Consumers," Wall Street Journal, 28 June 2012] He explains:

"According to a new study by Bain & Company and Kantar Worldpanel, Chinese consumers are adventurous shoppers who are constantly trying out new brands and are rarely loyal to one. The findings are likely to disappoint the marketing departments at major consumer product companies, the researchers say. 'There's always been an expectation that the Chinese will become more loyal as the market becomes more mature and we're saying "no" to that,' said Bruno Lannes, a Shanghai-based partner for Bain and the lead writer of the report. 'This may be sobering news for brand managers. The reality is that consumers in China, like in other countries, don't think of brands when they shop.' The researchers studied the shopping habits of 40,000 Chinese households by arming them with scanners to track their purchases in real time. Twenty-six types of consumer products were tracked in beverage, packaged food, personal care and home care categories. Chinese shoppers are most often engaged in what Mr. Lannes calls 'repertoire behavior,' which means that they consider and buy several brands when shopping rather than sticking to one favorite."

As Chow notes, that has to be disconcerting for marketers who believe that advertising and promotions can build brand loyalty. Chow continues:

"The more they shop in a category, the study found, the more brands they'll try. The 20% of Chinese shoppers who shopped the most for biscuits, for example, bought 10 different brands of treats, while the average shopper tried six. 'Chinese do love brands. It's a reassurance for them. But even though they love them, in most categories, it doesn't mean they love one in particular.'"

It's not all bad news for marketers Chow reports. He notes that "certain products do inspire loyalty, including beer, soft drinks and chewing gum." Other brands that appear to garner consumer loyalty include "diapers and infant formula." He believes that loyalty to particular brands of infant formula may have a lot to do with "recent scandals of tainted products." Chow concludes:

"With such little brand loyalty among most categories, what are marketing executives supposed to do? Mr. Lannes advises to scrap the idea of creating loyal customers and focus more on attracting shoppers in stores so they take notice of a particular brand. 'There was an expectation that loyalty would increase,' he said. 'But we don't expect China to really evolve this way.'"

Jeff Walters, Amitabh Mall, and Vaishali Rastogi, analysts with the Boston Consulting Group, agree with the Bain & Company and Kantar Worldpanel analysts that western "companies cannot treat these markets as fledgling versions of the developed economies that have been their mainstay. They must rethink how they 'go to market' in these places, which frequently do not have a state-of-the-art marketing, distribution, or retailing infrastructure." ["Going to Market in Developing Economies: How to Improve In-Store Execution," bcg.perspectives, 28 March 2012] They continue:

"Retailing in developing markets is highly fragmented, and going to market requires a different set of strengths and commercial relationships than in developed markets. Consumers have vastly different levels of disposable income and extremely different needs and wants. They are accustomed to a shopping experience that is unlike what consumers in more developed markets are used to. At the same time, consumers in developing markets are less jaded and more trusting of pitches, promotions, and displays inside stores. Many of the tried-and-true principles of in-store execution are universal. No matter where they live or how much they earn, consumers respond when they are offered the right products, at the right price, and in the right retail environment. But achieving that alluring mix of product, price, and environment is especially challenging in developing markets. Companies that can adapt to the specific challenges of in-store execution in these markets stand to win big."

Yuval Atsmon and Max Magni note that what is true for emerging markets in general is certain true in China "because of the vast economic and demographic differences across the country." ["Meet the Chinese consumer of 2020," McKinsey Quarterly, March 2012] "These differences," they write, "are set to become more marked, with significant implications for companies that fail to grasp them." They continue:

"While income is expected to rise across China, some cities and regions are already significantly wealthier than others. Understanding these variations in the rate of development is important because they will affect which categories of goods and services grow most rapidly, and where. Today, about 85 percent of mainstream consumers live in the 100 wealthiest cities; in the next 300 wealthiest, only 10 percent of consumers are mainstream, but that percentage will rise to nearly 30 percent by 2020. At that point, many families in these cities will be able to afford a range of goods and services (such as flat-screen televisions and overseas travel) that are now largely confined to the wealthiest urban areas. ... Some of them (Foshan in Guangdong, for example) are small in terms of absolute GDP or population size. But it's worth noting that the affluence of their populations could make them as attractive to companies as leading tier-one cities, such as Shanghai and Shenzhen."

If you want to know which Chinese cities your company should be concentrating on, you might read a report by published by Jones Lang LaSalle, a global real estate services firm, that highlights 50 Chinese cities worth watching over the next decade. ["50 Chinese Cities to Watch Over Next Decade in Such Sectors as Retail and Logistics," SupplyChainBrain, 23 March 2012] Atsmon and Magni conclude:

"No doubt China and its consumers' behavior will take some unexpected turns over the next decade. Nonetheless, our research reveals the clear direction of travel. To be sure of taking part in that journey, companies in the market should start making the acquaintance of China’s 2020 consumers today."

Although the world remains tightly in the grasp of an ongoing fiscal crisis, the future isn't necessarily bleak. If the global middle class can continue to grow, it will spark economic growth in both emerging and developed markets. Since the Chinese middle class is the most advanced, learning how to capture its discretionary spending is going to be worth the effort.

July 27, 2012

Innovators of the Future

I don't believe that any particular group of people or type of person has a stranglehold on innovation. Innovators can come from all races, genders, religions, countries, economic circumstances, and cultures. Even so, that doesn't stop people from trying to detect hot spots of innovation to determine why those hot spots exist. One thing that most analysts agree upon is that education helps create such spots. Specifically, more young people need to be educated in science, technology, engineering and math, the so-called STEM fields. In the search for future innovators, one group that has received a lot of attention is immigrants.

Although the United States is historically a nation of immigrants, there has been a lot xenophobia exhibited over the past couple of decades. Nevertheless, people like Edward Schumacher-Matos argue that "To 'out-innovate,' we must let more immigrants in." [Washington Post, 28 January 2011] Writing shortly after President Obama delivered his 2011 State of the Union address, Schumacher-Matos wrote:

"The only way the nation can meet Obama's call to 'win the future' is to bring in more high-skilled immigrants. ... We do indeed 'need to out-innovate, out-educate and outbuild the rest of the world,' as the president said, but a big part of the American way to do just that has been to use the skills of immigrants. The United States issues far more patents - a primary measure of innovation - than any other country, but immigrants were responsible for about a quarter of them in recent years, according to studies by researchers at Harvard Business School and elsewhere. At Intel, the world's largest maker of semiconductors, 40 percent of the patents are for work done by Chinese or Indian immigrants, the Council on Foreign Relations reported in 2009. Immigrants create patents at twice the rate of native-born Americans because they disproportionately hold degrees in science and engineering, Marjolaine Gauthier-Loiselle and Jennifer Hunt concluded in a study published last year by the Center for Economic Research in London."

Schumacher-Matos noted that there is nothing new about the notion that immigrants contribute significantly to the fact that America has been the world's leading innovation nation. He wrote:

"Immigrants such as the Italian Enrico Fermi, the Hungarian Edward Teller, the Germans Hans Bethe and Albert Einstein, and the Pole Hyman Rickover were central in building our preeminence in nuclear power, physics and arms, for example. David Ho from Taiwan pioneered protease inhibitors against AIDS. Sergey Brin from Russia founded Google. The list goes on."

Immigrants, like those identified by Schumacher-Matos, have historically been welcomed to U.S. shores. In fact, the rest of the world used to lament the fact that America was draining it of its best brains. In recent years, debates about undocumented aliens have thrown a pall over all immigrants (legal or otherwise). Schumacher-Matos reports that "researchers David Kerr of Harvard and David Lincoln of the University of Michigan found [in 2010] that the large presence of immigrants in high-tech fields stimulated business and actually created more jobs than they took away for native-born Americans." Sometimes that kind of data is lost in the debate. New studies are confirming most of the arguments put forth by Schumacher-Matos. For example, a study conducted by the Partnership for a New American Economy, a nonprofit group co-founded by Mayor Michael Bloomberg of New York, concluded "that immigrants played a role in more than three out of four patents at the nation’s top research universities." ["Immigrants Are Crucial to Innovation, Study Says," by Andrew Martin, New York Times, 25 June 2012] Martin continues:

"The report points out that while many of the world's top foreign-born innovators are trained at United States universities, after graduation they face 'daunting or insurmountable immigration hurdles that force them to leave and bring their talents elsewhere.' The Partnership for a New American Economy released a paper in May saying that other nations were aggressively courting highly skilled citizens who had settled in the United States, urging them to return to their home countries. The partnership supports legislation that would make it easier for foreign-born STEM graduates and entrepreneurs to stay in the United States."

Martin reports that some people "worry that the partnership's ideas for immigration reform would undermine similarly skilled American workers while failing to address broader problems with immigration policy." America needs more skilled workers not fewer. I've pointed out in past posts that millions of jobs are currently going unfilled because enough skilled workers can't be found. I'm guessing that Bloomberg's Partnership also favors more Americans gaining the skills that make immigrants such valuable employees. I don't see this as an "either/or" situation. America wins when more of its citizens are educated in STEM fields as well as when it attracts foreigners educated in those disciplines. Martin continues:

"The most recent study seeks to quantify the potential costs of immigration policies by reviewing 1,469 patents from the 10 universities and university systems that had obtained the most in 2011. The schools include the University of California system, Stanford and the Massachusetts Institute of Technology. Patents, the study maintains, are a gauge for a nation's level of innovation and an important way for the United States to maintain an edge in STEM fields. In one illustration of the issue, the study notes that nine out of 10 patents at the University of Illinois system in 2011 had at least one foreign-born inventor. Of those, 64 percent had a foreign inventor who was not yet a professor but rather a student, researcher or postdoctoral fellow, a group more likely to face immigration problems. Some of the patents that were reviewed for the report have become business ventures. Wenyuan Shi, a professor at the University of California, Los Angeles, earned a patent for an ingredient in a lollipop he developed that works as a dental treatment for children. A native of China, Mr. Shi has created a company to commercialize his inventions."

In years past, the U.S. would have celebrated the fact that world's best and brightest were flocking to its shores. Today, "immigration laws can make it difficult for foreign-born students to remain in the United States after graduation." Not everyone, however, is focusing on immigrants as the primary source of innovation in the future. Valerie Jarrett, a senior adviser to President Obama, and Tina Tchen, executive director of the council and chief of staff to the first lady, believe its time unleash the innovative power of another group -- women. ["Helping women reach their economic potential," Washington Post, 25 September 2011] They want to do this by encouraging women to enter STEM fields. They write:

"Women working in science, technology, engineering and math careers earn 33 percent more than those in other occupations, and these 'STEM' skills will become even more important in high-growth, high-tech fields such as health-care technology and advanced manufacturing."

Jarrett and Tchen note that women who want families often face the dilemma of choosing between raising children or pursuing a career. They believe that programs, like one announced by the National Science Foundation, could help women do both. They explain:

"To support female innovators and help women contribute to the economy, the NSF is taking steps to allow researchers to balance their responsibilities in the lab with their responsibilities at home. For example, if a researcher needs to delay the start of a funded project for a family-related reason, such as taking care of a young child or an aging parent, the NSF will work with her to make that possible without causing her to lose her grant. If she needs to interrupt research to have a baby, there will be options to add the lost time onto the end of her funding period without penalty. In many cases, NSF will even pay for technicians who can keep labs and research projects running during a period of parental leave. As an agency devoted to evidence-based decision making, NSF will also support research into the effectiveness of flexible workplace policies. This will ensure that the new programs are working and will help identify best practices to share with the public and private sectors. For many women who dream of becoming scientists and researchers, these kinds of simple, common-sense changes will make a world of difference. And our entire economy can benefit, because if more women have the chance to pursue STEM careers, it will lead to more innovation, entrepreneurship and growth."

I certainly agree that we need to do more to unleash the innovative power of women. Dominic Basulto, a "digital thinker" at Bond Strategy and Influence (formerly called Electric Artists) in New York, believes that the future may yet belong to another group that includes both genders -- the Baby Boomers. ["Why Baby Boomers are the innovators of the future," Washington Post, 26 June 2012] He explains:

"Baby Boomers are starting companies at a faster pace than ever before, according to a March report by the Kauffman Foundation and younger workers lack the disposable income and job prospects they once had. This means we may be witnessing a passing of the innovation baton to members of the older generation. As older Americans begin to define the debate around innovation, then the generation gap will soon make its presence felt in innovation hubs like Silicon Valley. ... Aging Baby Boomers ... have the disposable income, free time and optimism to try new things that once were exclusively the preserve of their younger colleagues."

Basulto concludes that entrepreneurial Baby Boomers are leading "a broad social transformation that is shifting power from the younger generation to their parents." A final group that has been identified as a source of innovation in the future is ... the group! Often referred to as crowd-sourcing, group innovation is just coming into its own. Jeff Howe writes:

"Technological advances in everything from product design software to digital video cameras are breaking down the cost barriers that once separated amateurs from professionals. Hobbyists, part-timers, and dabblers suddenly have a market for their efforts, as smart companies in industries as disparate as pharmaceuticals and television discover ways to tap the latent talent of the crowd. The labor isn’t always free, but it costs a lot less than paying traditional employees. It's not outsourcing; it's crowdsourcing." ["The Rise of Crowdsourcing," Wired, June 2006]

Kristen Cluth reports that "virtual collaborative tools ... are driving the growth of the new industrial revolution." ["Crowdsourcing Science at TEDGlobal," PC Magazine, 26 June 2012] She states that "Radical Openness" is breaking down "traditional boundaries" innovation through the use of "social networking, crowdsourcing, open sourcing, and collaboration."

There's good news in all of this. Whether you believe that the innovators of the future are going to be immigrants, women, Baby Boomers, or the crowd, people are predicting that innovation is going to continue and that the world should change for the better as a result.

July 26, 2012

Natural Gas Usage in Trucking Sector on the Rise

In previous posts, I have discussed the fact that trucking rates are likely to rise due to a number of factors, including rising fuel costs, driver shortages, and limited capacity (see my posts entitled Coming to Grips with the Shortage of Trucking Capacity and Trucker Shortage Continues to Garner Headlines). Bob Ferrari notes that there is likely to be added pressure on limited trailer capacity as shippers switch from air freight to ground shipments. "FedEx is confirming," he writes, "that the airport-to-airport transport model is in decline, that suppliers, manufacturers and retailers are opting for less costly methods of transportation for movement of components and finished goods." ["FedEx's Industry Shift Prediction: Be Aware and Plan Accordingly," Supply Chain Matters, 22 June 2012] Ferrari continues:

"What is clear is that other forms of less costly transportation are on the rise.  The FedEx Ground business experienced an average daily package volume increase of 3 percent, driven by more consumers ordering goods online. FedEx Freight segment reported a 4 percent quarterly increase in daily LTL (less-than-truckload) shipment volume. Readers might recall that LTL was not so long ago described as a declining business. Broader transportation industry data also reinforces a shift toward ground, rail and ocean container transportation options."

As I noted in a post entitled The State of U.S. Logistics, intermodal transportation looks to have bright future in the U.S. This is highlighted by the fact that trucking companies have been acquiring intermodal chassis and trailers in rising numbers.

Dan Gilmore, Editor-in-Chief of Supply Chain Digest, adds another factor affecting the cost of trucking rates -- the rising cost of Class 8 trucks. ["State of the Logistics Union 2012," 14 June 2012] He writes:

"Rising new Class 8 truck prices are impacting how carriers think about their fleets, and contributing to asset discipline. New trucks today are 30% or more above the costs of just a few years ago, meaning more existing vehicles need to be sold relative to new buys. Even though new truck sales have been relatively strong, even more are being sold off, mostly to foreign markets, keeping the nation's overall fleet status flat or lower."

Among the factors increasing trucking rates, perhaps none has been given more attention than rising fuel prices. That has resulted in more companies looking at natural gas as an alternative to diesel fuel. "Over the next five years, writes Sandeep Kar, global director of commercial vehicle research for Frost & Sullivan's Automotive & Transportation business, "the natural gas heavy duty commercial vehicle market is set to experience rapid growth in North America." ["What's going on with the natural gas truck market?" Vehicle Service Pros, 13 June 2012] Kar continues:

"As diesel fuel prices remain above the $3.50 per gallon range due to tight supplies, increasing global demand and political unrest, considerable interest has grown surrounding the potential for the use of natural gas as a vehicle fuel source. The development of natural gas engines for commercial vehicles has been occurring in small progressive steps over the past two decades and has finally reached a level of quality whereby they are comparatively reliable options. Given the low cost of natural gas in America, it offers a very high competitive price advantage over diesel fuel. Frost & Sullivan's recently released study titled Strategic Analysis of the North American Class 6-8 Natural Gas Truck Market reveals that by 2017, approximately 8 percent of new North American Class 6 through 8 commercial vehicles will be natural gas-powered, approaching annual sales of approximately 35,000 units."

Kar's data underscores the fact that natural gas-powered trucks are still relatively rare and will remain relatively rare in five years. Nevertheless, the number of natural gas-powered commercial vehicles is growing despite the increased cost of such vehicles. "Often," writes Jeffrey Ball, "buyers of these natural-gas trucks have received government subsidies that have helped defray the higher purchase price." ["Natural-Gas Trucks Face Long Haul," Wall Street Journal, 17 May 2011] Such subsidies are not likely to continue in today's fiscal environment. That means that a business case must be made for switching to natural gas. Kar believes such a case will be made. He continues:

"The market for natural gas trucks was initially targeted to applications at port facilities, as well as select refuse fleets. Part of the attraction for refuse fleets moving to natural gas is the prospect of fueling from landfill gas stations built on landfills that they deliver to. This not only ensured a significant fuel price savings, but also the ability to refuel on-site as part of the daily duty cycle. Frost & Sullivan projects that natural gas refuse trucks could approach a 50 percent share of new refuse vehicle sales by 2017. Many of the port facility vehicle purchases were made possible through government subsidies and grants which helped OEMs and engine makers run trials on this new technology. As a result of the support provided by these two industries, the technology has now been proven robust enough to be adapted and put into service on regional over-the-road delivery trucks. These vehicles are the segment that will derive the greatest growth over the coming years."

Kar reports that "all major North American OEMs are likely to offer their own in-house engine platforms" in the years ahead. He goes on to note that "Frost & Sullivan believes that [Paccar's] early mover advantage, along with the variety of vehicle platforms offered, will see Paccar continue as the market leader throughout the forecast period." Among other things, "Paccar has taken the early market lead in natural gas trucks, offering numerous Peterbilt and Kenworth trucks with the Cummins Westport ISL-G 8.9L engine. As well, Paccar stands alone as the only OEM to integrate the Westport HD 15L engine into its truck line-up." He continues:

"Daimler Trucks North America has also been successful in integrating the Cummins Westport ISL-G into its Freightliner product line and is expanding the range of options. Cummins Westport is in the trials phase of the ISX-G 11.9L engine which is likely to garner large sales, and Freightliner will leverage the engine heavily to increase sales in this market. Navistar recently announced availability of Cummins Westport ISL-G engines in its vehicle platforms, such as WorkStar and TranStar. Navistar is also expected to introduce natural gas-powered versions of key models, such as ProStar and WorkStar, based on MaxxForce 13L engine platform. Mack Trucks have been available with the Cummins Westport ISL-G for a few years, mainly for refuse and other select vocational applications. Recently, Volvo Trucks began offering VN series day cabs with the ISL-G engine. Both Volvo and Mack are likely to rapidly integrate the Cummins Westport ISX-G."

Kar reports that Volvo has also developed "a dual-fuel compression ignition engine option which uses a diesel and natural gas mixture of approximately 30 percent and 70 percent respectively." Kar next turns his attention to a topic that is critical to increasing natural gas usage -- infrastructure. He writes:

"Clean Energy Fuels is rapidly emerging as the market leader in fueling station infrastructure. It recently formed a partnership with Pilot/Flying J for fueling station expansion targeted at the long-haul sector. Moreover, Clean Energy has launched a co-financing program with Navistar to help fleets purchase natural gas vehicles, and this is expected to benefit both companies. Ultimately, the success of natural gas-powered vehicles will depend on the rate of the expansion of the fueling network upon which these vehicles depend. At present, the majority of fueling stations are 'return-to-depot' models which are not open to the public."

The editorial staff at The Green Supply Chain reports that Shell has "announced plans to develop natural gas filling stations at some 100 Travel Centers of America truck stops." ["Announcements Last Week Show Momentum Behind Natural Gas Powered Trucks is Building," 19 June 2012] The article continues:

"Travel Centers, based near Cleveland, announced that it had entered into an agreement with Shell to build and operate a network of at least 200 liquified natural gas (LNG) fueling stations at 100 or more Travel Centers locations on U.S. interstate highways. Thereafter, expansion will be based upon customer demand for the fuel, Travel Centers said. Travel Centers said it also will train 'a significant number' of its approximately 3,000 repair technicians to work on LNG vehicles. 'The locations will be jointly selected by TA and Shell with the intention of creating the infrastructure required to allow natural gas powered trucks to travel across the United States,' a press release from the company said. Travel Centers has 238 locations, almost all along major interstates across the country. They are especially concentrated in the Midwest and eastern half of the United States, which also is where CNG fueling has lagged compared to some areas in the western and southern United States."

The article notes that the Shell/Travel Centers announcement will provide "some competition to Clean Energy Fuels, the company started by legendary energy investor T. Boone Pickens." The GSC staff claims Shell's effort is "a move to goose the transition to natural gas trucks, which right now have a strong ROI given the current low prices for natural gas and declining premiums for engines that run on the fuel versus diesel (currently about $30,000)." It concludes:

"When shippers, carriers or others consider moving to natural gas trucks, they need to be able to 'fill up' where and when needed. That is a fairly easy problem for some types of companies, such as sanitation or local delivery operations, where the fleet is never far from a home base where companies such as Clean Energy and others can install private nat gas filling stations. But for many common carriers and shippers with private fleets, there is a bit of a 'chicken and egg' situation, with those companies interested in natural gas trucks but only if the on the road filling infrastructure is there to support it; meanwhile, the filling operations need to demand to build the infrastructure. But with the Shell commitment now added to what Clean Fuels is doing, the filling infrastructure at least along interstate highways should be substantial at the end of the next couple of years."

Kar agrees that "interest in natural gas trucks will grow in lockstep with the supporting infrastructure." With the implementation of infrastructure announced by Clean Fuels and Shell, one obstacle to converting fleets to natural gas will have been removed. Kar concludes:

"Over the coming years, the heavy duty natural gas truck market is set to see extremely rapid growth which will help many haulers reduce their total overall costs of operation, thus helping them drive towards a more stable and successful future. This implies that fleet managers of both private and for-hire fleets must now start preparing for effectively and efficiently servicing and maintaining these green trucks that will run on a green fuel that is in abundance in U.S. and can help reduce the carbon footprint and fuel cost associated with them. These trucks will feature new technologies and systems. Reducing the lifecycle cost and maximizing their vehicle uptime is now officially the duty of the fleet maintenance managers."

Once the infrastructure is in place it probably won't take too long for automobile companies to jump into the game and start offering natural gas-powered private vehicles. That prospect probably sends chills of thrills up and down T. Boone Pickens' spine.

July 25, 2012

S&OP: The Way Ahead

During a panel discussion he moderated earlier this year, Bob Ferrari asked panel members the following questions: "Many companies are now embracing sales and operations planning (S&OP) processes as a key mechanism to align anticipated product demand with supply and operations requirements. What do you believe are the logical next steps for organizations in their S&OP journey? Do you believe that the benefits of S&OP are being overhyped?" ["Some Thought Leadership Nuggets Related to the Future of S&OP," Supply Chain Matters, 5 April 2012] Before providing specific thoughts from panel members, Ferrari noted, "All the panelists were in agreement that S&OP is not a short-lived, vendor-hyped process and is not going away anytime soon. They characterized S&OP as a journey toward multiple outcomes and benefits. What is most important is knowing what the current and required maturity level should be." To see a couple of different frameworks for assessing S&OP maturity levels, read my posts entitled Is S&OP a Guiding Light or a New Religion? and Supply Chain Evolution and Transformation.

The panel member whose observations Ferrari first discusses are those of Matthew Davis, Research Director, Supply Chain, Gartner Inc. Ferrari writes:

"Matthew Davis observed that S&OP can be positioned as a means to determine where decisions and what decisions need to be made regarding the need to represent the one face of the firm to customers. It brings together teams that directly touch and/or influence product demand and supply, along with those responsible for influencing resources or making decisions as to options. The activities incorporated are generally focused on demand shaping or the ability to influence and respond to changing customer needs. In terms of future needs, with more and more manufacturing and service firms positioning product offerings as 'solutions-centric', the process will need to synchronize a combination of product, technology and coordinated services needs. As an example, in the high tech industry, a product could involve a combination of hardware, software and services coordination. All of this implies that the planning process changes from that of materials and physical needs to further include a broader context of project management based synchronization. Technology's role in the process is to help overcome time latency and aide [sic] in the ability to integrate information with the capabilities needed to influence and respond to customers. A broader scope of product solutions adds a project management dimension to the process."

The most important point that Davis made is that the S&OP process "needs to further include a broader context of project management." Arnold Mark Wells, a principal at End-to-End Analytics, agrees that the S&OP process needs to be more inclusive. In fact, he believes that an inclusive S&OP process can help bring companies together. ["How S&OP Can Bring Your Organization Together," SupplyChainBrain, 15 June 2012] I'll look more closely at Wells' views later in this post. The next panelist whose observations are paraphrased by Ferrari is Bob Parker, Group Vice President, IDC Manufacturing Insights and IDC Retail Insights. Ferrari writes:

"Bob Parker added the need to incorporate portfolio, situational and scenario based analysis to manage products, tradeoff decisions, as well as to mitigate risk, with an overall goal of continuous planning. He cited as an example, Procter and Gamble’s circles of cadence, involving strategic, tactical and operational decisions that need to be coordinated. The S&OP process never ends, it is continuous."

It seems to me that common sense would dictate that you would want to include supply chain risk management (SCRM) in the S&OP process. The past couple of years have clearly demonstrated how supply chain disruptions can significantly impact sales and operations processes. I've frequently commented that SCRM processes need to be continuous and I agree with Parker that the S&OP process also needs to be continuous. Nick Allen asserts, "A new era of sales & operations planning has arrived as companies learn to deal with an increasingly volatile business environment." ["S&OP: Managing volatility," Supply Chain Standard, 25 April 2012] Volatility must be constantly monitored if companies are going to react in time to mitigate its effects. Only a continuous process is up to the challenge. The next panelist whose observations Ferrari provides is Steven A. Melnyk, Professor of Operations and Supply Chain Management, Michigan State University. Ferrari writes:

"Professor Melnyk added the need to focus the process on required business outcomes, not so much in the sense of hard metrics, but on the required outcomes needed to satisfy customer and business needs."

Numerous supply chain analysts have pointed out that the clock speed of business is increasing. That means that efforts to "steer the ship" by looking at the wake (i.e., historical data) are not likely to take the company where it wants to go. That's why I agree with Melnyk that companies need to focus on desired or required outcomes. The final panelist whose observations are provided by Ferrari is Roddy Martin, Senior Vice President, Global Supply Chain Practice, Competitive Capabilities International. Ferrari writes:

"Roddy Martin added that the future of S&OP is framing the process differently, as a journey toward integrative decision-making. Too often, S&OP teams rush to include senior executives in the process without the process maturity, and the right level of information that can context business impact or business options. Having arguments as to the accuracy of information or the meaning and implications of information, chases senior executives away and can derail efforts. That is perhaps, the worst mistake. Executive S&OP is the summarization of all business planning and execution across various time horizons, along with the business decision implications related to resource plans."

Lora Cecere has predicted that horizontal processes are going to become much more important to businesses in the decades ahead. There is no more important process to make horizontal than the S&OP process. In an interview with the SupplyChainBrain staff, Arnold Mark Wells appears to agree with both Martin and Cecere. The article states:

"Wells views sales and operations planning as 'a decision process with several sub-processes.' Chief among them is the anticipation of market requirements, through such disciplines as demand planning and forecasting. But companies need to remember that S&OP requires the participation of multiple partners, including those responsible for supply and contract management, in the chain. The challenge, Wells says, lies in making sure that they are fully involved."

In his concluding comments, Ferrari agrees with Wells that the context for framing the S&OP process "needs to broaden." The SupplyChainBrain article continues:

"S&OP is all about eliminating the unscientific assumptions that tend to guide decision-making. They need to be replaced by a full understanding of the constraints that exist in a given sourcing situation, along with the opportunities that can be realized as a result. Visibility, of course, depends on good communications among supply-chain partners. S&OP provides companies with the excuse to achieve it. In looking at supply management, Wells says, companies need first to analyze the current sourcing situation, in terms of both risk and opportunities. They should consider the full range of terms and conditions that apply to a sourcing relationship. At the same time, those in supplier management need to be having an ongoing conversation with sales, to discuss how constraints should be factored into the picture. Given the natural tendency toward turf protection, sales could be threatened by such an approach. The solution, says Wells, is transparency. Sales and marketing must understand where the constraints are, and supplier managers need to stress their interest in working with them to reach a common goal. 'That’s what gets their attention,' he says. A certain amount of business-process change is required to implement an effective S&OP initiative. Technology, says Wells, can help to enable such change. One key to success is aligning the metrics and incentives that guide various functions. In addition, participants need to address the full range of relevant topics: working capital, finance, products, brands, marketing, channels and demand planning among them. Armed with such intelligence, marketing can understand how its goals to boost sales or enter new markets will be translated in terms of manufacturing, distribution and sourcing."

Obviously, integrating data so that participants in the S&OP process are working from a single version of the truth is important to achieving Wells' vision of an effective system. Nick Allen agrees with Wells that a good S&OP process can bring organizations together and help break down silos. He writes:

"One of the big issues with S&OP is that it cuts across so many different functional silos within a business. However, [Paul Ducie, partner at Oliver Wight], advises: 'If a company designs the right process, then the process itself forces the organisational silos to work together, so they start to create a synchronised plan throughout the organisation. Then we look at coaching behaviours, so that we get the collaboration and common ownership.' He says an important point is to have an individual in place that can ensure 'integrated reconciliation', to make sure the process is flowing through the various steps with the right information and that all parties are acting and performing in a way that will deliver the strategy."

A good S&OP process helps promote transparency and communication. It's not easy because the goals of various organizational departments can be in conflict. The S&OP process can help ease those tensions by promoting better organizational alignment as desired outcomes are agreed upon and worked towards.

July 24, 2012

Dealing with Change in an Ever-changing Business Environment

Business leaders don't need to be reminded that the business landscape is ever-changing. Nevertheless, a KPMG article states, "The resources on which business relies are becoming more difficult to access and more costly. Changing patterns of economic growth and wealth are likely to strain infrastructure and natural systems. The unpredictable results of a changing climate will affect physical assets and supply chains. And businesses can expect an ever more complex web of sustainability legislation and fiscal instruments." ["Expect the unexpected: Building business value in a changing world"] Each new dawn brings with it new challenges. The KPMG article cited above introduced a KPMG study of the same name. The study discussed ten megaforces "that will impact each and every business over the next 20 years." I discussed these "megaforces" in a two-part series entitled KPMG Identifies 10 Megaforces that Will Shape the Business Landscape, Part 1 and KPMG Identifies 10 Megaforces that Will Shape the Business Landscape, Part 2. As the introduction to the article concludes, "We can never know the future. But it is good business sense to be prepared for the possibilities: to expect the unexpected."

Michael Skapinker believes that part of expecting the unexpected requires businesses to develop a world view of their own. By that he means that businesses should have a sense of how they are going to respond when world events affect society as well as business. ["Business needs a world view of its own," Financial Times, 27 October 2011] Skapinker understands that the subject of a company's "duty to society" is a sensitive one. He was not surprised, therefore, when the chief executive from Royal Dutch Shell didn't respond specifically to a question about what his company was going to do about the situation in Syria. Skapinker points out that "Shell has a joint venture with a company controlled by a regime that has recently killed an estimated 3,000 of its citizens." As companies expand internationally, they are going to be confronted time and again with such circumstances and need to have thought through how they are going to respond. Skapinker continues:

"When I asked [the question about Syria], [Shell's chief executive] began by observing that being in the oil business meant you worked in incident-packed parts of the world. Shell was complying with US and European Union sanctions against Syria, which ban oil exports from the country. But there were 3,000 people in the Syrian joint venture and he had a duty to ensure they could continue to work safely. He added: 'We are not in charge of sorting out the political problems in Syria.' This reply has a certain coherence. Unless they are to ignore many of the world's markets, companies end up doing business in unpleasant places. They cannot effect political change themselves. If governments want them to limit or cease their operations in a particular country, they need to say so."

Although Skapinker agrees that companies shouldn't be in the business of regime change, he says that the problem with the approach taken by Shell and most other international companies "is that events often undo government foreign policy, leaving companies exposed." And that kind of exposure is generally not a good thing. Skapinker continues:

"Stephanie Hare, a senior analyst at Oxford Analytica, a consultancy, and Timothy Fort of George Washington University argue in an unpublished paper that companies need to go further and formulate their own foreign policies. They point out that there is nothing new about corporate diplomacy. The East India Company served as the business arm of British foreign policy. What has changed, they write, is that companies are more international and less tied to the government of a particular country. I am not sure that this is entirely the case. Shell is binational – Anglo-Dutch – but it is identifiably European. Vodafone is unmistakably British. Google and Facebook are American."

My initial response to the idea that companies need to develop their own foreign policy was that it was a bad idea. It sounds dangerous and inappropriate. Skapinker points out, however, that (like it or not) some companies get caught up in political intrigue regardless of their best intentions. He explains:

"What is true, as Ms Hare and Prof Fort argue, is that telecoms and internet companies such as the last three [i.e., Vodafone, Google, and Facebook] are more than a commercial presence in the countries in which they invest. The nature of their business makes them players in the political process. Communication companies are often central to modern-day revolutions, as Facebook and Twitter were in the Egyptian uprising. Governments try to control them. ... The internet has changed things for non-communications companies too. It is easy to whip up campaigns against them. Companies need to prepare for this by analysing the risks in their worldwide operations and preparing contingency plans. But foreign policy is hard. Who can say with any confidence what sort of countries Egypt, Tunisia or Libya will be five or even two years from now?"

Skapinker's point is that without a corporate "foreign policy" companies risk being carried by the tide of world events into situations they might not wish to face. He continues:

"Companies can decide they will operate worldwide but take care not to get too close to unpleasant governments. That can be difficult too. In Syria the government controls all oil production. Shell is a minority shareholder in three production licences. Nokia Siemens decided that, while governments everywhere required it to supply interception facilities for law enforcement purposes, it would no longer  provide the monitoring centres to activate that interception. These nuances matter. A corporate foreign policy has to be based on what, at root, a company stands for. Shell says its duty to staff is paramount. Its real test will come if the Syrian government turns on those employees."

Skapinker's objective is to awaken companies to the reality that they are going to have to make strategic choices as the business landscape changes. Without prior thought (i.e., developing a corporate foreign policy) things could get ugly fast. Professor Paul J. H. Schoemaker, Research Director of the Mack Center for Technological Innovation at Wharton, asserts that "adaptive strategic leaders — the kind who thrive in today's uncertain environment – do six things well." ["6 Habits of True Strategic Thinkers," Inc., 20 March 2012] Those six things are: anticipate; think critically; interpret; decide; align; and learn. I believe that companies that do those six things well will also thrive. Schoemaker discusses each of this attributes in turn beginning with anticipating events. He writes:

"Anticipate -- Most of the focus at most companies is on what's directly ahead. The leaders lack 'peripheral vision.' This can leave your company vulnerable to rivals who detect and act on ambiguous signals. To anticipate well, you must:

  • Look for game-changing information at the periphery of your industry
  • Search beyond the current boundaries of your business
  • Build wide external networks to help you scan the horizon better"

As I've noted in numerous posts about risk management, leaders need to keep their heads on a swivel. You never know from which direction the next challenge will come. Implementing a "what if" process goes a long ways towards helping a company achieve good peripheral vision.

"Think Critically -- 'Conventional wisdom' opens you to fewer raised eyebrows and second guessing. But if you swallow every management fad, herdlike belief, and safe opinion at face value, your company loses all competitive advantage. Critical thinkers question everything. To master this skill you must force yourself to:

  • Reframe problems to get to the bottom of things, in terms of root causes
  • Challenge current beliefs and mindsets, including your own
  • Uncover hypocrisy, manipulation, and bias in organizational decisions"

One way to do this is to ensure that you establish cross-functional teams. Participants from different disciplines will bring with them different perspectives, different questions, and different biases.

"Interpret -- Ambiguity is unsettling. Faced with it, the temptation is to reach for a fast (and potentially wrongheaded) solution. A good strategic leader holds steady, synthesizing information from many sources before developing a viewpoint. To get good at this, you have to:

  • Seek patterns in multiple sources of data
  • Encourage others to do the same
  • Question prevailing assumptions and test multiple hypotheses simultaneously"

You will never be able to eliminate all ambiguity; however, Schoemaker is correct when he writes about the importance of obtaining and analyzing good data. Businesses are quickly learning that integrating the massive amounts of data they gather is critical in today's business environment. Modern analytic techniques are allowing companies to discover patterns they didn't know existed. Technology is critical to this endeavor.

"Decide -- Many leaders fall prey to 'analysis paralysis.' You have to develop processes and enforce them, so that you arrive at a 'good enough' position. To do that well, you have to:

  • Carefully frame the decision to get to the crux of the matter
  • Balance speed, rigor, quality and agility. Leave perfection to higher powers
  • Take a stand even with incomplete information and amid diverse views"

I would have used the word "act" instead of the word "decide." I'm reminded of the teacher who asked little Johnny this question: "If there are five frogs on a log and three of them decide to jump off, how many frogs are left on the log?" Johnny's anwwer was, "Five." Confused, the teacher asked, "How do you figure?" Johnny responded, "There's a big difference between deciding to jump and actually jumping." Nevertheless, Schoemaker is correct that at some point you have to act. We've all heard the adage "better is the enemy of good enough." The search for perfect information is a never-ending endeavor. I've often stressed the best way to get good answers is to ask good questions. I believe that is what Schoemaker means when he says that you must frame the decision. Ask the wrong question and I can guarantee that you will get the wrong answer.

"Align -- Total consensus is rare. A strategic leader must foster open dialogue, build trust and engage key stakeholders, especially when views diverge. To pull that off, you need to:

  • Understand what drives other people's agendas, including what remains hidden
  • Bring tough issues to the surface, even when it's uncomfortable
  • Assess risk tolerance and follow through to build the necessary support"

You cannot achieve alignment if stakeholders are dealing with different sets of data. That is why data integration (i.e., having one version of the truth) is essential if alignment is to be achieved. It probably goes without saying, but achieving alignment also requires good leadership. Schoemaker's final attribute deals with learning. He writes:

"Learn -- As your company grows, honest feedback is harder and harder to come by. You have to do what you can to keep it coming. This is crucial because success and failure--especially failure--are valuable sources of organizational learning. Here's what you need to do:

  • Encourage and exemplify honest, rigorous debriefs to extract lessons
  • Shift course quickly if you realize you're off track
  • Celebrate both success and (well-intentioned) failures that provide insight"

Inculcating these attributes into your company's culture will go a long way towards making it resilient to an ever-changing business landscape. Ignorance is not bliss when it comes to the future. Companies know that things will change and they will have to respond and adapt if they are going to survive and thrive.

July 23, 2012

Additive Manufacturing at the Heart of a New Industrial Revolution

"The world of manufacturing is being shaped by a new industrial revolution," writes Peter Marsh, Caroline Nevitt, Katie Carnie and Martin Stabe, "the seventh in a series of key epochs for this sector in the past 2,000 years and the most important since the original industrial revolution that started in northern England around 1780." ["The seven ages of industry," Financial Times, 10 June 2012] The seven industrial epochs are explored in an interactive graphic that describes "key innovations, products and people that have shaped and are shaping each of the seven industrial epochs, and looks at the share of world manufacturing output in selected countries during each age." The seven industrial epochs identified are: 1) Pre-industry (1-1500AD); 2) Standardized products (1500-1780); 3) The factory system (1780-1830); 4) Transportation age (1830-1870); 5) Age of science (1870-1955); 6) Computer power (1955-2005); and 7) The new industrial revolution (2005-present).

In a previous post, I discussed an article from The Economist that also insists we are at the beginning of a new industrial revolution. ["The third industrial revolution," 21 April 2012] The article notes that "the first industrial revolution began in Britain in the late 18th century, with the mechanisation of the textile industry. ... The second industrial revolution came in the early 20th century, when Henry Ford mastered the moving assembly line and ushered in the age of mass production." The result of these two revolutions, the article claims, was that people became richer and more urban. The so-called third industrial revolution it asserts will be the result of "manufacturing ... going digital." It will be a revolution because it "could change not just business, but much else besides." Although the staff at The Economist and the writers from the Financial Times don't agree on the specifics of how historical timeframes should be labeled, they certainly agree that we are entering a new industrial age. Marsh and his colleagues write:

"This new period, which started in 2005, features the disciplines of 'networked manufacturing', connecting up design with physical production even when these activities are many miles apart, global 'niche' production, where companies make narrow ranges of products but sell them globally, and the rapid transfer of 'production intelligence' in the shape of designs, intellectual property and technology."

At the heart of this new industrial revolution is "3D printing, or high-tech 'additive' manufacturing." ["Democracy made with personalised products," by Peter Marsh, Financial Times, 14 June 2012] Marsh describes a manufacturing plant in Minneapolis, Minnesota, whose factory floor holds "100 or so machines, which require just a handful of human attendants, contains an internal chamber in which layers of powder are being fused using lasers to create complicated parts that end up in anything from boat seats to optical instruments. The machines are controlled by computer codes defining the shapes of the items to be made that can be sent by the internet." I have discussed 3D printing in several previous posts (see, for example, 3D Printing and the Supply Chain). The growing consensus is that additive manufacturing will indeed revolutionize how things are made and distributed. Marsh continues:

"Probably the biggest cheerleader for the sector is Abe Reichental, a 55-year-old Israeli-American who is chief executive of 3D Systems, another US company which with Stratasys [the Minneapolis company] is one of the world's two biggest producers of 3D printing machines. He says the technology can contribute to the 'democratisation of manufacturing' by lowering the barriers between design and production. '3D printing can provide the garage entrepreneur with the same productive capabilities as the large corporation,' says Mr Reichental. Another key attribute is that the technology makes it possible to produce 'one-off' or highly personalised parts more easily than with other manufacturing methods. Jeff Immelt, chief executive of General Electric, the US industrial group, is similarly enthusiastic. 'I think it's going to be big, I really do,' Mr Immelt says. The technology's biggest impact, Mr Immelt reckons, will include 'shortening cycle times' between designing products and making them. That could help manufacturers in the rich world compensate for higher wage costs compared with those in emerging economies such as China."

Shortening cycle times isn't just about offsetting wage differentials. Shorter cycle times are required to keep pace with the increasing clock speed of business in general. Derek Singleton writes, "The next manufacturing revolution is about empowering individuals with the same types of manufacturing capabilities that were once only available to large corporations. The plummeting costs of manufacturing-related technologies (e.g., CAD software and 3D printers) have reached the point where this field is now accessible to the average person. It's easier than ever to become a manufacturer." ["Anyone Can Be A Manufacturer," Software Advice, 13 March 2012] John Rogers, Founder and CEO of Local Motors, told Singleton "that he started the company 'to speed up the pace of technological innovation in the automotive industry.' But he also wanted to prove a point: everyday people can be manufacturers." Singleton insists when you look "at the technologies available today" you would have to agree with Rogers than anyone can be manufacturer. Those technologies include:

"• Crowdsourcing – Crowdsourcing is an approach to idea generation and product development, not a technology. However, there's a variety of tech resources available that enable crowdsourcing for any kind of project; check out Open Innovation for a great list.

"• CAD Software – 2D and 3D designs created with CAD software can be saved in a sharable file format before production. You can access professional-grade CAD software on a subscription basis for $19.95/month from Local Motors.

"• 3D Printing – 3D printers are rapidly decreasing in price, making it affordable to create a prototype model of a CAD design. Some 3D printers, such as Objet, are already powerful enough to make small numbers of finished items. As this technology advances, the hope is that individuals will be able to produce larger batches of finished products.

"• Manufacturing-as-a-Service – Manufacturing is following software's lead and becoming an on-demand service. Online manufacturing directories like Alibaba and ThomasNet can connect you with a manufacturer that will build for you so you don’t have to invest in any equipment.

"• Cloud Computing – The Cloud isn't a manufacturing-specific technology but it deserves a mention because of how cost-effective it makes running a product business. Cloud solutions like NetSuite and Plex provide affordable solutions for managing orders, inventory, accounting and other business functions.

"• E-commerce – Of course, the Internet is a critical enabler for any business these days. Sites like eBay, Amazon, or your own e-commerce website, make it easy for customers to find and buy from you. If you're interested in running your own e-commerce site, you should check out Volusion and BigCommerce.

Singleton concludes, "Collectively, these technologies make it easier than ever to go from idea to product to market. We've already seen technological advances democratize music, film, publishing and other industries. Why not manufacturing?" Ashlee Vance reports that the 3D printing has been around for over two decades. She also reports that additive manufacturing sector is growing rapidly. ["3D Printers: Make Whatever You Want," Bloomberg BusinessWeek, 26 April 2012] She writes:

"For 25 years, carmakers and aerospace companies have used industrial-grade 3D printers to fashion prototype parts for their vehicles. More recently, the medical field has turned to the machines to make custom hearing aids and invisible braces, while architects use the technology to produce models and consumer electronics companies to build prototypes of their latest gadgets. To a range of industries, 3D printers have become indispensable for doing business. The large industrial systems now run in price from about $5,000 to $1 million. These days, they can print in different colors of plastic and employ other materials such as metal, glass, and ceramics. Software makers are harnessing this power, making much better tools for manipulating objects. Today the market for 3D printers stands at about $1.7 billion, says Wohlers Associates, a consulting firm that tracks the industry. With sales of the machines rising quickly, Wohlers predicts the market will reach $3.7 billion by 2015."

According to Vance the first 3D printer was developed by Chuck Hull, an engineer and physicist, about three decades ago while he was working "for a modest-size manufacturer called Ultra Violet Products, or UVP." She continues the story:

"Hull helped steer the development of the company's ultraviolet-light curable resins, which were used to add protective coatings to furniture and other surfaces. Always a tinkerer, Hull began experimenting after hours with laying down numerous coats of the resin to make plastic models. 'I had been an engineer for 20 years, and it was always really difficult to prototype plastic parts,' says Hull, now 73. 'You would design a part, go to a toolmaker who would build a plastic model, then you would need to fix any problems and start again. The whole process took about six weeks, so the idea of building parts for yourself with a machine was really cool.' In a back room at the UVP offices, Hull crafted the first crude 3D printer. He filled a small basin with liquid resin and placed a platform controlled by an elevator mechanism inside the basin. Then Hull mounted a movable UV light fixture with a shutter overhead and wrote some software to control the orchestration of all these parts. The platform would be raised near the resin’s surface so that just a thin layer of the liquid sat on top. The light would turn on, the plastic would harden, and then the machine would lower the platform, lay down a new layer of resin, and the process could begin anew."

Although Singleton and Vance are correct that additive manufacturing means that anyone can be a manufacturer. Individual manufacturers (even thousands of them) don't really amount to a revolution. Marsh notes, "So far, however, 3D printing has yet to find much application in routine parts production, where items are made in batch runs counted in tens of thousands or even millions, and where the technology is normally too expensive compared with orthodox procedures such as metal cutting or plastics injection moulding." Nevertheless, it is part of spectrum of manufacturing processes that taken together do form the basis of a manufacturing revolution. He explains:

"3D printing is the latest manifestation of a broad range of 'additive' technologies in manufacturing – where materials are fused or bonded – as opposed to the way of making parts by conventional 'subtractive' machining. ... Over the next few years, the biggest optimists in the sector believe applications of the technology will gradually broaden out to make it possible to use the process for making parts in large production runs. That could be especially the case for small complex shapes where the economic advantages of using 3D printing are more established than for big, simple ones. Hans Langer, chief executive of Eos, a Munich-based company making 3D printers, says the new processes should not be regarded as mere substitutes for current techniques, but as paving the way to make new types of factory items that would be close to impossible to create with current techniques. 'We now have a way to make items that are lighter, use materials more economically and behave differently to products made today. 3D printing could lead to a completely new way to approach manufacturing,' adds Mr Langer."

There appears to be a growing consensus that we are entering (or in the infancy of) a new industrial revolution. More analysts are coming to the conclusion that, with labor costs rising overseas and transportation costs increasing, it makes sense to move manufacturing closer to consumers. Additive manufacturing will help make that decision much easier for some companies.

July 20, 2012

Language and Business

"Would it surprise you to learn," writes Mel Eatherington, "that a third of all workers fall short of employers' expectations in written communication skills? That's exactly what the College Board discovered when it surveyed 120 corporations in the Business Roundtable." ["Employees Lack Writing Skills in the Workplace," Western Carolina University] Eatherington continues:

"The companies who responded employ a staggering four million workers, meaning that approximately 1.33 million employees within these businesses have unsatisfactory writing skills. How can so many people lack these essentials, and is writing really that important?"

Eatherington reports that "half of all companies take writing ability into consideration when hiring"; so they must believe writing clearly and effectively is important. Apparently, however, the message hasn't reached potential employees. Eatherington continues:

"Who writes, and what do they write during their daily tasks? According to the survey, writing is a regular part of the job for two-thirds of all employees. Emails, reports, and presentations are just a few types of writing one might be expected to do in a professional setting, regardless of occupation."

Sue Shellenbarger claims that poor writing skills are often reflected in poor speech habits as well. As a result, companies are often embarrassed by the apparent lack of professionalism displayed by their employees. ["This Embarrasses You and I*," Wall Street Journal, 19 June 2012] Shellenbarger asserts that some bad habits are actually reinforced by "the informality of email, texting and Twitter where slang and shortcuts are common." She notes, "Such looseness with language can create bad impressions with clients, ruin marketing materials and cause communications errors, many managers say." Eatherington agrees with Shellenbarger and reports that "employees who cannot write well cost their companies big bucks each year." He cites one source that "estimates that remedying deficiencies in writing costs American corporations as much as $3.1 billion annually." Unfortunately, Shellenbarger claims, "There's no easy fix." She explains:

"Some bosses and co-workers step in to correct mistakes, while others consult business-grammar guides for help. In a survey conducted earlier this year, about 45% of 430 employers said they were increasing employee-training programs to improve employees' grammar and other skills, according to the Society for Human Resource Management and AARP."

Eatherington notes that "sending a single worker for remedial training in writing can cost more than $3000." He goes on to write, "These workers, it is safe to assume, have little future with the companies they work for if their writing skills are not brought up to professional standards." Bryan A. Garner, author of Garner's Modern American Usage and president of LawProse, a Dallas training and consulting firm, told Shellenbarger, "I'm shocked at the rampant illiteracy [on Twitter]." Shellenbarger reports that Garner "has compiled a list of 30 examples of "uneducated English," such as saying "I could care less," instead of "I couldn't care less," or, "He expected Helen and I to help him," instead of "Helen and me."

Max Mallet, Brett Nelson, and Chris Steiner indicate that "useless business jargon" is just as irritating as poor English. They claim "this annoying gobbledygook has mesmerized the rank and file around the globe." ["The Most Annoying, Pretentious And Useless Business Jargon," Forbes, 26 January 2012] Jennifer Chatman, management professor at the University of California-Berkeley's Haas School of Business, told Mallet and his co-authors, "Jargon masks real meaning. People use it as a substitute for thinking hard and clearly about their goals and the direction that they want to give others." Mallet, Nelson, and Steiner took it upon themselves to assemble "a cache of expressions to assiduously avoid," if you are going "to save you from yourself (and ... keep your colleagues and customers from strangling you)." Their list of phrases to avoid can be found by clicking this link. Two examples of jargon they deem worthy of reproach are:

"Core Competency -- This awful expression refers to a firm's or a person's fundamental strength—even though that's not what the word 'competent' means. 'This bothers me because it is just a silly phrase when you think about it,' says Bruce Barry, professor of management at Vanderbilt's Owen Graduate School of Business. 'Do people talk about peripheral competency? Being competent is not the standard we're seeking. It's like core mediocrity.'

"Buy-In -- "This means agreement on a course of action, if the most disingenuous kind. Notes David Logan, professor of management and organization at the University of Southern California's Marshall School of Business: 'Asking for someone's "buy-in" says, "I have an idea. I didn't involve you because I didn't value you enough to discuss it with you. I want you to embrace it as if you were in on it from the beginning, because that would make me feel really good."'"

I once heard sports announcer Bob Costas rant about one his favorite meaningless phrases -- "They control their own destiny". Either it's destiny or it's not. People can control outcomes, but not destinies. That phrase, however, didn't make the list assembled by Mallet, Nelson, and Steiner. Touching on the sporting theme, they did create "a 'Jargon Madness' bracket—similar to the [one used during the] NCAA college basketball tournament—featuring 32 abominable expressions." (Click to enlarge)

Jargon brackets

As you can see, the final two were "Drinking the Kool-Aid" and "Leverage." Mallet, Nelson, and Steiner asked readers to vote on which of those terms they believed should be declared the winner (or loser, depending on your point-of-view). Personally, I vote for "Drinking the Kool-Aid." Unfortunately, ridding the business world of jargon may decrease the annoyance level but it won't necessarily improve employee writing skills. Leslie Ferrier told Shellenbarger that "she was aghast at letters employees were sending to customers at a Jersey City, N.J., hair- and skin-product marketer when she joined the firm in 2009. Shellenbarger explains:

"The letters included grammar and style mistakes and were written 'as if they were speaking to a friend,' says Ms. Ferrier, a human-resources executive. She had employees use templates to eliminate mistakes and started training programs in business writing."

When it comes to writing skills, Shellenbarger says there may be a generation issue involved. She explains:

"Most participants in the Society for Human Resource Management-AARP survey blame younger workers for the skills gap. Tamara Erickson, an author and consultant on generational issues, says the problem isn't a lack of skill among 20- and 30-somethings. Accustomed to texting and social networking, 'they've developed a new norm,' Ms. Erickson says."

Shellenbarger admits that some of the problems arise because "some grammar rules aren't clear." She says that leaves "plenty of room for disagreement." She continues:

"Tom Kamenick battled fellow attorneys at a Milwaukee, Wis., public-interest law firm over use of 'the Oxford comma'—an additional comma placed before the 'and' or 'or' in a series of nouns. Leaving it out can change the meaning of a sentence, Mr. Kamenick says: The sentence, 'The greatest influences in my life are my sisters, Oprah Winfrey and Madonna,' means something different than the sentence, 'The greatest influences in my life are my sisters, Oprah Winfrey, and Madonna,' he says. (The first sentence implies the writer has two celebrity sisters; the second says the sisters and the stars are different individuals.) After Mr. Kamenick asserted in digital edits of briefs and papers that 'I was willing to go to war on that one,' he says, colleagues backed down, either because they were convinced, or 'for the sake of their own sanity and workplace decorum.'"

Personally, I agree with Kamenick that commas that are routinely omitted in today's writing deserve to be reinserted. Patricia T. O'Conner, author of a humorous guidebook for people who struggle with grammar, told Shellenbarger, "These disagreements can get pretty contentious." Shellenbarger continues:

"In workplace-training programs run by Jack Appleman, a Monroe, N.Y., corporate writing instructor, 'people are banging the table,' yelling or high-fiving each other during grammar contests he stages, he says. 'People get passionate about grammar,' says Mr. Appleman, author of a book on business writing. Christopher Telano, chief internal auditor at the New York City Health and Hospitals Corp., has employees circulate their reports to co-workers to review for accuracy and grammar, he says. He coaches auditors to use action verbs such as 'verify' and 'confirm' and tells them to write below a 12th-grade reading level so it can be easily understood."

It's sad to think that we have to "dumb down" our writing in order to be understood. I suspect that the "epidemic of grammar gaffes in the workplace" noted by Shellenbarger isn't going to ease; rather, it is likely to turn into a pandemic. It will take considerable effort in our educational system -- starting at the very beginning levels -- to teach students how to write and hold them to higher standards. As students get older and start thinking about careers, they need to understand that having good writing skills will make them more employable. I'll close with a quote from Ernest Hemingway on the subject of bad writing because he was a master of saying a lot in a few words. In Death in the Afternoon he wrote:

"If a man writes clearly enough anyone can see if he fakes. If he mystifies to avoid a straight statement, which is very different from breaking so-called rules of syntax or grammar to make an effect which can be obtained in no other way, the writer takes a longer time to be known as a fake and other writers who are afflicted by the same necessity will praise him in their own defense. True mysticism should not be confused with incompetence in writing which seeks to mystify where there is no mystery but is really only the necessity to fake to cover lack of knowledge or the inability to state clearly. Mysticism implies a mystery and there are many mysteries; but incompetence is not one of them."

July 19, 2012

U.S. Railroads on the Move

I don't believe I've previously written a post specifically about the U.S. railroad industry. Increasingly, however, the railroad industry is playing a larger role in supply chain discussions. The most attention that the industry had received in years was back in 2009 when Warren Buffett acquired the Burlington Northern railroad. Buffett's timing was pretty good. By early January of 2011, things were looking up for the railroad industry. Bob Ferrari reported, "The Wall Street Journal noted that the largest North American railroads hauled more of most everything in the fourth quarter [0f 2010], generating more optimism, hiring and previously idled equipment resource deployment." ["Positive News on the North American Rails," Supply Chain Matters, 27 January 2011] Ferrari went to provide some of the positive reports being received. He wrote:

"CSX Corp. and Union Pacific indicated that business is so good that they are rehiring more previous idled workers. Union Pacific recorded a 31 percent increase in operating income and noted that 2010 was the most profitable year in the company’s 150 year history. Business volumes were up 9 percent with all 6 business groups reporting shipment volume growth. CSX recoded a 46 percent increase in Q4 profit and noted growth across nearly all markets. The railroad plans to invest $2 billion in its business operations in 2011.

"Norfolk Southern recoded a 14 percent increase in revues and a 31 percent increase in year-on-year profits. Coal revenues increased 18 percent, intermodal was up 16 percent and general merchandise was up 10 percent.

"Canadian National Railway reported a 19 percent increase in Q4 profits with strong growth noted in all freight segments. For 2011, CN predicts continued increased freight activity in overseas container, metal products and iron ore, along with export demand in lumber, petroleum and chemicals. Canadian Pacific Railway reported a 34% increase in Q4 operating income and also noted strong demand across all lines of business. CP has allocated up to $1 billion for capital improvement programs in 2011."

Although many people associate railroads more with the industrial age than the information age, back in 2011 Daniel Machalaba reported that "the digital revolution is coming to freight rail." ["The Little Engine Really Could," Wall Street Journal, 22 May 2011]. He noted, "Major railroads are installing digital communications, global positioning receivers, sensors and computerized controls on their trains and tracks." He continued:

"New systems can gather intelligence on locations, size and speeds of trains and make automated decisions about when the trains should stop or go. Digital cameras and microphones on the tracks are working on monitoring train conditions to determine when equipment needs to enter a shop for maintenance. Some of these high-tech tools are already in limited use; others are still being tested. But in the next 10 to 15 years, freight-rail executives hope to put together the best solutions available and to transform one of the earliest network businesses, the railroad, into an integrated digital network that carries more trains and more freight at faster speeds and lower cost."

Lower cost rail rates would be welcomed by most shippers. Back in 2011, Christian Wetherbee, a senior transportation analyst for Citigroup, noted "that rates for container ships have fallen 'significantly,' while 'rail rates have gone nothing but up.'" ["Speed Is Key for Railroads, Ports in 'Post-Panamax' Era, CNBC, 25 February 2011] Whether the new technologies actually bring down rail rates or not, they are going to make the rails safer and more efficient. Robert Gallamore, a transportation consultant in Rehoboth Beach, DE, told Machalaba, that implementation of new features "could be the biggest surge in railroad technology since diesel locomotives replaced steam engines a half century ago. Technology will soon be able to produce a railroad that doesn't derail, collide, break down or fall off schedule."

By mid-2011, the good news for railroads continued to come in. In June of 2011, the Association of American Railroads (AAR) announced that May 2011 marked the 18th straight month of intermodal transportation gains. "The gains in intermodal [were] attributed to several factors, including growing international trade, better service, large investments in infrastructure and equipment by railroad companies, fuel costs, highway congestion and truck driver shortages, and the conversion of boxcar traffic." ["May Was 18th Consecutive Month of Gains in Intermodal Traffic," SupplyChainBrain, 9 June 2011] The AAR also announced that railroads were hiring workers. By end of 2011, the editorial staff at Supply Chain Digest was writing, "Warren Buffet certainly seemed to know what he was doing when he took rail carrier Burlington Northern private two years ago." ["Rail Carrier Profit Engines Roll On, While LTL Sector Slowly Crawling Out of Its Hole," 7 December 2011] The staff reported, "Net income in the sector for the quarter was up a very strong 19% in aggregate, led by Kansas City Southern's 98% gain. Increases in net income for UP, CSX and NS were up 16%, 12% and 24.5% respectively. This once not very profitable sector now finds itself with operating ratios (operating costs as a percent of operating revenues) of 70% or lower - meaning margins are fat."

Although most of the attention in the rail sector is focused on the larger companies, the Financial Times notes that the short-line and regional railways also play an important role. ["US railways: a model business," 24 March 2012] The article reports:

"Set against their seven national peers (annual freight sales: $60bn), the 560 or so short-line and regional railways (annual freight sales: $3bn) can seem a little like toys. They are not. These stubby railroads, formed when the majors shed lossmaking assets in the 1980s, are a vital link between companies and markets and the trunk routes. A combination of non-unionised workers, careful attention to service, and lower maintenance expenses allows companies such as RA, Genesee & Wyoming, OmniTRAX and Watco, among the largest short-line holding companies, to compete against trucking and earn a living where the national rails could not."

Clearly, however, when it comes to moving interstate freight the national railroads are kings of the road. They are also leaders when it comes to improving infrastructure. Michael Grunwald reports, "U.S. freight railroads will get $23 billion worth of upgrades this year, and taxpayers won't pick up the tab. That's because the railroads build, maintain and improve their own infrastructure and even pay property taxes on their tracks." ["Back on Tracks," Time, 28 June 2012] Grunwald continues:

"Also, freight trains are about three times as fuel-efficient as long-haul trucks, which means they help cut smog and reduce the U.S.'s carbon emissions and oil dependence. And forget those accident-prone trains your kids watch on Thomas the Tank Engine & Friends. In reality, shifting freight from roads to rails sharply reduces crashes and congestion. We don't think much about freight trains except when they make us wait at intersections or blow their horns while chugging through our towns. The industry evokes images of ruthless Gilded Age monopolies and hapless 1970s bankruptcies. But ... what's good for them really does tend to be good for us. It's not just that they are self-sufficient and fuel-efficient, employ 175,000 workers and have poured $500 billion into their trains, tracks and terminals since 1980. They are also quite literally the engines of our economy."

Most train enthusiasts long for the golden days of passenger rail, but Grunwald asserts that "America's passenger rail is a global joke." On the other hand, he claims, "Our freight rail is the envy of the world, carrying over 40% of our intercity cargo." He continues:

"Trains carry much less of Europe's freight, which is why trucks clog Europe's highways. And America's rail-shipping rates are the world's lowest, reducing the cost of doing business in the U.S.; they've fallen 45% in real dollars since the industry was deregulated three decades ago. The right should love railroads because they're proof that deregulation can work and the private sector can upgrade infrastructure. The left should love railroads because they fight global warming and provide union jobs. We all should love railroads because they bring us our stuff and keep prices down."

Grunwald is not much of a fan of other transportation industries; noting that they "perpetually lobby for government to widen highways and dredge rivers -- pressuring it to get taxpayers to foot the bill for what the railroads cover for themselves." To be fair, most highways, ports, and rivers are owned by the government and not private corporations. The government has to be involved when improvements to that infrastructure are required. Nevertheless, his point that railroads are a good deal for taxpayers (except maybe for passenger rails) is still a valid one. Grunwald concludes:

"Railroads are flourishing, attracting investors like Warren Buffett, and Association of American Railroads CEO Ed Hamberger says their main request of government is to be left alone to continue their renaissance. ... These days, Congress won't spend the bucks on infrastructure, regardless of the bang. But quietly railroads keep spending their own bucks. In an era of austerity, progress chugs along slowly and rarely blows its horn."

The next time you hear the haunting wail of a train whistle, you can be assured that the engines of the American economy are still running. And once all of the infrastructure upgrades discussed by Machalaba are complete, they will be running, on time, more safely, and with greater efficiency.

July 18, 2012

Piracy on the Decline: Will it Last?

For the past several years, maritime piracy has received a lot attention in the press. The geographic area that has received the most attention is the area off of the Horn of Africa. The reason, of course, is that Somalia has been the epicenter of pirate activity. Ocean carriers and shippers are concerned about piracy because the nefarious activities of these criminals cost time, money, and, too often, lives. According to Ron Widdows, group president of Neptune Orient Lines and chairman of the World Shipping Council, "Maritime piracy costs the global shipping industry anywhere from $3.5 billion to upwards of $8 billion a year." ["Piracy Costs Shipping Industry Billions," by Peter T. Leach, Journal of Commerce, 19 April 2011]

One of the reasons that piracy has garnered so much attention is that the incidents of piracy have been steadily on the rise. For example, Leach reported, "The International Maritime Bureau said worldwide pirate attacks in the first three months of 2011 reached the highest quarterly number ever at 142." He continued:

"The sharp rise was driven by a surge in piracy off the coast of Somalia, where 97 attacks were recorded in the first quarter of 2011, up from 35 in the same period last year. The Somali transitional government's foreign minister Mohammed Abdulahi Omar Asharq told the counter-piracy conference that the world is losing the battle against piracy. 'The race between the pirates and the world is being won by the pirates,' he said. Asharq said the solution to piracy lies on land, not at sea. 'Consequently the status quo view that manages acts of piracy is no longer a viable strategy. It is equally clear that piracy can only be uprooted on land, where it grows and persists,' Asharq said, appealing for international aid. 'The international community must make the urgent and necessary investment in the Somali security forces to build up the capability of the state and to establish its national authority."

Jump forward a year to March 2012 and one could only conclude that the international community's war against piracy was failing. In that month, "ten ships were hijacked by Somali pirates, ... making this the most attacks in one month since December 2010." ["Somali Pirate Activity Reaches 15-Month High," The Maritime Executive, 5 April 2012] The article continues:

"According to Bloomberg, pirate gangs may also be moving to attack larger merchant vessels. ... Four of the seized ships were used to make more attacks, rather than the usual holding for ransom acts. Maritime security experts believe that pirate groups will be encouraged by the latest hijackings and will be moved on organizing more attacks. ... A recent study done by One Earth Future Foundation showed that Somali pirate attacks rose to a record 237 in 2011, with ransoms worth $160 million paid to release 31 hijacked vessels. It also reported that pirates based in Somalia cost governments and the shipping industry as much as $6.9 billion last year. Currently, sea pirates have 13 vessels detained with 197 crewmen taken as hostages, according to the International Maritime Bureau (IMB)."

Based on that depressing start to the year, it comes as a surprise to learn that "antipiracy efforts helped slash attacks by a third in the first half of this year, though an alarming increase in incidents in the Gulf of Guinea helped offset declines in the major piracy hot spot offshore of Somalia, the International Maritime Bureau said." ["Antipiracy Efforts Cut Attacks By a Third," by Sarah Kent, Wall Street Journal, 16 July 2012] Kent continues:

"According to a quarterly report published by the International Chamber of Commerce's piracy watchdog, 177 incidents of piracy were reported in the first six months of the year, down from 266 in the same period in 2011, with the decrease largely the result of a drop in Somali piracy. The IMB attributed the decline in pirate activity in the region to efforts by international navies to disrupt piracy as well as the successful implementation of antipiracy measures by shipowners."

Sandra I. Erwin reports, "Security firms have rushed to capitalize on the shipping industry's rising fear of pirates. Approximately 200 to 300 companies today specialize in protecting commercial ships and oil tankers from pirates. At least half these firms are based in the United Kingdom." ["Security Firms Divided Over How to Succeed in the Anti-Piracy Business," National Defense, August 2012 issue] Michael G. Frodl, head of the consulting firm C-LEVEL Maritime Risks, told Irwin that "hiring armed crews today is the most economical option for shippers because there is so much competition for the business. ... Guards can cost anywhere from $40,000 to $50,000 for a 10-day trip." Although current strategies seem to be working, Erwin notes that the maritime industry remains unsure of the best strategies to combat piracy. She explains that "the cost of security is becoming an unaffordable burden" for shipping lines that are already operating on razor-thin margins. "Ships can choose to take detours to avoid the more dangerous waters," she writes, "but that drives up fuel costs." Most carriers understand, however, that "some type of security aboard is a must for any ship that transits the waters off East Africa, the Persian Gulf and the North Indian Ocean."

Most stakeholders, it appears, believe that public/private collaboration is required to tackle the piracy problem. Thomas P. Kelly Principal Deputy Assistant Secretary, Bureau of Political-Military Affairs, told a conference in Dubai, "The United States supports a multilateral approach that views piracy as a shared challenge. Piracy is most effectively addressed through broad, coordinated, and comprehensive international efforts. We consider the Contact Group on Piracy off the Coast of Somalia essential in enabling interaction between states and regional and international organizations on piracy." ["A Shared Approach for Shared Challenges," Press Release: US State Department, Scoop Independent News, 11 July 2012] Although these combined efforts seem to be working, the question remains: Will these latest results prove lasting? As noted above, Kent reported "that the drop in Somali piracy was offset by a 'disproportionate' increase in activity around the Gulf of Guinea, where 32 incidents were reported in 2012 compare to 25 in 2011. ... Attacks in this region were becoming increasingly violent, with guns reported in at least 20 of the 32 incidences." She continues:

"The news comes as the European Union announced plans to launch a fresh mission in the Horn of Africa to fight piracy and instability in the region. The mission, which will get up and running in the autumn, is designed to wipe out 'the scourge of piracy,' the EU's foreign-policy chief Catherine Ashton said in a statement. It is part of the bloc's more aggressive crackdown on suspected pirates, and comes after the EU's antipiracy force launched their first airstrikes on a pirate camp in mainland Somalia in May."

I suspect that ground operations in Somalia are main reason that piracy attacks from that country have diminished. As Kelly told the Dubai conference, "The only long-term solution to piracy is the re-establishment of stability, responsive law enforcement, and adequate governance in Somalia." Doug Brooks, president of the International Stability Operations Association, agrees. He told Erwin, "Ultimately, the solutions to piracy are 'land based'." Kent concludes:

"'Any lessening in the international commitment is likely to be followed by a renewed upsurge in pirate activity and greatly increased risks to international shipping,' said Ben Payton, Africa analyst at Maplecroft, a risk analyst company. 'Indeed, international naval efforts have dispersed the problem, rather than solved it. The naval presence off the Somali coast has encouraged more sophisticated pirates to move south, meaning that despite the reduction in overall attacks, operators are exposed to risks over a much wider area,' he added, noting that investors expanding into the offshore gas industries in Tanzania and Mozambique could be particularly vulnerable."

I agree with Payton that now is no time to let up on efforts to decrease the threat from piracy. The sooner it can be dramatically reduced the safer the seas will be for everyone. Eventually, stakeholders will come to the conclusion that the symptoms of piracy are found at sea but the cure for it is found ashore.