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716 posts categorized "Best Practices"

October 07, 2010

Let's Talk Jobs, Part 1

Back in January of this year some analysts still held out hope that the job market would dramatically improve as the year progressed ["Why a job-rich American recovery is still plausible," by Robert Barbera and Charles Weise, Financial Times, 11 January 2010]. Barbera is the chief economist, investment technology group, and economics department fellow at the Johns Hopkins University. Weise is chairman and associate professor of economics at Gettysburg College. In their op-ed piece, they acknowledged that others were "warning of a 'jobless recovery' of the kind that followed the last two recessions, in 1990-91 and 2001" but, back in January, they believed that a jobless recovery didn't need to be the case. They explained:

"The conventional wisdom now has it that the message embedded in Friday’s December US jobs report – a seeming end to firing but little evidence of net new hiring – will turn out to be a precursor to similar news on jobs that will dominate throughout 2010. We believe that these meagre expectations will turn out to be wrong, in large part because they mischaracterise how employment has swooned over the past two years. The scenario of a jobless recovery is founded on two propositions. First, that the crisis has left a damaged economy incapable of generating robust growth in demand. Second, that many employers responded to the recession by permanently restructuring their businesses and, in so doing, irrevocably reducing their payrolls."

Unfortunately, the naysayers proved to be correct and Barbera's and Weise's hopes proved unfounded. Their "more optimistic outlook [was] based on a different theory of why payrolls were cut so aggressively." They continued:

"Because of the turmoil in financial markets in autumn 2008, companies faced a severe cash crunch. As a result, they attempted to hoard cash in any way they could: they slashed order books, ran down inventories at an unprecedented pace and cut short-term borrowing. And they slashed payrolls. The drastic reduction in inventories and payrolls was not, in other words, a result of restructuring: it was symptomatic of panic, the same panic that caused the massive sell-off in equities, corporate bonds and mortgage-backed securities."

Because policy decisions made by panicked business executives are much more easily reversed than structural decisions, Barbera and Weise believed executives would reverse their decisions and begin rehiring employees. As we now know, that hasn't happened. Inventories remain low, cash is still being hoarded, and jobs haven't returned. Unemployment in the United States still hovers perilously close to double-digits. To be fair, some jobs have returned. In a press conference in mid-September, the President announced that some three-quarters of a million jobs had been created in 2010 -- far less than the eight million jobs lost during the recession. And many jobs that are available go wanting for lack of skilled workers ["Factory Jobs Return, but Employers Find Skills Shortage," by Motoko Rich, New York Times, 2 July 2010]. Rich reports:

"Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery. And because they laid off so many workers — more than two million since the end of 2007 — manufacturers now have a vast pool of people to choose from. ... [However,] manufacturers who profess to being shorthanded say they have retooled the way they make products, calling for higher-skilled employees. 'It’s not just what is being made,' said David Autor, an economist at the Massachusetts Institute of Technology, 'but to the degree that you make it at all, you make it differently.' In a survey last year of 779 industrial companies by the National Association of Manufacturers, the Manufacturing Institute and Deloitte, the accounting and consulting firm, 32 percent of companies reported 'moderate to serious' skills shortages. Sixty-three percent of life science companies, and 45 percent of energy firms cited such shortages. ... Employers say they are looking for aptitude as much as specific skills. 'We are trying to find people with the right mindset and intelligence,' said Thomas J. Murphy, chief executive of Ben Venue, a contract drug maker for pharmaceutical companies]. ... Leaders worry that the skills shortage now will be exacerbated once baby boomers start retiring. ... 'The new worker of tomorrow is in about sixth grade,' said John Gajewski, executive director of the advanced manufacturing, engineering and apprenticeship program at Cuyahoga Community College in downtown Cleveland. 'And they need training to move into manufacturing.'"

For more on some of the concerns that people have about the workforce of the future, see my posts entitled Is America Undergoing a Creativity Crisis? Part 1 and Update on Education in America. Rich provides some anecdotal evidence that children exposed to high-skills jobs can be attracted to them.

"At Astro Manufacturing and Design, a maker of parts and devices for the aerospace, medical and military industries, Rich Peterson, vice president for business development, recently gave a tour to a group of eighth graders. He showed off surgical simulators and torpedo parts, saying he wanted them to see the 'cool' things the company makes. By the end of the tour, more than a third of the students said they might consider working at a place like Astro, which is based in Eastlake and has five plants in the Cleveland area. For now, the company urgently needs six machinists to run what are known as computer numerical control — or CNC — machines. An outside recruiter has reviewed 50 résumés in the last month and come up empty. The jobs, which would pay $18 to $23 an hour, require considerable technical skill."

In a post entitled Innovation and Child's Play: Those Wild and Crazy Engineers, I provided several examples of organizations that are trying to encourage young people to gain the necessary skills to fill jobs in highly technical economic sectors. Rich concludes:

"Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed. ... As unlikely as it would seem against this backdrop, manufacturers who want to expand find that hiring is not always easy. During the recession, domestic manufacturers appear to have accelerated the long-term move toward greater automation, laying off more of their lowest-skilled workers and replacing them with cheaper labor abroad. Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker. ... The increasing emphasis on more advanced skills raises policy questions about how to help low-skilled job seekers who are being turned away at the factory door and increasingly becoming the long-term unemployed. ... How many more people would be hired if manufacturers could find qualified candidates is hard to say. Since January, they have added 126,000 jobs, or about 6 percent of those slashed during the recession. The number may understate activity somewhat, as many factories have turned to temporary workers."

An increasing number of analysts believe that the future belongs to highly-skilled workers ["Future hiring will mainly benefit the high-skilled," by Christopher S. Rugaber and Michael Liedtke, Washington Post, 5 September 2010]. Rugaber and Liedtke agree with Rich on the following points:

-- Whenever companies start hiring freely again, job-seekers with specialized skills and education will have plenty of good opportunities. Others will face a choice: Take a job with low pay - or none at all.

-- Job creation will likely remain weak for months or even years. But once employers do step up hiring, some economists expect job openings to fall mainly into two categories of roughly equal numbers:

- Professional fields with higher pay. Think lawyers, research scientists and software engineers.

- Lower-skill and lower-paying jobs, like home health care aides and store clerks.

Rugaber and Liedtke then ask rhetorically ask about the future of "those in between." Their answer: "Their outlook is bleaker. Economists foresee fewer moderately paid factory supervisors, postal workers and office administrators." They continue:

"That's the sobering message American workers face. ... Not until 2014 or later is the nation expected to have regained all, or nearly all, the 8.4 million jobs lost to the recession. Millions of lost jobs in real estate, for example, aren't likely to be restored this decade, if ever. ... Even when the job market picks up, many people will be left behind. The threat stems, in part, from the economy's continuing shift from one driven by manufacturing to one fueled by service industries. Pay for future service-sector jobs will tend to vary from very high to very low. At the same time, the number of middle-income service-sector jobs will shrink, according to government projections. Any job that can be automated or outsourced overseas is likely to continue to decline. The service sector's growth could also magnify the nation's income inequality, with more people either affluent or financially squeezed. The nation isn't educating enough people for the higher-skilled service-sector jobs of the future, economists warn."

For the unemployed the message is getting louder and clearer, if you don't have skills don't expect to find work. That message begs the question: What kind of skills? Rugaber and Liedtke continue:

"'There will be jobs,' says Lawrence Katz, a Harvard economist. 'The big question is what they are going to pay, and what kind of lives they will allow people to lead? This will be a big issue for how broad a middle class we are going to have.' On one point there's broad agreement: Of 8 million-plus jobs lost to the recession - in fields like manufacturing, real estate and financial services - many, perhaps most, aren't coming back. In their place will be jobs in health care, information technology and statistical analysis. Some of the new positions will require complex skills or higher education. Others won't - but they won't pay very much, either."

To help answer the question about what kinds of skills are going to be required to fill the 15.3 million new jobs that the government forecasts are going to be created over the next decade, Rugaber and Liedtke provide a industry by industry overview of the sectors likely to grow the fastest. They begin with health care.

"The sector is expected to be the leading job generator, adding 4 million by 2018, according to Labor Department data. An aging population requires more doctors and nurses, physical therapists, home health aides and pharmacists. Many of these jobs will pay well. Physical therapists averaged about $76,000 last year, according to the department's data. Others pay far less. Home health care aides earned an average of just $21,600. Home health care and personal care aides are expected to add about 900,000 jobs by 2018 - 50 percent more than in 2008. Jennifer Gamboa of Body Dynamics Inc., an Arlington, Va.-based physical therapy firm, says the drive to reduce health care costs should benefit her profession, which can treat pain less expensively than surgery. Gamboa plans to add two employees in the next year."

As I noted in a post entitled Shortages of General Practice and Family Doctors are Impacting Emergency Health Care, many of the tasks that now fall on the shoulders of general practitioners are likely to be activities performed by physicians' assistants and nurse practitioners. I suspect that many of the new jobs created will be in the area of helping close the primary care gap. Rugaber and Liedtke next turn to the information technology sector:

"Technology could be an economic elixir as computers and online networks expand ways to automate services, distribute media and communicate. Companies will need people to build and secure those networks. That should boost the number of programmers, network administrators and security specialists by 45 percent to 2.1 million by 2018, the government forecasts. Most of these jobs will provide above-average pay. Technology pay averaged $84,400 in 2008 - nearly double the average private-sector pay of $45,400, according to an analysis of the most recent full-year data by the TechAmerica Foundation, a research group."

Since Enterra Solutions is involved in the IT sector, I know from experience that the sector is likely to grow and the skills required to succeed in the sector will constantly change as new technologies emerge. The kinds of technologies we are creating at Enterra Solutions weren't possible a decade ago. That's a good segue to the final sector discussed by Rugaber and Liedtke -- new industries.

"Deepak Advani, an IBM executive, has a title he says didn't exist five years ago: 'Vice president of predictive analytics.' Companies and government agencies have amassed data on behavior ranging from shopping habits to criminal activity. Predictive analytics is the art of determining what to do with that data. How should workers' time be deployed? How best to target customers? Such jobs could grow 20 percent by 2018, the government predicts. Still, economists say more will be needed to boost job growth. The answer may be some technological breakthrough akin to the personal computer or the Internet. 'Most big booms come from a particular sector that moves the rest of the economy,' said Richard Freeman, a Harvard labor economist. Technology spurred job growth after the 1982 and 1991 recessions. The PC became revolutionary in the early 1980s. Internet use exploded after the Mosaic Web browser was introduced in 1994. Housing eventually lifted employment after the 2001 dot-com bust. 'There's a lack of clarity on what the next big thing is going to be this time,' said David Card, an economics professor at the University of California. Until there is, many people will have to lower expectations and living standards as they enter fields with less pay and less job stability, said Dan Finnigan, CEO of online employment service Jobvite."

The best way to find the next big thing is by fostering an environment that encourages entrepreneurs to begin start-ups ["To Create Jobs, Nurture Start-Ups," by Steve Lohr, New York Times, 11 September 2010]. Lohr reports:

"Modern tools of data analysis — fast computers, smart software and vast troves of digital information — often open the door to new insights. Consider the subject of jobs in America. For decades, the assumption has been that small business is the economy’s dynamic engine of job generation. Look at the numbers broadly, and that is the irrefutable conclusion: two-thirds of net new jobs are created by companies with fewer than 500 employees, which is the government’s definition of a small business. But research published [in August 2010] by three economists, working with more recent and detailed data sets than before, has found that once the age of the businesses is taken into account, there is no difference in the job-producing performance of small companies and big ones. 'Size plays virtually no role,' says John C. Haltiwanger, a co-author of the study and an economist at the University of Maryland. 'It’s all age — start-ups are where the job-creation action really occurs.' Start-ups account for much job destruction as well. Within five years, half of these businesses have folded. Yet the survivors are prime candidates to join the young, dynamic companies that make an outsize contribution to innovation, productivity gains and job growth, Mr. Haltiwanger says. So any serious discussion of job creation, it seems, should look at the business tactics and policy steps that are most likely to nurture more of these promising corporate upstarts."

In a post entitled Not All Small Businesses are Created Equal, I wrote: "The real entrepreneurial heroes are those that create high growth companies that provide employment for people beyond the entrepreneurs, their families, and a handful of others. These are the so-called small business superstars ["Small businesses: Measuring their power and their problems," by Edmund L. Andrews, The Fiscal Times, 1 August 2010]. Andrews reports that these superstar firms 'constitute only 2 or 3 percent of the nation's companies.' ... The fact that pinning down exactly what constitutes a superstar (other than a high growth rate) makes targeting policy decisions that support them extremely challenging." Lohr agrees that finding approaches to nurture the right kind of start-ups "can be tricky." As a result, "government small-business initiatives are often misguided." He continues:

"According to Josh Lerner, a professor at the Harvard Business School. Government programs to stimulate bank lending ... are not geared to entrepreneurial start-ups. Those new companies need equity investment to fund risk-taking, free of the financial burden of paying interest on loans. ... Most young companies make precious little income during their first few years, and their leaders are focused on hitting it big, not on tax rates."

Lohr provides an example of a company that could be considered a superstar start-up: Carbonite.

"It grew out of the observation that few people make backup copies of digital photographs, personal records and documents that they have stored on their computers — and often lose them if a hard disk crashes or a notebook machine is lost or stolen. So [David Friend, a founder of six companies over the last three decades,] and his co-founders set out to build an easy-to-use online backup service for consumers and small businesses. It stores their information remotely and offers unlimited storage for $55 a year. Carbonite’s revenue is doubling annually, to an estimated $40 million this year, Mr. Friend says. Its employment in the United States, largely engineers and marketing staff, has more than tripled in the last two years, to 132."

Another superstar start-up, SecondMarket, was created by Barry Silbert. The company "began with 5 employees and now has 150." Lohr reports that SecondMarket now "plans to expand abroad in Asia and Israel." Lohr continues:

"Five years ago, as a young investment banker, Mr. Silbert recognized the growth in restricted stock issued to corporate managers. This stock cannot be traded on public exchanges, so he wanted to set up a new marketplace to trade those shares. Mr. Silbert began in a tiny office in New York City with five people, two telephones and a few desktop computers. Their trading technology consisted of Excel spreadsheets, he recalled. It was a 'lean start-up' before that term was widely used. 'But that meant we were profitable almost from the start,' says Mr. Silbert. ... Today, SecondMarket is best known for dealing the private shares of fast-growing tech start-ups like Facebook, Twitter and LinkedIn. These companies have not yet gone public, but former employees and others often want to sell their shares."

Silbert "like many other entrepreneurs, ... advocates granting more residence visas to skilled immigrants, especially those who attend American universities." This is a subject that is raised time and again in articles about how to keep America the most innovative country on earth. Lohr concludes:

"'The best and the brightest from other countries come here, and then we’re not letting them stay,' [Silbert] said. 'That will damage innovation and job creation in the United States.' Foreign-born entrepreneurs have long played a big role in American start-ups. A study that tracked technology and engineering start-ups from 1995 to 2005 found that one quarter of them had a foreign-born chief executive or head technologist; by 2005, the surviving companies generated $52 billion in sales and employed 450,000 workers. There are signs that policy makers are looking to accommodate highly skilled workers and entrepreneurs, says Robert Litan, an economist at the Kauffman Foundation. As one example, he points to legislation proposed this year by Senators John Kerry, Democrat of Massachusetts, and Richard G. Lugar, Republican of Indiana. Called the Start-Up Visa Act, it would grant visas to immigrant entrepreneurs who create jobs in the United States. 'In this economic environment, I think job-creating ideas that don’t cost money are going to get a fair hearing,' Mr. Litan says."

In today's economic environment, common sense dictates that we should be encouraging anybody who can help create jobs. Keeping some of the world's brightest people in the United States is one way to keep America competitive ["The Global Jobs Competition Heats Up," by Martin Neil Baily, Matthew J. Slaughter, and Laura D'Andrea Tyson, Wall Street Journal, 1 July 2010]. Baily and company focus on multinational corporations headquartered in America rather than on small businesses or start-ups. They report that these corporations, "although they comprise far less than 1% of U.S. companies, ... account for about 19% of all private jobs, 25% of all private wages, 48% of total exports of goods, and a remarkable 74% of nonpublic R&D spending." They continue:

"Despite the common allegation that multinationals simply 'export jobs' out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10 million from 4.8 million. During that same period, employment in U.S. parent companies rose to 22 million from 17.7 million. But there is no guarantee that the past will be prologue. McKinsey conducted in-depth interviews with senior executives from 26 of America's largest and best-known multinationals. Their message is sobering: Today the U.S. is in an era of global competition to attract, retain and grow the operations of multinational companies that it's never faced before."

Although "all of the business leaders interviewed for this study agreed that U.S. tax policy has a 'major impact' on their competitiveness and investment decisions," many of them also "said that policies like limits on skilled immigration handicap their companies." In the words of one executive, tax considerations are "often one of the largest line items in the investment projection." The bottom line for jobs is that "U.S. multinationals will not aggressively invest and hire here at home if they can't realize attractive returns from doing so." Baily and company continue:

"There are several deep challenges now facing the U.S. economy in the wake of the financial crisis. Perhaps most importantly, U.S. companies have yet to resume vigorous job creation. ... U.S. multinationals are uniquely positioned to help America meet these challenges. But this will require far-sighted policy initiatives like liberalizing trade and protecting intellectual property. These firms are now the canaries in the U.S. economic coal mine. Will our lawmakers pay attention?"

As Baily, Slaughter, and Tyson note, there are a lot of allegations and heartburn about outsourced jobs going overseas. Tomorrow I will conclude this discussion of jobs and look at what some so-called experts indicate should be done to create jobs in the United States.

October 06, 2010

Update on Education in America

In a post entitled Is America Undergoing a Creativity Crisis? Part 1, it was pointed out that "in China there has been widespread education reform to extinguish the drill-and-kill teaching style. Instead, Chinese schools are also adopting a problem-based learning approach." Until recently, teaching critical thinking has been one of the hallmarks of American schools. The fact that the U.S. has had a workforce equipped with critical thinking and problem-solving skills is probably the most important reason that the last century was often dubbed the "American Century." Ironically, just as the world is converting to a more Americanized school system, American education is focusing "on standardized curriculum, rote memorization, and nationalized testing." A lot of people are not happy with what is occurring in U.S. education including billionaire Bill Gates ["Bill Gates' School Crusade," by Daniel Golden, Bloomberg BusinessWeek, 15 July 2010]. Golden reports that the Bill and Melinda Gates Foundation "is betting billions that a business approach can work wonders in the classroom." He continues:

"The foundation plans to spend $3 billion in the next five to seven years on education. If there's such a thing as a charity behemoth, the Gates Foundation is it. While its efforts in global health are widely applauded, its record in America's schools has been more controversial. Starting in 2000, the Gates Foundation spent hundreds of millions of dollars on its first big project, trying to revitalize U.S. high schools by making them smaller, only to discover that student body size has little effect on achievement. It has since shifted its considerable weight behind an emerging consensus—shared by U.S. Education Secretary and Gates ally Arne Duncan—that quality of teaching affects student performance and that increasing achievement is as simple as removing bad teachers, identifying good ones, and rewarding them with more money. On this theory, Gates is investing $290 million over seven years in the Tampa, Memphis, and Pittsburgh school districts as well as a charter school consortium in Los Angeles. The largest chunk of money, $100 million, will go to Tampa's Hillsborough County school district, the eighth-largest in the U.S., with 192,000 students and 15,000 teachers. These carefully selected programs, which will favor or penalize teachers depending on whether students make larger or smaller gains than their test scores in prior years would have predicted, are intended as models that, if proven successful, can be rolled out nationwide."

The big concern with this approach is that it is "an intellectual cousin of the Bush Administration's 2002 No Child Left Behind law, which required all public schools—though not individual teachers—to make 'adequate yearly progress' on student test scores." Golden continues:

"Some opponents of No Child Left Behind questioned its faith in data; are scores too narrow a gauge of how well kids are learning? Gates sees nothing wrong in relying on quantitative metrics. 'Every profession has to have some form of measurement,' he said in a late June interview with Bloomberg Businessweek. 'Tuning that, making sure it's fair, getting the teachers so they're enthused about it" are the keys. Still, the prospect of such measurement makes some educators and academic researchers uneasy. They contend that factors such as school leadership and culture exert a powerful influence on student achievement. Moreover, rating individual teachers based on their classroom's test results may be better suited to little red schoolhouses than today's large urban schools, where teachers team up, aides and tutors pitch in, and students come and go frequently."

Although one can appreciate why some quantitative data is necessary to judge achievement, if reliance on tests turns the American educational system into a "drill and kill" system, we will have lost rather than gained ground.

"[Wharton School statistician Howard Wainer], who spotted the mathematical fallacy behind the small schools movement, is also skeptical. 'It's conceivable you could get a value-added score to work at an elementary level, but how can you do it at a high school?' he asks. 'How should my physics gain score match against your French score? Was Mozart a better musician than Babe Ruth was a hitter?' Judging teachers on student performance creates a litany of such practical problems, from how to assess progress in subjects such as art, shop, or phys ed to accounting for the mobility of inner-city families. In Memphis, where Gates has invested $90 million, schools superintendent Kriner Cash says one-third of students move during the year, which means their gains can't necessarily be credited to one school, much less one teacher. Giving several tests a year can sort out each teacher's contribution, he says. Still, ratings may be tainted if frequent transience requires teachers to integrate newcomers and adjust to departures."

We certainly don't want to lose essential critical thinking skills and replace them by improved rote memory skills. I hope that Gates and company figure out how to increase the creative thinking of students as well as their ability to read, write, and do arithmetic. Paul Tough believes that the Promise Neighborhoods initiative, that was modeled on the Harlem's Children Zone, should be given a chance to work ["Don’t Drop Out of School Innovation," New York Times, 19 August 2010]. He writes:

"How much evidence does the government need before trying something new in the troubled realm of public education? Should there be airtight proof that a pioneering program works before we commit federal money to it — or is it sometimes worth investing in promising but unproven innovations? [In July,] the Senate subcommittee that allocates federal education money weighed in on one such promising innovation, slicing, by more than 90 percent, the $210 million that President Obama requested for next year for his Promise Neighborhoods initiative. Mr. Obama first proposed Promise Neighborhoods in the summer of 2007, pledging that, as president, he would help create in 20 cities across the country a new kind of support system for disadvantaged children, paid for with a mix of private and public money. In a single distressed neighborhood in each city, Mr. Obama explained, high-quality schools would be integrated into a network of early-childhood programs, parenting classes, health clinics and other social services, all focused on improving educational outcomes for poor children. ... Promise Neighborhoods was inspired by the example of the Harlem Children’s Zone, which over the last decade has compiled a solid, though still incomplete, record of success in the 97 blocks of central Harlem where it operates. Students at the group’s two charter elementary schools, mostly low-income and almost all black or Hispanic, have achieved strong results on statewide tests, often exceeding average proficiency scores for white students. Last year, 437 parents completed Baby College, the Zone’s nine-week parenting class, and 99 percent of the children graduating from the prekindergarten entered kindergarten on grade level. This fall, more than 200 students from the Zone’s afterschool programs will enroll as freshmen in college."

If you want tangible results, the Harlem's Children Zone is an excellent place to look. Even though I haven't heard anyone deny the good work being done in Harlem, Tough reports that "various policy groups, journalists and bloggers" insist that "the Zone has not yet proved itself." He indicates that a report from the Brookings Institution was especially impactful in convincing skeptics to be wary. He explains:

"The report acknowledged that the charter schools at the heart of the Zone have, indeed, substantially raised test scores for the children enrolled in them. But the report also argued that the scores are not as high as those at some other charter schools in Manhattan and the Bronx that don’t include the kind of coordinated system of early-childhood programs, family support and neighborhood improvements offered by the Harlem Children’s Zone. It is no coincidence that charter schools in and near the Harlem Children’s Zone have earned such impressive results. Over the last few years, thanks in part to intensive recruiting by the New York City schools chancellor, Joel Klein, Harlem and the Bronx have become a mecca for a highly successful class of charter schools, all run, to some degree, on the model of the nationwide, nonprofit Knowledge is Power Program: extended hours, energetic young teachers, an emphasis on discipline and character-building, as well as heavy doses of reading and math. These schools embody the attractive theory that we might be able to erase the achievement gaps between black and white children and between poor and middle-class children with nothing more than new and improved schools. But despite their robust test scores, there continue to be debates over whether these charter schools work for the most disadvantaged children in neighborhoods like Harlem, and no one has yet demonstrated whether the KIPP model could succeed at the scale of an entire school system. Geoffrey Canada, the founder of the Harlem Children’s Zone, premised his organization on the idea that schools like KIPP’s, though needed, are not enough on their own. To solve the problem of academic underperformance by low-income children, he argues, we must surround great schools with an effective system of additional services for poor families. These two strategies — call them the KIPP strategy and the Zone strategy — are not fully in opposition; they borrow ideas and tactics from each other. But they do represent distinct theories, both new, both promising and, at this point, both unproven."

At a time when hope is desperately needed in the workplace, in government, and in schools, Tough asks, "At this moment of uncertainty and experimentation, should the federal government wait, as critics of Promise Neighborhoods suggest, until ironclad evidence for one big solution exists? Or should it create a competitive research-and-development marketplace to make bets on innovations, the way the government did during the space race and in the early days of the Internet, and allow the most successful strategies to rise to the top?" For Tough, these are rhetorical questions. He obviously believes that we should let a thousand flowers bloom; although he admits that "a certain skepticism with regard to innovation is always wise, especially in public education, where highly touted new programs often turn out to be disappointments." He continues:

"The problem is that for low-income and minority Americans, the status quo is a deepening calamity. ... In May, the National Center for Education Statistics reported that in the nation’s high-poverty schools, the average graduation rate for 12th-grade students fell from 86 percent in 2000 to 68 percent in 2008, while the rate in low-poverty schools remained stable at about 91 percent. The declining prospects of the country’s poor and black students can’t be blamed on belt-tightening by Congress. In fact, the budgets for the two main federal programs designed to improve the performance of low-income children, Title I and Head Start, have risen steadily for the last 40 years, through Republican administrations and Democratic ones."

Unfortunately, Tough reports, recent studies have shown that "by the end of first grade, ... Head Start graduates were doing no better than students who didn’t attend Head Start." Yet that program continues with additional funding while other more promising courses of action are being cut. Tough laments, "Congress spends billions of dollars each year on unproven programs [but] does not itself argue that the government should start spending hundreds of millions of new dollars on new unproven programs. But it does undercut the argument that federal education dollars should be reserved only for conclusively proven initiatives." He concludes:

"Children who live in the 300-plus low-income neighborhoods that are pursuing Promise Neighborhoods support are, on the whole, stuck. Every year, their schools and Head Start centers receive more federal money, and every year, things in their neighborhoods get worse. Rather than stick with the same strategies and hope things somehow magically change, Congress should find more room in the budget to support the Obama administration’s declared approach: to try new strategies and abandon failed ones; to expand and test programs with strong evidence of success, even if that evidence is inconclusive; and to learn from mistakes and make adjustments as we go."

On that point, Tough and Gates seem to agree. New York Times' columnist Thomas Friedman agrees with Tough that initiatives like the Harlem Children's Zone deserve support ["Steal This Movie, Too," 25 August 2010]. He writes:

"I’d like to talk about some good news. But to see it, you have to stand on your head. You have to look at America from the bottom up, not from the top (Washington) down. And what you’ll see from down there is that there is a movement stirring in this country around education. ... Americans are finally taking their education crisis seriously. If you don’t want to stand on your head, then just go to a theater near you after Sept. 24 and watch the new documentary 'Waiting for Superman.' You’ll see just what I’m talking about. Directed by Davis Guggenheim, who also directed Al Gore’s 'An Inconvenient Truth,' 'Waiting for Superman' takes its name from an opening interview with the remarkable Geoffrey Canada, founder of the Harlem Children’s Zone. HCZ has used a comprehensive strategy, including a prenatal Baby College, social service programs and longer days at its charter schools to forge a new highway to the future for one of New York’s bleakest neighborhoods. Canada’s point is that the only way to fix our schools is not with a Superman or a super-theory. No, it’s with supermen and superwomen pushing super-hard to assemble what we know works: better-trained teachers working with the best methods under the best principals supported by more involved parents."

All the testing and measuring of students that can be done cannot account for parents getting involved in their children's lives and helping them to succeed in school. That is one of the things I really like about the HCZ approach. Friedman continues:

"It is intolerable that in America today a bouncing bingo ball should determine a kid’s educational future, especially when there are plenty of schools that work and even more that are getting better. ... For too long we underpaid and undervalued our teachers and compensated them instead by giving them union perks. Over decades, though, those perks accumulated to prevent reform in too many districts. The best ones are now reforming, and the worst are facing challenges from charters. Although the movie makes the claim that the key to student achievement is putting a great teacher in every classroom, and it is critical of the teachers’ unions and supportive of charters, it challenges all the adults who run our schools — teachers, union leaders, principals, parents, school boards, charter-founders, politicians — with one question: Are you putting kids and their education first? ... It is the quiet heroism of millions of public and charter school teachers and parents who do put kids first by implementing the best ideas, and in so doing make their schools just a little bit better and more accountable every day — so no Americans ever again have to play life bingo with their kids, or pray to be rescued by Superman."

In addition to ensuring that quality education is available to students regardless of race, economic level, geography, etc., individuals and organizations are also concerned about education that favors one gender over another. I have written before about how more women are needed in math and science. The House of Representatives has passed legislation entitled "Fulfilling the potential of women in academic science and engineering" to help address this issue ["Daring to Discuss Women in Science," by John Tierney, New York Times, 7 June 2010]. He writes:

"This proposed law, if passed by the Senate, would require the White House science adviser to oversee regular 'workshops to enhance gender equity.' At the workshops, to be attended by researchers who receive federal money and by the heads of science and engineering departments at universities, participants would be given before-and-after 'attitudinal surveys' and would take part in 'interactive discussions or other activities that increase the awareness of the existence of gender bias.'"

Tierney calls this legislation "Larry's Law" in honor of Dr. Lawrence Summers, who, while President of Harvard, suggested that men and women had different aptitudes for math and science. Tierney continues:

"I’m all in favor of women fulfilling their potential in science, but I feel compelled, at the risk of being shipped off to one of these workshops, to ask a couple of questions:

1) Would it be safe during the 'interactive discussions' for someone to mention the new evidence supporting Dr. Summers’s controversial hypothesis about differences in the sexes’ aptitude for math and science?

2) How could these workshops reconcile the 'existence of gender bias' with careful studies that show that female scientists fare as well as, if not better than, their male counterparts in receiving academic promotions and research grants?"

Tierney references a number of studies aimed at proving or disproving gender bias and aptitude. He then concludes:

"Of course, a high score on a test is hardly the only factor important for a successful career in science, and no one claims that the right-tail disparity is the sole reason for the relatively low number of female professors in math-oriented sciences. There are other potentially more important explanations, both biological and cultural, including possible social bias against women. But before we accept Congress’s proclamation of bias, before we start re-educating scientists at workshops, it’s worth taking a hard look at the evidence of bias against female scientists."

Despite concern about women doing well in math and science, when it comes to higher education, women have reached a turning point. This year more women than men were awarded doctoral degrees ["Report: More women than men in U.S. earned doctorates last year for first time," by Daniel de Vise, Washington Post, 14 September 2010]. He reports:

"The number of women at every level of academia has been rising for decades. Women now hold a nearly 3-to-2 majority in undergraduate and graduate education. Doctoral study was the last holdout - the only remaining area of higher education that still had an enduring male majority. Of the doctoral degrees awarded in the 2008-09 academic year, 28,962 went to women and 28,469 to men, according to an annual enrollment report from the Council of Graduate Schools, based in Washington. ... [However,] men may be staging a modest comeback. First-time enrollment in graduate education grew at a slightly faster rate for them than for women in 2009, reversing a long-term trend that has favored female enrollment. Meanwhile, the broader gender gap in higher education seems to be stabilizing. The split in enrollment and degrees remained constant through much of the past decade at about 57 percent women."

I'll end on that positive note. Education is important. Only an educated workforce can carry the weight of a growing economy into the future as it deals with emerging challenges in the age of information. That doesn't mean that everybody needs to get a doctorate or even attend college. It does mean that people need to receive a good basic education and then additional education and training that provide them with employable abilities and skills. Regardless of one's level of education, critical thinking is one of those skills that needs to be cultivated so that America remains a country of problem-solvers.

October 01, 2010

Flexible and Lean Supply Chains

There are a number of phrases one finds in articles and blogs about logistics. Two of the most common are "lean supply chains" and "flexible supply chains." It seems to me that there is a built-in tension between these two concepts. When I hear the term "lean" I also think of the term "thin." Consider a thin piece of wood, like a small strip of lath. A single piece of lath can be easily broken because it is thin and brittle. Stack a few pieces of lath together and they become much less brittle and much harder to break. My concern is that a lean supply chain can also be a brittle supply chain -- and brittle supply chains can break. Does that mean that flexible supply chains are better than lean ones? Let's go back to our example of the lath. If you stack too many pieces of lath together, the combined stack is stronger but it also loses flexibility. A rigid supply chain is the opposite of a flexible supply chain. There may be a better analogy for a supply chain than strips of lath, but I think it helps make a point. For supply chain executives, the challenge is to find the right balance between a supply chain that is too lean (i.e., is not robust enough but saves money) and one that is too rigid (i.e., is so robust and redundant that it is too costly to maintain and remain competitive). Let's first discuss the lean supply chain.

Saurabh Goyal, a Consultant in Enterprise Solutions at Infosys Technologies, asserts that a lean supply chain will include minimal inventory on hand, delivery that is just-in-time, and a configuration-to-order strategy ["Lean supply chain – Is that always good," Supply Chain Management, 30 March 2010]. You can tell from the title of Goyal's post that he is not completely sold on the idea of lean supply chains. He continues:

"In most cases a manufacturer would want to have a lean system for the raw materials and the work in progress. But would [it] want this for finished products as well at the point of sale, I think not. Take the case of cell phones, with the lead time to introduce a newer phone getting reduced ... manufacturers are wanting to keep minimal inventory levels in the supply chain and hence reduce losses due to dead sales for the product. This leads to a make-to-order scenario. But, does this hold good in today’s highly dynamic market condition. Today’s market requires the manufacturer to keep sufficient inventory at every Point of Sale and avoid missed business due to product non-availability. Even the lead time to introduce a competitive product with better features is decreasing by the day. As another example considering the Personal computer market, ... consumers usually have similar requirements with standard configuration. So, ... unless [a customer's] requirements are very specific, [a customer will] go for a product that essentially delivers [the fastest] with lowest lead time. It is for this reason that we see ‘Fast track laptops’ from Dell and similar [offerings] from other vendors. Even in ... consumer product groups like ‘Soap’, a customer [will] rarely wait for a [specific] soap to arrive on the shelf [instead of moving] to [more] a readily available brand. The concept of Lean does not hold true in these cases."

What Goyal is saying in a nutshell is that, when just-in-time fails to deliver, consumers will find a more readily available product and manufacturers end up the losers. He continues:

"[Al]though a company wants to have a lean supply chain at the ‘goods in process’ leg, ... at the same time it wants to have a ‘fat’ supply chain at the customers end. This means the business requires a hybrid system that caters to both push and pull. Pull in terms of having an agile system that responds quickly to any change in customer demands and Push in terms of maintaining sufficient inventory at the end of the system to be able to push sales by minimizing the losses due to non-availability of product."

Goyal understands that maintaining a "fat" supply chain on the product side could "lead to a lot of dead inventory in the stock." But he thinks that he has an answer that involves "agility, reverse logistics and modular engineering." He explains:

"A high degree of agility would not only give more visibility and effective supply & demand management but also allow the management to keep track on the Inventory and the obsolescence of its products. The quick response across various points also leads to a higher customer relationship focus. ... [However,] one still needs to take care of the inventory, which has a high degree of susceptibility to being obsolete. It is here that Reverse logistics comes into the picture. It would help in planning for the effective reuse, sale of the surplus and even disposal of these products. It will typically start from the Point of Sale and end at the point of manufacture/origin/disposal. This process would primarily help in clearing the shelf space for ... new products, tend to minimize the losses due to no sale and also ... create an effective system for reutilization of these products. To complement the process of Reverse logistics the manufacturers should also look into the aspect of Modular engineering. This means the product design [should] be as modular as possible leading to higher reusability of the components in the event of a product getting isolated. ... A typical depiction of the model described above would be as follows (click to enlarge):

Lean-supplychain-model

I agree with Goyal that modularity, where it can be used, is a good idea. I'm not sure, however, that his model has solved the built-in tension between lean and flexible supply chains. Even Goyal admits some uncertainty by asking a series of questions: "Is this system viable? How would such a system be designed? What are the business complexities involved?" Noted supply chain analyst Lora Cecere calls herself a "lean bigot" ["Lean Bigot and Proud," Supply Chain Shaman, 24 September 2010]. She explains why she "bristles" when she hears "the term LEAN in client interaction." She asserts that "many companies have attempted LEAN programs with the best of intentions; but have moved backwards." This backward movement, Cecere explains, results from "two disconnects." The first disconnect results from a failure to appreciate fully all aspects of "lean" schemes. She writes:

"Muda needs Mura. Lean principles spring from supply chain excellence in the Japanese manufacturing industry. The approach of Toyota Production Systems (TPS), one of the most popular approaches, is to focus on the elimination of three types of waste: Muda (non-value added work), Muri (overburden) and Mura (unevenness). I find most companies focus on Muda, sometimes work on Muri, but seldom get to Mura. This is the root of my disconnect. I find that we have the supply chain team designing lean systems assuming that Mura will happen; while sales teams incented to induce more unevenness into the supply chain through sales incentives, price management, promotions, marketing, and trade deals. The issue is that 99% of companies have no demand visibility. They cannot see. Orders are not a good reflection of demand. So the supply-centered processes of source, make and deliver focus on lean, while the sales and marketing processes induce more variability. I find that it spins the organization out of control. What to do? Focus on the design of value."

If you read Cecere's posts over time, you find some common threads running through them. One thread is the importance of real-time data for supporting a true demand-driven supply chain. As she notes above, if you don't have that kind of data you "cannot see." That leads to her second disconnect: missing opportunities to eliminate waste because proper data is not being collected and disseminated. She writes:

"Greater value from Demand Driven. I have experienced many types of lean. So, while I believe in reducing Muda, I have also witnessed magic happen in many very SUCCESSFUL Kaizen events. I value the benefits from value stream mapping, continuous improvement and poka-yoke (error-proofing). So, you might ask, why does Lora bristle when she hears the word LEAN? Lean is frequently applied in manufacturing companies to reduce all the waste that we can see. But what if we cannot see? What if demand volatility is high, and sales processes have done anything but created Mura? In these cases, I believe that we must design for demand variability, improve demand sensing (the time to sense true channel demand), and shape demand based on market conditions. This is my second disconnect. Many clients confuse lean principles as being demand driven. Lean is an enabler of demand-driven; but can only be successful if you first build demand sensing and shaping capabilities FIRST that are market-driven. I find that most companies have sales-driven or marketing-driven programs that are anything BUT market-driven."

For those unfamiliar with the word Kaizen, it is Japanese for "improvement" or "change for the better." It refers to the philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management. [Wikipedia] Cecere concludes that if better collection and analysis of real-time data is not implemented in order to reduce the unevenness (Mura) in the supply chain, "we are not ready for lean. Yes, you may argue that we can apply lean on high volume predictable products. To this, I would agree. However, we cannot broad brush the concepts widely across the supply chain." The editorial staff at Supply Chain Digest appears to agree with Cecere about the importance of data that drives supply chain decisions ["Buiding Sense and Respond Supply Chain Networks," 17 June 2010]. The article provides an excerpt "from the groundbreaking report on integrated supply chain planning and execution written by SCDigest’s research organization Chief Supply Chain Officer (CSCO) Insights. ... This excerpt provides a concise description of the third phase in the evolution to highly integrated planning and execution – moving to 'Sense and Respond' supply chain networks." The article continues:

"Phases I (The Basics) and II (The Real-Time Supply Chain) take care of the fundamentals and move companies much closer to a state of integrated supply chain planning and execution. But getting to a true 'sense and respond' network, in which operational and even tactical planning blur with execution processes, is where the supply chain is ultimately headed – and faster than many may realize. What is close to available today and will become commonplace in the future is the ability to see in near-real time a complete picture of supply and demand data, across multiple levels – from supplier’s supplier to customer’s customer. The view will also not be 'point-to-point' but 'many-to-many,' requiring collaboration and synchronization around supply chain execution and tactical planning – in near real-time. But it is a lot more than just technology, of course – it is completion of the journey from a forecast-driven supply chain, in which companies build supply chains around trying to predict demand, to a customer-driven one that is organized to respond to demand with lightning speed.’ While the picture will look somewhat different from industry to industry, 'build to stock' will ultimately give way to 'build or customize to demand' in virtually every one of them. Long production runs and costly changeovers will give way to much more flexible factories that can rapidly switch gears to cost effectively make short runs of product based on the latest near real-time demand data."

That article provides an excellent segue from discussions about lean supply chains to flexible supply chains. Dan Gilmore, Editor-in-Chief of Supply Chain Digest, breaks down supply chain flexibility into two types:

"Micro flexibility: ... How fast a supply chain could detect and respond to issues and opportunities in the short term – maybe even right now. The truck is late, demand suddenly surges, a customer needs some sort of special packaging or handling: how fast and how effectively can this these changes and needs be managed?

Macro flexibility: ... The speed at which a company's supply chain adapt and execute new strategies and programs to support changes in overall company strategies or market place changes. Easy example: company decides it wants to build a consumer direct e-commerce channel, maybe with new SKUs in the mix. How fast can the supply chain out in place what it needs to do to make that happen? Another: Dell decides to move into retail." ["What is Supply Chain Flexibility?" 4 March 2010]

Gilmore writes that he's "not sure 'micro' and 'macro' were really the best words to choose, but hopefully the sense of them is clear." In a subsequent article, Gilmore writes about "Defining and Measuring Supply Chain Flexibility" [23 July 2010].

"A couple of months ago, I wrote a column about supply chain flexibility, focused around the fact that most everyone seemed to agree that SCM flexibility was important, but how to define it and measure it was not clear at all. ... But we still didn’t have much of an answer to a real definition – and certainly not close to how supply chain flexibility might actually be measured. So I decided to reach out to some supply chain friends and colleagues whom I thought might be able to add some clarity here. My questions: What is SCM flexibility, and can it be measured?"

Gilmore started with Dr. Lee, who responded:

"'Flexibility should be measured with a time-element in it,' Dr. Lee told me. 'Hence, the flexibility to change volumes and mix must be time-based. Flexibility one month out versus flexibility three months out are very different. We should look at the whole time profile of flexibility in evaluating an operation - what is the flexibility over different time frames?'"

Gilmore agrees that "time is a critical dimension," but he still feels that Dr. Lee didn't define supply chain flexibility in a way that it could be measured. He next turned to "Tom Dadmun, once Supply Chain VP at network gear maker Adtran and now somewhere higher in the org chart, had this to add to the subject":

"'To me supply chain flexibility is about responsiveness to the customer. We can all debate whether we should call the process 'Demand Chain' or 'Value Chain,' but the key here is to have the Supply Chain respond to the customer’s demand,” Dadmun said. 'To be truly flexible is to have a responsive process at every link in the chain that will quickly respond to the new input signal,' Dadmun added. 'Who's in this control tower overseeing the entire value chain, even beyond the 4 walls of the enterprise? The Chief Supply Chain Officer of course. And his or her measuring stick of success is a hierarchical list of KPIs [key performance indicators], with alerts triggered by real time events identified by control limits on the BI Dashboard.'"

I agree with Dadmun that alerts triggered by specific KPIs must be part of a flexible supply chain. The earlier these alerts are provided to decision makers the more flexible the system becomes. The next expert to whom Gilmore turned was Bob Nardone, "a former VP of supply chain planning at Unilever/Best Foods and now running his own consulting firm (Supply Chain Guidance)."

"He notes that 'Defining Supply Chain flexibility concisely is a challenge and one that probably has different nuances for different businesses.' That said, he believes that 'supply chain flexibility is the ability to quickly respond to changes in demand while achieving your customer service, cost, inventory and return on assets (ROA) objectives.' That’s an important nuance – can you respond rapidly without breaking the bank? He adds that 'I don’t think flexibility can be determined by one measurement but rather by a composite of metrics that many businesses currently measure,' and that 'A business should only invest in the level of supply chain flexibility (supply and distribution networks, systems, and people) needed to be competitive and grow.'"

Cecere might argue that in the future maximum flexibility WILL be required to be competitive. The Supply Chain Digest article on sense-and-respond supply chains also leads to that conclusion. Nardone, I believe, is arguing for a phased approach to flexibility, one that keeps up with competitors or stays slightly ahead of them without spending so much to achieve flexibility that it makes the company non-competitive. That is a tricky strategy to follow. The next expert to whom Gilmore turns is Dr. David Simchi-Levi of MIT, who "has done some great work lately that looks very specifically at supply chain flexibility." Gilmore continues:

"He offers a specific definition of what supply chain flexibility means for manufacturers. If you have 5 manufacturing plants for a given business and each one can only produce one family of products, you have 1X flexibility. If each can make two families, you have 2X, etc. 'Full flexibility,' or 5X in this example, would mean every plant can make every product. The question then becomes what are the costs and benefits of achieving these different levels of flexibility? Those trade-offs can be specifically measured, he says. In subsequent comments to me, Dr. Simchi-Levi notes the connection of supply chain flexibility to the growing importance of supply chain risk management. 'Little can be done after a disaster has occurred,' Dr. Simchi-Levi says. 'Companies therefore need to plan their supply chains so that they can better respond to both mega-disasters and mundane operational problems.' He added that 'flexibility into manufacturing, supply chain, and network strategies is essential if companies are to respond effectively to on-going change. Of course, the question is how to achieve flexibility and how much of it is required since flexibility does not come free.' And I like this. Dr. Simchi-Levi says that he defines supply chain flexibility as 'the ability to respond to change without increasing operational and supply chain costs and with little or no delay in response time.' In this definition, he says, 'change refers to change in demand volume and mix, commodity prices, labor costs, exchange rates, technology, equipment availability, market conditions, the production and logistics environment or any supply disruption.' Now we are getting closer."

Finally, Gilmore turns to his "colleague Gene Tyndall of Tompkins Associates."

"Tyndall observes that 'Supply chain managers [tend] to be cautious about flexibility. While customers may want it, financial, security, and risk controls may limit the ability to achieve it.' He adds that 'flexibility usually comes with an added cost, and this must be weighed against the value proposition for it. Supply chain managers strive for predictability and consistency, mostly for cost control reasons. When flexibility is introduced, so often are uncertainly and exceptions.'"

Gilmore concludes with a sense of uneasiness "that for all the emphasis on supply chain flexibility and agility these days, we have nothing even resembling a standard definition or set of metrics to use to track where a company stands or what progress it is making (though Dr. Simchi-Levi is getting close)." I don't think that Cecere or Goyal would disagree with that. Until true sense-and-respond supply chains are implemented, there will continue to be tension between those advocating lean supply chains and those advocating flexible supply chains.

September 30, 2010

2010 Council of Supply Chain Management Professionals (CSCMP) Annual Conference, Day 2

Yesterday's post discussed the first day of the 2010 Council of Supply Chain Management Professionals (CSCMP) Annual Conference held in San Diego this week. In that post, I provided a link to a Supply Chain Digest video overview of the first day's events. The magazine also posted a video overview of the second day's events [CSCMP 2010 Day 2 Video Review]. In the latest overview, Supply Chain Digest's editor-in-chief, Dan Gilmore, is joined by Kate Vitasek, founder of Supply Chain Visions. The video runs about twenty minutes.

As I noted in yesterday's post, I took part on a panel moderated by supply chain analyst Lora Cecere. Lora posted her own thoughts on the panel in her blog Supply Chain Shaman. Here is some of what she wrote:

"Want to save millions? Maybe even billions? According to my panelists on Monday morning, September 27th, at The Council of Supply Chain Management (CSCMP), it comes down to rethinking the 'How' and 'What' of Distribution Requirements Planning (DRP). DRP, MRP and ERP are push-based applications. They work from the inside of the enterprise out. Demand-driven value networks, a more effective design, require a pull-based signal from the outside-in. They also require flexibiity. These traditional systems are rigid. The response is based on fixed, often inflexible rules. When demand volatility is low and inventory costs inconsequential, there is little impetus to change. However, in this time, of rising supply chain risk, increasing volatility, and pressure on working capital, two companies– Conair and Procter & Gamble – partnered with two best of breed vendors to tackle the problem with two very different, but synergistic approaches. This was the topic of my panel. I was joined by Jake Barr, Global Director of Procter & Gamble; Robert Byrne of Terra Technology; Jon Harding, CIO of Conair; and Steve DeAngelis, CEO of Enterra Solutions. Here I share insights from the panel."

If you have followed what Lora has written in her blog, you know that she believes traditional systems need to change and much better information sharing needs to take place up and down the supply chain. She believes the future will be demand driven, but more near-real-time data sharing is going to have to take place to realize fully the benefits of a demand driven supply chain. She continues:

"Conair tackled the 'how' of replenishment. Known for the iconic hair dryer, Conair manufacturers a wide range of hair accessories and appliances. The company is privately held with revenues of 1 Billion. A competitive industry, Conair shifted 90% of production to China to reduce costs. However, in the face of rising costs of compliance fees, the COO of Conair searched for a solution. (Compliance fees equal 2.7% of revenues for consumer durable industry manufacturers. They affect the balance sheet in the form of deductions.) It is a tough problem. Retailer rules change frequently, often with little notice. The system for rule publication is not very sophisticated: often ad-hoc posting on the retailer’s portal. Conair threw people at the problem, but they could not keep up. Through a unique set of circumstances, the COO of Conair discovered Enterra Solutions. Enterra, fresh from building rules-based ontology solutions (artificial intelligence) to help sense security issues in the middle east, went to work on the problem. They built a system that senses rule changes, gives early warning on potential incidents and serves as a system of record to improve deduction resolution. Within 9 months, the solution saved Conair millions in fines and reduced staffing. It is so successful, that Enterra is now packaging the Software as a Service (SaaS) solution to help other manufacturers."

Obviously, that is the kind of feedback that any company would like to receive. Here's what Lora had to say about the rest of the panel discussion:

"For most companies in the room, the 'what' of DRP, or changing replenishment logic to improve out-of-stocks and prevent short-cycling of manufacturing was top of mind. In this area of the supply chain, P&G is the hands-down leader. For the last six years, Procter & Gamble has been hard at work solving this problem by improving demand sensing. In the words of Jake Barr, Global Director, Procter & Gamble, 'We want to produce the products that we need only when we need them. Our systems are lean, and we need to be able to operate with shorter cycles. Demand sensing helps us achieve this.' Jake attributes the implementation of Terra Technology Multi-Enterprise Sensing to improving demand forecast accuracy and reducing billions in inventory. So much so, that he now has a new goal. He now wants to use the supply chain to fuel growth."

Before continuing with Lora's comments, it's worth pausing to consider the profundity of the statement that the supply chain can be used as a tool to fuel growth. Most often people consider supply chain investments part of the cost of doing business. As a result, they are looking to reduce costs in the supply chain as much as they can. As supply chain systems begin to sense and respond, how people think about supply chains could change dramatically. We might be at a tipping point. Lora concludes:

"Terra Technology’s multi-enterprise demand sensing engine uses multiple forms of downstream data – store transactions, retailer warehouse inventories, retailer shipments and orders – to find the best combination of downstream data to represent the true need for channel replenishment. The signal is used in the short-term horizon (one to four weeks) to set inventory targets and align supply. It has been successfully deployed in both modern trade and emerging economy supply chains. When asked by the audience, if this made the supply chain 'twitchy', Jake smiled. Why? Underlying Jake’s success to use the better signal from Terra Technology is P&G’s hard work on short-cycle, right-first-time manufacturing. In the face of the need for more flexible, dynamic supply chains, the traditional definitions of Advanced Planning Solutions (APS) and Enterprise Resource Planning (ERP) are crumbling. Companies are turning to new players and new techniques. This type of innovation, I think, will define the true supply chain of the future."

When you consider the fact that there is an emerging global middle class consisting of millions (if not billions) of new consumers, it doesn't take one long to realize that the importance of supply chains is only going to increase. If sense and respond systems can be implemented that turn supply chains into tools that fuel growth, all the better.

September 28, 2010

Implementing Supply Chain Solutions

Noted supply chain analyst Lora Cecere wrote last month about an exchange she had with a corporate supply chain executive ["Crossing the Great Divide," Supply Chain Shaman, 31 August 2010]. The executive said, "Our SAP implementation was expensive. I know we need it, but I am trying to get a Return on the Investment (ROI). I think that I can improve the ROI by using retail Point of Sale (POS) data to improve forecasting and replenishment. How are others using POS data?" Lora notes that simple questions like that rarely have simple answers. She indicates that the question was followed by a "deep discussion." Lora has learned from experience that when it comes to implementing supply chain solutions, the devil is always in the details.

Sachin Shetty, Principal Consultant for Enterprise Solutions – SAP Practice at Infosys Technologies, reminds us "that the most important phase in supply chain planning implementations is actually post implementation support" ["The most important Phase in Supply Chain Planning Implementations," Supply Chain Management, 1 September 2010]. He continues:

"Many customers after having spent a lot of money on implementing planning systems are not able to leverage the systems to the fullest extent and the usage of the planning system dwindles down. This can be avoided with much needed management focus on post implementation support. Unlike ERP system which becomes an integral and critical part of the daily activity of a user, planning systems are not critical in [the] short term and [a] planner always has [the] ability to use manually generated plans or previously generated plans in case the system is down. ERP systems constitute the lifeline of an enterprise and, in case of issues, get high visibility & attention. While planning systems issues are not so visible, ... in the long run [they] can have equally significant impact. Planning systems can produce excellent results during testing and go live but they can be completely inaccurate post implementation, if the business environment changes. Hence it is very important to track key metrics and fine tune the planning models based on business changes."

I agree with Shetty that post-implementation support is critical for making any supply chain management tool valuable. The only constant that businesses can count on is change and a system that doesn't keep up with change becomes more of a hindrance than a help. Shetty continues:

"Planning users need to have a certain degree of systems knowledge and there is a need to continuously coach users, after implementation, to use the solution and exploit additional features. Additional requirements need to be captured and modifications done to system to better aid the planning processes. There is a need for the planning support team to have deep planning process and planning best practice knowledge combined with in depth planning systems skills. Typical IT teams look at support from a perspective of resolving & closing tickets and maintaining the system uptime related SLAs. While this is important, in case of planning systems, this does not ensure long term success of planning implementations."

Like most things in life, supply chain management tools fit into the "use it or lose it" category. Shetty explains:

"At one of my customers, I noticed that the planning systems were being neglected by users. There were discussions of shutting down the application as the plans were not adding value to the business community and it running them was an overhead. On further probing, I realized that the support team [consisted] of technical team members without a lot of experience in Supply Chain Planning implementations. The team members had not seen any other best practice processes. Also there was no concept of Super Users who could align the technical support team with business users. Coaching the users, auditing the plans, enhancing the applications was not part of support team's activities and hence planning solution was not updated with changing business environment. This was pointed out to the customer and subsequent changes were suggested to the support model. Hence the post implementation support phase is the most important phase to ensure the success & growing use of planning systems and adequate focus is needed to create the correct support model."

Shetty's comments underscore the importance of supply chain management teams. If the right people aren't involved in decisions, implementation, and follow-up of new systems, then the chances of that system adding significant benefit to the company are greatly reduced. Steve Banker reminds us that we should have a broad vision of who actually makes up a corporate supply chain team ["The Supply Chain Team," Logistics Viewpoints, 8 September 2010]. He writes:

"Ideally, the supply chain team includes more than just the folks who work in manufacturing and distribution. For the supply chain to work efficiently and effectively, there are other folks in a company (who may not report to the Vice President of Manufacturing or Distribution) that should also be on the team."

Here are his suggestions for who should be on the Supply Chain Team in addition to the usual suspects:

"Human Resources – They can help you acquire talent, figure out systems to fairly evaluate personnel, and fire underperforming folks without being exposed to lawsuits. If you have managers that are making employees crazy, HR will often be the first to know.

The CEO and Vice President of Sales – When the CEO or VP of Sales pressures the sales force to meet the quarterly (or annual) revenue targets, watch out! In these scenarios, customers are often given unusually deep discounts near the end of the reporting period that trigger a high volume of shipments. The result is increased overtime in factories and warehouses; machines and equipment that are overworked; increased quality issues and, consequently, more returns; and a higher incidence of late or short shipments. Supply chain folks sometimes get blamed for these problems when the fault really lies with the way the firm is conducting business.

The Vice President of Marketing – Promotions can also lead to the surges in supply chain shipments and excessive costs that are borne by the supply chain organization. There are industries, like consumer goods, where many companies would find it very hard to remain in business if they did not use promotions. But if a company is running different promotions at the same time, they are needlessly yanking the supply chain organization around. If the supply chain does not have sufficient advance warning, and a decent forecast of volume surges, extra costs are incurred. And many companies really do not understand which promotions are truly profitable. In these instances, you are making the supply chain work harder for no good reason.

Cost Accountants – Many manufacturers and distributors sell a variety of high volume and low volume products. High volume products tend to be a lot less costly for the supply chain. They flow through the supply chain with less friction – i.e., fewer factory setups, fewer touches in the warehouse, truckload rather than less than truckload shipments, and lower inventory carrying costs. The supply chain likes high volume products. However, if a company lacks good cost accounting, high volume goods get stuck with overhead carrying costs that really belong to lower volume products. The result is that the high volume products look less profitable than they really are, and low volume goods look more profitable than they really are. If that is the case, a company can end up selling more of these marginal goods with high supply chain costs than really makes sense.

Product Development – When products are being developed, the main goal is to make products that customers want to buy at the right price. Well-run companies include 'engineer for manufacturing' and 'engineer for logistics' methodologies into their product development process. Sometimes small changes in the components that make up a product, or the dimensions of the product, can lead to large savings in the supply chain.

Chief Risk Officer – Supply chain organizations are often under pressure to do more with less. If your company does not have good risk management processes in place, adverse safety, health, or environmental incidents can occur. If these incidents are frequent enough, or significant enough, they can put the company’s survival into question."

You can understand how the kind of planning systems discussed by Shetty can be undermined by marketing or product development people if they are not a part of the team. I also agree with Shetty that if those tasked with post-implementation support for the system are not included on the team (both within the company and from the system provider) figuring out exactly who should be on what team won't be easy. As Banker concludes, "Collaboration is an important word in supply chain management." I couldn't agree more.

September 27, 2010

Work Less, Do More

Blog reader Nina Martin, who works for a life coach and entrepreneur named Stever Robbins, sent me Robbins' latest book, 9 Steps to Work Less and Do More, and asked if I would review it. She believes readers of this blog, especially other entrepreneurs, might be interested in what Robbins has to say. Robbins is an interesting guy. He indicates that as a child he grew up "in a traveling New Age commune." While living with that group, he "put on magic shows at KOA campgrounds in return for free lodging." Eventually, he says he "put away childish things" and "went off to get a degree in computer science and then an MBA." He discovered, however, that he liked performing. So he gave up corporate America to become a motivational speaker and life coach. Little of the advice that Robbins provides in his book is new, but he is an entertaining, almost flippant writer, who wants to make you laugh as much as he wants to change your life. Let's take a brief look at his nine steps along with a synopsis of what Robbins says about them.

"Step 1. Live on Purpose. If you're anything like me, a lot what you call work has very little to do with getting anything important done in life. Like when I compulsively check my social media sites every hour. That kind of thing must go."

Robbins is a "list" kind of guy. A lot of driven people use and review lists to remind about life's big goals. I've always suspected that while they were making and reviewing lists life was passing them by. John Lennon once wrote, "Life is what happens to you while you're busy making other plans." I'm not opposed to lists. I just don't believe that they should dominate your life. If you're directionless, then drawing out a life map of what you want and how you can go about getting it is a good idea. Just don't be surprised if life requires you to redraw that map occasionally. I wouldn't be too concerned about that. Some of life's most interesting journeys are the side trips we make. My recommendation is that you should map out your direction any time you begin something new (e.g., start college, get married, look for a job, found a business, or write a book). Just don't be afraid to change plans as you encounter unexpected twists, turns, and forks in the road.

"Step 2.Stop Procrastinating. What is procrastinating except the very art of not doing the very stuff you know is most important? We'll cover how to nip this in the bud, or at least arrange for someone to kick you into action when you're delaying. And just in case you're someone who claims being kicked into action doesn't work for you, we'll get out an ostrich feather and tickle you into action instead."

I agree with Robbins that the most frustrating people in the world are those who whine about their lot in life but do nothing to change it. Robbins writes, "You can talk yourself out of anything, no matter how important it might be." We often do that because the task ahead looks daunting. Robbins makes the common sense suggestion that big goals should be broken down into bite-size activities that don't look so daunting to achieve. Then you need to talk yourself into doing those bite-size activities.

"Step 3. Conquer Technology. Our supposed savior, technology, is for many of us the greatest obstacle we have to being truly productive. You'll learn how to use your technology to help you focus, instead of ... hey, hang on a second. There's an instant message coming in. ..."

Robbins is correct that technology can be abused as well as properly used. He provides, among other things, some useful advice about how to leave effective voice mails and write effective emails. Those recommendations alone might be worth the price of the book.

"Step 4. Beat Distractions to Cultivate Focus. Do you have any idea how much time is wasted multitasking? A lot. If you eliminate distractions and keep yourself focused, you can toss yourself into the kind of flow where the results come fast and easy. And you'll do it entirely without the use of pharmaceutical supplements."

This would be great advice if you had total control over your schedule and environment. Most people don't. Robbins does have a point about multitasking however. To learn more on that subject, read my post entitled The Mind -- it is a-changin'.

"Step 5. Stay Organized. When you have a place for everything and everything is in its place, it's no work at all to find what you need, when you need it. I'm not just talking about physical clutter; this is also about organizing your thinking, your projects, and your processes. Reclaim all that time you otherwise spend hunting for the next step, the next paper, or the next person by knowing exactly where to go and what to do when you need it."

I agree that organization is important and can save time. The TLC television channel is currently airing a series entitled "Hoarding: Buried Alive." From what I can tell, it is a series about people who have accumulated so much stuff (mostly junk) that they are literally being physically crowded out of their living space. Some hoarders undoubtedly believe that their junk is organized. Robbins doesn't believe in organized hoarding. He recommends, "When in doubt, throw it away." Although "when in doubt, throw it out" sounds more poetical, he may have also thought it sounded too much like a line from the O.J. Simpson trial to use. As "list person," Robbins once again recommends using lists to organize your life. Just don't hoard those lists.

"Step 6. Stop Wasting Time. Sometimes you appear to be doing exactly, precisely what you should be doing but are actually wasting time that could be spent doing something more meaningful, like eating bonbons and sipping fruit-flavored beverages in a hammock strung between your computer and your door frame."

Robbins is a proponent of the 80/20 rule, which, as defined by Richard Koch, states, that "a minority of causes, inputs or effort usually lead to a majority of the results, outputs, or rewards." This phenomenon was first identified by Pareto, an Italian economist. He discovered a consistent mathematical pattern in which a certain proportion of people earned a certain percentage of income and wealth. Robbins recommends the obvious: focus most of your effort on the 20 percent of activities that matter most.

"Step 7. Optimize. Doing things twice bores me silly. Especially when it comes to making mistakes. In this step you'll learn how to do things once or twice, streamline them to the point where the task is completely brainless, and ... Let's just say that I'll leave you to connect the dots. Think, 'brain-eating Zombies.' The implications will jump right out."

Since the principal focus of Enterra Solutions is business process optimization, I can certainly agree with Robbins that optimization is important. He recommends getting rid of outdated processes in favor of processes that help you optimize. If you don't know what those processes are, he suggests you start paying attention to the feedback you receive from those around you.

"Step 8. Build Stronger Relationships. You can't get there alone; you need someone to program the GPS while you're trying to read road signs. Relationships are, ultimately, how everything gets done. Together, we can do far, far more than we can alone. For example, one of us can measure while the other mixes, and then we can both eat the cookies when they're ready. You'll learn some excellent ways to create and deepen relationships that matter most."

You don't have to read very far into Robbins' book before you realize that he is someone who believes that finding joy in living is the ultimate success. An old Swedish proverb says, "Shared joy is a double joy; shared sorrow is half a sorrow." I suspect that is a sentiment with which Robbins would agree. As I wrote in another post, "In his book The Art of Innovation, Tom Kelley wrote, 'The myth of the lone genius can actually hamper [an organization’s] efforts in innovation and creativity. ... Loners are so caught up in their idea that they are reluctant to let it go, much less allow it to be experimented with and improved upon.' He goes on to note that Thomas Edison, who is often pointed to as a lone genius, had a team of fourteen people that helped him conceive, build, and market his inventions." I wholeheartedly agree that relationships matter.

"Step 9. Leverage. The ultimate in doing more, our final destination of leverage will give you several ways to make sure when you do get results, you get better, stronger, and faster than you'd ever dreamed possible."

Robbins defines leverage as "getting outsized results without having to put in more resources or work." He provides a number of strategies for gaining leverage, even if those concerning ostrich feathers aren't as helpful as you might wish.

Robbins' book is an easy read. I think it may be a bit too "list" crazy, but I believe he is hoping to help people whose lives seem completely at sea and foundering. Even for those of us who feel we have direction in our lives, his suggestions can remind us how to stay on track. At $14.99, the price is a bit steep for a paperback, but he works hard at making sure you won't be bored as you turn the pages. I think Robbins might agree with the anonymous author who wrote:

"Watch your thoughts, for they become your words;
Watch your words, for they become your actions;
Watch your actions, for they become your habits;
Watch your habits, for they become your character;
Watch your character, for it becomes your destiny."

For the record, technically one cannot control his own destiny -- otherwise it's not destiny. Frankly, I don't believe in destiny or fate or kismet. I believe in outcomes. I gather that Robbins believes in outcomes as well. If you want to make your outcomes better, he has a lot of suggestions that might help.

September 24, 2010

Shortages of General Practice and Family Doctors are Impacting Emergency Health Care

If you don't think that the health care system in the United States is already in crisis, there are several signs that indicate that it soon will be. Two challenges often identified as exacerbating health care challenges in America are rising costs and a growing shortage of general/family practice physicians. According to a recent program on National Public Radio, "There's already a shortage of primary care physicians nationwide. And with the new health care law, there will be tens of millions of new patients." ["More Patients Find Doctor Is Not In," Neal Conan and Julie Rovner, NPR, 30 August 2010]. Shrinking supply and growing demand means that patients can expect longer waits at the doctor's office and probably higher costs for services rendered. Rovner explains why there is a growing shortage of general practice physicians.

"A lot of [it is] pretty simple economics. It's expensive to go to medical school. And when you get out, you've got to you usually have big loans, and primary care doctors get paid less than specialists. So you're looking at big loans to pay off. And if you want to pay off those loans, you get paid a lot more if you become a specialist. Plus, it's hard to be a primary care doctor. The hours are long. The work is difficult. It's ... emotionally draining. Plus, there's more and more hassle, if you will, from insurers and bureaucrats and everything else. So a lot of students go to medical school [...] thinking they're going to become primary care doctors and then [end up concluding ...] why bother if I can get paid twice as much to be some kind of specialist."

Neal Conan responded to Rovner's explanation this way: "So no shortage of cardiologists, say, in New York or Charlotte, but primary care physicians in Kentucky, that's a problem?" Interesting enough, a report out of Kentucky demonstrates that Conan got it right ["Concierge model provides high-end doctor's visit," by Mary Meehan, Lexington-Herald Leader, 6 September 2010]. Meehan reports:

"More and more 'concierge' doctors in Central Kentucky are offering ... top-flight services for a price — ranging from $1,500 to $4,200 a person annually on top of insurance premiums. Doctors leaving a traditional general practice say decreasing payments from insurance and shrinking Medicaid and Medicare reimbursements mean they have to take on more and more patients to stay afloat. That results, the physicians contend, in stressed doctors and a reduced quality of care. So a small number are opting out of that system in favor of concierge services in which patients pay an upfront fee, and the number of patients served by a practice is capped in the hundreds rather than the 1,500 to 2,000 in a typical practice. The trend, which has been building across the country for about 15 years, is gaining traction in Central Kentucky, with two practices opening in Lexington and one expected to open soon in Versailles. There also are two in Louisville and at least 12 in Cincinnati. ... Dr. Michael Karpf, executive vice president for health affairs for UKHealthCare, said there is real pressure on general practitioners. In fact, Kentucky could use about 600 more general practitioners to serve 900,000 to 1.2 million underserved patients. It makes sense that doctors can feel overwhelmed and patients can feel underserved."

According to another article, the public shouldn't be looking to the educational system to solve the problem ["Primary-Care Doctors: Saying No to $191,000 a Year," by Ruchika Tulshyan, Time, 22 August 2010]. Tulshyan writes:

"Last year, America spent over $2 trillion on health care, the most of any OECD country. Still, with all that money going out the door there is a worsening income crisis among primary-care physicians that, if unaddressed, will lead to an acute shortage of these doctors in the years ahead, when retiring baby boomers will need them most. The education pipeline offers no hint of improvement. Less than 2% of current medical students are interested in general internal medicine and 4.9% in family-care practice, says a study by Dr. Karen Hauer, published in the Journal of the American Medical Association. While a growing concern, it's no mystery as to why the general practitioner (GP) is a dying breed. Rising medical-school costs — up between 4% and 7% from last year, according to American Association of Medical Colleges (AAMC) data — and a continually widening gap between general-practitioner and specialist salaries make the career choice for medical students a fairly easy one: get a specialty. ... In 2009, primary-care doctors earned a median salary of $191,401, according to the Medical Group Management Association's 2010 physician-compensation report. Cardiologists earned a median of $457,310 and dermatologists made $385,088 — doctors who owned their practices earned much more, on average."

A lot of people during these difficult economic times are probably thinking that $191,000 sounds like a lot of money. Tulshyan, however, reports, "The average medical-school student graduates with $200,000 in loans, according to the American Academy of Family Physicians (AAFP). This doesn't include their debt related to four years of undergraduate study. For some students the total debt burden can reach nearly $500,000 — a daunting sum that puts many of them off family medicine." Add to that normal expenses experienced by any family (e.g., mortgage, food, clothing, car, insurance, etc.) and you start to get a sense of why there is a growing shortage of GPs. Before returning to some suggestions that have been made to alleviate this shortage, I'd like to examine how the shortage has affected hospital emergency rooms. "In a snapshot of systemic waste, researchers have calculated that more than half of the 354 million doctor visits made each year for acute medical care, like for fevers, stomachaches and coughs, are not with a patient’s primary physician, and that more than a quarter take place in hospital emergency rooms." ["Health Care Wastefulness Is Detailed in Studies," by Kevin Sack, New York Times, 7 September 2010]. Sack continues:

"The authors of the study, which was published ... in the journal Health Affairs, said it highlighted a significant question about the new federal health care law: can access to primary care be maintained, much less improved, when an already inadequate and inefficient system takes on an expected 32 million newly insured customers? The study is the first to quantify the problem, according to Dr. Stephen R. Pitts, the lead author and an associate professor of emergency medicine at Emory University. Examining records of acute care visits from 2001 to 2004, the researchers concluded that 28 percent took place in emergency rooms, including almost all of the visits made on weekends and after office hours. More than half of acute care visits made by patients without health insurance were to emergency rooms, which are required by federal law to screen any patient who arrives there and treat those deemed in serious jeopardy. Not only does that pose a heavy workload and financial burden on hospitals, but it means that basic care is being provided in a needlessly expensive setting, often after long waits and with little access to follow-up treatment."

Enterra Solutions is looking to work with several hospitals to see if new ways of using social media and analytics can help relieve some of the pressure on emergency rooms. As a side note, Sack points out that another significant source of waste in the health care system is the result of excessive insurance costs and defensive medical practices aimed at mitigating the cost of litigation. He writes:

"Three Harvard professors and a colleague at the University of Melbourne in Australia estimates that the medical-liability system added $55.6 billion to the cost of American medicine in 2008, equal to 2.4 percent of total health spending. More than 8 of every 10 of those dollars — $45.6 billion — was attributed to defensive medicine by physicians who order unnecessary tests and procedures to protect themselves from malpractice claims."

Getting back to growing shortage of general practitioners and the impact that is having on the health care system, Julie Rovner suggests that some of care offered by GPs could be taken over by physician assistants or nurse practitioners.

"One of the ways ... of perhaps fixing this problem is making it more attractive for doctors to become primary care practitioners or making it more attractive for doctors who are primary care doctors to stay primary care doctors, perhaps not having them retire early. ... [One idea is called] the medical home, where a doctor would [be the] quarterback of a health care team. ... The doctor would offload some of the things that makes doctors crazy now, some of the paperwork, some of the things that perhaps doctors don't need as much training to do, that they could have a nurse or a nurse practitioner or even a social worker do instead. It would be better care for the patient, the patient could get different types of care, perhaps, at the doctor's office. The doctor would be freer to do things that only the doctor can do and perhaps have a more sane lifestyle. That's the idea behind the medical home."

Rovner explains that physician assistants are individuals with two-years of specialized medical school training instead of four and that nurse practitioners are basically nurses with master's degrees. Increasing the number of PAs and NPs would go a long ways towards decreasing the growing shortage in the least amount of time. Obviously, there are no real quick fixes to the problem. In the end, medical students will follow the money. Make it profitable to become a family practice doctor, especially in rural areas, and you'll see some self-correction take place within the medical community itself.

September 23, 2010

Entrepreneurship: The Benefits and Pitfalls of Partnering

In a post entitled Avoiding Mistakes that Lead to Failure, I discussed a Wall Street Journal article by Rosalind Resnick, the founder and CEO of Axxess Business Consulting, a New York consulting firm that advises startups and small businesses. She previously was a co-founder of NetCreations and hosted AOL's NetGirl Forum. Resnick also serves on the board of Do Something, Inc., a New York-based nonprofit organization that empowers young people to change their world. The subject of Resnick's article was "10 Mistakes That Start-Up Entrepreneurs Make." Number five on that list was "Entering a market with no distribution partner." Commenting on that "mistake" I indicated that I would publish a post on partnering in the future. This is that post.

One of the challenges that a successful start-up company can face is rapid growth. It's a good challenge to have; but, it's still a challenge. There are several strategies that a company can use to meet this challenge. First, it can hire new employees in sufficient numbers to meet growing demand. As any good HR person will tell you, however, hiring a lot of people in a very short time is no mean feat. If demand for a product or service erratic, a company may hire enough people to meet a spike in demand then realize that it is carrying an excessive payroll when demand falls. Hiring temporary employees to solve this situation risks affecting the quality of what is being produced at a critical time in young company's fight for survival. That leads to a second strategy -- outsourcing. A company can outsource activities that keep essential individuals from focusing on more important tasks. Unfortunately, these kinds of activities are rarely the ones for which a young start-up must hire a lot of people in a short period of time. Third, a company can find a partner (i.e., a larger, established company) that can immediately overcome any labor shortages the start-up may have. There are other advantages to finding the right partner as well. For example, good partners have established business connections and sales channels. Additionally, when demand slackens, it becomes the partner's challenge to keep its workers gainfully employed, not the start-ups. Sometimes, however, what appears to be a good partnership in the beginning can turn out to be a bust in the end ["In a Partnership of Unequals, a Start-Up Suffers," by Steve Lohr, New York Times, 18 July 2010]. Lohr explains:

"Technology start-ups and big companies work together all the time — refining ideas, seeking mutual advantage and accelerating the pace of development of new products and services. But these odd-couple relationships can be fraught with peril. Steve A. Stone, a veteran product manager at Microsoft, had an idea for an innovative way to identify and track digital objects across the Web. So he set up shop for a new company in his garage in suburban Seattle, and convinced a few Microsoft colleagues to join him. They began building their software, working late many nights, fueled by spaghetti and takeout Subway and Quiznos sandwiches. The start-up, Infoflows, began working with Corbis, the big photo library and licensing company owned by Bill Gates, Microsoft’s chairman, and in June 2006, the two signed a multimillion-dollar development agreement. But four months later, things fell apart, culminating in a Washington State jury verdict against Corbis for misappropriation of trade secrets, fraud and breach of contract. The jury awarded damages of more than $20 million."

Corbis is appealing the case. But Lohr claims that "the Infoflows-Corbis story is a striking case of a partnership between a start-up and a big company gone bad, and a catalog of pitfalls to avoid — courtroom battles, millions in legal costs and a business in limbo for years." The split between Infoflows and Corbis has been mean and messy. It doesn't have to be that way.

"'What you want is the business equivalent of no-fault divorce,' said Josh Lerner, a professor at the Harvard Business School. 'You want the ability to experiment, fail and disengage, and move on, to keep the innovation process moving forward.'"

That obviously didn't happen in the case at hand. Lohr explains the positions of the two sides:

"Corbis asserted that Infoflows was a poorly performing contractor that Corbis had patiently tried to work with, but finally gave up on. Except for a small sliver of technology belonging to Infoflows, Corbis said, all the work produced and the intellectual property was owned by Corbis. Infoflows saw things differently. 'They took our ideas and tried to claim them as their own,' Mr. Stone said. 'And they tried to crush a little company.'"

The appeal process could take years and Infoflows won't see a penny of the court award until the appeals process is complete and it remains victorious. The litigation has wreaked an enormous toll on the entrepreneurs that started Infoflows. Lohr explains:

"Infoflows may hold the upper hand now, but the long legal battle has taken a toll on the founders, they say. Retirement accounts and savings, they say, have been drained to pay legal fees. Still, unlike many start-ups, the Infoflows founders did have resources to battle the big company. And they had little choice. ... Infoflows, its founders say, talked to potential customers and venture capital backers. But the litigation with Corbis scared them away. 'No one wanted to come near us,' recalled Carlo Martin, a former engineer at Microsoft. 'It shut us down.' Infoflows, which had leased offices in Redmond, Wash., retreated to Mr. Stone’s garage. For Mr. Stone, overseeing the legal battle with Corbis was a full-time job, but the other five founders sought outside work, mainly as consultants and contractors."

Lohr reports that "the Corbis deal was a big bet on one customer" for the founders of Infoflows. But perhaps the biggest mistake they made was allowing the company to enter "into the partnership without patenting its software or system for tracking digital rights." Lohr continues:

"Technology start-ups that work with big companies, said Kevin Rivette, a Silicon Valley consultant, should take care to protect their most valuable ideas, even as they collaborate. 'Innovation without protection is philanthropy,' said Mr. Rivette, a former vice president of intellectual property strategy for I.B.M. Mr. Stone said he felt no rush to patent because he wanted the joint work with Corbis to move closer to a finished system. Infoflows, he said, would develop the underlying system for identifying and tracking digital objects across the Web, and Corbis would own the application for its photo-licensing business. In December 2006, after Corbis terminated its agreement with Infoflows, Mr. Stone met with Corbis managers to discuss details of the breakup. Corbis said the intellectual property it claimed as its own was covered in the nonpublic patent Corbis had filed back in January of that year. It was the first time Mr. Stone had heard of Corbis patenting the work, he said. 'I was shocked,' he recalled. The Corbis patent, Infoflows said, was a move on its ideas. Mr. Stone said he had an oral agreement with Corbis, supported by an e-mail exchange, that neither side would file for patents until their work was well along. Corbis denied any such agreement."

You'll have to watch the papers to discover how this sad tale ends. However, don't let the Infoflows/Corbis debacle sour you on seeking partnerships that could benefit your company -- just do your homework. Make sure you have good legal advice, iron-clad signed agreements, and patents to protect your intellectual property.

Sometimes partnerships are formed for reasons other than rapid expansion. One such reason is to obtain the services, ideas, and name recognition of a particularly important individual ["The perfect partner to provide a new spark," by Luke Johnson, Financial Times, 18 August 2010]. This scenario is the topsy-turvy version of partnerships where a large company is looking for a smaller partner (i.e., an individual innovator). Johnson explains:

"How do large corporations discover the creativity that founder-led companies seem to enjoy? The answer can lie in finding an implant entrepreneur. By this, I mean by forging a commercial relationship with a serial entrepreneur – a type of joint venture that suits both parties. The corporate benefits from the entrepreneur’s flair, reputation and self-confidence; the entrepreneur obtains access to the corporate’s capital, covenant and infrastructure. Classic cases of such arrangements were those organised by George Davies, who essentially invented the clothing retailer Next. He developed labels with Asda and, later, Marks and Spencer. The collections George and Per Una respectively seem to have proved to be winners for all concerned. Another example was Carluccio’s. Here Antonio Carluccio, the well-known Italian restaurateur and writer, provided his name and credibility to a new chain of casual dining outlets. Before this involvement he was famous for running a single, top-end restaurant in central London, and his television work and cookery books. His association gave the Carluccio’s chain an authenticity that was vital to its success. Yet the true management brains behind the operation were various ex-colleagues of mine from My Kinda Town, a pan-European restaurant business, including Stephen Gee, Simon Kossoff and Peter Webber."

Johnson notes that these kinds of partnerships can be tricky because "almost no high-achieving founders want to work for someone else. They enjoy their independence too much – and are simply too proud – to be a conventional employee." He claims that there are other ways that implant entrepreneurs can contribute (e.g., "serving as non-executive directors"), but to gain the most benefit from their energy and ideas, they need to become partners. Otherwise, Johnson writes, they "won’t necessarily deliver enough of their magic formula." He continues:

"After all, how much incentive do they have to really apply themselves? The answer is to devise some sort of partnership, licence, franchise or concession that permits the corporate to exploit the entrepreneur’s genius without suffocating it. In particular, this sort of deal works if the personality is a celebrity who is looking for funding and administrative support. Typically, it proves most advantageous in consumer sectors such as food, sport and fashion. By entrepreneur implant, I do not mean celebrity endorsement. I mean a long-term, exclusive enterprise where each party has a genuine economic interest and is mutually dependent. Each supplies ingredients the other lacks. Entrepreneurs get scale, while corporates get innovation. Increasingly, consumers want to patronise establishments with character. Large concerns struggle to invent these. So teaming up with individuals who have imagination and a track record, but want someone else to risk their cash, makes complete sense."

Johnson admits that the idea sounds easier to make happen than it is to accomplish. Personalities really matter in these kinds of partnerships. Corporate leaders have to swallow a bit of pride and admit that someone may be more creative than they are and the implant entrepreneur has to learn to compromise on some of his or her ideas. When it does work, Johnson claims, it provides a number of benefits. He concludes:

"It can be hard to break through the bureaucracy within a traditional hierarchy. Yet, with the backing of a serial entrepreneur, even the most radical concepts can receive a fair hearing. The latter can break the rules because they have the ear of the boss and access to the board. Working with an implant entrepreneur is not the same as corporate venturing or even intrapreneurship. Corporate venturing is the financing of external projects by industrial companies using venture capital techniques, while intrapreneurship is the cultivation of in-house entrepreneurial initiatives by full-time, permanent staff. Occasionally, implant entrepreneurs are freelancers who consult for a fee, rather than proper partners. That sort of looser scheme is less likely to do well, but may still provide the necessary spark to launch a new idea or process. Enlightened multinationals might do well to find the right entrepreneur partners, who can bring fresh thinking, profile and brand integrity. They are a sort of R&D department combined with a marketing resource. In an ultra-competitive world, the leaders are those who use every tool available to gain an edge."

In the end, of course, a partnership needs to make sense for both sides. I think that Johnson hit the mark when he defined a good partnership as one where both sides have "a genuine economic interest and [remain] mutually dependent. Each supplies ingredients the other lacks." Get it right and a partnership can help take your company to the next level. Get it wrong and a partnership can take you to court.

September 22, 2010

Packaging and the Supply Chain

In yesterday's post entitled The Packaging Challenge, I discussed a number of issues surrounding product packaging. Supply chain blogger Steve Banker wrote an interesting piece about a case study involving packaging that complements that post ["The Importance of Packaging in Supply Chain Management," Logistics Viewpoints, 21 June 2010]. Banker writes:

"I recently read a great business school case study by Terry Tremwel (Walton College of Business, University of Arkansas), Dan Lynch (Eli Broad Graduate School of Management, Michigan State University), and Jim Crowell (Walton College of Business, University of Arkansas) called 'Phoenician Phoods, Breakfast Cereal Manufacturer and Distributor.' The case focuses on a business executive at a fictitious food company that has to make a tough decision involving SKU rationalization, packaging, case pack size, transportation costs, manufacturing optimization, and new product rollouts."

Here's the set-up from the case study:

"The date is October 2008, "Sara [Haran] is the Executive Vice President of Business Units for Phoenician Phoods of America, Inc. Phoenician Phoods (PPA) [is] the fourth largest Ready-To-Eat (RTE) cereal manufacturer in the U.S.A. In the past 24 months, PPA's major competitors had rolled out multiple initiatives to either increase prices or reduce their package sizes. PPA had seen [its] gross margins sink, even as they were losing the battle for shelf space to [its] better funded competitors. Revenues were in decline. Kellogg's reduced the size of 1/3 of [its] line-up of cereals in early 2007. General Mills had revamped nearly its entire product package line in a "Right Size, Right Price" roll out in June 2007. PPA was have great difficulty in keeping [its] 10% market share, due to inroads by [its] competitors in the all-important $2 to $4 price range. PPA had taken the strategy of increasing prices as costs increased, and even then [its] price per ounce was better than [its] chief competitors. But, as [its] retail prices exceeded $4 per package, [its] market share plunged by 1.3% in 2007. The trend continued into 2008, decreasing another 1%."

It should be noted that the reported activities of Kellogg's and General Mills actually did occur. The case study authors also factually report that "research indicates that cereal size influences the profitability of SKUs (Stock Keeping Units -- products with unique UPC codes) in the category, even when controlling for facings, price per ounce, and price per box." They continue:

"Products that are 'A' and 'B' SKUs in rate of sales seem to benefit from larger case sizes, while 'C' and 'D' SKUs benefit from smaller case packs. This appears correlated to a reduction in out-of-stocks, due to the case size more closely matching the required rate of replenishment. Benefits include a reduction in labor requirements from reduced trips to the back room. These are the core supply chain management issues: choice of case pack size to match product sales velocity affects product availability and lowers costs due to inventory, transportation, packaging, and labor."

Those were the challenges and facts being confronted the fictitious Ms. Haran. In his post, Banker notes that "a more profitable SKU is more apt to keep its facings and stay on the shelf." He continues:

"But this is a 'nested-doll' problem. Dry cereal is a light product that sells at a good velocity. So, most of the shipments will likely be full truckload. The trucks will cube out before they weigh out. The size of the package and the number of products in a case affects the case dimensions. The pallet used will be one that conforms to Grocery Manufacturing Association guidelines (40 inches wide by 48 inches long by 50 inches high) to allow for efficient truck loading and reduced transportation spend. The packages should be sized so that the cases stack in a way that meets these pallet guidelines. The packaging and palletizing and wrapping should allow these pallets to be stacked two high without crushing the goods on the bottom pallet. There is a 'product swell' tradeoff that can be made to help with this nesting problem. In order to conform to government requirements, the boxes when sealed must have not less than 80 percent of the package contents be product. A box size that helps you build to the right pallet dimensions may have to make use of 'product swell' – add extra cereal to each box – to be in compliance."

Banker notes that there is a "Catch-22" to all of this. "A product in a new package is a new SKU. A retailer is unlikely to give a consumer goods (CG) company more shelf space. So, introducing new SKUs means retiring old ones. Planning and executing for a product’s end of life is something many CG companies struggle to do well." He concludes:

"The core supply chain management issues involve choosing the right product, case, and pallet sizes in a manner that will help increase product sales while lowering inventory, transportation, and packaging costs. As you can see, there are many complex tradeoffs."

Let's take a quick look at the SKU challenge noted by Banker. According to Nikhil Balkudi, the "biggest challenge faced in supply chain management is [the] explosion of number of SKUs. It is very common scene that total number of SKUs are 50 to 100 times the number of 'Real' product offerings." ["How to Control Proliferation of SKUs?," Supply Chain Management, 13 August 2010]. Balkudi continues:

"There are many reasons for which multiple SKUs are created from same 'real' Product. Some of them are listed below.

1) Customer Segmentation - Some customer[s] can buy in big size[s] but others do not have paying capacity so they buy in small[er] quantit[ies] so business[es] create different SKUs to cater to each of these customer segment[s].

2) Consumer Behavior - Irrespective of paying capacity in some markets customers have [an] inbuilt tendency to buy in bigger or smaller sizes. Depending on that for [the] same product in different markets we need different size SKUs.

3) Seasonal Consumption - [The] same product can be consumed differently depending on time of the year. Winter products will have [a] smaller demand during summer. Accordingly, you need different SKUs to tackle different seasonal requirements.

4) Legal Requirement - In some territor[ies] there [is] ... mandatory information that need[s] to be printed on Labels. Hence, [the] Label has to be customized depending on [the] market -- which lead[s] to multiple SKUs for same product even for same size.

5) Marketing Campaigns - Packaging is called 5th P of marketing. To catch the eye of ... customers in [a] crowded market place, packaging is changed often creating new SKUs.

6) Logistics Considerations - Packaging that works in one geograph[ical] context does not necessarily fit with logistics practices in some other geography. This warrants creation of additional SKUs to suit [the] logistics scenario in each of the geographies [where the] product is sold.

"We can keep adding reasons to above list but bottom line is simple -- supply chain management is getting complicated because of [the] explosion of SKUs. It is very common that [the] core number of product offerings of the company is 50 to 70 products whereas [the] total number of SKUs are between 5000 to 7000. Another dimension of the problem is [the] number of storage locations in distribution network. If company has 100 distribution warehouses then effectively supply chain management has to deal with 700,000 SKU-Location combinations. Imagine the amount of Planning and Execution effort spent in ensuring that each of these SKUs reach at the right place at the right time."

Balkudi notes that the SKU challenge is faced in a number of economic sectors from consumer goods, to pharmaceuticals, to chemicals. He concludes:

"Proliferation of 'Unwanted' SKUs, in my opinion, is the source of biggest waste in Planning activity. My rough thumb rule estimate is that 20-30% of total SKUs are unwanted and created without proper thought. So effectively speaking 20% to 30% of effort in planning activity is a waste. I [offer the] following thought process [as] one ... way to control SKU [proliferation]. Perform SWOT analysis for your core product offerings. Surely there must be some products which are real champions. Customers simply crave for these products. Every company has such block buster's. [The] SKU strategy followed hardly matter[s] in [the] case of these products. Customers will 'Pull' these products out of your supply chain in whatever size, shape or packaging they are available. In fact, if the products are extremely good and low quantity [and] SKUs are not available, then [a] couple of customers can combine also to buy a bigger size. In one of my assignments with Crop Protection company, some of their products offerings were so good that [a] few farmers use[d] to combine to buy [a] bigger size package if [a] smaller one [was] not available in the market place. You can surely reduce number of SKUs for these champion products without affecting sales revenue. On the other hand if product is facing stiff competition in marketplace because it is 'Me Too' type, then you need battery of SKUs to tackle competition."

There is an excellent discussion concerning packaging found on Wikipedia. The entry notes that "packaging is the science, art and technology of enclosing or protecting products for distribution, storage, sale, and use. Packaging also refers to the process of design, evaluation, and production of packages. Packaging can be described as a coordinated system of preparing goods for transport, warehousing, logistics, sale, and end use. Packaging contains, protects, preserves, transports, informs, and sells." The entry also succinctly lists the purposes of packaging and labeling:

  • Physical protection - The objects enclosed in the package may require protection from, among other things, mechanical shock, vibration, electrostatic discharge, compression, temperature, etc.
  • Barrier protection - A barrier from oxygen, water vapor, dust, etc., is often required. Permeation is a critical factor in design. Some packages contain desiccants or Oxygen absorbers to help extend shelf life. Modified atmospheres or controlled atmospheres are also maintained in some food packages. Keeping the contents clean, fresh, sterile and safe for the intended shelf life is a primary function.
  • Containment or agglomeration - Small objects are typically grouped together in one package for reasons of efficiency. For example, a single box of 1000 pencils requires less physical handling than 1000 single pencils. Liquids, powders, and granular materials need containment.
  • Information transmission - Packages and labels communicate how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some types of information are required by governments. Some packages and labels also are used for track and trace purposes.
  • Marketing - The packaging and labels can be used by marketers to encourage potential buyers to purchase the product. Package graphic design and physical design have been important and constantly evolving phenomenon for several decades. Marketing communications and graphic design are applied to the surface of the package and (in many cases) the point of sale display.
  • Security - Packaging can play an important role in reducing the security risks of shipment. Packages can be made with improved tamper resistance to deter tampering and also can have tamper-evident features to help indicate tampering. Packages can be engineered to help reduce the risks of package pilferage. Some package constructions are more resistant to pilferage and some have pilfer indicating seals. Packages may include authentication seals and use security printing to help indicate that the package and contents are not counterfeit. Packages also can include anti-theft devices, such as dye-packs, RFID tags, or electronic article surveillance tags that can be activated or detected by devices at exit points and require specialized tools to deactivate. Using packaging in this way is a means of loss prevention.
  • Convenience - Packages can have features that add convenience in distribution, handling, stacking, display, sale, opening, reclosing, use, dispensing, and reuse.
  • Portion control - Single serving or single dosage packaging has a precise amount of contents to control usage. Bulk commodities (such as salt) can be divided into packages that are a more suitable size for individual households. It is also aids the control of inventory: selling sealed one-liter-bottles of milk, rather than having people bring their own bottles to fill themselves.

From the time that humans first started gathering berries, they have been constructing packages. They may not have put as much thought into the first rudimentary packages (such as reed baskets) as we do into packaging today's products, but packaging has nonetheless played an important role in humanity's progress and that's not going to change. Product packaging is going to continue to play an important, if complex, role that affects almost every division of a company from production to sales.

September 21, 2010

The Packaging Challenge

Decisions about how a product is packaged can have enormous consequences. Consumers rarely think too much about the packaging products they buy come in. I can assure you, however, that manufacturers, distributors, and retailers think a lot about packaging. The marketing website KnowThis.Com provides an enlightening overview of "packaging decisions [that] are important." They include:

Protection – Packaging is used to protect the product from damage during shipping and handling, and to lessen spoilage if the product is exposed to air or other elements.

Visibility – Packaging design is used to capture customers’ attention as they are shopping or glancing through a catalog or website. This is particularly important for customers who are not familiar with the product and in situations, such as those found in grocery stores, where a product must stand out among thousands of other products. Packaging designs that standout are more likely to be remembered on future shopping trips.

Added Value – Packaging design and structure can add value to a product. For instance, benefits can be obtained from package structures that make the product easier to use while stylistic designs can make the product more attractive to display in the customer’s home.

Distributor Acceptance – Packaging decisions must not only be accepted by the final customer, they may also have to be accepted by distributors who sell the product for the supplier. For instance, a retailer may not accept packages unless they conform to requirements they have for storing products on their shelves.

Cost – Packaging can represent a significant portion of a product’s selling price. For example, it is estimated that in the cosmetics industry the packaging cost of some products may be as high as 40% of a product’s selling price. Smart packaging decisions can help reduce costs and possibly lead to higher profits.

Expensive to Create - Developing new packaging can be extremely expensive. The costs involved in creating new packaging include: graphic and structural design, production, customer testing, possible destruction of leftover old packaging, and possible advertising to inform customer of the new packaging.

Long Term Decision – When companies create a new package it is most often with the intention of having the design on the market for an extended period of time. In fact, changing a product’s packaging too frequently can have negative effects since customers become conditioned to locate the product based on its package and may be confused if the design is altered.

Environmental or Legal Issues – Packaging decisions must also include an assessment of its environmental impact especially for products with packages that are frequently discarded. Packages that are not easily bio-degradable could draw customer and possibly governmental concern. Also, caution must be exercised in order to create packages that do not infringe on intellectual property, such as copyrights, trademarks or patents, held by others.

According to Maeve Hosea, packaging is particularly important for products sold primarily through traditional bricks-and-mortar enterprises ["Consumers look for design on their path to purchase," MarketingWeek, 8 September 2010]. She writes:

"Up to 70% of purchase decisions are made in store and are heavily influenced by pack design and merchandising. Since most people still use bricks-and-mortar supermarkets, there is a huge opportunity to both build loyalty over time through clever pack design and make people change their minds at the time of purchase. Design can be a very powerful marketing tool, argues Mike Smart, design strategist for the Design Council. 'Design gives form to the idea and the role of the designer is very much to understand and position themselves between the ideas world and the physical product on shelf. Designers have a focus on the craft of making something but maintain the integrity of the research behind that brand.' Good designers bring the whole consumer experience of the product to life through the packaging, he adds. This encompasses how it is perceived on shelf, how it is taken home and how it is disposed of. Imagery, brand values, product functionality and pure innovation are some of the many ways packaging can add value to marketing strategy. Dan Hill, author of marketing title Emotionomics, says: 'Packaging can influence through the use of clever colour schemes, size, material quality, unique shapes or size.' Packaging’s role is to deliver all the aspects of the brand promise and deliver it in an emotional and compelling way."

Costs must always be weighed against sales and the less packing material that is required the cheaper the product is to produce -- and the higher potential profit margins. Dell, which doesn't have to compete on shelves with its packaging, claims to have eliminated millions of pounds of packaging over the past two years ["Dell Eliminates Use of 18.2 Million Pounds of Packaging Since 2008," Business Wire, 24 August 2010]. In making packaging decisions, Dell executives assert that they follow "the company's "three Cs" packaging strategy, which focuses on the cube (packaging volume); content (what it's made of) and curbside recyclability of its packaging materials." Another company that prides itself on "green" packaging is the Procter & Gamble Company ["P&G Pilots Sustainable Packaging for Beauty Products," Environmental Leader, 13 August 2010]. The article reports:

"The Procter & Gamble Company (P&G) plans to pilot the use of renewable sugarcane-derived plastic on selected packaging for its Pantene Pro-V, COVERGIRL and Max Factor brands, starting in 2011. The sustainable packaging also is 100 percent recyclable in existing municipal recycling facilities. P&G says the sugarcane-derived plastic is a significant development in sustainable packaging because it is made from a renewable resource. The company explains that the new material is made in a process that transforms sugarcane into high-density polyethylene (HDPE) plastic, a type commonly used for product packaging. P&G plans to source the plastic from Braskem SA, which manufactures the material using ethanol made from sustainably-grown Brazilian sugarcane. The pilot will be rolled out globally over the next two years, with the first products expected to be on the shelf in 2011."

Detractors counter that thousands of acres of rainforest have been destroyed so that sugarcane can be grown. As you can see, packaging decisions, even those a company believes are in society's best interests, can have some consumer blowback. One of the most intriguing articles I've read recently about packaging focuses on the efforts of Doug Herrington, vice president for consumables at Amazon, to get suppliers to use different packaging for on-line consumers than they do for in-store consumers ["Packaging Is All the Rage, and Not in a Good Way," by Stephanie Clifford, New York Times, 8 September 2010]. Clifford reports:

"Doug Herrington’s office at Amazon.com suggests that he is particularly bad at getting items out of their packages. Along his wall, there is a Philips Norelco shaver still in its plastic clamshell casing, coffee pods in their retail display containers and a bottle of Tide inside a box. But Mr. Herrington, vice president for consumables at Amazon, is trying to make a point: With a typical online purchase, 'you’ve got a ton of packaging and a ton of work ahead of you,' he said. For nearly two years, Amazon has been trying to get manufacturers to adopt 'frustration-free packaging' that gets rid of plastic cases and air-bubble wrap — major irritants for consumers and one of Amazon’s biggest sources of customer complaints. But the frustration persists. Only about 600 of the millions of products Amazon sells come in frustration-free versions. And other big online retailers, like Walmart.com and Target.com, have not embraced the new packaging, even when manufacturers make it available."

When you think about it, Amazon's idea makes a lot of sense. Products shipped by Amazon don't need to have fancy packaging because the sale has already been made. The problem for suppliers, of course, is that they would have to create two lines for every product, one line for packaging products for traditional retailers and another line for on-line retailers using frustration-free packaging. That's not necessarily cost effective. Clifford continues:

"For brick and mortar retailers, traditional packaging remains popular because it can help deter theft. But in Web shopping, there is general agreement that the alternative packaging is a hit with consumers, and that it is simple for packaging companies to create. It is also environmentally friendly, using recycled and recyclable cardboard rather than plastic and wire ties, quicker to produce than the retail packaging and costs less. Now Amazon, still determined to get more manufacturers to sign up, is making the case by taking the angry customer feedback on old-school packages directly to the product makers. Compared to the traditional versions of the products, frustration-free products have earned on average a 73 percent reduction in negative feedback on the Amazon site."

According to Clifford, some suppliers have succumbed to the pressure and made it work. She explains:

"The strategy worked for Philips, the electronics company. It recently made the packaging change on its Essence electronic toothbrush when the company saw the feedback. 'It wasn’t necessarily that the product was the issue, it was the unpack experience — you’ve got to get scissors or knives,” said Stephen Cheung, senior consumer marketing manager for Philips Oral Sonicare packaging Healthcare. Philips asked the supplier AllpakTrojan if it could create a new package. Because manufacturers usually use one supplier for the plastic part of their packages and another for the cardboard, 'even before you make anything you’ve lost a little efficiency in the design process,' said Dave Hoover, sales manager for AllpakTrojan. With this project, though, AllpakTrojan could use a single material, and it went through a machine just once instead of the two to three times required for the traditional package. 'From design to finish, it’s as efficient as it gets,' he said. Within three weeks, AllpakTrojan had designed the new container, tested it by dropping it from various heights and putting it on a vibration table and had it ready. The toothbrush’s travel case protected the brush head, and cardboard compartments held the charger and toothbrush base. Without the fancy printing, shiny cardboard backing and plastic, 'it’s much less expensive,' Mr. Hoover said. And the environmental benefit was significant: the square footage of material used was much smaller, and the cardboard was recycled and recyclable. Philips said it was so happy with the change that it was looking to switch the packaging for other items. The company said it was also pushing other online retailers to adopt this packaging, to tepid response."

Clifford confirms what I noted above: "big manufacturers" are reluctant to adopt two packaging options because of "the complexity in having different packages for physical retail and electronic retail and a lack of coordination among the major e-commerce companies." Clifford continues:

"'One of the biggest hurdles is to convince a company that it’s worthwhile, or the volume is there, to sell the same product in two different formats,' said Anne Johnson, director of the Sustainable Packaging Coalition, an industry working group operated by the nonprofit institute GreenBlue. And because retailers did not work together on a common standard, 'you don’t end up with unified approaches to these issues, therefore you never solve these issues,' she said."

Clifford notes that there have been some "hiccups" in Amazon's efforts to get frustration-free packaging right. She reports, for example, that hard drives shipped in such packaging were damaged in transit and "Amazon switched that packaging back." Nevertheless some suppliers are providing products in the new way.

"In addition to Philips, recent converts include Polaroid and Procter & Gamble. Brands like Duracell, Jp-PACKAGING2-articleInline Bounty and Tide introduced their own frustration-free packages. Duracell, which offers a 28-pack in a frustration-free version on Amazon, had 'been getting rave reviews from consumers about the packs on Amazon,' said Bob Jacobs, Duracell marketing director. Mr. Jacobs said Duracell made that packaging available to all Web sites that sold the 28-pack, but a check on Target.com and Walmart.com showed that those were still selling only the plastic-encased retail packs. Target said it did not have a similar packaging program but was exploring more e-commerce-friendly options with some vendors. Walmart.com said it reviewed the size of shipping boxes and tried to minimize the environmental impact. 'It’s such a win-win proposal,' said Nadia Shouraboura, vice president for global fulfillment at Amazon. 'We don’t expect to make a miracle in a week, but I think over time it’s going to happen.'"

I suspect that as e-commerce continues to grow suppliers will realize that profit margins for products sold on-line can be increased even more if the packaging used to ship them is significantly cheaper than the packaging used to generate product interest in traditional stores. When the volume is high enough to make running two lines for packaging profitable, suppliers will jump on the bandwagon. Humorist Dave Barry once wrote, "More and more products are coming out in fiercely protective packaging designed to prevent consumers from consuming them. These days you have to open almost every consumer item by gnawing on the packaging." I think that Doug Herrington wishes he would have written those words. He certainly agrees with them. I'll have more to say about packaging tomorrow.