Freight costs reduction is almost
What if I told you this simple strategy can reduce the overall freight costs by over 75%. It will be hard to believe – right? Well, by the end of this article you will see an actual case study analysis proving this to be the case.
If you study that case example seriously enough, you can replicate the strategy in your own company, and see for yourself the enormous benefits it creates.
But, this magnitude of cost reduction needs strategic thinking. I call it a strategic because it is not a tactical (and, certainly not a trick). A trick is something which is impermanent, a sleigh of hand.
For example, I know a trick that can instantly cut your freight bill to zero. But, why would I even talk about this sleigh-of-hand. A trick rarely enriches you – it merely has some entertainment value, and perhaps, ocassionally, a short term monetary value.
For my clients, I focus on things of lasting and real value.
This strategy is so obvious to me that I am constantly surprised that very few companies are doing it. In fact, this is the first thing I look for when I visit a new company.
And, invariably, in every company, I find room for improvement. “Why is it not equally obvious to everyone else?” – that is a constant surprise to me. But then, that is the very definition of “the curse of knowledge.”
Consider the following scenario and see if sounds familiar: you join a new role (in the same company, or in a new company), and suddenly you are now in charge of the freight and shipping costs.
You look at the numbers, and they seem high. But as yet you have no means of saying they are high, so you dig out some benchmarks on google (or from your past experience, or reports) and while nothing definitive can be said because benchmarks never compare apples with apples, your gut feeling is confirmed. The freight costs for your company is in fact higher than the norm.
Even when you can conclusively prove that the freight costs are higher than the norm – what is your next step?
I could go on with another 20 points of activities that could be potentially done to reduce the freight and shipping costs. Each of them would be a legitimate alternative – though not the first thing to be looked at.
At different points in time, during my projects, I have seen all of them being done. Indeed, I have done many of these same things, but only at the right time. As in the rest of life, here too, timing is everything.
We have to do the first things first. And, for that very reason, you should not start with doing any of these things listed above.
Because if you do any of these things before doing the first thing first – your vendors, and even staff, will identify you either as a novice, or as non-serious player. And, they will calibrate their response accordingly.
So, what is the first thing that players will expect you to do?
Let me illustrate with three examples each one getting more and more complex, and see if you can guess the answer.
I and my business partner were standing in the warehouse of a mid-size global player in a nice margin business. On the shipping docks were sitting a number of pallets – each half or more full of goods. I asked about the paperwork for one of the pallets and was surprised to be handed a thick sheaf of papers. Right on that single pallet sat more than 50 shipments, all going from one large city to another. Each was accompanied by a consignment note (and a Con. note fee of $35 each). So I asked why they were not being shipping in a single shipment, and distributed by a local courier? Or alternatively, by a inter-city courier covering the entire shipment. “We have always done the things this way” was the answer. I calculated that – just those 4 pallets were wasting at least $3000 in additional freight costs. That was over $100K a month – the practice was changed and the hole plugged straight away.
After a very thorough and detailed analysis of the inventory holdings, and movements within this company, we created a chart similar to the one shown below:
Because there was no scientific approach to inventory targeting (besides what was built into the ERP system), and because even that was very sloppily implemented, the company suffered from having excess stocks for items that were not required, and shortage of items that customers wanted. Almost every location suffered from this problem.
Even a very generous inventory allowance revealed that over 70% of the inventory was wrongly located.
As a result, the staff were all the time trying to track things in their system and ship the items from where they were located to where they were required.
This third example is a much larger business. It had a global supply chain network, though we were only analysing the national network. Almost all the locations were decided based on factors other than efficiency or effectiveness. Some were just historical decisions, left to continue on without any thought. Others were made because the regional manager preferred to be located there (even though the customers for that region were located somewhere else).
A very thorough analysis of all the locations, and all the movements revealed that current network was the worst possible configuration for cost and customer service. Only the freight vendors benefited with this configuration (which had evolved gradually over several years). Take a took at the figure below:
Your own situation will not be exactly same as any of the three situations above. It would rather be same, same – but different. That is the reason I will not go too much into any of the examples above.
I am also skipping a lot of details about how the above analysis was done, and the changes were implemented.
In reality, it took weeks to conduct the analysis, and months to implement the recomendations. But the resulting benefits ran into millions of dollars in last two cases, and were worthwhile in each of the case. In each case the results prevented another round of dibilitating lay-offs, perhaps even saving the company in the long run. The cost of analysis, and implementation was mere fraction of the savings in every single case.
You will have to think about how to reduce the transportation movements in your business. But if the above businesses had the room to reduce the transportation movements by up to 83%, then your business might have at least some room to reduce transportation movements. You do not need to negotiate with the vendors to do this. You just need to organise your supply chain better.
And, once you do this properly, your vendors will take your business a lot more seriously. I have seen the change.
A word of caution is advisable at this juncture. The results above – over 70% erroneous inventory holdings, over 80% redundant movements due to supply chain misconfiguration, over 50 shipments that could be consolidated into a single shipment – are anything but typical.
In fact, in my over 25 years of hundreds of projects, they stick in memory full of similar cases, only because these cases were so far out on the limb. That is why it was easy to dig out the data for them, and share the facts of the cases (in a disguised form).
Does that mean you will not have these opportunities?
Quite the contrary, you will have these three, and nearly a dozen more, different types of opportunities to minimise the number, size and volume of shipments.
There will be a multitude of different types of unnecessary freight movements. These three were just the most obvious examples that occurred to me as I was writing this article. If I leaf through our past projects folder, I could detect at least a dozen more types of unnecessary freight movements.
But each company is different, and will have its own example of this practice. The trick is to have enough experience to recognise an unnecessary freight movement when you see it. And, then to call it as such you need fortitude and backing.
Finally, you need to come up with a comprehensive model that will replace the current logistics model. And, you need to be able to sell it to all the stakeholders.
And, you have not even started talking to your logistics vendors yet. The truth is that there are so many different ways of reducing freight costs that any blog will not do full justice to it. There are a couple of reports that we have issued covering the matter. Look for them in the footer on our website, or contact me.
Someone asked me this question on a popular social platform. The subtext was this:
What kind of discount do you think they’ve negotiated with the major carriers (UPS, FedEx, USPS, etc.)?
I have over 12 years of operational experience and 23 years of commercial negotiation experience with freight companies on large scale global freight operations.
Even though I have no direct experience with Amazon’s freight operations (and I would not reveal any inside information, even if I did) I think I am well qualified to answer this question.
Based on my review of Amazon’s cost reports, I would first question the full details of $28 Billion freight spend. My gut feel is that all of it may not be freight bill for external freight vendors such as UPS, FedEx or USPS etc.
Moving on, irrespective of the
As such, Amazon would start with a massive advantage in the price negotiations with the vendors. There are two questions here:
1. How big? And,
2. How well Amazon uses this advantage?
Let’s start with the second question first – because I have worked with many companies who had a similar massive advtange where they formed bulk of the trade on some lanes and yet did not know how to negotiate and control freight well enough.
What went wrong?
In many cases the same company has 20 or more divisions each with its shipping department – negotiating with the same vendor on the same lane. In most cases the vendors pitched their best salesmen while the buyers thought of freight as a fixed cost (an after thought).
The net result? They were paying the retail! Or, close. Worse still, they did not know the difference. I will skip a lot of other bad news, except for the worst one – they were signing contracts which were largely one sided (favouring the freight vendors). And, as usual the contracts make all the difference in any transaction.
So how well does Amazon perform on this front?
An external point of view is that it performs very well. What is my evidence? Read these articles to get a sense:
There are many others in the same vein. Sure it is a political hot potato now, but the facts of the case are still quite clear. Amazon is using every advantage it can. And, quite well.
Let’s spend some time on the first question.
How big is the advantage?
Everyone knows that the full truck, full plane, or full ship, or full shopping centre is very lucrative proposition for the vendor. Any operation close to its peak volume is at its most productive.
Think of what kind of rent subsidies do the anchor tenants enjoy in shopping centres, and in commercial buildings?
What kind of deals do Take-or-Pay (ToP) buyers enjoy on LNG trains where investment in each train exceeds several billions of dollars. There are countless such examples in the realms of supply chains – ranging from explosives to chemicals to gases to property to FMCG etc.
Almost all commercial operations have a bulk buyer who enjoys significant cost advantage over the retail buyers.
How do you model the advantage? How do you model the industry cost curve and pick your vendors? How do you negotiate your advantage?
All this is an art – which cannot be summarised in a few pages. You have to live it all day, every day, for years to master the art.
In a future post I will reveal Amazon’s achilles’ heel, which none of the big box retailers have yet identified, and which would level the playing field for them.
If you are in Australia, it is more than likely that you already know this saga. If you are not in Australia, or do not follow the news cycle, take a look at the video below:
Several years ago it was this:
Some band-aid solutions are rolled out – mostly to restore public confidence and get the demand up again. However, a comprehensive supply chain security regime is never put in place.
Having done large scale supply chain transformation projects for companies as sensitive as explosives, chemicals, fertilizers, food stuff, soft commodities, bakeries, meat, dairy, livestocks, and many others, we have seen both – the vulnerabilities and some really cutting edge supply chain security in practice.
Unfortunately, supply chain security, in conceptualisation and training, has not kept paced. There is no university course that covers this topic sufficiently. Conferences skirt this topic. Books cover it sketchily. Regulatory framework is patchy and officious.
And after complying with the regulatory burden most people relax in the belief that they have done enough.
Yet, dozens of incidents have demonstrated that regulatory framework is never enough. Each company has to develop its own supply chain security framework, based on its own particular circumstances. Even compliance with insurance requirements is not enough. Reputation damage to your business is a non-insurable loss in most cases.
Complying with regulatory and insurance requirements is a good start. You also need a more robust, holistic and comprehensive supply chain security framework that provides the guidelines for your own company’s supply chain security model.
Our report titled SUPPLY CHAIN SECURITY – A COMPREHENSIVE, HOLISTIC FRAMEWORK provides the information to get you started.
Better still – run a one day workshop based on the content of the report. It will be the best 20K your company ever spent.
Recently, the value of trust in supply chain was brought home to me in a graphic manner. An owner of a medium sized business (who was trying to be one of our well-wishers) showed me (and one of our new recruits in sales management department) the way they were using dummy websites to generate leads for their business. He also mentioned that nowadays this is a very common practice to create dummy websites, even dummy companies and fake addresses for the sheer ease of doing so and anticipated potential benefits.
He wanted to encourage us to do the same thing. We listened to him politely, thanked him for his opinion, and refused to go down that path.
He was firmly in the camp of people believing that you have to fake it till you make it.
Obviously there is a huge contingent of people who follow this philosophy. To justify themselves they often quote Richard Branson saying this:
I don’t know if this phrase was truly said by the man himself. However I would feel a little bit uneasy if pilots in their airlines adopted this mantra. It basically means that they accept the job as a pilot hoping to figure out how it works later, meanwhile they are going to fake it till they make it.
I know I have carried the example to an extreme, and pilots do need certification before anyone offers them a job as such.
However, I am also aware that there are more subtle considerations such as aircraft types, routes and even airport characteristics where most pilots will not accept command of an aircraft till they know for sure they can do the job.
Like them, I am firmly in the camp which says ‘make it real and keep it real.’ The risks are far too high; and the numerous opportunities to train and learn without exposing your passengers (or business network partners) to the unnecessary risks make it almost callous to do otherwise.
Yet, many people persist.
This belief – fake it, till you make it – is usually based on the assumption that nobody will offer you a job if you’re perceived as not qualified for it.
On the contrary, you are the best person to judge whether you are truly competent enough to take on a job. At the same time, with the job offers comes the responsibility of choosing, whether to accept it, or not; the responsibility of evaluating your own skills, experience and competence for this particular job.
Unfortunately, there are far too many people forsaking this responsibility that can only apply at a personal level.
That is also the reason why there is a lot of trust deficit in the business world.
If you are faking it, your reader, your audience, your client, your customer will most likely know that you’re faking it. It is just a matter of time.
Whether you are a motor mechanic who’s faking the knowledge of the type of motor that you’re repairing or you’re a heart surgeon or any job in between. Faking it is definitely not going to make you happier or more successful for the simple reason that your customer will always be uneasy with you. Furthermore, in your heart you will always know that you are faking it, which is not the best thing for your self-confidence and self-respect.
Supply chain management is not a unique field which requires a large amount of trust between people to collaborate. In fact, trust is a fundamental requirement for all collaboration, cooperation and joint activities between human beings.
It becomes even more significant in supply chain management where it is both individual trust and institutional trust.
Why is trust so important anyway?
There is an important reason why I mention it.
As supply chains become more and more sophisticated, as they become more entangled and evolve into business networks, the need for trust within the supply chains becomes more and more intense.
Let’s take a specific example to make this generic statement more real.
Suppose you are a soft drink manufacturer, and the suppliers of empty cans has a captive plant right next to your bottling plant, you have a good chance of hearing about their business ups and downs and know well in time about events that might affect your supply. Now just substitute this captive supplier of packaging by a bunch of suppliers half way around the earth who might have significant cost advantage (because of manufacturing cost, for instance), and see how important it will be for you to keep open clear lines of communication in order to run your business smoothly and efficiently.
Companies typically want to engage with supply chain partners who will be able to deliver on what they promise, barring a totally unanticipated event. If your business network partners are not fakes themselves, most likely they will not engage with you further when they find out that you’re faking it.
Although trust in supply chain management is a very popular topic, it is evident that establishing trust within the business network can be very challenging. It takes time, patience and effort of each and every supply chain partner. It can be even more difficult to maintain trust over time. As the concept of trust is rather abstract, it is also hard to measure. At the same time, despite all the difficulties and efforts you can be sure that developing trust with your suppliers and customers is worth the efforts.
So what is trust and what are the components of it?
How to make sure that there is enough trust between you and your supply chain partners?
Is it always worth the investment of your time and effort?
Is there such thing as too much trust within the business network?
First of all, trust in supply chain management, as in any other cooperation between people, includes numerous factors.
You should maintain good communication at all times between you and your partners. Communication also means honesty and openness. Fairness and loyalty can also be very helpful in establishing trust. Another integral part is the competence and your openness about whether you are qualified for this particular job or not. This kind of relationship requires goodwill and willingness not to exploit your partner’s vulnerabilities. This is even more important because of the confidential information which is shared between supply chain partners and with management consultants.
My colleague, who was at the meeting mentioned at the start of this article, wondered aloud about the advisability of trying to create some websites to generate additional leads for our training business.
And my answer was an unequivocal “no”.
The reason was very simple.
I like to make it real – and keep it real.
I gave my colleague an example of the difference between level of trust required for a pharmacist, a general practitioner and an open-heart surgeon.
When you go and buy a medicine from a pharmacy, you do need a certain amount of trust. You need to be confident that the pharmacist will indeed give you the formulation that the doctor has prescribed. You need to be sure that it is pure, unadulterated and sold at the market price.
However the level of trust required from a general practitioner is much higher. Because you will have to literally remove your clothes in front of him. In this case you need the confidence that your general practitioner is able to examine you, to find out what was wrong.
This trust requirement further multiplies when we are talking about a heart surgeon. You need to be completely sure of your heart surgeon as you need to entrust him your own body, because he will be actually cutting you open and looking literally at your heart. Imagine a heart surgeon who lives with the philosophy mentioned earlier.
In the situation where people need to share confidential information, where the profitability of your business depends largely on the competence and honesty of someone else, it is critical to make efforts in order to develop trust. A low level of trust in this case may give a bit more independence and space at first but later on it will definitely result in lower productivity and profitability in supply chain.
Management consultants by their nature need to establish a very firm bond of trust with their customers. The clients need to be able to entrust them with a lot of confidential data and information as well as their innermost strategies so that management consultants could work successfully and effectively.
To be able to establish this kind of firm bond of trust you have to make sure that there is no possibility that your customer misunderstands any of your marketing messages. You should be unambiguous about your market position. It takes us to the next point.
It is always better to say clearly and honestly if the required skills or competences for a particular project are not within your company’s skillsets.
Let me make it real with another example. Very often when we formulate segmented supply chain strategies for our clients’ business, we need to understand the customer segmentation criteria. As part of that activity we need market research data, which is obviously outside the competency set of our business. I am very clear with my clients when such situations arise. I also say that I am in a position to recommend a few good market research firms, if necessary, but customers are welcome to choose any others that they want to use so long as the required segmentation data is available at the end of the exercise.
Sophisticated clients always appreciate a consulting company which is honest about where their competency starts and where it ends. On the other hand there are consulting firms who pretend that they are able to magically do everything.
In most cases they end up doing nothing well enough, and in the long term they usually lose not only the trust of their clients, but also their own self-respect.
Looking beyond management consulting, as mentioned before, trust is important for collaboration between supply chain partners. When you are working with your supply chain partners – suppliers and customers – in innovation, in order to create new products faster, in enhancing the profitability and reducing the cash-to-cash cycle, you know that relying on fakes will only come back and bite you at the worst possible time.
Typically deep understanding of customer segments is required to be able to configure a segmented supply chain so that the end-to-end business strategy is in coherence. This activity obviously requires an immense amount of trust running all the way through the entire business network.
However, similar to the example comparing a pharmacist, a general practitioner and a heart surgeon, the required trust will always depend on the situation and on the level of collaboration that we need from each participant within the 5-STAR Business Network.
Supply Chain Segmentation Drives Today’s Digital Marketing – This is how I explained the situation to a group of a senior executives of the company I was consulting to recently.
The profitability was falling, and customers were abandoning the company (I cannot go into too much specifics of the case for obvious reasons of confidentiality). Let us say that each customer segment was unhappy.
They would place or order and get a very mediocre service (from their point of view). I do not want to go into too much detail of their frustration because I do not want to reveal more details of the company. But suffice it to say that the experience was akin to paying for a sports luxury vehicle, and getting a cheap low-end vehicle.
This was surprising! Everyone in the client’s team was astonished to see the data. But the truth could not be denied. A number of focus groups revealed that they were unhappy because they could get the same product for much lower price elsewhere.
The results were predictable – high customer churn, accompanied by falling profits.
The main reason was that all these various customer segments were being served by a single supply chain that was a happy medium of all their requirements.
No wonder, none of the customers felt that they were getting what they deserved. The company was clearly not showing their customers that they cared for them, and as a result most customers simply voted with their feet.
So, what is the solution?
Clearly, a segmented supply chain is required to demonstrate to each customer segment that the company is going beyond the marketing and positioning statements, to actually serve them with care that evokes trust and loyalty. This is not the only company that is in this situation. About 60% (estimate) companies I observe are not very far from this reality.
It is relatively easy to segment the market and come up with catchy marketing slogan for each segment that resonates with them. The hard work involves to follow up that marketing message with a tailored supply chain that delivers what your promised.
Business Network is now the engine of the society and it will need newer models of commerce to fast track the recovery.
Hollowing out of skills out of entire societies without replacing them with another set of useful skills, very high level of youth unemployment (frequently disguised by serious looking play on iPads and tablets), growing economic imbalances risking implosions of unrest, civil commotion or even a great war have all combined to create a very alarming set of circumstances.
Whatever transpires in the short term, eventually the business people will have to lead the way to recovery around the world. It is evident that I am passionate about newer models that work better. In my projects and work around the world, I have noticed that in almost all circumstances there is always some way to make things better. We only have to look around and see where the guidelines are, what the trends are and which models will suit the trends.
Eleanor Roosevelt (1884-1962) famously said – Great minds discuss ideas, Average minds discuss events, Small minds discuss people.
While it is very tempting to discuss just one of the three key ingredients of life – either ideas, or events or even people, I prefer to discuss all three because all three of these are inextricably linked. People make events and create ideas. Ideas create events and help people become successful. And events shape people and give impetus to ideas. A book full of concepts and ideas but with no stories about people or events would be extremely boring and dry.
On the other hand, a book with just chronicles of events or people would hardly be worth bothering to read unless its authors possessed immensely entertaining style of writing (which I do not) and even then would be of little practical value besides entertainment. I mostly use events and people to illustrate ideas and concepts to make them more tangible for the readers.
Primarily, then, this book is about ideas and concepts – yet you will see enough discussion about people and events to be able to use the concepts. Most of the people and events discussed are relatively well known so that background contextual information is already present in the readers’ domain and I do not have to supply it. Occasionally I had to use events from case studies based on our work – only because we could not find a well known event illustrating the concept.
I do not make apologies for that or for disguising some data or names of the entities for obvious reasons of confidentiality. Every couple of decades powerful juxtaposition of the trends leads to unique and revolutionary way of commerce. Contrary to the portrayal by the gushing accounts and adulation of the commentators, most pioneers merely stumble on the these trends by a process of trial and error. Other companies, the more nimble and hungry ones, follow the pioneers closely and build strong businesses in their lead.
More established companies then follow suit and try and recover lost ground using their financial muscle and market power sometimes succeeding and sometimes failing in this. Many other companies are so caught up in hubris of their past success or internal politics or some other such attention sapping device that they fail to move at all, or move too late, often with disastrous consequences. Chronicles of such disasters would perhaps be more instructive than the starry eyed accounts of success. As Daniel Coyle points out in his book The Talent Code, the only way to succeed massively is by failing repeatedly at progressively more complex smaller tasks till you master them.
However, most writers and authors persist with the formula that has succeeded since the first bard told stories of the victories in war, and I have no doubt that we will continue to see many starry-eyed accounts of success for centuries to come. It is difficult not to get caught up in the current of adulation that surrounds a particular company at a point in time.
Any such apparent adulation in this book is despite my effort to be objective and cognizant of the cyclical nature of success. As defined earlier, the aim of this book is rather more solemn. It is to take a wide and deep perspective on business trends, define the useful trends as seen from user perspectives, and come up with useful information for the business executives and managers.
The biggest trend sweeping the world – business and non-business – today is networking. Just last week Facebook has announced its IPO filing, valuing the company at $100 Billion. Analysts, pundits and business school professors are still debating what entitles it to that kind of valuation when many others with similar business model – Orkut, MySpace and a plethora of wannabes – have failed to monetize the eyeballs to any great extent. It is not even validated how many of those numerous Facebook accounts are authentic.
— Excerpted from the introduction of THE 5-STAR BUSINESS NETWORK
To read a synopsis of the book, please click here
To buy the book, please go here
Every time I fly out of Australia to Europe, I face a choice – whether to fly the national airlines Qantas, or another airline such as Singapore Airline or Emirates.
However, when it comes to its alliance partners, Qantas leaves a lot to be desired.
Most of the time I choose Qantas because of my long association with the airline, and the trust it has built with me over those 25 years. However, when it comes to its alliance partners, Qantas leaves a lot to be desired. Iberia managed to lose my baggage and left me with no clothes to wear to an important meeting.
British Airways and Heathrow almost always continue to amaze me with how low a company can fall in short space of time – and then continue to fall further almost on every experience.
I wonder how many other passengers – especially frequent business travelers – feel the same way about their preferred airline where they dislike the alliance partners so much that they are switching loyalties just for that reason.
On the other hand, the rival alliance has some strong airlines – Singapore Airlines, Lufthansa to name a couple – that will beat any of Qantas alliance partners hands down. This creates dilemma for me every time I fly internationally out of Australia. My latest experience with British Airways and Heathrow Airport has convinced me that no matter how much I love Qantas, I have to stop allowing that to interfere with my comfort, safety and convenience in other locations where Qantas hands over the relationship to its alliance partners – who do have to keep the same standards.
Most industries have now morphed into business networks of supply chains that compete with other business networks of supply chains for customer dollars.
But the airlines are not the only companies that lose customers, or suppliers because of their partners.
Most industries have now morphed into business networks of supply chains that compete with other business networks of supply chains for customer dollars. This transformation in business world is best highlighted by my using the sports of soccer and hockey as an example.
While many companies are still grasping the full implications of this massive shift in the business landscape, others have already adjusted to the new reality where A-team players only play the game A-team while the others are left to play with the rest. This not only applies to your supply chain partners, but also to the knowledge intermediaries such as the universities, consultants and brokers.
They used to say that a person is known by the company s/he keeps.
I think, in the modern commercial world of networked businesses, we have come to a stage where a company is known by the company it keeps.
All the attempts at social media corporate manipulations are futile if your business network and supply chain partners carry a millstone of bad reputation around their neck.
Some of that bad reputation will rub off on to your business – no matter how much you try the social media management.
Now that all the factories have moved to China (or some such places as Vietnam, Bangladesh, Taiwan), and all the customers have moved to the PC (or some such places as mobile phones or tablets) what will happen to all the middlemen?
The retailers, the wholesalers, the shopping centres, the warehouse parks, the dealers, the brands, the long established cosy relationships, the long martini lunches, the twice weekly afternoon golf games and the executive chefs in the board rooms?
Many people are asking this question in many different ways. While the scenario above has not fully transpired yet, and, may indeed never transpire in such a stark detail, many companies are starting to ask “what if that happens”.
Consider, for instance, all the happenings at Alibaba. The Chinese e-commerce giant went public in the US with an IPO that stirred the world at large and the online retailing world in particular. If you are wondering about the reason, then look at the numbers below. As per Wall Street Journal
In 2013, the combined transaction volume of Taobao and another Alibaba-run shopping site called Tmall reached $240 billion, says a person with knowledge of the figure.
The total is more than double the size of Amazon.com Inc, triple the size of eBay and one-third larger than the value of all the transactions last year at the two U.S.-based e-commerce giants combined.
People stood up to take notice only when there were widely reported news reports that just in one day (the Chinese version of Black Friday), Alibaba achieved nearly $5.75 billion in sales (on just one of its website), which was three times more sales than the entire country of USA achieved on Black Friday.
Reportedly, almost the entire valuation of Yahoo is based on the value of the shares it holds in Alibaba.com.
More such amazing facts are available from this report on Business Insider. As per The Economist, analysts predict that the Alibaba IPO will value the company somewhere between $55 billion and more than $120 billion.
That would make it the most valuable 5-STAR Business Network on earth – with transactions reportedly surpassing $1 Trillion a year soon.
Lately, Alibaba has partnered with US company ShopRunner to bring American goods to China. It has also been active in “shopping” for lucrative relationships with retailers, buying shares instead of acquiring the whole business.
This is obviously only the beginning of its full potential – although B2B exchanges have been in the offing for nearly 15 years now. Many are warning that as B2B exchanges mature into adulthood, they could easily start to restructure the whole global supply chains. No wonder the entire media world is going gaga over Alibaba’s prospects.
Even those who recognise the hype cannot help but wonder if the sad state of retail is somehow connected to the seemingly unstoppable Alibaba force and the trend it heralds. For example, one highly respected fellow blogger (Steven Dennis) recently stated in his blog,
As a former Sears senior executive I’ve followed the once mighty brand’s journey from mediocrity to bad to just plain sad. What a long strange trip it’s been.
When I left in late 2003 we were gaining traction in our core full-line department store business and piloting several important growth initiatives. To be fair, whether we could pull off the necessary transformation was highly questionable. But one thing is now certain. The subsequent actions taken under a decade of Eddie Lampert’s leadership have assured the retailer’s demise.
So, what will happen to the retailers, the shopping malls, the brands and the dealers? Will Alibaba, and its Chinese direct suppliers kill all these? Not so fast! While e-commerce is changing the face of corporate America, there are many reasons Alibaba will not be as successful as projected by the alarmists.
Firstly, there is another company to think about – a home-grown version of it. A yet unknown part of Amazon is AmazonSupply.
Predictive shipping and unmanned drones are made more prominent in the news agenda.
Meanwhile, Amazon’s “unsexy” B2B business, a “$8 trillion bet”, has been growing silently in the background, perhaps making it eight times bigger than Alibaba and the biggest 5-STAR Business Network on earth.
AmazonSupply, a wholesale and distribution hub, started in 2005 and has grown to carry 2.2 million products, ranging from office equipment to industrial components, materials and more.
After nearly 15 years of languishing on the wayside, the B2B exchanges are finally coming true, slowly. Already, wholesalers are whispering about the threats from AmazonSupply; although many specialty wholesalers and distributors are somewhat confident that their turf is safe from the giant’s claws due to their highly segmented market.
Nonetheless, nobody knows what will happen in future.
AmazonSupply, Alibaba, or B2B exchanges, could become so powerful that they will suck small players into their enormous vacuum of suppliers. The process can even accelerate if trust keeping mechanisms are built into B2B exchanges. Seller and buyer ratings, as well as seller/buyer protection seen on sites such as eBay and PayPal are not enough to cover the sheer size of B2B transactions.
Even the current rating system on Alibaba will not suffice, should this attractive market grow in the years to come.
The current trust keeping mechanism in international trade is Letter of Credits, which has been around for hundreds of years.
It is defined by Investopedia as: “A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.”
To keep up with the pace of change, new supply chain finance mechanisms must evolve, something that can deal with the increasingly globalised supply chains. Only with sustained focus on supply chain finance, can B2B exchanges morph into true 5-STAR Business Networks.
While traditional sources of supply chain finance have a vested interest in keeping the status quo, new supply chain finance mechanisms have been slow to emerge and remain an opportunity for the likes of Amazon, PayPal and Alibaba. If they crack that nut, the rest is open slather.
Once these mechanisms break through, the face of global supply chains and global commerce will change for good.
Beware the Story:
Trust Your Emotions AND Verify All Facts
Less that two-thirds of all outsourcing succeed because of the way human brain functions.
If the croc-brain takes over the survival instinct kicks in and the decision is purely instinct or emotion based.
However, if the modern neo-cortex takes over the decision is purely factual and ignores all else.
You NEED to engage all parts of the brain in the decision making process.
By Doug Hudgeon
The Cost Reduction Tip
In the Eric Carle children’s story, The Mixed Up Chameleon, a chameleon attempts to become the perfect animal by adopting the best parts of different animals e.g. an elephant’s trunk, a giraffe’s long neck etc. At the end of the book, he’s so mixed up that he cannot catch flies for dinner.
As obvious as it is that an animal has evolved to work well only as a whole, when companies outsource their back office operations, they often try to keep favoured parts of their current operations.
For example, they may outsource payments but keep their approval processes or outsource claims but keep their task management system. This inevitably increases costs and regularly leads to the failure of the entire outsourcing project. Clients aren’t wholly to blame here.
Often outsourcing vendors, to close a sale, will pander to the requests of their clients to create a mixed-up chameleon and not properly recommend that they implement the complete chameleon.
If you are going to outsource a function at the lowest cost with the least change management then you need to find a vendor with a process that you can adopt completely.
Don’t select a vendor based on some other criteria (e.g. they are the market-leader) and ask them to implement only parts of their process.
If you cannot find a vendor whose process you can adopt completely then don’t outsource the function.
Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.