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Category Archives for "Strategic Sourcing and Procurement"

How Supply Chain Strategy Can Help You Resolve The Innovators’ Conundrum

This is a million dollar question for most companies – start-ups or conglomerates. A lot of time and money is wasted either because the companies do not bother to ask this question in time, or try to answer it in the wrong way.

“What Comes First – Make, or Sell?” – this is a conundrum from millenia – akin to the chicken and egg question. Indeed, this may be the genesis of that famous question. I call this the “Innovators’ Conundrum.

Here is my answer to a similar sounding question on a popular forum.

A Good Story

Let me tell you a story from my book The 5-Star Business Network – Vivek Sood | Global Supply Chain Group :

One of our large corporate clients faced exactly this dilemma when investing in the renewable energies sector.

In simple words, the dilemma was whether or not an entrepreneur with a good idea should go looking for customers or go looking for the ability to build the product/deliver the service.

Innovation can be driven either by demand or supply

Depending on the choice made at this point in time, the two models of innovation will look very different as shown in the figure below:

Alternate models of innovation

There are enough proponents for both types of models. In our work with clients, this conundrum has frequently surfaced and is always argued quite passionately by different senior executives in either of the two camps.

On one hand, there are the proponents of the Reaganomics supply-side theory – arguing ‘if you build it, they will come’. On the other hand are the more traditional thinkers arguing unless we have the customers and services pre-defined, how can we build anything?

Objective analysis of key drivers of demand and supply will show the basis of innovation

In this story, as a way out of this dilemma, we listed the factors on which the decision was dependent. Among the factors were questions related to the certainty of the customer demand, such as:

• Are the real customers properly identified?

• Do the real customers know exactly what they want?

• Have the real customers communicated their demand to the market explicitly?

• How likely are real customers to change their minds?

• How easy is it for real customers to change their preferences?

On the other hand, there were several factors related to the level of innovation itself – whether it was just an incremental innovation or a giant leap. Key questions in this realm were:

• By what factor (multiplier) does this product/service improve the customer life?

• What are the existing means of getting the same value in use?

• What makes the new product better than the existing product?

• What tangible measures can be used to measure the superiority of the new offering?

• Do the real customer really value the new offering as superior as the provider does?

The board agreed that innovation will only succeed if the Supply Chain structure matches the demand and supply drivers

Based on these factors we developed the following matrix to enable answering the question:

Figure: Innovation Drivers and Supply Networks

Red box (Box 1) is the danger zone

In box 1 (red colour) – in a situation where the level of innovation is only incremental and the certainty of customer demand is very low – massive investments are required for customer education as well as for building a viable supply network.

This is because most potential supplier will see the situation as high risk and will only respond to monetary inducements to buy co-operation. A very high percentage of innovative efforts are in this square and, as a result, fail because of lack of deep enough pockets and difficulty of fighting the battle on two fronts simultaneously.

A basic supply chain would be the only possibility in this instance – where the organization has to move on two different fronts to build demand and supply simultaneously. This is shown in figure 8.3 (of the book mentioned above).

The key lesson for the players in the red box is that you need very deep pockets to fight the battle on both fronts – demand and supply.

If you lack that financing ability, try and move up or right – either find a niche of customers with pent-up demand looking for the right product/service by moving up, or move right in the matrix by creating a step change in the users’ lives by creating a product that far surpasses anything else available in the market place in terms of the customer experience.

If you cannot do either of these two things, keep looking for ways to make one of these two moves; or, consider scrapping the idea altogether.

Light Green Box (Box 2) needs more customer intimacy and/or supplier agility

Recall our client case study; the company, in this case, was in box 2 (light green colour) – with massive innovation but uncertain customer demand due to competing technologies promising similar magnitude of innovations.

In such a case, the business suffers from a chicken and egg situation. The customers do not buy because of some uncertainty, perhaps regarding which technology will ultimately win the battle; after all, no one wants to be stuck with a Betamax VCR and find that VHS standard has won the battle.

At the same time, the company is not in a position to invest too much in production capacity unless the customer demand is certain. Most businesses in this type of situation try and work with customers on a conditional basis – promising to build capacity if the orders are placed.

However, customers are not inclined to place orders because of the factors driving uncertainty in their own world. A way out of this situation then is to work with the supply network on a conditional basis – promising and delivering massive returns as the demand materializes.

The key is to find the right suppliers with the superior world-class capability and flexible capacity who are willing and able to understand the situation and work in it.

At the same time, flexible product design and investment in customer education to reduce demand uncertainty and increase buy-in also yield good results.

The need for flexibility, adaptability, ability to hold supply in readiness for the demand that builds up through education, clarity and events results in an adaptive supply chain that looks like alternative number 2 in the round figure above.

The key strategy is to make sure that suppliers and co-developers of technology and production capacity are fully on board with the plan and work alongside your business – as part of your 5 STAR Network.

If you have any doubts about any of the co-developers or suppliers, it is better to continue looking, negotiating and influencing till all the members of the 5 STAR Network are fully on board with you.

Consultants, think tanks, industry organizations, academia, research laboratories, brokers play a critical role in bringing together businesses that could form part of the same 5 STAR Network.

They play an even more important role in keeping the network humming smoothly, ironing out any wrinkles in the relationships. Such an adaptive supply chain is shown in Figure 8.4 of the book.

We have already seen how, in such an adaptive model, several organizations work together in an adaptive network to think and solve problems of their common customer/s.

Our client, an entrepreneur with massive innovation, used this model to work alongside some of the largest and best heavy machinery and engineering corporations in the world in order to bring their technology to the market successfully.

This was also a good example of the Fire-Aim-Ready (FAR) Innovation, but we will use yet another case example – of a much more ubiquitous product, an iPhone – later in this chapter to illustrate that effect.

Dark Green Box (Box 3) needs more supplier intimacy and/or customer flexibility

In box 3 (dark green) above the situation is exactly the reverse. Imagine a pharmaceutical company trying to find a cure for cancer or a number of other old age infirmities.

As the population ages, the demand is already present and growing. However, on the supply side of the equation, the research and development are being carried out in the laboratories of large pharmaceutical companies and their collaborating partners in academia, scientific establishments, consultancies and other organizations.

The patent system, to some extent, restricts the collaboration – barring this anomaly every company would be keen to collaborate much more openly to gain part of the returns of a first mover advantage in a blockbuster product.

However, in any scenario, an adaptive supply chain similar to the figure above will result in far quicker and more effective innovation at a much lower cost. In fact, that is the reason for collaboration, despite the patent laws.

Successful strategies in this scenario will hold demand in Supply Chains till supply eventuates. At the same time, the business will make massive R & D investments to build further product innovation and sell limited quantities to early adopters under limited conditions – which is indeed the case in the pharmaceutical industries.

We will not discuss the box 4 (yellow box) in this article because such a scenario, where demand is highly certain and the level of innovation is mammoth, is rarely encountered in real life. Such opportunities are snapped up in a jiffy.

All innovation must have an effective business network

We have seen how the super-networked businesses use their 5 STAR Business networks to build adaptive supply chains and gain a massive advantage in the field of innovation. But this does not happen only in the fields of pharmaceuticals or high technology.

Apple, Amazon, Inditex and many other case studies dispersed throughout this book demonstrate clearly how super-networked businesses innovate better than the rest of the businesses in their industry.

Consider the case of Apple once more. Whether it is iPads or Apple TV, the company has never shied from firing first and then taking aim towards the target.

For example, the much maligned and a total flop Apple Newton, released around 1995, served as the key platform for the eventual success of iPads. Just because the technology or the public was not ready for the product, Apple did not shy away from testing, learning, improving, testing again, learning more and eventually succeeding.

As it succeeded with other products and learned the lessons (get the iTunes and iPod ready before launching iPhone) it has had less number of flops along the way.

Eventually, Apple will be ready with a unique, highly personalized and anticipated experience for each customer – which is the holy grail of the modern era. Most successful companies have followed similar Fire-Aim-Ready (FAR) trajectory to innovation, and examples abound.

Your Company’s Innovation

If you have questions about your own company’s innovation strategy, send me an email on info@globalscgroup.com or take our diagnostic survey. The results are always enlightening for senior executives, as they always bring up some blind spots. Covering these spots will save you a lot of heartache, time and money.

I write about The Supply Chain CEOs, The 5-STAR Business Networks and Unchain Your Corporations. My website is at http://viveksood.com

Value of Trust in Supply Chain Management

Why Trust in Supply Chain Is Important?

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.

Deficit of Trust in Supply Chain, and Its Side Effects

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. people in round

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.

Components of Trust in Supply Chain

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.

Levels of Trust in Supply Chain

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. exercise-in-ground

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.

people-workingTrust in Management Consulting

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.

Trust in The 5-STAR Business Network

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.

How Organizational Silos Can Ruin Your Supply Chain

Organizational silos are based on the division of labor, on organizing the labor in such a way that each individual specialized in what he/she knows best, so that it can all be integrated in such a manner that a cohesive whole which is created in the result is much better in quality and much cheaper in price. This gift of the industrial age to humanity allows to make a production must better in quality and must cheaper in price. Indeed, because of the period of time, the person will become very good at his production and work at a much faster rate, even if the technology is the same. Each employee will make his work much faster, and he would make it much better quality than if he was making the whole product.

By the 70’s, the division had been carried too far, in fact, so far that each person would pretend that as if he has nothing to do with the other employees. To give you an example, I was working in a business transformation project in a mid-sized airlines and I was sitting in the office of the person in charge of maintenance planning of the aircrafts. At one point in the conversation he dug out and e-mail exchanged with his colleagues from across the room and this e-mail exchange had been carried on over a period of 18 months. This trivial matter could have been solved by just walking across the room in an authentic spirit of give-and-take and collaborating across the silos. People in both silos have entrenched themselves into such a position where no action could be taken, the decision-making was extremely slow and people were pointing fingers at each other.

In fact, every organization we have seen, to some extent or other, suffers from this silos mentality. The bureaucratic organization of supply chain 0.0 leads each department to become a pyramid. Any information which needs to be passed from one department to another would have communicated with the head office of one department to another. Imagine the time wasted and the problem of information distortion in the process. By killing the spirit of collaboration, it hampers efficiency and effectiveness.

No wonder this kind of organizations find it very hard to compete against even rudimentary supply chains, such as supply chain 1.0. Many companies struggle with one business transformation after another without addressing the root cause of information holding and silos in supply chain 0.0. If the company stays stuck in organizational silos, no appreciable improvement will be seen: Information holding will become rife and selective information sharing, the norm. Blame will be the name of the game in such a situation.

Below are 20 questions that every executive should ask about the supply chain in their business:

 

Your Business Network is your Business’ Net Worth

Your-Business-Network-is-your-Business-Net-Worth— Excerpted from the introduction of THE 5-STAR BUSINESS NETWORK

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

A Company Is Known By The Company It Keeps – 2

A Company Is Known By The Company It KeepsThere I was – stranded at the Heathrow Airport again – and cursing myself for trusting British Airways and Heathrow once more.

However, when it comes to its alliance partners, Qantas leaves a lot to be desired.

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.

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.

American Airlines does little to beat its rivals in the US and in my view none of these match Qantas in service or aircraft presentation.

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.

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 for that reason.

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. A Company Is Known By The Company It Keeps

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.

Will Alibaba and its 40 million accomplices ride roughshod over Corporate America?

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.

will-alibaba-amazonAmazonSupply, 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.

Caveat Emptor – Buyer Beware

www.outsourcing3.com

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.

How to Prepare Simple, Effective Cost Management Reports (part 1)

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Effective management accounts are critical to a cost reduction initiative. Without it, your stakeholders can’t see that their pain is justified. It’s like the difference between running on a treadmill (without a watch or odometer) and running through the countryside. If you have a destination and can track your progress, your motivation will be higher.

Good management accounts are different from good financial accounting in that management accounts in a cost reduction initiative are concerned with real money out the door right now whereas financial accounts are often reporting on expenditure decisions made years ago (depreciation). I’ve prepared a sample data set that I’ll use for the upcoming series of posts.

The management accounts are from the fictional company ABC Services who provide software and consulting in the facilities management sector. They have one office in Sydney and another in Melbourne and the bulk of their revenue comes from the sale of asset management software but have an active consulting arm. They kicked off a cost management initiative in November 2010.

The management accounts tracks their expenses and revenue over the 12 months from July 2010 to June 2011. 1-296x300You can see from the orange line above that revenue has consistently increased throughout the year and from January 2011 their cost reduction program has made some headway.

Now let’s take a look at the impact of this on their profit: 2-300x255As you can see from the above chart, moderate to strong revenue growth combined with a high impact cost reduction initiative can create some stellar results.

In the next post, we’ll look at the data elements underlying the above charts and slice and dice the monthly data by location, division, expense type and headcount to see what areas of the company contributed most to this turnaround and which areas require further work.

Note that I’ll be changing the underlying data throughout the series of posts to highlight the importance of certain elements of the data set so don’t look for consistency across these posts. I’ll do a wrap up post at the end.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Teach Your Old Vendors New Tricks

hudgeon12By Doug Hudgeon The Cost Reduction Tip In the 1970s and 80′s, skateboarding went through a renaissance. Difficult tricks became commonplace and impossible tricks became possible. The invention of polyurethane wheels in 1972 and the US drought in 1976 (which led to the draining of concrete pools) kicked off these advances but it was not until groups of skaters such as the Z-Boys began challenging each other to innovate that we saw an explosion of new tricks. A good example is the Ollie. Within days of Alan Gelfand’s arrival in California in 1976, the Ollie became a standard part of every skateboarders repertoire. The Ollie is a trick performed off a vertical wall (such as a swimming pool wall) where the skateboard sticks to the rider’s feet as he or she flys above the lip of the wall. Every half-decent skater can do the Ollie but it’s not until you’ve seen it that you even realize it can be done. We’re at this same stage with enterprise software. New entrants into the enterprise software space are performing impossible feats. Some of these new tricks such as SAAS delivery require new technology but many tricks simply require you and your existing vendors to re-conceive your service requirements and their service offering. This can both improve your vendor’s capabilities and significantly reduce your costs. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Cost Reduction – Start by Looking for Game-Changing Opportunities

hudgeon12By Doug Hudgeon The Cost Reduction Tip When looking at cost reduction opportunities in an area, you should start by assuming that you can remove 100% of the cost. If that’s not possible, then look at ways to remove 90% of the cost. If you don’t start ambitiously, you’ll miss some real plum cost reduction opportunities. Internal IT hardware logistics are a good example. You may have staff engaged in building and deploying hardware on site. Instead of looking at how you can improve the process, first ask yourself: Why are we doing this at all? Why can’t we get our vendor to build the hardware and ship it straight to our user’s desks. If the user can’t plug it into the network themselves then give them a help desk number to call for assistance. Speaking of help desks, the internet provides countless opportunities to reduce your cost of service by an order of magnitude. Multi-million dollar help desk ticketing systems from BMC Software and others can be largely replaced with SAAS (or ‘cloud’ in the newest lingo) providers such as Assistly. Now, before you start defending the functionality of Remedy (BMC’s product) sit back and imagine a world where Assistly was the only option: What changes would you need to make to your processes and people? How much would you save and what would your end users have to give up? My bet is that you could deliver an equivalent service to your end users (perhaps better?) and cut your costs by 90%. Unless you dream big, and act on those dreams, you’ll never realise dramatic cost reductions. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

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