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Procurement Reform bill becomes law and Memorial Day

Today is Memorial Day  and it is significant that President Obama and Congress strove to get the Procurement Reform Act ( officially  the Weapon Systems Acquisition Reform Act of 2009 ) passed before Memorial Day.

The defense industry and supply chain is remarkably "production" oriented. The focus is passively on what the Government  wants rather than proactively understanding the changing needs of  combat in different theaters. To quote:

 “By and large the government gets what it wants, when it wants it, for the price it’s wiling to     pay,” said Alan Chvotkin, executive vice president and counsel at the Professional Services  Council, who spoke this week at a panel discussion about the federal acquisition workforce. However, he said the procurement system still has room for improvements.

At the same discussion, Steven Schooner, an associate law professor and co-director of the Government Procurement Law Program at George Washington University, pointed out the Obama administration views contractors as lining their pockets at the taxpayers’ expense. Schooner said the president, Congress and the news media can’t treat contractors as pariahs because the government can’t operate without contractors’ support."

The intense public scrutiny of defense contracting results in contractors being treated as pariahs,as Schooner says. Consequently, mindless and irrelevant projects take a life of their own while combat troops have changing needs on the ground.Choosing and changing projects quickly is a top requirement in today's globalized world.

Let us hope, that efficiency and communication in the supply chain, right to the brave soldier whether in Afghanistan or South Korea,improves with the Procurement Reform Bill.

Managing risks, actuaries and lessons from AIG- where was the human factor?

Actuarial sciences are primarily mathematical and depend on past data. Since there was no past data the risk of insuring the mortgage-backed securities was underestimated. AIG insured banks for the securities they bought and these debt swaps were an unknown collection of mortgages- some of whom were simply bad loans.

It is not yet clear as to what happened to the human factor in all of this. Maybe the insurance piece was handled from London and there was no real understanding of what was happening on the ground in the US as AIG went on taking on balooning risks. For example, several years ago someone mentioned about a real estate agent he knew who just collected her 6% commission on a home sale being totally uncertain as to how the buyer was going to pay the mortgage. This kind of information was available and discussed accross communities in America as the AIG crisis was building up.

The buyer,seller, real estate agents, real estate closing lawyer, the bank's lawyer in every now defaulting loan closing day would have had a sense of the dubious nature of the loan. Why did not the risk guys at AIG pick it up? Or did they -and nobody listened? 

Banks know that there is risk  and that is why they buy insurance and that is why AIG is paying up and US tax payers have to foot the bill of this now enormous risk.

Going forward, business will have to re-examine their methods of gathering not just past data but new data that is readily available but in this case had not been built into the actuarial models. Raw numbers and technology cannot replace the human factor where human, qualitative real time input must be sought from the ground to get a better sense of the real risks.

The Recession and Buyer-Seller (B2B) Relationships

Marketing and Supply Chain went through a paradigm shift in 1987 when Dwyer,Schurr and Oh published their article Developing Buyer-Seller Relationships. Since then many scholars have used the marriage analogy to understand long term B2B relationships, business markets (SRM)and even consumer markets (CRM ) . Every link of the supply chain is a B2B relationship and it needs to be stable like a solid marriage, so that the next link in the value chain gets reliable product or service.

NBC reports that divorce is down 49% in DC due to the recession as it is simply not affordable by both parties !Similarly I guess B2B relations tend to continue in a recession as it is too expensive and risky to look for new partners both on the buy side and sell side of the business.

On a lighter vein B2B marketers and Supply Chain Managers need to smile with the country song it's cheaper to keep her.

Towards global B-to-B trust and transparency in 2009

2008 has been a watershed year in many ways and everyone is talking about 2009 with hopes of better times.

There is one theme that should become important in 2009 given the learning from the Mortgage Crisis, Auto bailout and resulting  union supplier competitor unity and the Madoff scandal. And that is more trust and transparency that would have to be re-built from the ground up.

We should see more online transactions and use of the Internet both by businesses and also consumers as with the recent zoom in Amazon sales. When transactions are digital and open to scrutiny by those concerned on a real time basis- there is a real shot for everyone concerned- to chime in with comments and concerns- in time. So as more systems go online there will be more integration both for the sake of reducing costs and improving efficiency but also bringing real time trust and transparency in dealings.

Wishing readers a Very Happy and Prosperous 2009 !

700 or 2% of US car dealers may close- but could there still be light for US Auto?

With all the turmoil in financial markets the troubled US auto industry seems to be on the verge of total collapse.  700 dealers might close because customers can't get finance as Ford and GM stock touched a57 year low.

All may not be lost for US auto as the GM-Chrysler deal might promote receiving some federal funding to re-tool. On the distribution side with the closing distributorships I was cheered to read some comments here . According to these comments most if not all these 700 dealers will be US Auto dealers and not import dealers. These auto dealers are ones with large product lines,little differentiation among offerings and too much territory squeeze much like McDonald franchises who might wake up to find another McDonald just across the road and much more competition.

If this is indeed true for US auto distributors then there might be streamlining of the distribution channels and remaining dealers might become more healthy when the credit situation improves.

I tried comparing the "locate" the dealer feature for "Chevy" on the GM website and the locate a dealer for Toyota.Toyota offers one dealer when you search by ZIP code after which you have to dig deeper for more dealers.On the other hand, GM starts with 3 dealers on the first page and offers 3-4 pages of dealers. Too much choice for lesser numbers of cars sold and probably too many dealers.

Seems similar to the US auto upstream supplier policy of having many component suppliers who have a hard time turning a decent profit. Here downstream distributors seem to also have too much "internal" competition to turn in good profits. The situation is off course much more difficult in tough economic times.

Michigan Auto Industry is changing

Somehow Michigan fascinates me for its auto industry and what it has given to the study of management,innovation and the wrong way to manage buyer seller relationships. When I heard on the radio about the leading rate of job losses and foreclosures in Michigan, I felt bad for the folks in Michigan. But this may be changing......

The news report that "suppliers learn collaboration and innovation" gave me hope. However, it is not the suppliers who need to learn collaboration but the auto industry who need to. In fact this blog has commented on the difference between US and Japanese auto and the long but vain scholarly research that has brought this out to an unresponsive auto sector.

But now, suppliers are no longer willing to cut prices to oblivion but are diversifying their customer portfolio and are not totally depending on the Auto industry but trying out opportunities in office furniture,food and appliance where a reverse auction type of mentality has started changing several years ago. Now the auto industry is changing, rationalizing the supply base and becoming more collaborative and driving innovation with its suppliers. I was particularly impressed with the take of Amerikam CEO Stephanie Leonardos on how long and painful this realization has been for Michigan Auto. But read the last few paragraphs of the interview here.

You don't repeat reverse auctions!

Reverse auctions are controversial. Suppliers bid their lowest rates on-line and prices keep going down and the buyer's organization is happy. Inefficiencies in the supply chain reduce, transparency increases and suppliers are on their toes. Sounds not very collaborative and that's what I had though so far till I went yesterday to the CAPM Seminar "Sourcing the Pfizer Way".

The seminar was held at the Global R&D center of  Pfizer,Groton  and was kindly organized by Mary Kachinsky of Pfizer and participants learned a great deal  about sourcing particularly  in a knowledge intensive environment where all your internal clients are highly qualified  scientists and physicians involved in drug discovery.

I had missed Sam Dowell's great presentation at NECON 2007 where I had presented as well. The "aha" moment came for me, when I realized (after a question) that you don't repeat reverse auctions. You do them initially to rationalize your supply base and also when you are checking out overseas suppliers for price. You invite bidders after a thorough pre-screening and always invite several suppliers in multi-country reverse auctions so that there is enough "same country" competition. And most important, you do not necessarily go with the lowest bidder and make that very clear, upfront. But once you decide suppliers you try to make the relationship work ...

How Relationship Marketing is Changing Procurement Management

Sometimes its just a quick remark that clarifies difficult issues and that happened with me yesterday when a very competent procurement professional mentioned that their company did not do much procurement activities i.e. bidding,negotiation because they preferred to stay with the same supplier. So, there was not much growth in procurement as a career...

This set me thinking because it marks a major shift in management practice because companies are realizing that just as it is more profitable to have good customer relationship management downstream - its probably more effective to have good supplier relationship management upstream the value chain. Just as you need to "fire" or "sack" your bad customers you need to do the same with your bad suppliers but for the good ones you have - good relationship management seems to be paramount.

So procurement managers need to extend skills beyond "negotiation" just as sales managers need to extend skills beyond simply trying to "close" the sale....paradigms have shifted!

Mature Global design Strategies improve profits

I was rather happy to read the Aberdeen report's summary which highlights that global product design and development leads to reduction in product development time and time to market while allowing the protection of intellectual property through Digital Rights Management.

This blog and my research has been investigating these issues for some time and I am glad that the data is now available. The question is how do you make it work in practice, particularly if you are not a gigantic organization that can afford to open offices worldwide and actually place your person to work with the supplier in another country. That is an interesting question .....

From supply chain to "global value chain" a report from NECON 2007

I returned from NECON 2007 and was struck by a major change in the supply profession from 2006. In three  words "global value chain," in contrast to the narrower "savings" theme of the previous year.

While in 2006 there was some talk about managing the global supply organization and global suppliers - this time I found a distinct shift in the way speakers addressed these two issues. Large corporations like Pfizer are clearly thinking globally for both managing the supply organization and suppliers. The ISM Chair Lisa Martin's talk was just superb and covered the global value chain imperative succinctly.

Stephen Slade's  talk explained how software today can help with making the entire value chain more visible across global operations.Similarly the panel discussion on outsourcing clinical trials had a star panel of both buy and supply side experts and the panel brought out the complexities of the global contract research process.

I was motivated by all the exciting sessions to add slides to talk some more about the "low cost country" aspects rather than only focus only on the difference between business processes and knowledge processes. I too emphasized the "value" chain perspective in the context of low-cost country sourcing.

Overall, a great conference !