Perspectives on Various Issues of Interest

Investment Recovery Programs

A recent CAPS Research Benchmarking study found that the average cost benefit of investment recovery programs to be $31 for every dollar of investment recovery operating expense incurred. Investment recovery programs focus on redeploy, resell and reuse of their surplus or obsolete materials and equipments. In the CAPS study, sixty companies reported a total cost benefit of $1.23 billion, which averages $20.5 million per company. The median cost benefit is $8.6 million, indicating large recovery programs at larger organizations. After removing the outliers, the average benefit was found to be $14.2 million and the ratio of cost benefit to expense is $27 on each dollar invested. None of the survey respondents reported a negative cost benefit. Cost benefit values are calculated by adding gross revenue realized from sales, the fair market value of surplus assets that have been redeployed within the organizations, and the value of other related cost avoidance. The figures for gross revenue realized from sales and the fair market value of surplus assets that have been redeployed within the organizations during the reporting period were $798 million (65 percent of the total cost-benefit value), $386 million (31 percent of the total cost-benefit value). The remainder  was from the value of other related cost avoidance. 

Top management support and financial incentives to be engaged in investment recovery played an important role in increasing the cost-benefit values. 85 percent of the respondents indicated that they report directly to the supply management organization.  Technology also is playing a key role in implementing and maintaining an effective investment recovery program. Firms are using e-auctions and other Internet-based tools more regularly, and with greater success.

Source: Wade, D. S. 2009. Recycle, redeploy, resell, reuse. Inside Supply Management, August 2009.

Wal-Mart's Sustainability Index

Last year (July 16, 2009), Wal-Mart President and CEO Mike Duke announced the creation of a worldwide sustainability index. The intent is to develop the sustainability index over a period of time. The final goal is to implement product labels that clearly rate the environmental and sustainable aspects of the product. As a first phase, Wal-Mart is engaged in assessing supplier's sustainability efforts in the areas of energy and climate, natural resources, material efficiency, and people and community. In the second phase a sustainability consortium is going to be created that will work with retailers, suppliers, nongovernmental organizations, and the government to create a global database of information on the life cycle of products.

Source: Stokes, S. and Dooley, K. 2009. Wal-Mart's sustainability index. Inside Supply Management, October 2009.

Evaluating Procurement Competence - The five levels

Below, are the five levels of procurement competence as defined in an article published in CSCMP Quarterly:

(i) Traditional: Purchasing's primary role is to fulfill the needs of internal clients. Some approved vendors may be in place, and purchasing tries to ensure that business units buy from those suppliers. Other functional areas may make sourcing decisions and inform the purchasing department after the fact. The purchasing professional's day-to-day role is almost exclusively transactional.

(ii) Basic: The sourcing organization's strategy is typically driven by a corporate mandate to reduce the price paid to suppliers. There are defined and documented procedures, but they may not be consistently followed. While there is some effort to address strategic issues, the primary focus is on driving down prices. Purchasing personnel are included in the sourcing process but they do not drive the process.

(iii) Intermediate: These strategic sourcing/supply chain organizations follow a strategy that focuses on price as a major component of cost and is aligned with corporate business goals wherever possible. The organization's processes are based on strategic sourcing principles, and the group uses many sourcing techniques with success. Business units are included in the process but do not always respond when asked to participate in strategic sourcing initiatives. The majority of the organization's spend is visible, and analysis focuses on reducing the total cost of ownership.

(iv) Advanced: Strategic sourcing is firmly embedded in the organization's supply chain. Supply chain and strategic sourcing strategies are integral to the company's overall strategy for future growth. The business units welcome participation on cross-functional supply chain and strategic sourcing teams, support the sourcing process, and actively partner with the supply chain/strategic sourcing organization. The organization's spend is visible, and analysis is supported by automated systems that track total cost of ownership.

(v) Value-creating: In these world-class sourcing organizations, the head of supply chain and strategic sourcing is at the C-level in the company. Supply chain and strategic sourcing processes are recognized as value creators throughout the company. The supply chain/ strategic sourcing organization helps business units and corporate leaders develop integrated business strategies. It is often asked to be the enterprise's leading change agent and innovator.

Source: Yarusso, L. 2009. 3 Steps to Strategic Sourcing. CSCMP Supply Chain Quarterly, Quarter 3/2009. 

Spend Management Strategy

(i) Spend management allows companies to efficiently analyze opportunities for savings, identify opportunities to choose the right suppliers, enter into favorable contracts, monitor compliance, and evaluate supplier performance in relation to an organization's long-term objectives.

(ii) Spend management softwares aid in streamlining, linking and integrating the procurement process. As a part of spend management strategy, the software solutions aid in spend analysis, contract management, and sourcing management. Firms can analyze, manage, consolidate, control and track spend data, which increase visibility, reduce costs, increase savings, and improve contract and government/enterprise compliance. For example, the 2008 study by Aberdeen group (Spend Analysis: Pulling Back the Cover on Savings, October 2008) indicate that spend management initiatives helped organizations to increase their contract compliance by 30.6 percent. Firms were able to gain savings of 92 percent from improved sourcing activities, and were able to increase their return on investments by around 40 percent.

Source: Dixit, A. 2009. A smarter way to spend your money. CSCMP Supply Chain Quarterly, Quarter 3/2009.

Secure Freight Initiative - The 10+2 Rule

The Secure Freight Initiative is intended to reduce the risk of terrorism and it utilizes latest tracking and tracing technology, current data capture methods, and communicating and reporting capabilities. It also emphasizes cooperation among trade partnerships and governments and provides a detailed account of goods and materials entering the United States via maritime shipping containers. The detailed security filing:

- Allows the Customs and Border Protection (CBP) to identify potentially high-risk cargo through the identification of actual cargo movements. 

- Expedites the processing of lawful international trade by identifying low-risk shipments early in the supply chain.

- Improve the accuracy and reporting of the cargo description.

- More efficiently allocate CBP resources to focus on true security threats.

The creation of Importer Security Filing (ISF), which is a CBP regulation pursuant to Section 203 of the SAFE Port Act of 2006 and section 343(a) of the Trade Act of 2002, as amended by the Maritime Transportation Security Act of 2002, for non-bulk ocean shipments arriving into the United States.

The ISF 10+2 mandates importers to electronically transmit to the CBP specific data elements 24 hours before loading any container into a ship bound for the United States. 

The "10" data elements include:

1) Manufacturer (or supplier) name and address

2) Seller (or owner) name and address

3) Buyer (or owner) name and address

4) Ship-to name and address

5) Container stuffing location

6) Consolidation (container stuffer) name and address

7) Importer of record number/ foreign trade zone applicant ID number

8) Consignee number(s)

9) Country of origin

10) Harmonized Tariff Schedule number (HTSUS)

The "+2" are data files which the ocean carrier must transmit to the CBP within 48 hours of the vessel departure. These elements are:

1) Vessel Stow Plan to indicate the location of each container on the ocean vessel.

2) Container status messages (CSM), which detail information on the movement and status changes of a container as it travels through certain parts of the supply chain.

In addition to these, there are rules for reporting these data elements which must be followed by both the importer and carrier:

- The Master Bill of Lading must be reported in addition to the above 12 items.

- Data elements must be reported by the tariff number at the lowest bill of lading level.

- Manufacturer (or supplier) name and address, country of origin and commodity harmonized tariff number must be linked to one another at the line-item level.

All concerned parties are expected to comply with the 10+2 rule on and after 26th January 2010.

Source: Pranitis, R. 2009. Examining the 10+2 Rule. Inside Supply Management, September 2009.

Global Perspective on Emission Reduction Targets

In 2009, the G8 group of nations agreed (in Italy) that the increase in global temperatures should be no more than 2 degrees Celcius above pre-industrial levels. To accomplish this, global emissions have to be cut to 50 percent of the 1990 levels by 2050. For rich countries, that is equivalent to a cut of 80 percent of their emissions by 2050. Currently, the emission levels in America and Europe are 24 tonnes and 10 tonnes per head.

The Intergovernmental Panel on Climate Change (IPCC) figures suggest that the developed nations should aim to reduce the emissions by 25-40 percent below 1990 levels by 2020. So far the targets put by developed countries on the table are around 15 percent below 1990. The European Union is committed to 20 percent cut, rising to 30 percent if the rest of the world promises significant cuts. Details plans are developed by EU to achieve this target. Japan's new government has promised a reduction of 25 percent on 1990 levels, although the approach to achieve this is not revealed. Before the Copenhagen conference, the U.S. announced that it would offer a 17 percent cut on 2005 emissions by 2020 - the figure in the Waxman-Markey bill. This amounts to around 4 percent below 1990 levels - well below the 25-40 percent expected of developed nations. It is still possible that other nations might accept it, since the prior administration's policies have delayed the emission reduction actions and further the world is aware of the constraint on America's negotiators due to the precarious position of the legislation. The Senate reacts badly if it senses that America is being pushed around by foreigners. It voted 95-0 to reject the Kyoto deal that the Clinton administration had negotiated. China has offered a 40-45 percent cut in the carbon intensity of its economy by 2020. Even though it is less than the 50 percent target that America was hoping that China would accept, it is a good start.

Although, in theory Kyoto is a legally binding agreement with a compliance mechanism, it is difficult to implement it in practice since there is no effective way of holding non-compliant countries accountable. Some countries such as France have called for a toothier compliance mechanism involving trade sanctions, also referred to as "border-tax agreements." In fact, the Waxman-Markey bill also includes a provision for border-tax adjustments. For most developing countries, such compliance mechanisms are detrimental to their economic progress. An alternative approach is to provide monetary incentives to the developing nations to honor their emission commitments. There are two reasons for the rich nations to offer monetary incentives. One, it is widely accepted that the developed nations are responsible for pumping 200 years-worth of carbon dioxide into the atmosphere. Thus, it is reasonable to expect the developed world to help the developing world adapt to climate change. Second, the monetary incentives present a pragmatic way to get the developing world on-board with emission reductions. Except for China, most developing nations lack the capital required to invest in cleaning up their economies.

China suggests that the developed world should provide 1 percent of its GDP (about $400 billion) a year to the developing nations to implement emission reduction programs. The African Union wants $67 billion a year for Africa alone. Britain has suggested that the developed world should pay $100 billion in total. The European commission is proposing 100 billion Euros a year in 2020. The gap evident in these numbers is even higher when the approach for handing over money from developed world to developing world is taken into account. China and the African Union suggest government-to-government transfers only, whereas Britain and European Commission are talking about a combination of government-to-government transfers and private capital. According to International Energy Agency, the 2 degrees Celcius target will require around $ 1 trillion a year in investment. According to the World Bank, around $475 billion of the $1 trillion need to be spent in developing countries.

Some constructive ways to come up with the cash has been proposed. Mexico wants a $10 billion Green Fund to which countries should contribute on the basis of their emissions and their GDP. Norway is suggesting an auction of 2 percent of carbon-market emissions allowances which could raise $15-25 billion. The poorest nations have proposed a tax on air travel which could raise $8-25 billion. The World Bank has a $5 billion target for its climate investment funds. Altogether these proposals only amount to $60 billion, still way below the target numbers. To address this gap, there are suggestions for mobilizing private capital investments in developing-world clean-energy infrastructure. These long term energy infrastructure investments should suit pension and sovereign-wealth funds who have assets of $12 trillion and $3.75 trillion, respectively.

Source: "Closing the Gap: How the world divides on a global deal." The Economist, A Special Report on the Carbon Economy, December 5th 2009.

Lego's Consolidation of Regional Distribution in Eastern Europe

In 2004 Lego, the sixth-largest manufacturer of toys in the world, manufactured its products in Denmark, Switzerland, and the Czech Republic. The company had 11 warehouses and distribution centers in Denmark, Switzerland, France, and Germany where order execution and order deliveries were handled. To overcome the financial problems, in 2004 the company decided to cut its logistics costs by 20 percent by consolidating all its European distribution activities under one roof (except for the Billund, Denmark warehouse that handles fulfillment of Internet orders). Lego settled on Prague in the Czech Republic, largely due to its low labor costs. Instead of constructing its own warehouse, the company leased a one-million-square-foot building and hired a third party logistics company DHL Exel Supply Chain to run the day-to-day distribution operation. The reason to utilize contract logistics company was the seasonal nature of the product (60% of sales occur in the few month prior to December holidays). The changeover was undertaken in two phases. In 2006, Lego closed down five DCs and transferred those operations to the Prague facility. A year later the remaining five DCs were also closed. 

Before this shakeup, the company had used 55 transportation providers for inbound and outbound shipments to its 11 warehouses in Europe. It trimmed down to 11 international carriers who are capable of serving Europe as well as Asian markets. Although DHL Exel Supply Chain manages the daily rendering of loads, Lego selects its transportation providers and handles contract negotiations with them. With the new transportation structure, Lego engaged in careful planning to attain efficient line hauls. It changed its shipment scheduling to improved load consolidation by working with DHL and jointly developing a Web-based transportation management system. The software helps to tender loads to carriers, optimize loads, and route shipments.

Lego and DHL worked together to recruit and train 400 year-round employees (in peak selling season - 900 employees). To appropriately train these workers, a process-mapping exercise was undertaken to create a knowledge base of their current practices. The process-mapping exercise also revealed some inefficiencies inherent in their current mode of operation (e.g. additional services that were highly expensive yet at times unnecessary - example customer request of only one SKU to be placed on each pallet).

The consolidation of distribution center resulted in several advantages:

(i) Lego now receives inbound loads from manufacturing plants and prepares them for shipment to customers more quickly than it could in the past.

(ii) The company not only achieved the target 20 percent savings in distribution costs, but reached 40 percent mark in 2009.

(iii) Shift to a single distribution center eliminated unnecessary handling by multiple DCs.

(iv) Lego needs to train a single group of workers to perform value-added-tasks (such as application of price labels).

(v) Unnecessary inventory was reduced.

(vi) Carrier consolidation reduced Lego's shipping expenses.

Source: Cooke, J. A. 2009. Lego's game-changing move. CSCMP's Supply Chain Quarterly, Quarter 3, 38-41.

A Broader View of Environmental Responsibilities in Supply Chains

Firms are responding to governmental regulations to reduce their carbon footprint. In the United States, the Waxman-Markey climate bill is expected to reduce GHG emissions by 17 percent from 2005 levels by 2020. The bill will also establish a cap and trade system in which companies will be required to have "pollution permits" to emit carbon dioxide. In 2012 the government would give away 85 percent of these permits and auction off the rest. 

Best in class companies are not merely responding to these regulations but are developing a long-lasting, broader, multi-pronged corporate sustainability initiative. For these companies the move to include environmental considerations is not new. For example:

(i) "Global citizenship" has been a key part of HP's value structure since it was founded in 1939. Since 1957, HP has identified it as the most important of its seven core values.

(ii) In 1972 Volvo communicated the environmental challenges facing the automobile industry in front of the United Nations Environmental Conference. In early seventies Volvo included the aspect of environmental care into its corporate mission statement. 

(iii) Since 1993 Nike has incorporated environmental stewardship into its long-term business objectives. Nike's stated goal is to, "create performance innovation products that minimize environmental impact by reducing waste throughout the design and development process, use environmentally preferred materials, and eliminate toxins." Nike has set a target date of 2011 to have 100 percent of its footwear achieve design and waste-reduction goals. Apparel and equipment are scheduled to reach similar targets by 2015 and 2020, respectively. By achieving this, Nike will be able to reduce 17% of waste inherent in Nike's supply chain and will increase the use of environmentally preferred materials by 20 percent.

(iv) 3M made the decision to adopt the sustainability vision almost 30 years ago. Since embarking on this path, the company has been able to prevent the generation of more than 2.2 billion pounds of pollutants and at the same time has been able to achieve about $1 billion in first year savings from environmental projects.

(v) M&M Mars uses low-cost methane gas generated by the landfill to help power the plant and reduce its electricity usage from 30 million kilowatts to 20 million kilowatts in five years. This has also resulted in reducing carbon emissions by 10,000 tons annually. The move has decreased M&M Mars's reliance on local utility, stabilized its annual budget, and cut costs by $600,000 annually.

Source: Glover, T. 2009. Beyond carbon counting. CSCM's Supply Chain Quarterly, Quarter 3, 30-36.

World's Largest Logistics Companies - 2009

	Millions of U.S. dollars	Millions of euros
DHL Supply Chain	$ 17,748	€ 12,469
CEVA	$ 4,933	€   3,465
Kuehne + Nagel	$ 4,047	€   3,096
Wincanton	$ 3,794	€   2,665
CAT Logistics	$ 3,744	€   2,630
Penske Logistics	$ 3,282	€   2,305
UPS Supply Chain Services	$ 2,990	€   2,100
FIEGE Logistik	$ 2,684	€   1,885
DB Schenker Logistics	$ 2,338	€   1,642
Ryder Systems	$ 2, 318	€   1,629

Source: Transport Intelligence

Consolidation in Auto Industry - Implications for Suppliers

A study involving 350 automotive conducted by PRTM reveal that Asian and European auto suppliers are likely to take over their distressed counterparts. For example, the study indicates that China's Guangzhou Automotive Components and Weichai Power Company are leading suppliers in the auto industry who are well positioned to buy suppliers in other countries. According to the study, most of the bankruptcies and buyouts are likely to occur among suppliers of chassis and electrical and electronics systems. Chassis systems, which include brakes, steering, axles, and suspension, require considerable capital expenditure and thus any reduction in order volume adversely impact suppliers' profitability. Since electronics represent the future of vehicle industry, many suppliers would like to buy other companies in this area to add such capabilities in their businesses. The study suggested that only one U.S. company, glass and paint manufacturer PPG of Pittsburgh, PA, would potentially escape this shakeout due to its diversified portfolio. Several of the remaining 31 North American auto suppliers will either declare bankruptcies or be acquired.

Source: "Several Chinese Auto Suppliers Likely to Emerge as Leading Global Consolidators." www.prtm.com Press Release, August 2009