Meet Richard Wilding

As Professor and Chair of Supply Chain Risk Management and Director of the Supply Chain Risk Forum at the Centre for Logistics and Supply Chain Management, Cranfield School of Management UK. Richard works with European and International companies on logistics and supply chain projects in all sectors including pharmaceutical, retail, automotive, high technology, food, drink and professional services to name a few. He is a highly acclaimed presenter and regularly speaks at Industrial Conferences and has undertaken lecture tours of Europe and Asia at the invitation of local Universities & Confederations of Industry. He has published widely in the area of supply chain management and is Editorial Advisor to a number of top journals in the area.

Do Traditional Silo-based Organizations Squelch Innovation?

Richard Wilding is a professor of supply chain risk management at Cranfield School of Management, Europe's largest faculty group specializing in the area logistics and supply chain. Among the many topics that fall under the general heading of supply chain risk management is what Professor Wilding refers to as "demand chain management." Demand chain management integrates marketing activity and supply chain activity, because according to Professor Wilding, you cannot innovate supply chains without understanding what drives value in the final marketplace.

Professor Wilding defines innovation as creating value -- economic value, social value and environmental value through the application of ideas that are new to your organization. Traditional silo-based organizations, he says, are very good at supporting innovation within the individual silo, because in theory, you have a group of experts, in very specific disciplines, sharing and developing ideas together. The problem, from a supply chain perspective, is how the process cuts across all the different silos.

Richard Wilding often refers to the need for "T-shaped people," who have their arms outstretched and are excellent problem-solvers within their own functional specialisms, but also have the capacity to interact and communicate with experts from other disciplines and functional areas. These are people who carefully consider the decisions they make in terms of how the supply chain will be affected both upstream and downstream.

When you look at structuring an organization, you have to put procedures and processes in place to ensure that innovation is occurring across all silos, and that, according to Richard Wilding, is where traditional silo-based organizations can be weaker. The combat the problem, he suggests bringing people together in an organized manner, which can be as simple and informal as offering free sandwiches in your company's canteen once a week as a sort of innovation icebreaker between silos. Addressing specific issues can be accomplished through more formal training and development events, where people from different silos are brought together to gain unique perspectives from one another. "We've done that very successfully at Cranfield," Professor Wilding said, " where, for example, the supply chain and marketing people will actually come together and take a course on both supply chain and marketing." It is an atmosphere that encourages debate and discussion, which can be very powerful, he added.

Are New Organizational Structures Needed for Companies to Innovate?

"Today," Professor Wilding says, "everything is very much network-based, so we can no longer afford to have people stuck in their individual silos." We need new ways of working that allow for broader views of our processes. It's okay to work within an individual silo as long as there are mechanisms in place to give people a view of what is going on outside of their silos.

When asked for his views on open innovation, not only within the walls of an organization, but with suppliers and customer as well, Richard Wilding said he believes it is "absolutely critical." When you apply the concept of open innovation to supply chain, you can clearly see the importance of tapping into ideas that can come from virtually any link in the chain -- and beyond.

To illustrate the point that innovative ideas can come from anywhere, Professor Wilding used the example of benchmarking in the pharmaceutical industry. Once the decision is made, he says, generally everyone will rush off to benchmark businesses within the pharmaceutical sector, but what if you broaden your thinking to include businesses outside the sector? From personal experience, Richard Wilding referenced his work with an organization that is looking into the movement of blood products, but instead of limiting its benchmarking to the supply chains of organizations that also move blood products, they are looking at products with shelf life and other similar issues, such as dairy products. Looking outside your sector is a great way to find ideas that may be new to your business or sector, but have already been proven in another sector -- it is just a matter of looking at things in a different way.

The same can be said for collaborating with suppliers and customers -- getting inside the minds of people connected to, but outside of your company, is another way to tap into innovative thinking. You have to understand their issues, and they yours, before innovation can occur.

Professor Wilding says, "To move forward with innovation, you have to work at it, and that requires networking." You have to get out there and start talking to people, and that doesn't always have to mean networking in the physical sense. Richard Wilding says he and his group have recently started a few discussions at LinkedIn and says there is no doubt, that in its own way, LinkedIn is fostering new thoughts, ideas and innovations just by virtue of people coming together and sharing information.

Does Breaking Down Silos and Sharing Knowledge Dilute Our Power?

If knowledge is power, are we at risk of giving that power away by sharing too much information across silos? Richard Wilding doesn't see that happening, because as he said, "At the end of the day, everybody inside an organization has to start speaking the same language, and that is the language of profit." In his experience, people who try to leverage their knowledge to gain power over another silo within an organization eventually leads to the destruction of the business. There is an old Biblical saying that Richard Wilding believes applies to this situation -- 'give and it will come back to you, pressed down, shaken together and overflowing.' In other words, by sharing information and ideas, you will receive greater benefit in the long-term, which is especially true in supply chain environments.

Putting Windows in Silos

One area that Professor Wilding has focused on of late is working with companies to gain transparency, because transparency is essential to building trust within organizations and in the supply chain. If people and organizations aren't comfortable putting trust in one another, he says, they begin to "play games." For example, if you don't trust that an order is going to arrive on time, you are likely to over order, and that kind of thinking puts strain on supply chains. That is why Richard Wilding believes organization must begin the process of creating transparency. "It can be like putting windows into a business process and windows into the silos," he says, "and not all these windows need to be completely clear glass. Some might be frosted glass, but at least you can see that there is a light on in that room, and that's very important to give people confidence that activity is taking place at a particular time."

Social Network Analysis as a Supply Chain Integration Tool

Having worked in both corporate and academic worlds, Peggy Lee brings a unique blend of practical and theoretical experience to the topic of networking.

In her corporate career, Peggy was focused on strategic planning and project management in the areas of inter-organizational, interstate and international networks, primarily "connecting machines" that would allow people to process calls across multiple boundaries. Her academic career began some 20 years later when she left the business world to pursue a Ph.D. in logistics operations and materials management from George Washington University. She achieved that goal in 2001 and has taught logistics and supply chain management ever since.

Peggy says she has always been interested in how people, entities and organizations are connected to one another, and what methods they use to facilitate specific results. Supply chain management, she says, fell into that category, and fit her vocational interests, which is why she chose cargo clearance procedures through select ports in developing countries as the topic for her Ph.D. dissertation. Her objective was to determine whether privatization caused clearance flows to move faster, in a more collaborative, concerted, cooperative manner, and its effect on supply chain integration.

To meet her objective she developed a questionnaire, which, because she was talking to everyone about their interactions with everyone else in the supply chain, formed a sort of matrix. After presenting her findings at a conference, someone suggested that she consider scrapping the matrix in favor of using social network analysis.

Social network analysis (SNA) is the mapping and measuring of relationships and flows between people, groups, organizations, computers, websites and other knowledge-based entities. In essence, it is both a visual and mathematical analysis of human relationships' which was exactly what Peggy Lee needed to put more rigor to the concept of supply chain integration.

Peggy D. Lee is convinced that SNA is something both academicians and corporate practitioners would find useful, because the final product is an easy-to-read "diagraph" that indicates who is talking to whom and the degree to which actors in the supply chain, or any other type of network, are connected.

How Can Supply Chain Networks Become More Integrated?

Technology alone will not deliver supply chain integration unless (to use the social network analysis analogy) it facilitates people connecting with people. "So, rather than using the term 'supply chain,' which implies a sequential discussion between Point A to Point B and from Point B to Point C," Peggy Lee said, "we must start to look at supply chains as networks of people."

The way to accomplish supply chain integration, she believes, is to leverage technology, and then lower the unit of analysis down to individuals, or at the very least, down to departments, because it isn't companies or organizations talking to one another, it is people talking to one another. "Once we understand how and when people and groups communicate, then we can work on moving up the food chain to look at how the organization communicates,” Peggy added.

Do Supply Chain Organizations Need to Change the Way They Operate?

Peggy D. Lee doesn't believe supply chain organizations need to change the way they operate, but they should recognize the fact that there are multiple modes of doing business and interconnecting.

Face-to-face meetings consume time and money we can't afford, so Peggy recommends harnessing the power of non-traditional tools such as Facebook, which allow people to get to know each other, especially within organizations that operate across vast geographical distances. She is not a fan of Twitter, however, because she sees it as too impersonal, but overall, Peggy strongly advises supply chain organizations to embrace new and different ways to communicate and collaborate.

As a university professor, Peggy often works with her students in virtual spaces, specifically Second Life, a virtual world that enables its users, or "residents," to interact and socialize with each other by way of avatars. In addition to creating and trading virtual property, the online world offers a three-dimensional modeling tool that residents can use to build virtual objects. "The learning curve can be steep," she says, but it is just one example of how people can interact and share ideas in a unique and rich environment.

Peggy Lee also recommends a book called Total Engagement: Using Games and Virtual Worlds to Change the Way People Work and Businesses Compete, by Byron Reeves & J. Leighton Read, who believe the psychology behind gaming could be the key to engaging people more fully in their careers and increasing productivity.

"I think embracing new technologies, especially those things that we used to think of as kids’ games, can be really helpful," Peggy says. "Work is changing, it’s no longer get up in the morning, stay there ’til whenever and go home. I know I do a lot of my work from my kitchen table. So, embracing new technologies, especially social networking sites, is important for supply chain organizations, because the people that they’re hiring take these things for granted,” she added.

Meet Peggy D. Lee

Peggy D. Lee has what she describes as a "nontraditional academic background," which is an apt description when you consider that she spent approximately 20 years in the telecommunications industry before leaving to pursue her Ph.D. in logistics operations and materials management from George Washington University, which she completed in 2001. After teaching operations and supply chain management at Penn State University from 2001 to 2009, Peggy stepped into her current position of Clinical Assistant Professor of Supply Chain Management at Indiana University's Kelley School of Business.

After gaining ten years of practical experience as a global procurement manager with Intel Corporation, including two two-year Intel international expatriate assignments in Asia and Latin America, where he was responsible for driving strategic sourcing strategies and mitigating risks tied to business continuity disruption or materials operations disruption, Damon De La Pena struck out on his own. Today, Damon owns BDM Consulting with fellow former Intel colleague Richard Brady.

BDM Consulting provides very focused services in five key areas. The first area, supply chain lean assessment, is focused on helping companies identify gaps in their supply chain operations that can be bridged by leveraging technology solutions. Damon De La Pena was quick to point out that BDM Consulting is not a technology company, but rather a "knowledge company" that provides the experience, assessment and analysis needed to identify potential solutions. "One of my key learnings as a consultant," Damon said, "has been that you can't know everything, so you build a team of business partners around you who can provide resources like technology solutions."

The second and third areas of BDM Consulting involve strategic sourcing and supplier management. In Damon's experience many US and international companies are overly focused on the transactional side of procurement. In other words, accepting the requisition and making the purchase on behalf of their clients. "What we try to do," Damon explained, " is coach our clients to source strategically -- to gather internal and external data on different commodities, and then craft a strategic sourcing plan." This, he says, allows companies to consolidate their spends and to reduce their supply base, which in turn allows them to focus, strategically, on core suppliers that typically make up 80% or more of most company's spends. "It is a very different skill set than simply executing a purchase," Damon says, "you have to have people who can set strategy, interface with internal stakeholders, and then negotiate by consolidating the spends into these larger contracts."

Number four on BDM Consulting's services list is inventory optimization. What BDM brings to the table is segmenting inventory by partnering with manufacturers to evaluate lead-time, availability and cost. According to Damon, the company also excels at inventory reduction and cost reduction by transitioning client-owned inventory to supplier-owned inventory.

And finally, to round out their services list, BDM Consulting is in the process of launching supply chain training. In essence, Damon De La Pena and his colleagues at BDM are bundling their combined experiences into training modules, of sorts, that will cover strategic planning, change management, executive and management coaching and organizational design.

Overcoming Strategic Sourcing Challenges in Latin America

As he mentioned earlier, Damon De La Pena worked in Latin America while employed by Intel Corporation. His primary responsibility at the time was to drive strategic sourcing initiatives, so he speaks from experience when he says the biggest challenge companies face in Latin America, and other developing countries, is the gathering of external information. In the United States, Damon said, we have easy access to corporate financial data, commodity data and other types of information through a number of sources, like the Wall Street Journal, from a global perspective. The Internet has helped to level the information playing field, even in developing and Third World countries, by giving commodity managers or supply chain professionals access to the same information available to their counterparts in the United States -- assuming they have a good Internet connection.

Challenges arise, however, when, on a local or regional level, that same data is not readily accessible electronically. The solution, according to Damon, is to collect data manually through local government and registration agencies. Damon also recommends that commodity managers in countries like Latin America begin networking more aggressively, and encourages companies to support their buying agents and strategic procurement professionals by allowing them to network. "I experienced it myself, in Latin America," Damon said, "I had to reach out to learn what organizations suppliers belonged to, what professional organizations could I join, or at least network in, to help me collect market intelligence.”

How DBM Consulting, "a Small Start-up," Went Global

At the three-and-a-half year mark, Damon De La Pena still considers his company a small start-up, but that hasn't stopped him from competing on the global stage. "I may not have the big IT budgets, I may not have the marketing budgets, but I have learned to connect with really great channel partners globally that need consultants to go in and to do initial assessments, gap analysis, and some business process mapping for them. I found those types of companies that are willing to bring me in, even as the small guy, and help me to perform more competitively than I would have been able to do on my own," Damon said.

Damon is also not afraid to be creative and innovative by tapping into free and competitively priced tools for small businesses that have allowed him to leverage cloud computing and other cutting edge technologies. He has even gone so far as to establish a partnership with a small software company called @Task, which affords him the opportunity to perform complex project management on the Web, in a secure environment that is accessible by his clients, for information sharing in real time.

Leveraging what the technology world has to offer and forming strong partnerships with like-minded companies, Damon says, has given him the opportunity to go global in a very short period of time. "We’ve done work in Scotland for an oil company; we’ve done work in Romania for an oil company; I was just in China last year; I’m currently bidding on several supply chain lean assessments for multinationals in the free trade zone in Shanghai. And so, it has allowed me to truly focus on what’s going on globally even though I don’t have a huge company or a huge staff. It has allowed us to be creative on how we bring in other consultants, independent contractors to get the job done and to provide great service to our clients.”

"From a cost containment perspective," Damon added, "I think my innovative thought leadership piece is to try to communicate to the world that I can be competitive, and have experience and depth in the supply chain field, even though I’m not one of these large consulting firms. What I’ve found—at least for my clients—what they value is, when they hire BDM, they’re getting practitioners; they’re not just getting consultants. They’re getting people who have actually been commodity managers, have been buyers, have been global managers, and we tend to relate well with our clients and with their problems because of that."

Closing Thoughts on Supply Chain

In Damon De La Pena's experienced opinion, companies that are going to be "lean and mean and successful in the future," will not put their procurement and supply chain functions on the back burner. "That’s what I’m trying to coach my clients," Damon said, "and what I would coach yours as well, especially owners of companies that are in manufacturing and are doing global type of work, is that their supply chain needs to be a core business strategy at the CEO level.”

Meet Damon De La Pena

Damon earned an MBA with an international business focus from Arizona State University. In addition to his current role as Managing Director of BDM Consulting, Damon De La Pena cultivated this focus with practical experience from two Intel international expatriate assignments and integrates this experience into optimizing his client’s business operations. He spent the last 10 years developing his global management skills as an expat in South East Asia. In this capacity he negotiated global contracts and managed inventory procurement for one of Intel's start up factories. While on assignment, he took on a role as a Risk and Controls Manager mitigating excessive cost risk, business interruption risk, and corporate fraud. A key career highlight of Damon's was the creation of a new Global Risk Management Organization for Intel's largest division, the Technology Manufacturing Group. He managed a global team of Risk and Controls Managers in 14 countries. This organization was able to reduced overall risk exposure to Intel Corporation by $300M over a three year period.

Ken Lyon has worked in logistics, freight forwarding and supply chain management since 1978. He began his career in operations, but his keen interest in the practical benefits of technology, and its impact on the industry, eventually led him to the supply chain solutions side of the business.

Looking back, Ken says the most memorable period of his career was the ten years he spent with UPS as part of the founding management team of what was then called UPS Worldwide Logistics, before it became the UPS Logistics Group, and then went on to become what is known today as UPS Supply Chain Solutions. "It was an exciting time for innovation," Ken said, "and working with great people who really embodied everything that UPS stands for was an invaluable learning experience."

Having witnessed its impact on other industries, Ken Lyon left UPS to pursue and develop supply chain and logistics opportunities tied to the Internet, which brings us to Ken's current position with VisibleLogistics, a provider of on-demand supply chain and logistics services and web solutions.

Collaboration Leads to Supply Chain Innovation

In an uncertain economy, Ken Lyon says, most organizations are focused on today's problems, which is completely understandable. What Ken advises, on the other hand, is to take a step back and look at things a little differently, because that, he suggests, is where organizations will find ways to innovate.

VisibleLogistics, Ken says, is very keen on collaboration because supply chain operations are always conducted in partnerships with other parties. He understands that many companies are suspicious of collaboration, and that most have pursued it because they have to, not because they want to. Ken's goal is to change the way companies view collaboration by helping them understand the value, benefits and innovations that can be realized by partnering with like-minded organizations.

"We're all part of a global economy and more organizations are outsourcing anything that can be done cheaper, or more efficiently, and that has had a profound impact on how supply chains are structured and how they operate," Ken said. The bottom line is, very few companies are large enough to do everything, from procurement, to delivering products into the marketplace. "I think the last big enterprises to do this were the automotive companies, and as we’ve seen over the past few years, they’ve all suffered terribly in the latest recession, because when you’re structured in the way that you’re having to do everything yourself, it means you have a colossal asset base that is very, very difficult to change," Ken said.

Regardless of what industry you're in, Ken says, today, it's all about being responsive to customers. Again, to use the automotive industry as an example, when a customer enters a showroom to purchase a very specific model, they either have to settle for a vehicle with different features and a different color than they had in mind, or they would have to wait several weeks for a custom order. Today, Ken says, many companies have moved beyond that and have transformed their supply chains to be more responsive to the customer -- and the only way for many companies to accomplish a greater level of responsiveness is through collaboration. "That is the real value and power of partnerships," Ken said, "and what will drive the global economy forward."

Trust is the First Step Toward Collaboration

Again, Ken acknowledges the fact that some factions are uneasy with the concept of collaboration, and feel it is just a way of exporting jobs to lower-cost economies. That may be true in some cases, he said, but generally it's about developing the intellectual property and knowing how to manage your network so the value stays with you. At the same time, you're creating higher-value jobs, while passing jobs that require less skill, and can be outsourced at a lower cost, on to regions where people will welcome the opportunity. It all requires a very complex and sophisticated choreography of managed assets, order flows, financial flows and information, and that is an area of the business Ken Lyon is particularly interested in.

The first step toward collaboration, Ken advises, is to start trusting each other, because trust in the basis for any collaboration. By way of example, Ken points to social networking. It is interesting, he says, that the evolution of social networking has made people more comfortable with trusting other parties. When someone finds you on Facebook or LinkedIn, all they have to do is reference a mutual connection and they become part of a network of professionals you trust, which in Ken's mind, offers very positive benefits. "As these principals and mindsets become more pervasive, especially with the younger generation," he said, "trust will really take root and everyone will be more comfortable with the idea of sharing information and working together to solve problems -- which the foundation of effective, agile and responsive supply chains."

Connecting All Parties in a Supply Chain

According to Ken Lyon, "Most supply chain visibility solutions tend to be very elaborate and very complex to establish. They tend to focus on tier-one partners, when what you need is a mechanism that draws people together in the tiers below tier one, and those organizations don't have very sophisticated information technology or fancy IT staff that can spend months establishing connections."

"We designed VisibleLogistics as a means of connecting all parties in a supply chain quickly and easily," Ken explained. The company's goal is to focus on the two areas that have the most impact on supply chain operating costs -- the inventory, which is where all the money is invested, and the orders that drive the inventory between participants.

VisibleLogistics' solution has practical notification mechanisms embedded into it that serve as early warning systems to prevent and manage stock-outs and other events that pose supply chain disruption risks. In closing, Ken Lyon said, "If you are a tier-one operator with hundreds of thousands of transactions, orders and shipments moving through the supply chain, it's not possible to watch every detail, when all you really need is advance warning of problems or delays -- and time to react. That is what adds responsiveness and proactivity into your supply chain, and that is exactly what we're doing with VisibleLogistics."

Meet Ken Lyon

Ken Lyon, CEO of BitLogistics, is one of the pioneers of informatics development and its application within the logistics and transportation industry. Working in this arena since the early seventies and specifically with information technology since 1979 he has been directly involved in many of the pivotal events that have helped shape the use of computer based communications within the industry. He was with United Parcel Service for nine years -- the last five years as Information Services Director and then Vice President with UPS Worldwide Logistics.

Ken has produced several papers and been a speaker at conferences and international trade and transportation conventions around the world including the 1997 OECD ministers' conference on electronic commerce and the recent Global Information Summit for Nikkei in Japan. He also acts as a strategic consultant to several multinational companies and government agencies, helping them understand the impact of technology on the logistics industry.

Rohit Talwar, a UK-based futurist, strategist and change agent, was kind enough to carve several minutes out of his busy schedule for an interview with Logipi's Dustin Mattison.

As a veteran watcher, Rohit has watched communications evolve to the point where we are all more aware of global trends -- population growth, environmental trends, new sites and new technologies, the rise of China and India, and the gradual economic shift from west to east -- it is all part of our everyday vernacular. Equally important, is the fact that we are more aware of how to use trends for fueling innovation.

Rohit believes the key to leveraging trends is allocating time to think about how the larger trends, and some underlying trends, around technology, behavioral change, the way people are using innovations like social media to communicate, even attention spans, will effect business. "All of these things are changing," he says, "and it is essential to allocate time to think them through and really understand what they will mean for the customers you serve, the markets you target, the way in which you train and develop your people, and the way in which you engage with the marketplace."

Innovation Incubation

Innovation, Talwar Rohit says, requires a 360 degree perspective. You want to generate ideas within your organization, but you also want to bring your supply chain partners and customers into the mix -- really look across the entire supply chain to see who can provide ideas to help you address specific challenges. Today, it is not uncommon to find companies using the Internet to source ideas for their businesses, to make themselves magnetic, and to float new ideas.

Once you have attracted new ideas, Rohit advises, the next step is to create a streamlined process inside your organization to incubate and test those ideas with an eye toward turning them into practical change for the business. "It is a process that requires time and the allocation of resources, but most importantly, it requires very clear focus on why you're doing it, so that people don’t just see the innovation as a 'nice to have' activity that can be put aside when real work gets busy," Rohit said, "We've got to make sure that people understand that innovation is about creating the future of the business and securing the next round of revenue, profit, growth and employment opportunities."

When people understand the importance of innovation they are more likely to pay attention -- then, Rohit says, it's about having dedicated champions to make sure those ideas evolve into practical change that has been tested, refined, and eventually fully implemented.

The final piece of successful innovation incubation is to make certain people understand the rationale behind the idea by communicating it both internally, and externally, to you customers and partners across the supply chain. It is essential, Rohit said, that everyone understands the benefits and how it will effect them.

From a big picture perspective, Rohit Talwar said, "I think another critical enabler to this process is to really encourage people to think and give them permission to think, to allow people to have radical ideas, to have rules around the idea-generation process that say anything is allowed; you can put any possibilities on the table and particularly those that might challenge the current ways of doing things. The more open you are, the more you encourage that kind of thinking, the more likely it is that you’ll bring in some ideas that will bring about real groundbreaking change in the organization.”

Supply Chain Trend Watching in the Middle East

According to Rohit Talwar, "There has been a huge amount of wealth generated through oil revenues in particular, and that has led to an investment boom in the Middle East. At one point last year, the figure was over four trillion dollars of investment going into different types of projects in the region." And while Rohit acknowledges that the boom has waned some, he is still seeing a push by key players, particularly Saudi, Qatar and Abu Dhabi, to diversify and ween their economies away from oil dependency.

For example, in Abu Dhabi, we're watching the Masdar energy city being built, which will be the world's first waste-neutral, carbon-neutral, energy-neutral city. Right now, Rohit says, there are people developing new models and processes that will power buildings with renewable energy -- they have also recently piloted fully electric driverless taxis -- if they are successful, these innovations can be rolled out across the world. Saudi Arabia is pouring hundred of billion of dollars into high-tech cities driven by a whole new set of economics with a very real focus high-tech infrastructures and industries, as well as the industries that support them.

What we're witnessing in the Middle East, Rohit says, is the beginning of countries moving up the wealth ladder, along with rising income standards of the people, which equates to the consumption of more goods and services. That, coupled with elaborate construction projects, Rohit believes, will have an enormous impact on the logistics industry. "These countries will require a very effective supply chain to deliver a very broad range of goods and services in an efficient manner. That, in turn, is creating a demand for the skills of supply chain management, so the Middle East is really on the radar of the entire supply chain industry".

Meet Rohit Talwar

Rohit Talwar is an award-winning speaker on future insights and strategic innovation, and has addressed leadership audiences in 40 countries on five continents. Profiled in the UK's Independent newspaper as one of the top ten global futurists, Rohit Talwar's expertise has been sought by 3M, BBC, Bayer, De Beers, DHL, IBM, Intel and many other multinational organizations.

Enrique Carrillo is the newly appointed Director of Information Technology for Baxter International in Latin America, a position he says has become more of a value chain role in most companies across the region. Instead of being a typical infrastructure, software, architecture role, the new CIO role is geared more toward value management and leveraging technology to enable the value chain.

Latin America, he says, is at the perfect stage to be an incubator of thought leadership for three reasons. First, for most companies, Enrique says, Latin America is still considered an emerging market, with the exception of three countries, which are Mexico, Brazil, and Colombia.

Secondly, the maturity of the supply chain infrastructure, and the information technology infrastructure, in most countries, is finally getting to the point where companies can execute best-in-class solutions that were not previously available in the region due to cost or infrastructure limits.

Third, before the economic crisis, companies were fairly content with their rates of growth in the region. Once the recession hit, Enrique says, US executives began paying more attention to what was happening outside the four walls of the US, specifically looking at emerging markets, like Latin America, where market share was likely being neglected and there was ground to be gained.

Supply Chain Challenges and Opportunities in Latin America

In terms of infrastructure and supply chain knowledge, Enrique sees Mexico, Brazil and Colombia leaning more toward the maturing levels on the continuum. "When it comes to solutions, most companies in the IT sector are looking at those three countries as regions where they can capture market share and work with clients to support their needs as partners, rather than what I like to call the 'onesie-twosie' type of opportunities that come up just as spillover opportunities from multinationals that have operations in the region," he added.

When asked to comment on challenges and opportunities in Chile, Argentina and Costa Rica, Enrique said he believes the opportunities are out there, but to find them you have to look beyond the maturity of the supply chain, you also have to look at the forecast for these countries. "When you look at Latin America," he said, "we are not talking about the United States of Latin America, we’re talking about distinct countries, 20 in total, depending on how you count them, so you have to look at the political and economic forecast for each country from one year to the next.

In Central America, for example, Enrique Carrillo believes the Costa Rican outlook for the first half of this year — especially the industrial sector and supply chain — is trending upwards as global demand picks up. In 2009, he says, many optimistic forecasts were not achieved. This year, he believes, will be the year that optimism will be achieved.

El Salvador, he says is also improving, and there is external demand, but it is strictly tied to the recovery of the United States. Guatemala is seeing recovery, and the political situation in Honduras is slowing returning to normal, while Panama is heading in the opposite direction despite the boost provided the infrastructure projects surrounding the Canal expansion.

On the South American side of Latin America, Enrique believes there are tremendous opportunities in Argentina, and while they are still struggling to return to the international credit markets, the political issues are being resolved.

Brazil's economy, Enrique believes, is on a sharp rebound. "I think that the domestic sector and the middle class are definitely the primary drivers of economic growth, and that has been underscored by falling unemployment and the recovery of the retail sales." Chile, he says, will have to be watched based on the elections, but everything appears to be very positive at the moment. "From a supply chain perspective, when we’re looking at Colombia, I think they will see a moderate recovery. Last year was up and down for them, and that translated into flat growth for 2009," he added.

In 2010, Mexico's credit rating, which Standard and Poor's downgraded to a BBB, is going to be a source of concern. This, Enrique thinks, will cause attentions to be diverted to emerging countries within Latin America. In contrast, Moody's upgraded Peru's credit rating from a Ba to a Ba3, which, according to Enrique, means the international credit agencies are looking at Peru as a place to expand business, and obviously, that means supply chain will play a role in Peru this year -- something many companies will take advantage of.

And finally, regarding Venezuela, Enrique Carrillo believes the devaluation announced on January 8, 2010, was necessary "from a bolívar to a US dollar perspective" for improving the competitiveness and balancing increasing budget deficits, but it will probably cause a surge in inflation.

With Venezuela's two-tier exchange-rate system, the rate will move from 2.15 bolívars per dollar to a preferential 2.6 bolívars per US dollar, but that is exclusive to food and medicine, Enrique says -- all other transactions will be an established 4.3 bolívars per dollar. Free markets are leaning toward six bolívars per US dollar, so companies that want to do business in Venezuela are constrained from a supply chain perspective as far as getting goods in and out of the country with this two-tier exchange-rate system.

The Big Picture Perspective of Supply Chain in Latin America

Looking at the entire region from a pure supply chain perspective, Enrique Carrillo believes we're witnessing an evolution of sorts. Companies are more focused on supply chain costs, including total cost of ownership, supply chain assets, infrastructure assets and information technology assets. They are also looking at implementing best-in-class solutions as opposed to customized solutions or localized solutions with local vendors -- something Enrique says is necessary for survival.

"Everybody is now looking at business in a box," Enrique said, "where you can actually expand your business on a predetermined model, and can process things from a supply chain perspective in a way that it becomes a 'pick list,' much like a configurator when you go to the website at Dell to configure your computer."

Supply chain now has a more important role, and it has evolved even in the last five years. From Enrique's perspective, "Supply chain management was viewed as distribution and logistics in Latin America, and now people are understanding that supply chain is a key business driver, just as information technology is an enabler and key driver of efficiencies at a company. So, the merger of business and supply chain solutions are happening at a rapid pace, and I think it will continue to happen in 2010.”

IT Solutions in Latin America

In Latin America, the mainstays of IT continue to be ERP systems primary because they can link many disparate systems, but companies are looking beyond having one ERP system to manage their manufacturing sector. Today, they are interested in using it to drive their "order to cash" and their services in a more collaborative environment with key partners and vendors.

Enrique says, "CRM and electronic data management systems are at the heart of it all. Everybody is looking at basic intelligence as a key aspect for improving efficiency and taking out waste within the organizations."

Based on the new rules, and the political and economic conditions of the region, companies are also deciding whether they should continue with traditional distribution networks. There was a time when most companies facilitated direct shipment from their Latin American factories. Today, Enrique says, various constraints have made it more difficult to move goods in and out, so many companies are looking at creating more of a centralized distribution network.

Companies in Latin America are also focusing on putting more controls into their demand management supply chain solutions to not only optimize inventory, but the total cost of the supply chain operation. "This is new," Enrique says, "and it will take companies some time to get there, but companies are moving in that direction."

"In Latin America, just as in any other region," Enrique says, "you have companies at various stages on the maturity scale, from those that are just beginning to get to the level of identifying best-in-class supply chain management solutions to companies that have not been able to accomplish their objectives internally and are looking to external partners to help them get it done."

The World's Supply Chain Paradigm Shift

In Enrique Carrillo's personal experience, based on his time as Senior Partner and Managing Director for the Value Chain Practice at Azurian, and as a partner with IBM, companies are in the midst of a paradigm shift -- moving supply chain from a sort of "back-end operation," to a key business partner that is taking center stage in business and governance decision-making processes. Just a few years ago, he says, sales and marketing dictated the pace, and supply chain was more of a "reactionary must-have activity," or "necessary evil." Today supply chain is at the center of strategic decision-making and planning.

The Future of Supply Chain in Latin America

Enrique Carrillo advises companies to stay tuned, because there is a lot of work to do in the region and there is much more to come -- the infrastructure in falling into place; there are new ports, new railroads and new roads being built -- and security is improving from a transportation perspective. Centers of Excellence for manufacturing and distribution are being created, and shared services are being established in major Latin American countries as well.

"I think we're moving in the right direction," Enrique concluded, "people are paying more attention." Proof, he says, is that Logipi's Dustin Mattison called to arrange this interview.

Meet Enrique Carrillo

Enrique Carrillo is the Director of Information Technology for Latin America North and South at Baxter International. Prior to joining Baxter International, Enrique was the Senior Partner and Director at Azurian SCM, which specializes in delivering Information Technology and Value Chain Management consulting services to Latin American companies. During his career he has excelled at being a catalyst in developing and implementing progressive business strategies leveraging IT intelligence to gain competitive dominance, raising the standards of organizational leadership and executive management through high level professionalism and focus on results.

Enrique has enjoyed 18-plus years of success driving vision and executive-level leadership for Fortune 500 multinational organizations and global supply chain networks such as IBM, Daimler-Chrysler, HP, Tatung, Michelin, GM, Phillips Electronics, Nortel Networks, Johnson & Johnson and GE. He is a veteran in management consulting, professional services, manufacturing and technology industries, with a globally focused career bringing significant experience in Value Chain Management, Information Technology, Strategy, Finance, Change Management, executive leadership, and building and growing international business units.

Who is Clareo?

My name is David Serafine and I am the President and CEO of Clareo Inc. I have spent the last 12 years designing supply chain security solutions in over 30 countries to date. I began my career working for a private security company, eventually being promoted to a district management position and finally directed the global supply chain security program for a fortune 50 company, which led to the creation of Clareo Inc.

Clareo Inc is a premium security solutions provider that focuses on designing secure global supply chain programs. The company was created in response, to what I believe to be very limiting, ineffective regional offerings that do not meet the unique aspects of global companies. Based on my experience, it was critical to offer a global suite of services and experience that accounted for unique risk variables, geographies and circumstances for companies… no more cookie cutter approaches.

Q. What are some primary factors that impact global supply chain programs?

I believe there are a number of factors that have impacted global supply chain efficiency and cost.

Theft:

Depending on which resource you cite, there is anywhere from $50-$100 billion lost each year due to theft, every penny of which is then tied right back to the increasing cost of the commodity. Theft impacts supply chains by increasing future premiums, impacting supplier availability, concessions, to angry customers, overtime re-build, loss of future sales in markets, etc. An enormous impact that is rarely tracked properly in companies

Global MRAs (such as C-TPAT):

Companies fail to understand the requirements of the upkeep to these programs, the programs themselves lack teeth and quite honestly, they were meant to be a very minimal baseline for companies to build their supply chain security programs on, not to define the “end state of their programs.” They are also myopic; they are based on one country’s perception of an acceptable minimum standard. Companies have allowed these programs to define their end goal to global supply chain programs and are unsure why their losses and costs continue to rise.

The silo effect:

The pressure to cut costs immediately has created a brutal cycle of chewing up vendors and the resulting “savings” is merely a snapshot of the day. I have numerous examples of companies “saving” money through a change yet every bit was lost in a few months due to theft, fraudulent damage claims, etc. These figures are rarely communicated across departments and the cycle starts all over again to find a cheaper provider. Total loss of visibility to build and ship of product:

The order of the day is to find someone to build the product on your behalf cheaper, ship it and deal with returns, etc. ODM production, while maybe cheaper on the front end, is taking away all visibility to the build and ship of a branded product. This is impacting brand integrity, increasing the risk of loss and further burying the root cause accountability for the product loss.

Q. How do most companies try and manage their supply chain security programs?

Some utilize insurance alone:

This would be what I would refer to as the worst case scenario within a global supply chain program. This literally encourages specific targeting of that commodity by organized gangs. This is merely a way to pass back any occurrence back to the consumer.

Some utilize point-to-point escorts:

This is the least efficient use of money, and in many countries, is also ineffective. Some resources are not properly licensed, others have no counter-surveillance training, are trying to keep up with a truck over varying geographies and weather conditions for hundreds of miles, etc.

Some use the newest “widget” that is claimed to be the panacea for all supply chains:

Technology has some applications… when it actually works. There are numerous issues with technology, particularly in certain countries and in the manner in which they are being used. Volume, cost, the ability to retrieve the device, ability of device to be located/defeated, type of container, etc all have an impact on success of this approach. The number one issue that I have found is that technology is almost always used as a reactive approach. Once the unit is stolen, the call is made and now the teams try and locate the losses sometimes through thousands of dots on a screen. The device “sleeps,” etc.

Q. What are some justifications by companies for not investing in proactive risk mitigation?

Insurance:

The number one response by companies is that they are insured. However, if you ask the vast majority of people in any company what it means to be “insured” relative to a cargo loss, the typical answer is “we get 100% of the money back from the loss” due to theft. If you ask someone in risk management what it actually means, they will be able to tell you what shortcomings are contained within the agreement when the theft takes place. 100% coverage is never the case in any circumstance for the issues I mentioned previously, however, even more so, if we are referring to most international shipments where there are limits on liability for losses.

“It’s not my product”

This is an easy answer, and again, pushes the loss accountability back to other people and ultimately to insurance. Clareo helps facilitate agreements between carriers and companies to ensure both have a vested interest in front end secure design solutions.

“We are C-TPAT certified”

Again, this is not going to stop a theft from taking place. This is a minimum facility standard and those, in and of themselves, will not necessarily prevent a theft from taking place. This is a minimum start for a global company to build a much more comprehensive layered program.

“We do not lose anything”

To that I argue one should bottle that and sell it. All commodities, in their inbound raw materials suppliers or outbound finished goods, will have loss. The better answer is “we do not know how much we are losing”…

Key points to consider in design

1.) One size does not fit all… do not let the latest widget dictate your global program.

2.) Multi-layer approach is critical, as is the point of origin risk and the point of destination risk.

3.) The program must have the ability to assess compliance, measure the results and evolve.

4.) Supply chain security needs to be a value in an organization and not a priority… priorities change daily. Values are inherent and stay constant. The commitment to these programs must be part of the commitments of companies to their customers to keep costs low long term and to keep the integrity of the product to the level they sell it. Value and not a priority.

Read more from David Serafine

What is Slowly Rusting Your Global Supply Chain: Government Incentives and Cargo Crime

David Serafine

Clareo, Inc.

http://www.clareo.biz/what_is_rusting.pdf

Value-Based Security Procurement

David R. Serafine, CPP™

ASIS International

http://www.abdi-secure-ecommerce.com/asis/p-79-1632.aspx

Top Four Manufacturing Challenges in Pakistan

Because Raja Adeel Khalid leads both the Supply Chain team and the Sales team at Dawlance, he has very interesting perspectives on manufacturing challenges in Pakistan. The fact that he is a customer of his own Supply Chain team, this makes the combination even more challenging yet enjoyable, he feels.

The number one challenge for most companies, he says, is managing working capital. The cost of financing in Pakistan is in the 16 to 17% range, which, Raja says, in light of the economic slowdown is too high, and companies cannot afford it. For that reason, Raja believes it is essential that a company's minimum working capital is blocked in the entire supply chain -- from raw material to inventory in the factory, on the high seas and at the port, at warehouses -- all the way to the consumer.

The second challenge is in the area of forecasting. The recession has made forecasting and planning a daunting task. Raja says, no one was able to forecast accurately last year, but we still had to do business, so it must be dealt with and improved gradually but consistently.

Third, Raja says, is the volatility of Pakistan's currency. The Pak Rupee is not very strong against major currencies, which is a real challenge for Procurement managers or Buyers.

Last, but not least, Raja believes there is a lot of room for improvement in Pakistan's infrastructure, something that requires Government involvement. If you divide Pakistan into North and South, Raja says, you will see that infrastructure in the North is much better, so again, there is much room for improvement especially in the Southern Region.

Solutions to the Challenges

What can be done to address these issues? That, Raja says, is the million dollar question. However, in terms of managing working capital, Raja believes the days of managing the entire supply chain only with systems, such as SAP or Oracle, are over. What he suggests is a complete "tear-down" of the supply chain. In other words, segregating it into small components, which provide a better view of working capital blocked in each area. "You have to be able to look at how much you have ordered, what your financial commitments are, and how much of your inventory is on the high seas and at port/factory etc, because IT MATTERS!! He says, you can't use materials that are lying at port. For example, In the US or in Europe, he added, you might have access to those materials in a day or so, but in Pakistan it can take six or seven days. So, the only way to control is to monitor & address each segment separately.

Raja's solution was to build a dashboard that allows him to focus on each and every component, after setting benchmark for each one of them. And, because you can't afford to lose orders, he added, you have to hit a balance between managing working capital and monitoring stock outs, which his dashboard addresses as well.

Regarding forecasting, Raja says we have to have our finger on the pulse of the market and we need to be proactive, not reactive. Additionally, he says, we must be able to change and modify our plans as the situation warrants. The solution, he says, is to filter information to ensure accuracy levels within plus or minus 10%. It is essential to be agile enough to adjust future plans accordingly or we will lose our competitive edge, he added.

Pakistan's currency issues present a real challenge that is not easily solved. Raja says, initially, the country could hedge foreign currencies, but the State Bank of Pakistan currently has regulations against it. Therefore, Pak Rupee devaluing rapidly increases the procurement cost substantially.

Finally, without the support of the government, there is little to be done about improving Pakistan's infrastructure, and while companies are addressing it by talking to other agencies, at the end of the day, it is mainly in the hands of the Government. Although we have seen some incredible work in Karachi (which is the Financial Hub of the country) by the City District Government, there is still a lot of work to be done in the Southern part of Pakistan, Raja emphasized.

Security-related Disruptions -- A Fact of Life

Commenting on Pakistan's current security situation, Raja Adeel Khalid said, "I think that it is a fact of life and we can't ignore this but we've got to deal with it. We, as a nation understand that and as industry professionals, we have to run our supply chains anyway."

When Raja was with Toyota, for example, the company introduced Kanban, which meant goods were ordered on a daily basis. Soon afterwards, one of the company's local suppliers wasn't able to make one of its daily deliveries due to a strike in the city. The solution for Toyota was to stockpile at least one day of inventory from each of its suppliers.

"There is no right answer," Raja, says, "and these sorts of disruptions should not happen, but when they do, you just have to deal with them. We're all fighting against this, and I don't believe this will be a problem in the long term."

Empowering Pakistan's Supply Chain Community

In Pakistan, Raja says, supply chain is a relatively new phenomenon, which makes finding qualified individuals somewhat difficult. Young people, he added, are more interested in other fields at the moment, something Raja and others are working to change.

In 2007, Raja established the Supply Chain Forum of Pakistan, a community similar to Logipi, that is focused on empowering supply chain professionals by providing a space where they can share experience, knowledge and best practices. "The goal of the forum," Raja said, "is to add value to the nation's economy and contribute to its competitiveness." Ultimately, Raja's goal for the forum is to bring passion and pride to the supply chain profession by ensuring a win-win for all stakeholders, which include industry professionals and supply chain professionals from the academic world.

Meet Raja Adeel Khalid

Raja is a business graduate from the University of Warwick, UK. He was with Toyota Pakistan initially where he was tasked with ordering supplies and managing inventory to ensure the smooth production of Toyota and Daihatsu vehicles. Today, Raja Adeel is Executive Vice President - Head of Sales and Supply Chain for Dawlance, Pakistan's leading home appliances manufacturer specializing in Refrigerators, Deep freezers, Microwave Ovens, Washing Machines and Split Air Conditioners. Dawlance is the market leader for more than 25 years in Pakistan with the market share over 70%. Dawlance currently exports to 15 countries and has a Vision to be the Regional Champion.

Raja also happens to be a Founder Director of “Supply Chain Forum of Pakistan”, first platform ever for the development of Supply Chain professionals in Pakistan.

The Challenge of Connecting Non-hierarchical Manufacturing Networks

The European electronics industry faces stiff competition from manufacturers in the far east and United States. In order to compete, European companies have to respond with improved flexibility to changing requirements and collaborate across the supply chain effectively capitalizing on collaborative decision making, shorter distances, high skill levels and shared cultural understanding.

According to Fortunato Cartolano, who is tasked with managing research and development for a project dubbed "CONVERGE," it is essential for the European electronics industry to capitalize on opportunities for streamlining the supply chain through shared knowledge, collaborative decision making and cultural understanding.

To address the issue, the electronics industry has already formed a number of non-hierarchical networks that inherently require greater collaboration at the tactical and strategic management level, which in turn requires a new level of data and information sharing between network partners. The new collaboration level requires a higher level of coordination on tactical and strategic management level and therefore a new level of data and information sharing with network partners. Managers have to distinguish in a new manner between shareable and non shareable information. As they weren’t obliged to do this in the past tools and methods are missing. The CONVERGE project closes this gap by providing a framework and tools for exchanging tactical and strategic information for decision making in non-hierarchical supply chain networks.

At present, collaboration within non-hierarchial networks is primarily focused on the operational level and is accomplished through Enterprise Resource Planning (ERP) systems. At the operational management and shop floor level, ERP systems can provide an integrated view of operations information across all functions within a company and can be used to build links to other companies. Where they fall short is in providing transparency at the strategic and tactical planning levels -- and that is exactly what Fortunato Cartolano and other electronics industry experts are addressing with the CONVERGE project.

The CONVERGE Solution

The CONVERGE project brings a consortium of experts, representing the European electronics industry, academia and technology providers, together as part of a research effort aimed at closing the gap by providing a framework and tools for exchanging tactical and strategic information necessary to make informed decisions. The overarching goal of the CONVERGE research project is to facilitate the free sharing of data and the "interconnectedness" of different supply chains while providing assurances that confidential information is secure.

The speed of development in the electronics industry demands supply chain transparency. Companies need visibility into future orders and risks across the supply chain, as well as visibility into tactical and strategic decisions made by their suppliers and customers, in order to plan their own activities accordingly. CONVERGE endeavors to create a network of partners who share information on previously agreed terms. Because each partner in the network needs the ability to make its own tactical and strategic decisions based on the multiple supply chains, the information cannot be centralized.

To that end, CONVERGE delivers a de-centralized decision support system for production planning and resource optimization based on:

1) a new reference model for inter-organizational decision taking,

2) deployment methods to adapt the generic reference model to application fields, networks and companies and

3) existing software supporting customer and supplier relations. Besides scientific and technological experts the CONVERGE consortium involves

a) four manufacturing companies addressing directly their network problems and

b) a supply chain interest group (non funded) representing the companies’ network partners.

This ensures a high industrial impact and dissemination level. In about 5 years the expected cost saving is in the order of 180 Mio. € (~$248 million) just assuming a diffusion rate of 10% of the 600 European Electronic Manufacturing Service companies.

Project CONVERGE Expected Results in Detail

15% on quotation generation cost

20% on delivery times (proactive production planning)

15% on inventory levels (current asset/non operating working capital)

+ 20% income and fulfillment of orders

Improvement of product quality

15% to 20% time savings (closer strategic coordination)

Overall performance and capacity enhancement

Meet Fortunato Cartolano

Fortunato Cartolano brings 25 years of business development and key program management experience to the table, having worked for SIEMENS Automotive and Magneti Marelli. Fortunado offers a bicultural background, is fluent in four European languages, and has practical work experience in over twelve countries across four continents. He holds a Master of Science in Aerospace Engineering from Institut Supérieur de l’Aéronautique et de l’Espace in Toulouse, France, and an Executive Master of Business Administration from HEC International Business School in Europe.

Today, Fortunato is President and CEO of FCO Global, a firm that specializes in strategy and management consulting, operational and financial performance improvement, and domestic and international business engineering and development.

Fortunato Cartolano is also actively involved in a 30-month research and development project called "CONVERGE," which aims to improve supply chain integration and real-time decision making by connecting non-hierarchical manufacturing networks within the European Electronics industry.

Meet Kate Vitasek

Kate Vitasek is a faculty member and lead researcher for the University of Tennessee’s Performance-Based Outsourcing program. She teaches executive development courses and serves as a mentor in the University’s Center for Executive Education. She also teaches MBA classes on performance management and lean supply chains for Wright State University, along with seminars for the Warehouse Education Research Council and the Council of Supply Chain Management Professionals.

The Creation of an Outsourcing Game-changer

Kate Vitasek is a name you might already know. If not, you should probably make a point of remembering it, because Kate Vitasek and a team of researchers may have uncovered a model that will transform the economics of outsourcing. It is called "vested outsourcing," and it has garnered quite a bit of media attention over the past few months. In short, vested outsourcing is a methodology that encourages companies and service providers to work collaboratively, and become "vested" in each other's success.

The term "vested outsourcing" was coined by researchers at the University of Tennessee, who, over the course of a four-year study funded by the United States Air Force and led by Kate Vitasek, examined companies with the very best outsourcing relationships and agreements. In the end, the research team identified "10 inherent ailments in today's flawed and old school outsourcing agreements." They also revealed five rules for creating a successful vested outsourcing agreement.

As the founder of the vested outsourcing concept, and in her role as lead researcher on the project, Kate Vitasek has created a business model that she, and many others, believe is an outsourcing "game-changer."

Game Theory, Freakonomics and SuperFreakonomics

In a recent interview with Logipi's Dustin Mattison, Kate Vitasek explained that vested outsourcing is associated with game theory, or behavioral economics. Game theory, you may recall, came into the general public's consciousness with the release of the film, A Beautiful Mind, which profiled the genius of mathematician John Nash. If you've seen the film, Kate advises to think back to the bar scene where Nash and his friends have their sights set on the same blonde woman, during which he also has "eureka moment." In the scene, Nash says, "If we all go for the blonde, we block each other, not a single one of us is going to get her. So, then we go for her friends, but they will all give us the cold shoulder, because nobody likes to be second choice. But what if no one goes for the blonde? We don't get in each other's way, and we don't insult the other girls. It's the only way we win." He went on to say, "The best result would come from everyone in the group doing what's best for himself, and the group." Game theory, which has proven to be successful, is also referred to as "Nash equilibrium," which as Kate put it, "really became the jettison for the study of collaborative economics and how people work together."

Kate Vitasek also referenced Freakonomics and SuperFreakonomics, co-authored by Steven D. Levitt and Stephen J. Dubner. An excerpt from the front flap of Freakonomics reads, "...economics is, at root, the study of incentives--how people get what they want, or need, especially when other people want or need the same thing." SuperFreakonomics on the other hand is about incentives and why people do what they do. In other words, according to Kate, "If you put an incentive out there, organizations and individuals will go toward those incentives."

"Vested outsourcing," Kate says, "uses collaborative economics or game theory, as well as incentive, to create a methodology for outsourcing that really binds the economics in that collaborative relationship to change the game."

And finally, the foundation of vested outsourcing is what Kate calls, a "what's in it for we relationship." It is an idea that flies in the face of how we have been trained to think about the art of negotiation, which is normally coming at it from a "what's in it for me" perspective. Vested outsourcing requires companies to sit on the same side of the table with their partners. After all, Kate said, both sides are working toward common goals, so it makes perfect for both sides to ask, "What's in it for we?"

The Five Rules of Vested Outsourcing

One of the key premises of vested outsourcing is its focus on buying results as opposed to buying tasks or activities. A conventional outsourcing relationship, Kate said, is activity or transaction-based. Companies pay for every touch, for every pallet to be stored and every call to be answered. In other words, every transaction generates a fee from the outsourcing provider. As companies become more efficient, and begin to eliminate transactions, they are literally creating a perverse incentive that penalizes outsource providers by reducing the number of transaction-based fees.

"What we need to do," Kate said, "is change the way we pay for things; instead of paying for activities, we pay for results." That is the whole idea behind vested outsourcing.

As we mentioned earlier, Kate Vitasek's research project identified five rules that should be applied anytime you're structuring an outsourcing deal. "If you follow these rules," Kate says, "you're likely to end up with a better outsourcing deal."

Rule #1

Replace the transaction-based business model with an outcome-based business model. The idea is to pay for the desired outcomes, not the individual activities. Begin by looking at the big picture. Ask yourself what you are you trying to achieve? Are you trying to lower supply chain costs as a percentage of sales, cut overall transportation costs, reduce inventory? Whatever your goals are, contract for the work based on outcomes.

Rule #2

Focus on the what not the how. Many conventional outsourcing agreements begin with a very long statement of work, where it is dictated what the service provider will do. Vested outsourcing "flips the concept on its head," and asks the question, why would you outsource to experts and then tell them how to perform the work? Remember to allow your service providers to be innovative in defining how service is delivered.

Rule #3

Clearly define measurable desired outcomes. Because payments will be paid based on outcomes, it is essential to define what you're trying to achieve and how those achievements, or outcomes, will be measured.

Rule #4

Develop a pricing model with incentives that are optimized for service tradeoffs. The idea is to create positive incentives that drive your outsource providers to solve a defined amd measurable set of problems.

Rule #5

Develop a governance structure that focuses on insight not oversight. Many companies have layers of people who are micromanaging their service providers. Move away from overseeing, or micromanaging, service providers and move toward a more positive environment where you have insight that is used in a positive way to achieve your desired outcome.

The Bottom Line

Vested outsourcing is a research-driven business model that is supported by The Outsourcing Institute (OI) as one of the next-generation, or what they call Outsourcing 2.0, concepts, and many thought leaders, including OI, ARC Advisory Group, and Palgrave MacMillan, who recently published Kate's book, Vested Outsourcing, believe the model will have the same significance that Six Sigma and Lean had on improved production processes in the 80s and 90s.

Under the direction of Kate Vitasek, University of Tennessee researchers studied outsourcing relationships and agreements, and have identified five rules that can help companies develop a sound outsourcing strategy and facilitate true vested, or performance-based, partnerships. "if you're not applying the rules of vested outsourcing," Kate said, "our research found that organizations typically get sick or have ailments, and we have revealed 10 common ailments in conventional outsourcing models in our book, as well as in an excerpt that we are allowing as a free download at www.vestedoutsourcing.com." You'll also find a wealth information on the vested outsourcing concept at the company's website, which those us of here at Logipi who have already done so, highly recommend you explore.

Meet Jason Peterson

Jason Peterson is an experienced entrepreneur, attorney, and producer named as one of the ‘Top 30 entrepreneurs under 30’ in Los Angeles. Jason is the founder and CEO of GoDigital Media Group, a provider of distribution, marketing, and content management solutions for digital media, and Symbolic Entertainment, a commercial production company.

GoDigital has four operational areas: (i) digital music monetization, (ii) digital movie & TV monetization, (iii) digital marketing services, and (iv) content & supply chain management technologies. GoDigital represents over 900,000 music copyrights, including content from famous artists such as The Temptations, James Brown, and Akon as well as over 15,000 hours of movie and TV programming with programs such as Instant Star, Lexx, and Lunar Jim.

Jason has produced music videos for Sony BMG, EMI, Universal, and Warner Bros among others. In addition to music videos and commercials, Jason has been a producer on seven feature films and nine television pilots. Jason remains the youngest producer to ever have produced a feature film in competition at the Sundance Film Festival (“The Beat”, Sundance 2003).

The foundation for his work is a license to practice law, a Juris Doctorate from Pepperdine University and a business degree with an emphasis in Cinema / Television from the University of Southern California’s Marshall School of Business honors program.

GoDigital's Version of Supply Chain

As the CEO of GoDigital Media Group, a New Media firm specializing in a number of strategic services, including distribution and digital supply chain, Jason Peterson's role is to set strategy, define business requirements for each of the company's business units, and ensure that the company has the financial and human resources required to execute that strategy.

The majority of GoDigital's work is in the entertainment space, in other words, music, film and television, which means its supply chain is very different from that of a typical manufacturer, because GoDigital's goods are intangible. "Every good is unique," Jason said, "it is produced by a producer one time, and then replicated as a mezzanine file." Once replicated, files do follow a sort of distribution supply chain path, but again, it is very different from physical distribution. Because the products are digital, the process involves file transformation, transcoding, metadata and things of that nature.

The Internet poses a number of supply chain business model challenges in terms of infinite shelf space and pure competition. The digital supply chain is in place, as is the network of providers, which means entertainment companies can get their content to market, around the world, in different territories, and in different exhibition formats, but can anybody find it? Therein lies the crux of the problem. "We built the business models," Jason said, "but can anybody find the content? Are we able to induce demand for the content, and how do we do that with our partners in the supply chain? Because when you’re in an infinite shelf space, the environment is very difficult. It's not like you walk into Blockbuster and you just go down the 'New Release' aisle and see what’s there. If it’s not on a home page, how are you going to find it?"

Digital Supply Chain Management as Defined By GoDigital

To drill a little deeper into GoDigital's business, it should be noted that GoDigital developed an integrated software and systems platform called Content Bridge that is a Web accessible content management platform with supply chain automation characteristics that fit squarely within the definition of digital supply chain management.

In the entertainment industry, Jason Peterson defines digital supply chain management as a process of managing your content internally such that you know your rights and obligations on that content -- understanding the characteristics of that content and being able to syndicate or distribute it to the myriad of business partners within your supply chain.

Each type of content, Jason explained, has different exhibition models. A movie, in the digital consumption model, for example, would have different exhibition models, including, high-end digital cinema, exhibition via computer using Internet models such as iTunes and Hulu, exhibition via television using digital models like VoD and iDTV, and exhibition via mobile phone using current networks and moving toward fourth-generation networks. So, as Jason stated, each of those exhibition formats requires a unique supply chain for delivering the content to retail, and ultimately, to the end user. "Digital supply chain management is really an appropriate term for the process of managing your content and syndicating, or delivering, it to a myriad of business partners across all those different types of exhibition,” Jason added.

What Digital Supply Chain Managers Could Be Doing Better

In Jason Peterson's mind, there are a couple of, what he calls, "pains" that need solving.

For starters, Jason believes digital supply chain managers need to do a better job of integrating all of the different processes that make a content-centric business work. "It’s one thing," he said, "to have a disparate system that does one thing really well, like transcode media, and maybe a big pipe that delivers media well to a business partner, but it’s an entirely different thing to integrate media transcoding, delivery, contract management, order management, and metadata management -- all in one place -- so that you have all the tools you need to effectively product manage those assets as they’re coming into market, and that’s a real pain for a lot of big content-centric companies. They’ve got disparate systems, individual departments to focus on one thing, and the left hand doesn’t talk to the right, and so it takes a long time to bring a product to market." Jason sees it as a lack of quality assurance due to the disparate processes and the huge human component. "it’s very difficult to be efficient and exploit a high percentage of your catalog in an environment like that, so I think bringing together all the processes in one place is very important," he added.

Secondly, in terms of what Jason believes supply chain managers could be doing better, lies in the area of "exhibition business model management," or "rights management." In the film and television industries, there is a traditional "windowed" business model that starts at the highest consumer buy-in, i.e., the movie theater level, to sell-through rental, all the way down to the lowest level, which is free television. Translating that business model into the digital space, and executing it with a myriad of business partners -- each with different business models, new business models and new exhibition formats -- and applying countless rules to individual products will become increasingly important, and nobody, according to Jason Peterson, outside of ContentBridge is doing it very well.

Improvements That Could be Made in Digital Distribution

Jason Peterson advises digital supply chain managers within major content-centric businesses to ask themselves, "How can I take the cost out of distributing, or syndicating, content for the retailer or business partner?" The answer to the question, Jason says, is to change their workflows to "restore once, digitize once, and distribute to many."

Currently, in the entertainment industry, major studios are making consumer-centric companies (retailers, portals, etc.) pay for the digitization and the delivery of media assets. Jason Peterson explains the process as follows, "A studio might keep an HD cam master and maybe a mezzanine file master in some format, DPX, CineForm or whatever, at their post production house. And if I run a set-top box company and I’m delivering movies to the television over this Internet-enabled set-top box, when I do a deal with that studio, I have to pay that post house to digitize my content, conform it to my mezzanine, or exhibition specification, and send it to me. And that happens over and over again for every business partner."

Jason says the current process represents a huge cost center, a huge time-waster, and is generally not very efficient -- meaning he would like to see digital supply chain managers shift their workflows from "digitize many and distribute many" to "digitize once and distribute many."

Digital Content's Love-Hate Relationship With the Internet

According to Jason Peterson, getting the product to market is only half the battle, at most. "There certainly are logistical issues in terms of exhibition, business model management, and logistical issues in the mobile space related to media formats and codecs and things of that nature, but assuming you have the systems to get the content to market in a manner that’s usable by your business partners -- and when I say ‘get the content,’ I mean the substantive content, the metadata, the marketing collateral, the whole package -- there’s still a very large problem that has to be surmounted, and that is the Internet," Jason said.

As Jason stated earlier, the Internet, as great as it is, creates an environment of infinite shelf space and pure competition. Inducing demand for content, down the supply chain, at the retail level, especially if it is not front and center on the retailer's homepage, really becomes a marketing problem. We live in an environment of increasing white noise, we’re getting more messages than we’ve ever gotten before, and Jason asks some valid questions... How do you cut through that white noise? How do you find people to which your content is relevant, and enter into what Jason calls, "a value-added bilateral relationship." In other words, how do you find the people who want to buy your content, and then stay connected to them so you can re-market to them intelligently over time?

Retailers like iTunes, YouTube and Hulu are moving toward becoming brands, and the exhibition format will become more and more agnostic. Overtime, they will offer many exhibition formats across many devices, because consumers won't want to download different types of content at different sites. What they will want, Jason says, is to go to the one location because ownership has access rights, and because they trust the brand, like the software and like the overall experience. The questions remain, however, once they arrive at a branded site, how will consumers be exposed to content, how can content owners engage the consumer and convert them into loyal repeat buyers, and how will content owners package the data to work with every business partner in the supply chain to deliver the content that consumers really want? These, Jason says, are the real challenges.

GoDigital's Integrated Digital Supply Chain Solution

"We recognized very early on that there was a massive problem facing the entertainment industry," Jason said, "and that problem was: If I have millions of pieces of content and hundreds, if not thousands, of business partners, how do I get all of that content to all of those business partners who all have heterogeneous requirements in an efficient, cost-effective, quality-assured manner?"

To address those problems, GoDigital Media Group built ContentBridge, a set of integrated tools that deal with everything from contract rights-holder management through the asset-management, product creation, distribution, and, in the near future, market intelligence. In closing, Jason Peterson said, "We've taken those disparate processes I discussed earlier and brought them into a cohesive platform that deals with the challenges of the digital space -- that is the really interesting vision here -- the unity of process that allows companies to act more efficiently, more quickly, and ultimately exploit business opportunities better than they otherwise would have been able to."

In Narasimha's experience, supply chain visibility is one of the biggest challenges facing the industry. In Latin American countries, Narasimha says, supply chain organizations are beginning to come up with new processes for increasing supply chain visibility from a production perspective. Without visibility, he added, production cannot be streamlined, which impacts the bottom line. Finding methods that allow supply chain information to flow through different headquarters and different systems is the real challenge.

Narasimha is focused on the demand signals, more specifically making sure they are accurate and received in a timely manner -- the only way to ensure proper supply chain planning. The key to finding the supply and demand balance, he says, is getting the right information from the right source. His role as a consultant is to design a supply chain process that delivers complete visibility of all necessary information with key performance indicators.

Meet Narasimha

Karunakar Narasimha Karunakar is a supply chain consultant and solutions visionary who has worked with various Fortune 500 companies with dealings in Latin America. His role is to match business problems with business applications to deliver technical solutions. Narasimha holds multiple certifications, including PMP, CSQA, CPIM and CSCP.

Having read the Wall Street Journal article titled, "Companies More Prone to Go Vertical," as well as Logipi's follow-up blog titled, "Vertical Integration -- Oracle, Pepsi, Apple, GM and others are going back to the future," Bill Leber, a business development manager with Swisslog, graciously accepted an invitation from Logipi to share his thoughts on the topic.

From Bill's perspective, last year's mantra was "hunker down and preserve cash." If you look at 2009, he says, it was a really bad year for all industries that require any sort of major capital outlay., M & A activity, which is typically a driving force in distribution system investment, was also relatively quiet. Companies haven't done a lot of aggressive expansion, he added, which has left many with cash on their balance sheets, so they are looking at what they are going to do with that cash moving forward. If you marry that with the Wall Street Journal's supposition that companies hope to gain more control over materials, manufacturing and distribution through vertical integration, you're talking Bill Leber's language.

As a business development manager with Swisslog, Bill is seeing a trend toward companies investing in "their sphere" to improve competitiveness, which is exactly what Swisslog does -- help companies invest in their distribution facilities to improve their supply chain. In Bill's words, "Our company specializes in material handling, automation, and software systems that optimize warehouses, distribution centers, order fulfillment centers and those sorts of facilities."

"We're saying consider the internal alternative to a 3PL"

Expanding on Swisslog's capabilities, Bill Leber said, "We’re asking companies to reconsider the trade-offs, long term, to insourcing vs. 3PLs. In Bill's opinion, once companies who choose to outsource distribution and logistics reach a certain critical mass they are giving up more than they think -- in particular, control and better connection to end users and suppliers. Relying on third party performance, he warns, can put companies at a strategic disadvantage to their competitors.

Vertical integration, as the Wall Street Journal article points out, gives companies more control, and says the reasons for choosing to do more internally vary from one company to the next, "Arcelor, the world's largest steelmaker, wants more control over its raw materials. Pepsi wants more authority over distribution. GM and Boeing are moving by necessity, to assure quantity and quality of vital parts from troubled suppliers. Some are repurchasing businesses they only recently shed."

"People have maxed out on outsourcing," Bill said, "we've heard a lot, in the last three years, about how to pick the best vendor, how to manage vendors and how to get closer to vendors, but there is a limit to that." Bill Leber would like more companies to think about the tradeoff involved with choosing to outsource -- "Your vendor is selling you on the fact that they can deliver better economy of scale and more expertise, but they also need a revenue stream and margin out of the work they're doing for you," he warned.

Getting Control of the Distribution Network

In Bill Leber's experience, the absolute best argument for vertical integration is PepsiCo. "Look at all the money Pepsi just spent on acquiring their bottlers," Bill said, "They didn’t do that because they were having issues with getting the stuff in the bottle -- It’s about getting control of the distribution network."

After years of outsourcing, helping companies regain control is a big part Swisslog's business. From facility design and financial justification to systems integration and operations support, Swisslog's primary objective is to find the optimal solution for its clients. "Our real niche is finding the best balance between a fully automated system and a semi-automated, or a manual system, and our core competence is the design, implementation and maintenance of the actual equipment and software that runs the distribution center," Bill explained.

Leber sees the economic trends signaling a return to vertical integration because he believes the United States is under-served and already lagging behind. "If you look at the degree of vertical integration and material handling automation, Europe is far ahead of the US," Bill said, "Even China, where labor costs tend to be low, is now more performance-driven -- our company has seen more market activity for automated distribution centers in both China and Europe than we do currently in North America.”

When asked if he sees vertical integration as the exclusive domain of large multinational companies, Bill said Swisslog works sucessfully with a number of +$100 million revenue companies, as well as several "huge" clients in the fortune 100, and while he hasn't seen recent specific examples of mid-sized companies moving toward vertical integration, he feels certain that it's only a matter of time until they follow the trend as well.

Meet Bill Leber

In his role as Business Development Manager for Swisslog, Bill Leber is responsible for driving the company's value added solutions to warehouse and distribution system design and automation in the North American market. Bill is an accomplished commercial manager with a proven track record in marketing, sales and new business development delivering a sustainable, positive bottom line. He also has extensive hands-on experience in the development and execution of market plans and comprehensive customer proposals.