What is Supply Chain Management (SCM 101), and should you major in it? (part 5 of 7)

to talk to the Fortune 500 who would
they get their money from. Right, right – I get it. Now I’ve got more to say on that so it so hang in there. So customers are won’t, they’re saying they’re willing to
pay more. I’m not convinced. Investment attractiveness. I found a few studies
that basically said this. Firms have two customers: the consumer buys the stuff, I
agree, and those people who provide financial capital to the firm buying at
stocks and months. I agree with that. Shareholders recommend the top
priorities for corporate expenditures should be to clean up the
environment and create greener products and promote sustainability. Increased
dividends were ranked lower at third place. If I know my corporate America, I’m
not buying that but if I’m throwing out a survey I’m saying all the right things.
If I’m a vice president a director or a CEO. Like I told you, I sat down with over
50 companies last semester all of which you’d recognize the names of and none of
them said what that is saying there this is one of our top priorities right now.
You hear crickets chirping in that room where it wasn’t a priority for them. So
hang in there, I’m trying to get at these are some legitimate reasons for why
there is momentum. If you go to the next page. Is that page 5? Oh page 4.
Dis-aggregation of overhead costs. If you look at a manufacturing company – a
company that builds something. Keep it simple. They have three types of costs.
They have direct material costs, direct labor costs, and then everything else is
called overhead. Ok, corporate America for the last 20-30 years has been obsessed
with reducing direct material and direct labor costs and they’ve gotten very good
at it. It’s almost gotten to the point where you know there’s not a lot left
there to do in terms of cutting costs. So corporate America’s saying, “Ok now we have these overhead costs that we haven’t been paying attention to that much, let’s
start hacking away at those costs.” Because if you can cut costs by $1,
that’s the same thing as giving a company $1 worth of pre-tax profit. So
you go into a company you work for someone and you figure out how to do
something better, faster, and cheaper. You go to your boss and you say, “I’ve cut our
costs by $1.” You’ve done the same thing as going to your boss and saying,
“I’ve given our company $1 worth of pre-tax profit.” You could double sales
and maybe given them two extra cents, but it’s not nearly as effective as cutting
costs. So corporate America has gotten really good at cutting costs. It’s very
effective in terms of widening margins, increasing asset turnover, and pumping up
ROI. So now their focus is on, ok let’s start plugging away at these overhead
costs. My point there is, if you look at waste and pollution and not being green
and not being sustainable, those costs are huge and they get thrown into an
overhead account. And one of the reasons companies have struggled with managing
these costs is they haven’t been tracking them. Keeping track of it, they don’t know
the costs in detail, they don’t know the costs where they’re coming from in
excruciating detail. It’s really hard to cut costs if you don’t know what your
costs are. If you don’t know where your costs are coming from. And I’m saying for
a lot of environmental types of costs like pollution, they don’t know exactly
what they are, where they’re coming from but the bills get paid and it’s really
hard to get better at that if you’re not measuring it and you don’t know where
it’s coming from. So corporate America is finally acknowledging that we can still
pursue our passion of widening margins and pumping out asset turnover rate,
increasing ROI. And the next frontier for them will be on overhead and within overhead comes pollution. So there’s potential there for it to be industry driven from
that standpoint that you can increase profitability and be greener and be more
sustainable. But for industry and corporate America it tends to have to be
profit driven because that’s how they role because so much
revolves around shareholder value today. If you go to the next page – Ability to
Influence Regulations. But other reasons why companies might decide to be greener is if they’re the best at sustainability, regulatory geniuses(?) might actually come
to them for the standards and the benchmark that other companies have to
follow. So if you’re always a leader, you’re never behind and you set the
benchmark and standard for industry. So I think a lot of companies decide to take
on sustainability for that reason – that they want to be the benchmark for
everyone else, especially their competition. Imagine if you’re an industry,
you’re competing against a bunch of companies and always chasing you on
these regulations that have something to do with pollution waste and
sustainability. Problems with disposal – it’s getting really expensive. I worked
at General Motors in the late ’80s at a truck plant and we would make trucks and
stick parts together and there would be a lot of stuff left over. There’d be like
carpet left over, metal left over, and you think, why not design the truck in a way
so that when you stick the parts together nothing’s left over? They didn’t
even think in those terms back in the late 80s, they thought but actually they
just didn’t even cross their mind at that point. So they were sending a bunch
of solid waste to landfills. Local municipalities would have to pay like by
the ton and get insurance and all that stuff and label it a certain way. They
were sending so much stuff to the landfill, to a local municipality
landfill, that they couldn’t afford to send it there anymore. So what would you
do if you were an executive, a director, or a VP? Probably say, “Well build the damn trucks in a way where there’s no stuff left over.” No, that would be way too
leading-edge. What they decided was, we’ll putting on trucks and trains depending
on what fuel prices are, we’ll open up our own landfill in South Dakota, and
we’ll ship it out there. General Motors opened up their own
landfill in South Dakota for mostly truck and car plants that were in the
Metro Detroit area. Not too proactive right? But that was their solution to
dealing with it’s too expensive to send it at the local landfill so we’ll send
it out to our own in South Dakota. They ran the numbers, they crunched the
numbers, they did the economics, and they said this actually generated cost
savings for us, so let’s do it this way versus just saying how about we didn’t
create the crap in the first place so we’d only have to open up a landfill. We
require an investment, require training. It might not actually accomplish
anything for five to ten years down the road, but guess what? You never had to open up a landfill in the process – one of which is still
operating today. All right, so I’m trying to wrap it up here as to all the reasons
that companies are trying. Four, five… page six. There is some data out there that
basically says the companies that are sustainable, they’re greener, that take the
environment seriously, that take child labor loss seriously, that take energy
seriously. I was in a Seattle Washington this past summer. I have a former student
of mine, he’s created his own company. His company basically is, he’s created a
framework for sustainability that doesn’t just focus on an unjust energy,
that doesn’t just focus on child labor, that doesn’t just focus on pollution.
Because what he noticed was, he was out in the workforce and there were all
these different standards for doing this really well, this really well, and this
really well, but there wasn’t one comprehensive framework that corporate
America could buy into. So he created one and he has this rubber stamp. The
company’s called Verago and he basically says if you do this framework,
it’s all-encompassing and you can get a rubber stamp from my company that says
you take sustainability very seriously. So he has a roundtable now of companies
that have looked at his framework and they’ve said, “You know what? This is
pretty good and if we do this and then use it with our suppliers, we’re gonna
not only do things better, faster, and cheaper, we’re gonna be more sustainable,
we’re gonna get waste out of our company and that’s the right thing to do. But
anytime you get rid of waste, which is always non value-added you actually do
things better, faster, and cheaper and make more money.” So I went out there to
Seattle, Washington. The meeting was that Microsoft headquarters – oddly enough an example of a company that’s one of the most successful in
human history that reached the point where they got big and fat. I was there
and on the day of the meeting it was announced that Microsoft is laying
18,000 people. So that was a bad time to have a meeting and be at Microsoft
headquarters because that had never happened at Microsoft before. But they
had a meeting with a bunch of other companies: Honeywell, Nike, Coors, Kellogg’s.
We basically sat in a circle and said, “This stuff’s really important, but we
need a framework that we can work with that doesn’t just focus on bits and pieces
of sustainability – that puts it all together.”
So I actually had a student, former student, that has a company now that this is
gaining momentum. Honeywell is test pilotting and a couple of other companies are
likewise test piloting. They’re very happy with the results, the return on
investment, the payback period – its impact on sustainability. So that’s all going
very well, but the point I’m trying to make is, it looks like if you look at
sustainability and the companies that are said to be sustainable and you study
them, they make a lot of money and so maybe we can be sustainable, more
environmentally responsible, and greener and still be very profitable. Maybe the
way to look at it is, its waste and all waste is not value-added, which increases
costs and lowers performance. So maybe this is the next step of the cost
revolution or quality revolution that’s going on. Alright so the next page. This
is kind of the more important one that I wanted to talk about is, the fact is, most
companies aren’t sustainable. They’re not environmentally responsible. They’re not
socially responsible. So like what’s the big hang-up and the problem? Why do they
struggle with us? Why is it not a priority? So on page 7, first bullet
I have is this is top management must be willing to accept and champion
corporate-wide development if these developments are to be accepted. Vice
presidents and CEOs got to back it up. I hate to be cynical, but if I’m a vice
president or a CEO and I know I only got 2 to 5 to 10 years left and a huge part
of my compensation package is in a company stock and I know what makes
stock’s stock prices go up. You widen margins. How do you wide margins?
You cut costs. You increase asset turnover rate. You do more with less. How
do you do that? You outsource more. Uour ROI goes up. Your stock goes up. I go
to Naples, Florida in the wintertime. Richest place in the world during the
wintertime. Has more billionaires and millionaires per capita than any other
place in the world. I start meeting these people. A lot of them are from the
Midwest. Like where’d you work? What companies did you work? You’d be
shocked at how many of them are former auto industry, executive, Titan types that
are worth 10, 20, 30, 40, 50 million dollars. I kind of get it. If I can cut costs
really quickly by outsourcing to something to China because it’ll cost me
30 cents per part versus $1 part, I can reduce my direct material costing that
as a direct and to my body bottom-line almost
immediately. Stock goes up. My compensation goes up. But five, ten
fifteen, twenty years down the road when that part sucks in quality, when the lead
times are really long, when the insurance is really expensive, in the auto industry
there’s data that basically proves twenty years into this. Twenty years ago
if you bought a part from Indiana for a dollar and you bought it for 70 cents
from China, we got twenty years worth of data now that says the China part’s way,
way, way more expensive. It’s actually like a dollar fifty because you have
larger inventories, longer lead times, more expensive insurance, more freight.
Yet all those costs up over the time period that you’re buying the parts from
China. It’s way more expensive than dollar, so it actually would’ve been
cheaper. But there’s some executive that made that decision that is a
multi-millionaire because of that decision. And right now it’s killing
companies because they’re stuck with that sourcing decision five, ten, fifteen,
twenty years later and they’re trying to make sense out of the data and say well
actually the data says this, why do we make this decision back then? There’s
someone out there that’s a little self-serving that’s focused on doing
things better, faster, and cheaper or not thinking long term and that sometimes
includes not considering sustainability. *Person asks a question, but it is hard to hear* In the auto industry, my students go out into the auto industry and buy parts for Ford. Their boss’s boss’s boss tells them, “You have to cut costs by five percent a year.” So if you buy a part for a dollar, okay, you
have to cut those costs by five percent a year. Okay so after five years you want
to pay was that seventy five cents per part? Then after ten years you expect to
buy that part for 50 cents per part? So what I’ve noticed is I’m informally
doing a study on this if you look at the vice president’s of say operations or
supply chain management, to what extent are their bonuses contingent on them
generating an immediate cost savings? So you got the CEO saying this is your
compensation package is gonna look like. I’ll bet you it’s a very large component
of that and the problem with that is you tend to be very short-sighted in your
considerations. Especially again, let’s say in your 50s or 60s or 70s, and you
know you’re out in five years. They know how to do stuff that can save companies
billions of dollars, but they’re not thinking beyond 5, 10, 15 years because
they’re gonna be down in Naples, Florida in a multi-million dollar house. And
that’s what that’s the self-serving egotistical part that I struggle with is
we need the people at the top of the food chain starting to think like us so
by doing this right now you guys will be at the top of the food chain. In your
case, Sally, five years. In your case, three. In your case, maybe twelve. Okay, joking, joking. Moving on. Our customers really willing to pay the
added costs associated with having something that is socially responsible
if that actually means companies have to increase their costs. There are many
reported cases of sustainability investments which we have resulted in
negative returns. Sustainability investments have actually lowered the
value of some firms stocks. There’s, there’s some data out there that says if
you invest in sustainability, that it doesn’t pay for itself as
quickly as corporate America likes or is used to. Now I’m gonna pick on you
again since you’re on my students. Let’s say you go to your boss and you say, “Boss,
give me a dollar. I’m going to invest that dollar in our
company. It’s gonna save us at least a dollar.” Your boss is gonna say, “How long
will it take for that one dollar investment to save me at least a dollar?”
In corporate America out there what do you think the going rate is for payback
period? I was going to say 6 to 12 months.
The problem with a lot of the greener investments like when you want increase
like recyclability content, you want to stick parts together where there’s
nothing left over, the payback period, it’s there there’s a return on
investment, but it tends to be a little further out. So if you’re an executive
that’s not going to be there a little further out, you’re less inclined to
green-light investments that don’t have a payback period of six months or less.
Ideally you walk in there you say, “They’ll pay for itself in two weeks.” Boss says, “Here’s the dollar. That’s a no-brainer. That’s gonna make me look really good.”
Back we’re back to ego. It’s gonna make me look really good. But I would argue too,
if you can do something that doesn’t have long-term consequences where it
pays for itself in two weeks, there’s probably something to that. If big cost
and industry as tools and equipment are breaking down and that costs factories
lots of money because of tons of downtime, they implement software that
says clean your tools on these dates and they won’t break down. So you can spend a
million bucks on software – that’s an investment that pays for itself in about
two weeks. So that’s a no-brainer for a manager. The thing is they don’t have an
unlimited supply of resources so that they have a dollar to spend they’re
saying I’ll spend it on the preventative maintenance software because the payback
period is two weeks, but if I increase the recyclability content gosh that
could be way down the road. What am I going to do with that $1 that the vice
president gave me to invest to help do things better, faster, and cheaper? So
there’s a little bit of a struggle out there for managers because when they
look at the out return on investment the payback period, the numbers aren’t
working for them when it comes to stuff that tends to be a little greener. Here’s
another one how do firms incorporate sustainability issues into…

2 thoughts on “What is Supply Chain Management (SCM 101), and should you major in it? (part 5 of 7)

  1. Update as of January 2019: Students are still getting 3-5 job offers
    upon graduation. The average starting salary is in the low $60s, with the top students getting offers of over $70K. Most graduates are well over $100K by age 30. Also, CEO backgrounds are trending on SCM work experience.

  2. Handout can be found at:

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