Apple in the PRM blender yet again

Regular readers will recognise that I have been following a Supply Risk Management train of thought for some weeks. Linked with that is a forthcoming debate piece in Public Money and Management - I hope you will find that interesting, particularly those in the public sector.

However, you will also recall that I have been considering the SRM implications for Apple and specifically the iPhone 5 (you can pick you the blog trail here and here). The SRM issues for Apple just don't seem to be going away - today we learn that the Chairman of Foxconn, a strategic supplier, has announced:

"We can't really fulfil Apple's requests. Our shipments are insufficient ... given the huge market demand"

 Shares in Apple have, not surprisingly, fallen!

Meanwhile what will happen with the supply chains and shares of Sony and Nokia?  Have they alternative sources of supply? Who, in the customer pecking order, will Foxconn favour in terms of customer preference?  How will the various buyers, who compete in the marketplace and supply chain, have positioned themselves as preferred customer?  Which of the competitors has best positioned themselves in terms of SRM? While some believe that Foxconn has excess capacity elsewhere, what due diligence was completed on the basis of potential aggregated demand?

This is a fascinating saga which has implications right throughout the mobile technology world, but the lessons learnt should ring out for all CPOs.

When procurement strategy meets drugs war

I've discussed suppliers holding buyers to ransom as a result of the financial crisis (for example Comet and Lotus) but I never thought I would discuss pharmaceutical suppliers holding cancer victims within a country to ransom. Yet that is exactly what is happening as state run hospitals in Greece are deprived of bowel cancer drugs by German pharmaceutical company, Merck.  Of course Merck have a justification in that the pharmaceutical industry are owed £1.4bn by Greece and there is an hint of corruption about how the Greeks have resold previously supplied drugs.

On the other hand we also know that the pharmaceutical companies have a history of harvesting excessive profits and are not without questionable morals.

But will this lead to an increase in health tourism and Greek patients travelling to other EU countries for treatment?  Will that merely displace costs from one country to another and have a detrimental impact on the health delivery in those countries?  Equally, will the EU have to pick up additional costs as patients who may otherwise have been treated have require more expensive support?

The personal price to patients and families just couldn't be calculated and whole life costs take on a much more literal meaning.

This is really high-level European Procurement Strategy and a much more worthy topic of debate than whether or not Channel #5 is dangerous.  An innovative response is required and the leverage of all European country health budgets brought to bear before lives are lost unnecessarily.

Procurement sums up at the House of European History

The EU's House of European History will double its estimated £58m cost to £112m, while its annual running costs are estimated to soar by 80% to £12m per year. Part of the cost increase is said to be the finding of an underground river; were there no historical records of the river? When the underground river was located, were the additional costs fully understood and the business case reviewed prior to continuing to pour money into the project?  These are fairly obvious questions.

However, I think the real scrutiny should be on the calculation of running costs. The previous example of the Scottish Parliament construction suggested that the recurring costs of window cleaning had been unnecessarily increased through a poor design of windows.  But why have the running costs of the House of European History increased so dramatically?  Were they miscalculated at the start?  How many years have they been based on?  What was previously not included that now needs to be included?  An 80% increase on running costs suggests something was seriously wrong, a lack of due diligence, and a lack of scrutiny! We know that good procurement should be concerned with Whole Life Costs, and that capital costs frequently are far exceeded by ongoing revenue costs.  In fact there are plenty of examples of ongoing revenue costs leading to decisions being made that some investments can no longer be sustained.

Either way this is another example of poor cost estimates and/or poor procurement. But it also strikes me as weak project management and risk management. It begs the questions: 'Where will the line be drawn in cost overruns? and 'Who will be accountable for the additional costs?'  It can be assumed that European citizens will pick up the tab for something which the vast majority will never set foot in. Surely, when reviewing EU procurement there has to be scope for exploring a shift of responsibility from the  client having to pick up the tab when their advisers get it wrong. (I have previously discussed the deference given to experts.) 

I think there also needs to be some form of policy shift, particularly when citizens are being faced with austerity and asked to live within their means. Why can't tolerances be set within which projects have to be delivered; if those tolerances are exceeded then there needs to be serious and meaningful expert or political accountability?  Had such a tolerance been set perhaps this history lesson would have stopped once the underground river was located and the burden of an additional 80% of annual running costs laid at the feet of those who got it wrong, as opposed to being passed to the innocent European citizen.

Anyone want 2,400 laptops?: A cautionary tale of shared procurement.

It could be a very good time to buy a cheap laptop; but would you want 2,400?  If you do, now's the time to contact Torfaen Council in Wales.

Believing they were buying laptops on behalf of three councils, they discovered that one of their partners did not share that view. The council which opted out of the purchase claim they hadn't made any commitment as it was their view the business case didn't stack up:

At no point did the city council make a formal commitment to the project and we were surprised when we learned that Torfaen had undertaken this procurement.

I suspect that all three councils will think twice before their next purchasing collaboration.

This should not be viewed as a case against collaborative purchasing, but instead a demonstration of the need to have clear written agreements in place between partners prior to entering into any contractual agreement with the market.

Perhaps, the impact could also have been reduced had they merely entered into a framework arrangement with no commitment to purchase. The strange thing is that previous questions, which appear to relate to the same contract, seem to suggest that no confirmed quantities had been given:

... in reference to the 400 unit figure quoted in the original tender, that suppliers were told that this was no indication of the number of units it would purchase in future... We told suppliers the quantity of laptops that we had purchased in the previous financial year and advised that there was no guaranteed usage for the contract period.

If this relates to the same laptop contract then things could get even more messy since there were issues raised previously regarding the mini-competition evaluation approach with the projected demand being a clincher in the award.

It is not clear if Torfean's supplier has taken any steps to support the council in reducing the impact through selling on their behalf, but if you happen to see 2,400 unused laptops, just out of warranty, on eBay or Gumtree, this may be a good time to contact the seller direct.

Comet brought down by supply chain

If you are one of the 7,000 employees of Comet, the high-street electrical retailer, you could understandably not share the euphoria or even care that the UK has allegedly come out of recession. You may also feel that managing the economy is nothing more than rhetoric -  real-life makes you wonder what happens to you when Comet goes into administration next Thursday.

Just as alien will be the language of SRM, upstream management, and trade credit insurance but they are what is really behind the predicament.

As we have been discussing all too often in this blog, cash flow and the absence of credit are throttling businesses - Comet is just the latest high profile casualty. The banking crisis now has a different meaning!  Yet at the same time suppliers are considering the risk of whether their customers are a good credit risk.

This is another twist of the Lotus discussion, but this time the problem appears to be Comet's difficulty in obtaining trade credit insurance.  Trade credit insurance would provide protection to suppliers in the event of Comet's failure.  Ironically the risk of failure is increased as a result of a lack of suppliers confidence - it's a vicious circle.  This is calling for new procurement skills and strategies; the need to reassure the supply market that the buying organisation is a good risk.

Yet at the same time how much of a suppliers lack of confidence is coloured by a lack of buyer humility and benevolence having been shown to the supplier when performance was not as well as expected.  To a certain extent 'the ball is now on the other foot'.  But there's also a systemic risk - how can buyers convince their Accounts Payable of the need to accelerate payment.  Could this be the time for pCards to step in with the card issuers effectively providing the trade credit insurance? Could/should the government intervene?

I recently discussed Supply Chain Financing although that was from the perspective of the buyer supporting the supplier. This is different with suppliers potentially holding buyers to ransom - will they take the risk?  Will suppliers seek to renegotiate prices and terms in return?  It is clear that the aftershocks of the financial crisis are like an electrical current with shocks going up and down the supply chain but increasing in magnitude, velocity and frequency.

Can a $10 hinge be strategic?

I bet if I asked the average person that question they would look at me blankly. Even if I asked 'where would a hinge be positioned in a Kraljic matrix?', I suspect most would think it was on the lower end of risk.

But what if the hinge is on a laptop?  What if it was going to adversely impact on the new Windows 8?  Today's WSJ has a fascinating article 'Window 8 Success Hinges on $10 Part' which illustrates the importance of laptop hinges.

Strange thing is the number of times procurement people tell me that low value purchases are not where there attention should be focused.  My response could be something about the straw which breaks the camels back; now on reflection I think I will refer to the $10 hinge which moves the laptop's back. Aim for lowest price and a single source supplier and you may just have made a mistake!

Lesson learnt: strategic sourcing is about more than price.

Procurement responsibility, accountability and L'Aquila

I do not intend to address the procurement weaknesses associated with the 2009 earthquake which led to 308 dying. However, for those unaware of ongoing story, I want to touch on the consequential sentencing yesterday of six scientists and a senior government official.  They were members of Italy's 'Great Risks Commission' and they've now been sentenced to six years imprisonment.  The seven plan to appeal but, nevertheless, two judges decided the experts had downplayed the risks of a massive earthquake.  I have no way of knowing if that was a reasonable judgement, or whether the penalty is proportionate.

Please, please don't get me wrong, I am not trivialising the L'Aquila tragedy. However, in the procurement world we have many academics, advisors and practitioners who are asked to future-gaze and make recommendations on what should be expected or providing reassurance. Sometimes the recommendations are implied predictions of savings to be achieved, sometimes of predictions of impact, sometimes predictions supply risk.  What would happen if, as procurement predictors, we were held more accountable for our predictions.  Personally, I would welcome this.  It would lead to more robust research, less over-selling, and greater focus on outcomes. It could weed out the snake oil salesmen and charlatans.

But it may also drive a better ownership of supply risk management - ownership which is clearly lacking, if we can accept KPMG's recent benchmarking report which implies that only 18% of organisations have risk management integrated into procurement for direct spend (8% for indirect spend).

Are we ready for greater accountability, or is that just one risk we are not prepared to accept?