Aligning incentives in supply chains

Most companies don't worry about the behavior of their supply chain partners. Instead, they expect the supply chain to work efficiently without interference, as if guided by Adam Smith's famed invisible hand. In their study of more than 50 supply networks, V.G. Narayanan and Ananth Raman found that companies often looked out for their own interests and ignored those of their network partners. Consequently, supply chains performed poorly. Those results aren't shocking when you consider that supply chains extend across several functions and many companies, each with its own priorities and goals. Yet all those functions and firms must pull in the same direction for a chain to deliver goods and services to consumers quickly and cost-effectively. According to the authors, a supply chain works well only if the risks, costs, and rewards of doing business are distributed fairly across the network. In fact, misaligned incentives are often the cause of excess inventory, stock-outs, incorrect forecasts, inadequate sales efforts, and even poor customer service. The fates of all supply chain partners are interlinked: If the firms work together to serve consumers, they will all win. However, they can do that only if incentives are aligned. Companies must acknowledge that the problem of incentive misalignment exists and then determine its root cause and align or redesign incentives. They can improve alignment by, for instance, adopting revenue-sharing contracts, using technology to track previously hidden information, or working with intermediaries to build trust among network partners. It's also important to periodically reassess incentives, because even top-performing networks find that changes in technology or business conditions alter the alignment of incentives.     

Leading through rough times. An interview with Novell's Eric Schmidt. Interview by Bronwyn Fryer

Few large companies have soared as high, sunk as low, and struggled as long as the 18-year-old networking software maker Novell. For years, the company dominated the market for local area networks, but by 1997, it had faltered due to misguided acquisitions, product missteps, and large unsold inventories. That's when Eric Schmidt arrived from Sun Microsystems to take over as Novell's third CEO. He turned the company around with a deft combination of cost reductions, divestitures, and new product rollouts, and by 1998, it was back in the black. Unfortunately, the good times didn't last, and like most technology companies, Novell is once again struggling with a slowdown in demand. But Schmidt is optimistic about returning Novell to good health, and his strategies suggest ways for other organizations to handle themselves during downturns. He counsels against being overly cautious during such times. It may be necessary to eliminate excess inventory, cut costs, and reduce the size of the staff and the management team in order to stabilize a company. Working to retain those employees whom he calls the "smart people" and keeping them motivated will have long-term payoffs. Further, Schmidt says it is necessary to acknowledge and overcome a "culture of fear," the deadening environment of cynicism in which employees suppress thoughts and feelings because they're worried about layoffs. His additional advice: keep new products coming out to sustain the interest of customers and the press, pay attention to your cash position, stay focused on your desired outcomes, and take heart from other industry leaders.     

When your contract manufacturer becomes your competitor

PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers. Shanghai Automotive Industry Corporation (SAIC) started out manufacturing vehicles for Volkswagen and GM; now it's preparing to sell its own cars in China, Europe, and North America. Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside. In this article, the authors explore the double-edged relationships original equipment manufacturers (OEMs) forge with their contract manufacturers (CMs). On the one hand, an OEM can reduce its labor costs, free up capital, and improve worker productivity by outsourcing all the manufacturing of a product. The company can then concentrate on value-adding activities--research and development, product design, and marketing, for instance. On the other hand, an OEM that retains a contract manufacturer may find itself immersed in a melodrama replete with promiscuity (the ambitious CM pursues liaisons with other OEMs), infidelity (the OEM's retailers and distributors shift their business to the upstart CM), and betrayal (the brazen CM transmits the OEM's intellectual property to the OEM's rivals or keeps it for itself when the contract is up). OEMs cannot simply terminate their outsourcing arrangements--they need contract manufacturers in order to keep specializing, adding value, and staying competitive. But OEMs can manage these relationships so that they don't become weak or the CMs too strong. Doing so requires modesty about revealing trade secrets; caution about whom one consorts with; and a judicious degree of intimacy, loyalty, and generosity toward partners and customers.     

The triple-A supply chain

Building a strong supply chain is essential for business success. But when it comes to improving their supply chains, few companies take the right approach. Many businesses work to make their chains faster or more cost-effective, assuming that those steps are the keys to competitive advantage. To the contrary: Supply chains that focus on speed and costs tend to deteriorate over time. The author has spent 15 years studying more than 60 companies to gain insight into this and other supply chain dilemmas. His conclusion: Only companies that build supply chains that are agile, adaptable, and aligned get ahead of their rivals. All three components are essential; without any one of them, supply chains break down. Great companies create supply chains that respond to abrupt changes in markets. Agility is critical because in most industries, both demand and supply fluctuate rapidly and widely. Supply chains typically cope by playing speed against costs, but agile ones respond both quickly and cost-efficiently. Great companies also adapt their supply networks when markets or strategies change. The best supply chains allow managers to identify structural shifts early by recording the latest data, filtering out noise, and tracking key patterns. Finally, great companies align the interests of the partners in their supply chains with their own. That's important because every firm is concerned solely with its own interests. If its goals are out of alignment with those of other partners in the supply chain, performance will suffer. When companies hear about the triple-A supply chain, they assume that building one will require increased technology and investment. But most firms already have the infrastructure in place to create one. A fresh attitude alone can go a long way toward making it happen.     

Cocreating business's new social compact

Moving beyond decades of mutual distrust and animosity, corporations and nongovernmental organizations (NGOs) are learning to cooperate with each other. Realizing that their interests are converging, the two sides are working together to create innovative business models that are helping to grow new markets and accelerate the eradication of poverty. The path to convergence has proceeded in three stages. In the initial be-responsible stage, companies and NGOs, realizing that they had to coexist, started to look for ways to influence each other through joint social responsibility projects. This experience paved the way for the get-into-business stage, in which NGOs and companies sought to serve the poor by setting up successful businesses. In the process, NGOs learned business discipline from the private sector, while corporations gained an appreciation for the local knowledge, low-cost business models, and community-based marketing techniques that the NGOs have mastered. Increased success on both sides has laid the foundation for the cocreate-business stage, in which companies and NGOs become key parts of each other's capacity to deliver value. When BP sought to market a duel-fuel portable stove in India, it set up one such cocreation system with three Indian NGOs. The system allowed BP to bring the innovative stove to a geographically dispersed market through myriad local distributors without incurring distribution costs so high that the product would become unaffordable. The company sold its stoves profitably, the NGOs gained access to a lucrative revenue stream that could fund other projects, and consumers got more than the ability to sit down to a hot meal-they got the opportunity to earn incomes as the local distributors and thus to gain economic and social influence.     

Beyond offshoring: assess your company's global potential

In the past few years, companies have become aware that they can slash costs by offshoring: moving jobs to lower-wage locations. But this practice is just the tip of the iceberg in terms of how globalization can transform industries, according to research by the McKinsey Global Institute (MGI). The institute's yearlong study suggests that by streamlining their production processes and supply chains globally, rather than just nationally or regionally, companies can lower their costs-as we've seen in the consumer-electronics and PC industries. Companies can save as much as 70% of their total costs through globalization--50% from offshoring, 5% from training and business-task redesign, and 15% from process improvements. But they don't have to stop there. The cost reductions make it possible to lower prices and expand into new markets, attracting whole new classes of customers. To date, however, few businesses have recognized the full scope of performance improvements that globalization makes possible, much less developed sound strategies for capturing those opportunities. In this article, Diana Farrell, director of MGI, offers a step-by-step approach to doing both things. Among her suggestions: Assess where your industry falls along the globalization spectrum, because not all sectors of the economy face the same challenges and opportunities at the same time. Also, pay attention to production, regulatory, and organizational barriers to globalization. If any of these can be changed, size up the cost-saving (and revenue-generating) opportunities that will emerge for your company as a result of those changes. Farrell also defines the five stages of globalization-market entry, product specialization, value chain disaggregation, value chain reengineering, and the creation of new markets-and notes the different levers for cutting costs and creating value that companies can use in each phase.     

农产品电商供应链发展的问题及对策分析

目前,国内农产品供应链还存在采购环节复杂、库存积压、信息传递不流畅、物流配送效率低等问题。互联网时代的到来给农产品供应链发展注入了新鲜血液,推动农产品供应链从单一走向融合,给农村经济发展带来了新的曙光。要完善农产品供应链,可以从采购、库存、信息管理、物流管理四个方面进行改善,优化采购环节,明确顾客需求和关系目标,库存分类管理,拓展零售渠道,建立第三方物流,实现农产品电商供应链和农村经济更高效的发展。     

Global added value of flexible benefits

Flexible benefits, or "flex," is a strategic human resources solution that can give companies a truly competitive edge in winning the global war for talent and containing costs. Several companies in Asia plan to implement flex in the next few years, and a number of emerging best practices in flexible benefits design are being developed. This article discusses the many advantages of flex, flex best practices emerging across Asia, and important considerations for employers when designing flexible benefits. Finally, the author shows how one global company in Singapore found flex to be an effective differentiator for attracting and retaining talent as well as helping manage employee health care costs.     

Enacting a European supply chain: a case study on the role of management accounting

This study reports on an action research project carried out in two non-Japanese, U.K. manufacturing companies that were considering the establishment of a strategic supply partnership. In the assembler company, materials constituted 80% of manufacturing costs with the result that managing supply chain costs has become a most critical element in overall cost control. The company was seeking closer ties involving information sharing and R&D collaboration with suppliers of strategic components. On its part, the supplier wished to move towards the level of co-operation and trust that the two companies had realized in their U.S. operations. The participation of the researchers as neutral intermediaries between the two companies gave them an opportunity to analyse the role of management accounting in the construction of a strategic partnership. The constitutional role of accounting is highlighted together with the need to develop costing and performance measurement technologies that can be understood and respected by both senior managers and non-accountants involved in the procurement process.     

Advisor Choice in Asia-Pacific Property Markets

This paper examines advisor choice decisions by publicly traded REITs and listed property companies in Asia-Pacific real estate markets. Using a sample of 168 firms, we find robust evidence that firms strategically evaluate and compare the increased agency costs associated with external advisement against the potential benefits associated with collocating decision rights with location specific soft information. Our empirical results reveal real estate companies tend to hire external advisors when they invest in countries: 1) that are more economically and politically unstable, 2) whose legal system is based on civil law, 3) where the level of corruption is perceived to be high, and 4) when disclosure is relatively poor. Additionally, we find the probability of retaining an external advisor is directly related to the expected agency costs. Lastly, we find evidence of return premiums in excess of 13 % for firms whose organizational structure matches their investment profile. As such, we conclude that the decision to hire an external advisor represents a value relevant trade-off between the costs and benefits of this organizational arrangement.     

Build the co-creative enterprise

These days more companies are inviting customers to help them design products. Now a few are taking things further and including their other stakeholders--employees, suppliers, distributors, and even regulators--in "co-creation" efforts, too. By focusing on improving the experiences of everyone involved, such firms are achieving breakthrough insights, lower costs, new revenues, and new business models. Consider how this worked at France's La Poste, which wanted to expand package delivery and banking services in light of a decline in its mail business. La Poste had three obstacles: unmotivated union tellers, customers disgruntled by long waits, and frustrated local managers, who felt caught in between. The company set some high-level goals and invited all three groups to decide how to reach them together. To get tellers' buy-in, La Poste gave them a say in their schedules. In workshops, the groups figured out when each office should be open and how its space should be configured. The results: a 50% decrease in waiting time, a jump in satisfaction for customers, soaring job satisfaction among tellers, and significant growth in package delivery and banking, despite the recession.     

Making Financial Goals and Reporting Policies Serve

The main. nancial goal of Progressive Insurance, the third largest underwriter of auto insurance in the U.S., has remained the same since the late 1960s. Expressed in three words, "96 and grow," the goal tells the company's managers to pursue all growth opportunities while maintaining a "combined ratio" no higher than 96, or what amounts to a minimum 4% spread between revenues (premiums) and costs (including expected losses). Thanks in part to the clarity of mission provided by this goal, the company has produced an average 15% rate of growth in revenues and earnings, along with a remarkably stable 15% return for its shareholders, since going public in 1971.
Progressive's simplicity and clarity of mission is also partly responsible for another of the company's distinctive policies: product pricing that, while disciplined, is aggressive and highly decentralized. Having invested some $500 million per year developing statistical models for pricing individual customer risks and acquisition costs, the company was among the. rst in its industry to underwrite "non-standard" risks. And aided by sophisticated pricing models, each of Progressive's 100 or so local product managers are charged with adapting those models to come up with premiums for their own regions.
To go along with its strategic and organizational innovations, Progressive also has an innovative disclosure policy. Apart from SEC reports, the company's communications seldom mention earnings or earnings per share, and the company has never provided earnings guidance. With the passage of Reg. FD in late 2000, the company brie. y considered offering guidance. But in the spring of 2001, the board decided instead to provide monthly releases of its realized combined ratio. Since adoption of this new disclosure policy, Progressive has seen a 50% drop in the volatility of its stock price.     

Microcapitalism and the mega-corporation

More than 100 miles from Bangalore, India, there's a rural area called Kuppam where one in three citizens is illiterate, more than half of the households have no electricity, and there's a high rate of AIDS. It's exactly this challenging atmosphere that prompted Hewlett-Packard to choose Kuppam as one of its first "i-communities" initiatives. Through the program, HP creates public-private partnerships to accelerate economic development through the application of technology while simultaneously opening new markets and developing new products and services. HP brings to these initiatives the management disciplines of a successful technology business. For example, it unearths customer needs using an iterative cycle that involves prototyping products and services and then closely observing residents' experiences with them. It fields a diversely talented team that brings many skills to the initiative, including deep technical ability, management acumen, and market knowledge. It takes a systems approach, simultaneously examining all the elements that must come together to create a working solution to a given problem. It establishes a "leading platform" on which other players--comapnies, nonprofits, and government agencies--can build technologies and applications. Practices like these help ensure that HP's investment yields real, sustainable results for the community in question. But HP also sees returns to its own business. In Kuppam, the company is discovering the need for (and developing) new products like a solar-powered digital camera, with printer, that fits in a backpack. By engaging the community and its leaders and working with them to design valuable new tools and capabilities, HP is gaining the knowledge it needs to be a stronger competitor in other developing regions.     

Leading change from the top line. Interview by Thomas A Stewart and David Champion

Most CEOs who specialize in turning around struggling companies focus on costs. But for Fred Hassan, chairman and CEO of Schering-Plough, the primary focus in a turnaround is the top line. Since 2003, when Hassan took the helm at the global pharmaceutical company, he has overseen a remarkable recovery in performance. And consistent with his philosophy, the turnaround started with sales. Considering sales reps as less than crucial to strategy, Hassan cautions, is a big mistake. At Schering-Plough, he has concentrated on motivating and organizing salespeople to create trusting relationships with doctors. "You have to differentiate the salesperson in the customer's mind--just like you differentiate brands," he explains. A doctor may see 60 pharmaceutical reps on a regular basis but actually trust far fewer. To earn a spot in this inner circle, Schering-Plough reps try to turn each customer encounter into an occasion to help doctors provide better care for their patients. Schering-Plough also restructured its sales forces so that reps carry not just one kind of product, as they do in most pharmaceutical companies, but several. Covering a broad range of treatments gives reps more ways to build value-adding relationships with doctors. In this interview, Hassan discusses his success at Schering-Plough and his experiences at other pharmaceutical companies. During his career, he has built a reputation for being in tune with the front lines, as well as for reaching out to the managers who supervise salespeople. He has found that this level of personal attention not only makes reps feel respected but also gives him valuable strategic insights.     

Security Market Effects Associated with SFAS No. 131: Reported Business Segments

In this study we examine the economic impact of the expected shift from the FASB's segment reporting requirements found in SFAS No. 14 to those found in SFAS No. 131. SFAS No. 131 was the joint effort of the United States' FASB and Canada's Accounting Standards Board (AcSB). It requires firms to report segments based on the firm's internal reporting and management arrangements (the management method) rather than on SFAS No. 14's line-of-business method. One alleged deficiency with the line-of-business method is its flexibility that allowed companies to combine segments. Analysts complained that companies abused this flexibility to conceal information. The management method allegedly is less flexible because companies must report segments externally the same way that they manage them internally. We examine the economic impact of the reporting standard shift by first developing company variables related to the alleged concealment of information under SFAS No. 14. These variables help us to explore why companies combine business segments under the line-of-business method and what costs companies are expected to incur when they are forced to implement the management method. Next we identify a series of dates that chronicle when the market received information about the content of SFAS No. 131. Results of the stock return tests suggest that SFAS No. 131 had a significant impact on firms that previously had the greatest incentives to conceal segment information, consistent with the conjecture that the standard imposed unanticipated costs on affected firms.     

SOME NEW EVIDENCE ON WHY COMPANIES USE CONVERTIBLE BONDS

The popular argument for convertibles holds that they provide issuers with "cheap" debt and allow them to sell equity at a premium over current value. Objecting to the "free lunch" implied by such an argument, financial economists have offered other explanations that show how the combination of debt and equity built into convertibles can serve to reduce information and agency costs faced by companies and their investors.
In this article, the authors use the results of their recent study to reconcile the two positions. Following Jeremy Stein's view of convertibles as "backdoor equity," the authors argue that convertible bond financing is an attractive alternative for companies that have large growth potential but find both conventional debt and equity financing very costly. Such companies are often deterred from funding their capital investments with straight public bonds by their high risk, relatively short track records, and high expected costs of financial distress. At the same time, the information "asymmetry" between management and outside investors can make equity very expensive in such cases. In layman's terms, management may feel that the company's share price does not accurately reflect its growth prospects, or be concerned that the mere announcement of a new equity offering will cause the share price to fall sharply.
To the extent the stock market is persuaded that management's choice of convertibles is based on this combination of promising growth prospects with limited financing options, it is likely to respond more favorably to the announcement of a new convertible offering. The authors furnish evidence in support of this argument by reporting that the market reacts less negatively to those convertible issuers with higher post-issue capital expenditures and higher market-to-book ratios, but with lower credit ratings and higher (post-offering) debt-equity ratios.     

The fallacy of the overhead quick fix

Facing pressure from a few large, low-cost competitors, Thornton, an old-guard specialty-equipment manufacturer, fought back by eliminating overhead. Over two-years, it outsourced components and consolidated operations. But instead of cutting overhead, it added more and became still more uncompetitive. Thornton is not alone in either its predicament or its failed reaction. Many large manufacturing companies are finding themselves at a cost disadvantage in markets they have dominated for years. One reason is excessive overhead structures, the result of an unchecked buildup of indirect employees needed to control rising organizational complexity. Another reason is the emergence of the "robust" competitor, comparable in size and product scope but able to produce at a lower unit overhead cost. Data collected from more than 100 manufacturing plants worldwide illustrate the differences between overhead cost structures of bureaucratic, niche, and robust companies. The gulf between these groups highlights the need for action by bureaucratic companies, and, in some cases, by niche companies. But high-overhead companies are doomed if they cut overhead out of the system either by outsourcing or downsizing. If they expect to retain their size and also become more cost competitive, they must rethink their manufacturing systems. Well-designed and well-controlled processes mean higher product quality, faster cycle time, improved flexibility, and lower overhead costs. Sustainable overhead reduction means a commitment to continuous improvement. This includes segmenting, mapping, and measuring existing processes and then working to improve them.(ABSTRACT TRUNCATED AT 250 WORDS)     

Pricing and the psychology of consumption

Most executives know how pricing influences the demand for a product, but few of them realize how it affects the consumption of a product. In fact, most companies don't even believe they can have an effect on whether customers use products they have already paid for. In this article, the authors argue that the relationship between pricing and consumption lies at the core of customer strategy. The extent to which a customer uses a product during a certain time period often determines whether he or she will buy the product again. So pricing tactics that encourage people to use the products they've paid for help companies build long-term relationships with customers. The link between pricing and consumption is clear: People are more likely to consume a product when they are aware of its cost. But for many executives, the idea that they should draw consumers' attention to the price that was paid for a product or service is counterintuitive. Companies have long sought to mask the costs of their goods and services in order to boost sales. And rightly so--if a company fails to make the initial sale, it won't have to worry about consumption. So to promote sales, health club managers encourage members to get the payment out of the way early; HMOs encourage automatic payroll deductions; and cruise lines bundle small, specific costs into a single, all-inclusive fee. The problem is, by masking how much a buyer has spent on a given product, these pricing tactics decrease the likelihood that the buyer will actually use it. This article offers some new approaches to pricing--how and when to charge for goods and services--that may boost consumption.     

How to sell services more profitably

When products become commodities, manufacturing companies may seek to differentiate themselves with value-added services--a potentially profitable strategy. Unfortunately, companies often stumble in the effort. Reinartz and Ulaga conducted in-depth studies of 18 leading companies in a broad variety of product markets to learn what distinguished the successes from the rest. They discovered four steps to developing a profitable services capability. RECOGNIZE THAT YOU ALREADY HAVE A SERVICE COMPANY: You can identify and charge for simple services--as Merck did when it stopped quietly absorbing shipping costs. Switching services from free to fee clarifies their value for managers as well as for customers. INDUSTRIALIZE THE BACK OFFICE: To prevent delivery costs from eating up service-offering margins, build flexible service platforms, closely monitor process costs, and exploit new technologies that enable process innovations. The Swedish bearings manufacturer SKF provided off-site access to an online monitoring tool that could warn of potential failure in customers' machines. CREATE A SERVICE-SAVVY SALES FORCE: Services require longer sales cycles and, often, decisions from high up in a customer's hierarchy; what's more, product salespeople may be inimical to change. Schneider-Electric did a major overhaul of its sales organization and trained its people to switch from cost-plus pricing to value-based pricing. FOCUS ON CUSTOMERS' PROCESSES AND THE OPPORTUNITIES THEY AFFORD FOR NEW SERVICE OFFERINGS: You may need to acquire new capabilities to take advantage of those opportunities: The industrial coatings specialist PPG had to learn how painting robots function after it offered to take over Fiat's Torino paint shop. Services can both lock in customers and help acquire new accounts. They should be developed with care and attention.     

How Managers' everyday decisions create or destroy your company's strategy

Senior executives have long been frustrated by the disconnection between the plans and strategies they devise and the actual behavior of the managers throughout the company. This article approaches the problem from the ground up, recognizing that every time a manager allocates resources, that decision moves the company either into or out of alignment with its announced strategy. A well-known story--Intel's exit from the memory business--illustrates this point. When discussing what businesses Intel should be in, Andy Grove asked Gordon Moore what they would do if Intel were a company that they had just acquired. When Moore answered, "Get out of memory," they decided to do just that. It turned out, though, that Intel's revenues from memory were by this time only 4% of total sales. Intel's lower-level managers had already exited the business. What Intel hadn't done was to shut down the flow of research funding into memory (which was still eating up one-third of all research expenditures); nor had the company announced its exit to the outside world. Because divisional and operating managers-as well as customers and capital markets-have such a powerful impact on the realized strategy of the firm, senior management might consider focusing less on the company's formal strategy and more on the processes by which the company allocates resources. Top managers must know the track record of the people who are making resource allocation proposals; recognize the strategic issues at stake; reach down to operational managers to work across division lines; frame resource questions to reflect the corporate perspective, especially when large sums of money are involved and conditions are highly uncertain; and create a new context that allows top executives to circumvent the regular resource allocation process when necessary.