Retailers Should Invest More in Employees

Doug Rauch, the former president of Trader Joe's, visited my Service Operations class at MIT last week. When he mentioned that Trader Joe's invests in its employees a lot more than its competitors do, he was challenged by one of my students: "Isn't it a bad idea to invest in employees in settings like yours where shopping is transactional and can easily be done online?"

Doug had a strong reaction. "Nowadays you can go through an entire day without a single person acknowledging your existence. But don't forget that we are people who generally like connecting with other people." He went on to explain how profitable it is to invest in employees, even for a supermarket that competes on the basis of low prices, and how most online grocers have not found a way to make money.

My class had already discussed QuikTrip, a convenience store chain with over 500 stores, and Mercadona, Spain's largest supermarket chain. We also talked briefly about Costco, a large and publicly-traded wholesale club. All of these retailers, along with Trader Joe's, invest significantly more in their employees than is typical for their retail peers.

They also have high profits, low prices for their industry, excellent operational metrics, and a reputation for great customer service. These retailers deliver great value to their customers, employees, and investors all at the same time. (My article in the January-February 2012 issue of Harvard Business Review, Why "Good Jobs" Are Good for Retailers, analyzes how they manage to do this.)

Even so, I was not surprised that my student was questioning Doug on his company's choice to invest in its employees. Many in the business community still see employees in low-cost retail as interchangeable parts. They can see with their own eyes that most large retailers, such as Wal-Mart, do not invest much in their employees. And it makes sense to them, as it made sense to my student, that low-cost retailers really have only one thing to offer their customers: the quick, cheap sale. That's what the customers are there for and there's no point in offering more.

These people miss two things.

1. Even in low-cost retail, it takes a lot of human effort and judgment to get the right product to the right location at the right time and to make an efficient transaction.

It's the low-paid employee, not the inventory-management software, who notices that a shelf looks messy or that some of the products are in the wrong place. It's the low-paid employee who notices that some of the lettuce has gone bad or that there are still signs up for last week's promotion. It's the low-paid cashier who can tell the difference between serrano peppers and jalapeno peppers during checkout. It's the low-paid employee who notices that there are too many customers waiting in the checkout and offers to open an additional cash register. When retailers don't invest in human capital, operational execution suffers and the company pays with lower sales and lower profits than it could have had.

2. Even in low-cost retail, there is still interaction between customers and employees.

It's the employee who notices a customer standing in the aisle looking lost and offers help. It's the employee who can read from a familiar customer's face that he's had a bad day and could use a friendly smile. It's also the employee who can turn a customer off — maybe permanently — by being rude or even just not very helpful. It's the people who make you want to shop here even though you can easily buy the same stuff there. Yet most low-cost retailers forget about that.

Those are what we could call the business reasons for more investment in employees. But business on the scale of these retail chains is never just business. It's people's lives — the employees' and the customers'.
I care that millions of retail employees are not given decent wages, benefits, work schedules and an opportunity for growth, even though doing so is free for retailers. I care that a lot of human talent is wasted.

When I'm shopping with my children, I care what view they are forming of the society they live in. I try to go to places where they will see what people are like at their best, not at their most disengaged. I want them to live in a society in which people acknowledge each other's presence and are kind and respectful to each other, and I think that begins with being brought up to see kindness and respect as normal. What Doug Rauch and others have shown is that what I want for my children is not at all incompatible with what they want for their companies.

Zeynep Ton is a visiting assistant professor in the operations management group at MIT's Sloan School of Management.

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Don't Put Your Customers at Risk

Don't Put Your Customers at Risk:
In the wake of the deadly meningitis contamination, your business needs to keep its supply chain squeaky clean. It's not enough to blindly trust your suppliers, you have to check and check again. Here's how.

For Flowering Tree Botanicals, monitoring the supply chain that goes into making its all-natural bath and body products is crucial.

Layla Colegrove, the company's chief executive, uses only United States-based companies for sourcing the ingredients such as Shea butter, olive oil, goat milk, and witch hazel that go into her soaps and shampoos. She performs regular checks that her suppliers meet U.S. Food and Drug Administration standards for production, handling, and storage. And for an upcoming line of cosmetics, she has chosen suppliers that have agreed to do regular microbial tests themselves. Colegrove also plans to hire a testing laboratory to do even more close examination of all her products in the coming months.

While that may sound like overkill, it's not. It's a sign of the new world we live in.

"It has become very important to us as a small business to make sure our products are good quality and that they are not going to harm any of our customers," Colegrove says.

You can never lose track of what's in your business' supply chain--and who, exactly, is contributing to it. Ignoring those basics can lead to catastrophes, such as the one allegedly caused by New England Compounding Center in October. The center's steroidal drug was reportedly laced with bacterial meningitis, which killed dozens and sickened hundreds after doctors used the tainted drug--because they trusted the pharmacies that provided it.

It's also a potent reminder that microscopic mishaps can permanently damage your brand--or even shut down your business forever.

Nearly every small business has a supply chain that needs careful tending. So, how do you make sure the components you put in your own product are perfectly safe, sanitary, and non-defective?
Fortunately, lots of data exists about potential supply partners. As a preliminary step, you can dig into credit reports and legal proceedings through databases such as Lexis Nexis and Dunn & Bradstreet.

To dig deeper, you may want to sign on the help of one of many companies that specialize in even broader searches that can help you get a clearer picture of a company's total risk to you. One is Briefcase Analytics, of Cambridge, Massachusetts. Another is SAP's Ariba, which provides an Internet-based service that provides continuous supply-chain monitoring.

Here's how they work: Briefcase, for example, lets companies do a comprehensive records search on any firm that small-business owners might want to enlist as a supplier. To do so it taps 600 databases in 50 countries. Briefcase then compiles a report that factors in financial strength, business integrity, labor and human-rights record, health, safety, and the environment, and the company's record on privacy and intellectual property to create a total risk score.

Such a service could have been important in shutting down NECC earlier than this year, as the company had documented operations violations stretching back to the 1990s, according to an October story in the New York Times.

"Part of this is the diligence of pharmacies," says Shanton Wilcox, a principal and North America Lead of logistics and fulfillment for the consulting firm Cap Gemini, which is headquartered in New York City. "The pharmacy is engaging with the compounding company, so are they auditing the records?"

Regularly reviewing supply chains is a relatively new concept to many smaller United States-based businesses. But the practice has gained popularity over the past five years as imports, primarily from China, have been found tainted with lead, melamine, and other poisons, or have had severe defects leading to fatalities. That's because profit motives have generally driven production in past decades, emphasizing cost containment over safety, experts say.

"The entire supply chain succeeds and fails together," Richard J. Cellini, chief executive officer of Briefcase says. "It is only as strong as the weakest link and [European and Asian companies] have gotten this rather more quickly than North Americans companies who are more focused on cost, not risk."

Even if your company is so small that your supply chain monitoring needs are minimal, you may be particiapting as a vendor to a much bigger company, such as Walmart or Sears. Such companies have elaborate supply chain monitoring systems themselves, and you'll be asked to interact with them by entering data about your own production process.

One such system--from Aravo Solutions, a supply-chain management company with about 100 employees, in San Francisco--contracts with companies such as General Electric and Best Buy, allowing big businesses to continuously monitor all the vendors in a supply chain to check for problems. Similar to that of Briefcase, the Aravo system queries databases that look up legal and other documents on companies to provide a risk score. It also includes things like research into commodities supplies in particular regions. That can be critical in determining if supply will be a problem at a certain point.

While Aravo, Ariba, and Briefcase can help you get your house in order, the rest of your supply-chain monitoring system will be more internally focused on production. It is likely to be a home-grown network that taps a database, or a series of databases, that contain and systematize all of your product information, and which analyzes various points of your production.

The typical system must also have in place controls that sort your different product types, forcing regular reviews by pulling samples for quality inspections."A robust, quality system is the crux of this whole thing," Wilcox says, and it should go beyond what regulatory agencies such as the FDA require, especially because the FDA is not staffed to fully monitor all companies.

While managing a clean supply chain is complex, some small businesses have found a way to get an extra boost from doing so. Consider the All American Clothing Co., in Arcanum, Ohio, which has found it can blend its supply-chain-monitoring efforts with a clever marketing campaign.

AACC has designed a system, using Unix and Microsoft servers and SQL (structured query language) programming, that lets the company--and its customers--identify the fields and mills in which the cotton that makes every item was grown and processed. The system operates in real time for the company, and provides an after-the-fact look for customers. Each of the company's jeans includes a "certificate of authenticity" that lets customers go online, punch in a unique identifying number, and find out about the more than 11,0000 farmers, millers and clothing finishers who contribute to the making of the 60,000 pairs of jeans AACC produces annually in the United States.

B.J. Nickol, a co-owner and vice president of marketing, says the company had to put the system in place for its own tracking and to meet FDA requirements. The side effect is that it helps the company trace potential product problems more quickly, and customers seem to love it.

"We target a niche of customer that demands 'USA-made' and have a lot of patriotism, so they love to see who they are helping out by purchasing a USA garment," Nickol says.

Apple Can't Innovate or Manage Supply Chain

Apple Can't Innovate or Manage Supply Chain: Stock in media-worship-object, Apple (AAPL), is trading about 14% below its all-time high. When Steve Jobs passed, Apple lost its source of innovation. And when supply chain expert, Tim Cook, took the CEO slot, I thought he would at least be able to make sure the trains ran on time.

Is Apple Supply Chain Really the No. 1? a Case Study

Everything about Apple Inc is the talk of the town, for example, the new Ipad, Iphone 5, Apple Map or even environmental and labor issues at its suppliers' facilities. Surprisingly, IT research firm Gartner ranks Apple Supply Chain as the best supply chain in the world for 3 years in a row. Without a doubt, Apple Inc is the world leader in Innovation, Branding and Software Ecosystem. But, is Apple's Supply Chain really the number 1? This case study will show you the analysis of Apple Supply Chain core processes, challenging issues and complexities of its operations.

1) How Apple Supply Chain Works?
Information about Apple Supply Chain is a bit here, there and everywhere, it's kinda tough to find the actual case study. To the best of my knowledge, many business schools still use the case study "Apple Computer's Supplier Hubs: A Tale of Three Cities" from Stanford University (1996). To get a closer look at modern day supply chain at Apple Inc, this case study utilizes content analysis technique. Annual Report (SEC Filing) of 2011 is analyzed and simplified supply chain processes are constructed as below,

Supply Chain Planning at Apple Inc

Supply Chain Planning at Apple Inc is the classic example of New Product Development Process (NPD). It's the integration of R&D, Marketing and various function under supply chain management. From the above graphic, Apple Inc accelerates the new product introduction by acquiring licensing and 3rd party businesses. The whole process looks very similar to that of other industries. Interesting point is that Apple Inc has to make pre-payments to some suppliers to secure strategic raw materials.

Supply Chain Model of Apple Inc

Supply Chain Map is the way to express large system from points of origin to points of consumption in simple to understand manner. Information from annual report is also used to produce Apple Supply Chain Map.

Apple Inc purchases raw materials from various sources then get them shipped to assembling plant in China. From there, assembler will ship products directly to consumers (via UPS/Fedex) for those who buy from Apple's Online Store. For other distribution channels such as retail stores, direct sales and other distributors, Apple Inc will keep products at Elk Grove, California (where central warehouse and call center are located) and supply products from there. At the end of product's life, customer can send products back to nearest Apple Stores or dedicated recycling facilities.

2) Apple Supply Chain Challenges
What does it feel like to be "Apple Inc"? One journalist indicated that the life of Apple Inc is fairly easy by utilizing its negotiation power. Believe me, Apple Supply Chain has very high risks. There are many challenges to overcome, for example,

- Global economy could affect the Company.
- Some re-sellers may also distribute products from competing manufacturers.
- Inventories can become obsolete or exceed anticipated demand.
- Some components are currently obtained from single or limited sources.
- Some custom components are not common to the rest of the industries.
- Ability to obtain components in sufficient quantities is important.
- Supply chain disruption such as natural and man-made disasters can be serious.
- Company depends on logistical services provided by outsourcing partners.
- Company also relies on its partners to adhere to supplier code of conduct.

The above information is also from annual report. As you can see, most of the risks are on supply side.

3) How Complex is Apple Supply Chain?

Some people in blogosphere said that Apple Supply Chain is not that complicated. So this section will explain some characteristics of Apple Supply Chain through various metrics and compare them with Amazon Supply Chain.

Inventory Turnover 
Inventory Turnover is traditional financial measure to determine how efficient company uses its financial resources to create sales, the higher number is the better. Supply chain professionals also use this metric in inventory management function. Generally accepted calculation is [Cost of Goods Sold / Average Inventory]

Inventory Turnover of Amazon vs Apple Inc

The above picture shows that inventory turnover of Amazon and Apple is 10 and 59 respectively (cost of goods sold of digital content/downloadable products are excluded). From the face value, Apple seems to be more efficient. Anyway, there is a reason for this. Apple Inc is now marketing company with no manufacturing facility but Amazon is a distributor of general merchandise. It's pretty natural that Amazon has to keep more stocks then inventory turnover can be much lower.

Number of Key Suppliers
Supply chain management is about relationship between trading partners. Working closely with strategic suppliers will bring competitive advantage to the firm.

Number of Key Vendors Amazon vs Apple

Apple recently said that they have about 156 key vendors across the globe. This amount of suppliers is quite manageable. According to this information, Amazon has about 3 million suppliers in total. Top 5% of this is 300,000 suppliers, way more than that of Apple Inc.

Number of Warehouse Facilities
In the United States, transportation cost is the big portion of total logistics cost. Then, good management of related function is essential.

Number of Warehouse Facilities Amazon vs Apple

Apple inc has central warehouse in California but Amazon has approximately 28 warehouses from coast to coast. What Apple has to do is to synchronize data between central warehouse and its own 246 stores + customers. With appropriate level of automation, this kind of operations can be done efficiently.

For Amazon, thing is more complicated than that. Amazon is known to employ many PhD graduates in operations research/industrial engineering. The reason is that Amazon distribution environment must be mathematically solved through optimization method. Typically, they have to determine how many facilities they should have, where serves which market, items/quantity stored in each location, how to manage transportation between warehouse-to-warehouse and warehouse to customers in order to minimize cost and increase service level.

Number of Items (Stock Keeping Unit)

Stock Keeping Unit aka SKU is another indication of supply chain complexity. One model of phone but different software inside is considered different item/SKU.

Number of SKUs Amazon vs Apple

According to this, Amazon has about 170 million items on its catalog. About 135 million items are physical products. For Apple, they have about 26,000 items (rough estimate, subject to change). The point is that, if you have to make demand forecast, which one will more difficult for you, 135 million items or 26k items.

Product Life Cycle
Put it simple way, product life cycle is how long you can sell products (the longer is the better).

Product Life Cycle Amazon vs Apple

From rough estimate, Amazon has some seasonal products such as summer ware. They can only sell it for 3 months max. The life of Apple's key products are way more than 12 months. It goes without saying that demand forecast of seasonal, short life cycle products is very very difficult to estimate.

As you may notice, based on example characteristics, Amazon's Supply Chain is far more complicated than that of Apple Inc.

4) Conclusion
The results from the analysis of Apple's processes, challenging issues and complexities indicates that the success of its supply chain operations depends on how well they manage supplier relationship. This includes early supplier involvement in new product development, close communication and supplier performance improvement/evaluation. Then, Apple Inc is dubbed as "King of Outsourcing".

In your opinion, does Apple Supply Chain deserve the number one spot?

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Procurement -- Subcontracting and Product Quality in China

Procurement -- Subcontracting and Product Quality in China: Marshall W. Meyer, professor of management at Wharton, has made many trips to China to research the rapid growth of its economy and the successes and difficulties it has had in growing so quickly. In this interview, Meyer discusses the recent controversy surrounding China's exports of substandard toys and pharmaceuticals to the United States, and the implications for supply-chain management.

Raising the Bar: Can China Meet the Quality Challenge?

Raising the Bar: Can China Meet the Quality Challenge?: After being stung by consumer backlash and stiffer penalties for piracy, counterfeiting and contamination, China is working hard to overcome its reputation for poor quality. Many experts see quality issues as the simple growing pains of an accelerating economy. After all, China already makes high-quality products such as iPods. The challenge today for foreign partners: How to set and enforce effective quality benchmarks.

Chinese Manufacturing in an Age of Resource Price Volatility

Chinese Manufacturing in an Age of Resource Price Volatility: China is slowly moving away from energy subsidy policies that hold down prices -- especially for industry. Those subsidies protected exporters from devastation when energy prices shot up to record-setting levels in 2008 and helped to keep social unrest somewhat under wraps. No one knows for sure how far China will go in reducing energy subsidies for business in the future, but China could use subsidy policies as a tool in pushing particular industries away from low-value exports that generate a lot of waste to higher-value goods that produce less waste.