I recently read a case study by Rogelio Olivia and Noel Watson entitled Cross-Functional Alignment in Supply Chain Planning about an anonymous consumer electronics developer and distributer based in Northern California. In this article, I will try to relate some of their observations that were proven to be effective steps toward improving their overall supply chain management process.

Sales, marketing, finance, manufacturing and supply chain operations must anticipate demand and reconcile their forecast predictions to reach a consensus. As competition increases, and markets and supply chains globalize, the process of collaborating and reconciling your demand predictions becomes that much more challenging, but increasingly important.

The article mentions improvements in recent years in cross-departmental interfaces, such as those between Purchasing & Manufacturing. But broader-reaching integration, they argue, among more departments is needed.

This case study also found a collection of different incentives among these related departments (Finance, Sales, Operations, and Marketing), which was not only quite common, but often lead to contradictory goals. For example, Sales might have a tendency to overstate their projections to ensure operations maintained adequate levels of inventory, even if this might negatively impact finance.

This particular company, however, decided to ignore these differences, and focus solely on implementing a new supply chain planning process, rather than trying to adjust their incentive roadmap.

This collaborative demand-planning methodology is often referred to today by industry consultants as the Sales and Operations Planning Process (S&OP). The article further defines this process as a means to facilitate demand planning, master planning and the flow of information between them.

Master planning seeks the most efficient way to fulfill demand by facilitating purchasing and materials requirements, production, and distribution planning. Demand planning focuses on the customer, predicting future demand from scheduled orders, prevailing market conditions, and marketing & sales activities such as promotions, or new product launches. A basic S&OP process facilitates the transfer of information from demand planning to master planning.

The subject of this case study was an anonymous consumer-electronics company which sells to big box retailers such as Best Buy, and uses Asian based contract manufacturers to make their products. They also had global distribution centers in North America, Europe and Asia.

To improve their supply chain management effectiveness, this company adopted a new forecast planning process to create and maintain a Business Assumption Package (BAP), for managing their price plans, product intros & sunsets, and anticipated market trends. It is important to note that participants in this BAP process included senior leadership from marketing, finance, sales and operations.

The BAP was discussed and updated each month, and used as the basis for the following 3 forecasts:
• Top Down Demand Forecast (Macro) – Weighted more long term
• Bottom Up Demand Forecast (Micro) – Weighted more short term
• Statistical Inference Forecast (extrapolating past sales results) – reference point for first two forecasts to further investigate and justify any significant deviations

The final consensus forecast was provided to the Finance Dept every quarter, which, in conjunction with the BAP, revised their financial targets, and reconciled their pricing and promotion strategies to meet their financial goals or analyst expectations. Once Finance approved the final forecast, it was released in order to generate the Master Production Schedule (MPS).

Whereas in the past, these forecast planning meetings often resulted into contentious disagreements, the new forecast planning process not only brought about a much more constructive discussion between the impacted departments, as their stake in the accuracy of these forecasts was carefully reviewed and adjusted monthly, but the resulting operational improvements were dramatic.

Now that all the functional stakeholders were actively involved in developing and assessing the product offerings and promotional plans, there was more procedural quality in the planning process, more accountability, and as overall by-product of this new process, an improved incentive alignment was realized.

• Forecast efficiency improved from 58% to 88%
• Dramatic increase in inventory turns
• Excess & obsolescence costs decreased

The article expands on the concept of procedural quality, in other words, the soundness of the judgments and inferences drawn to help develop and validate their forecast plans.

Procedural quality suffers when incentives and priorities can bias the plan. But their new process, by involving all the stakeholders, and regularly updating and validating their projections, and by incorporating the three different forecasts, transformed a more dubious process into a much more collaborative one. Each stakeholder better understood their counterparts needs and assumptions, had more faith in their results, which in turn, better aligned their actions.

Additionally, by combining three forecasts into a single, evolving consensus opinion, accuracy improved. It also provided for extensive validation across the all the departments, increasing awareness of the aggregate needs and goals of the global enterprise. Customer feedback from sales & marketing, for example, was equally weighted alongside input from operations and finance regarding product offerings and promotions. This fostered more constructive collaboration in reconciling their differences, which was in stark contrast to the contentious arguments that had characterized their prior meetings. Each department began to appreciate their respective resources and constraints, and how their functions impacted one another.

As a more collective, open, and transparent process, ownership of the plan spanned all stakeholders, fostering trust, and better adherence to the plan, and thereby promoting better alignment of overall goals and objectives.

So, when considering improvements to your supply chain, before you do anything, try focusing your efforts first and foremost on your demand-forecasting process, and you may be surprised how vital this critical first step impacts the rest of your supply chain management execution.

Premium gasoline in Denmark in 2008, Friedman tells us, was $9/gallon, and the government added a CO2 tax in addition just for good measure. This deliberate policy to tax carbon raised the costs of fossil fuels to the point where it spurned innovation in alternatives. Today, 1/3rd of all terrestrial wind turbines in the world originate in Denmark, resulting in an export rich, nascent renewable energy industry. Their economy has grown 70% since 1981. Their unemployment rate was under 2% (in 2008), and 16% of the country’s energy needs are met by wind and solar power. In 1973, 99% of Denmark’s energy came from the Middle East, but today it is zero.

Friedman says “Green is not simply a new form of generating electric power. It is a new form of generating national power – period. What kind of America would you like to see – an America that is addicted to oil and thereby fueling the worst autocracies in the world, or a green America that is building scalable alternatives to crude oil, and thereby freeing ourselves from the grip of countries who have drawn a bull’s-eye on our back and whose values we oppose?”

Friedman quotes an old Chinese proverb, “When the wind changes direction, there are those who build walls and those who build windmills.” He asks, “What will we do? Build walls around our embassies…tariffs around our products, legal walls to protect our automakers…trade barriers to wall off our economy.” Do we turn inward and shun change, or embrace this unique socio-economic opportunity.

Evidence of global warming is abundant. One telling statistic involves ice samples from a thousand years ago showing C02 in the atmosphere at 280 parts per million vs. 2007, where it is 384 parts per million, and climbing 2 parts per million per year. There have also been major reductions in the amount of summer sea ice in the arctic, and the incidence of floods, droughts, heat waves and wildfires is growing. The general consensus among climate experts is that the earth is warming at an alarming rate. Ted Turner sums it up in his own blunt way. “We’re too many people – that’s why we have global warming. Too many people are using too much stuff.”

Growth of the Chinese middle class is also contributing to more warming. In 2006, 34 million Chinese traveled abroad, a 300% increase from 2000. By 2020, 115 million are expected to travel abroad, the largest block of tourists in the world. China alone expects to build 40 new airports over the next few years, and greenhouse gases from her planes are expected to increase 5 times by 2025. “The International Energy agency in Paris predicts world oil demand will grow to 116M barrels per day by 2030, up from 86M in 2007. About 2/5ths of the increases will come from China & India. “

The Weather Channel now tracks the number of record highs vs. record lows, and you can pull up almost any month and the number of record highs outpaces the number of record lows. During the week of March 15, 2008, for instance, 185 record highs were tied or set, but only 28 record lows were tied or set. Arnold Schwarzenegger summed it up this way. “If 98 doctors say my son is ill and needs medication, and two say ‘No, he doesn’t, he is fine,’ I will go with the ninety-eight.”

Friedman also points out that Saudi Arabia’s oil income is expected to reach $200B in 2008, and 15 of the Sept. 11 terrorist were of Saudi decent. In 1978 there were 3000 madrassas in Pakistan, and today there are over 30,000. Much of the funding of these religious schools originates from oil-rich Saudi Arabian backers who tend to promote fundamentalist Islam, often sympathetic with terrorism. The point being that there is a strong correlation between America’s heavy reliance on fossil fuels and the funding of terrorism.

Friedman also references Greg Mortenson’s same observations in “Three Cups of Tea.” In December 2000, a Saudi publication reported that Al Haramain Foundation had built 1,100 mosques, schools and Islamic centers in Pakistan and other Muslim countries, but was also accused by the 9/11 commission of funding the Taliban and Al Qaeda. Our excessive spend on petrodollars has provided great wealth to the Gulf States, particularly Saudi Arabia, whose hegemony has increased dramatically in the Middle East as a result. These dollars, in turn, can provide for the spread of a much more conservative, fundamentalist interpretation of Islam, promoting intolerance of Western views, and often relegating women to diminished roles in society.

Additionally, Friedman notes as a State’s reliance on oil exports increases, the less democratic the state becomes. The Arabian Peninsula is a perfect example, but so are countries such as Venezuela. Friedman references Michael Ross, a political scientist at UCLA, who argues that oil rich governments tend to use the oil revenues to relieve social pressures that might otherwise lead to greater accountability from representation. Oil backed regimes don’t have to tax their people for revenue, so these leaders are less accountable to the people vs the American Revolution, sparked by the motto “No taxation without representation.”

Ross also writes that women in the Middle East are underrepresented in the workforce and in government because of oil – not Islam. “When fewer women work outside the home, they are less likely to exchange information and overcome collective action problems; less likely to mobilize politically and lobby for expanded rights.” Ross shows that oil states typically have strong patriarchal cultures, and keep women subordinate in society.

These same interdependent relationships are seen in a nature as well. The American Naturalist and founder of the Sierra Club, John Muir is quoted in the book “when we try to pick out anything by itself, we find it hitched to everything else in the Universe.” An article in the Aug 5, 2007 NY Times examined the disappearance of Aspen trees in Yellowstone National Park, and their amazing rebound when wolves were re-introduced to the park. The Elk had devastated the Aspen tree population, but when the wolves came back, they kept the Elk population in check, allowing the Aspen trees to rebound.

When invited to speak at a Chinese auto executive meeting, Friedman sardonically encourages the Chinese to grow dirty, just as the Western world did during the Industrial Revolution. After all, it’s only fair, and this will also give America time to develop the next technology in green power, which we will gladly sell back to the Chinese to fuel our own future growth. Friedman surprised the Chinese with his endorsement of their polluting ways, but his sarcasm, and real message was not lost on anyone. Today, there’s a global race to develop the next great technologies in clean energy.

Jeffrey Immelt, CEO of GE, credits the more forward thinking policies of the European Union for developing their alternative energy market. Denmark, Spain and Germany required their utilities to produce a certain amount of alternative energy each year, and offered long-term subsidies. The Europeans created a market for wind-turbines in the 1980s, when America abandoned wind because the price of oil fell. Now, at least half the US requires their utilities to generate a certain amount of their power from solar, wind, hydro, geothermal or biofuels, but each state has different standards. When Congress tried to pass a uniform national standard for the entire country in 2007, it was defeated. The US has given the EU a big head start, but we are slowly realizing the significance of a progressive energy policy.

At the World Economic Forum in 1999, Bill Gates admitted there was likely an Internet bubble, “But you’re all missing the point. This bubble is going to attract so much new capital to this Internet industry that it is going to drive innovation faster and faster.” Indeed we know now there was an Internet bubble, but the massive investment and innovation in IT that resulted, has created a lasting, burgeoning, Internet economy, of which the US is arguably the leader.

Friedman takes a page from Denmark and Norway, advocating their carbon tax policies, even though detractors claim these types of taxes would disadvantage our economy making American exports, more expensive, and less competitive. He points out there are many factors that determine the cost of exports, and the value of your currency is paramount. Additionally, building upon the Scandinavian example, Denmark is the leading exporter of wind turbines as a result of their carbon tax policies that have stimulated this industry. Additionally, if needed, the US could place carbon tariffs on those countries that do not tax carbon yet, such as China.

Friedman summarizes the gas tax argument in the following quote. “Gasoline taxes help reduce consumption, shift people to more fuel efficient vehicles, shrink the amount of money we send to petrodictators, improves air quality, strengthen the dollar and balance of payments, help mitigate global warming, and give citizens a feeling they are contributing something to the war on terrorism.”

To appreciate the challenges we face to passing new energy policy legislation, Friedman quotes Machiavelli in The Prince. “It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in introducing a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. “

Friedman’s rebuttal to the age old complaint categorizing him as another liberal who favors more taxes is quoted in the following passage. “The American people certainly have been taxed quite enough. Right now, they are being taxed by Saudi Arabia, taxed by Venezuela, taxed by Russia, taxed by Iran, and, if we stay on this track, they’ll soon be taxed by Mother Nature….I’d rather my taxes go to the US Treasury, not the Saudi Treasury, or the Iranian Treasury…”

China makes thousands of locomotives, and they are much cheaper than General Electrics, but because GE’s are the most energy efficient in the world, with the lowest CO2 emissions, and best fuel mileage per ton pulled, China buys them from GE. Much of this progress can be attributed to the EPA’s emission standards, which fueled new technologies in locomotives. Now, GE Transportation workers receive double the average wage in their respective cities, thanks to $4M Evolution Series diesel locomotive, the most energy efficient locomotive in the world.

Friedman talks about the “Porter hypothesis,” named after the Harvard Business School professor Michael Porter. In 1991, Porter said that “appropriately planned environmental regulations will stimulate technological innovation, leading to reductions in expenses and improvements in quality. As a result, domestic businesses may attain a superior competitive position in the international marketplace, and industrial productivity may improve as well.”

An interesting dilemma involves the utility industry. Customers want to lower their utility bills by using less energy, but the utility is incented to produce more energy to sell to the public for more consumption. A new regulation called decoupling plus, which is now in place for electric utilities in California and Idaho, decouples profits and rising sales.

The way it works is an independent auditor determines the net dollar savings delivered to customers by a utility’s conservation programs. The utility in return is reimbursed for any out-of-pocket losses, and rewarded a proportion to reductions in customer costs delivered by the utility’s conservation programs. Poor performance exacts a penalty, and if utility sales rise un-expectantly, the extra revenue is returned in the form of lower future rate hikes. As a result, the utility is now incented to improve energy efficiency instead of boosting total overall energy consumption.

Similar to Denmark, in Japan the cost of gasoline is twice as much as in America because of government taxation and price controls. The government, in turn, has invested these revenues in renewable energies like solar and home fuel cells. The high energy prices have also fueled demand for low-energy appliances such as washing machines, televisions, and hybrid vehicles. Companies like Mitsubishi Heavy Industries dominate the highly efficient electric turbines market, steel blast furnaces, and other industrial machinery. The environment ministry forecasts exports will turn energy conservation into a $7.9B industry by 2020.

Thanks in part to a green sticker program; consumer’s pressure to improve efficiency is constant. The avg. air conditioner uses 2/3 less electricity than in 1997, and the avg. freezer, 23% less.

Even the US army in Iraq is taking notice. Because the electric grid in Iraq is so unreliable, the US military requires generators to operate, and the main reason so many soldiers perish as a result of IEDs is because they are constantly required to deliver fuel to power all the generators. By greening the army, replacing diesel powered generators with wind & solar, fewer soldiers on the road would be needed where they are most vulnerable to attack.

China is 1/5th of humanity, and it’s now the biggest carbon emitter and the second-largest importer of oil, right behind the US. As such, Friedman points out, as China goes, so goes the planet earth. Currently there are 1.3B people in China, twice as many as 50 years ago. Acid rain falls on 1/3rd of China, ½ the water in its seven largest rivers is useless, 1/3rd the population breaths polluted air, and less than 20% of the trash in cities is treated and processed in an environmentally sustainable manner. 5 of the 10 most populated cities in the world are located in China. In Beijing alone, 70-80% of all deadly cancer is related to the environment. Lung cancer is now the number one cause of death in China.

However, in 2006, China instituted a national renewable energy mandate requiring provincial govts to develop and adopt renewable energy, namely wind, hydro and biomass, to 16% of total energy production by 2020 (7% today). Also, new rules were imposed on power plants to burn the cleanest fuel first, natural gas, solar or wind before resorting to the cheapest and dirtiest fuel, coal. China is also in the process of shuttering their most inefficient power plants. Overall, China has quickly realized the mounting problem facing them, and has taken steps to institute incentives to develop their burgeoning alternative energy industry.

Meanwhile, the American energy bill is hung up in Congress, slave to the wealthiest lobby. Daniel Kammen at the University of California, Berkeley, an energy policy expert, points out that if you add all the federal dollars going into energy research, which includes oil, gas, coal and solar, it would total about $3B, and $5B from the private sector, which equates to about nine days of fighting in Iraq.

Mike Ahearn, the CEO of First Solar, one of the US’s leading solar manufacturers which started in 1992, almost went bankrupt until John Walton of Wal-Mart invested, enabling them to complete their first manufacturing facility in 2004, after a total investment of $150M. In the three years since its completion, their revenues have grown from $6M to over $500M by end of 2007, and have cut the cost of solar modules from $3 per watt in 2004, to $1.12 per watt by the end of 2007, which is when they went public with a market capitalization approaching $20B.

In 2003, Mike Ahearn said they started looking for markets that would provide the scale they needed. Japan had the world’s first solar incentive program dating back to 1990. But Sharp, Kyocera, Sanyou and Mitsubishi were local leaders, and Sharp already owned a dominant share of the Japanese market. Japan had the biggest solar market in the world, but it was effectively closed to non-Japanese companies, per Ahearn.

Headquartered in Arizona, with its main factory in Ohio, First Solar wanted to exploit the American market, but world demand for solar was elsewhere. Ahearn said they went to Washington, and many states in the Southwest, and to utilities, but the same incentives fueling the Japanese market, were absent in the US.

In 2004, Germany created “feed-in” tariffs, which required local utilities to pay consumers for any local solar system at a price determined by national law for twenty years. Now consumers had an incentive to erect their own solar systems on their own homes and businesses, and the utility not only had to interconnect to it, but they also had to pay the consumer for any power they generated back to the utility (in excess of whatever they used).

First Solar ended up partnering with German scientist and engineers, and today over half the equipment used in their production line originates from German manufacturers and suppliers. Spain, Italy, France, Greece and Portugal all quickly followed suit with the German feed in tariff model. It’s no surprise First Solar built their second plant in eastern Germany, and now provides 540 lucrative jobs to the Germany economy. Ahearn is quoted “Countries all over the world are now contacting us to build our next factory there, but so far no one has called from the US…”

Wal-Mart is sighted as an example of a major US corporation embracing energy efficiency. They focused on promoting energy-efficient, compact fluorescent light bulbs and sold 100M+ in 2007. They estimate that the energy savings from these bulbs has the same effect as removing 700,000 cars off the road. In 2005, their stated goal was to make their fleet of 7200 tractor-trailer trucks 25% more fuel -efficient by 2008, and 100% more efficient by 2015. Wal-Mart has taken a leadership position in energy efficient initiatives, and it’s improving their bottom-line.

Friedman is convinced that clean power and energy-efficient technologies will become the defining measure of a country’s economic standing, environmental health, energy security, and national security over the next 50 years. “The ability to design and build, and export green technologies for producing clean electrons, clean water, clean air, and healthy and abundant food is going to be the currency of power in the Energy-Climate Era – not the only one, but right up there with computers, microchips, information technologies, and planes and tanks.”

They argue that once a bank becomes too big to fail (TBTF), they can skirt regulations by shifting risk into their less regulated, more complex lines of business, such as derivatives, CDO’s and Structured Investment Vehicles (SIVs). They continue to increase risk to speed growth knowing that ultimately the US Federal Government will have no choice but to come to their rescue (a.k.a. Moral Hazard – AIG, Bear Stearns, Merril Lynch in 2008) in the unlikely event of a catastrophic financial melt-down.

Ronald Reagan is generally credited with ushering in the modern deregulation movement in the US drawing from the ideas of noted University of Chicago Economist Milton Friedman. Reagan’s first Treasury Secretary was Donald Regan, the Merrill Lynch CEO who led the deregulation of brokerage commissions, as he sought to transform Merrill Lynch into a diversified financial services company.

Congress under Reagan passed the Garn-St. Germain Depository Institutions Act in 1982, which removed many regulations from the Savings & Loan (S&L) industry, allowing them to expand into commercial lending, corporate bonds, and other higher risk investments. Reagan praised the Act as “the first step in our administration’s comprehensive program of financial deregulation.” Between 1985 and 1992, over 2000 banks failed, and over one thousand people were indicted. Thrifts suspected of fraud cost the government $54B.

Even after the S&L crises, Washington was dominated by Alan Greenspan at the Federal Reserve, an Ayn Rand disciple himself, and Robert Rubin, and Lawrence Summers at the Treasury, who were both strong advocates of banking deregulation. The Bush Administration continued to promote the financial de-regulatory environment right up to the 2008 collapse.

The Gramm-Leach-Bliley Act of 1999, and the Commodity Futures Modernization Act of 2000 not only repealed the Glass-Steagall separation of commercial and investment banking, but also restricted the regulation of over-the-counter derivatives. Both these bills were widely seen as responsible for the financial crises of 2008.

Johnson & Kwak also point out how Wall Street began to attract the top talent from the most prestigious business schools. “While only 5% of men in classes around 1970 were in finance fifteen years after graduation, that figure tripled to 15% for classes around 1990.” The banking sector, with its lure of great wealth, were attracting some of our brightest students out of the math and science PHd programs.

In the 1990s, asset-backed financial products such as Mortgage-backed securities (MBSs), and later, Collateralized Debt Obligations (CDOs), became increasingly important to Wall Street. In 1997, JP Morgan pioneered the use of Credit Default Swaps (CDS) as well, which were leveraged as a strategy to shift the risk of default on the underlying loans from the bank (JP Morgan) to the CDS issuer (often AIG). This enabled the bank to avoid having to maintain capital reserves for these loans.

Banks used securitization (CDOs & MBSs) to pass on default risk to their investor clients. However, some banks believed strongly in the soundness of the more senior tranches, which were less riskier than the junior tranches, but paid out a smaller rate of return. They also often had more investment interest in the higher yielding, but consequently, riskier tranches, even though most of the senior tranches received AAA ratings from the credit bureau agencies.

Banks created Structured Investment Vehicles (SIVs) to raise money by issuing commercial paper and investing it in longer-term, higher-yielding assets. “Citigroup, for example, used SIVs to buy over $80B in assets by July 2007. These vehicles allowed banks to invest in their own structured securities without having to hold capital against them.” SIVs allowed banks to take on more risks without increasing capital requirements.

Fannie Mae and Freddie Mac were Government Sponsored Enterprises (GSEs) with a mandate to not only provide liquidity to the housing market, but to lend to people with low to moderate incomes. “In 2002, as part of the Bush Administration’s Blueprint for the American Dream, they committed to finance $1.1 trillion in loans to minority borrowers.” Many in Congress have blamed these mandates and increasing loan targets set by HUD as the main contributor to the housing bust, but Johnson & Kwak would argue otherwise. The riskiest mortgages, they claim, which fueled the bubble would never meet the strict conforming loan guidelines used to regulate Fannie & Freddie lending.

“As profit-maximizing private corporations, Fannie and Freddie tried to relax their underwriting standards in order to get into the party, reducing documentation requirements and lowering credit standards. But ultimately, regulatory constraints prevented them from plunging too far into subprime lending. Housing expert Doris Dungey wrote “The immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum loan-to-value ratio of 80%…plus all their other regulatory strictures, managed fairly well against the irresistible force of innovation.”

Elizabeth Warren, the Harvard Law Professor, Assistant to the President, and Special Advisor to the Treasury Secretary, called for the creation of a consumer protection agency which would have the authority to regulate “unfair, deceptive or abusive acts or practices for all credit, savings and payment products.” The Obama Administration backed her idea and proposed the creation of the Consumer Financial Protection Agency (CFPA). Although the banking lobby mobilized against it, the agency was created with the passage of the Dodd-Frank Wall Street Reform & Consumer Protection Act, signed into law by President Obama on July 21, 2010.

Johnson & Kwak argue there are at least six banks that are TBTF – Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo. The $180B taxpayer funded bailout of AIG was in effect a response to the colossal impact an AIG collapse would have had not only on these banks, but on our entire financial system.

Additionally, Alan Greenspan, the Chairman of the Federal Reserve from 1987 to 2006 diverged from his de-regulatory rhetoric after the financial crises of 2008. More excerpts from his comments are in the book, but some notable quotes include: “If they’re too big to fail, they’re too big…At a minimum, you’ve got to take care of the competitive advantage…I don’t think merely raising the fees or capital on large institutions or taxing them is enough…I mean radical things, as you know, break them up…In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole.” Ironically, once one of the loudest advocates of financial de-regulation, Greenspan, was now suggesting some of the harshest regulation. He wanted to break up the TBTF institutions.

Opponents often argue that big banks provide financial services that large corporations require, and that the only way US banks can compete for these services on a global scale is to be allowed to grow as large as their global competitors. Another common argument against regulation is that larger financial institutions are more efficient than smaller one’s due to economies of scale.

Johnson & Kwak state there is no empirical evidence to support these claims. To the contrary, large, multi-national corporations instead rely on a conglomerate of different banks for major offerings of debt or equity. When Johnson & Johnson needed to raise debt in 2008, they used 11 different banks, and in 2007, 13 different banks. Johnson & Kwak not only promote asset cap limits, but feel these limits must be adjusted and regulated based on the asset risk.

Johnson & Kwak also point out studies that show economies of scale vanish at some point below $10B in assets. They cite the 2007 Geneva Report, “International Financial Stability,” co-authored by Roger Ferguson, a former Federal Reserve Vice Chairman, that found consolidation in the financial sector over the previous decade did not lead to economies of scale beyond a low threshold. Rather, large banks are actually less efficient than mid-sized banks without the TBTF subsidy (ability to take higher risk due to TBTF stature). Another study showed larger banks gained productivity not through acquisition & consolidation, but rather through investments in Information Technology.

In summary, 13 Bankers demonstrates how TBTF institutions can not only threaten the stability of the entire financial system as they seek to speed growth through financial innovation and risk-taking, but they are also less competitive & less efficient than their midsized counterparts once you remove the TBTF subsidy. Kwak & Johnson show how de-regulation caused the S&L crises of the early 1990s, and similarly how that same de-regulation fervor in the 2000s lead to the 2008 crises, just as today the calls for less financial regulation have already begun. How quickly we forget, and how influential the power brokers of Wall Street are in shaping public policy. Financial innovation, and a general over-emphasis of the financial sector from the lure of great wealth in the longer term creates destructive bubble environments unless they are carefully watched, regulated and broken up when their size becomes a TBTF threat.

Soon after an ERP system is implemented, many end-users will gravitate toward the narrowest capabilities of the software, most pertinent to their own jobs. Unfortunately, they often fail to recognize the full capability of a single, integrated, enterprise-wide solution with a common look and feel, and a single version to truth (single-database design). ERP strives to extend the roles of its end-users, so they not only better manage their own duties, but can appreciate the full impact their functions have with the rest of the business, anticipating potential pitfalls, and aligning departmental goals with corporate-wide objectives.

As an example, a Financial Analyst may be tasked with evaluating the profitability of their top customers, so they can target their offerings toward key accounts. However, if the Analyst is focused solely on Accounts Receivable, because they are more familiar and comfortable within the accounting suite, they may fail to consider the amount of service and support a particular client requires. This information would more readily reside in the CRM (Client Resource Management) modules. Similarly, they may fail to consider collections, charge backs, or the declining credit rating of a customer. An eLearning solution can remove these blinders, by cost-effectively perpetuating application proficiency through-out the workforce, and broadening their understanding of the rest of the ERP system, and the workflows that inter-connect their job functions.

eLearning applications enable companies to document their business processes as well, including the thought process and reasoning behind any changes to these workflows. Once a business process has been established, an eLearning solution can capture those workflows and document them in an interactive training session that includes video, audio, and text bubbles that sequentially take the end-user through a full mock business process, with actual screen shots and video streams of the software application itself. In addition, an eLearning solution should include learn it, try it, and know it modes, to test for proficiency and understanding. Once developed, these training sessions can provide the proof necessary to document business processes, to meet compliance requirements associated with Sarbanes Oxley, IFRS, and US GAAP.

To maximize the value of an ERP investment, it’s critical to continue to manage and adapt your system to your business, which includes changes to workflows, and upgrades, and expanding the network of inter-connected applications, leveraging the full power of Service Oriented Architecture (SOA). But in order to maintain user proficiency, it’s imperative to implement an eLearning strategy, in order to adapt and document internal changes back out to the end- user community, so that they can continue to perform their job functions to their highest productive capacity. As you consider your ERP investment, consider an eLearning solution as an integral part your overall ERP strategy.

A modern ERP solution enables a company to eliminate disparate software applications, or point solutions, that may not only be obsolete and costly to maintain, but are run in virtual silos, so that individual departments cannot easily link communication or workflow to other departments. Often times there are manual, paper-based processes or spreadsheets for departmental interactions, which are not only time-consuming and burdensome to maintain, leaving you more susceptible to errors, but are also more dependent on internal staff that understand the idiosyncrasies and “work-arounds” of the current system.

Consider a wholesaler taking an order from a retailer. If the wholesaler has an order entry system from a point solution it may be effective in capturing that initial order, and generating a shipping order for the warehouse, or an invoice for billing, but if it’s not integrated with the supply chain system, they won’t be able to determine how much inventory is left w/out contacting the warehouse, or checking a report. And if it’s not integrated with the financial system, they won’t be able to verify the credit worthiness of a particular client, and see if there are any outstanding invoices. Additionally, they may fail to promote excess inventory identified for discounts under promotion. Such disconnected work environments promote departmental silos. Lapses in the system become the problem of another department, and ultimately hurt the competiveness of the enterprise because they lack common goals or a shared vision.

The process of implementing an ERP solution enables a company to examine their internal processes, re-engineering them for enhanced efficiency, and improved workflow. It’s an opportunity to eliminate manual processes and spreadsheets, and streamline interactions between departments. It further blends and integrates the responsibilities of each department so that they are working in tandem, empowering individuals while enforcing accountability, and facilitating the core competency of the business. An integrated ERP system’s main value, therefore, is not just the ability to streamline the transactional functions, but more importantly, to improve communication and accountability between departments, making educated businesspeople out of the staff, who can now be armed with individual and department goals that raise the competiveness of the entire enterprise.

However, before I do so, it’s worth noting the following individuals who were willing to challenge the conventional wisdom of Wall Street. Greg Lippmann, a Bond Trader at Deutsche Bank, Steve Eisman, a Portfolio Manager at FrontPoint Capital (suby. of Morgan Stanley ), Michael Burry, an ex-Physician turned independent Hedge Fund Manager of Scion Capital who worked out of a small office in San Jose, CA, and Jamie Mai & Charlie Ledley of Cornwall Capital, a couple of young 30-somethings who started out with $110K in a Charles Schwab account working out of a garage in Berkeley, CA. Their portrayals as somewhat maverick investors were fascinating, but you will need to read the full story, which I highly recommend, to fully appreciate their backgrounds and development as independent, forward-thinking, contrarian investors.

Other players worth mentioning were Joe Cassano, who ran AIG FP (Financial Products), the London based unit of AIG that provided the vast insurance against the default of these risky subprime investments, and Gene Park, also of AIG who, along with Joe Cassano, began to realize the folly of this insurance in early 2006 thanks in part to Gregg Lippmann’s appeals to them. Howie Hubler of Morgan Stanley who was fired in October of 2007 for losing $9B, the largest trading loss in the history of Wall Street, receives a noteworthy mention as well.

“A mortgage bond was a claim on the cash flows from a pool of thousands of individual home mortgages.” Salomon Brothers, the creator of this mortgage bond market, would take pools of these home loans and segregate the payments into different sections called tranches.

The buyer of the first tranche, considered the ground floor and most risky, were dissolved in first wave of mortgage prepayments. In exchange, however, the investor received the highest interest rate payment as long as his mortgages were not pre-paid or refinanced. The top floor tranche was the least risky, but as a result received a lower interest rate and the best odds that his investment would continue to reap the cash flow from these monthly mortgage payments.

“The pool of loans underlying the mortgage bond conformed to the standards, in their size and credit quality of the borrowers, set by one of several government agencies, Freddie Mac, Fannie Mae, and Ginnie Mae. The loans carried, in effect, government guarantees; if the homeowner defaulted, the government paid off their debts.”

As this mortgage bond market evolved, bonds were later created for subprime loans that did not qualify for government guarantees. These subprime bonds not only included prepayment risk, but actual losses from non-payment of the loans. The first floor tranche was exposed to losses until his investment was entirely wiped out, whereupon the next losses affected the next investor.

One factor that led to the boom in subprime lending was the growing income disparity among borrowers in the United States. Additionally, as credit card debt increased overall, lenders targeted these borrowers with offers to consolidate their higher interest credit card debts into lower interest rate mortgages, often as a second mortgage on a house (or a refi).

“In 2000, there had been $130B in subprime mortgage lending, and $55B had been repackaged as mortgage bonds. In 2005 there would be $625B in subprime mortgage loans, $507B of which found its way into mortgage bonds.” These subprime lenders would make the loans, and then sell them off to the fixed income departments of Wall Street investment banks, who, in turn, packaged them into bonds to sell off to their own investors. This was considered the originate and sell model, used to remove these risky loans from your books.

A credit default swap (CDS) was an insurance policy on a corporate bond which required two premium payments per year. An investor (CDS Buyer) might pay $200K per year to buy a ten-year credit default swap on $100M in GE bonds. At $200K per year for 10 years, their total risk was $2M. However, if GE defaulted on its debt any time over this time period (10 years), the bondholders recovered nothing, and you, the CDS Buyer, made $100M. The risks associated with buying a credit default swap were therefore pre-determined, and JP Morgan is credited with inventing the first corporate credit default swaps in the mid-1990s, as a tool for hedging.

Michael Burry notices in early 2005 that the US housing market was being driven by irrational lenders extending easy credit and he decides to short the real estate market by purchasing credit default swaps (CDS’s) on subprime mortgage bonds. Essentially, he was betting these subprime bonds would default as the housing market bubble burst.

The dealers of credit default swaps, led by Deutshe Bank and Goldman Sachs, developed the pay-as-you go swap. “The buyer of the swap (the buyer of insurance) would be paid incrementally as individual homeowners defaulted. These agreements were formalized by an organization called the International Swaps and Derivatives Association (ISDA).

“On May 19, 2005, Mike Burry completed his first subprime mortgage deals, buying $60M in credit default swaps from Deutsche Bank – $10M each on six different bonds. By the end of July (2005), he owned credit default swaps on $750M in subprime mortgage bonds.”

Greg Lippmann, a bond trader for Deutsche Bank, in an effort to attract investors created a presentation called “Shorting Home Equity Mezzanine Tranches.” Similar to Michael Burry, it was based on buying credit default swaps (CDS’s) on the worst triple B slices of subprime mortgage bonds. You could make a bet w/out a major up-front investment. Instead, you paid about 2% per year for at most-likely no longer than six years, which was the longest expected lifespan of the 30 year loans. Lippmann was convinced that it was just a matter of time before the defaults would happen. And when they did, your CDS’s began to pay out.

Michael Burry bought CDS’s from Goldman Sachs without knowing who was taking the other side of his trade until 3 years later. Goldman was the market maker, and it turned out AIG was the insurance company with the stellar credit (AAA bond rating from S&P, and Moody’s) supposedly able to back CDS’s to Burry thru Goldman. “In 1998, AIG FP entered the new market for corporate CDS’s: It sold insurance to banks against the risk of defaults by huge numbers of investment-grade public corporations. The CDS had just been invented by bankers at JP Morgan, who went looking for a AAA-rated company willing to sell them – and found AIG FP.”

Goldman convinces AIG to provide this same corporate credit insurance to the subprime mortgage market. Goldman created a security called the synthetic mortgage bond-backed CDO (Collateralized Debt Obligation). “In a mortgage bond, you gathered thousands of loans and, assuming that it was unlikely they would all sour together, created a tower of bonds in which both risk and return diminished as you rose. In a CDO you gathered 100 different mortgage bonds –usually the riskiest, lower floors of the original tower-and used them to erect an entirely new tower of bonds.” The rating agencies were also paid well by Goldman for each deal they rated.

A synthetic CDO was a security comprised of CDS’s on BBB rated mortgage bonds. Michael Burry paid 2.5% (250 basis points) to own credit default swaps on the worst rated BBB bonds, and AIG paid 12 basis points (.12%) to sell CDS’s on those same bonds, filtered through a synthetic CDO. “The insurance Mike Burry bought was inserted into a synthetic CDO and passed along to AIG. The roughly $20B in CDSs sold by AIG to Goldman meant roughly $400M in riskless profits for Goldman, each year.

Why didn’t AIG have to maintain capital reserves against these swaps as most insurance regulation stipulates? Why were there no collateral requirements? Senator Phil Gramm, a Texas Republican who chaired the Senate Banking Committee in the late 1990’s, pushed through the Gramm–Leach–Bliley Act (named after the 3 Republican Congressmen who sponsored the bill), which President Bill Clinton signed into law in 1999.

This bill repealed part of the Glass–Steagall Act of 1933, and relaxed the rules separating commercial banking from investment banking. But more importantly, it blocked the regulation of derivatives, disposing of any collateral requirements so the likes of AIG and Bear Stearns could sell CDS’s unabated. This provision also had the strong backing of the Treasury Secretaries from the Clinton administration, Robert Rubin and Larry Summers, who teamed up with Alan Greenspan, an Ayn Rand disciple himself, to prevent the regulation of these new financial instruments. Greenspan, admittedly, would later regret this decision which cast a pall on his tenure as Chairman of the Federal Reserve.

Lippman begins buying CDS’s from Deutsche Bank’s own CDO department. He also hires a Chinese Quant named Eugene Xu to study the effect of home price appreciation on subprime mortgage loans. He also flies to the London headquarters of AIG FP in an attempt to convince them of the impending housing crises which would ruin their CDS insurance business.

In early 2006, Joe Cassano, in charge of AIG FP, agrees with his employee Gene Park and Greg Lippman and decides to stop insuring these deals, although they would continue to insure the ones they already had. When a Mexican strawberry picker in Bakersfield, CA, earning $14K/year was lent over $700K to buy a house, you knew this house of cards was destined to fall.

A mezzanine CDO was a CDO composed of mostly BBB rated subprime mortgage bonds. The synthetic CDO was composed of CDS on the BBB subprime mortgage bonds. If a CDO ends up being worthless, so is the investment of selling a CDS on that same CDO.

In Jan 2007, BBB bonds had lost over 30% of their value from par (100) to the high 60s. Meanwhile, the CDOs created from those same bonds were still being sold by Merril Lynch and Citigroup. Bear Stearns and Lehman Brothers continued to publish reports supporting the bond market. Moody’s and S&P agreed to change their rating methods, but not on the old bonds they had already rated.

Bear Stearns is also a big seller of CDS’s, but is not required to post collateral on those potential debts, which is why Cornwall Capital becomes concerned about Bear Stearns viability in the financial crises. As such, they turn to the British Bank, HSBC (3rd largest bank in the world) to buy CDS’s on Bear Stearns.

Another problem was how the Credit Default Swaps were valued. There wasn’t really an open market to sell and buy these new financial instruments, and so they were valued by the big investment banks, namely the Goldmans, the B of A’s, and the Morgan Stanley’s of Wall Street. And because these banks may have been on the other side of the CDS trade, they were reluctant mark up their value even as evidence of the mounting defaults grew.

As a result, Michael Burry’s Scion Capital lost 18.4% in 2006 as the S&P gained over 10%. The market makers in his CDS investments were still not increasing their value, and meanwhile, he continued to have to pay out the annual premiums.
Howie Hubler, a bond trader (Buy Side) at Morgan Stanley was making large bets against the subprime market just as the Morgan Stanley brokers (Sell Side) were peddling these same investments to their own clients. In other words, their own trading desk was shorting the same investment they were marketing. Hence, the impetus for the Volcker rule, and the financial regulation (Dodd-Frank Wall Street Reform and Consumer Protection Act) passed by Congress and signed into law by President Obama in 2010.

In September of 2008, Lehman files for bankruptcy, and Merrill Lynch sells itself to B of A after announcing $55B in losses on subprime bond-backed CDOs. The US Federal Reserve rescues AIG with a loan of $85B.

The Wall Street Investment Banks convinced the rating agencies to bless these complicated CDO investments which were full of risky subprime loans. Before the rating agencies caught on, and adjusted their evaluation methodology, the writing was already on the wall.

“The mezzanine CDO was invented by Michael Milken’s junk bond department at Drexel Burnham in 1987. The first mortgage CDO was created by Credit Suisse in 2000 by a trader who had spent his formative years, in the 1980s and early 1990s, in the Salomon Brothers mortgage department. His name was Andy Stone, and along with his intellectual connection to the subprime crises came a personal one: He was Greg Lippmann’s first boss on Wall Street.”

These early bond investments pioneered by the likes of Stone and Milken eventually morphed into more complex agreements such as CDS’s and synthetic CDO’s based in part on a need to develop new vehicles to fuel Wall Street’s insatiable appetite for subprime loans, which exacerbated the fragility of the housing market. But, they needed these risky loans like a drug because they were the underlying assets, as shaky as they were, behind these increasingly complex investment vehicles.

Their complexity, and resulting obscurity, provided Wall Street, which profited for many years as the middleman, with the disguise to continue to prop up this fragile housing market until the bubble burst. Eventually the game ran out of believers, thanks in part to the efforts of Lippmann and Eisman, who were early to the scene and not afraid to challenge this charade, revealing it for what it truly was, a house of cards.

Three Cups of Tea, the first book from Greg Mortenson documents the conception of his mission in life, to improve the education of children in Pakistan & Afghanistan. This true story reveals the perilous challenges in that part of the world, home to Al Qaeda and the Taliban, and how an inspired promise from one man evolved into a mission of many different communities from individuals to villagers, and from politicians to the military.  It starts out as an overly ambitious and unlikely promise to repay a small debt of gratitude, to serendipitously addressing the greater challenges of terrorism well before Sept. 11, 2001 even galvanized US resolve in this conflict.

The story begins in 1993 when a failed ascent of K2, the world’s 2nd highest peak, leads to Greg’s rescue by a small destitute village in Pakistan called Korphe. Here, Greg is provided with shelter, food, and a bed while he is nursed back to health by the kindness of strangers. Once recuperated, and venturing outdoors on his own for the first time, he encounters 80 school children sitting outside writing their lessons with sticks in the dirt, and fool-hardily promises to return to build a school for them one day. Thus begins the journey of Three Cups of Tea, the title of which is first shared by the village elder from Korphe, Haji Ali. “The first cup of tea you share with us, you are a stranger. The second cup you are a friend. But with the third cup, you become family – and for our families, we are willing to do anything, even die.”

Greg’s seemingly benign promise that few including Greg ever thought would materialize, amazingly, and almost haphazardly begins to fall into place aided greatly by his own human struggles and travails back home in Berkley, CA. After reading this first story, one cannot help but relate to the challenges we all encounter in life, and feel inspired as Greg endeavors to such an important and relevant contribution to society.

The story continues in Stone into Schools, which turns its focus toward Afghanistan as Greg’s nascent organization begins to take hold. One of the main premises of this book is the strong support for the research conducted by Nobel-award winning economist Amartya Sen, from which Mortenson postulates “young women are the single biggest potential agents of change in the developing world – a phenomenon referred to as the Girl Effect. If you teach a boy, you educate an individual; but if you teach a girl, you educate a community. No other factor even comes close to matching the cascade of positive changes triggered by teaching a single girl how to read and write. In military parlance, girls’ education is a force multiplier – and in Muslim societies, the ripple effects of female literacy can be profound. Additionally, Education is one of the basic values that Americans of all faiths share with Muslims everywhere.”

Since 1995, when Greg first embarks on that initial undertaking to fulfill his promise, today his organization called the Central Institute of Asia has built 131 schools in some of the most remote regions of Pakistan and Afghanistan which lack educational infrastructure, and because of isolationism, are often more destitute and susceptible to religious extremism. Add the resource wealth from rich Arabic countries with Osama Bin Laden types who seek to establish their own warped brands of Islamic fundamentalism using madrasahs to indoctrinate young impressionable children who lack other educational options, and you create an uninterrupted supply of future terrorist.

Greg points out that during the 1990’s about eighty thousand boys who had received hard-line religious instruction in these madrasahs were recruited directly into the ranks of the Taliban. In one passage he observed an enormous tent, adjacent to a refugee camp where families came for daily rations, which functioned as a Madrasah where young boys were tutored in jihad. Many of the parents were unhappy their kids were attending these schools, but because the jihadis were providing them with food, shelter and medicine, they tolerated them.

The book also explains that in the early 1970s the women of urban Afghanistan enjoyed freedoms that were fairly liberal for a conservative Muslim society. Many women in Kabul actually worked in medicine, law, journalism, engineering and other professions. But within the first week of taking Kabul, the Taliban stripped away these privileges, relegating women back to their homes, and under their veils. The Taliban actually confined all women physicians to their homes, not allowed to even venture out. Additionally, every girl’s school and university in Afghanistan was abruptly closed, and the act of teaching girls to read and write was outlawed.

In April 2003, Parade magazine, the Sunday newspaper circular, ran a cover story on Greg’s school building organization, and their offices received over $900,000 in donations, which fueled their school building initiatives, and advertised this unknown organization to the American public. Today, Greg’s institute is not only well known around the US, helped by his busy speaking tour at many US colleges and universities, but he has also gained some notoriety among the governments and villages in Pakistan and Afghanistan, which often vie for a school in their own communities. The Parade article was a watershed moment that secured their financial footing, and enabled the organization to prosper.

As his mission has evolved and gained traction in the media even the highest levels of the US military have recognized his efforts. On Dec. 26, 2008, The Wall Street Journal quoted Colonel Christopher Kolenda from the US Army. “Education is the long-term solution to fanaticism.” Jason B. Nicholson, an American serviceman from Fayetteville, NC said “Central Asia Institute (CAI) projects provide a good alternative to the education offered in many of the radicalized madrassas from where the Taliban sprung forth with their so-called ‘fundamental Islamicism.’ What can be better than a future world made safe for us all by education? The CAI is now my charity of choice.”

Perhaps one of Greg’s most defining moments came on the morning of July 15, 2008 in the remote village of Pushgur, Afghanistan. Two UH-60 Black Hawks, and one CH-47 Chinook helicopter landed and the first person to step out of the lead Black Hawk, clad in desert-camouflage fatigues, was Admiral Mike Mullen. Reporters from Reuters, the Wall Street Journal, the Washington Post, NPR, BBC and ABC-TV, as well as Thomas Friedman, the Pulitzer-Prize winning editorial-page columnist for the New York Times all were there to witness this important event for this small village, the opening inauguration of a CAI sponsored, eight-room school.

“This school is here because of you, the local people, and your commitment and dedication to start education in your community. This is a proud moment in which we all celebrate your efforts to build a better future for your country.” - Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff

“Having fought for so long under the shadow of war, I believe that the finest service that a mujahedeen can now perform is to build schools and promote literacy. The opportunity to participate in this effort is one of the greatest honors of my lifetime.”  - Wohid Khan, former Mujahadeen Commander

Today, every Special Forces soldier deploying to Afghanistan under Admiral Eric Olson, head of Special Operations Command, is required to read Three Cups of Tea. Admiral Mullen’s stated strategy to win over the hearts and minds of the Afghan people is not only predicated on providing for their safety, but for supporting the establishment of their local communities and government. Mortenson’s undertaking is arguably one of the most important contributors to this higher purpose than that any foreign organization, including the Harmid Karzai government and the US military alike.

The bittersweet ending of Stones into Schools involves the completion of their most challenging, most remote and highest elevation, four-room school made possible through the sacrifices of some determined Afghanis , and Greg’s tireless support of their efforts. It’s truly an uplifting end to the second chapter of an important mission halfway across the globe. Stones into Schools provides some unique insights into this difficult environment, and might make one question how our resources can best be spent in addressing the real, long-term challenges associated with lack of freedom and education, and the resulting global terrorism.

These types of financial deductions are common among Manufacturers, Supplier/Distributors, and Consumer Packaged Goods (CPG) companies which develop, manufacture and supply products to retailers, who in turn sell to the end-user consumer. A deduction occurs when the retailer, for whatever reason, decides to short-pay the invoice from the supplier.

Generally, there are three types of deductions. Authorized deductions, often in the form of trade promotions from the supplier, can occur if the retailer meets certain incentives, such as ordering so many products by a certain date. The supplier then provides discounts in the form of authorized deductions. They’re authorized, welcomed, agreed to by both parties, and foster business partnership.

Penalty deductions occur when mistakes are made, and the supplier is penalized by the retailer for not correctly fulfilling the order, or meeting certain requirements. Some examples might include damaged goods, shipping the wrong Stock Keeping Unit (SKU), the wrong amount, or missing the deadline. As a penalty for non-compliance, the retailer extracts a deduction as a form of compensation for the mistake.

The third type is an unauthorized deduction. Often misrepresented as a supplier mistake, some retailers attempt to coerce better deals through trumped up charges, or exaggerations, faulting their suppliers for dubious mistakes. The supplier, thus, did not authorize the short pay, but their options may be limited unless their ERP system is up to the task.

Deductions dilute receivables but are generally a preventable leak, even as retailers regularly rely on them to bolster their own bottom lines. Particularly as more retail power is aggregated among big players like Walmart, Best Buy, and Home Depot, they are more apt to win bigger concessions from their suppliers, who dare not risk losing an important customer. In an economic downturn, retailers may use deductions aggressively. But in an upturn, the supplier may be more apt to ignore deductions because they need not jeopardize a relationship when times are good.

Trade promotions are often vulnerable to deductions because they can become too complex to administer or interpret. The sales rep may promise a deal to the customer, but fail to communicate it accurately to their finance department. The finance department may not have an easy way to track the promised promotion, which leads to errors, and more deductions. Without tight integration between marketing, sales and back-end accounting, and without clearly defined, easy to understand promotions, deductions will result.

Additionally, without an integrated system to create, administer and track promotions, it can be very challenging to research and contest deductions. The resolution process is often manual and paper-based, therefore time-consuming and prone to errors.

Suppliers and Manufactures will often automatically write-off deductions that are under a certain threshold, because the time and effort required to research the claim, and negotiate a settlement, can outweigh that effort. The sophisticated customer may also attempt to determine that threshold, so automatic write-offs occur, as another way to capitalize on potential cost savings.

To address this increasingly vulnerable profit leak, a company must align its people and processes, from better promotional planning, to order-to-cash execution. Sales & Marketing must align their promotions with finance, so discounts, delayed discounts, and accruals can be tracked and administered correctly. Demand forecasts must be communicated back to the supply chain, so they can deliver on promised timeframes. Information on customer pick, pack and shipping procedures must be captured in the ordering process to ensure error-free order fulfillment.

If and when a deduction does occur, despite these steps, Finance needs the flexibility to assign ownership for research and resolution to the most appropriate department, whether it’s sales, customer service, credit or collections. Finance, Sales and Marketing also need to be able to determine customer profitability, not only including deductions in that calculation, but the costs associated with resolving them as well, so they can better align their promotional efforts back toward their truly, most valuable clients.

Other important considerations would include a single, common, customer database shared among all the departments, with flexible workflow, and an integrated order to cash, and order fulfillment process. Flexible reporting, and profitability analytics, such as capturing important metrics like Days Sales Outstanding (DSO), preferably delivered in a real-time dashboard, are equally important, and critical to identifying deduction trends in order to ward off future dilutions. Deduction management is a critical step to elevating the profitability and competitiveness of the enterprise.

It starts out revealing the strength of Buffet’s inner resolve, or his inner scorecard as he describes it. Back in 1999, most value investors had given in and bought technology stocks, seduced by their increasing run-up in price, and the frothy Internet-hyped environment. Buffet describes himself as always having been an “inner scorecard guy.” As a result, he was able to resist the temptation to participate in the internet bubble despite much criticism at that time. He was more concerned with his own personal values, based on his true investment principles, rather than trying to appeal to broad opinion. An outer scorecard guy, on the other hand, is always more concerned with how the outside world perceives him.

Warren learned from an early age the power of compounding, and was forever struck by a meeting with Sidney Weinberg, CEO of Goldman Sachs back in 1940, when at the age of ten, Warren accompanies his father, Howard, then a banker/broker at the Omaha National Bank, on a trip to Manhattan. Warren admired the lifestyles of these Wall Street brokers, and how one of its most powerful men treated this wide-eyed boy with such reverence. Not long after this encounter, Warren reads 1000 ways to make $1000, which emphasized starting now, and the power of compounding. Warren wanted to be rich, and live like the men on Wall Street, but he had to start earning and saving now, so that the power of compounding money could have the greatest effect.

Buffet began to think of time in a different way because compounding linked the present to the future. A dollar today could be worth ten dollars tomorrow if managed properly. At the tender age of 12, Warren had scrounged and saved $120, to the great amusement of his family, and decided to invest it all in 3 shares of Cities Service Preferred for himself and his sister Doris, simply because it was a favorite stock of their father. At first, the stock dropped from $38 to $27 before eventually rebounding to $40, where Warren quickly sold it. But eventually, Cities soared to $200 per share. Buffett said he learned 3 important lessons from this experience, which he still recalls as one of the most important episodes of his life. First, don’t dwell on the price you pay for a stock. Two, don’t rush to grab a profit. And three, if he made a mistake investing someone else’s money, they might get mad at you as his sister did when the stock first dropped. So, don’t invest someone else’s money unless you’re sure you can succeed.

As a high school teenager, Warren is blessed with analytical capabilities, and a love of all things statistical and math. He was also an avid reader of successful business men such as Jay Rockefeller and Andrew Carnegie. As an enterprising young teenager, he makes money delivering newspapers, collecting lost golf balls at the golf course for re-sale, and even wading into the golf ponds after hours to find more of them. He repairs and refurbishes broken pinball machines and entices local barbershops to install them by offering to split the proceeds with them 50/50.

Warren was socially awkward, somewhat introverted, and a year younger that most of the students in his class, having skipped half a grade. He spent more time reading the The Daily Racing Form, and following horse races, studying the probabilities of each horse winning the race, than he did chasing women, who made him very nervous. Warren eventually realized he needed to be more social, and remembers one of the most influential findings of his entire life, discovering Dale Carnegie’s book on How to Win Friends and Influence People. Warren desperately wanted to be loved and popular, and he relished practical systems that he could practice and follow. Now he had his human relations bible to live by. Rule one, don’t criticize, condemn or complain.

Warren graduates from high school 16th out of a class of 350 students, writing future stockbroker under his yearbook picture, and goes on to enroll at the University of Pennsylvania. After breezing through UPenn, Warren returns to Omaha and applies to graduate school at Harvard, only to be rejected based mostly on his interview. Harvard wasn’t interested in stock-pickers, but having recently read Benjamin Graham’s “The Intelligent Investor,” he enthusiastically applies and is accepted to Columbia Business School, where his emerging idol, Benjamin Graham, is now a professor.

Graham preached that a stock’s intrinsic value was the price per share if you sold off all the assets, minus the liabilities, which left you with the company’s equity or net worth. Eventually, Graham felt a stock’s price would reach its intrinsic value. From Graham’s class, Warren learned 3 important principles:
• A stock is the right to own a little piece of a business, and a stock is worth a fraction of what you would be willing to pay for that business.
• Use a margin of safety. Investments are built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors
• Mr. Market is your servant, not your master. Mr. Market’s moods should not influence your view of the price. However, from time to time, Mr. Market does offer the chance to buy low and sell high.

After Columbia, Warren returns to Omaha to work at his father’s brokerage firm, and begins selling GEICO stock to friends and family, one of his favorite bets at that time, the early 1950s. But Warren immediately grows uncomfortable with the conflict of interest of selling stocks based on commission, which could compromise his buy & hold preferences.

Buffett’s prayers are answered when his college idol, Benjamin Graham, reverses his earlier decision, and allows Warren to join his investment firm based in NYC called Graham Newman. Warren begins to develop his own investment strategy which diverges somewhat from that of Graham in regard to diversification. Benjamin’s approach, in an attempt to maximize the margin of safety, invests small portions in many stocks that meet his investment criteria. He calls these companies Cigar Butts because they sold at a big discount to net assets and were good for about one puff before unloading them. He spent less time on the quality of the investment itself, and more time aggregating many stocks that met his criteria, and taking small positions in each one of them. Graham’s ideas of diversification were extreme, and Warren preferred to take much larger positions in fewer stocks. He had complete confidence in his own abilities to determine a worthwhile investment, as exemplified by his early success in GEICO.

Warren dabbles successfully in arbitrage at Graham Newman on Cocoa Bean futures, following Jay Pritzker’s investment in Rockwood, a chocolate maker based in Brooklyn. But he eventually found it more profitable to simply follow Jay Pritzker’s lead, and invest directly in shares in Rockwood, just as Pritzker was doing, an investment strategy Warren coins as coatailing, or unabashedly following investment ideas learned from other investors like Jay and Ben.

By 1956, at the age of 62, Benjamin Graham was tiring of investing, and wanted to move out to California to pursue his true loves of art, music, women and leisure. With the firm Graham Newman winding down, Warren decides it’s time to branch out on his own, and moves back to Omaha to start his own partnership based on the Graham Newman model called Buffet Associates, started with seven partners on May 1, 1956. He devises a formula to reward his upside gains based on investment results, not commission, and similarly penalize himself personally for any downsides as well.

A major turning point in Warren’s growth as an investment manager came in 1958 in the form of an under-valued company called Sanborn Map. Sanborn published detailed maps of power lines, water mains, building engineering, and emergency stairwells for all the cities in the US. Its customer base was shrinking as insurance companies merged, but its stock price was cheap at $45/share even though its investment portfolio was worth $65/share. To get a hold of that investment portfolio, Warren needed to raise more capital not only from his partnership, but from individuals outside the partnership as well.

Warren wanted the Sanborn board to distribute the investment portfolio to the shareholders but they refused, and Warren decided he needed to wrest away control of the board by accumulating the stock himself, or attracting more investors in the stock who were more amenable to his way of thinking. Eventually, the board capitulated, forced by Warren’s hand, and this ushers in a new investment strategy in Buffet’s evolution, enabling him to exert a more active role in how a company is managed.

Dan Cowin, another Graham disciple in Buffet’s network, brought him a textile maker in New Bedford, MA called Berkshire Hathaway, because it was selling at a discount to the value of its assets. Buffet wanted to buy it, and liquidate it, or tender the shares he acquired back for a profit. Through an apparent slight by the owners, Buffet decides to build an equity stake with the intention of acquiring a majority position, which he completes in 1965. The original investment in the textile maker itself becomes a dog as local textile mills migrate to cheaper labor and lower productions costs elsewhere in the country. But eventually, Berkshire morphs into the mutual fund like behemoth that is today, representing the pooled investments in all of Warren Buffet’s holdings.

Berkshire Hathaway invests in many companies along the way, from Coca Cola, to Clayton Homes, a mobile home manufacturer, to General Re and Swiss Re, reinsurance companies, and to PetroChina in 2008. Johnson & Johnson, Proctor & Gamble, Travelers, JP Morgan, Goldman Sachs, NetJets and ConocoPhillips are just a sampling of the many prominent names in his portfolio.

In 2004, Warren correctly predicts the downfall of the dollar because he felt Americans were over-consuming vast amounts of foreign manufactured products on borrowed money. US debt and government spending were all increasing, a harbinger of bad things to come. Buffet complained they were spending over two percent of US income just to pay interest on our national debt. Warren wisely puts his money where his mouth was by purchasing $12B of foreign currency to hedge Berkshire’s dollar risks.

In 2008, Buffet begins referring to the derivative market as “financial weapons of mass destruction.” As the financial crises unfold, Berkshire Hathaway with their enviable financial strength and AAA rating is poised to rescue many businesses at advantageous rates. He gives $150M to Sealed Air at 12%; $300M to Harley Davidson at a 15% interest rate; $300M of ten-percent contingent convertible senior notes from USG; $250M of Tiffany bonds at 10%, and a $2.7B, 12% convertible stake in Swiss Re. These aggressive investments at the height of the financial crises, coupled with his statesmanlike appearances on CNBC, proclaiming his confidence in the US economy, helped stabilize the markets and positioned Berkshire Hathaway as one of the great benefactors of any turnaround in the economy.

For me, as an avid stock investor, the most interesting part of this story is Buffett’s evolution as an investor, from his early years as a value hunter, seeking under-valued asset plays, to his modern day transformation which included big contrarian bets, often presciently before the heights and depths of the markets. Additionally, Buffet had a great appreciation for enduring American brands such as Coca Cola, Proctor & Gamble and Johnson & Johnson. From the evolution of Warren’s investment philosophy, to his adoption of the Dale Carnegie edicts, to his extreme discomfort and avoidance of confrontation, and to the types of friendships and qualities he valued, as he fostered long-term business relationships based on honesty, integrity, unequivocal trust, and dedication, this story reveals a fascinating portrait of how this vulnerable, humble, self-deprecating, and didactic man not only became the richest person on the planet, but ultimately reached the decision to give away the bulk of his fortune.

I liken these concepts to driving your car on a road trip to a new destination that you’ve never been to before, just as an executive drives their business toward new strategic short term and long term goals. Your vehicle dashboard tells you how fast you’re going, the amount of gas in the tank, the coolant temperature, and engine RPM’s, just to name a few. These are Key Performance Indicators (KPI’s) or taken as a whole, your Business Intelligence (BI). In business, depending on the industry and department, KPI’s might include margins, sales, inventory, turnover, etc. It’s measuring and monitoring the performance of your car or business, but it’s not leading you to your destination. No, that’s where your onboard GPS navigation system comes in.

The navigation system keeps score, like a scorecard, constantly updating your results, noting how long it will take to reach your destination, checking off way points along the trip, factoring in wrong turns, and making adjustments as needed until you arrive at your final target. The scorecard helps your business focus on reaching your goal, and monitors the results of the execution of your strategic plan. The dashboard, on the other hand, is less concerned with your overall strategic objective, and more focused on specific operational goals that will ultimately contribute back to the strategic plan.

Along the way, you may stop at an information booth to read about your destination, and nearby attractions. This would be considered a portal, an area that stores vast amounts of data and information, some relevant, and some not so relevant, but that you may find helpful to peruse and consider.

As you’re driving along and enjoying the scenery, suddenly, your low fuel indicator light shines on your dashboard, signifying it’s time take an action. This would be considered a business alert, often in the form of an email, notifying you of a potential problem that needs to be addressed asap.

So, the next time you hear the terms dashboards, scorecards, KPI’s and business alerts, think first of your vehicle dashboard, and the rest will fall into place. Consider what KPI’s you’d like to see on your own personalized dashboard, to help you achieve your own goals which should be in alignment with the company’s strategic plan. Consider the business alerts, or red flags, that should alert you to a potential problem, and a required action. And what scorecard functionality, or benchmarks, both financial and non-financial, will help the company determine if they are indeed effectively implementing their strategic plan.