Why Four Weeks Of Design Thinking Offers Better Digital Transformation

Derek Klobucher

Digital transformation can do a lot to help the mining industry, such as improving onsite operations and decision making. Design thinking can optimize those improvements – if properly utilized.

Metals and mining corporation Vale has a compelling story of a successful implementation that took only four weeks. The result was a completely new process, according to Vale’s IT innovation manager at SAP Leonardo Live in Chicago.“The mining sector has embraced the introduction of new technologies, which have resulted in significant productivity benefits,” professional services firm EY stated in a recent mining update. “But there is the gap between the potential from digital transformation and the poor track record for successful implementations.”

Management assets across a global supply chain

The mining industry is on the upswing, enjoying growth in the U.S., Europe, and China, according to EY. Vale has been growing too, investing more than $120 billion during the last decade and expanding to 27 countries, according to Vale’s Helio Mosquim.

This growth brought a lot of challenges, such as managing new assets across the globe, according to Mosquim; intelligent maintenance would help the company increase uptime, boost productivity, and cut costs. Supply chain was also a big concern for the Rio de Janeiro-based multinational, which produces iron ore, copper, and more.

“Imagine producing ore in the middle of the Amazon, and transporting it all the way to the ports, and going through the distribution centers in Malaysia and Oman – and on to China,” Mosquim said. “Optimizing production, optimizing logistics and shipping … it’s a big challenge for us to optimize the whole chain.”

Saving time by automating critical tasks

Workforce effectiveness was another challenge for Vale, which has about 110,000 employees, according to Mosquim. Inventory is about $1.6 billion of Vale’s $11 billion annual spend, so the company automated purchasing processes to make them more intelligent.

For example, maintenance workers used to ask someone else to create a purchase requisition before acquiring a new part for damaged equipment, according to Mosquim. This completely manual process often overlooked parts that were already available (perhaps the previous shift ordered the same thing), and finding the missing information required searching through multiple screens.

These steps often resulted in a lot of redundant work and wasted time.

“Between 25% to 40% of rejections of all the purchase requisitions [occurred] because [the part] was either available on contract or in inventory,” Mosquim said. “And the equipment was out there waiting for the part.”

A “totally different approach” in just four weeks

Vale only expected to enhance its legacy platform, as opposed to taking full advantage of innovation services. But Vale’s vendor helped the company connect APIs directly to its system and use everything in the cloud – and implement it quickly.

“We set up a plan to innovate in four weeks,” Mosquim said. “And that was an amazing experience.”

Vale put its procurement team through a design thinking session to sort major pain points. They had a draft prototype by week one; by the following week, they had feedback – and were making adjustments.

“The result was very effective, very impressive,” Mosquim said. “When we saw the totally different approach, we were very confident that it was going to be able to deliver.”

“We had an opportunity to have a totally new process … we had other managers come in saying, ‘We would like to invest in this innovation,’” Mosquim said. “In the end, we got a little bit from each solution, and we put it in the cloud.”

Design thinking helped Vale digitally transform its supply chain, asset management, workforce effectiveness, and more. Digital technologies – including Internet of Things and machine learning – could also help mining companies improve safety, optimize site-wide operating systems, and more, according to a smart mining conference last week.

“You can only truly achieve a sustainable productivity improvement by adopting an integrated end-to-end business approach from market to mine,” as the EY mining update stated.

Design thinking could be your key to a successful implementation.

Learn more about SAP’s approach to design thinking.

This story originally appeared on SAP Business Trends. Follow Derek on Twitter@DKlobucher

Comments

About Derek Klobucher

Derek Klobucher is a Brand Journalist, Content Marketer and Master Digital Storyteller at SAP. His responsibilities include conceiving, developing and conducting global, company-wide employee brand journalism training; managing content, promotion and strategy for social networks and online media; and mentoring SAP employees, contractors and interns to optimize blogging and social media efforts.

Why Australians Pay The Highest Power Prices In The World

Gavin Mooney

This is the second in a series of three posts looking at the hot topic of Australian power prices:

  1. Do Australians really pay the highest power prices in the world?
  2. An explanation for the high power prices in Australia (this post)
  3. A look at what can be done about the high power prices in Australia

In Part 1 we established that – while there are a few different ways to compare the data – Australia does have pretty much the most expensive electricity in the world. The price increases in the last decade have been significant, more than doubling according to the Consumer Price Index.

The question now is why prices have risen so much, when Australia is blessed with vast coal and gas reserves and huge renewable energy potential?

First, we need to look at the components of a typical residential electricity bill.

  • Wholesale: Effectively the cost to generate electricity.
  • Network: The charges for delivery of energy via the poles and wires from the point of generation (power stations) to the point of consumption (homes and businesses).
  • Retail: Charges levied by the consumer’s chosen retailer for selling electricity.
  • Federal environment: This includes items such as the large scale renewable energy target and subsidies for feed in tariffs.
  • Metering: These charges only apply in Victoria to fund the state-mandated roll out of smart meters.

These components have all contributed different amounts to the rising energy prices. A September 2017 report by the Australian Competition and Consumer Commission (ACCC) identified and ranked the source components of power bill increases over the last decade by how much they had each contributed:

  1. Network charges (41%)
  2. Retail costs and margins (24%)
  3. Wholesale costs (19%)
  4. Green schemes (16%)

Let’s now look at these one by one in more detail as well as the effects of renewable energy.

1. Network charges

Investment in the electricity network has been the primary driver in power bill increases for some time. 

The way the network companies make their money is by earning a certain rate of return on their asset base. As the size of the asset base increases, so do revenues. A revenue cap is set by the regulator every five years, dictating how much the (natural monopoly) networks can spend on building and maintenance. The end consumers foot the bill for this, even if the spend wasn’t needed. This has turned out to be the case in Australia.

Investment decisions were based on forecasts projecting that demand for electricity would continue to rise. The forecasts were wrong – demand has flatlined and declined since about 2009, mainly due to increased rooftop solar and energy efficiency improvements in household appliances. Consumers may also have reacted to higher energy prices. (As a side note – demand may increase again if there is widespread adoption of electric vehicles in Australia.)

2015 Senate enquiry found that there had been significant overinvestment in networks far beyond what was required, especially in the government-owned companies in NSW and QLD. This has been termed network “gold plating”.

2. Retail costs and margins

Retail costs have also risen. This is the part of a power bill that several investigations have found is the hardest to monitor, and the least transparent to consumers. 

There are a few different reasons for the increases in retail costs.

Finding the best offer
The market is characterised by very wide price dispersion, meaning a consumer can save hundreds of dollars by moving from the worst to the best offer. It is also complex, making it hard to compare rates and find the best offers. Private comparison websites do not include all market offers, while the websites offered by the Australian Energy Regulator and the Victorian government do not provide the tools customers need to differentiate between offers. A Grattan Institute study in March 2017 found the system was so complicated that many consumers did not understand what savings they could make and just gave up.

The Thwaites review in August 2017 found Victorian households are paying on average 21% more for their electricity than the cheapest market offer available. Nearly a quarter of customers could save $500 or more by switching to the best available offer.

Punishing loyal customers
Consumers are often attracted by the deep discounts of a retailer’s initial offer, only to slip unknowingly onto a much smaller discount or a costly standing offer a year or two later. AGL Energy chief executive Andy Vesey admitted last year that big power companies were guilty of punishing their most loyal customers in this way, but said subsequently AGL was abandoning the practice.

Retailer profit margins
Profit margins have also been in the spotlight recently, with a Grattan Institute study finding retailers’ profit margins in Victoria were around 13% – higher than in other retail sectors, and more than double the margin that regulators considered fair when they set retail electricity prices. The study concluded that Victorians would save about $250 million a year if the profit margin of electricity retailers fell to match that of other retail businesses. The companies rejected this, saying they have been forced to spend more on marketing due to increased competition.

Failure of competition
Competition in electricity retailing hasn’t delivered what was promised: lower prices for consumers. The failure appears to be worst in Victoria, the state with the most retailers and the longest experience of deregulation.

The market is highly concentrated. Despite there being 25 energy retailers in Victoria, three players (Origin, AGL and Energy Australia) command a market share of over 70%. The next two largest players, taking the total market share to around 90%, are vertically integrated, making it difficult for others to compete.

3. Wholesale charges

Network charges may have been the primary driver of power bill increases over the last decade, but they have now levelled off. More recently, it is the cost of electricity generation that has been the biggest contributor to rising electricity prices. In the past year or so some states have seen increases of over 100%.

There are two main reasons for the increases in wholesale costs: generator bidding behaviour and the soaring price of gas.

Generator power
With the recent closures of the Northern and Hazelwood coal plants in the last year, the gap between supply and demand at peak times has tightened. The market is therefore now far more susceptible to wholesale price surges if a generator breaks down (not uncommon, given Australia’s ageing fleet of coal generators) or an operator decides to withhold their electrons from the market until demand rises. In each state, the two or three principal generators command a market share of 70% or more, giving them enough clout to swing the market.

Indeed, generator market power was clearly seen in Queensland recently with two generators having two thirds of capacity and prices spiking. When the Queensland Government directed its generators to tone down their bidding, prices immediately reduced significantly.

The rise of gas
The second reason for the sudden increase in wholesale costs is much higher gas prices. As supply has tightened, natural gas fired power plants are increasingly being called upon to meet demand. As illustrated in the diagram below, prices are set in five-minute intervals, determined by the price of the most expensive generator required. At 4:25 this was $38, set by Generator 5. Settlement is done in half hour blocks and the spot price for the half hour is determined as the average of the prices for the six five-minute intervals.

As the most expensive fuel that we rely on to create electricity to meet our needs, gas is increasingly determining the wholesale price that generators are paid. Gas generation now sets the wholesale price around a third of the time in South Australia.

Why is gas going up?
The reason for the rising gas prices is more mysterious. Australia has a lot of gas, so much in fact that it is expected to become the world’s largest exporter by 2020. Yet it is cheaper to buy Australian gas in Japan than it is in Australia and AEMO is already forecasting a shortfall in domestic gas supply.

ACCC chairman Rod Sims noted “International prices are at all-time lows; Australian gas prices are at all-time highs.” High local prices appear to be the result of so-far inexplicable behaviour by exporters, selling gas at lower prices on the export spot market than they could achieve by selling the gas locally. Australians are effectively subsidising loss-making exports. Or it could be down to a cartel controlling Australian gas.

An ACCC inquiry into the east coast gas market identified three causes:

  1. The introduction of the export LNG projects changed gas flows and domestic prices.
  2. Oil prices fell faster and further than some thought possible, curtailing investment in gas exploration and development.
  3. Regulatory uncertainty and exploration moratoria have significantly limited or delayed the potential for new gas supply.

4. Green schemes

Responsible for about one sixth of the electricity price rises in the last decade, green schemes include:

  • The bipartisan renewable energy target
  • Solar feed-in tariffs that pay consumers for power sent into the grid.
  • Some programs designed to boost energy efficiency, mostly through the use of better light bulbs and appliances.

The cost of green schemes is not transparent: it is smeared over all electricity consumers and can appear costless to some. But they do cost consumers, often inequitably as those with solar panels are being subsidised by those who do not have them.

Is renewable energy to blame?

No. Well, maybe partly.

Renewable energy has increased significantly over the last decade and now provides around one fifth of Australia’s energy needs. It is an easy target and often blamed in sweeping statements as the sole reason for power price rises without an appreciation of the finer details explained above.

The Renewable Energy Target has helped reduce power bills and will continue to do so, according to the government’s own modelling as well as analysis by energy market experts ROAM Consulting, who found that Australian households would pay over half a billion dollars more for power in 2020 without the Renewable Energy Target in place (equivalent to more than $50 per household).

The ACT has the lowest bills in the country and is on track to reach its goal of 100% renewable energy. Indeed, a recent report by the Australian National University showed that electricity price increases from 2006-2016 were highest in the states with the least renewable energy.

But on the other hand…

Wind and solar generate intermittently and at zero marginal cost – their operating costs are far lower than coal and gas generators. This means that when wind and solar are generating, prices will be lower.

However, over the medium term, lower wholesale prices could contribute to early retirement decisions for existing coal generators, and push prices higher due to increased reliance on more costly gas plants.

Intermittent generation can also increase spot price volatility and this puts upward pressure on electricity prices as well as making new investment decisions more difficult.

Now we understand the many reasons why Australian power prices have risen so much, we next need to look at what can be done about it. Stay tuned for Part 3!

Read Part 1 of this series here.

Comments

Gavin Mooney

About Gavin Mooney

Gavin Mooney is a utilities industry solution specialist for SAP. From a background in Engineering and IT, Gavin has been working in the utilities industry with SAP products for nearly 15 years.

He has had the privilege of working with a number of Electricity, Gas and Water Utilities across the globe to implement SAP’s Industry Solution for Utilities. He now works with utilities to help them identify the best way to run simple and run better with SAP’s latest products.

Gavin loves to network and build lasting business relationships and is passionate about cleantech and the fundamental transformation currently shaking up the utilities industry.

Benefits Of Using A Third-Party Logistics Vendor

Aaron Solomon

Using a third-party logistics (3PL) vendor can be a great way to improve your business in a variety of ways. The benefits of this relationship can potentially include some cost savings, but even if there are no direct cost savings or even an increase in costs, there are still potential benefits for your customers’ overall experience.

What is a 3PL and how does it work?

A 3PL is a vendor that fulfills your orders for you. Typically, you ship them inventory in bunk that they keep in their warehouse. As you receive orders, that information is forwarded to them, and they use this inventory to fulfill your orders and bill you for their services.

What are the benefits of using a 3PL?

Given that a 3PL will charge for their services, what are the advantages of outsourcing fulfillment?

Reduce overhead increases

If your sales volume starts to increase beyond your capability for housing inventory and fulfilling orders in a timely manner, there’s the issue of how to meet this increased demand. Investing in new, larger facilities and additional staff will not only take time to bring about, but may not be the best option right away. If you meet the new demand by using a 3PL there may be an increased cost per order, but you will be able to more quickly expand your operations to meet demand. This can also be used to buy time. While you may have reduced margins for these orders while using the 3PL, in this time you can more carefully consider not only if increased operations are justified long-term, but seek out the most cost-effective solutions for increasing your operations internally.

Reduce shipping time and costs

If your operations are located on the West Coast, shipping to customers on the East Coast will always take longer and cost more. Large retail companies typically operate several fulfillment centers located around the country to address this but for small and medium businesses this can often be cost prohibitive. If you are finding that a large portion of orders are coming from the other side of the country, a 3PL located closer to these customers can allow you to offer reduced shipping times. Depending on the fees of the 3PL the shipping costs may even be able to be lowered for some of these customers.

Reach new markets

Some products may have shipping costs that render certain geographical markets impractical to market to in your current state. For example, a US based company may find it hard to sell large or heavy products to European customers due to the large costs of shipping. Similarly, some products cannot be shipped by air due to hazardous material restrictions and can cost sales based on the shipping time. If you have a 3PL located in Europe, your goods can be sent to the 3PL by slow but relatively inexpensive ocean freight and the fulfillment center can then ship these products to European customers with more competitive rates and shipping times.

Leverage their expertise

Just as you focus on sales, a 3PL’s focus in on the fulfillment process. Whether it’s their shipping process, their packaging, or their relationships with shipping carriers, this can all translate into an improved customer experience as well as a learning experience as you grow your business.

For more on the power of digital transformation, see How Technology Enhances The Customer Experience.

Comments

About Aaron Solomon

Aaron Solomon is the head of Training and Content Development for SAP Anywhere. With a dedicated history in knowledge management and consulting, he is driven to provide quality information to customers and help them understand how best to grow their businesses. His areas of expertise include e-commerce management, data analysis, and leveraging technology to improve efficiency.

Human Skills for the Digital Future

Dan Wellers and Kai Goerlich

Technology Evolves.
So Must We.


Technology replacing human effort is as old as the first stone axe, and so is the disruption it creates.
Thanks to deep learning and other advances in AI, machine learning is catching up to the human mind faster than expected.
How do we maintain our value in a world in which AI can perform many high-value tasks?


Uniquely Human Abilities

AI is excellent at automating routine knowledge work and generating new insights from existing data — but humans know what they don’t know.

We’re driven to explore, try new and risky things, and make a difference.
 
 
 
We deduce the existence of information we don’t yet know about.
 
 
 
We imagine radical new business models, products, and opportunities.
 
 
 
We have creativity, imagination, humor, ethics, persistence, and critical thinking.


There’s Nothing Soft About “Soft Skills”

To stay ahead of AI in an increasingly automated world, we need to start cultivating our most human abilities on a societal level. There’s nothing soft about these skills, and we can’t afford to leave them to chance.

We must revamp how and what we teach to nurture the critical skills of passion, curiosity, imagination, creativity, critical thinking, and persistence. In the era of AI, no one will be able to thrive without these abilities, and most people will need help acquiring and improving them.

Anything artificial intelligence does has to fit into a human-centered value system that takes our unique abilities into account. While we help AI get more powerful, we need to get better at being human.


Download the executive brief Human Skills for the Digital Future.


Read the full article The Human Factor in an AI Future.


Comments

About Dan Wellers

Dan Wellers is founder and leader of Digital Futures at SAP, a strategic insights and thought leadership discipline that explores how digital technologies drive exponential change in business and society.

Kai Goerlich

About Kai Goerlich

Kai Goerlich is the Chief Futurist at SAP Innovation Center network His specialties include Competitive Intelligence, Market Intelligence, Corporate Foresight, Trends, Futuring and ideation.

Share your thoughts with Kai on Twitter @KaiGoe.heif Futu

Tags:

Finance And HR: Friends Or Foes? Shifting To A Collaborative Mindset

Richard McLean

Part 1 in the 3-part “Finance and HR Collaboration” series

In my last blog, I challenged you to think of collaboration as the next killer app, citing a recent study by Oxford Economics sponsored by SAP. The study clearly explains how corporate performance improves when finance actively engages in collaboration with other business functions.

As a case in point, consider finance and HR. Both are being called on to work more collaboratively with each other – and the broader business – to help achieve a shared vision for the company. In most organizations, both have undergone a transformation to extend beyond operational tasks and adopt a more strategic focus, opening the door to more collaboration. As such, both have assumed three very important roles in the company – business partner, change agent, and steward. In this post, I’ll illustrate how collaboration can enable HR and finance to be more effective business partners.

Making the transition to focus on broader business objectives

My colleague Renata Janini Dohmen, senior vice president of HR for SAP Asia Pacific Japan, credits a changing mindset for both finance and HR as key to enabling the transition away from our traditional roles to be more collaborative. She says, “For a long time, people in HR and finance were seen as opponents. HR was focused on employees and how to motivate, encourage, and cheer on the workforce. Finance looked at the numbers and was a lot more cautious and possibly more skeptical in terms of making an investment. Today, both areas have made the transition to take on a more holistic perspective. We are pursuing strategies and approaching decisions based on what delivers the best return on investment for the company’s assets, whether those assets are monetary or non-monetary. This mindset shift plays a key role in how finance and HR execute the strategic imperatives of the company,” she notes.

Viewing joint decisions from a completely different lens

I agree with Renata. This mindset change has certainly impacted the way I make decisions. If I’m just focused on controlling costs and assessing expenditures, I’ll evaluate programs and ideas quite differently than if I’m thinking about the big picture.

For example, there’s an HR manager in our organization who runs Compensation and Benefits. She approaches me regularly with great ideas. But those ideas cost money. In the past, I was probably more inclined to look at those conversations from a tactical perspective. It was easy for me to simply say, “No, we can’t afford it.”

Now I look at her ideas from a more strategic perspective. I think, “What do we want our culture to be in the years ahead? Are the benefits packages she is proposing perhaps the right ones to get us there? Are they family friendly? Are they relevant for people in today’s world? Will they make us an employer of choice?” I quite enjoy the rich conversations we have about the impact of compensation and benefits design on the culture we want to create. Now, I see our relationship as much more collaborative and jointly invested in attracting and retaining the best people who will ultimately deliver on the company strategy. It’s a completely different lens.

Defining how finance and HR align to the company strategy

Renata and I believe that greater collaboration between finance and HR is a critical success factor. How can your organization achieve this shift? “Once the organization has clearly defined what role finance and HR must play and how they fundamentally align to the company strategy, then it’s more natural to structure them in a way to support such transformation,” Renata explains.

Technology plays an important role in our ability to successfully collaborate. Looking back, finance and HR were heavily focused on our own operational areas because everything we did tended to consume more time – just keeping the lights on and taking care of our basic responsibilities. Now, through a more efficient operating model with shared services, standard operating procedures, and automation, we can both be more business-focused and integrated. As a result, we’re able to collaborate in more meaningful ways to have a positive impact on business outcomes.

In our next blog, we’ll look at how finance and HR can work together as agents of change.

For a deeper dive, download the Oxford Economics study sponsored by SAP.

Follow SAP Finance online: @SAPFinance (Twitter)LinkedIn | FacebookYouTube

Comments

Richard McLean

About Richard McLean

Richard McLean, regional CFO for SAP Asia Pacific Japan, oversees all key finance and administrative functions for field and regional headquarters, supporting more than 16,000 employees. He has more than 20 years of experience in senior finance roles with leading global companies across a range of industries, including financial services, investment banking, automotive, and IT. He joined SAP in 2008.