Monthly Archives: June 2006

Sourcing Based Product Lifecycle Management

Last month, the ISM awarded a number of individuals and organizations the R. Gene Richter Award for Leadership and Innovation in Supply Management. The recipients were primarily organizations that had demonstrated massive improvements in their sourcing and procurement functions which came about through concentrated improvement efforts. These improvements were the direct result of the adoption and consistent implementation of best practices across the sourcing and procurement functions in the organization. This week we are discussing the best practices that helped one or more of the recipients transform their organizations and win these coveted awards.

Today we are going to discuss how sourcing-driven product lifecycle management (sourcing-based PLM) and related best practices can take your sourcing organization to the next level, as it did for KLA Tencor, as described in the article Changing Directions in the latest issue of Inside Supply Management.

In addition to institutionalizing the five pillars of

  • strategic sourcing,
  • commodity councils,
  • negotiation expertise,
  • performance-based contracts, and
  • formal supplier management with supply base rationalization and supplier scorecards,

for the emerging supply chain department, the supply department extended the company’s product life cycle management (PLC) to include sourcing. A product is not allowed to leave the investigation phase before a strategic sourcing strategy is devised and accepted. This resulted in 40% to 50% cost reductions and more than a 50% improvement in lead time and availability. In addition, product performance, quality, and field reliability of the produced products were significantly improved.

When you consider that up to 80% of a product’s cost can be locked in during the design phase, and that strategic sourcing has been proven to significantly reduce procurement cycle times when properly implemented, it should not be surprising that early application of the sourcing process can have a significant impact.

Legal Cooperation

Last month, the ISM awarded a number of individuals and organizations the R. Gene Richter Award for Leadership and Innovation in Supply Management. The recipients were primarily organizations that had demonstrated massive improvements in their sourcing and procurement functions which came about through concentrated improvement efforts. These improvements were the direct result of the adoption and consistent implementation of best practices across the sourcing and procurement functions in the organization. This week we are discussing the best practices that helped one or more of the recipients transform their organizations and win these coveted awards.

Today we are going to talk about how legal sourcing can revolutionize sourcing as it did for Johnson & Johnson, as described in the article Odd Couple in the latest issue of Inside Supply Management.

In 2004, the World Headquarters Law and Procurement Departments at J&J formed the legal sourcing group with the initial objectives of

  • identifying where sourcing support could add the most value,
  • implement several “quick win” projects to demonstrate sourcing’s value,
  • optimize law department processes and integrate sourcing, and
  • build a sustainable support structure and knowledge base.

This partnership resulted in a database that provided detailed information to support analyses, process design, and negotiations as well as advanced reporting capabilities not previously available. This improved the quality of information available to the law department. It also helped identify 3rd party services such as copying, coding, and reporting that could benefit from sourcing expertise. As a result of new policies and the involvement of sourcing in identification, competitive negotiation, and preferred suppliers to support litigation, sourcing has saved over 3M in third party services.

As a result of this success, the legal sourcing group moved on to assisting litigation in rate change requests, case budgeting, and discovery management. As a result of the partnership, the litigation group has saved 8.7M in the first year of the partnership.

The reality is that if procurement is willing to

  • listen to the needs of organizational units and learn,
  • adapt sourcing tools and process to the environment (and not vice versa),
  • focus on the customer’s needs and respond to them,
  • establish credibility before approaching sensitive areas, and
  • realize that the success of the case is paramount, in some cases costs or standard processes might have to come second,

then procurement can help legal become a more efficient and cost effective organization. Procurement: It’s not just for materials anymore!

Center Led Purchasing Models

Last month, the ISM awarded a number of individuals and organizations the R. Gene Richter Award for Leadership and Innovation in Supply Management. The recipients were primarily organizations that had demonstrated massive improvements in their sourcing and procurement functions which came about through concentrated improvement efforts. These improvements were the direct result of the adoption and consistent implementation of best practices across the sourcing and procurement functions in the organization. This week we are discussing the best practices that helped one or more of the recipients transform their organizations and win these coveted awards.

Today we are going to talk about center led procurement and review how it helped DaimlerChrysler transform their sourcing organization, as described in the article Consolidating Global Procurement in the latest issue of Inside Supply Management.

Whereas a classic decentralized model of procurement has each business, function, or geographic unit responsible for its own purchases, and a classic centralized model of procurement has all purchases routed through a single central organization, a center led model of procurement has a central organization that focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing that handles major common buys and guides the individual units in minor uncommon buys. Center led models have most of the advantages of both the centralized and decentralized models without many of the disadvantages. Considering that this is one of the topics slated for the e-Sourcing Forum Summer Series, I’m going to forego an extensive discussion on center led models today and simply re-iterate some of the results achieved by DaimlerChrysler.

In brief, over a six year period, the International Procurement Services volume grew by more than 400%. It yielded

  • an 80% increase in purchasing results in spot buys,
  • a 30% increase in the manufacturing facilities’ purchasing results, and
  • a 77%+ increase in internal customer satisfaction.

Purchase Automation

Today we are going to talk about purchase automation and review how it helped Fluor Hanford transform their sourcing organization, as described in the article Empowering End Users in the latest issue of Inside Supply Management.

Fluor Hanford developed a tool that, among other benefits,

  • provided visibility on existing material inventory levels throughout the company,
  • reduced transactional involvement,
  • took greater advantage of the cost and process savings offered by the purchase card system, and
  • drove additional price reduction through supplier integration.

This allowed the organization to reduce redundant buying by about $300,000 in a twelve month period, the average per transaction cost by 68% (to $34 from $106), and convert all sourcing areas to an Electronic Commerce Agreement.

As we discussed last Wednesday, the ultimate innovation in procurement evolution is the purchase order free supply chain, but just like you can’t go from zero to sixty in a sports car, you can’t go from no automation to no purchase orders in a single step, it’s a process, and the real innovation is in continuous process improvement, with streamlined automation the best practice first step.

Skills Development (Talent Management)

Last month, the ISM awarded a number of individuals and organizations the R. Gene Richter Award for Leadership and Innovation in Supply Management. The recipients were primarily organizations that had demonstrated massive improvements in their sourcing and procurement functions which came about through concentrated improvement efforts. These improvements were the direct result of the adoption and consistent implementation of best practices across the sourcing and procurement functions in the organization. This week we are going to discuss the best practices that helped one or more of the recipients transform their organizations and win these coveted awards.

Today we are going to talk about skills development and review how it helped BP transform their sourcing organization, as described in the article Accelerating Procurement Capabilities in the latest issue of Inside Supply Management.

In July 2004, BP introduced the Capability Accelerator Program, a modular skills development program focused on improving the skills of its sourcing professionals over a rigorous six month period. Consisting of eight modules, the program was tailored to each participant based on independent assessments of each individual against a role model job profile. The program included hands on expert coaching and peer learning groups. Surveys indicated that nearly 50 percent of the participants indicated a perceived significant improvement while the remaining responses indicated some improvement for an average of 3.3 on a 4 point scale.

The program was developed because BP realized “There is a direct link between the skills of our procurement professionals and our ability to capture value.” The reality is that the effectiveness of your sourcing organization is ultimately not dependent on the technology you use or processes you put in place but the people who staff it. Yes, tools will make them more efficient and process that institute best practices will increase the value of each activity they perform, but the real value stems from their ability to find innovative savings opportunities, streamline processes, and lead innovation. The more skilled they are, the better they do (especially if they have good tools to support them).

As with Information Technology, Sourcing and Procurement is an area where star performers really shine. I’ve read studies that demonstrated, based on bug free lines of code, that your best developer is up to 22 times as efficient as your average developer (with an average efficiency of 10 to 15 times). This sounds astounding – one star performer can do the job of up to 20 average performers, so you can hire 10-20 warm bodies at market rates or one star at 2X to 3X the market average rate and save a bundle, huge ROI – how else can one person save you that much money? Well, if you’re a large organization with over 1B in spend, with a sourcing manager who manages 100M in spend, and she finds an innovative way to squeeze 2% out of your production costs above and beyond what is obtained by using auctions to drive down prices and decision optimization to optimize award allocations, that’s 2M in savings that directly resulted from the action of one individual, sans technology or process. Every event she conducts is going to save you money, whereas your star IT performer just reduces fixed headcount costs!

Thus, investing in skills is one of the best innovative practices that you can employ. (Innovative because most companies do not invest near enough in employee skills development, regardless of the function). There are multiple ways you can go about this. In addition to designing and implementing a program in house, you can quick start a good skills development program by partnering with universities that offer customized programs (such as the W.P. Carey School of Business at Arizona State University or the Supply Chain Resource Consortium at NC State University), organizations that offer training and certifications (such as the CSCMP or the ISM), or even specialist consultant and training organizations (like Next Level Purchasing). Each of these options can bring you tremendous value, so just go for it!