Monthly Archives: June 2006

Build to Order (Supply Chain Management)

Recently, on Procurement Central, Dave Stephens indicated that he saw “a growing link between “Long Tail” thinking (excelling in variety vs. going for the homogenous blockbuster) & demand-driven supply chains” and indicated that he would like to see a fellow blogger tie the threads together. Although I might not be entirely sure how to wind them up with spring-loaded precision , I’m pretty sure how to connect them. And the first answer is “Boeing” and its 787. Specifically, instead of building a complete aircraft from a bill of materials, Boeing will instead attach fully completed subassemblies from its suppliers.

So how does this tie “long-tail” and demand-driven? The answer is the sub-assembly. By switching to this model, Boeing is indirectly engaging more suppliers as its tier 1 suppliers will need to engage more suppliers to build the subassemblies. Furthermore, by reducing its assembly time, it can essentially build its aircraft on demand. Thus, we have a connection.

Of course, the big question is how do they intertwine? Hard to answer, but we get another connection if we look at Dell. Dell is now using a number of suppliers for many components, long-tail. Furthermore, it builds computers, and orders components, based on user demand, demand driven.

So now that we have connected the threads, how do we begin to twine the two threads? I could be wrong, but I believe the answer is, as the title of this post suggests, “build to order”. What do I mean by this? Design your products not as integrated wholes, but interconnections of components. Furthermore, make sure the connectors are standard, then you can switch out subcomponents, just like PC enthusiasts can switch out memory chips, video cards, and even processors. Then work with a number of suppliers capable of providing different versions of the components (long tail), order components based upon continually updated forecasts (demand driven), and assemble the final product to customer specifications (build to order).

I’ll admit its not the whole answer, but I think it’s a good, innovative, start. Feel free to share your views or e-mail thedoctorsourcinginnovationcom.

Green With Envy

Green with Envy is exactly what you might be if you don’t follow in the footsteps of some of the most innovative sourcing organizations and, simply put, go green.  For those of you who follow e-Sourcing Forum, you might have picked up on this trend after reading Green Suppliers,  Will Kermit Change His Tune?, and Go Green and Save 30% or more!.  (Even Supply Excellence decided to get in on the action.)  Today we’re going to recap the many benefits beyond just helping the environment.

  • Waste Reduction Initiatives that result from green policies can save you hundreds of millions of dollars.  Interface, Inc., the world’s largest carpet manufacturer, was able to save $260M.
  • Green Buildings will save you significant energy costs, improve the environment, and even improve your health.  (Fresh air with increased oxygen content is the best cure for the new wave of environmental illness that results when some people are locked in closed steel and concrete buildings with stale air for long periods of time.
  • Green Buyers can avoid environmental taxes and resultant cost increases.  For example, some Chinese chopstick exporters are slapping a 30% hike on single-use disposable wooden chopstick prices in response to a 5% tax levied by the Chinese government to try and slow deforestation. 
  • Green Products improve market share.  Recent sales figures show that Toyota, Honda, and other Asian manufacturers claimed a record 40% of the U.S. market, thanks in large part to sales of more fuel efficient and environmentally friendly hybrid vehicles.   Starbucks has been proactively sourcing growers that commit to fair labor practices, fair pay, and environmentally responsible cultivation methods – and they keep getting bigger everyday.
  • Green Policies can reduce production cycles.  JCI recently began producing door panels using a method that eliminates the need for adhesives and reduced supply costs as well as production time.

In other words, the benefits to going green extend well beyond making tree-huggers happy – and go right to your bottom line!

Involved with or know of other examples of green sourcing?  Feel free to email me: thedoctor<at>sourcinginnovation<dot>com.

Problem Solving Series I: Understand the Problem

Last Sunday we discussed the Operations Research Modeling Process because it described a basic problem solving process that you could apply to sourcing and supply chain problems.  Today we are going to start a series of posts that are going to discuss some problem solving strategies that will help you in the application of this process.  This series will run on Sundays for at least the next five weeks, so keep checking back for more tips, tricks, and insights that you can use.

The first step of the Operations Research Modeling Process is “Recognize the Problem”.  Today we are going to discuss eight problem solving strategies that you can use to aid in this process and clarify them with examples from the sourcing space.

( 1 ) Clarify the Problem

It is often easier to solve specific problems then vague generalizations.  If you need to reduce spend on a high-spend category, then determine precisely what commodities or materials make up that category and reformulate the problem as reducing spend on each of the commodities or materials individually.  If you need to help engineering identify the appropriate widget to source for a new prototype, determine what properties are required vs. what properties are desired.

( 2 ) Identify Key Elements

Some aspects of a problem are more relevant than others.  Take our spend reduction problem.  Reducing spend on a commodity can be re-stated as reducing spend on the individual spend components.  Identifying which components are the highest spend, especially with respect to a should-cost model or market index, will help you greatly. 

( 3 ) Visualize the Relevant Process

Sometimes you know all the factors that contribute to a problem, and sometimes you do not.  Our spend problem is also relevant here.  Maybe global transportation costs from your suppliers in one of your low cost countries are higher then you think they should be.  However, just looking at costs per unit or quoted freight rates are not going to give you the whole picture.  However, if you visualize the process, which starts with a crate being packed and put on a palette, continues with the palette being loaded into a truck, transported to a warehouse, sitting there for three days, being loaded onto a boat, crossing the ocean, being unloaded to a warehouse where it sits for four days, being loaded onto another truck, and finally delivered to your factory, you will see that there are significant excess inventory costs on both sides of the ocean.  If you could synchronize shipments on both sides of the water, you could eliminate significant built in inventory holding costs even if the land and sea freight rates are not negotiable.

( 4 ) Draw a Diagram

Visualizing a problem can increase your understanding, but if the problem is complex, it might be a lot easier to draw a diagram to help you keep track of the different aspects of the problem you have visualized. 

Lets say that you need to consolidate your supply base because you are using over a dozen suppliers with over three dozen collective shipping locations for a commodity and you have determined you should be able to mitigate single-supply risks with only three or four suppliers and you need to choose who those suppliers will be.  Lets also say that you want to retain a flexible demand-driven supply chain and make sure that every receiving location can be supplied by at least one supplier in seven days or less.  Finally, you need to reduce costs by at least 10%.  We now have a problem that is beyond simply considering Total Cost of Ownership (TCO), which is the current state of the art supported by most of the advanced decision optimization systems on the market today, and well into Total Value Management (TVM), which is, generally speaking, not (directly) supported when your problem includes more then one of the standard well-defined optimization problem space boundaries, and this one includes traditional sourcing (TCO/TVM-based determination), inventory and logistics, and network design.  In order to use even your state of the art TVM-based decision optimization system, you will first have to determine which groups of suppliers can satisfy your time-based shipment requirements as well as which business rules dictate which suppliers can and cannot be used in conjunction.  Drawing a diagram of all the potential shipping and receiving destinations will help you determine which supplier shipping centers can supply which of your receiving centers, and that information will be crucial to building a valid model.

( 5 ) Consider a Specific Example

Sometimes problems are just too abstract for us to solve easily.  For example, let’s say we want to consolidate our supply base but want to know the minimum number of suppliers it will take to meet our supply chain flexibility requirements.  If we have access to the right solvers, a solver can determine this for us given a mathematical model.  However, we need to be able to appropriately specify the model and we need a check for its validity.  A specific example will help us here.  Choose four suppliers and determine whether or not each receiving center can be supplied by those four suppliers.  If it can, we know that the optimal answer is at most four, so if the solver comes back with a higher number, we did not properly formulate the model, and probably need to clarify our understanding.  If it cannot, we know that those four suppliers cannot constitute a solution and any solution with four or less suppliers must include a different set of suppliers.  Furthermore, by working out all the relationships, we will have specified the majority of constraints for that problem instance and if we feed just that sub model to the optimizer, then we have a good check on the accuracy of that model.

( 6 ) Consider Extreme Cases

Although we again consider specific examples here, we are testing what happens at the boundaries of our problem space.  For example, let’s say we are trying to determine whether or not the fuel surcharges that were charged by our current carrier over the last year are reasonable and fair.  To do this, we would build a should cost model for each route based upon an the lowest fuel rate and the highest fuel rate for the year (the extreme cases).  If most of the average charges for each route fell into our should cost ranges, then the rates were probably fair.  If most fell outside of the range, the rates were probably not fair and we should either change carriers or build in maximum fuel surcharges based upon a standard market index.

( 7 ) Consider Levels

Sometimes solving a problem requires preventing the problem.  This requires determining what led to the problem and fixing that process.  For example, let’s assume a preferred supplier is adamant that rates cannot be reduced because the profit margin is too slim even though direct competitors are quoting 10% less.  If the direct competitors are located in the same geographic market, chances are that either the supplier’s overheads are too high, the amounts they are paying for the raw materials are too high, or their processes are inefficient.  If you examine each in turn, you might find an obvious weak point that you can help them fix and allow you to continue your relationship at a significantly lower cost.  For example, let’s say their material costs are too high.  If this is a product you buy from multiple suppliers to mitigate risk, then you could save each of your suppliers money, and lower your costs, by sourcing the raw materials for all of them at a higher volume and associated spend leverage.

( 8 ) Change Perspective

Let’s say you are in a tough negotiation that isn’t going way.  Consider the viewpoint of the other party.  Why won’t she go lower?  Why can’t she?  If it is because their production costs are simply to high to support lower rates, then maybe working with them to find ways to produce the product at a lower cost is the answer.

Now, I know all of these are obvious, but in the midst of a high-pressure dilemma, especially one that must be solved quickly, it is easy to forget a couple of these strategies, and you never know which approach is going to work in advance.  Reviewing them regularly and attempting to apply them whenever a problem comes up will not only keep them fresh in your mind, but increase your problem solving aptitude – and that’s what strategic sourcing is fundamentally about.  When we are identifying, attacking, and removing any unnecessary costs and inefficiencies in the supply chain, we are identifying, attacking, and solving problems. 

Next week we will discuss some strategies to aid with the second step of the Operations Research Modeling Process: Problem Formulation.

Strategic Sourcing Week Review

This week we defined a basic sourcing process, indicated there were five critical process-driven phases that can be greatly enhanced by software solutions, and discussed each of them in turn as a solid foundation for going forward. 

We also discussed some innovative features of the best marketplace offerings, indicated there was still room for innovation, and hypothesized what the next big breakthroughs will be. Today we are going to summarize the innovations that are yet to come that we discussed this week as a foundation for our first innovation week, which begins Monday.  This is going to be our first set of posts in a regular series where we discuss innovative practices of current and future leading supply chain organizations.

Monday we discussed spend analysis, the process of aggregating, classifying, and leveraging spend data for the purpose of cost reduction, performance improvement, and greater compliance, and indicated that the most innovative solutions have the ability to slice, dice, and drill down on multiple dimensions simultaneously, support custom defined filters, and detect spending patterns <i>and</i> variations in an on-demand fashion.   In the future, innovative spend analysis tools will integrate market data and business intelligence to determine which spending patterns are the furthest off from expected values.

Tuesday we discussed RFX, the technology used to identify new suppliers, determine if suppliers are willing to provide a product or service, obtain additional information on supplier offerings, and collect bids, and indicated that the most innovative solutions come with supplier portals that actively engage your suppliers in the process.  The next major innovation in RFx will be the integration of business intelligence that will let you discern supplier viability and quality before your first interaction, so you do not waste time screening suppliers already known to be inappropriate to your line of business.

Wednesday we discussed Auctions and I predicted that the future leaders in auction technology will incorporate some form of decision optimization directly into the live event.  This will allow best practices and total value management to be taken into account during the auction and guarantee that the identified awards not only respect all of the relevant business rules but are optimal in that respect.

Thursday we discussed Decision Optimization, which I defined as the application of one or more rigorous analytical techniques to a well-defined model to generate the absolute best decision from a multitude of possible alternatives in a rigorous, repeatable, and provable fashion. I then predicted that future leaders in the e-Sourcing space are going to be those that master decision optimization technology and its various applications.  Although I stopped short of indicating specifically what this might entail, because it is a complex subject upon which intend to write multiple posts over the next year, I will indicate that the more innovative implementations will be those that are not only capable of handling quantitative and qualitative constraints, but also capable of solving the models from a well-balanced Total Value Management perspective.

Finally, yesterday we discussed contract management, which is critically important from a savings realization viewpoint, and I indicated that despite the recent considerable advances in the technology, I believe future systems will incorporate advanced business analysis that will allow them to detect contracting patterns.  These systems will not only point out What types of contracts and clauses are usually used for a certain type of supplier and / or commodity, but what types of contracts and clauses should be considered given the financial status of the supplier, historical performance, and commodity specifics.  They will automatically draft starting contracts for you and indicate when you are missing important clauses like IP protection or delivery terms and when recommended updates are inconsistent with your usual practices.

In other words, even though today’s sourcing technology is a considerable breakthrough compared to most other forms of traditional enterprise technology, it’s going to continue to get better as time goes on.  Furthermore, on-demand providers are going to be leading the way – but that’s another post for another time.

Contract Management

Monday we defined a basic strategic sourcing process, indicated there were five critical process driven phases that can be greatly enhanced by software solutions, and indicated that we would spend one day discussing each of these technologies this week.  Monday we discussed spend management and spend analysis, Tuesday we discussed RFX, Wednesday we discussed auctions, and Thursday we discussed decision optimization, a personal passion (and expertise).  Today we are going to discuss the last critical technology in the basic strategic sourcing cycle – Contract (Lifecycle) Management – C(L)M.

Whereas yesterday’s topic of Decision Optimization is my personal favorite, I have to confess that contract management is probably my least favorite.  After all, all the fun takes place leading up to the award.  Once the award is made, all that’s left to do is execute it, track it, enforce compliance, and ensure performance – the boring tactical elements come into play big time.

However, this is the very reason that contract management should not be overlooked!  I’ve read numerous studies, including some from Aberdeen, that state that, on-average, 60% or more of negotiated savings are never captured in practice?  Why?  There are a number of reasons, but most of the costly ones come from incorrect orders and lost discounts and rebates, due to poor contract management and compliance tracking. 

Without a good contract management system in place that tells a buyer who she should be ordering from, when, and for what location, she is likely to simply reorder from the last supplier used when supply gets low.  If it turns out that this is the supplier that was only supposed to be used as an overflow supplier, then chances are the costs are much higher then the primary supplier with whom discounts were negotiated.  Furthermore, many suppliers offer their volume discounts in the form of rebates, which buyers have to apply for.  If you don’t have a good compliance-based contract management system in place to track your purchases, you will probably not realize when you qualify for rebates and these applications will probably not be collected in the long run.

Furthermore, today’s C(L)M systems are quite powerful and offer a number of advanced features above and beyond just contract tracking.  These features will generally include a searchable centralized contract repository, collaborative capabilities, workflow capabilities, monitors, alerts, reporting, and even template and clause-based contract creation capabilities.

Of course, as with every other technology we’ve discussed this week, I think there is still some room for improvement.  I think one of the areas of improvement will be in the area of business intelligence, specially in the area of automatic recognition of contracting patterns.  These systems will not only point out What types of contracts and clauses are usually used for a certain type of supplier and / or commodity, but what types of contracts and clauses should be considered given the financial status of the supplier, historical performance, and commodity specifics.  They will automatically draft starting contracts for you and indicate when you are missing important clauses like IP protection or delivery terms and when recommended updates are inconsistent with your usual practices.

This concludes sourcing week and our introduction to the basic strategic sourcing processes where technology has a large role to play. I’m sure many of you are already familiar with these steps, but I wanted a solid foundation on which to kick off the blog and lay the seeds of future innovation.  Next week we’ll kick it up a notch and discuss some innovative practices of leading procurement centers and additional innovative practices that the future may hold.