Monthly Archives: August 2006

Quantifying the Value of Supply Chain Security Investments

As mentioned in a recent Industry Week article, recently the Stanford Global Supply Chain Management Forum, together with IBM, conducted a study in the manufacturing innovation series called Innovators in Supply Chain Security: Better Security Drives Business Value to determine if the significant levels of investment often required to improve supply chain security and mitigate risks was justified. This study, which was based on inputs from eleven manufacturers and three Logistics Service Providers (LSPs) that were considered “innovators” in supply chain security, clearly demonstrated that supply chain security provides quantifiable business value.

In addition to the collateral benefits of:

  • Higher supply chain visibility,
  • Improved supply chain efficiency,
  • Better customer satisfaction,
  • Improved Inventory Management, and
  • Reduced cycle and shipping time

The report quantified the following benefits that resulted in considerable cost reductions and savings for the study participants:

  • Improved Product Safety
    38% reduction in loss; 37% reduction in tampering
  • Improved Inventory Management
    14% reduction in excess inventory; 12% increase in on-time delivery
  • Improved Supply Chain Visibility
    50% increase in data access; 30% increase in data access timeliness
  • Improved Product Handling
    43% increase in the automated handling of goods
  • Process Improvements
    30% reduction in process deviation
  • More Efficient Customs Clearance
    49% reduction in cargo delays; 48% reduction in cargo inspections
  • Speed Improvements
    29% reduction in transit time; 28% reduction in delivery time windows
  • Resilience
    30% reduction in problem identification, response, and resolution times
  • Higher Customer Satisfaction
    26% reduction in customer attrition; 20% increase in new customers

Supply chain security challenges are becoming much more apparent with the rapid expansion of global trade. Currently, over 200 million containers are shipped to the world’s seaports annually, and the US receives approximately 17,000 containers today. With an average of only 6% of US containers physically inspected, increasing security concerns, and the recognition that security has to extend simply beyond asset protection, the US government has implemented and adopted a number of initiatives to minimize transportation risk. These initiatives include:

  • The Advanced Manifest Rule (AMR) / Advanced Cargo Information (ACI)
    that requires detailed cargo data for all modes to be submitted to the U.S. CBP before arrival and an ocean container is allowed into the U.S. only if detailed contents information has been electronically provided at least 24 hours before the container is due to be loaded on a ship at a foreign port of origin
  • The Container Security Initiative (CSI)
    being used by the U.S. government to push inspections and pre-screening upstream to originating ports
  • The Customs-Trade Partnership Against Terrorism (C-TPAT)
    a pseudo-voluntary security initiative that overviews security best practices and implementation procedures that will reduce inspections and expedite processing for participants
  • The Emergency Planning and Community Right-to-Know Act (EPCRA)
    that details information requiring environmental and safety hazards relating to hazardous materials to be given to people in the community
  • The Free and Secure Trade (FAST) initiative
    that allows low-risk goods being transported by trusted drivers via trusted carriers for trusted firms to pass rapidly through border crossings
  • The Smart and Secure Trade lanes (SST) program
    established by the container shipping industry to ensure the global security of cargo containers by way of a baseline infrastructure that will provide real-time visibility, physical security through non-intrusive, automated inspection and detection alerts, as well as a complete audit trail of a container’s journey

Failure to comply with any of these initiatives can lead to significant delays, and even disruptions, in your supply chain as the result of delayed loading, unloading, clearance through customs, or even diversions.

So what can you do to improve your security? Although the report did not focus on any specific initiatives, it did overview some of the measures taken by the companies that were interviewed. These measures included:

  • additional storage and transportation security
  • anti-piracy features / methods for identifying genuine products
  • product tracking tools / RFID
  • implementing measures to comply with voluntary security initiatives
  • advanced training programs
  • incorporation of security requirements into supplier contracts
  • development of a security knowledge base

The Sourcing Innovation Series: Part VII

Yesterday was another busy posting day. David Bush of eSourcingForum posted his thoughts on The Future of Sourcing? while Jason Busch tackled Sourcing Innovation: Next Generation On-Demand. Not long after, Tim Minahan jumped back into the fray in response to Jason’s post with What’s Next According to Busch: Supply Skills Networks.

David posted his contrarian view based on his observations in sourcing and eSourcing over the last seven years. In addition to noting the emerging desire for decision optimization and complex modeling capabilities in eSourcing platforms, David notes that the future will be forged by process improvement and enhanced corporate understanding of how to use technology since there are fantastic platforms available now that did not exist 10 years ago. After all, especially from the technology side – it’s not done. Once a tool is brought into the process, you will have some functionality that will help immediately but there is a maturation process that vendors and customers alike are going through to find the best fit and features. This is a very fluid process and every release of an application will address more issues but they will never be complete. The software can help any organization with weak areas but this always should be supplemented with personnel improvements and new innovative ideas.

Jason blogged about on-demand, this year’s hot topic (and the subject of my first weekend series over on eSourcing Forum: The Good, The Not-So-Bad, and The Coming Pretty). Jason, who previously blogged that on-demand approaches will embed external content and insight as a fundamental part of their value proposition predicted that the real power of On-Demand will come when providers learn how to leverage the user network as the strategic advantage of the application itself. One early example Jason gives is Open Ratings that aggregates supplier financial, operational, and performance data from many sources to better predict supplier financial viability. Jason also notes that while Open Ratings collects, centralizes, and analyzes information, that next generation approaches will probably rely on decentralized information query, retrieval, and analysis and points to the new agent-based search approach of Vinimaya as an example.

Jason also reminds us of his earlier prediction on how next-generation on-demand solutions will enable a new type of decentralized service delivery where an On-Demand platform could enable the creation of virtual shared services teams between organizations based on processes, skills and availability and that this is where he thinks the real value will be. In his view, 99% of first generation (i.e., current approaches) On-Demand models only deliver value through reducing the cost of ownership for member participants of existing types of technology offerings — or customers — rather than offering a new value proposition entirely.

In response to Jason’s claim that an On Demand platform could enable the creation of virtual shared services between organizations based on processes, skills, and availability, Tim notes that considering the talent crunch for skilled commodity and sourcing experts, Jason’s concept is particularly intriguing and well-timed. After all, recent studies from Purchasing Magazine, ISM, and Denali Consulting place talent recruitment and retention among a supply management executive’s top challenges.

But then Tim Minahan suggests another possibility … Jason’s shared-skills concept could also present new opportunities for top-performers to turn supply management into a revenue-generating profit center since some companies are already ’sharing ‘ their sourcing and category expertise and operational procurement capacity and systems infrastructures as part of new for-fee procurement outsourcing offerings, such as IBM. If this becomes a very profitable offering, then we probably will see Jason’s next-generation on-demand platforms sooner rather than later.

Since these pieces are very well written, and since I do not have anything to add as-is, I’m not going to elaborate on them but instead will ask what would happen if we try to merge them into one prediction? A first attempt tells us that it will be a process-oriented future driven by next-generation on-demand technology that will make critical information more accessible and usable for tomorrow’s knowledge workers, but what does that mean? As I pointed out in The Coming Pretty, I think the answer is that next-generation on-demand will be based on enhanced business process management (BPM) that will allow for workflow applications that can be customized on-the-fly to incorporate modified processes and workflows that not only allow for the construction of more versatile and configurable applications than before, but also allow trained business users to define their own workflows through a visual environment. In other words, platforms that evolve with your processes!

The Sourcing Innovation Series: Part VI

Yesterday was a prophetic day for the future of sourcing. Both Jason “The Prophet” Busch of Spend Matters and Eric Strovink, President and CEO of biq, chimed in with their thoughts.

Jason started off by taking a different approach. While the other bloggers took a technological, process, or relationship perspective, Jason took an old-fashioned (or should I say new-age) approach in his post Sourcing Innovation: Securitizing Direct Materials. In his posts, he suggests that the future of sourcing might involve securitizing future capacity (e.g., future machine time and the costs of the other underlying components such as materials and labor) which would not only allow a company to book a certain amount of capacity over a given time frame, but allow them to start to trade it on the options side of the equation as well, which could benefit all parties.

This is a very interesting proposal, and if you read my weekend series posts over on eSourcing Forum last month (I: An Introduction, II: Risks and the Need for Resilience, and III: Managing Risk) on Supply Risk Management, you’ll notice that one of the mechanisms I advocated for combatting risk is the reservation of capacity to ensure it is there when you need it. So I certainly agree with the underlying concept of securitizing capacity from a risk management perspective, but I have to question the feasibility of trading capacity on an open market. After all, how do you qualify, or should I say, quantify quality on a generic scale that can be used by all parties relative to all products that a given plant can produce? After all, not only might a given plant produce products of different qualities, depending on its strengths, but what I rate a “9″ out of 10, you might rate a “7″. I believe this could definately hinder trading on an open market. However, the idea might work in a closed exchange, where all parties buy and sell the same types of products in the same markets and use the same ratings systems. I hope Jason’s post receives a large number of comments … I am very interested to find out what the masses think on this one.

Of course, if a large, trusted organization maintained control of a generally agreed upon common ratings systems, the idea might be more viable. The fundamental problem is that finding the right part in a global exchange with thousands of suppliers and millions of SKUs is almost as hard as trying to find the right song. (Did you think Doug Hudgeon was the only rock and roll fan? And yes, I too prefer Pandora.) If you look at the music industry, though it has seen drastic changes in recent years, what has remained constant is the fact that most listeners still find their music with the assistance of a filter: a reliable source that sifts through millions of tracks to help them choose what they do (and don’t) want to hear. (The Pitchfork Effect, Wired 14.09.) In order for Jason’s concept to take off, an exchange that can help buyers find compatible suppliers, and determine what capacity securities they can make use of, will be required. That’s why I think a closed exchange might work while an open one may not.

Eric took a results-oriented perspective in his predictions which were, in brief:

  1. With respect to consulting, the end of “credenza-ware” is in sight.
  2. As a corollary to (1), gain-share compensation models will become more widespread.
  3. Price erosion in e-sourcing and e-commerce software will continue, driven both by decreased tools costs and by a new generation of rapidly-maturing and far less expensive solutions.
  4. Knowledge is the dog; software is the tail.
  5. In-house sourcing consulting services at e-sourcing and e-commerce vendors will be hard to maintain.
  6. Compliance will become a more important source of savings.
  7. Demand reduction is an under-utilized savings mechanism that will become increasingly important.
  8. The Balkanization of sourcing by category will accelerate, and highly specialized approaches will evolve in key commodity areas

Or, in more succinct terms:

  1. Knowledge-based win-win consulting relationships will become the norm.
  2. Accuracy will become the key savings driver.
  3. Specialized approaches for key commodities will become the norm as e-sourcing tools improve and drop in price.

And I agree completely – although I must add the caveat that although I expect gain-share compensation models to become more widespread, they may never become the norm.

On a different note, my extended weekend series on optimization finished yesterday over on eSourcing Forum. In this series I discussed the benefits (A Powerful Tool), the reasons for its late arrival (Why it was Relegated to the Shadows), why it is here to stay (Why its time is finally here), and the advantages and disadvantages of integrated and specific standalone optimization solutions (POE or BoB). Considering that one of my major predictions for the coming years is a shift towards optimization-based platforms, this is probably one of the most important weekend series of the summer.

Remember to check out Spend Matters again today to see if anyone commented on yesterday’s post yet (and to see if he continued the discussion today – I’m sure Jason is just getting started) as well as eSourcing Forum, as I am fairly certain today is the day David is going to post.

The Sourcing Innovation Series: Part V

Today I’d like to welcome a special guest columnist to Sourcing Innovation, Eric Strovink, President and CEO of biq. Eric has some interesting takes on the future of sourcing. I hope you enjoy them.

Thanks for inviting me to contribute to your round table discussion.

I try to spend time with our customers and our consulting partners, understanding what they are doing, how successful they’ve been, and what techniques and software products have or haven’t worked for them. Here are a few “future of sourcing” predictions that I’ve (correctly or incorrectly) internalized from those discussions.

  1. With respect to consulting, the end of “credenza-ware” is in sight. It will no longer be possible for sourcing consultants — no matter who they are — to put savings recommendations into a binder, deliver a presentation, and walk away. They will have to manage the implementation of their recommendations, as many are already doing today. Smarter firms will price for procurement re-engineering approaches, i.e. sustainable longer term savings as opposed to one off sourcing events.
  2. As a corollary to (1), gain-share compensation models will become more widespread. This will require innovative compensation models that provide for equitable outcomes when fee calculations are excessive (i.e., when savings are above maximum anticipated levels), or when savings are partially attributable to changes in market conditions that are unrelated to the sourcing initiative.
  3. Price erosion in e-sourcing and e-commerce software will continue, driven both by decreased tools costs and by a new generation of rapidly-maturing and far less expensive solutions. Mainstream ERP vendors, who previously perceived significant revenue opportunity in the sourcing space, may become disinterested as margins fall.
  4. Knowledge is the dog; software is the tail. E-sourcing vendors who place a primary focus on knowledge management and on innovative technologies to improve data visibility will trump vendors who focus on process. For example, many consultants still use Excel spreadsheets and the email system as their RFx mechanism, yet they achieve remarkable results. Clearly, the job can be done without software-assisted process management — what’s required is the knowledge of what to ask, how to ask it, and how to measure and evaluate the responses. Creating mechanisms to help companies derive value from data, and then combining that with well-engineered knowledge transfer, will win the day.
  5. In-house sourcing consulting services at e-sourcing and e-commerce vendors will be hard to maintain. It’s difficult structurally for vendors to pay consultant-level wages/bonuses to an FTE, and they typically won’t — so thought leaders in the sourcing space tend to drift back to the consulting sector. I therefore suspect that vendors who succeed in building partnerships with independent consulting firms will be able to provide higher value to their customers than vendors who try to maintain an in-house consulting capability.
  6. Compliance will become a more important source of savings. The way that compliance is done today — “Do we have a contract with this supplier?” — is not effective. We need to confirm that the terms of the contract are being followed. Is anyone checking line item charges on the invoices? Is the rate card being compared to the actual charges? If we’re buying office supplies, who is auditing the item substitution logic that we so carefully negotiated? Is our price for an off-contract item higher than current retail? I’ve seen an off-contract Palm Pilot for $700 on a supplier’s invoice, at the same time that it was listed on their web site for $325. Conventional A/P audits, when they can be performed, will find rate card variances, but they miss inappropriate charges. There may be a valid rate card entry for a five-pound package, and an automated audit will verify that the package was billed at the correct rate. But was it, in fact, a five-pound package, or was it really a five-ounce letter? The key to success will be to identify mechanisms by specific commodity that lead to effective identification of invalid charges, along with sustainable means for controlling the issues operationally.
  7. Demand reduction is an under-utilized savings mechanism that will become increasingly important. Sometimes demand reduction can be achieved with simple measures. For example, it’s said that deploying a T&E system reduces demand by about 10%, because employees self-regulate spending if they believe they can be audited. So, even if we stipulate that no other benefit is forthcoming, deciding whether to deploy a T&E system is straightforward. A similar argument can be made around the implementation of e-commerce systems. There are other actions that can be taken to reduce demand, such as asset management and re-use (which includes, as a component, intelligent purchasing — buying near the top end of the PC market, for example, results in an asset that is useful three years out). Internal benchmarking and measurement are some way from realization, but provide the best means of controlling spend in all categories.
  8. The Balkanization of sourcing by category will accelerate, and highly specialized approaches will evolve in key commodity areas. In some categories, aggregation may be the answer; in others, such as commercial print, point software solutions may be appropriate. Specialty outsourcers already exist for contract labor, mailroom, and other categories. Consulting firms as well as e-sourcing vendors will increasingly find themselves “brokering” category-specific approaches on behalf of disclosed or undisclosed specialty partners.

I could go on, but I’ll leave it there. Some of the predictions I haven’t included are related to innovative work that is underway in various places, which I’m not able to discuss. Suffice it to say I think there will be some interesting surprises in our space.

Thanks for the great post, Eric!

Stay tuned … I have a feeling there are more great guest posts to come!

The Sourcing Innovation Series: Part IV

Just when you think you’re going to have a nice relaxing sourcing-innovation free weekend … BAM! … they pull you back in. Although most bloggers, including Jason “The Prophet”* Busch, take the weekend off, this is when The Blogging Thunder from Down Under often unleashes his masterpieces. (* This one’s mine.)

In an aptly titled post Rogers and Hammerstein: The Future of Sourcing, Doug tells us that the future of sourcing revolves around the purchaser and the vendor creating a new relationship structure and that the purchaser simply finding a new vendor in an effort to cut costs or improve supply is not the answer.

An example of a new relationship structure is the vendor and purchaser using a novel distribution strategy that creates operational efficiencies for the vendor and a competitive advantage for the purchaser; or the vendor and purchaser working together to impact demand rather than unit cost. The critical feature of the new relationship structure is that it is created by the purchaser contributing internal knowledge about such things as its purchasing patterns, logistical challenges and payment requirements and the vendor contributing its market knowledge to produce an item or service that perfectly fits the purchaser’s needs and the vendor’s ability to service those needs.

I think Doug is right on the money here … after all, I’ve been saying that sourcing is not going to be the same five years from now and that it is going to get a lot more strategic. This is one of the ways its going to get more strategic – once you’ve rationalized your supply base and found the right partners, the only way you are going to improve is by working with them. However, when he asks what technology will enable this type of collaborative innovation, he makes a good point … this collaboration is going to require new processes, which are going to need to be embedded in new technologies to maximize efficiencies.

So what are these technologies going to look like? The nature of technology is that it’s always almost impossible to predict where it ends, but I believe I can tell you where it starts. Enhanced Product Lifecycle Management (PLM) solutions, real-time supply chain visibility software, and innovation software.

I briefly discussed PLM in my Sourcing Based Product Lifecycle Management post back on June 30 (2006) and will discuss it further in my third Purchasing Innovation series, which is slated to run over on eSourcing Forum the weekend of September 8 (2006). Simply put, PLM is the process of managing the entire lifecycle of a product from its conception, through design and manufacture, to service and disposal. In the future, these products will be collaboration centric and all supply chain partners will be able to collaborate though a single platform to effectively contribute and improve the process.

Supply Chain and Spend Visibility Software, being promoted by new players such as Apexon and Zycus, lets you know, in real time, what product you have in stores, in warehouses, on route, and on order at any given time and provides real time alerts of any delays or potential issues before they impact your supply chain so you can make alternate plans or take alternate actions as well as letting you know who you’re spending your money on, when, and for what categories.

Innovation software is probably the newest category of software solutions hitting the market appropriate for your emerging supply and spend management needs. Most of these products are still very process focused, but I suspect they will expand to incorporate strategies and domain knowledge as time goes on. As indicated in my recent post indicating that Innovation Matters, you could always start with BrightIdea.com‘s On Demand Innovation Management Software, which gets you up and running immediately. Of course, this isn’t the only choice. You could also try Jenni‘s Idea Management Software, Centric Software‘s Product Intelligence software, or Imaginatik‘s Idea Central Software.

Of course the big question is – will they merge into a single solution or be replaced by something entirely new?