Monthly Archives: November 2006

Best Practices from Lessons Learned

One of the best practice-oriented talks at the 2006 Informs Annual meeting was William Hefley’s talk on Identifying Issues in Sourcing: Informing Development of Best Practices. In this talk, William Hefley of the IT Services Qualification Center at CMU discussed lessons learned from dealing with client organizations. The fifteen lessons learned identified point to best practices that you can adopt to improve your sourcing organization.

Lessons Learned

  1. Clients often make decisions to source without considering:
    • fit with broader strategy
    • short term organization performance impact
    • appropriateness
    • risk of losing internal expertise
  2. Clients tend to rely on consultants to conduct source selection without consideration of consequences.
  3. Some client organizations establish special sourcing projects named to convey popular images to investors.
  4. “Distress outsourcing” leads to more distress.
  5. Most clients do not baseline existing operations or benchmark desired states.
  6. Clients tend to abdicate entire responsibility to providers after a deal is signed.
  7. Clients negotiate better deals when internal team bids are involved.
  8. Both clients and service providers are challenged in SLA (Service Level Agreement) interpretation.
  9. Most client and service provider teams interpret scope differently.
  10. Client organizations often have difficulty with expectation management.
  11. Clients typically do not execute communication plans for internal or external audiences.
  12. Buy in of management, power brokers, and other key stakeholders is important for any project.
  13. Clients are seriously challenged by internal and external change management.
  14. Clients need to know skill sets and competencies required to manage services internally and externally.
  15. Clients need to retain, develop, and deploy appropriate technology and management skills to manage, oversee, and coordinate with service providers.

Implied Best practices

  1. Determine appropriate sourcing strategies and anticipated results before considering outsourcing to a service provider. Outsourcing doesn’t always add value.
  2. Bringing in consultants is a great way to augment your expertise, but only if you work with the consultants and actively participate in the process.
  3. Don’t initiate a sourcing project just to please investors – initiate a sourcing project because you expect benefits.
  4. Handing your problems over to someone else will not solve them – identifying the causes and resolutions will. Outsourcing improves efficiencies, it is not a miracle cure.
  5. You can not measure improvement without a baseline, nor can you define an appropriate SLA without a reasonable understanding of expected improvements.
  6. Outsource providers are good at managing their operations – not yours. You need to define your overall sourcing strategy, manage the relationship, and make sure the services provided are in-line with your goals.
  7. Understand your costs before you attempt to negotiate a deal. After all, the goal of outsourcing is to add value, and a service is generally not valuable if it costs you more to outsource the process than to manage it in house.
  8. Adopt a common language consistent with customer service goals, not hard-to-measure quality metrics.
  9. Again, adopt a common language consistent with your organization’s customer service goals and make sure both parties understand the scope of the deal on both sides before it is signed.
  10. Define your outsourcing goals up front and make sure a senior, experienced professional is in charge of managing the relationship.
  11. It’s important to communicate your intent before the deal is inked, gather feedback from the appropriate stakeholders, and update them regularly on results.
  12. Without buy-in, it will be hard to gather the internal support required to make your project a success.
  13. Hire or retain a change management expert and have the team responsible for managing service delivery work with the expert to define and implement appropriate processes.
  14. Seek external training for any skill sets and competencies that your organization is weak on. Consider academic programs and professional programs (such as Next Level Purchasing’s, now the Certitrek NLPA SPSM program).
  15. Define appropriate processes and employ technology to ensure those processes are consistently employed in a best-practice fashion. Strive for six sigma quality.

The Efficio Survey (on the Changing Face of Procurement)

As mentioned in Spend Matters, Efficio recently released a study that looked at the changing face of procurement in Europe. Like Jason, I’m not going to spoil the report for you, but merely point out six key imperatives for procurement presented by Efficio.

  • Become a manager of relationships
    Procurement must possess highly developed relationship skills to effectively manage both internal and external stakeholders as well as suppliers.
  • Grow into the role of managing networks, not “vendors”
    As businesses continue to focus on core strength and outsource specialist activities, they have to manage increasingly complex supply chains.
  • Focus on value, not only on cost
    Procurement’s new role of managing whole networks of business partners will increasingly require it to extract value from those relationships as well as cost.
  • Broaden the skills base
    Procurement clearly needs a much broader set of skills than the core functional skills of tender execution and supplier negotiations.
  • Become part of the business
    Procurement must continue to integrate with the organisations in which it operates and be seen as a multi-talented business problem solver.
  • Don’t stand still
    Procurement needs to constantly focus on overcoming the challenges that lie ahead, and on proving its worth through excellent internal customer service and tangible results.

These recommendations are a great start, but I’d like to toss out five more of my own:

  • Smart Sourcing, not Low Cost Country Sourcing
    Remember, it’s not unit cost, but landed cost, that has the larger impact on your overall cost, and when the number of “touch” (or transition) points from a Low Cost Country is typically four times the number of “touch” (or transition points) from a local supplier, you can see how your transportation costs can really add up. A good post on Low Cost Country Sourcing is JB’s post “Global Sourcing: Does Innovation Matter?”.* (This post was in response to my challenge post, Is Low Cost Country Sourcing to China Really Innovative?.
  • Visibility, not Reduction
    All though a lean, rationalized supply chain is important, effective supply chain control is requires more than just a good design, it requires visibility, a topic I visit regularly. See my post Global Supply, Visibility, and Performance, for example.
  • Data, Data, Data
    Bad data and / or bad classification can cost you a lot, especially in global trade. For more information, see my post on Managing Global Trade Data.
  • Compliance, Compliance, Compliance
    Some estimates state that up to 70% of negotiated savings are never realized! Make sure all contracts are tracked and monitored from the date of inking to the date when the last product is delivered. Buyers have to buy against them, payments have to be on schedule, agreed upon rates need to be adhered to, and, most importantly, rebates and post-order discounts need to be recouped.
  • Don’t forget Legal!
    Major procurements often come with a lot of risks. Make sure you engage legal counsel from day one to make sure you mitigate all of your legal risks before they happen. (See my post on Key Concepts for Major Procurements.)

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Supply Chain Direction II: Collaboration is Key

… And a study underway by Craig Hill at Georgia State University may prove it. In his presentation Performance Aspects of Collaborative Planning Forecasting and Replenishment (CPFR) Technologies, Dr. Hill is studying the effects that the implementation of CPFR has had at over 110 compaies that have employed CPFR for over five years. The premises of CPFR is that it (1) decreases inventory, (2) increases customer satisfaction, (3) positively affects stock price, (4) improves performance, and (5) increases sales. Dr. Hill’s preliminary results seem to indicate that inventory turnaround is increased (by 16%), return on assets is increased (by 12%), and average sales are increased. Increased inventory turnaround decreases inventory levels which increases savings (and decreases overall costs), return on assets positively impacts company performance (which likely increases stock price), and increased sales are increased sales. In other words, Collaboration is Key.

On a related note, eyefortransport’s 2nd Supply Chain Directions Summit takes place three weeks from today. For more details, see my earlier post.

Lean Sourcing

Recently, Jason Busch essentially reprinted an article from the first edition of Azul Partners’ newsletter Sparks on “The Top Ten Myths of Analyst Relation”# over on Spend Matters. Although a very good article, I would have reprinted excerpts from regular contributor Lisa Reisman’s Aptium Global executive whitepaper on “Lean Sourcing: Creating Sustainable Purchasing Savings” since all reports indicate we are headed for a global economic slowdown, with U.S. growth expected to nearly halve in 2007 (from 3.3% to 1.8%), taking global growth with it (from 5.2% to 4.4%). *

Most of us realize that economic slowdowns result from reduced consumer spending and result in smaller coffers and lower profit margins as you trim prices in your attempt to maintain your market share. But what we may not realize is that from a sourcing perspective, this could actually drive our prices up, and not down as one might expect. Although historically downtowns may have been a great opportunity to extract concessions from your supply base desperate to maintain their volume when there is less market share to go around, the recent focus on strategic sourcing and, more importantly, e-Auctions in a transparent marketplace has not only trimmed all the fat there is to trim from many suppliers, but reduced the margins of some suppliers to the point where they can only maintain profitability under (very) high volumes. Therefore, if demand for their products drops significantly, they will have to raise prices to stay in business (unless the underlying commodities they require take a sharp downtown, which I would not hesitate to state is not likely in many markets with China and India still high on a global binge buying craze on pretty much everything they can get their hands on).

Therefore, as I have indicated before, e-Auctions and a myopic price focus is not going to cut it anymore, and you are going to have to start adopting a full-fledged sourcing cycle based on a TVM (Total Value Management) approach which includes sophisticated spend analysis, decision optimization, and compliance management and incorporates best-practice six-sigma processes, financing, trade management, inventory management, and lean sourcing.

Unlike stand-alone e-Auctions which caught on because of their quick-hit results (even though such results were not sustainable in the long term since three hits to the profit margin was usually the most your supply base could take and stay in business), Lean Sourcing is a long-term strategy that provides continued value to your organization over time. For many companies, it’s the next evolution of strategic sourcing where you take your TVM focus and augment it with best practice lean principles. And like any good process, it’s a journey – not a destination.

Lean Sourcing provides a number of benefits to organizations, but, as highlighted in the whitepaper, there are four key benefits that place it apart from most sourcing strategies:

  1. Greater buy-in from key functional areas
    operations and purchasing which care about both price and performance
  2. Greater likelihood of implementing identified sourcing savings
  3. Improved quality and reduced waste
  4. On-going additional cost reduction opportunities via collaboration with supply partners

Furthermore, it’s not a hard journey either. The following advice (from the whitepaper) is more than sufficient to get you on your way:

  • Create a Lean Sourcing processes that can be mapped and easily communicated to all team members
    open communication facilitates fairness and buy-in
  • Develop project milestones, deadlines, and target dates
    in reality, only one thing can drive results better than accountability
  • Create a team member incentive structure and compensation plan tied to process outcomes
    nothing drives results from motivated (star) performers better than an incentive plan that not only rewards them for results, but rewards them more for better results
  • Take a global perspective, albeit one that carefully analyzes supply risk
    smart-sourcing requires you consider all the options and take the best one (sometimes that will be China, but sometimes it will be the factory down the street)

* Source: Lost in America, Canadian Business Oct 23-Nov 5, 2006.
# All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

 

Everyday Lessons from Operations Research

Although many of the presentations at the INFORMS Annual Meeting in Pittsburgh are very academically focused, Mark S. Daskin’s Presidential Address Everyday Lessons from Operations Research had a lot of great lessons for those of out us in the field. The following are Mark Daskin’s Top 13 lessons from operations research:

  • 13. Service Gets Worse as Utilization Increases
    Think about customer service lines.
  • 12. Performance Degrades as Variability Increases
    … but variability can be reduced through risk pooling. Think about global sourcing.
  • 11. Variability is necessary.
    Relationships cannot be determined without variability.
  • 10. Expect the unexpected in today’s world.
    There are 300 M people in the US, which means 800 K will be at least 3 standard deviations from the mean in any study you are conducting. There are 1 B people in China, which means at least 2.7 M will be 3 standard deviations from the mean. Globally, there are over 400 K people over 4 standard deviations from the mean in any study you are conducting.
  • 9. If it is too good to be true, it probably is not.
    Learn from experience – and samples.
  • 8. Life is full of errors.
    Both Type I (false positive) and Type II (false negative) – and there is no free lunch. As you decrease one type of error, the other type of error increases – unless you want to pay for more data.
  • 7. A good decision can result in a bad outcome.
    C’est la vie.
  • 6. If you are not using all you have, don’t pay for additional quantity.
    It’s not savings if the item perishes in industry.
  • 5. You can never do better by adding a constraint.
    Adding a constraint can never improve the objective function – that’s optimization.
  • 4. Keep it Simple
  • 3. Think about problem formulation
    • What do you know?
    • What do you need to decide?
    • What do you need to achieve?
    • What inhibits you?
  • 2. Look for compromise solutions
    Sometimes optimal is not good enough – do a tradeoff and robustness analysis before accepting a solution since your optimal solution may be very susceptible to change.
  • 1. Data is not information.