Monthly Archives: December 2006

On the Second Day of X-Mas (Market Intelligence)

On the second day of X-Mas
my blogger gave to me
two boxing gloves
and a lesson in strategy.

In the Autumn issue of CPO Agenda, you will find the article Raw nerve by Richard May which indicates that sometimes a tough response is required when suppliers demand raw material price increases. Sometimes there are reasonable justifications for the request, but sometimes the justifications are not warranted. If you remember my post on The Internet & the Purchasing Knowledge Revolution, or Charles’ recent insights on Supply Excellence on Caveat Emptor: Economic Indices Could Be Misleading You and Supply Market Assessment 101 you might recall that a single commodity index alone does not justify a price increase.

You need to know where the supplier is buying from, the relevant cost indices of the raw materials in those regions, the relevant exchange rate between your supplier’s supplier and your supplier, it’s expected stability, the relevant exchange rate between your supplier and you, and it’s expected stability. An increase in the steel index in the U.S. is irrelevant if your supplier buys its steel in China. Also, the cost increase in a commodity can often be offset by a recent currency devaluation. Therefore, the first defense you have against a commodity increase is a deep understanding of your should-cost structure, including that of your supplier. It’s your first boxing glove.

Your second boxing glove is a good strategic sourcing process that you can use to find an alternative source of supply, enabled by a cross-functional team that will allow you to quickly and efficiently work through the process. If there are genuine reasons for a cost increase, but your supplier refuses to collaborate to keep costs down for both parties, sometimes you need to find an alternate source of supply.

On the First Day of X-Mas (Strategic Sourcing Strategy)

On the first day of X-Mas
my blogger gave to me
a lesson in strategy.

Everything should be strategically sourced.

As I’ve indicated before, this does not mean that you should apply an intense multi-stage strategic sourcing effort on everything you buy, just that you should have a strategy for dealing with every category – since that’s the key to success across the board.

Where do you start? One method would be to create a nine-cell grid that divided your purchases into direct goods, outsourced services, and indirect / MRO along one axis and strategic, non-strategic but custom / non-commodity, and commodity along the other axis and then assign a default strategy for each grid cell.

For example:

  Direct Outsourced Services Indirect / MRO
Strategic Collaboration with a small set of strategic suppliers Dedicated Contract Owner Collaboration with a best-in class provider for each category of services
Custom Decision Optimization on a Pre-Qualified Set of Suppliers Managed by a Strategic Outsourcing Provider Managed by a Senior Sourcing Professional
Commodity Reverse Auction Multi-Stage RFX Lowest Bid

Another method would be the one described in Detail in Next Level Purchasing‘s course Savings Strategy Development that I reviewed last week in Part I and Part II. At a high level, NLP recommends segregating opportunities into quick hit opportunities (which can generally be executed rapidly using best-practiced based eSourcing tools), supplier relationship / collaboration opportunities, and strategic sourcing opportunities, which can be attacked using NLP’s 10 phase approach to world class sourcing. The course is worth it for the details on these segmentation and detailed sourcing methodologies alone. ( Maybe I should be asking for referral fees. )

I’m personally not sure what the best methodology for you is, but what I have personally found is that the existence of a methodology is sometimes much more important than the actual methodology itself – and that the best methodology is usually one based on a best-practice methodology that has worked well for others, tweaked to your own needs. So if you don’t have a methodology and a coherent across-the-board strategy for your procurement organization – get one, it will enable more success than any tool ever will – since it will tell you where to apply the tool for maximum return.

And yes, I know the Christian twelve days of Christmas traditionally start on Christmas day, but this is the twelve days of X-Mas. Moreover, do you really want to be reading a series of posts that start on Christmas Day?

Product Compliance

There’s more to sourcing than just acquiring products – a good sourcing plan aligns with your corporate strategy, which, hopefully, should be focused on green products and initiatives. That’s why Aberdeen’s benchmark report on Product Compliance: Protecting the Environment, Protecting Profits (courtesy of Managing Automation) caught my eye.

This report starts off by stating that most manufacturers have not developed systematic, repeatable product compliance processes that efficiently address today’s complex and challenging business environment with an every increasing corpus of complex legislation (including the recent EU RoHS directive and the 7th Amendment to the Cosmetics Directive) placing constraints on the design, distribution, and reclamation of each and every product produced.

Manufacturers today spend considerable time and effort ensuring that their products comply with a multitude of regulatory mandates. Yet many companies’ approaches to ensuring compliance have left them at a high risk of noncompliance, potentially resulting in an inability to sell in global markets, unmet customer mandates, blocked shipments, and associated revenue loss. The high risk level exists despite significant efforts to achieve compliance by most companies. In fact, meeting compliance challenges today has resulted in increased product development cost, decreased ability to innovate, and added staffing.

The most interesting finding in the report that caught my attention was that compliance performance is less dependent on level of effort than on implementing best practices and enabling those practices with the appropriate compliance infrastructure. In other words, brute force can not be used to tackle the problem, you need technology enabled best practices.

According to the report, top business initiatives being pursued include:

  • design for compliance
  • improving compliance documentation and evidence
  • bundling compliance into NPD (new product development) processes
  • proactively monitoring product designs for compliance
  • physically auditing products against compliance requirements

Furthermore, Aberdeen’s findings demonstrate that investments into best practices and enabling technology really pay off. Best in class companies have compliance rates of 90% or more, as compared with laggards who average 10% to 40% of products in compliance with applicable requirements. In addition, leading companies have 53% fewer stopped shipments than other companies and top performers have 35% fewer product recalls. Furthermore, there is often a strong disconnect between self-reported levels of compliance and assessed level of compliance. For example, Aberdeen’s Environmental Compliance in Electronics study (now AberdeenAccess members only) found that actual compliance levels are lower than self-reported and that companies are typically at a higher risk than they believe.

What are the major challenges that impact product compliance? According to the study, challenges include:

  • lack of consolidated information on regulatory requirements
  • lack of accurate product data
  • difficulty to determine applicability or exemption
  • resource or skill shortages
  • differing requirements by country
  • inefficiency in gathering material data from suppliers

These challenges can be addressed by the recommendations offered by the report:

  • adopt proactive compliance strategies
    and consider exceeding the strictest global standards in order to enable global sales
  • proactively monitor and assess compliance early in and throughout the product lifecycle
  • seek more detailed product composition from suppliers
  • audit content to address potential variability in your supply chain
  • standardize and centralize compliance processes and organizations
  • automate compliance processes with a compliance infrastructure

and by the following processes and technologies:

The Nokia Saga

Both Spend Matters and Supply Excellence have recently discussed Nokia and their journey to a center-led organization. According to Tim, Nokia has made the move in an effort to save $300 M Euro over three years by better aligning supply strategies with business requirements, reducing purchasing operation and transaction costs, and better integrating supply management with supply chain management and product creation.

The reality is that they are doing a lot more than just moving to a center led model. According to the presentation at eyefortransport‘s recent Supply Chain Directions Summit in the San Francisco Bay Area, they are also focusing on:

  • improved capacity planning
  • 3PL cost management programs
  • offering new service levels to manufacturing centers and to sales
  • collaborating with suppliers to reduce packaging requirements
  • better supply base management
  • improved frame agreements
  • location-based supply chain improvements

Although they did not release the dollar values associated with improvements they have made to date, they have reduced packing requirement ratios from as high as 2.0 to under 1.4, almost doubling the amount of product they can fit on the same shipment. They have improved capacity utilization by focusing on lane-based planning and dealing with short term and mid-term plans separately, with long-term plans updated quarterly. They have evolved outbound shipments to small lot order sizes which they are better able to optimize, since the vast majority of their orders (> 85%) are now small lot sizes. They are also evaluating non-traditional delivery methods in some regions and achieving great success.

They’ve restructured their frame agreement to include a standard contract which includes all of their standard clauses and SOX compliance, fill-in-the-blank appendices to deal with standard requirements such as compensation, storage, service levels, and service levels, and customized fill-in-the-blank appendices for each region to deal with specific local requirements such as TAPA or C-TPAT compliance, GPS monitoring, driver screening, security escort requirements, etc. This allows them to draft better contracts, faster, with reduced risk.

They’ve found that:

  • controlled variables can be a large source of improvement
  • tangible metrics are essential to achieving success
  • the revised frame agreement regulates requirements
  • risk management, security teams, and 3PL collaboration guarantee risk reduction
  • constant audit and process reviews sustain growth
  • collaboration is essential in strategy, tactic, and action plans

Note that eyefortransport‘s sister organization, eyeforprocurement has a number of upcoming events next year custom designed for today’s procurement professionals, including the Supplier Management Forum next April in Miami. Registrations received before year’s end save $400 off of the regular registration rate and those who quote “sourcing innovation” in the discount code field save an additional $100.

The Dangers of Centralized Buying

One of the more interesting talks at the 2006 Informs Annual Meeting was Katri Karjalainen’s talk on Conflicting Goals in Centralized Organizational Buying.

Many organizations large and small pursue centralized buying in hopes of achieving the following benefits:

  • economies of scale
  • purchasing expertise
  • administrative efficiencies
  • specialization
  • volume discounts
  • optimal use of resources and process efficiencies

However, centralized buying brings with it the following corresponding disadvantages:

  • missed local opportunities
  • loss of local knowledge
  • loss of control over supplier performance

As a result, the organizational conflicts often arise due to:

  • divergence of subunit goals
  • conflicts of preference between purchasing center and remote units
  • lack of subunit inclusion
  • cost of certain purchases on a corporate contract may be higher than the subunit could achieve locally
  • quality of certain purchases on a corporate contract may be lower than the subunit could achieve locally

As a result, the benefits of centralization are highly dependent upon commitment to contracts by the organization and the subunits and economies of scale, the primary reason most organizations centralize purchasing efforts, are often the last to materialize.

That’s why I keep promoting Center Led Procurement where you can have the best of both worlds.

I know it might be difficult, as Jason Busch points out over on Spend Matters, but I think it’s worth it.