Monthly Archives: February 2007

Charge into Contract Manufacturing!

A few months ago, Geraint John penned a great article over on Supply Management where he urged CPOs to take the lead in contract manufacturing and understand the differences between contract manufacturing and other types of supplier relationships.

According to the article, contract operations have unique characteristics and differ from other types of strategic sourcing in several ways. First of all, products are typically shipped straight from a contract manufacturer to your end customer. Secondly, the supply market for contract operations tends to be very fragmented and many of the firms are small or medium sized with only a local, rather than global, presence.

Success factors include a good legal agreement, performance metrics, regular senior-level joint management reviews, the use of only appropriate tools and processes, and “externship” where your company’s employees work side-by-side with those of your partner to ensure you don’t lose vital knowledge as a result of outsourcing.

Furthermore, these relationships, which often require creativity, need to be managed by highly skilled individuals, but finding and developing the right people can be a major challenge with the current talent crunch.

So what’s a CPO to do? Take Charge and lead the way – it’s the only way to guarantee success. But remember CapGemini and CFO Research Services’ nine best practices for successful outsourcing relationships (as summarized in the Outsourcing Journal).

  • Visit the supplier’s site.

    Consider visiting supplier’s customers to assess the supplier’s true capabilities.

  • Define and document all performance metrics; then capture and report them.

    Deciding what factors you’ll measure helps both you and your outsourcer understand what’s important in your relationship.

  • Capture and report qualitative reaction to supplier performance.

    Stay in touch with the users and make sure they are being satisfied.

  • Conduct formal audits of the supplier’s processes and performance.

    Remember that section 404 of the Sarbanes-Oxley Act requires companies to document the effectiveness of their internal controls. When they outsource, they must do this themselves or obtain a Statement on Standards No. 70 report.

  • Allow or encourage company managers to join the supplier’s team.

    The closer your personnel are to the supplier, the better their outsourcing experience.

  • Include incentives for excellent performance and impose penalties for poor performance.
    Suppliers given incentive to provide excellent service are more likely to provide it.
  • Be willing to revise performance objectives during the contract term.

    Companies willing to adapt to change are generally happier with their outsourced activities than those who lack such flexibility.

  • Consolidate work with a few strategic suppliers.

    It’s easier to manage a few relationships than many.

  • Use a formal governance process for outsourcing.

    It’s the only way to ensure all the pieces are being addressed.

Sourcing 2007: Part IV

In What’s Ahead for 2007? Wharton predicted the following:

  • In U.S., Housing Slump Tempers Upbeat View
  • India Is Rocking
  • Spain and Europe: Banking on Continued Growth
  • Challenges Ahead for Latin America
  • The Outlook from Inside China

Furthermore, be it directly or indirectly, all of these will impact your supply chain. After all, falling housing costs are dragging down the GDP and weakening your strength in the global market. Moreover, if housing costs stop falling and start rising again, an employee’s cost of living will rise, and as cost of living rises, so does wage pressure – after all, if you do not, or your supplier does not, keep up with inflation, given the current talent crunch, your best employees will likely go elsewhere. Thus, your costs are going up, and not just because of raw materials.

The rocking stock market is driving investment in India, which means that if you’re looking to enter the country, you will have a rapidly diminishing available talent pool to pick from. But if you’re already doing business in India, you could be leading the pack in the year ahead.

With significant price gains in European stock markets and a strong euro, investment is going to continue to flow into the region. Expect stronger competition from your European counterparts in the year ahead.

Despite a strengthening economy, Wharton has it right when they note that some governmental reforms are necessary in order to achieve more stable, and less corrupt, political systems and that growth in many Latin American countries will continue to be limited by the weaknesses of the state and that the consequences of this weakness include deficient public services, a fragile judicial system, high rates of crime and corruption, tax evasion and a sizable informal economy. Of course, the same can be said about parts of Africa, but they don’t seem to be under the microscope this year.

China is going to effect you no matter where you are or what market you’re in, even if no one can tell you how. That’s all I have to say for now.

The IACCM noted that even though China and India are the emerging markets of the early 21st century, tomorrow’s hot spot could be a different market altogether. The country they highlight is Russia, the world’s eighth most populous nation that is rich in natural resources, including timber and farmland. Russia has problems similar to those Wharton pointed out for Latin America, including weak intellectual-property rights, pervasive corruption, and a shaky government commitment to private enterprise, but as progress is made in these areas, those countries that are able to establish a solid base early could be poised for explosive future growth.

CNN reminded us that right now the biggest problem with job growth isn’t too few new jobs, it’s too few skilled workers. The talent war is in full swing and this year it will be taking no prisoners.

Back in October The Economist warned us of the Slow Road Ahead and that America’s long-term potential rate of growth is falling, perhaps to its lowest pace in over a century. Canadian Business echoed the sentiment in its Outlook 2007 edition that started the year off. It pointed out that on a year-over-year basis, real economic growth slowed to 3% in the third quarter of 2006–the lowest since early 2003. And it’s likely to get worse. At this point, the primary drag is coming from the direct effects of the burst housing bubble. A year ago, resale home prices were rising at a 17% annual rate; they’re now falling at a 3% rate, the worst result in at least 38 years. Pulling this all together, we expect global growth, excluding the United States, to come in at 5.3% in 2007, not far off 2006’s generational best of 5.8%. Including the U.S. drags the global forecast down to 4.5%, the lowest in four years. Thus, things will still be tough in North America, but that’s a good thing – it will force us to become better at spend and supplier management, which will allow those companies that do to take off like a rocket in the next upswing.

Wharton, The Economist, Canadian Business, CNN Money, and the IACCM are not the only media outlets making predictions – Aberdeen and AMR jumped into the game with the new year, but they always have a lot to say, and I’ll be tackling their viewpoints throughout the year.

Sourcing 2007: Part III

David Bush of eSourcing Forum started off by predicting that optimization will gain more mainstream traction (and considering companies employing optimization with advanced sourcing techniques are still saving almost 12% per event, now more than ever you have every reason to adopt optimization), M&A activity will spike, and supply management technologies will continue to align, particularly in what David calls the triple crown: spend analysis, strategic sourcing, and contract management. I’ll go one further. I think this year you’ll start to see integration with e-Procurement systems that help buyers manage their individual buys.

Tim Minahan predicted that all of those crazy sustainable supply strategies that he’s been touting over on Supply Excellence are going to hit the mainstream. Well, I think they will at least hit best-in-class – after all, despite a few fiascos, Walmart is pushing for it – and with that clout, it’s going to happen, even if a few stumbles are made. Furthermore, Tim Minahan, Kicking and Screaming, also predicted that you will pay higher prices, you will experience a supply chain shock, you will rethink your low-cost country sourcing strategy, and you will lose your top talent.

Charles Dominick of the Purchasing Certification Blog predicted that a new wave of low-cost country sourcing is about to hit us, major supply disruptions caused by significant Force Majeure (don’t know what this means, take his Supply Management Contract Writing course) event will occur, and that a few big name executives, unprepared for either the impending raw material cost escalations (thank China) or Force Majeure supply disruptions, are going to be publicly fired in a big way. I’ll go one further – at least one really big company is going to be the subject of a major lawsuit as a result of their failure to deliver (a) necessary components that cause a major electronics or high-tech vendor to lose considerable market share or (b) promised relief supplies in a timely manner.

Jason Busch, who filed some of his predictions on his joint Supply Now podcasts with Tim Minahan, decided to focus instead on sourcing tactics that innovative procurement organizations will be employing in the year ahead. From strategies that dive into currency, logistics, freight, and import costs, to objective alignment, to strategic supplier rationalization, the top organizations will be extending their innovative mark on their supply chain.

Dave M of Buyer Analytics predicted that technology will transform the way your company interacts with suppliers (a statement Apexon, Connect4Growth, and Servigistics could wholeheartedly support), global procurement will finally mean global talent, spend and supplier management will start its progression from art to science, green procurement will be mandated by forward thinking managers and consumers, and public procurement will be forced to accept modern and lean procurement principles. With the exception of that last point, I think we can all agree – after all, I can think of a few countries that will be as wasteful with public tax dollars as ever this year.

Jean-Phillippe Massin decided to forego predictions and just give you 27 Purchasing Leading Practices that you can employ to take your procurement organization to the next rung on the devil’s staircase.

David Rotor decided to be coy and avoid the issue entirely, but did point out that we are Still Fighting the Talent War and provided you with a nice set of links to posts that complement my own ongoing Talent series very nicely. So I’ll join Tim and David in the chorus: You Will Lose Your Top Talent!

However, predictions have not just been limited to us bloggers. In Sourcing 2007 Part IV, I’ll summarize some of the more salient points from the more traditional media.

Servigistics – Tomorrow’s Strategic Service Management Today

In yesterday’s post, Strategic Service Management, I talked about the importance of making the customer efficient while maintaining a profit – something you are likely to only achieve in today’s highly competitive marketplace with strategic service management – a proactive approach to service management that balances service strategy, resources, commitments, and pricing that supports the integration, optimization, and efficient management of core business processes, adds to your overall business solution, and differentiates your offering from that of your competitors.

Why is it important? Despite the huge investment in IT to support the front end of the sales cycle (which can consume up to 85% of the IT budget in some organizations), in today’s competitive market, you can still see declining sales without the right strategy – which today needs to involve services. After all, in a well run services organization, particularly in the durable goods and consumer goods verticals, post sales service can provide a nice margin of 20% to 50%, which not only turns service from a cost center into a profit center, but increases your profit while decreasing your costs (since you simultaneously optimizing your resource allocation).

So, how does Servigistics tackle Strategic Service Management? Three ways: parts management, pricing management, and workforce management. What’s the difference?

Service Parts Management is the process of ensuring the right part is available at the right place at the right time. The alignment of planning, forecasting, and inventories, it makes sure you can respond to a customer need as it arises, without costly expedited shipping, unnecessary wait times, or financial losses (that can result from service level guarantees).

Service Price Management is the management and optimization of service parts prices by way of sophisticated pricing methodologies, advanced optimization techniques, and adaptive business logic to maximize revenue. Pricing is more difficult than you might think. It’s not about charging as much as you can – because that limits you to a few customers. It’s not about charging the most competitive price, because that might cut your margins to the point where sustainability is at risk. It’s finding the right balance that maximizes your customer base while maintaining profitability.

Workforce management is the process of optimal workforce scheduling to make sure that you have the right number of service professionals on duty and the right amount of service equipment (and vehicles) available to deliver committed levels of service 24 hours a day, 7 days a week, 365 days a year. This involves monitoring and adjusting your schedules on a continuous basis, optimally dispatching and routing service professionals as service calls come in, and aligning your workforce skill set to meet your evolving customer needs.

So, optimize the workforce to deliver the right part at the right time at the right price and you simultaneously minimize cost and maximize resource utilization and revenue opportunity. Does it address everything? Well, for starters, you still need a good strategy and product life cycle management tool to understand what might go wrong, when, and what you will need to fix it, so it’s not yet a panacea solution, but it is a great start. All you have to do is look at their customer list – a Fortune 500 who’s who of High Tech, Heavy Equipment, Automotive, and Aerospace – and the magnitude of savings a service management solutions suite has enabled for them. (As per a 2005 Business Week article, Avaya reduced service parts inventory from $250 million to $160 million, Sun Microsystems saved $40 million and Dell nosed out Hewlett-Packard for the top spot in the U.S. hardware support market, growing its service business unit by more than 20%.)

Strategic Service Management

As I’ve been mapping out the supply chain space, one of the oft-overlooked areas that I keep stumbling on is service management – and by that I am referring to customer service management, and not just outsourced services management. After all, I do preach Total Value Management (TVM), and unlike Total Cost of Ownership (TCO), TVM is concerned with all of the life-cycle costs associated with a product, and that includes servicing and customer returns.

I know I haven’t blogged much about this area in the past, in fact, my only post to date has been my post on The Art of Service Management back in November. In that post, I described P.T. Harker’s talk on the evolution of service management and how the new goal of service management is to make the customer efficient and how making the customer a part of the process helps to ensure that the product or service is what the customer wants, which in turn increases your chancing of selling the product or service to the customer.

But service management is about more than just making the customer efficient and sufficiently satisfied – it’s about making the customer efficient and sufficiently satisfied and making a profit at the same time. With enough effort, you can make almost any customer efficient and sufficiently satisfied, but if you spend more than you get, you will not stay in business very long.

How do you do that? Strategic Service Management. A proactive approach to service management that balances service strategy, resources, commitments, and pricing that supports the integration, optimization, and efficient management of core business processes, adds to your overall business solution, and differentiates your offering from that of your competitors. How do you get there? Well, as with any new initiative you find a partner to help you get to the next level. Who should you choose? That’s up to you, but one provider you should look at is Servigistics – the second stop on my whirlwind virtual tour of Atlanta – and the subject of an upcoming blog post.