Monthly Archives: April 2007

51% of Companies Don’t Understand (Supply Chain) Risk

Yesterday, Aberdeen released their latest supplier performance and risk management benchmark report, “Supply Risk Increasing While the Market Stands Still”, which found that although two thirds of the organizations surveyed expect supply risk too increase, only 49% of organizations have bothered to implement a supplier performance measurement and risk management program. That tells me that at least 51% of companies do not understand risk, for if they did, they would be doing something about it.

The study found that there is direct correlation between the length of time a supplier performance and risk management program has been in place, the percentage of the supply base measured, and the positive results enjoyed by the organization. Moreover, best-in-class companies, which (i) have had programs in place for at least three years, (ii) measure 51% or more of their supplier base, and (iii) engage in supplier performance management and risk management in the supply base 70% of the time achieve:

  • 92% effectiveness in product and service quality
  • 91% on-time-delivery
  • 87% price competitiveness
  • 85% service and performance capability

Best-In-Class companies surpass their peers in pretty much every way.

  • 43% have instituted cross-functional teams of key stakeholders
  • 68% have instituted a structured performance and risk management program
  • 55% more supplement basic tools with more complex financial risk mitigation strategies
  • 57% use supplier performance systems, 54% use supplier databases and rating systems, and 48% use supplier market research and intelligence

In addition to pointing out some key differentiators, the report also overviews a number of enablers that can help a company that wants to achieve best in class status. These include:

  • Supplier Scorecarding and Reporting
  • Automated Calculation of Key Supplier Performance Metrics
  • System Notification of Performance Issues & Disruption Events
  • Integration with Spend Analysis Tools
  • Reporting of Key Supplier Operational and/or Financial Risks
  • Web-Based Portal for Supplier Self-Registration & Information Maintenance
  • Hedging and Other Insurance Solutions

In addition, they point out the following strategies that can be leveraged for maximum advantage:

  • Re-organization of the supplier performance and risk management initiatives into cross-functional ownership mode among all key stakeholders
  • Re-alignment of focus on supplier performance risk management activities to address customer and regulatory pressures
  • Implementation of a supplier performance and risk management technology layer across all business processes
  • Supply base segmentation on key criteria such as spend concentration, number of available sources per commodity, etc.

This report is definitely worth a read – especially if only 49% of organizations are actively addressing risk.

Ahoya, Akoya

When I was being blown away in the windy city, I had a chance to sit down with Brett Holland, Co-Founder and SVP of Akoya (acquired by i-Cubed). It was an illuminating conversation, and one that highlighted why companies like Akoya and Apriori are taking spend management to a whole new level, especially in manufacturing (even though they are both attacking problems at different ends of the spectrum using two different approaches). Not wanting to spoil Brett’s upcoming posts over on Spend Matters, I decided to hold off on a post of my own.

In his “Getting Ahead of the Product Cost Management Curve”* post on Spend Matters [WayBackMachine], Brett points out that procurement and sourcing play a very critical role in understanding the product cost implications associated with the sourcing and purchasing of engineered components and that procurement and supply management can and should lead conversations regarding product costs since today’s spend management 2.0 solutions allow procurement and sourcing professionals to arm themselves with much more information about what drives costs and where there are opportunities to save money in direct materials and contract manufactured component categories. Furthermore, most of the current approaches in the market are highly complementary to each other and manufacturing companies should be working with all types of product cost management techniques to maximize their position in an increasingly competitive environment. And this last point is key. One solution is great – a small basket of complementary solutions that attack cost from all the angles is either better.

In his “Taking Control of Cost Management for Engineered Direct Materials”* post on Spend Matters, Brett points out that in the past, there have not been very good ways to systematically find cost inefficiencies and take action on them within engineered direct materials. Companies have developed cross functional teams, conducted six sigma projects, brought in consultants and domain experts, but none of them have had the direct access to the critical data and the analytical tools to dissect it so they could have a clear picture on the factors that drive cost inefficiencies in the direct materials across the organization.

However, today, analytical solutions are available for product cost management that can take the data that is within your control – financial, purchasing, supplier, and manufacturing – analyze it, and present you with a highly accurate list of parts that have potential cost savings. Additionally, these analytical solutions provide reasons why these savings opportunities exist and potential actions to take to capture them. The analytical solutions can then be complimented by activity-based cost models, risk management solutions, supplier relationship management solutions, and e-Procurement packages that help execute on the actions.

Furthermore, Today’s product cost management analytics work by drawing out the elemental factors within the part and its manufacturing requirements that drive the cost. They then analyze this data to determine commonality and comparability, and can predict target costs. They augment (and sometimes correct) this predicted cost with data that determines the factors that may contribute to cost inefficiencies (you can think of it as the evidence that makes the case). From this combination of approaches, these analytical solutions can accurately assess which parts are good renegotiation candidates, which parts are good resourcing candidates, which suppliers are best at each part, and other actionable findings.

This last point is key – and why you should use a basket of complementary solutions, starting with Akoya and Apriori. Akoya helps you figure out where you are likely overspending and why, and Apriori helps you figure out by how much and what you do about it, with its process-based mechanistic cost models. In other words, given the forest, Akoya helps you find the trees that need to be cut down and Apriori is the saw you use to tackle the trees.

For another perspective on Akoya, refer back to Jason’s “Spend Management Goes Upstream: Part 3 – The Akoya Philosophy” post.

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

CombineNet Comunique VIII: CombineNet Energy

Recently, CombineNet (acquired by Jaggaer), one of the few companies lucky enough to have inspired a whole series of posts (I, II, III, IV, V, VI, VII) on this blog, launched CombineNet Energy which, although it sounds like a new sports drink, is actually a re-launch of their advanced sourcing application platform with built-in decision guidance systems for the energy sector.

As you may know, back in 2003 CombineNet, in a leading initiative, formed an Energy Division, which, considering the recent energy crisis, doesn’t look nearly so crazy or risky in hindsight. According to their

solution overview, in a competitive energy market place, shareholders insist on strong financial performance, customers expect reliable and affordable service, and regulators require detailed reporting and compliance. In this pressured environment, CombineNet Energy offers proprietary, optimization-enabled decision guidance technologies that enable energy executives, policy makers and business managers to address the most complex strategic, financial and operational issues confronting the energy industry. CombineNet Energy’s advanced technologies help energy companies increase operational efficiencies and maximize profits.

In addition to their advanced sourcing platform, based on their Expressive Bidding and Scenario Builder offering, they are now offering a Gas System Guidance System, GS2, that they are promoting as an entirely new breed of operational and financial planning tool for the natural gas industry that simultaneously analyzes all elements of the vertically-integrated natural gas operation, including supply, transmission/compression, storage, operational solutions and contractual constraints, to guide weekly, monthly, and annual operational decisions that maximize profits and efficiency. It sounds very interesting – pipeline optimization is a tricky problem. At any one time, you can only pump one-way, and it’s hard to predict exact demands in advance. They even have a Video Demo, which is kind of neat.

The also have an on-line flash-based value-assessment Calculator that an energy company can use to estimate it’s potential cost reductions using the CombineNet tool (which is quite important because this type of technology comes with a hefty price tag, and not every one understands that the rewards can be many times greater than the investment). For example, given the number of Local Distribution Companies, the annual operating revenue, annual gas purchase expense, annual volume of gas withdrawn, the weighted average cost of gas, the annual transportation expense, and the property, plant and equipment balance, it is able to calculate an estimated range of savings that would be obtained using CombineNet’s solution. Check it out.

I’ll eventually get to my promised “Powers of POE” piece …