Monthly Archives: January 2008

Supply Management in the Decade Ahead X: Collaboration

This post continues our coverage of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead” (a detailed report based on research jointly undertaken by the ISM, A.T. Kearney and CAPS Research), and our review of the seven critical supply strategies for succeeding in a dynamic world in particular, with the fifth critical supply strategy identified by the report – collaboration.

Unlike the days of old where a company could extract gains by creating competition in their supplier markets in order to use the “invisible hand of the marketplace” to maximize value from competitively sourced suppliers, the new marketplace requires collaboration to achieve value above and beyond what you are realizing today.

Respondents to the study identified the following three strategies as the top three internal collaboration strategies for an enterprise:

Use cross-functional teams for category and supplier strategy development and implementation
Establish shared goals and objectives between the supply management organization and other internal organizations
Integrate business planning and supply management processes

Respondents to the study identified the following three strategies as the top three external collaboration strategies for an enterprise:

Collaborate with suppliers and customers to reduce supply chain costs
Provide transparency of cost and financial information throughout the supply chain
Collaborate among supply chain companies to root out waste

The study itself highlighted the following four generic key success strategies:

Internal collaboration and integration must advance further if companies are to capitalize on their future needs
External collaboration will require a shift from competition to partnership for some segments of a company’s supply base
Technology will be necessary to enable an increase in collaboration
Companies must be willing to jointly work through their concerns with risk and IP protection

The study then went on to highlight some keys to external collaboration:

Manage Strategic Suppliers
Collaboratively Obtain Innovation
Block Competition through technological exclusivity and tying up supplier capacity
Increase Transparency

I’d like to focus on the first and third recommendations. Managing suppliers might be good, but enabling suppliers is much better. Give them the tools and information they need to help you be a better supplier to your customers, and your gains will be greater. Blocking is also good, but blocks have shorter and shorter life-spans as time goes on. Considering that your supplier probably obtained at least some of it’s new technological capabilities from a vendor itself, it won’t be long before it’s competitors have the same capabilities and your competitors line up partnerships with them. the doctor thinks that a better strategy would be to become the strategic customer to your strategic supplier and work with them to continually outpace your competition.

How much do you know about your (corporate) spending?

Today I’d like to welcome Bernard Gunther of Lexington Analytics, a specialist consultancy in spend analytics based in Lexington, Massachusetts.

How well do you understand the pricing you actually get from your vendors? Many companies don’t know as much as they should. Think about a typical situation:

Last year you finished a sourcing project and signed a contract with a vendor. The entire team, including purchasing, the business line and finance all believe the new rates will save the company significantly. Since then you have been buying from that vendor. Now, a year later, you want to know, are you getting the pricing you expected to receive?

How much do you really know about the spending? There are seven simple questions that you should consider. If you are managing your vendors properly, these should be easy for you and you should have the analytics to support them. If these are hard to answer, you have to ask yourself, “Do I really know what I’m paying for?”

Contract Pricing
Does your contract contain a pricing schedule?
This sounds simple, but surprisingly many contracts don’t have pricing. Sometime the pricing is buried in different statements of work. This can be fine if the pricing is consistent across all statements of work. But you have to ask, why can’t the pricing be transparently put into a single location where it can be referred to by other documents? This should be true if the pricing is contained in a schedule; a formula; a discount from list retail price; or even if it represents a discount from a benchmark.
Invoice detail
Does your invoice contain enough detail for you to determine which price you are supposed to be getting?
For each item on the invoice, can you tell the relevant contract terms to calculate the price? If you have fixed hourly rates for different types of electricians, but the invoice just states “Replace 10 power outlets – $1,546.05”, you have no way to confirm the pricing is correct. If your contract states you obtain a discount from a list price, do you have the list price on the invoice or even a separate table of list prices? If you don’t regularly capture these prices, you will find it very hard to reconstruct this data a year later.
Electronic invoice
Do you get the invoice data electronically?
If you are ordering electronically, this should be easy. If you only have paper invoices, doing any analysis is going to be difficult. You’ll have to have data entry done on the data before you can do any comparisons. Every vendor should be able to provide you with a spreadsheet with their invoice details along with each invoice.
Contract Coverage
For what percentage of the spending is there a price which can be calculated from the contract?
Using your electronic invoice data, you determine the portion of spending for which you can calculate the contract pricing. If this number is 98%, you have good coverage. If it is much less, you have to ask if you are comfortable or if you need to expand the coverage of your contract. For example, shipping rates might not be included in the contract pricing, but if they represent 1% of spending, it may not be an issue to worry about. If shipping costs end up being 25% of your spending, perhaps you should establish pricing (using your contract, their contract or a new contract). You may have a great price for PC hardware, but if 40% of your PC spending is not covered by the contractual rates, you need to understand the pricing on these other items.
Pricing correctness
For what percentage of spending is the pricing the same as in the contract?
For items you buy that can be priced from the contract, are you getting the contractual price? This may sound obvious, but errors happen. If you don’t check, you don’t know. Error rates can be significant, sometimes approaching 20% or more of the items purchased. If 20% of the items you purchased are at prices 15% higher than the contractual rates, you have just had a 3% price increase across the board.
Pricing trends
If the contract pricing allows for pricing variation (for example, if the price is a discount from list price), how does the unit pricing vary?
Are prices regularly rising where they shouldn’t be? Are prices flat when they should be declining? For example, you might expect general office supply pricing would stay flat; paper products might vary with the price of paper; technology pricing to decline; labor prices to vary based on market pricing; etc. Do prices drop when a new, lower price contract is put in place? Your analysis should be able to make these pricing changes transparent to all interested parties.
Demand mix trends
Has the demand for different items changed?
Is the change in the contract coverage a function of users buying new items? If you are measuring, in detail, how a vendor is used, you will understand, in detail, how the user demand is shifting over time.

Some people assert that this is all useful, but it’s too hard to do. If you don’t manage your spend data and do not have detailed contracts, it will take some work to do this the first time. But we’re talking a few days or weeks of effort, not months or years. Once you’ve designed your invoice data and contracts for easy analysis, using the right tools, these reviews can be done in hours. The value delivered can be significant. If you don’t look, you will never know.

Thanks, Bernie.

Supply Management in the Decade Ahead [2008] (Collected Links)

What Do Object Oriented Programming and Custom GUIs Have To Do With Actionable Data?

Note to the astute reader: This is essentially the same comment that I made in response to Jason Busch’s “It’s Not Just About the Data — It’s About Acting on the Data” post on Spend Matters on Thursday.

I don’t know, but if anyone can tell me, I’d be grateful. The Supply Chain Management Review recently ran an article titled “Supply Chain Measurement: Turning Data Into Action” that, apparently, uses a three step process to help you transition from making measurements to taking actions, which is, of course, the reason you’re measuring in the first place. If the measurements indicate that there is something that can be improved, then you should take action.

The steps are outlined as follows:

Understand Interdependencies – Use Themes and Patterns
Identify the Tradeoffs and Analyze Root Causes
Develop and Prioritize Action Items

I could be wrong, but I thought that patterns were generally used in object oriented design to represent standard relationships and interactions between objects and classes, without specifying the final application objects or classes that will be involved. In addition, I thought that themes were pre-configured graphical user interface customizations that are generally used to customize the look and feel of an operating system or window manager. I don’t see what either of these have to do with supply chain measurements. Furthermore, this looks more like a prescription for modernizing a classic procedural software application into a modern object oriented software application than it does for supply chain improvement. I have to say I’m just a little confused.

The article doesn’t help much. With regard to understanding interdependencies, it says to think of the data as a narrative; your job is to reveal the final story. A narrative? Are we supposed to be writing a work of fiction? Then it says that the data can be sliced into different thematics and that it’s helpful to visually map the metrics to the themes. Are we supposed to be creating works of art?

Then it goes on to say a a successful analysis of themes, interdependencies and tradeoffs reveals is where the levers are in your supply chain. Levers? Where did they come from? Now you have to be a mad scientist too?!?

About the only thing I understood in this article is that supply chains are complex, and that’s why you shouldn’t try to summarize everything about a supply chain in a single, short, article. Because you end up using so many metaphors that, by the end of it, your audience will, like Pinky, be stunned so senseless that all they can do is ask about the metal floors.

Where Pinky and the Brain Devise A Plan To Market Their Strategy

Pinky and the Brain
They’re Pinky and the Brain
Yes, Pinky and the Brain
One is a genius, the other is insane
They’re advertising guys
Their mind is on the prize
They’re dinky
They’re Pinky and the Brain, Brain, Brain, Brain,
Brain, Brain, Brain, Brain, Brain

Before each night is done
Their plan will be unfurled
By the dawning of the sun
Take over the sourcing world

They’re Pinky and the Brain
Yes, Pinky and the Brain
Their twilight campaign
Is easy to explain
To prove their sourcing grace
They’ll overthrow the space
They’re dinky
They’re Pinky and the Brain, Brain, Brain, Brain,
Brain, Brain, Brain, Brain, NARF!

Pinky	Gee Brain, what are we going to do tonight?
Brain	Same thing we do every night Pinky – try to take over the Sourcing World!
Pinky	How are we going to do that, Brain? Narf?
Brain	Remember last night’s lesson Pinky? Where I explained to you that we are going to market our strategy to take over the sourcing world?
Pinky	And what’s our strategy again Brain?
Brain	Come here, Pinky.
Pinky	OK, Brain.
Brain	Closer, Pinky.
Pinky	Why Brain? Narf!
Brain	Brain jumps up and conks Pinky on the head. For that!
Pinky	What’cha do that for, Brain?
Brain	Because last night’s lesson in marketing took ALL night. Even an ADD chimpanzee hyped up on caffeine would remember it. We didn’t even get started on our plan to take over the world!
Pinky	What was it about again, Brain?
Brain	About marketing our strategy to the Napoleons who also want to take over the sourcing world! They will serve as our lieutenants as I lead us to victory!
Pinky	I remember now Brain! Nog! It was about how the world shares cheese and neapolitan ice cream and that’s why we have to take over the entire sourcing world at once!
Brain	Yes, Pinky. If it makes it easier for your little pea-brain to understand, it’s about how the world shares cheese and neapolitan ice cream and that’s why we have to take over the entire sourcing world at once. But now that we’ve settled that, as part of our plan to market our strategy to take over the sourcing world, we need to create content that the Napoleons of tomorrow will want to read. We need to make sure that our first piece of content is really riveting.
Pinky	We’re not going to play in the toolbox again, are we Brain? Last time the hammer fell on my foot, it really, really hurt.
Brain	No Pinky, we’re not going to play in the toolbox again. We’re going to come up with inspirational content that will draw the Napoleons in like flies to a barn.
Pinky	How are we going to do that, Brain?
Brain	I’m working on it. Brain paces the floor for a few minutes in deep thought. He stops just as a look of evil inspiration crosses his face. Pinky, are you pondering what I’m pondering?
Pinky	I think so, Brain, but I don’t see how hiring Britney as a personal life coach is going to help us with our image problem.
Brain	No, you twit! We use the strategy of our biggest competitor, whose name I shall not utter, and find our own analyst or blogger who will write great content for us and then simply usurp that content to create our sourcing world domination web site. Since the central content will come from a trusted and credible source, our new site will be trusted and credible as soon as it launches. The Napoleons will flock to it! They’ll assume that because we too are smart enough to recognize the intelligence of the analyst or blogger, that we too must have intelligent things to say. So they’ll also read the messages we want them to read, and if we craft those messages carefully around the usurped content, a few of these Napoleons will buy in. They’ll spread the message and convince the other Napoleons. Soon we’ll have our own Napoleon army – and the sourcing world will be powerless to stop us!
Pinky	But how are we going to do that, Brain? Unlike the competitor whose name you will not utter, who has a much bigger budget than we do, I don’t think we can afford to buy off any bloggers or analysts – except for that firm downtown, but their reputation seems to be fading – and I get the impression that most of the bloggers and analysts with the reputations we’d want don’t really like us very much.
Brain	I know, Pinky. Which is why, instead of buying them off, we’re going to confuse them with humility.
Pinky	I don’t think that’s going to work, Brain. Some of them are pretty smart! Narf!
Brain	It only has to work long enough for them to take a close look at our new hypno-spend tool, Pinky.
Pinky	The what?
Brain	The hypno-spend tool. It’s our slicked up spend reporting demo tool with a brand new UI that uses pleasing colors, smooth curves, tranquil sound effects, and spinning coins to signal screen changes. When paired with our new demo specialist, whose soothing voice sounds just like Ben Stein, who has extensive training in hypnotism and suggestion, no one can resist our story that automated cleansing is the key to spend analysis.
Pinky	But I thought analytics capability was the key to spend analysis, Brain! Narf!
Brain	Smack! Brain smacks Pinky upside the head again. I told you never to say that again!
Pinky	I’m sorry, Brain.
Brain	As I was saying, five minutes into the demo with our new hypno-spend tool, and they’ll believe the moon is made of green cheese!
Pinky	Green Cheese! Yum! Can I have some, Brain?
Brain	Pinky, you fool! I was just using a metaphor!
Pinky	A metal floor? Like the one in our cage?
Brain	No – a metaphor. Where you use a set of words to represent a concept.
Pinky	Oh.
Brain	Would you like a demo, Pinky!
Pinky	Sure Brain.
Brain	Pinky, Feast your eyes on the hypno-spend tool!
Dot	Oooh! Pretty Colors!
Brain	Dot! What are you doing here?
Pinky	Dot? Dot! It’s good to see you! It’s been … it’s been …
Brain	Years! Dot, what are you doing here?
Dot	I came to say hello!
Pinky	But didn’t Mr. Plotz forbid you from ever setting foot in this building?
Dot	He did. But he also let us go.
Pinky	Go where?
Brain	She was fired, you twit!
Pinky	Set on fire? Gosh! That sounds painful.
Brain	No, no, NO, Pinky. She means she doesn’t work there anymore.
Pinky	Oh.
Dot	Yes, I’m free. Free to find new opportunities. Free to explore the sourcing world! Free to look at applications with such pretty colors!
Brain	Do you like it? It’s our new prototype hypno-spend tool.
Dot	Hypno-whattie?
Brain	Hypno-spend tool. When it’s combined with our master Ben-Stein sound-alike hypnotist, anyone who sits through a five minute demo will believe that automated cleansing is the ultimate key to spend analysis!
Dot	Okay. Whatever. I just think it’s pretty. But I think it would be even prettier with swirling pink instead of swirling purple.
Pinky	Hey, that’s a great idea, Narf!
Dot	Let me fix it for you!
Brain	No! Don’t touch that! It’s still a prototype! There’s only two copies – one on the computer and one on the portable hard-drive!
Dot	Don’t worry, I know what I’m doing!
Pinky	Ooh! That’s sooo pretty!
Dot	Just wait until you see … oops!
Brain	Oops? What did you do?
Dot	Well … you had your keys mapped a little differently than I’m used to … I kinda deleted it!
Brain	DOT!
Dot	You have a back-up, right?
Brain	Of course I have a back-up. Pinky, hand me the back-up.
Pinky	The what?
Brain	The external hard drive. The shiny metal box I asked you to keep safe.
Pinky	Oh, that. Just a sec, Brain. I’ll go get it. Pinky disappears for a few seconds. He returns with an extra shiny external hard drive. Here you go, Brain!
Brain	Pinky, why does it feel a little bit damp?
Pinky	Well, you told me to store it in the safest place I know, and the safest place I know is under my water bowl?
Brain	You what?! Don’t you know that water shorts out electronics?
Dot	Oh, don’t worry so much big Brain. I’m sure it’s okay.
Pinky	Yeah, Brain! Nog! It’s just a little water!
Brain	Let’s see it! Brain hooks up the external hard drive. He hits the power switch. Ka-Boom! Piinnkkyy!
Pinky	Yes, Brain?
Brain	It’s time to return to the marketing cage.
Pinky	Why, Brain?
Brain	To prepare for tomorrow night.
Pinky	What are we going to do tomorrow night? Narf!
Brain	The same thing we do every night, Pinky. Try to take over the sourcing world! Good night, Dot.
Dot	Good night!