Monthly Archives: September 2008

Why is the Perfect Order So Difficult?

Reading the latest research, you’d think that finding the Holy Grail would be easier than filling a perfect order. According to Benchmarking the Perfect Order, a recent study by Kate Vitasek of Supply Chain Visions and Karl Manrodt of Georgia Southern University that was commissioned by the Vendor Compliance Federation, the Perfect Order Index for 2007 was a measly 27.2%, assuming that every order was damage free (due to data unavailability for a proper estimate). Let me say it again — 27.2% at best! That means that three out of every four orders was flawed. That’s performance so bad, that it’s three times worse than the US aviation industry, the poster child for poor performance, where, on average, only one out of four flights was delayed.

After all, how hard should it be to deliver an order:

  • on-time,
  • complete,
  • damage free, and with
  • correct documentation

Think about it:

  • you know the delivery date when you agree to the order,
    and you shouldn’t be agreeing to anything you can’t deliver on
  • you know, line item by line item, what you have to deliver,
    as well as how many units are required
  • you know the fragility of your products,
    and should be packaging and handling them accordingly, and
  • you have to know the documentary requirements, especially if you’re exporting
    as failure to know can result in seized and destroyed shipments at your expense

So what’s the problem?

Well, obviously, you are!

But Why?

That’s the Billion, if not Trillion, dollar question, isn’t it? And the answer is, ultimately, that you’re not prepared for it. Why not? Although it’s hard to say in any individual case, it’s most likely because you haven’t shifted your focus from internal performance to customer delivery. In essence, you haven’t prepared for it. Instead of abondoning outdated software, processes, and metrics that focus on you for newer software, processes, and methods that focus on the customer, and allow you to get everything that really matters right, you’re still using the software, processes, and metrics that you were using 20 years ago during the quality revolution.

Let me explain.

With regards to on-time, most of you are probably still tracking “on-time” as shipped on-time with respect to whatever internal production and distribution schedule you devised. When you ship is irrelevant if the stores need it by Monday for a promotion on Tuesday that’s expected to generate tens of thousands of sales. If on-time to your system is “shipped four days before due date”, but you’re shipping by truck from Texas to Alaska, you’ve got a problem! With limitations on how many hours a driver can drive in a day and border delays, you ain’t gonna make it. You need logistics management software that understands minimum, average, and worst case delivery time requirements (by season) and you need to schedule each shipment to a different location in a large order separately.

With regards to complete, you can’t tackle it on a line-item by line-item basis, split across half a dozen shipments on two different carriers and wash your hands of it when the system says everything’s shipped. It’s only complete if it arrives complete. This means that you have to have an extensive shipment and delivery tracking system in place to insure that everything in a disaggregated order hits the checkpoints that need to be hit when they need to be hit so that part of an order doesn’t get lost. Again, just shipping it “complete” doesn’t make it “complete” if you’re breaking the order up across shipments – because then all shipments have to arrive by the designated date and time for the order to be complete. You need a web-based supply chain visibility solution that can be utilized by your partners to update progress as it happens.

With regards to damage-free, you can’t just package it in accordance with minimally acceptable padding, check a box, dust your hands, and call it a day. You have to ensure that all third parties in your distribution network that handle the product do so with the necessary care and that it passes through each checkpoint undamaged. If one of your distributors screws up and breaks something, you need to get a replacement shipment out, and maybe even expedited, before it arrives broken and useless at the customer site. Again, you need a web-based supply chain visibility solution that can record the order status as it clears each checkpoint.

With regards to correct documentation, you need to make sure that all of the documentation required by each check-point is included before it leaves your facility. These days, if you’re importing or exporting, this requires a Global Trade Management Solution, because it’s almost impossible to manage the dizzying array of requirements otherwise.

In short, unless your key metrics have been defined to be 100% customer-focussed, and you have the proper logistics management, supply chain visibility, and / or global trade solutions in place, you’re not going to be able to achieve the perfect order the majority of the time, and the perfect order will continue to be a “holy grail” when, in actuality, it should be a common occurence. The solution, like the problem, rests with you.

Centering the Pack: Ron Southard, Randy Littleson, Justin Fogarty

Slowly but surely, the Seven Grand Challenges of Supply and Spend Management cross-blog series is lumbering along. Since my last post, Ron Southard of Safe Sourcing, Randy Littleson of The 21st Century Supply Chain, and Justin Fogarty of Supply Excellence have offered us their (introductory) posts on the subject.

Ron starts off with a tale of technology, noting that to some extent, too much thought leadership in these technologies is being invested in games, consumer gadgets and the like instead of less sexy tools focused on reducing the cost of goods which will instantly improve profitability and foster economic growth creating new jobs. Especially when the technology exists today to attack the problem of escalating costs of raw materials, shipping, retail price increases and other associated supply chain costs, as it has for years. And it’s only getting better. As I am attempting to illuminate in my B2B 3.0 series, innovative companies have been, and still are, introducing technologies that put buyers on even footing with consumers — and the only thing standing in the way of a better business model is adoption. (I urge you to check out the inaugural Sourcing Innovation Illumination Introducing B2B 3.0 and Simplicity For All as well as the upcoming Illumination on why Simplifying B2B for Suppliers Enables Buyers, to be released next Tuesday.) You can be sure, based on his initial post, that his contribution is going to be a good one.

Randy decided that five challenges alone were enough to fill your plate, and gave us his list, which contain a couple of doozies:

  • Connecting Outsourcing and Lean
    Lean requires synchronization, and outsourcing, at least today, makes synchronization a challenge.
  • Controlling That Beyond Your Control
    A huge challenge for brand owners will continue to be balancing the issues of being in control when they are not directly in control of all aspects and to continually adjust to changing conditions “on the ground” that impact costs.
  • Sustainability
    This is a real and serious issue that will only increase in priority on a global basis. Since it fits in with one of my seven grand challenges, I have to agree!
  • Identifying Supply Chain’s Role
    Too many companies are taking far too tactical a view on their supply chains. I agree, and so does Bob. So what are we going to do about it?
  • Volatility
    … things are moving at a faster pace and customer expectations continue to climb while their loyalty is less. Volatility is on the rise …

Justin decided to skip the challenges get all prophetical, but at least he took a page out of my B2B 3.0 handbook. Noting that it’s obviously difficult to envision exactly how the medium will look from a UI or feature/function standpoint on the 30 year time frame … I think it’s safe to say that finding potential suppliers will be easier via powerful discovery tools and networks. And that’s just the start. Starting with communities like and CustomPart.Net, and moving on-to custom mash-up search engines like the Supplier Search Engine, the movement is already starting. As for suppliers … they’ll have a greater ability to evaluate their buyers and potential customers. Tomorrow’s B2B 3.0 will be interactive, and will allow for true collaboration, not just data-push. Companies like Co-exprise and Apriori are starting to make that happen in new and innovative ways for direct and custom-part manufacturers. And the new world provides tremendous opportunity for buyers and suppliers who embrace discovery and discussion, as Vinimaya is demonstrating with its new enterprise search technology. The opportunity is there, but, more importantly, as Justin astutely points out, those companies that fail to adapt to increasingly connected world, the challenge may be staying afloat.

Also, in addition to Bernard Gunther’s commentary on Opportunity Analysis that went up Monday, Bob Ferrari has posted parts two and three of his series as well!

A Tale of Murder and Intrigue in India

The Murder: I just read a short piece in Supply Chain Digest that noted that Lalit Kishore Choudhary, the India CEO of an Italian transmission company, was murdered by an angry mob after dozens of angry laid-off workers pummelled him during a meeting to discuss possible re-instatement.

The Intrigue: Searching for further information, I found this story in Industry Week which quoted India’s labor minister, who declined to criticize the attack, who said it should serve as a warning for management, workers should be dealt with compassion, and the workers should not be pushed so hard that they resort to whatever happened.

WTH?!? As far as I can tell, it sounds like the labor minister is saying that if you get fired for violence, and the discussions to reinstate you don’t go your way, that you can form a mob and kill your former boss. What?!?! You have the right to demand better pay and employment guarantees, but in today’s economy, you can’t expect the latter. If you don’t get what you want, you have the right to leave, and if you get laid off, you often have the right to severance. But you don’t have the right to resort to violence, and you definitely don’t have the right to kill your boss — who may not even have any say in the matter. Even the CEO has to answer to a self-serving Board of Directors!

According to the Industry Week article, a domestic industry body said the incident would hurt India’s international business image. Furthermore, the Federation of Indian Chambers of Commerce and Industry has said that such a heinous act is bound to sully India’s image among overseas investors and deserves our utmost condemnation. All I have to say is that I nominate that as industry statement of the year. If the reporting is accurate, the labor minister effectively said it’s okay to mob and kill your boss if you get fired for violence. Who’s going to want to open an operation in India in that economic climate?

(Supply Chain) Initiative Cost Justification

Last year, over on the e-Sourcing Wiki, I brought you The Quest For Purchasing Fire, a guide on how to develop the internal strategies for selling the procurement tools internally. This process had two key steps that, if not done properly, could be major stumbling blocks in getting your initiative off the ground. These key steps were defining the value proposition and building the business case.

The fact of the matter is, when you get right down to it, often the biggest stumbling block is to secure funding for your initiative. Unless the project happens to be a pet project of the CEO or CFO, chances are you won’t be able to secure funding unless you have a clearly stated and easily understood kick-ass value proposition and a well-researched and documented business case to back it up — preferably one that shows big dollar signs to the company’s favor. Thus, it’s important to zero in on the cost-justification in both of these steps and reduce the decision to one that should be a no-brainer ( especially since we know that, in some companies, it would appear that having a functioning brain is not a requirement for an executive position ). If your CEO and CFO can see a significant ROI, which includes an ROI in the near-term, which they know makes Wall Street and / or the private investors happy, they’re much more likely to find the money you need “in the budget” than if they don’t see a savings opportunity that will make them look good.

That’s why it was nice to see an article last month over on the Supply Chain Digest site that offered up six steps to improved cost justification for supply chain and logistics initiatives. Simply put, when it comes to understanding the best way to put together a cost justification for your project, you can use all the good, free, advice that you can find.

The article offered up six useful guidelines to consider when putting together your value proposition and proposal. At a high level, these guidelines were:

  • Understand your company’s investment analysis model
    What does your CFO care about? IRR (Internal Rate of Return), PP (Payback Period), NPV (Net Present Value), ROIC (Return on Invested Capital), etc? Make sure to use the measures your CFO is comfortable with and wants to see. It will help insure that your proposal makes it to the top of his pile.
  • Link funding requests to key corporate strategies and objectives.
    The CEO wants to further the corporate strategies and objectives outlined by the Board, because, simply put, his success in that area positively impacts his annual review, and bonus. Talk to those strategies. That will make sure your initiative gets his attention.
  • Develop a Strong Summary with a Detailed Back-Up
    Your CEO is busy. Very busy. Probably doing stuff that’s not all that important (but that’s not entirely his fault – boards and wall street like to waste an executive’s time), but stuff that consumes his or her time nonetheless. Therefore, it’s important that you have a strong, straight-to the-point, executive summary that says why the company should do this, and what results it will have … because that’s all he or she might have time to read. However, if your CEO likes what she hears, he or she will ask the CFO or another member of the management team to “dive into it” which is where the detailed calculations and supporting materials come into play.
  • Use the Numbers to tell a story.
    Remember, the CFO likes numbers. So base the story around those numbers. “We will generate a 300% ROI by implementing an e-Procurement system that … “.
  • Review Preliminary Justification with Key Stakeholders
    And make sure to to have them verify every assumption that you make. The last thing you want is for the manager tasked with verifying your submission to find that one of your key assumptions is wrong. Even if the affect is minor on the final ROI calculation, being overworked, he’ll likely assume that the whole plan must be faulty, throw it out, and vote nay without even giving you a chance to correct it. But if you meet with the key stakeholders and everyone agrees, you can get it more-or-less right the first time and not have to worry about your initiative getting killed off before it even has time to begin.
  • Triple Check to Eliminate Math Errors and Risky Assumptions
    A CFO is likely to assume that if you can’t add, since you have a spreadsheet to do it for you, you probably can’t do anything else you say you can do either, and deny your project without even considering it. And CEO’s don’t like risk, so if you can get (almost) the same results with less risky assumptions, you should use them.

Good advice all around.

Opportunity Analysis: The Challenge is Having Accurate and Usable Spend Information

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Sourcing Innovation‘s “Seven Grand Challenges for Supply & Spend Management“, lists the seventh challenge as “Opportunity Analysis”. As a practitioner, I can report that bad procurement data is the biggest obstacle to successful opportunity analysis. By “bad” I mean procurement data that exists when the items are purchased / invoiced is not captured and made available for future analysis. The ongoing data analysis is rarely designed into the procurement process making the analysis hard to do and therefore rarely done.

I find it surprising that half of the large companies I deal with don’t have a formal process for analyzing their AP data. Though they may dump transactions from their AP system into a spreadsheet or a data warehouse, the data is raw and unprocessed and not consistently analyzed or well understood. This is not proper spend analysis, it is flying blind. If the quality of procurement information is so lacking for AP data — the most basic spend data — imagine how bad it is for invoice level data where pricing accuracy can be determined

Accurate and usable procurement information requires source transaction data, ways to enhance that data, and processes to get value from the enhanced source data. The data should be collected and analyzed as part of the regular purchasing process. Data analysis should be designed into the process flows. I will illustrate some of what’s involved to answer the simple question, “Did I pay the right price for an item?”

At a high level, the source data includes:

  1. “Transaction level” information on each purchase that includes: what is purchased, the unit pricing, the amount bought, who bought it, and data to link each transaction to the order, the payment and the contract. The specific data available will vary depending on the commodity. Airline information is different than computers, which is also different than facilities management.
  2. Contract information structured so that each item on every invoice can be priced and stored in a way that links them to transactions.
  3. Payment information which identifies the vendor being paid, who bought the item, which transaction detail links to the payment.

Data Enhancement: Making the raw data meaningful.

  1. Commodity assignment. For an item level cube, the commodity assignment will be more detailed than an AP cube and may be based on the description, the part number, or other attributes of the item.
  2. Pricing context. Each item purchased should link to the contract price, historical pricing, benchmark pricing (internal and external), and other information that puts the unit price paid into context.
  3. Cross item information. Some of the pricing comparisons need to be done across multiple items rather than against a single item. An analysis of the mix of team members on a consulting engagement or a legal matter would be an example.

Data Processing: Converting the meaningful data into actions that save money.

  1. Every month or quarter, the data needs to be collected, enhanced, and analyzed. The analysis should be able to answer such as:
    • Did we pay the contract price?
    • How much of the spending was off-contract?
    • How did the demand shift?
    • How much of the spending was on items that were not intended to be purchased?
    • Which organizations are responsible?
    • How much extra spending did this cause?

    Each company should be able to answer these basic questions in hours, not days or weeks. The data should be in-house and it should not require work from the vendor beyond originally providing the data as part of the invoicing process.

  2. Periodically, the team needs to answer questions like:
    • For a recent price change, what happened to the spending? If we applied the old pricing to the new spending pattern, how much would we have spent? Is this what was expected?
    • Is the mix of items we buy “optimal”? How much could we save by optimizing our demand?
    • How has the market price changed relative to our pricing? Is there enough shift that we should re-bid our spending?
  3. Use the data to generate savings, for example:
    • Request refunds for overcharges
    • Add more items to the contractual pricing terms so we can monitor the pricing moving forward
    • Shift the demand to generate savings
    • Negotiate with the vendor for lower prices

    And, on and on for different ways to leverage the information

This all sounds relatively easy. But it’s not happening today. Let me illustrate from a client example of office supplies. I don’t mean to pick on office supplies vendors, but this is a category with part numbers and contracts so it provides a good starting point for this type of analysis.

The client bought office supplies online through a punch out mechanism from their PO system. The vendor processes the orders, ships the items, and presents invoices for payment. The invoices are approved in the PO system and the vendor is paid per the contract. The contract was written 2 years ago and allowed for fixed (discounted) prices for the top 500 items being bought. When the contract was signed, 250 items were on the list. The new contract offered price reductions on certain items, which the sourcing team projected, would save 12%. Since the contract signing, most prices have been stable, with some exceptions for paper.

As the program was implemented by the client, there were a number of problems with the data:

  • For 20% of the items purchased, the item numbers recorded in the PO system did not match the item numbers in the contract. This was largely a problem of how the PO system recorded the data
  • The client could not state what percentage of the spending was for items with contract prices and what percentage was off-contract. The client needed to ask the vendor for this analysis.
  • The client had agreed to price changes, but did not track those changes and could not calculate the impact of those price changes on overall spending. Again, they had to rely on the vendor to track the pricing and do the analysis.
  • The buyers had shifted their demand, so that of the 250 items in the contract, over 75 were not being bought anymore and of the top 250 items being bought, there was no contractual price for almost 100 of the items. The vendor was waiting for authorization to add 50 new items onto the contract list (with better discounts).

This was all fixable. Fixing it generated incremental savings of 5% and improved the relationship between the client and the supplier. But it didn’t happen until we, the consultants, highlighted the problem and the opportunity.

Generally, we find that procurement data is a mess. And it shouldn’t be. But, this is why it’s a challenge.

Thanks Bernard!