Monthly Archives: November 2009

Masco Knows the SCORE

I enjoyed this recent article over on Supply Management . com on how when you “know the score”, like Masco, and use collaborative two-way scorecards (like Canada Post does), you can save a lot of money. Masco saved over $5M with its pilot project with just one supplier, exceeding their initial savings goal by over 40%. And that’s just the tip of the iceberg. When they roll the program out to their other strategic and high-volume suppliers, I’m sure they’ll save 10 to 100 times that.

Although it’s hard to measure, and even harder to define, true collaboration — where both parties commit to continuous improvement — works. And it generates significant returns when both parties work together and merge their strengths, knowledge, and experience pools. This is because, as the article points out, good collaborative two-way scorecards will:

  • Put the strengths of your purchasing professionals to use
  • Leverage suppliers with whom you do significant business
  • Transfer technical expertise from suppliers to you and vice versa
  • Focus on win-win opportunities that engage both parties
  • Allow both parties to honestly evaluate operations and identify areas for improvements and realistic targets

For more on Masco’s Score methodology (formally labeled their Supplier Collaborative Cost Reduction Evaluation initiative), see the article. It also has their five steps to success, which, though high level, are pretty good.

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Overcoming Cultural Differences in International Trade with Korea

Today’s post, which is partially based on materials from Dick Locke’s seminars on International Purchasing, is edited by Dick Locke, Sourcing Innovation contributor and President of Global Procurement Group and Global Supply Training.

This post is going to examine some of the cultural differences that you may encounter (as an American or Canadian Sourcing / Procurement Professional) if you are doing business with Korea. We start by discussing each of the eight key cultural considerations outlined in our introductory post and then highlight a few other points that you should be aware of.

As per our initial post, this discussion is high-level and general in nature and, as Dick Locke points out in his classic text on Global Supply Management, while it is too easy to stereotype a country, individuals in each country will vary from the stereotype. You need to take time to get to know the people you will be dealing with because their behavior may be nothing like the usual behavior of the country in which they reside and there is always a chance that you might run into people who are trained to act like you … while in your presence.

While Korea, and more specifically South or the Republic of, has a lot of similarities with the Asian countries that surround it, it also has a lot of differences. Having built the third largest Asian economy in less than half a century, starting with low-cost high-quality export production and then a move into high-tech high-value-add in the 90s, they tend to move at a rapid pace. Also, as (recent) history has taught them that compromise leads to defeat and second place spells disaster, they are extremely competitive. They are always looking for an advantage, quick profits, and a quick sale … which is generally more important to them than the development of solid, long-term, business relationships (which the Chinese and Japanese prefer to focus on). As a result, you should be careful of exclusivity and focus on shorter-term awards based on past-performance.

  • Power DistancePower distance is moderately high in Korea. They have a vertical society that strictly observes protocol. You must show a Korean the respect he deserves based on status, age, and rank … or risk being outcast. However, unlike many other Asian cultures, this does not prohibit you from being tough in negotiations … they expect it.
  • Uncertainty AvoidanceHofstede’s classic work indicates that they are high on uncertainty avoidance, but this is not really the case. Of all the Asian countries, they are among the most willing to experiment and take risks, as long as the reward is there. They are also very creative and inventive.
  • IndividualismDue to the structure of their society; their core beliefs of kibun, hahn, and Confucianism; and their obsession with the survival of their society, they are not very individualistic when compared with the Western world. However, their tenacity and outgoing nature makes them more individualistic than many other Asian countries.
  • Polychronic vs. Monochronic TimeKorea is very monochronic. Punctuality is very important and they abhor wasting time. They are always striving to beat the Japanese and this requires getting the most out of every minute.
  • Personal / ImpersonalIn Korea, personal and family relationships are very important. As a result, good, personal, relationships are important for business. However, while Korean businessmen will shake hands, it is critical to remember that touching is generally an affront in their society, so no “pats on the back” unless they do it first, you’re at a social event and inebriated, and you’re willing to apologize for it immediately and the next day.
  • Buyer / Seller RankYour rank as a buyer is quite low in Korea compared to other Asian countries. They are strongly focussed on profit and have an innate distrust as foreigners.
  • Importance of HarmonyWhile Korea is still strongly influenced by the teachings of Confucius, and the correctness of social relationships that bring harmony, they are also strongly influenced by hahn, which describes the build-up of pent-up energies, unrequited yearnings, and general frustrations that developed under conditions of extreme hardship and oppression. As a result, they are more prone to violence than other Asian countries, very nationalist, and very, very competitive. So while harmony is important, especially since it also relates to kibun, it is not nearly as important as it is in Japan, or even China.
  • Importance of FaceKibun, which roughly translates as face or reputation, is a very sensitive issue for them, on part with Japan. They see it as correct behavior necessary for social balance and it is part of their strong sense of honor.

Finally, it is very important to socialize with Koreans if you want to build a business relationship. Accept every offer for evening entertainment (and read up on their dining customs first), even if you need two teams to keep up with them.

Finally, as I strongly recommended in my first post, if you plan to start doing business with any new international country, including Korea, you should do a thorough job on your homework. You can start with:

  • Dick Locke’s course on the Basics of Smart International Procurement (which is offered through Next Level Purchasing and counts towards the SPSM2 certification or ISM Continuing Education Hours), or
  • a customized seminar from Dick Locke’s Global Procurement Group. Dick Locke and his associates each have decades of experience doing business with over two dozen countries, including the fifteen biggest importers and exporters to and from the United States, and Korea. A single day with an expert like Dick Locke could save you months of headaches.

Again, a big thank you to Dick Locke for serving as editor for this special series of posts and providing some up-to-date materials and information for the purpose of this series.

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Cost of NOT Using Modern Supply Chain Systems: 6.8 Billion

A recent article over on CNN Money that noted that the store theft cost to your family, largely due to a 9% jump in retail theft over the past year, is $435 — as shoplifting, employee theft, and supply chain fraud cost retailers $42.2 Billion between July 2008 and June 2009, had a surprising revelation.

Breaking this mega-loss down, we find that:

  • 18.7 Billion is due to employee theft
    which could be considerably reduced with better screening, security and processes
  • 15.0 Billion is due to shoplifting
    which could be somewhat reduced with better security, but will likely always be a problem
  • 6.8 Billion is due to processing, supply chain errors, and frauds
    which could be eliminated with good systems and processes
  • 1.7 Billion is due to other causes

There’s no excuse for any errors. Good end-to-end e-Procurement systems can match every invoice against the purchase order and contract and make sure you’re only paying for what you ordered at contracted rates. Good forecasting and inventory tracking systems will prevent costly errors. And good visibility systems will allow you to spot any exceptions as soon as they occur and stop frauds, and fraudsters, in the act.

So now that you know that not using this technology is personally costing you, and everyone else in your organization, about $70 a year, why aren’t you using these systems? The reduction in loss alone over their service life-time will more than pay for them. (Not to mention the savings that a good sourcing, e-procurement, or inventory system can help you identify!)

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Trade Extensions Trades Up Its UI and e-Negotiation Management Capabilities

About a year ago, I introduced you to Trade Extensions (TE) on the eleventh day of X-Mas. A provider of an extensive on-demand e-Negotiation platform, Trade Extensions is an emerging player in the global e-Sourcing marketplace — one that offers negotiation management, extensive RFX, and (reverse) auctions with embedded real-time decision optimization.

Since my initial coverage, Trade Extensions has made the following significant updates to their platform:

  • a brand new UI across their end-to-end system
    The new UI is crisp, clean, and click-minimal. It’s quick and easy to use and very self evident. Plus, their online help pages are very extensive and updated regularly by the entire TE development and consulting teams.
  • integrated data cleansing & classification capabilities
    Have to fix a lot of data? Just create a rule and map it, just like you’d do in a spend cleansing and classification system.
  • OLAP Reporting for Scenarios
    Users now have access to full OLAP capabilities when viewing scenario results and reports.

In addition, the following features, which I have not covered before, have been improved:

  • extensive modifications to their bid supplement functionality
    Data — pricing, discount(s), rebate(s), etc. — can be captured at any level (supplier, business unit, plant location, etc.) and used for mark-ups, discounts, qualitative scores, or as the basis for any formula(s) the user wishes to define.
  • flexible bid forms
    Not only does TE support full Excel integration, but bid forms can be designed by the user to fit their business needs. There’s no need to force your information into a single system format. A user can create additional worksheets, add columns and rows to existing worksheets as required and add macros and formulas without interfering with the platform’s ability to read completed bid forms.
  • outlier analysis and statistical reporting
    The platform can automatically detect bids that might be too high or too low and flag them for your review (after you define your outlier rules, such as specific bid field values x% away from average / historic / custom calculation). The platform also includes a number of statistics reports, including a parameter statistics report that contains a detailed analysis at the lot and bid level.
  • composed filters
    Filters, which allow you to define constraints on any set of suppliers, ship from locations, ship to locations, products, etc., can now be defined on other filters to allow for very easy, and very powerful, constraint creation.
  • selection sheets
    Excel spreadsheets can be used to define allocation constraints, discounts, penalties, and multipliers … greatly simplifying discount and constraint creation in many cases.
  • project management functionality
    100% integrated into the cohesive e-Negotiation platform, the project management functionality allows for the creation of phases and tasks, the allocation of resources to phases and tasks, and the creation of scopes (by supplier, geography, etc.) as appropriate.

They’ve also continued to increase its power. Consider a recent project run by a financial services firm that tendered all of the components of a direct mail project that would result in the mailing of 1.8 Billion documents. The project, which consisted of 65,000 items, 60,000 transport destinations, and 400,000 bids from over 100 suppliers was valued at $1 Billion with a “B”.

The project was to ultimately deliver documents to the firm’s customers, but to get to that stage each part of the supply chain needed to be tendered. This included design, paper supply, printing, assembly, and transport. The project was completed as a single tender with offers collected on-line and all components tendered concurrently. In addition, suppliers could make conditional offers that reflected their own efficiencies that could present the firm with further savings. This was a project that could not even be attempted by hand as it would take someone close to two weeks just to scan each bid. There’s no way someone could even fathom attempting to optimize this scenario if all they had was a spreadsheet solution that couldn’t handle more than 65,536 rows.

Finally, TE is one of the few players in the market to make their pricing scheme public.

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Target Costing Works and You Can Do It Too!

A recent article in Purchasing on how “purchasing learns cost modelling” noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpool was able to close a gap of 30% between the target cost for an aesthetics module on one product and the initial design cost by way of a cross-functional team that included purchasing, marketing, sales, engineering, global design, production, and quality control. This greatly improved Whirlpool’s chances of hitting its profit target while saving it a bundle of money up front.

The concept, which dates back to the Toyota Production System and the beginning of Lean, is starting to take hold in a number of big companies like Boeing, Olympus, Komatsu, LG, and CAT and getting great results. But it’s not just limited to large companies, even though most of the articles I see, including this one, give you that feeling.

Thanks to not-so-new players in the market, like Akoya, which was founded in 2004 and offers an impressive industry-leading competitive banding solution, and Apriori, which was founded in 2003 and offers impressive industry-leading virtual production environments, mid-size companies can get in on the action at relatively low cost and save millions for literally pennies on the dollar.

With one (or both) of these partners on your team (as their solutions can be used complementarily, and I know of at least one big mutual customer that does so to great success), you can jump-start the process and see savings in a matter of weeks. Literally. But don’t just take my word for it. Take their customers’ words — and results. If you call them, I think you’ll find that they’ll happily give you relevant references. Their products help you get Lean fast, and it’s a shame they get so little press because it doesn’t take a massive Lean transformation to get started on your target-costing journey (even though that should be your ultimate goal).

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