Monthly Archives: October 2010

If the Supplier Walks Away Whistling …

… simply put, you didn’t do a very good job. While the supplier should be walking away from the table with a hint of a smile on their face, as you want a positive relationship, if they’re whistling a jaunty tune and dancing to it, you got suckered. And these days, it’s happening all too often.

As per this recent post on the SCM blogs by James Baehr of Greybeard Advisors on how last minute bids and contract extensions can limit leverage, contracts are being benignly neglected. Procurement professionals are too busy issuing quick bids and placing orders based solely on price. As a result, the decision criteria is generally limited to price and Procurement finds itself with little, if any, room to negotiate for a better whatever. Furthermore, many buyers have taken to simply extending existing contracts, sometimes two or three times. This leaves money on the table and compromises leverage since the organization generally becomes more dependent on the supplier from whom they are no longer getting the best price. It’s not long before Procurement is stepping over dollar bills to pick-up pennies and the supper is walking away from the table with a jaunt in his step, whistling a happy tune …

Analytics I: Optimization Comes of Age

Today’s post is by Eric Strovink of BIQ.

I remember my first experience with optimization. I was taken to a guidance counsellor’s office at my local high school, where a special terminal was set up. This terminal was connected to a system that would allegedly try to find the “best” college for me. It asked many questions. Questions like, “Would you prefer a warm climate?” and “Would you prefer an academic setting with equal numbers of men and women?” Well, duh. Those were easy answers.

My goal was to attend one of the premier engineering schools in the US. I wanted MIT or CalTech or Stanford or Carnegie Mellon. I’d be happy with Rice. If my grades or scores weren’t good enough for the snooty super-competitive schools, I’d try for Rensselaer or Northeastern.

The system ended up choosing an entirely unsuitable school, evidently equally weighing my academic preferences and my social and geographic preferences.

What’s my point? Well, in a microcosm, this has been the essential problem with optimization. When you provide a “constraint” — and let’s be precise, here, the term really is “constraint” — an optimizer will not look outside that constraint for options. It cannot. It is a mathematical engine, and it can’t read your mind and figure out which is a “soft” requirement and which is a “hard” requirement. As far as it’s concerned, they’re all requirements, and, by whatever God you (don’t) believe in, it will find a solution that fits those requirements, if there is one.

That’s one reason why optimization has struggled to find its way.

I was listening to my wife talking to a survey telemarketer the other day. She said, “I really don’t have an opinion about Blue Cross’s responsiveness to patient needs. I’ve never had Blue Cross.” There was a pause. Then she said, “But how can I have an opinion on a 1 to 10 scale, if I’ve never used them?” There was another pause. She said, “OK, but ….” There was another pause. She sighed, and said, “OK, 5.”

What’s my point? Well, do you really know the answer to what kind of constraints you should impose on your optimization model? Or are you supplying an answer because you don’t know the answer, but you have to supply something? And after the optimization model has solved, can you remember all the places where you guessed, but you didn’t really know? What if you forgot one of those places? And what if that one guess caused the model to solve in a really non-optimal way (non-optimal from your perspective, not its)?

That’s another reason why optimization has struggled to find its way.

The breakthrough has come with what I’ll term “guided optimization”. If you hike in the White Mountains of New Hampshire, for example, you have a large number of excellent trails to choose from. Many of them are safe climbs that lead to outstanding views and vistas; but others lead up steep, often wet cliffs that are unsuitable for casual hiking. You need a guide; in this case, any of the excellent guide books from the Appalachian Mountain Club. In the case of optimization, your guide usually needs to be an experienced practitioner who can help you set up your model, show you how to move constraints to find inflection points in your model, and so on. (The good news is that lots of vendors provide guided services now, and it isn’t that expensive. Especially when you consider that optimization can be incredibly valuable.)

Companies that provide guided optimization services, like Trade Extensions, have enjoyed solid growth and have left a legacy of satisfied customers. You can always use optimization software on your own (Trade Extensions is no exception); but until you really understand what you’re doing, it can be unwise.

Optimization vendors have claimed for years that their systems are usable by novices. I don’t dispute that there are cases where this is true, and has been true. But for me, it’s a case of crying wolf: there have been so many claims, for so many years, with so many tears, that I’m solidly in the “get a guide” camp. I do hope, though, that optimization vendors will take additional steps to make guidance unnecessary. the doctor has assembled a pretty comprehensive list of what needs to happen.

At the end of the day, if you can’t do analysis yourself, you’re less likely to do it at all; which, as you’ll see in the next installment, is the theme of this series.

Next: Analytics II: What is Analysis?

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Want More Influence? Ask the Right Questions!

In a recent post over on Commitment Matters on getting to the top table, Tim penned a great post on where a CPO should be placed on the organizational chart, and why. Nine paragraphs in, after discussing the standard view of Procurement as a cost centre (which never gets direct reporting status to the CEO), the department that’s only visited when something goes wrong, and a barrier to getting things done, Tim made a great point. A CPO is only going to get a seat at the top table if it makes a significant contribution that visibly improve organizational performances.

This is only going to happen if Procurement shifts its emphasis from cutting costs to adding value. This requires Procurement professionals to change the types of questions they ask, the data they collect, the conversations they have inside and outside the department, [and] the areas in which they invest in skills. When Procurement approaches Engineering, it can’t be about “how can we help you cut cost” because, in Engineering’s mind, that translates into “how can we help you cut quality and increase risk of failure”. It has to be about “how can we help you source the highest quality products and services within your budget”. Similarly, when Procurement approaches Manufacturing, the focus has to be on “how can we help you ensure supply at the highest levels of service”? If a production line shuts down, that could cost a lot more than paying an extra 2% on the raw material costs. This isn’t to say that cost shouldn’t be a factor, as value can monetarily be defined as profit contribution – total costs of operation, but that cost can only be one, small, component. Once Procurement is trusted, then the questions can shift to “how can we help you get the level of quality and service you’re currently getting at a better price, so you can show a year-over-year cost savings and look like organizational heroes”.

I’d strongly encourage you to read Tim’s post on getting to the top table. It’s a great thought-piece.

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Question: Is There a Place for ESO in Your Supply Chain?

A recent article over in Global Services on “bridging the divide” indicated that there is a rising demand for ESO, Engineering Services Outsources, but a shortage of talent. In fact, they claim this is a 60 Billion market. I’m not sure I agree.

While outsourcing has been continuing to move up the value chain, from back-office functions to customer support and service to system implementation and configuration, for your average manufacturing or consumer goods company, engineering services are not only at the top of the value chain, but represent the core of the company’s IP and operations. (And while some would argue marketing is equally as valuable, since there’s no value produced if the product doesn’t sell, that is typically augmented by, or outsourced to, specialist agencies, who don’t have anything without the unique product or service, built by the engineers, to back them up.) As a result, I’m not sure that most companies are ready to even consider Engineering Outsourcing as a possibility.

Furthermore, if your company is built around the manufacture or production of goods, moving to ESO isn’t as easy as simply augmenting or replacing an internal team with an external team. If you’ve been doing engineering internally, then you have a considerable amount of money invested in assets to support engineers — equipment, hardware, software, and specially designed or outfitted locations. What do you do with all that? The software is licensed to you. The hardware and equipment are installed at your location. And the only way you’re going to get what your building is worth (as you would have invested a considerable amount in the power grid, specialized hookups, etc.) is if you can find another company making a similar product who’d be able to take advantage of the infrastructure.

And then there’s the IP issue, especially if you’re outsourcing internationally. Yes, you own the design, but the end customer isn’t going to buy a design. They’re going to buy a product. And if the outsourcing firm borrows from your IP to make a competing product at a lower price point, then your potential customer base could shrink considerably, especially if they get their product out first (possibly licensed through a related, but distinct company). And while you could probably get an injunction pretty quick in your home country (if it has good IP laws), how much are you going to be able to accomplish in the rest of the world in a short time frame?

In other words, while I can see the model starting to take off with new start-ups who can’t afford the infrastructure or who can’t afford to hire a whole team when the immediate plan is to produce a single product and see if it takes off (or with companies trying to quickly expand into new markets with similar challenges), I believe it will be a while before ESO takes off in big established companies who already have large teams in place.

Does anyone have a differing opinion?

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