Monthly Archives: April 2011

Want to Cut Cost? Focus on Quality!

I’m glad I read all the way to the bottom of a recent article in CPO Agenda on “cutting it fine”, even though I became a little discouraged about half-way through, because the response from Willem F van Oppen, owner of Provoque Consulting in The Netherlands, succinctly summarized the problem with continuously focussing on the non-strategic activity of cost cutting.

As long as companies only play to shareholder value and its myopic dynamics, procurement will not be able to successfully drive a strategic agenda of value sourcing.

There’s a limit as to how much cost can be cut. That’s why, by the third reverse auction on a category, costs actually go up. At some point, all of the margin is squeezed out of a supplier and the costs are not going to go down without a sacrifice in quality or service unless value is improved. This might take the form of increased quality (since a product that lasted longer or sold at a higher price would, relatively speaking, cost less) or better service (since service has a cost too) or it could take the form of raw material substitution or production process upgrades (since reduced production time would lower production costs). Either way, value is being added.

As Rod Wood pointed out, a key role of the Procurement function is cost management. Cost cutting is a knee-jerk reaction to a problem that often introduces more problems than it solves (when quality, service, and/or on-time delivery decreases) whereas cost management is done according to a strategic plan that balances quality, risk, security of supply, product development, and logistics. The odds of the success of the former aren’t much better than a roulette table while the odds of success of the latter are about equal to the house winning.

What Your Supply Chain Can Learn from Starbucks

A great post over on the HBR blogs on “Why I Appreciate Starbucks” summarized some of the fundamental differences about Starbucks when compared to other multi-national corporations. These differences are part of its success story and contain best practices that can be used to improve your supply chain.

The author identifies the following fundamental differences between Starbucks and your average corporation as follows:

  • it sees itself as part of a larger community,
  • it tries to balance profit with social responsibility,
  • it creates a “third place” between home and office where people can connect comfortably,
  • it trains its employees to brew the perfect espresso in order to insure the quality of its signature product is not sacrificed,
  • it doesn’t let major disruptions delay important actions and events that need to be done,
  • it understands that employees feel far more committed to companies whose values and mission they find inspiring, and
  • it understands that customers and clients increasingly prefer to support companies whose values are consistent with their own.

These lessons can be easily translated into supply chain organization success.

  • The supply management organization must see itself as part of a larger company.
    In a successful business, all of the individual units cooperate and act as one larger business unit.
  • The supply management organization must balance cost reduction with social responsibility.
    The media and consumer backlash that can result if the organization cuts cost by buying from third world factories that employ child labor, for example, can cost way more than the amount the organization will save.
  • The supply management organization must create an atmosphere of collaboration
    and provide a comfortable meeting area where cross-functional teams can meet and work together towards success.
  • The supply management organization must train its employees to source the perfect bill of materials,
    where cost, quality, reliability, and all other important factors to the business unit that needs the product or service are appropriately balanced and the end result is overall better than what the organization would have negotiated on its own.
  • The supply management organization must be able to work through major disruptions quickly and without significant impact to overall commitments to its end customers.
    The supply management organization should regularly be gathering market intelligence and updating its contingency plans and be ready to get the job done no matter what, even if it means a lot of extra elbow grease now and then.
  • The supply management organization must hire an A-Team that believes in the mission and values of the organization.
    A team that is not committed will never achieve the level of success as a team that is.
  • The supply management organization must put the needs of the organizational units they serve between their own.
    The needs of the many outweigh the needs of the few, or the one.

Follow this advice and your supply management organization is on its way to becoming world class.

Does Your Supply Chain Have An Audit Trail?

A recent article in Industry Week on “Lessons Learned from High-Profile Product Recalls” had a number of good tips on what to do to prepare for a recall before it happens, but one tip in particular stood out. Specifically, the need for audit trails. Every risk management article these days talks about being prepared, identifying key stakeholders and information requirements, developing communication plans, preparing reverse logistics and fulfillment operations, and evaluating risk vs. cost, but few point out the need for good audit trails down to the component, and sometimes raw material, level.

Without a good audit trail, if a serious defect is discovered across a product line, or one or more food products you are selling is tainted with E. Coli or salmonella, you will have no choice to recall the entire product line because you will have no way to trace the defect back to the source and forward to only the affected units. For example, if all of the tainted soup cans came from a cannery in Michigan, then there is no need to recall the cans from Nebraska and Georgia. And if all of the overheating batteries came from one plant in China, and they were only used in two specific lines of laptops, and you have six, at most you will be recalling one third of the units.

So make sure you can trace each product back through each supplier, component manufacturer, and, in the case of food products, each grower. Otherwise, when a recall does happen, it could be financially devastating.

Open Call for Demos and Thought Leadership

While Sourcing Innovation is always willing to consider unsolicited guest posts on any supply management topic, right now Sourcing Innovation is interested in the following subjects and looking for thought leadership on these important issues that are going to shape supply management in the years ahead.

  1. Next Generation Sourcing
    Whether you call it Value Focussed Supply (CAPS), Next Practices (The MPower Group), the Supply Chain Value Creation Framework (Tompkins Associates), High Definition Sourcing (Bravo Solution), or Next Level Supply Management (Greybeard Advisors), its clear that the practice of supply management must continue to advance if a supply management organization wants to obtain, and maintain, world class status.
  2. Supply Chain Education
    I’m convinced that, right now, Supply Chain Education is Broken and that a new model is needed to fix it. I’m looking for supporting and contradicting views on the issue. We need to establish a dialogue around this fact before its too late because most of your experienced top talent is going to retire and walk out the door in the next five years.
  3. Next Generation Supply Chain Platforms
    Right now, everyone is buzzing over cloud and social network platforms, even though the cloud does not yet offer any apparent advantages over true multi-tenant SaaS and most social networks don’t let you do anything more than waste time poking your friends. We need to figure out what a true next generation platform really is, not what the hype mongers tell us it should be. (Hint: It’s not Twitter.)

*SI has never refused an open demo request, and doesn’t plan to start now, so all requests will be accepted, but it can only guarantee a review and write-up by the end of May to the first seven respondents.

Can You Really Afford to Ignore 20% of Your Supply Base

A recent article over on the CPO Agenda on how “Procurement Success is a Two-Way Street” noted that a recent Efficio grassroots survey found that almost two-thirds of respondents never met with 20% of their suppliers. Now, there are some suppliers, like office supplies vendors, that you never have to meet with because the organization is only using them to source readily available commodities where supply outstrips demand and where another vendor is waiting for the business down the street, but do these types of suppliers really constitute 20% of the supply base? Not likely. I have to agree with the author in that this is a recipe for potential disaster. Considering that, thanks to the recent downturn, small suppliers can often go from financially viable to bankrupt in a matter of weeks, or days (as all it takes is one of their key customers to go belly up), failure is always just around the corner.

In addition, a lack of regular communication keeps the supplier in the dark about your needs, and if the supplier is not aware of projected future demand spikes sufficiently in advance, the supplier may not be able to plan its production schedules accordingly, and you might be left with egg on your face as the company’s hottest selling SKU goes out of stock.

This isn’t to say that you need to meet with each supplier regularly. If the supplier is not critical, or demand predictable and easily communicated in advance, you can simply meet on a quarterly basis and establish a methodology where you push information out to the supplier on a regular basis. But if the supplier is critical, at the very least a status update call should be occuring on a bi-weekly basis just to make sure there are no gremlins in the gears. And make sure communication is agile and happens quickly when something changes, for better or for worse.

For some tips on agile communication, see how “Procurement Success is a Two-Way Street”.