Monthly Archives: July 2011

What to Look for in a Strategic Sourcing Decision Optimization Solution

Once it is understood that Strategic
Sourcing
Decision
Optimization
is
the
application
of
rigorous
analytical
techniques
to
a
well-defined
sourcing
scenario
to
arrive
at
the
absolute
best
decision
out
of
a
multitude
of
possible
alternatives
in
a
rigorous,
repeatable,
and
provable
fashion, one can define some core capabilities of a strategic sourcing decision optimization platform. Then, when one is looking for a sourcing platform that includes decision optimization, one can determine whether or not the platform includes true strategic sourcing decision optimization foundations.

The following are core capabilities that should be present in any platform that claims to be based on strategic sourcing decision optimization:

  • Solid Mathematical Foundations
    LP, MILP, QP, and Convex optimization are good foundations. Random sampling, Monte Carlo simulation, and evolutionary / genetic programming are, on their own, not sufficient.
  • True Cost Modelling
    The models must be accurate and complete. Not “close” approximations.
  • Sophisticated Constraint Analysis
    At a minimum, capacity, allocation, (risk) mitigation, and qualitative constraints must be supported.
  • What If? Capability
    The “holy grail”, the tool must be able to generate, analyze, and compare multiple “what if?” scenarios in order to truly be useful to the organization.

In addition, the following capabilities are nice to have:

  • Constraint Impact Analysis
    Why is this solution “optimal”? Which constraints are driving the allocation?
  • Network Modelling
    for the analysis of demand across multiple categories and network (re)design
  • Automatic Scenario Generation
    that automatically creates “what if?” variants of a given scenario to jump-start analysis

For more information, see our recent article on What to Look For in a Strategic Sourcing Decision Optimization Solution over on the new Next Level Supply site. This article, that summarizes and updates some of SI’s best writings on Decision Optimization, including the Next Level Purchasing Optimization Interview and the e-Sourcing WikiPaper, is a good refresher for those of you looking to (re) acquire a sourcing platform based on strategic sourcing decision optimization.

What Competing Agendas?

The following was recently spoken at a leading sourcing conference:

The dynamics and sometimes competing agendas between finance and procurement are widely known.

Huh? What competing agendas? I am on planet Earth, right?

But more seriously, the fact that this myth is continually perpetuated is a serious problem. The reality is that, in a properly run organization, Finance and Procurement have the same fundamental agenda: Reduce Cost. Increase Efficiency. Drive Innovation. The only difference is that, for the most part, Finance is internally focussed while, for the most part, Supply Management is externally focussed. Just like the real goal of corporate finance is to insure that the company has more than enough money to achieve its goals and generate a return for the shareholders, the real goal of Procurement is to insure that the company has more than enough money to obtain the goods and services it needs and generate value for the customers, which, in turn, generates value for the shareholders.

The ultimate goal of any organization is to derive value for the stakeholders — employees, customers, and shareholders alike. Value is more than profit, it’s also sustainability and brand image. For example, if all a company does is produce cheap products that wear out quickly, either it’s going to go broke in warranty costs, or, if the product is not under warranty, it’s going to have a lot of upset customers who are not going to buy again, putting the long term financial viability of the company on the line.

As a result, Finance is about more than cutting costs and hitting budgets, it’s about analyzing the value of an internal spend and determining if the value is there to help meet the company’s goals. If hiring the best people increases that option, then Finance should determine that a higher payroll is the right decision and cost should be cut from somewhere else or, if there are no less critical areas, debt should be secured to obtain additional value, and profit, down the road.

Similarly, Procurement is about more than cutting costs to hit a savings target. It’s about finding the optimal balance of cost and value-add to maximize the overall return to the company. If buying from a supplier that costs 10% more will have a huge impact in brand perception, because either the component manufacturer is well respected and using their name will increase consumer interest or because the defect rate is significantly lower, then the slightly higher cost supplier is chosen. But if it’s a simple office supplies spend, then cost is cut to the low end of market pricing.

And both organizations are trying to find the right balance between cost cutting and value generation to meet the company’s goals and increase shareholder return. Just because Procurement is always spending while Finance is always trying to cut spend doesn’t mean that the departments are in opposition. Finance knows better than any other department that companies have to spend money to make money, it just wants to insure that the money is being spent wisely. And a good Procurement organization has better spending as its ultimate goal. There is no competing agenda between the Finance and Procurement Group, and any organization that thinks there is has a serious problem as they are not aligned, and alignment is become a key to success in today’s economy now that the Old Normal has returned.

Is Your Supply Management Organization Ready for Gen-Y?

Hopefully, now that you understand that Supply Management is the solution to the woes of the company as well as the country, your organization is ramping up, hiring, and looking for new talent. At approximately 70 Million strong, Gen-Y, also known as the Millennials, will soon become the largest generation in the workforce. As a result, they will soon represent the largest talent pool available to your organization. But is your organization ready?

The Millennials are not like the Baby Boomers, who looked for long term job stability and growth. Whereas your average baby boomer might take a job with the intention of staying with the same company for her entire career, a recent survey conducted by the Australian Experimental Learning Centre found that 64% of Gen-Y employees intend to stay less than two years with their employer. Current estimates are that most members of Gen-Y will have 20 to 25 jobs in their lifetime.

This poses three major challenges for your organization:

  • Recruitment
    Gen-Ys are always looking for the next great opportunity. Why is your opportunity the next great opportunity?
  • Training
    Given the average lifespan of a Millennial in your organization, you will need to get Millennials up to speed quickly and efficiently in order to maximize the value you get from them before they move on.
  • Knowledge Capture
    You will need a great Knowledge Management Program that captures, indexes, and makes available all the knowledge they bring to, and create for, the organization. Otherwise, each new Millennial will have to start the cycle anew.

Is your organization ready?

Is Supply Management the Economic Cure Everyone is Looking For?

In a recent article over on the ISM site that asks [if] your supply chain [is] ready for stagflation, the authors state that the current economic outlook for the long-term is stagflation, which they also state is practically unavoidable because the drivers are difficult to reverse. However, they also state that it may be shortened if the right actions are taken.

What are the right actions? According to the authors, the period of stagflation may be shortened if investments are geared toward revamping and improving supply chains, a task which falls under the purview of Supply Management. Why will this help?

Consider the situation, as summarized by the authors:

  • we’re in a recession that is the deepest since WWII,
  • the NIA thinks we are headed toward hyperinflation, but the US Federal Reserve believes otherwise; regardless
  • a long recession builds pent-up demand for consumer goods, at a time when
  • interest rates are at a historical low,
  • unemployment is still high, and
  • the Federal Reserve Bank has pumped significant capital into the economy.
  • Historically, increased consumer spending pulls the economy out of recession, but
  • consumer confidence, and spending, usually improves with expectations of (near) future improvements in the economy. When this occurs
  • if companies cannot meet demand, we’ll see “demand-pull” inflation and
  • if inflation occurs, the Federal Reserve will likely increase interest rates.
  • Right now, inventories are too low and
  • manufacturing is experiencing significant cost pressures. Thus,
  • the outlook is low profitability for manufacturers and
  • low profitability and inflation will result in slow, or no, economic growth — stagflation!

Now consider what will happen if Supply Management is allowed to invest considerable dollars in revamping supply chains.

  • Increased efficiency and optimally balanced inventories will prevent the “demand-pull” inflation that is predicted to occur and
  • as a result, interest rates will likely stay reasonable.
  • Cost pressures will decrease as a result of re-balancing of production to minimize logistics costs, increase efficiency, and use more affordable materials which will result in
  • profitability for manufacturers increasing.
  • A resurgence of corporate faith in the economy will lead to more hiring,
  • which will renew consumer confidence, and since they will have more dollars to spend as a result of decreased unemployment levels,
  • spending will increase, releasing the pent-up demand for consumer goods, and then the
  • economy will rebound.

No stagflation. I think the authors of the piece over on the ISM site that asks [if] your supply chain [is] ready for stagflation are brilliant. Because, with a careful analysis, it really does look like better Supply Management, with investments in supply chain improvements across the board (which result in more job creation immediately), can pull the economy out of the funk it is in.

Cost Leaders Do Not Sacrifice Quality or Customer Focus, Part II

Yesterday’s post talked about the principles of cost leadership and how cost leaders do not compromise quality and customer focus. It’s only low cost if quality, service, and other factors stay equal. Otherwise, it’s low cost up-front, higher cost (and loss) later on. If an organization is not on the cost leadership track, it should be. However, like any other initiative, there are a number of show stoppers and initiative killers that can prevent the organization from becoming a cost leader if they are not identified and addressed as soon as they materialize. As per the recent article on why businesses should shift from cost management to cost leadership in Chief Executive, these include:

  • Complexity
    If the initiative is not easy to explain and not easily understood by the stakeholders, it may stall before it starts.
  • Lack of Cross-Functional Support
    If there is no buy-in by key stakeholders across the board, failure is likely eminent.
  • Impatience
    Stakeholders will want to see actionable recommendations from any initiative quickly, and these actionable recommendations will need to be capable of being implemented in the near term.
  • Under-Resourcing
    Don’t attempt to build equity or buy-in by under-resourcing the initiative (to keep costs low); as the authors of the article note, this is equivalent to crippling the racehorse at the starting gate
  • Education
    Training will be critical for the success of a cost leadership initiative. A training component will need to be included. Moreover, training is often the best tool to reduce the fear and apprehension that goes with any new initiative.
  • Under-Communication
    Communication is critical for any initiative, and early wins must be publicized and recognized to maintain the support necessary for success.
  • Over-Hyping
    No initiative is perfect and all-encompassing. Don’t overestimate the potential impact of the initiative, and never, ever, say that the new system will fix everything.