Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Tuesday’s post introduced us to the philosophy of the KBS approach that is focussed on gaining an increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, to gain an ongoing business advantage. This philosophy revolves around a four-step continuous improvement cycle that starts, and ends, with Cost Model Generation. Yesterday’s post described the cost modelling process in detail. Today’s post will conclude our series on Knowledge Based Sourcing by describing some of the focus areas of Knowledge Based Sourcing.

As per Booz Allen’s recent article in SIG on “Achieving Greater Impact Through Advanced Sourcing Approaches”, Knowledge Based Sourcing is focussed on developing a deep contextual and analytical understanding of several critical areas associated with the spend category, including:

• Supply market economics and cost drivers,
• Drivers of price in the supply market (beyond costs),
• Variation in supplier capabilities and cost structure (and its drivers),
• Spend category economics, including internal usage economics as well as cost/performance trade-offs, and
• Spend category impact on broader business objectives.

An understanding of these areas is critical because:

• without an understanding of cost drivers, the true sources of cost can never be attacked,
• without an understanding of costs beyond raw materials, processes can never be improved,
• without an understanding of variation in supplier capabilities, it will be difficult to determine which suppliers are high performers and which suppliers are low performers,
• each spend category has its own distinct cost drivers, and
• controlling cost is only one component of the overall value equation — and the customer wants value.

Furthermore, the most appropriate spend categories for KBS are those with:

• highly volatile market prices,
• a large number of component inputs,
• highly variable product specifications,
• large fixed costs in production process,
• scale and utilization cost sensitivity, and/or
• complex multi-tiered supply chains.

These categories are typically tackled with:

• Industry value chain analysis,
• Analysis of supply-demand dynamics,
• Production process mapping,
• Bottom up cost build up — by component, plant or supplier,
• Parametric modelling and regression analysis,
• Comparative factor cost analysis across suppliers and locations,
• Analysis of scale and utilization impact on costs, and
• other advanced analytical techniques.

And the end result is that insights beyond price materialize, including:

• the identification of cost-advantaged suppliers,
• the identification of appropriate order quantities,
• the identification of trade-offs between cost and product performance, and
• improved transparency of underlying cost drivers that drive “win-win” outcomes.

And in the end, not only does the Supply Management organization get price under control, but it is better able to support strategic business objectives which gives it stronger positioning and credibility within the organization as a whole.

Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Yesterday’s post introduced us to the philosophy of the KBS approach that is focussed on gaining an increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, to gain an ongoing business advantage. This philosophy revolved around a four-step continuous improvement cycle that started, and ended, with Cost Model Generation.

Today’s post is going to drive into the five-step process that is used to generate the cost models that drive Knowledge Based Sourcing.

1. Engage Suppliers
   Introduce them to the KBS methodology that will be used to drive the supply management process going forward. Explain the benefits to both sides and review the promises that KBS makes to the supply base. Make sure they know that the goal is to reduce underlying cost (driver)s, not their profit, and provide continual advantages to all parties going forward.
2. Collect Cost Information
   Start with conference calls to validate cost component templates and starting costs. Follow-up with on-site visits to validate general ledger information and confirm cost information with controller/CFO.
3. Develop Starting Cost Models
   Detail component raw materials and processes required to build the product from the component level upward. Then identify a best-in-class cost structure and operational model based on market research. Finally, evaluate impact of cost drivers and fine-tune the model appropriately.
4. Calibrate Cost Models
   Test the sensitivity of critical assumptions, internal demand scenarios, and cost models against current products. Include other TCO/TVM parameters as appropriate (to account for defects, brand power, etc.) and fine-tune the model(s) as appropriate.
5. Communicate Gaps
   For each supplier, provide cost element performance breakdown detail, focussing on those areas where the supplier is weakest. Classify the savings opportunity based on projected spend/volume, and then work with the supplier(s) to create collaborative action plans to close the gap.

Once the gaps are identified, the Supply Management department works with the supplier to reduce costs. This often involves the identification of appropriate lean manufacturing techniques to decrease setup time, reduce process steps, reduce delays between process steps, reduce variation, reduce manufacturing footprint, and reduce lead-time while increasing quality and reliability (as this decreases defect rates and return costs).

It’s a solid process, and correctly applied, will yield solid results.

Yesterday’s post introduced us to Knowledge Based Sourcing, the Next Level Supply Management proposal put forward by Booz Allen as its entry into the Next Level Ring. Described as a competency consisting of a set of powerful techniques used to identify high impact value drivers that result in increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, and gain an ongoing business advantage, Knowledge Based Sourcing (KBS) is defined by its characteristics, which were reviewed in detail in yesterday’s post.

Today’s post is going to discuss the basic philosophy of Knowledge-Based Sourcing, which is a simple, four-step continuous improvement cycle:

• Cost Model Generation
  a detailed cost model that captures the majority of component costs, including all of the cost drivers
• Gap Identification
  which identifies where costs are higher than they should be based on raw material costs, realistic production costs, and market averages
• Gap Closure Plan
  which outlines a plan to attack and reduce costs that are too high
• Standard Cost Revision
  which updates the costs in the cost model to current costs and updates the baseline according to new information

This continuous improvement cycle incorporates the following aligned behaviours:

• cost standards for major processes based on physical realities and best-in-class data points
  as a goal towards reducing costs below known minimums for a given process with defined equipment and resources is not just unrealistic, but stupid
• best-in-class performance compared with known (supplier) costs
  as exceeding best-in-class cost performance will generally not be possible unless the process is changed
• dialog around cost improvement ideas relative to best-in-class pricing
  as many heads are better than one
• agreement on a realistic improvement plan
  as all parties need to be on-board for success
• supply management as a learning opportunity

that improves based upon a better understanding of cost, best-in-class performance, and past improvements

And, most important, promises the suppliers that:

• no requests will be made to undercut cost structures
  as this is unfair
• a fair profit and SG&A allowance will be incorporated into target cost models
  as all supply chain partners need to profit
• comparisons will only be made with peer-group suppliers using real, validated data
  as other comparisons are invalid
• detailed feedback will be provided on cost elements that need to be improved
  as improvement does not happen in a vaccum
• collaboration on waste removal will occur
  as waste is quickly becoming one of the most significant contributions to unnecessary costs (thanks to rising raw material, power, and water costs)
• business will be rewarded to those that open their books and demonstrate best-in-class costs
  as the goal of KBS is to collaborate on cost improvement
• information will be protected as confidential
  as it’s only fair
• knowledge gained can be applied to other business
  as this is a great incentive for collaboration and improvement

It’s a good philsophy, and a good foundation for improving supply chain relations. Tomorrow’s post will dive into the cost modelling process.