Monthly Archives: April 2013

The Strategic Category Management Lifecycle: Getting it Right; Part I

Two days ago, when we asked if there was a difference between strategic category sourcing and strategic category management, we noted that there technically was a difference but that, for all intents and purposes, strategic category sourcing and strategic category management should be treated as one and the same. The reason? Study after study has shown that, on average, 30% to 40% of negotiated savings never materialize and this is because the “strategic” element is usually forgotten once the sourcing exercise is over. For savings to materialize, the strategic plan has to be followed from the time the award is granted, through the time the last unit is sourced, and to the time the last unit is reclaimed and/or the last warranty expires (depending on the strategic plan).

Sourcing only identifies savings opportunities. These opportunities are only realized through the execution of the strategic plan which occurs in the Procurement, Logistics, and Warranty/Returns management function. The entire lifecycle of the category has to be managed in order to achieve the potential savings from managing a well designed category. This is the first step to getting it right.

Thus, the first thing one needs to understand is the entire lifecycle of a category-based supply chain. At a minimum, the strategic category management lifecycle consists of at least the following nine phases / tasks:

  1. Rationalization
  2. Supplier Identification
  3. Sourcing of the (Servitized) Category
  4. Contract Award(s)
  5. Supplier Management
  6. Procurement
  7. Logistics / Inventory Management / Distribution
  8. Inverse Logistics / Repair and Recycling
  9. Credit / Material Recovery

Each of these phases must be addressed, and skipping any one phase can jeopardize the entire strategic plan and the savings you hope to capture and/or the value you hope to create. In our next post, we will describe each of these phases in more detail.

What Costs Your Supplier More? Their Warehouse or Your SIM Practices?

I know this question is a little out of left field, but it’s an interesting question in that both are costing your supplier money and, therefore, both are costing you money (as all costs get passed up the supply chain in the end).

According to an article in DC Velocity last fall on how distribution centers lose thousands of hours a year on unproductive workflows, each worker loses an average of 15 minutes of productivity in an eight-hour shift due to process inefficiencies. Assuming these are union workers who get an hour for lunch and thirty minutes for breaks, that says that almost 4% of the work-day is being wasted. In a warehouse with 50 workers, it adds up to about 500 days of lost productivity, which is significant as this equals the salary of 2 workers, which costs the average company about $60,000 annually in the US.

Gartner estimates a typical company spends an average of $1,000 in supplier management costs annually per supplier. Part of this cost is Supplier Information Management, and, specifically, the (initial) creation and maintenance of supplier profiles consisting of contact information, insurance certificates, compliance tracking, and product catalogs, just to scratch the surface. While the amount of time to create and maintain this profile, and thus the associated costs, vary, on average it can be estimated to be about $700 as all of the major vendors and analysts seem to agree that a good SIM solution reduces supplier management costs, on average, by 70%.

Now, at this point, you’re probably asking what’s the point of this article as 60,000 is clearly much greater than 700 and there seems to be no comparison — but hold on! You have to remember one very important point — you’re not the supplier’s only customer. The supplier has other customers who, if they are implementing SIM, will also be delegating this work to the supplier who will have to create another, almost identical, profile, and upload all of the relevant information, etc. And today, you can assume that any major customer of the supplier is implementing at least some basic level of SIM given that they will be sued and/or fined seven ways from Sunday by the U.S. Government if they don’t insure the organization is not on a watch list, that payments are properly reported, etc.

If the supplier is a small contract manufacturer who only has 50 customers, then the supplier would be spending $35,000 just creating and maintaining SIM profiles. That’s one person’s salary. But if the supplier is a large office supplies vendor with 500 customers, that could theoretically be $350,000 worth of man hours to properly maintain all of the requested profiles. Ouch! (Needless to say, not all profiles are going to be accurately maintained in this instance!)

In other words, a sudden surge in the popularity of SIM combined with the slew of systems (not all of which are created equal) that are now available and being implemented by various companies will add a costly burden to your suppliers, as you don’t all use the same SIM solution and, even when there is overlap, not all SIM solutions allow a vendor to create one master profile and share the relevant information with each supplier who wants access to the profile. Done right, SIM is a great technology, but the problem with a lot of the (second tier) solutions is it’s not done right. Many of the solutions are built for the buyer and the supplier is a bit of an afterthought, resulting in a solution where a supplier needs to create and maintain an instance of their profile for each buyer. As a buyer, it’s imperative that you don’t buy, and encourage, such a solution because all this does is shift the burden to your already stretched supplier and doesn’t help anyone.

It’s important to make sure that any SIM solution you buy allows a supplier to define a master profile and share the relevant data with all relevant buyers on the platform with just a click of the mouse and allows the supplier to reuse pre-existing information whenever relevant. A supplier should never have to enter the same piece of information more than once. Otherwise, you’re wasting his time and your money. (A really good SIM solution would allow a supplier to import a profile he already created in a competitive product, but SI hasn’t seen that ability in the SIM solutions of any of the major players yet.)

Is There a Difference Between Strategic Category Sourcing and Strategic Category Management?

And if there is, should there be?

Category Management is an approach to supply management where the range of products and services sourced by the Supply Management organization are broken down into discrete groups of similar or related products and services. The idea is that a systematic, disciplined approach is applied to the category which is treated as a business unit. Strategic Category Management is simply category management in a strategic context.

Category Sourcing is the process of sourcing a category designed to be treated as a business unit. It is generally treated as part of the category management process. Strategic Category Sourcing is category sourcing in a strategic context.

So, technically, there is a difference. But should there be?

Study after study has shown that, on average, 30% to 40% of negotiated savings never materialize. Why? Because most organizations treat category management and category sourcing as one in the same, and simply do the sourcing. In order to realize the full savings potential of category management, you can’t just focus on the sourcing. You also have to focus on the procurement, the logistics, the inventory management, and the accounts payable.

While strategic category sourcing can identify savings potential and value generation above and beyond regular strategic sourcing because similar products / services are often provided by the same suppliers who will offer greater volume discounts and / or who can customize the value added services to maximize profit potential for all parties, the savings are only realized if the sourcing strategy is followed through. For example, let’s say part of the strategy was to insure that stock was ordered just in time, but the warehouse decided to keep the old schedule and always maintain a buffer stock of 45 days when delivery only took 15 days. In this case, the value negotiated wouldn’t be delivered. Or, let’s say the supplier agreed to an additional discount of 10% off of all negotiated prices once 5 Million in orders had been placed (on an expected contract value of 10 Million over 3 years), but never actually deducted the discount on the invoices when the threshold was reached after 18 months. If a close eye wasn’t been kept on the total spend, there’s 500,000 down the drain.

In other words, for strategic category sourcing to deliver value, the strategy has to be followed through over the life-time of the award. Failure to do so will result in lost value. In other words, the category has to be continually monitored as part of a strategic category management effort for the value to be realized. And this means that while there is a difference, treating the processes as separate and just doing one or the other will result in lost value and strategic category sourcing and strategic category management should, for all intents and purposes, be treated as one and the same.

How Do You Define “Closed Loop” in the Indirect Supply Chain?

Yesterday, in reference to an article on 8 steps to a servitized supply chain that appeared last summer in the Supply Chain Quarterly, we asked what is a servitized supply chain? It was a good question that merited a good answer. However, if you read the article, which finished by noting that the most powerful benefits of this business model arise from integrated teams that can provide closed-loop feedback from the customer all the way back to the suppliers, you are led to another question. Namely, what does closed-loop really mean when you are talking about services, and, when you are sourcing such services, how do you define closed loop in the context of the indirect supply chain that provides the umbrella that services normally fall under?

In the direct space, a closed-loop supply chain is one where Original Equipment Manufacturers (OEMs) reintegrate their returned products into their own production network. The entire life-cycle, from cradle to grave, is effectively and efficiently managed to insure waste is minimized, value is maximized, and sustainability is achieved. A closed loop supply chain considers raw materials, production, distribution, warranty, returns, disassembly, and reclamation of raw materials. It designs for easy repair, reuse when possible, and disassembly / recycling when not. When properly designed, such a closed-loop supply chain maximizes value.

So what is the equivalent in the indirect space? For starters, it must be a supply chain that maximizes value over the life of the indirect supply chain. In addition, it must cover everything involved in the creation, production, delivery, and recovery of those services. Creation is rather straight-forward — it is the design of the services. Production is rather straight-forward — it is the creation of the materials and processes for the delivery of the services. Delivery is rather straight-forward — it is the distribution of the services to the end client. But what is recovery? In indirect, in addition to the reclamation and recycling of any materials produced for the purposes of delivering the services, it is the collection of feedback designed to improve the services in the next iteration.

For example, lets’s say the service is training on a new supply management solution you just purchased. In this services supply chain, the creation is the design of the curriculum; the production is the creation of the specific syllabi, texts, presentations, walkthroughs, videos, and guidebooks, etc.; the delivery is the in-person hands-on training course; and the recovery is the collection of any materials distributed for re-use and feedback on what was good about the course, what was not very effective, and what could be added or done differently in the future.

In other words, in the indirect space, the closed-loop is the creation, distribution, collection, and recollection of knowledge gained in order to increase the value delivered while improving the sustainability of the supply chain.

Do you agree?