Monthly Archives: October 2013

Bravo Business Center 2.0 – A Complete Category Solution for MRO: Part II.1

In Part I, we discussed how BravoSolution, realizing the limitations in their original, ground-breaking business center solution, enhanced the solution to be a complete solution for certain verticals that have standardized, predictable workflow-driven processes at the heart of their categories. We discussed how they transformed a solution that was a complete category management solution for nine (9) somewhat disparate categories, to a complete vertical solution for five different verticals (with more coming in the future) that was based on the collective decades of experience of their global sourcing team (working out of ten offices in four continents) in those verticals.

MRO, short for Maintenance, Repair and Operations, is a vertical that’s almost tailor-made for a business center solution. Even though, as a category, it is one of the broadest categories imaginable as it has to deal with whatever is required to keep any and all electrical, mechanical, hydraulic, telecommunication, or other physical system operating at normal levels — be it a production line, telecommunication backbone, power center, water plant, ventilation system, or office building — from both an (emergency) repair perspective and preventative maintenance perspective. As a result, depending on the company in question, the category could include just about any product or service under the sun. However, unlike CPG categories, the organization is generally not sourcing in volume and not looking for production capabilities, innovation capabilities, partnerships, or other value-adds that are required for success in those CPG categories.

As a result, MRO success often depends not on identifying the supplier who can give you the best price at the best service level on a part, but on identifying the supplier who can give you the best average price at the best average service level over a large market basket of parts, or the supplier who can bundle the services associated with installing a related market basket of parts (as part of preventative maintenance) at a competitive rate (which not only reduces the direct costs of having to deal with two different suppliers for parts and services, but the indirect administration and communication costs).

In addition, MRO suppliers tend to quote differently than volume-based manufacturing production facilities. Manufacturers will often quote based on production tiers, or give flat discounts or rebates based on production volumes for a single product, whereas MRO providers provide list pricing, and then quote discounts based on total dollar commitments across a market basket (as individual volumes for most categories aren’t enough to merit much of a discount).

Other complexities with MRO revolve around the sheer amount of data that needs to be captured, the creation of the right market basets, defining the qualitative metrics to appropriately capture the service levels of interest, defining the equations that appropriately trade off cost vs. quality vs. service level, and defining the cost drivers for the high-priced categories that will define when costs can change in a multi-year contract.

At a large MRO company, there will be thousands of products and services that need to be quoted from dozens, if not hundreds, of suppliers. Just creating all of the required data sheets that need to be distributed to the suppliers will be a challenge, breaking them down into baskets, sub-baskets, or items with alternate specifications for the sub-set of suppliers who will only bid on a sub-set of the RFX a nightmare. For some categories, service metrics are more important than cost. For example, if an automotive production line goes down, that can cost a large automotive manufacturer seven figures a day. In this case, spending an extra $10 an hour for a service provider with a guaranteed on-site service time of 4 hours vs 8 hours is a no-brainer. Even if their cost is substantially lower, service providers who cannot guarantee a required response time can not be considered for an award in some categories. In other categories, service levels, while important, can be traded off against cost. Consider warranty repairs. A five day turnaround vs. a seven day turnaround for a returned consumer item makes very little difference to a consumer that is out of a provided product for almost a week anyway, and trade-offs can be made in cost and service level. However, these trade-offs need to be evaluated in an appropriately defined equation. While a five day vs. seven day turnaround is almost equal, a five day vs. a twenty-one day is not. Unless the twenty-one day repair cost was high double-digit percentage cheaper than the five day, an organization wouldn’t risk the customer animosity that could result. And, in some categories, costs are driven by market conditions. If the service provider is supplying mostly steel parts (of 50% or more purity) that it has to source every year, and the steel index rises 10%, then the supplier will have to raise its prices (by at least 5%) to break even. Such a supplier cannot enter into a multi-year contract and give you it’s absolute best price today unless there is a cost-correction built-into the pricing model (as it would have to eat the loss otherwise).

In other words, the MRO category has some unique peculiarities that can make using a traditional sourcing solution a royal pain in the backside as the huge amount of set-up alone can be daunting. And if the solution doesn’t allow at least some of the work to be templated and re-used, the buyers will soon revert to the classic three-bids-and-a-buy through an auction just to “git-r-done“. But with BravoSolution’s Business Center, the basic templates are ready to go and once an organization uploads its item list, market baskets, list pricing for each supplier (and current / previous bid discounts), and current contracts; defines it’s service level equations and cost-vs-service level trade-offs; and defines its bidding guidelines and key milestones, a basic event is ready to go — and incumbent suppliers don’t even have to provide a price list (if the current price list in the system is still accurate), just their discounts for being awarded certain market baskets or dollar levels. In tomorrow’s post, we will dive into the BravoSolution MRO Business Center.

BravoSolution’s Business Center 2.0 – A Complete Category Solution for Transportation, MRO, Temporary Labour, GPO Category Management, and Retail: Part I

Two years ago, we reviewed BravoSolution‘s Business Center Category Sourcing Solution that took e-Sourcing to a new level for nine common categories that provided the average Supply Management organization with a considerable sourcing challenge. In order to maximize savings in each of these categories, the organization needed to construct category-specific RFQs/RFBs for the category, collect extensive amounts of detailed data, build a tailored model, and/or analyze the impact of each possible sourcing decision. And if the RFXs were designed wrong, the data was incomplete, or the model missed key trade offs, the solutions were sub-optimal at best, and not even as good as the current supply management situation in the worst case.

That’s why BravoSolution built a solution that, capturing the years of experience and knowledge built-up by their global sourcing and solutions teams (who work out of offices in ten different countries on four different continents), that would allow a buyer to:

  • define an event of the supported type with the click of a mouse,
  • dynamically determine appropriate, and minimal, data requirements,
  • send the appropriate RFXs to the chosen suppliers with just a few clicks of the mouse,
  • push the data into the optimization engine,
  • add or remove (default and pre-defined) constraints with a few mouse clicks, and
  • select the award scenario and generate a contract template with a click of the mouse.

It was a great leap forward in e-Sourcing technology for the average buyer who was not an expert in e-Sourcing, and definitely not an expert in the chosen categories. But it had limits — specifically, out-of-the-box, it was limited to the categories that it supported or to categories for which repeatable methodologies could be identified and for which appropriate workflows could be implemented (as long as the buying organization was willing to work with the BravoSolution team to build a new category solution).

Knowing this, and knowing that certain industries had needs that were different than other industries, BravoSolution decided that what was needed was an equally simple solution that could be applied company wide (to all significant categories) for buyers in industries that needed extra support (either due to the complex nature of the problems, the time intensiveness of the categories, or the average level of e-Sourcing sophistication of the buyer in an industry where the average organization is arriving late to the advanced sourcing party). This is because BravoSolution realized that the reality of the situation is that if e-Sourcing is easy to use for some categories, but hard to use for other categories, the organization will continually favour the easy categories in their sourcing efforts, to the detriment of the organization’s cost savings or value generation goals. If a sourcing event is appropriately designed and effectively executed, and the organization has Procurement policies and systems in place to insure that the identified and negotiated savings are appropriately captured, most of the savings are going to be identified in the first event and the incremental return on subsequent events, especially in an economy where costs are going up and the supplier has more bargaining power, will be minimal. Meanwhile, more and more dollars will flow down the drain as savings-rich categories get continually ignored.

But if the sourcing team is presented with a solution where every souring event is as easy as every other sourcing event, intelligence is built in for all of the common categories, and existing data (such as supplier locations, contract transportation pricing, production constraints, etc.) can be re-used and propagated from one event to the next, then every category is going to be given equal consideration for the strategic sourcing treatment. And BravoSolution’s new and improved business center solution makes this a reality for the Transportation (3PL), MRO, Temporary Labour, GPO Category Management, and Retail industries.

In the remainder of this series, we will discuss BravoSolution‘s new business center solution, built on collaborative sourcing capabilities (that were covered in these posts on Collaborative Sourcing, High Definition Sourcing, and Category Excellence) for MRO, GPO Category Management, and Retail. Stay tuned. (We’ll be back at the same KaT time on the same KaT channel.)

Are American Companies Threatening Their Own Supply Chains?

A recent article over on CNN Money on how Starbucks is in Hot Water over China prices has me wondering. According to the article, Starbucks is charging more in China for a cup of coffee in China than it is in Chicago or London (with a medium size Latte costing $4.40 vs $3,20 and $4.00). Similarly, it is charging as much as $18 in China for its Starbucks Coffee mug, that sells for between $10 and $14 in the US.

This is despite the fact that it is doing quite well in China, with strong sales contributing to a year-on-year jump in revenues in the Asia Pacific region of 30%.

Is this how you want to be treating a country you rely on for low-cost product production?

In the case of Starbucks, it could be argued that the mugs are not a main source of income, and since the coffee beans are not sourced from China, Starbucks isn’t really relying on China for its supply chain. But consider Apple, which is using refurbished parts to repair products in China and limiting some warranties to one year, as compared to the two and three years it offers in North America.

We all know that Apple relies on Foxconn Technology Group for it’s iPhone and iPad production, and is thus heavily reliant on China in is Supply Chain.

The last thing Apple should want to do is get the attention of China’s government, that recently recorded fines against five international dairy firms after they were accused of fixing the prices of baby formula, and that is currently investigating production costs and price setting practices at 60 pharmaceutical companies as part of a wider anti-corruption crackdown.

But this post isn’t about Starbucks or Apple, but about every company sourcing from China that also does business in China. Considering their dependence on China, shouldn’t they be treating the Chinese market with the fairness that they demanded for years? How many years were we conveying the message that American negotiators shouldn’t stop until they paid China price, as Chinese sellers had a history of charging foreign buyers more than native buyers?

If we want to get China price, shouldn’t we be charging China price, or at least a price that’s fair with respect to what we charge else where? Otherwise, what right do we have to complain about unfair competition or about a government that might respond by slapping fines on us and/or adding new export tariffs to punish us for our relatively un-ethical pricing measures.

Perks and pitfalls of knowledge diffusion in the supply chain

Today’s guest post is by Professor Ralf W. Seifert & Olov H. D. Isaksson.
Ralf W. Seifert is Professor of Operations Management at IMD and he teaches in the “Leading the Global Supply Chain” (LGSC) program.
Olov Isaksson is a PhD candidate at the Chair of Technology and Operations Management at EPFL, specializing in buyer-supplier relationships. He previously worked at Henkel as a supply chain project manager.

Do you collaborate with, and learn from, your suppliers, or are you serving them the knowledge to compete with you head-on on a silver platter? This question is increasingly relevant in today’s global competitive environment. Firms are routinely leveraging global sourcing to gain cost advantages but competition nowadays occurs between supply chains, rather than businesses. Thus keeping an eye on your supplier’s ambitions is vital.

Case in point, just look at the ongoing patent infringement lawsuits between Apple Inc. and Samsung Electronics Co. Apple turned to Samsung as a supplier for its new iPod and iPhone products back in 2005. At first the two companies jointly developed the components, which gave Samsung an insight into Apple’s technology and operations. Being the only supplier for the processors, Samsung also gained critical knowledge on Apple’s prediction of the market size for the iPhone. In 2010, Samsung launched its own smart phone and has since become Apple’s largest competitor. Today, Apple still remains dependent on Samsung, but it is trying hard to diversify its supplier portfolio.

The above situation exemplifies the negative aspects of knowledge spillovers in the supply chain — i.e. how important knowledge that exceeds the scope of the formal transaction can be diffused between customers and suppliers, and then be used in a rivalrous manner. At the same time, spillovers can also have positive effects and lead to a competitive advantage for the supply chain as a whole.

How does your desire to draw on trading partners for innovation balance with the need to protect strategic knowledge? And, to what extent do you take co-competition from suppliers into account in your supplier assessments? We engaged 34 executives from different high-tech firms and asked them about their opinion. Their consensus: recognizing knowledge spillovers is a critical issue in today’s supply chains. Both suppliers and customers are seen as important sources of information for innovation (see Fig 1).

“We get plenty of valuable information about the market, its players in the value chain and its main drivers from our customers and suppliers. My business relies on it. It is a great input for our R&D portfolio,” said Dr. Ir. Kees Joziasse, Director of Innovation at Corbion Purac.

Figure 1

While most high tech firms protect their innovations through patents, most of the executives stress that knowledge spillovers occur outside formal collaborations — to a large extent via personal interactions between employees of the firms (Figure 2).

Figure 2

Greg Nelson, Sr. Director R&D LED Systems at Philips highlights that employees possessing important knowledge must be conscious of the risks and rewards of knowledge spillovers when interacting outside the firm:

“Knowledge spillovers in the supply chain are a clear attention point. There is a need to create awareness up front with people who have these contacts and to have an explicit policy regarding what can be transferred. Policy restrictions must be balanced with the potential benefits that can be derived from collaboration and not hinder speed in the process. While policies and procedures are not always 100% effective, they do help create awareness in the organization to guard against unintended transfers.”

The Supplier Perspective

While a supplier can learn from its customers, it cannot choose who wants to buy its products/services. Still, Ted Smith, EMEA Sales Director at ON Semiconductor suggests that firms can leverage knowledge spillovers and gain a competitive advantage by carefully choosing collaboration/innovation partners.

“We typically don’t select which customers to do business with, but we do select customers to innovate with. We work with selected alpha-customers, or early adopters, who support supplier innovation in return for a head start in the market.”

The Supply Chain Perspective

Good and enduring partnerships can lead to a competitive advantage for the supply chain as a whole: Mukesh Singh, Senior Regional Manager at BASF explains that “Suppliers easily share their new learning/knowledge if the customer has a strong supplier relationship management program.”

However, it is important to agree upfront how innovative output that is generated in a collaboration should be divided. Dan Negrea, Managing Director AEMtec GmbH and Chief Technology Officer at ECMS exceet, elaborates:

“We strictly consider the background and foreground intellectual property (IP) in our cooperation with partners. The background IP is a source of information “for free.” The foreground IP is normally shared between our company and the customers. Product related IP goes to the customer and process related IP stays with us. In most cases, cutting edge products require the parallel development of a product and a manufacturing process.”

The Customer Perspective

Most executives viewed knowledge spillover as a positive phenomenon. Reflecting on the Apple-Samsung example, others might beg to disagree. Managers do need to protect important knowledge from potential competitors and patents offer only limited protection. Thus, strategic supplier assessments and a detailed supply chain contract are vital to mitigate this risk. If the knowledge in question is critical, in-house production or vertical integration of the supplier might still outweigh short-term gains.


Knowledge spillover readily occurs in your supply chain. Managers need to be aware of the risks of negative leaks, which can have detrimental consequences for the firm. At the same time, knowledge spillover can offer significant benefits for your supply chain if suppliers leverage newly acquired competences to your advantage. These are our recommendations:

  • Explicitly recognize the potential of knowledge spillovers in collaboration and sourcing decisions up-front! What do you need to protect from your competitors? Are there limitations in your supply chain contract? To what extent can your enforce non-use, non-disclosure and non-competition clauses in a global marketplace?
  • People buy from people. Make sure that employees are aware of the risks and benefits of knowledge spillovers! Create an appropriate policy regarding disclosures and interactions outside the firm!
  • Have a clear strategy with regards to each supply chain partner! Do you want a win-win situation or to squeeze a supplier? In collaborations, clearly agree upfront how innovative output shall be divided! If the knowledge is strategically important, in-house production or vertical integration of the supplier might be the safer option.

Thanks Ralf and Olov for this interesting take on Supply Chain collaboration.

Cross-Border Shipping with Mexico

Today’s guest post is from Dick Locke. Dick, who has delivered seminars to over 100 companies across the globe, is a seasoned expert on International Sourcing and Procurement who wrote the book. (Here is the link to his archived posts.)

the doctor sent me this article from Inbound Logistics and wondered if I agreed. Well, mostly, but I think it overstates some difficulties. I operated an International Procurement Office in Mexico and we were able to get on-time delivery to our US customers in the 98% range over long periods of time … and that included supplier performance, cross border performance and logistics performance in two countries.

Some of the issues the article mentions are common in every country. Natural disasters are just one example. Every logistics network has to have backup plans when problems occur. And of course, when you’re operating in another country you have to have an open mind to doing things their way.

The article does have some good points:

* Exporting from Mexico requires using a Mexican customs broker. If you are moving goods to the US, you will probably want a US customs broker also, unless you want to have your own people at the border. Yes, that’s an extra step in the process.

* The border does jam up around Christmas as many expatriate Mexicans ship presents south.

* Of course you need to understand your country’s security related requirements, such as C-TPAT in the US.

* You should always avoid insuring every shipment and rely on a blanket policy

* You do need to keep track of goods crossing the border

But some is either overstated or applicable to any country, and some I disagree with.

* If you are shipping LTL there are several LTL logistics companies, all aimed at industry. DHL, Fed Ex and UPS as well as local Mexican companies such as Estafeta all do cross-border LTL work.

* You are not “guilty until proven innocent” under Mexican customs regulations any more than you are in the US or other countries. And the US has the same five year “statute of limitations” on customs errors … and it’s five years from your last import of a product.

* I wouldn’t ask a Mexican carrier to price services in US dollars. Fuel costs are in pesos as are nearly all of the carrier’s operating expenses. Asking to price in dollars will get you a higher price and possible attempts to renegotiate if the dollar weakens.

As an observation, the Mexican trucking industry is changing. Twenty years ago, it was a collection of small, independent1 truckers. Today there are bright, new, shiny trucks on the Mexican roads and large, serious logistics services available.

1 Extremely independent. Mexican truck drivers were the last of the wild west cowboys. A habit of stopping off overnight at what were euphemistically called “cantinas” made on time delivery really difficult. Times have changed.