Monthly Archives: December 2014

Procurement Trend 04. Control Tower Model / Omni Channel Approach

Only one anti-trend remains. Once we finish this post, we complete our formidable burden, and hope that the sour taste in our mouths will soon depart now that we have shown those fictionally-focussed futurists in fine detail that the snake-oil trends they have been selling have no worth. We want to abash them for their apathy, but we will leave it up to LOLCat to decide their fate. While LOLCat thinks on it, he would like to point out to these Rip van Winkles that when it comes to sleeping through life, No One Out-sleeps a Cat!

So why do these analyst catfish keep churning out the same lousy predictions year after year? Besides the fact that light rarely penetrates down to where they are, it’s probably because they look around, see the laggard organizations still struggling with the best way to organize its operations, and assume they can still sell last decade’s playbook in this decade’s marketplace. Thus, if most organizations are still fighting to get beyond the de-centralized model, then the control tower model sounds quite futurish. Plus, we have the situation where its

  • different strokes benefit different folks
    as different models work well in different circumstances
  • integrated channels result in integrated data feeds
    and more data results in better decisions
  • regional differences not only provide opportunities,
    but can hinder success with the wrong model/approach

So what does this mean?

Understand the Primary Models

There are three traditional models of Supply Management: decentralized, centralized, and center-led. In the decentralized model, there is a Supply Management team in each organizational unit responsible for purchasing for that unit. This model has advantages, primarily along deep knowledge of supply market and needs, and deep disadvantages, primarily with respect to the inability to exploit organizational spend. In the centralized model, all spend is centralized through one Supply Management team. This model has its own set of advantages and disadvantages, many of them diametrically opposite to the decentralized model. In the center-led model, there is a central Supply Management team which defines the categories, identifies the best sourcing methods, executes the contracts, and guides each department on how to procure against the contract. It is supposed to combine the best features of each model.

Understand where Each Model Fits

Each model has its uses. In an organization where most buys don’t cross organizational units (with respect to product needs or supply base), decentralized can work. In an organization which has primarily indirect spend that is common across the organization with a strongly overlapping supply base, for example, a centralized model is a best. In an organization with a mix of common and uncommon categories and suppliers, a center-led model where some spend is centralized and some spend is left up to the individual organizational units is often the way to go.

Understand Centre-Led vs. Center of Excellence vs. Control Tower

They are all similar, but they are not the same. Center-led is where a central organization centralizes some spend but leaves other spend up to the individual departments. A Center of Excellence may do the same thing, but it centralizes sourcing knowledge and best practices and, where appropriate, works with and guides the organizational units on decentralized spend to make sure they always apply best practices and get the best results. A Control Tower is a next generation Center of Excellence that not only manages both centralized and decentralized spend, but continually re-evaluates centralization and sourcing strategy and adapts the model with the market to generate the maximum impact for the organization.

Pick the Model that is Right for Your Organization

Arguably, the Control Tower model is best in theory, but pick the model that best fits your organizational needs based on where it is with respect to Supply Maturity.

Procurement Trend 05. Return to Regional and Local Sourcing

Just two very trying anti-trends remain. We’re one post away from fearlessly finishing our formidable burden, but the sour taste in our mouths still remains as we must continue to provide those factually-challenged futurists with counter-examples to the trends of their forerunners who saw this coming a decade ago. (Check the very early SI archives if you don’t believe me. Go ahead. Check. This post will still be here.) We want to abash them for their apathy, but we will leave their hard-earned humiliation for LOLCat, who wants to point out to these Rip van Winkles that when it comes to sleeping through life, No One Out-sleeps a Cat!

So why do these garbage hauling patrons of Quark keep pushing us trends from their flights of fantasy? Besides the fact that some of them obviously spent the best part of last decade hauling garbage, it’s probably because they look around, see the laggard organizations still struggling with the insourcing/outsourcing balance, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are losing hand over fist in their outsourcing arrangements, maybe it’s time to pull them back, especially if

  • energy, and thus transportation, costs are going higher and higher
    and since oil, natural gas, and coal reserves ARE limited, and the dwindling supplies that remain are getting harder to extract, cost have nowhere to go but up, up, and away
  • labour costs are rising in emerging and emergent markets
    and the faster they emerge, the faster labour costs increase
  • nearby markets have low transportation costs and high automation can
    contain labour costs
    since the shorter the distance, the less energy required to cover the distance; plus, intelligent automation decreases the amount of manual labour required to product any product

So what does this mean?

Understand the Total Cost of Outsourcing

Remember, it’s not just landed cost (unit cost and transportation cost), it’s also import/export costs, communication and remote management costs, on-site visits, liability costs, return costs, and other related costs. If many of these costs are rising, then outsourcing is probably not the right idea. If only one or two of these costs are rising then it depends how much, and how fast, and what the alternatives are.

Understand the True Opportunity in Near-sourcing / Insourcing

Near-sourcing will have many of the same costs, but transportation, remote management, and return costs will often be lower. Plus, if you pick/invest in a more advanced plant with newer automation technology, the higher labour costs are probably negated by the lower overhead costs, and the opportunity costs that are often lost waiting for delayed shipments, prototypes to land in your hands for testing, and emergency issue-resolution sessions (across time-zones 8 to 12 hours apart) are often minimized as well. However, a lack of automation can result in significantly higher labour costs, a lack of appropriate trade agreements with respect to the products being purchases can result in higher import or export fees, and energy costs could be higher as well (if renewables don’t enter the equation). The whole cost model has to be evaluated (and compared to the whole cost model associated with outsourcing).

And make a decision based upon true (future) costs

One should never make an insourcing, near-sourcing, or outsourcing decision on today’s costs – make it on expected costs over the next five years. Use the market data that you are collecting for market trend analysis and predictive analytics to figure out what the costs are going to be over the next five years and then choose the optimal production strategy based upon the amortized five-year cost. Consider the hard and soft costs associated with relocating production and/or services, making a change for a very short term gain will not result in any savings being realized. Do the math and make the right choice.

A New Year Will Soon Be Upon Us? Are You Ready for The Coming Changes?

Where Procurement is concerned, the more things change, the more things stay the same is one thing you can count on. Very little changes year-over-year, and that’s probably why the futurists keep pushing the same trends year after year, including those trends old enough to be in many historian’s ancient history books. (We’re not joking. Take globalization, governmental regulations, and supply chain risk for example. These have been issues and trends since “global” trade began between Egypt and Mesopotamia, which occurred over 5,000 years ago. What’s “future” about that?)

Moreover, a best practice, even if its only been adopted by the leading organizations, is not a future trend. It is an ongoing trend if it started a few years ago, but if the leading organizations adopted the practice ten years ago, then it is not even an ongoing trend. It is a past trend that, either due to lack of maturity, resources, or relevance, didn’t cross the chasm. A current, ongoing, trend is something that just in the last few years and is just reaching the point where it will cross the chasm and a future trend is one that has only recently been identified and still in the process of being adopted by the early adopters, which, in Procurement, would be the Hackett Group top 8%.

However, while the changes may be small and few and far between, they do happen, and over time they accumulate and occasionally lead to big breakthroughs which launch new trends. These trends, in the early stages, are the ones you care about. Not trends that were forming ten years ago, because everyone already knows about them, including every competitor you have, and not possible trends ten years out, because, in the interim, the future could diverge significantly from the future required for that trend to materialize. Trends that are in the early stages of formation today. Trends that, if you start preparing for them, put you in the Procurement Leaders camp and keep you there.

Those trends, and only those trends that make you a leader, are the trends that Sourcing Innovation talks about in its latest white-paper on Top Ten Trends for Supply Management Value Generation in 2015 (registration required). Two years ago, SI told you about the top ten things that an organization could do to reign in rapidly rising costs before hyperinflation in key categories put its profitability at risk in its white paper on The top Ten Things to Do in 2013 to Control Costs (registration required). Then, one year ago, SI told you how to mine the goldmine of savings potential an untapped organization is sitting on through the proper application of The Top Ten Technologies for Supply Management Savings Today (registration required).
Now that your organization has its costs are under control and a proper technology infrastructure in place for leading-edge Supply Management, it’s ready to tackle Top Ten Trends for Supply Management Value Generation in 2015 and get processes and programs in place to capitalize on opportunities before the competition.

To find out what the Top Ten Trends for Supply Management Value Generation in 2015 are and what to do about it, download this new Sourcing Innovation white paper, sponsored by BravoSolution, today!

On The First Day of Christmas

My SI gave to me

A glimpse into the eventuality …

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