Simply put, because when you do, target costing becomes a reality. And with target costing, you can not only set, but achieve, realistic cost goals for key products. This is only achieved when you have good insight into end to end cost components from a raw material, energy, labour, and overhead perspective. And this is only achievable when you have the systems that allows you to gather real cost data right down to the raw materials, and not just average cost data from across buying organizations (that are used to feed statistical models).

Seven years ago today SI ran an article on how Target Costing Works and You can Do It Too! We quoted an article from the now-defunct Purchasing magazine on how purchasing learns cost modelling which noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpol was able to close a gap of 30% between the target cost for a module on one product and the initial design cost.

We also noted that new players in the market, like Akoya (which was puchased by I-Cubed in 2014) and Apriori (which Whirlpool selected as a provider in 2013 [Source]) could be used to help set target costs as Akoya’s market intelligence and statistical models gave a decent target range and Apriori’s production cost models, when populated with raw material, energy, and overhead costs, gave an expected production cost.

But one thing these providers couldn’t necessarily do was figure out how low costs could go if the costs could be traced right down to raw material providers, which can only be done if the input component costs can be traced through the supply chain. But with a solution that allows all costs to be collected and correlated, aggregation and streamlining opportunities to be identified and captured, and high production / overhead costs to be identified, aggressive, but realistic target costs can be set and realized as the organization knows where to focus its cross functional teams. And that’s one of the big reasons why you want to get a grip on supply dynamics!

In our last post we introduced you to Supply Dynamics, a new direct procurement solution provider with a mature solution that was developed over the last 15 years, first as a skunkworks project inside, and supporting, O’Neal Industries, and then recently spun off into a new completely independent standalone best-of-breed offering.

We described their ability to collect relevant data feeds on the full product life cycle from raw material to finished product, correlate that data, track the product lifecycle from raw material to buyer warehouse, and, most importantly, to determine which data needs to be tracked in the first place using their efficient and inexpensive automatic extraction software that processes (CAD/CAM) blueprint files and builds up the appropriate bill of materials and manufacturing process overview automatically.

But their software can do more than that. Much more.

Their solution also tracks (contract) demand and sales forecasts and not only allows an organization to predict a 12-month rolling forecast at any time, but do so at the product, part, or raw material level — broken down by category, region, or other dimension of interest. Since the platform keeps such detailed records, it can do such detailed predictions.

Their solution also cross references all product data across not only all bill of materials but all suppliers. This means that you can see holistic metrics around each component and raw material. More specifically, for any given raw material, you can see the total forecast across all products for a year, how many assemblies it will be used in, how many BoM records it appears in, how many vendors are supplying, how many processors are working (if the raw material passes through a processor on the way to a component manufacturer), how many different processed forms it takes, etc. For steel you can see how many lbs the organization is expected to use, how many fasteners (or other primary component categories of interest) it will be used to create, how many raw material vendors supply it, how many processors process it into its various allows, how many alloys the the organization uses, how many grades of those alloys it employs across the product line, and how many individual specifications for various grades it has used over the years.

And the platform doesn’t just support bill of materials for an assembly or component, it also supports much more detailed bill of resource for individual parts that specify the material inputs in detail at a fine-grained level. For example, not just “steel” but “X52 Carbon Steel, API 5L Standard”. Also, any processing requirements. These are extracted from the part level blueprints, verified by the suppliers, and the entire process verified by Supply Dynamics’ in-house team of US experts.

From this combination of bill of resource data and forecasts, the platform is able to automatically identify aggregation opportunities across a raw material type (steel) or instance (stainless) type by looking at total weight / volume, vendor count, and demand split. The user simply specifies the business unit of interest; any restrictions on vendor, conversion process, form, spec, and time period; and the max % of allocation to a single vendor, the minimum number of current vendors providing the raw material, and/or a minimum volume / weight / spend requirement for it to be considered and the system reports on the top potential opportunities, which the buyer can quickly drill into to determine the real potential. Maybe the demand is too geographically disjoint, maybe the top suppliers are satisfying the majority of regional demands, or maybe the prices from the top suppliers are at market and no opportunity is there, but maybe the demand is centralized, too many suppliers are supplying the same location, or prices are above market and there is a great opportunity. Regardless of the truth, it’s very easy for a buyer to drill in and find out.

It also has geographic visualization capability so that, for any raw material, you can see where it’s produced, where it’s consumed, and whether the distribution looks right geographically. This makes it very quick to visually identify awards that just don’t make sense and figure out where effort should be focussed. The same is true for machine shop locations, processors, and suppliers. You can visualize your supply chain by raw material, part, component, assembly, or vendor. And you can cross reference this against D&B scores and disaster mapping to visually see which suppliers are ranked poor and which suppliers, processors, or manufacturers might be impacted by a disaster.

The Supply Dynamics platform is very powerful and would support any platform focussed more on the strategic sourcing or day-to-day procurement activities of a supply management organization with a large direct procurement need quite well. It’s a rather innovative new offering and one that SI expects we’ll be hearing more about as well in the new year. Especially since they are about to launch a new capability that might turn the marketplace on its head. Stay tuned.

As per our last two posts on the nature of supply dynamics, anything that is unknown is unmanaged, and any information that is incomplete is misleading, distracting the analysts into barren, abandoned mines instead of yet undiscovered mines bristling with veins of gold. In the Procurement of manufactured products, if an organization is using systems originally designed for indirect (and/or services) spend, much of the information is incomplete and many of the opportunities identified by the system are misleading. This means that Procurement is likely to waste time pursuing opportunities that aren’t as valuable as they appear and, moreover, even when they strike gold, they won’t necessarily profit of it as they won’t have the visibility into how much of the gold is actually ending up in the organization’s vaults vs. how much is being lost as it is smuggled out by traitorous workers in league with the foreman who takes a cut [as in the classic Have Gun Will Travel episode “The High Graders” 1-19), which is exactly what happens when the supplier continues to buy off-contract from their preferred supplier (and not yours) in exchange for favoured treatment to them (and not you)]. Just because we’re not in the old west doesn’t mean that the long standing tradition of high-grading has not continued where the supplier’s personnel feel they can get away with it. (Remember, in some countries, finding creative ways to profit is applauded, whether or not it is ethical in the country of the buyer.)

But Supply Dynamics, a new-again stand-alone player (but a mature and seasoned offering that was recently spun out on its own from O’Neal Industries which bought it years ago when it was stand-alone for exclusive use before realizing Supply Dynamics was more valuable as a separate company) in the direct procurement space wants to change all that. Realizing that, like Claritum did for tail spend, cost control requires multiple checks and balances (which is why Claritum designed a multi-party system and not just a buyer system with limited supplier access through a portal), Supply Dynamics designed a system where buyers, suppliers, and third party distributors can all share information with each other. This way, the buyer sees exactly what raw materials are required, with their associated specifications, who they are being bought from (as reported by the organizations the suppliers have been authorized, or contractually obligated, to buy from), exactly what negotiated cost savings are being realized, and exactly what their untapped opportunities are (both from a volume leverage and a standardization viewpoint).

How does it do this?

First of all, it pulls in data from the (contract) manufacturers, their component and part suppliers, the raw material suppliers they are supposed to be buying from, and the distributors that manage the organizational inventory on a regular (monthly or weekly) basis. This allows an organization to track, for each part they have complete specifications on, the lifecycle of the part from the raw material to the finished product and whether the inflows and outflows match and are as expected. They can see the raw material shipments from the raw material suppliers to the component suppliers, the shipments from the component suppliers to the contract manufacturers, and the shipments from the contract manufacturers to the buyer’s warehouses.

This allows the Supply Dynamics solution to track not only supply chain costs but supply chain contract fulfillment — if the parts manufacturers are using the right raw materials from the right raw material providers, if the contract manufacturers are using the right parts from the right parts providers, and if the warehouses are ordering the right products from the right suppliers.

And you’re probably thinking this is all fine and dandy, because the real problem is not the tracking (since you could conceivably just ask each party to send shipment information and match it yourself, although that’s much easier said than done), but figuring out what to track in the first place. Even if you have a system that can track all of the appropriate bill of material and product attributes, how do you get all of the relevant bill of materials and product attributes in the system in the first place when the average manufacturing organization has tens of thousands of parts where the majority have not been strategically sourced or sourced with a cost breakdown beyond unit cost, tariff, transportation, and warehouse cost.

But, fortunately, Supply Dynamics has solved this problem too. They have an automated Part Attribute Characterization (PAC) process that allows them to quickly and inexpensively load the required information into the application. They do this by first extracting the bulk of the information from the blueprints (in CAD/CAM) format that the buying organization uploads. They have spent years developing and customizing this in-house software to extract and format as much information as possible and then, when the blueprints are uploaded, they automatically create accounts that give the manufacturers access to review and verify the PAC — as these manufacturers will be held accountable to buying and manufacturing against that PAC — and work with the buying organization to make sure the manufacturers do the necessary review and fill in any identified gaps. Then their in-house team of expert engineers does a quick manual sanity check, pushing any products into a review queue that don’t look quite right. (If the blueprints are complete and the manufacturers did their job, the bulk of projects will be okay.) Finally, the in-house experts complete the PACs and the system is ready to go. The software is quite efficient and the process is so refined after 13 years of refinement that most of the time it takes Supply Dynamics longer to get the files from the buying and supplying organizations than to process the files and verify the processing (which is all done in house by US persons for those concerned with IP and security).

Supply Dynamics is very good at this process. Over the years, they have performed Product Attribute Characterization on over 191,000 parts for 35 OEMs, including names like GE and Westinghouse, which cross over 378,000 detailed bill of material records. In addition, they maintain master specifications and detailed chemistries on over 39,000 raw materials that are used in the production of the parts used in the bill of materials. As a result, chances are they’ve already seen, and know the specs for, most of the raw materials you use, which means data load and completion is very fast for new organizations.

But they’ve built more than a system that just solves these two problems. We’ll cover Supply Dynamics, and their solution, in more detail tomorrow in Part II.