Category Archives: Best Practices

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?

Seven Tips for Succeeding in Any Market, Part II

Yesterday, we noted that the article published in Chief Executive last year on Seven Tips for Succeeding in Asia actually provided seven tips for succeeding in any market and, briefly, explained why. Today, as promised, we are going to review the supply management corollary to each of these seven tips because they will help you increase the value of your Supply Management organization.

So, without further ado, here are the seven tips for creating a successful Supply Management Organization.

  1. To expand your organizational influence, pick a department with an unmet need your organization can readily fulfill.
    For example, let’s say you are not yet supporting any marketing and legal spend and know that you have to go after one of these sacred cows to increase your spend under management. Let’s also say that you just hired a new analyst who was a marketer in a past life and who has experience sourcing creative services from his past job but not a single professional in your organization knows anything about e-Discovery, which is Legal’s issue of the day. In this case, you should go after Marketing as you have someone who can help them source better talent more efficiently, and save them money by decoupling non-value added services.
  2. Find a mentor on the Board (of Directors) who understands the value you can bring to the organization and can help you forge stronger ties with the C-Suite.
    This will get you more support across the organization and will inevitably help improve your financial situation as other budget holders see the value in supporting your efforts. Eventually, they will be willing to pay their share of system upgrades, GPO fees, or contract labour who you identify as being able to reduce their costs and/or increase the value they offer.
  3. Scale your organization by learning the language of finance.
    Let’s face it, if you can’t explain to the CFO in a language she understands that the budget and cost savings calculations should not be decoupled, you will be forever doomed with constantly being tasked to do more with less until the organization implodes under the weight of an increasingly impossible task. You need to be able to demonstrate the ROI of investments in training, technology, and talent to get the budget you need to deliver the savings the organization wants, and the ROI you know your Supply Management organization is capable of with sufficient budget.
  4. Be sure to consult regularly with the IP specialist on your legal team.
    Considering that you will be sourcing contract manufacturing and services from value-added services providers who could very easily copy your products and steal your expertise, you need to make sure you are adequately protected to discourage this from happening, especially in foreign markets.
  5. Keep an eye on your ROI, especially when services and SaaS contracts are about to come up for renewal.

    While there isn’t an advanced sourcing technique or technology that won’t save you money in the right situation when properly applied, not all techniques and technologies are created equal, and neither are all situations. If a service provider isn’t delivering the value you expect, they may need to be replaced. And if a technology platform isn’t delivering a decent ROI, it definitely has to be replaced. Your cash is limited. You can’t be wasting your budget on non-ROI products and services when there are dozens of products and services that can save you double digits and provide an ROI of 3X to 10X, or more.
  6. Go after the low-hanging fruit first.
    The fruit at the top of the tree may be juicier, but it is a lot more difficult to pick, and the risk of falling off of the ladder and seriously injuring yourself is much greater. Start with the easier wins, gain experience, and work your way up to the harder wins.
  7. Reward success with bonus pay tied to performance.
    Give your top talent the opportunity to increase their compensation without ceiling, and watch your savings soar and value surge. Just be sure to tie the compensation to appropriate metrics, because you get what you incentivize! (But, whatever you do, don’t put a ceiling on potential compensation. If you know you’re not going to make any more money, why would you work harder? There’s a reason the most successful companies in the enterprise space don’t limit the earning potential of their sales-people. They know that every dollar earned in commission puts ten dollars in their bank account, and the shareholders know that, at the end of the day, every $10 in the bank ramps up valuation by $20 to $100 and makes them many times richer in the end than the sales-person. If you think about it, a truly successful organization is one where the top sales-person and the top buyer both take home more than the average CXO!)

And this is how you begin to create a successful Supply Management organization. There’s a lot more to success, but these corollaries are a good starting point.

Seven Tips for Succeeding in Any Market, Part I

Last year, Chief Executive published an article on Seven Tips for Succeeding in Asia that, when you get right down to it, really presented seven tips for succeeding in any market. And while they were sales focussed, they did contain some good lessons for Supply Management, which is why SI is covering them. So sit back, relax, and after we get through the basics, we’ll dive in to the real lessons.

The seven tips for succeeding in any market are:

  1. Pick a segment within a fast-growing market sector that still has an unmet need your company can fulfill with a differentiated product or service.
    Let’s face it, you have a much greater chance of breaking into a market that is still growing when you can meet a demand not currently being serviced than you do of breaking into a stagnant market that already has a number of established products that dominate 90% of sales and that people unconsciously trust.
  2. Find a mentor who understands your business, the local culture and can also help you cement connections, stretch financial resources and expand into new territory.
    Even in an established market, your chances of success are better if you have an advisor that is tapped into what the public really wants, and can hook you up with appropriate marketing and advertising agencies to target them and contract manufacturers / providers to fulfill your manufacturing or contract service provider needs at the best value.
  3. Scale your business by tapping professional management who can bring in sophisticated financial and management tactics.
    Most businesses lack sophisticated financial modeling skills. As a result, any business that acquires them has a much better chance of scaling.
  4. Be sure to retain a good corporate lawyer, who can help you to navigate intellectual property-protection issues.
    It’s imperative to protect your intellectual property no matter where in the world you are.
  5. Keep an eye on your cash-burn rate, ditching products/services that don’t work out quickly and focusing on the money makers.
    Cash flow is the life-blood of any business. It doesn’t matter what your valuation is or future (projected) receivables are if you can’t make payroll.
  6. Conquer markets within grasp before trying out new opportunities.
    While it’s nice to have stretch goals, over-extending your reach and spreading yourself too thin is a just a recipe for disaster!
  7. Keep human capital by rewarding fast learners with pay tied to results.
    Reward your value-generating star performers and they will stick with you and help you make more money.

And each of these tips has a supply management corollary, that we’ll address in tomorrow’s post.

Do Successful Supply Management Organizations Adapt to their Customers?

Or do successful Supply Management Organizations adapt their customers to them?

It’s a good question. For a few years now, thought leaders, including the doctor here on SI, have been saying that good Supply Management organizations become the go-to organization in the company. They do this by making sure that each time they are engaged, they identify what the customer organization thinks is valuable and ensuring that they deliver that in addition to, or, if need be, instead of cost savings. Supply Management also works hard to identify problems, including problems the customer organization may not even know it has, and solutions to those problems. Supply Management also goes out of its way to make sure that the customer organization gets its fair share of credit so that the customer will want to use the services of the Supply Management organization again. As the success stories spread, and its reputation grows, more organizations turn to Supply Management, which begins to be known as the go-to organization. Once Supply Management has most of the organizations of the company as internal customers, it hits the target of 80%+ spend under management, and begins to deliver not only significant savings, but to identify value opportunities.

For example, if Marketing is approaching Supply Management for the first time, Supply Management won’t focus on its cost savings strengths, because, honestly, Marketing doesn’t give a damn about savings. Marketing’s job is to create as much demand and value as it can within the budget it is given. As long as Marketing stays within budget, it’s happy. As a result, Supply Management will need to identify what Marketing really needs. Is it a better campaign management process (and Supply Management is the king of processes)? Is it better supplier identification and qualification? Is it a way to qualify the value it is getting (through a balanced scorecard, for example)? Supply Management will deliver what Marketing really needs, and also identify ways that cost can be reduced on the production side (be it print, media, etc.) and freed up for more value-creation activities such as campaign design or creative development (for web and print media). In addition, if Marketing said it needed help with supplier identification and qualification, Supply Management might also notice that Marketing’s supplier management and campaign management processes were weak, and devise appropriate processes, using its RFX and/or project management tools, to improve Marketing’s processes and then demonstrate to the Marketing department how it could do better (and, if need be, let Marketing take full credit). Marketing will see a department that wants to produce value (and not just reduce budgets), make Supply Management a core part of its spend-related processes, and spread the good word.

But is identifying, and doing, what the customer wants the right thing? If, as Michael Schrage implies in his book that asks what do you want your customers to become, you are what you consume, then you should be doing more than just servicing your customer desires. Specifically, instead of adapting to the (internal) customer, you should be adapting the (internal) customer to you.

Of course, this is easier said than done when you don’t have any internal customers, or any customers beyond the customers with spend that has been mandated to you by the CEO, CFO, or COO. If you don’t have internal customers, you have to adapt to their needs, or at least appear to adapt to their needs, in order to get them. That being said, it may be that the only way you’re going to ultimately succeed as a Supply Management organization, especially when you are continually given the ludicrous mandate of cost-reduction (without any consideration of whether or not it makes sense), is if you adapt your customers to appropriate processes and technologies. If the processes and technologies your internal customers are using don’t reduce cost, increase efficiency, or add value, then theose customer processes and technologies need to be adapted to processes and technologies that do — otherwise, you will be hindered as a Supply Management organization.

Remembering that, as Michael Schrage points out, the real purpose of business is to profitably transform a customer and that the real purpose of Supply Management is to align with, and serve the, organizational goals, at some point Supply Management has to go beyond just serving the internal customers — it has to adapt them to be cogs in the Supply Management wheel that keeps the business turning. Just like Apple trained its customers to be design connoisseurs, Supply Management needs to train its customers to be value connoisseurs — who know how to balance cost and expected return appropriately for all types of spend.

While, in the end, Supply Management might just be one stray vegetable in a very large pot of organizational stew, it has a choice. Supply Management can be the bland celery that absorbs the flavours all of the other vegetables until it has absolutely no individual flavour of its own, or it can be the pepper that defines the flavour of the organizational stew. It’s your choice, Supply Managers.