Category Archives: Best Practices

Share Ideas Through a Center of Supply Chain Excellence and Put Your Own Best Practices to Work

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Knowledge drain is simply not acceptable in today’s economy. I couldn’t agree more. The ability to identify, analyze, and quickly adapt to market changes — before your competitors do — can mean the difference between a profitable quarter and Chapter 11. Undoubtedly! Companies fighting for survival need to deploy every asset they have, including a highly valuable but invisible asset — best practices developed by employees. Assuredly. But these best practices are typically not documented, and even when they are, not effectively distributed or consistently implemented. Unfortunately. This means that companies can lose their best ideas. Disaster waiting to happen.

Mergers and acquisitions, cost cutting, and senior employee retirements or resignations (because a bright competitor recognized their talent and offered them a significantly higher compensation package) all result in your hard-won knowledge, ideas, and insights walking out the door if you don’t have good knowledge management processes and systems that capture and share your best practices and knowledge.

That’s why I liked the recent article in the Supply Chain Management Review on how to “put your own best practices to work”, even though it did mention social networks when all you really need is the useful Web 2.0 tools they are built on (and not all the useless time-wasting add-ons found in the unproductive social networks of today). If you start with wikis and moderated discussion forums, you can build a useful knowledge network that will actually be used in an iterative and evolutionary way without a lot of hassle or up-front investment.

So where do you start? You can:

  • Design Across Internal Boundaries
    Make sure your forums and wikis are silo-free.
  • Recruit the Right People
    Recruiting Supply Chain Subject Matter Experts as content moderators is key to ensuring quality, validity, and program adoption.
  • Think About the Thought Process
    Manage information in a way that reflects a company’s culture and process patterns.
  • Design an Implementation Approach
    Tradeoffs between resource requirements, enterprise constraints, and implementation time are a few of the factors to consider. Make sure the initiative is owned by the business, and not IT. You don’t want the system that is technologically “the coolest”. You want the system that works for the people who need to use it.
  • Set Up for a Successful Launch
    Get buy in from a wide range of business users to use the center of excellence as part of their daily business routine.

Ten Tips to Maximize Your Working Capital

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A recent article in the Supply Chain Management Review, a publication which never fails to deliver high quality content month after month, tackled the fact that, for better or worse, in this economy cash is king and you need to do everything you can to improve your working capital without hurting your suppliers. That’s why this was such a great article, it wasn’t the usual “reduce days sales/receivables outstanding and increase days payable outstanding” BS that doesn’t really help anyone. It was ten well thought out points of advice to help you tackle and analyze your supply chain and working capital situation and make good decisions on how to improve it.

The article noted that the first thing you have to do is get the organization working off of one set of numbers. Sales, operations, production, and procurement often work off their own sets of forecasts, padded to insure they are not penalized for late delivery. Adding excess inventory in every step of the chain can tie up a lot of cash needlessly. Also, while operations focusses on lead time, work order, surplus, quality, part, and finished good metrics, finance focusses on ledgers, forecasts, reserves, write-offs, debt, capital, and cash. The organization needs to focus on a common set of metrics and numbers that take into account the needs of both divisions and manage of those metrics and numbers together. Then, focus on each of the following points.

  1. Get Back to Basics
    Understand the planning parameters and whether or not they reflect (the new) reality. Only then can you build true models and forecasts.
  2. Get the Data from the Source
    The best way to find cash is to follow the cash trail and see where it is needlessly tied up. Create reports that monetize cash-critical decision points in key processes.
  3. Educate Finance on Operations
    Tie operational metrics to financial metrics to help finance understand the cash-flow requirements and break down the organizational silos.
  4. Educate Operations on Finance
    Tie financial performance to operational impacts to help operations understand the working capital restrictions and break down the organizational silos. Make sure operations understands how they contribute to RONA, ROIC, and ROCE.
  5. Benchmark Performance to Policies, Industries, the Fortune 500
    Are you exceeding your standards? Your peer group’s standards? The standard for big industry at large? If not, you have room for improvement.
  6. Establish a Metric Hierarchy Focussed on Freeing Up Cash
    For example, casual metrics such as early receipt of material value, quality discrepant material value, surplus material value, early purchase order to need date material value all directly influence the top level metric of days of inventory outstanding (DIO), which ties up cash and influences your top level metrics of RONA, ROIC, and ROCE as every day you hold inventory adds cost which decreases profit which decreases return. Understand your metric hierarchy and monitor the low-level metrics daily to identify little problems before they turn into big ones.
  7. Establish a “Cash Council” of Cross Functional Executives
    Improving cash flow and working capital needs to be everyone’s responsibility.
  8. Aim High, and Re-Evaluate the Business Model
    Creating a goal to reduce working capital requirements of the business by 30 percent may not be attainable by efficiency improvements alone. The business model may need to be evaluated and updated in areas such as customer contract type and terms, vendor management of inventory, outsourcing of business processes, portfolio re-alignment, divestitures or acquisitions, supply chain restructuring, and new partnership or joint venture agreements. And that’s good. A better business model may bring other improvements as well.
  9. Invest in Systems to Automate (Working Capital) Performance Reporting
    Don’t waste time building reports … spend time evaluating and diving into reports, getting to root causes, and solving the issues.
  10. Review Cash Policies on a Periodic Basis
    External business conditions and internal performance capabilities can change, which requires periodic review and update of key policies driving cash and working capital consumption.

Best-In-Class Procurement is About Cost Avoidance, Not Savings!

In a recent post over on his Purchasing Certification Blog, Charles asked “why doesn’t Procurement save as much on non-traditional categories” in response to his review of Aberdeen’s latest “CPO Agenda” research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.

As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.

The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.

A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.

Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!

Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.

In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!

Are Things Finally Starting to Look Up for the Oompa Loompas?

In our last post we lamented that, after a very tough year last year, there was no love for the oompa loompa’s on Valentine’s Day. With the burning of the Sydney Chocolate Factory, the shuttering of the West Berkeley Scharffen Berger and San Franciso Joseph Schmidt Plants (SFGate) by Hershey, and the tainting of Private Selection with Salmonella, among other chocolate-related disasters that started off the year, Oompa Loompas have been having a very hard time.

Since then, we’ve learned that chocolate could one day be in short supply, the Maya nut can be prepared to taste like chocolate, and an oompa loompa spent the night in jail after a drunken ball with Spiderman and Tinky Winky.

But more recently,

  • March 6, 2009 Cadbury’s is going Fair Trade (SupplyManagement.com)
    Cadbury’s has agreed to pay a minimum price of $1,600 per tonne of cocoa it buys from Ghana to improve living conditions in the region.
  • May 8, 2009 Chocolate is on display at the NC Museum of Natural Sciences (wral.com)
    Which includes the cacao tree.
  • May 8, 2009 TCHO’s Waterfront Factory Opens
    It’s 20,000 square foot Pier 17 factory on the San Francisco waterfront is open for business.
  • May 10, 2008 Chocolate can Power an F3 Racing Car (bigpondnews.com)
    Researchers have developed a formula three racing car that runs on biodiesel made from cocoa butter, the waste product from chocolate production.
  • May 11, 2009 Cold Stone Expanded Their Partnership with Rocky Mountain Chocolate
    Several hundred stores across the country are going to be co-branded with the Cold Stone Creamery and Rocky Mountain Chocolate brands, increasing exposure, and hopefully demand, for chocolate goods
  • May 10, 2009 UAE Premium Chocolate Business Resists Recessionary Dynamics (ameinfo.com)
    The premium chocolate business in the UAE has been booming, with Barsha-based ChoCo’s seeing a threefold increase in sales for chocolate between 2006 and 2008.

It’s not much compared to all the harshness they’ve had to endure for the last couple of years, but it’s a start.

Are You Taking Full Advantage of Sourcing Innovation?

While Sourcing Innovation is, first and foremost, a daily blog dedicated to bringing you the latest and greatest in best practices, education, and innovation in sourcing, procurement and supply management, it’s more than that. In addition to its archive of almost 1,300 deep and insightful posts that remain as relevant as the day they were written, Sourcing Innovation also offers one the most extensive resource sites in the space, and a growing collection of wiki-papers, white papers, and presentations.

The SI Resource Site, which is completely searchable through the Site Search page, catalogues more events, on-demand podcasts and webinars, publications, and societies than any other site in the space. It also contains:

  • A Glossary
    with about 30 articles on core topics, each complete with reference links to more information
  • The Illuminations
    which represent Sourcing Innovation’s branded thought-leadership white papers
  • New Presentations
    which are designed to distill key pieces of information from long posts, articles and white papers

Then there’s:

  • The e-Sourcing Wiki
    where the doctor authored or co-authored almost 35 wiki-papers on relevant supply management subjects
  • The (new) Linked-In Group
    where you can ask the doctor questions and participate in conversations with other supply management leaders
  • And Slideshare
    where the doctor has started to post presentations for those of you who like viewing presentations on-line

I encourage you to check out all that SI has to offer, and I welcome any suggestions you may have.