Category Archives: Best Practices

On the Fifth Day of X-Mas … (Supply Management Takes Center Stage)

On the fifth day of X-Mas
my blogger gave to me
five golden rings,
four little words,
tri-focal lens,
two boxing gloves
and a lesson in strategy.

Five Golden Rings

Legal.
Finance.
Sales and Marketing.
Product Development.
Human Resources.

Supply Management continues to sit at the intersection of these departments. Supply Management must work with Product Development to understand their needs with respect to quality, reliability, and functionality. Supply Management must work with Sales and Marketing to understand what product characteristics can be expounded upon to generate buzz or increase value (and, ultimately, the sale price). Supply Management must work with Human Resources to understand organizational values, look for strategic partners, and source temporary and contract labor. Supply Management must work with Finance to understand working capital requirements and preferred payment terms. Supply Management must work with Legal to create the best contracts for the organization and ensure that they appropriately protect the organization against all foreseen risks.

That’s why the sourcing organization needs to form cross functional teams consisting of representatives of each department that are involved with each and every sourcing project from the get-go. This not only streamlines the process, but increases your chances of success. During RFP formulation, Legal and Finance will help you nail down the terms and conditions in the template contract to streamline signing down the road. Product Development and Human Resources will help in supplier pre-qualification. Sales and Marketing can assist in the RFP evaluations. And with everybody’s help, you’ll ultimately make the right decision every time and maximize the value of each and every sourcing effort.

On the Fourth Day of X-Mas … (Collaborate)

On the fourth day of X-Mas
my blogger gave to me
four little words,
tri-focal lens,
two boxing gloves
and a lesson in strategy.

One of my favorite presentations from the last few years is Coca Cola‘s presentation on “Winning Together” from eyefortransport’s Supply Chain Directions Summit back in 2006.

The presentation, which described Coca Cola’s big push to improve its supply chain through collaboration and information sharing, noted that success depends on:

  • relationships,
  • communications,
  • commitments, and
  • visibility.

These little words have a meaning that’s just as big today as it was two years ago. They’re still the blueprint of success between you and your supply chain partners. Although important, the keys to sourcing success are never canned processes or over attention to metrics, but working as an extended team with your supply chain partners and focussing on the customer. This means communicating to them early when a shipment is in danger of being late, working with them to find alternate sources of supply if the primary source dries up, and suggesting material and design changes that will reduce costs and improve quality. Strong relationships are the key to success and sustainability — take the time to get it right.

Furthermore, it’s important to remember that, when you get right down to it, very little information is truly confidential, and the best way to resolve issues and collaboratively improve supply chain performance is often to put everything on the table. It’s important to share all relevant information with your partners, and give them whatever they ask for if it will help them help you. Remember, there’s a big difference between sharing information with a trusted partner and blasting it all over your corporate web-site. You can always enter into two-way protection agreements if need be, but you can’t collaborate if you don’t share.

On the First Day of X-Mas … (Sourcing Strategy Selection)

On the first day of X-Mas
my blogger gave to me
a lesson in strategy.

Even in these uncertain times, everything should be sourced.

As I said before, two years ago to the day in fact, this doesn’t mean that you should apply an intense multi-stage strategic sourcing effort to everything you buy, but that you should have a strategy for dealing with every category — since that’s the key to success across the board. Some categories will be tackled with negotiation, some with strategic sourcing decision optimization, some with reverse auctions, and some with spot buys.

One way to start is to breakdown your spend by category (direct, outsourced, indirect/MRO) and part type (commodity, custom part, or strategic part). This gives you the following methodology grid:

Part Type/Spend Direct Outsourced Services Indirect / MRO
Strategic Collaboration with a small set of strategic suppliers Dedicated Contract Owner Collaboration with a best-in class provider for each category of services
Custom Decision Optimization on a Pre-Qualified Set of Suppliers Managed by a Strategic Outsourcing Provider Managed by a Senior Sourcing Professional
Commodity Reverse Auction Multi-Stage RFX Lowest Bid

For direct and indirect spend, you can also approach the problem by opportunity type:

Opportunity Methodology
Too many vendors Spend consolidation with 2-3 vendors
Too few vendors RFX to add vendors
Insufficient vendor knowledge RFI
Insufficient solution knowledge RFP
Insufficient vendor bids RFQ
Insufficient bid movement Auction
Complex bids / Constraints Decision Optimization
Contracts unavailable Contract Management
Unmonitored contracts Procurement Audit
No spend baseline Spend / Invoice Analysis
Overly complex category Disaggregation
Uncoordinated Sourcing Efforts Program Management

And, as Charles (of Next Level Purchasing), Eric (of BIQ), and I have said before, you should segment your opportunities into quick hit opportunities (that can be accomplished by an invoice review or quick reverse auction event), near term strategic sourcing opportunities (that can be accomplished by a multi-round sourcing event employing sophisticated negotiation and decision optimization techniques), and longer term supplier relationship / collaboration opportunities (that require changes in methodology and production). This allows you to get some quick wins to fund your efforts, some near term wins to demonstrate the long-term effectiveness of a strategic sourcing program, and long-term wins to bring continued success in the years ahead.

Although it’s hard to say with complete confidence what the best methodology is for any given organization without knowledge of the organization and its needs, it is easy to say with complete confidence that the existence of a methodology is sometimes more important than the actual methodology itself as organizations with well-defined methodologies for sourcing consistently outperform those without. (Just like organizations with well-trained and certified teams outperform those without consistent training and experience.) Furthermore, these organizations will tweak the methodology over time based upon experience and continued learning until they end up with a best-in-class approach to organizational supply management.

Design for Frugal Growth, Be Ready for Explosive Growth

A recent article in Strategy + Business pointed out the best reason why a company should design for frugal growth … it lays the foundation for explosive growth when the situation presents itself. To see this, let’s look at the design for frugal growth triangle that clarifies the five things a company designing for frugal growth has to focus on:

  • Accountability
    A company that is prepared for frugal growth is accountable for every dollar spent, and only spends dollars that lead to organizational improvement, such as increased efficiency, quality or productivity; cost savings and avoidance; and innovation-focussed R&D.
  • Innovation
    A company intent on frugal growth is constantly innovating new processes to improve efficiency and quality and reduce costs and innovating new products to bring to market to increase profitability.
  • Pull-based Functional Relationships
    A company designing for frugal growth does not tie up working capital in unnecessary and excess inventory … it uses a flexible and responsive supply chain to pull products and services on an as-needed and timely basis.
  • Differentiated Capabilities
    A company focussed on frugal growth knows that it needs to differentiate itself if it is to survive, especially in a down market.
  • Ability to Leverage Scale
    A company that has adopted the frugal growth philosophy has created economies of scale by consolidating research, manufacturing, and distribution. It has also established cross-functional teams and close collaboration between business units, removing the bottleneck that plagues so many of today’s departmentalized corporations.

All of this helps prepare a company for explosive growth when opportunity knocks. Here’s why:

  • Innovation Mindset Recognizes New Opportunities
    A company with an innovative mindset is always looking for problems to solve as well as new solutions to existing problems and will be the first to recognize a new opportunity when it presents itself.
  • Accountability Provides Focus
    An accountable company, used to focussing on getting results for every dollar spent, will be able to focus on the opportunity, develop a plan to take advantage of the opportunity, and execute the plan with the resources it has.
  • Differentiated Capabilities Enable New Product Design
    A company with differentiated capabilities will be able to quickly design new products to meet the specific opportunity presented to it, or streamline production processes to meet a surge in demand for existing products.
  • Pull-based Functional Relationships Allow for Rapid Response
    A company with optimized pull-based functional relationships will be able to quickly scale up production to fuel explosive growth when the time is right.
  • Ability to Leverage Scale Opens Up Markets
    A company that can leverage scale can use the same cross-functional capabilities to open up new markets, and expand globally when the opportunity arises.

Subscribe … and Take Your Knowledge to the Next Level

As a regular reader of Sourcing Innovation, you’re on a quest to continually expand your knowledge of sourcing, procurement, and supply chain vendors, technologies, and best practices as this helps you to be the best professional you can be. The best way to do that is to make sure you stay on top of the wealth of free information available to you. One way to do so is to check the blog daily and watch for new additions to the sidebar (under “Free Resources“) and the resource site. Another way is to Subscribe. You can receive Sourcing Innovation blog posts in your inbox as well as newsletters, special announcements, and direct links to the latest resources available to you.

In addition, you can also sign up for the Next Level Purchasing Free Purchasing Resources Program which gives you free access to the Managing Supplier Performance course, a new purchasing tips article in your in-box every two weeks, and first access to Next Level Purchasing white-papers, including the 2008 Purchasing & Supply Management Carer & Skills Report.

The last two articles have been quite insightful. In “Cost Reduction Ideas (Beyond Sourcing)”, Charles Dominick, the President of Next Level Purchasing, with the help of Rob Patton of Paladin Associates, outlined four ideas for achieving cost reductions without switching suppliers, including:

  • Ask & You May Receive
    Sometimes your suppliers have cost saving ideas … all you have to do is ask them.
  • Aggregation
    Aggregate your need, especially for a commodity item, with other buyers.
  • Specification Rationalization
    Use industry standard components and standardize on as few as possible.
  • Leveraging the Supply Chain
    If you have multiple suppliers buying the same raw material, consider buying it for them if the combined volume nets a lower price.

In “Supplier Partnerships: Your End of the Deal”, Charles identified four common supplier goals that you can help your suppliers achieve. Helping your suppliers achieve their goals increases their commitment to your needs for cost reduction as a buyer — and I don’t think anyone can say they don’t need cost reductions in today’s market. The contributions you can make include:

  • Reduced Payment Cycle
    Right now, your suppliers are suffering from a credit crunch and most likely hurting way more than you are. Pay them in a reasonable time-frame, and go to the top of their favorite customer list.
  • Reduced Complexity
    Customized reports, unique packaging requirements, and other “special requirements” come at a cost to your supplier (and, ultimately, to you). Eliminating unnecessary services, especially those without value-add, will reduce your supplier’s costs … and yours.
  • Better Sales Forecasts
    This is actually a two-for-one. First of all, providing your supplier with better sales-forecasts will help it insure that it buys only what it needs to make your products. Buying more locks up cash in inventory that it can’t afford to lock up right now, and buying less means it will have to pay more on spot buys. Secondly, you can commit to multi-year deals, which increases your supplier’s confidence in future sales, and revenue–targets. This keeps your supplier on stable footing and keeps you on the preferred customer list.
  • Testimonials
    Suppliers need sales now more than ever. If you will step up and certify the quality and reliability of the supplier to the marketplace, that will increase the supplier’s business and stability. Not only will this make you a favorite customer, but it will decrease your risk that your supplier goes out of business when you need it most.

If you haven’t, I would consider signing up for Next Level Purchasing’s Free Purchasing Resources Program. In my view, there are not enough good quality free resources out there, and you should take advantage of the few there are. And besides, when you consider that the last mailing reached over 97,500 subscribers, you know that it must consistently deliver information that you can use.