Category Archives: Best Practices

A Strategic Sourcing Plan Outline

I didn’t go to ISM, but I did check out some of the materials that have been appearing on the ISM site, and one abstract in particular that caught my attention was “Strategic Sourcing Plans Made Easier with a Take-Away Outline” by Robi Bendorf of Bendorf & Associates.

The abstract starts off by noting that the development and implementation of formal detailed strategic sourcing plans for major spend categories has been and will continue to be an essential element of top-class supply management operations – yet most supply management organizations do not have them. Noting that it is generally easier to define plans and procedures when you have a draft to start from, the abstract provides an example of a step-by-step procedure for the development of formal sourcing plans and a detailed outline of what should be in the plan.

The plan outline is worth reviewing, because it outlines what you have to think about in order to develop a good plan. At a high level, the plan outline presented is as follows:

  1. Category Description
  2. Current Business Strategy for Category Utilization
  3. Strategic Sourcing Team
  4. Category History
    • Total Annual Volume
    • Historical Price Changes
    • Lead Time History
    • Cost Improvement History
  5. Current Supplier Overview
    • Supplier Financial Data
    • Quality
    • Delivery
    • Innovation
    • Supplier Relationship
  6. Current Process Overview
    • Supplier Segmentation
    • Supply Chain Map
    • Supplier Selection
    • Contracting Method
    • Ordering Process
    • Performance Measurement
    • Inventory
  7. Supply Market Overview
    • Marketplace Suppliers
    • Marketplace Buyers
    • Competitor’s Sources
    • Market Trends
    • Major Raw Materials
    • Cost Drivers
    • Company Bargaining Power
    • Market Indexes
  8. Cost / Value Analysis
  9. Plan Objectives
    • Short Term Objectives
    • Long Term Objectives
    • Relationship to the Corporate Business Plan
  10. Implementation Strategies
  11. Action Plan

This is a great overview as it demonstrates that a lot of factors need to be considered in the formulation of a plan even at the category level. Without a thorough understanding of the category, the sourcing team will not be able to determine the appropriate cost / value tradeoff and create a supply management plan that will simultaneously achieve cost reduction and avoidance while achieving the business strategies outlined in the corporate business plan.

Total Value Management (TVM) is the Root of All Value Models

Regular readers of this blog will know that I’ve been preaching Total Value Management essentially since the beginning, and with good reason. Not only is it the root of all modern supply and spend management value models, as I will briefly illustrate in this post, but it’s easy to understand and capable of being modeled in a modern strategic sourcing decision optimization solution – which is the key to the extraction of maximum value from the scenario at hand.

As defined in the wiki-paper on Strategic e-Sourcing Best Practices on the e-Sourcing Wiki [WayBackMachine], TVM is a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals. Whereas a TCO model looks at the total quantifiable cost – as defined by the direct costs (such as unit, transportation, and tariff), indirect costs (such as switching and transaction), and market costs (such as quality and brand), a TVM model looks at the value to cost ratio by also including the potential impact costs with each decision. For example, a myopic focus on short term savings could actually lead to a loss in future years if the lowest cost supplier today is using antiquated production technology compared to a slightly higher cost supplier who just introduced new production technology that is going to allow for reduced production costs over time. Similarly, a myopic focus on LCCS increases risk and the expected losses associated with your sourcing decisions in future years (since, statistically speaking, some risks are going to materialize). In other words, TVM also looks at impact costs, risk mitigation (by way of constraints), and strategic alignment with the business goals with an emphasis on choosing the decision that is expected to maximize business value in the future.

To see why it’s the root of all value models, we’re going to look at Smock, Rudzki, and Rogers’ corporate value model, CSC’s supply chain evolution model, and Hackett’s five stage model for evolutionary procurement.

Smock, Rudzki, and Rogers’ Corporate Value Model, as found in their recent text about On Demand Supply Management, is a five level model that progresses from a focus on price (or unit cost) to a focus on Return on Invested Capital (ROIC), which is defined as net income minus dividends divided by the invested capital, and Competitive Intelligence. More specifically:

  1. Price Focus
  2. Cost & Value Focus
  3. Total Cost of Ownership
  4. ROIC Focus
  5. ROIC & Competitive Intelligence

ROIC is maximized by TVM. TVM is Value (Created) / Cost, and Value Created can be defined as profit / cost, and profit is maximized when the difference between income and external distribution of part of the income (of which dividends are a form) is maximized.

CSC’s model of supply chain evolution starts at the business unit and progresses to interconnected businesses in a value chain, with five stages defined as follows:

  1. Internal Improvement at Business Unit Level
  2. Alignment of purchases, processing, & shipping
  3. Closer focus on customer satisfaction
  4. Trading partners & suppliers are included
  5. Automated Connections Between Business

Improvements at the business unit level have about the same impact as PPU cost reductions – not much is saved in the best case, as unit cost is often a small percentage of the total cost of ownership, and significant losses occur in the worst case, as moving the source of supply halfway around the world will cause transportation costs to spike, especially with the cost of oil these days. Alignment of purchases, processing, and shipping will let you use improved systems and methodologies, but all that does is reduce the tactical transactional costs – which, in most companies, are not the biggest savings opportunities. A heightened focus on customer satisfaction starts the company moving towards a TCO mindset as customers are happiest when costs are low and quality is high. Including trading partners and suppliers helps the company to look at the total value, but actually bridging the information sources between partners allows the cost and value elements to be identified and requires the supply chain to embrace the total value management philosophy and evolve from a supply chain to a value chain.

The Hackett Group’s five stage model for evolutionary procurement traces the evolution of the supply management from supply assurance to value management, and, more than anything, this model, by one of the leading think tanks in the space, proves my point on its own.

  1. Supply Assurance
  2. Price
  3. TCO
  4. Demand Management
    • high % spend/sourcing with early demand influence
    • low % maverick spend
    • high internal customer satisfaction
  5. Value Management (ROIC, EBITDA, etc.)

Kill the Left-Suckers! (Bold Leadership for Organizational Acceleration)

By far the best presentation at this year’s 41st Annual Supply Chain & Logistics Canada Conference on Creating a Resilient Supply Chain was Jim Tompkins’ (CEO of Tompkins’ Associates) presentation on Bold Leadership for Organizational Acceleration. (He also gave the keynote, which was a great presentation as well, but this was one of the best presentations I’ve been to in years.)

Not only is Jim a great speaker, and if you haven’t heard him, I encourage you to attend his session the next time you’re at a conference where he is speaking, but he’s also really good at telling it like it is. And in this presentation, where he gave his top three tips to bold leadership success, he didn’t pull any punches. In reverse order, his tips were:

  • Don’t Do Anything Stupid,
  • Focus, and
  • Kill the Left-Suckers.

And I couldn’t agree more! What’s a left-sucker you ask? It’s someone who can’t do his (or her) job, and pulls his (or her) manager away from doing what the manager is supposed to be doing to help the individual who can’t do his (or her) job. Why is this so bad? Isn’t that what managers are for? Well, they are there to help, to teach, and to guide – but they’re not there to do their subordinates’ jobs. When managers are consistently pulled away from their jobs, they don’t get their work done and then their directors have to step in to pick up the slack. When the directors get consistently pulled away from their jobs, they don’t get their work done and then the C-Suite has to pick up the slack. When the C-Suite has to pick up the slack, they aren’t getting their work done, and then the CEO gets pulled into fire-fighting on a daily basis – and instead of the CEO leading the C-Suite in setting strategic direction, he’s bogged down in tactical execution while the company starts burning down around him.

As Jim says, a CEO should have three hours a day to do nothing but focus on the strategic. He needs to think about what the company is doing, what they should be doing in the short and long term, and how they are going to get there over the required time period to either reach the top or maintain their place on the top. If he’s consistently being pulled in half-a-dozen directions, that’s not going to happen. So you need to make sure that it does – by identifying, and eliminating, the source of the problem – the left-suckers!

If you can train them – great! If you can find them another role that they can do – that’s good too. But if you can’t train them, or find a role that they can do without constant supervision and hand-holding, then you have no choice … you have to terminate them. Or they’ll terminate your company. Bravo, Jim. Bravo!

Stacking the Supply Chain

Industry Week recently ran an article that asked the question “How does your supply chain stack up?” Written by the Director of Corporate Partnerships from the University of Tennessee, the article summarized the main lesson learned by the Department of Marketing and Logistics since they started offering supply chain assessments in 2006.

To date, the department has performed eight supply chain audits for companies across a diverse range of industries that ranged from 100M in annual sales to 30B. Although the firms were very diverse, they found that, to their surprise (but not mine), that all of the firms faced exactly the same supply chain problems.

Specifically, they found the seven following commonalities:

  • Too much product complexity
    Too many models and lack of a good process to eliminate underperforming products.
  • Too much slow-moving and obsolete inventory
    Sales doesn’t want to reduce price because they’re measured on margin – but products lose value over time while incurring inventory holding costs.
  • Supply chain considerations not part of the product design process
    Design teams rarely consider inventory, transportation, or warehousing issues – just to name a few.
  • No supply chain strategy
    Many supply chain organizations are so consumed with the daily battles of cost control, inventory management, and customer service that they don’t plan for the future – sometimes with disastrous results.
  • Ineffective matching of supply with demand
    In most companies, sales is driven by revenue generation while operations strives to cut costs.
  • Physical network problems
    Many organizations do not have an optimal network design. Warehouses need to be appropriately placed and transportation optimized.
  • Global issues and outsourcing problems
    Outsourcing decisions are made everyday, but few firms consider the total cost of an outsourcing decision.

Addressing just one of these problems can lead to millions in savings. For example, a hard goods manufacturer achieved 600M in cash-flow improvements through inventory and asset optimization and another manufacturer found 5M to 10M in savings simply by restructuring its distribution network.

So what can you do? Lots. And even though the article stopped short of specifying what you can do, this blog entry is not. If you have these problems, you can start by looking into these potential solutions:

  • Product Line Consideration
    Look to today’s modern auto-companies. Instead of giving you 30 different options, and letting you choose from 2^30 or 1B different configurations, some only sell three or four standard configurations of a car: the base model, the value model, the extended model, or the luxury model. Assembly is efficient and product complexity is minimized.
  • Pre-Launch Price Reduction Planning
    Model the inventory holding cost up-front, analyze historical price trends, and pre-determine dates where remaining inventory will be reduced, marked down, and cleared. If the product happens to be composed largely of raw materials that are increasing in price (i.e. steel) and has a scrap value that increases over time, you can take this into account as well and determine a formula that is to be run on predefined dates to determine the appropriate price decreases. This is very important if you are in electronics, where you can predict that in 6 months the product will have lost 20% of its value – that tells you that a 10% reduction in 3 months might be better than having to fire-sale the product in 7 months.
  • Include supply chain in product design
    When different options have dramatically different material, inventory, warehousing, or transportation costs – supply chain can point this out.
  • Sync the Plans
    Every time the business plan is updated, update the supply chain plan as well to meet the goals of the business plan. Don’t have a supply chain plan? Get one!
  • Forecast with Foresight
    Make sure forecasting is done by an integrated Sales & Operations Planning team that includes the head of sales, the head of marketing, and the head of supply chain – and that every department works off of the same forecast.
  • Network Modeling
    Model your current network, and re-run the network flow model at least once, if not twice, a year to optimize flow – and do a complete network re-design exercise every three years to determine the optimal network design and if any changes need to be made.
  • Outsource Intelligently
    Don’t outsource anything you haven’t optimized internally first – displacing a problem doesn’t solve it, it just makes it worse. If you need help getting your house in order, bring in an expert to help you.

It’s Time for Procurement to Take the Helm

The recent issue of CPO Agenda has a few good articles in it, including “At the Helm or All at Sea” by Dick Russill that starts off by noting that to steer into more strategic business waters, CPOs must abandon the cost savings myopia and service mentality that tarnish procurement’s image.

The article has a number of good points, which include the following:

  1. success at managing external costs must be measured relative to the cost and cash-flow forecasts in the financial plan, not by isolated savings
  2. purchasers must change – if they don’t, then emphasis will be shifted to legal (to cut better contracts) and finance (to help the company make better investments)
  3. it’s a self-harming paradox for procurement to define it’s importance by the huge percentage of the budget it consumes and to define its success by how much it can reduce that spend
  4. the businesses that fail are those where the principles of the business are to make money; the businesses that succeed are those where the principles set out to deliver outstanding quality of goods and services to their customers
  5. suppliers need to be regarded as a source of value and goodwill, not as a source of cost and overpriced material goods
  6. ultimately procurement’s business role is to contribute strategy, distill out its supply implications, and then act to make the strategy happen

Why is this important? Let’s take it point by point.

  1. if savings are isolated, then they are the exception and not the rule; furthermore, companies that tout isolated savings are usually those that have just started to implement strategic sourcing and do not realize that negotiated savings are not realized savings (as this requires tactical follow-through to capture the strategically negotiated savings)
  2. Purchasing’s time to shine is now … if you let the opportunity pass you by, then the CEO will look elsewhere
  3. It’s not total savings, or even total cost of ownership, but total value
  4. a business focussed on making money is focused primarily on sales and secondarily on cost cutting – neither is a formula for success
  5. not all innovation comes from within – your suppliers are an excellent source of innovation
  6. again, it’s about total value management, and this starts with a strategy that guides procurement throughout their sourcing and procurement activities

Procurement needs to move up the value chain – and the article has a great table that outlines the evolution of procurement from tactical cost reduction to strategic value creation, that it defines as Route 42, presumably after the M42 Motorway.

The Route 42 roadmap is the following:

Cost Savings
1. Push harder on existing deals
2. Aggregate similar deals
3. Acquire approval for more profound changes
4. Standardize and go after larger deals

Cost Management
5. Improve contract management
6. Evaluate deals against total lifetime cost
7. Develop supply strategies
8. Enhance the view of procurement
9. Improve specifications

Value Creation
10. Create a cross-functional team
11. Develop collaborative supply relationships
12. Increase influence over monopolies
13. Penetrate non-traditional purchasing areas
14. Develop strategies, including ‘forensic’ procurement