Category Archives: Best Practices

Comparing Apples with Oranges (Value Based Sourcing)

In the winter edition of CPO Agenda, you will find an article entitled Comparing Apples with Oranges which notes that moving from a sourcing process based on minimizing cost to one based on maximizing value means embracing supplier differences.

The article discusses value-based sourcing, a sourcing methodology geared towards getting the greatest value out of a more broadly defined supplier relationship. The article encourages procurement professionals, who it claims have traditionally focused on sourcing goods and services, to look at value beyond the immediate scope of purchase to other capabilities and sources of value and indicates that value-based sourcing implies figuring out what other assets, capabilities, or benefits a supplier can bring to the table beyond the product or service currently being sourced.

It then presents a graph that shows value-based sourcing overshadowing advanced sourcing, and although I agree with the importance of value-based sourcing, I disagree with value-based sourcing overshadowing advanced sourcing – it’s simply another component of “Total Value Management” (on e-Sourcing Forum [WayBackMachine]), which is the ultimate goal of advanced sourcing, supported by decision optimization, cost modeling, and life-cycle sourcing.

Nonetheless, the article does make some good points about some of the merits of value based sourcing, and since value based sourcing is a part of Total Value Management, I will do my best to summarize the most salient points herein.

Value-based sourcing seeks differentiation. Complementary capabilities help value chain partners bring more to the table than what is initially requested. Value-based sourcing requires a strategic approach where the procurement professional looks first and foremost at the suppliers’ capabilities. Value based-sourcing treats the supplier more as a partner than a vendor, crafting a complex relationship that allows the supplier’s capabilities to be leveraged to full benefit. Finally, just as advanced sourcing requires a sharp understanding of key business issues and value drivers, so does value-based sourcing.

As a side-note, you can still download the “Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal”, courtesy of Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric) from Aberdeen. It’s a great report, and if you haven’t downloaded it already, I would suggest you do so. And if you’re still trying to identify figure out where to start, the answer is spend analysis, and Procuri (acquired by Ariba, acquired by SAP) has an upcoming webinar on Wednesday that should contain some good pointers to get you started.

Selling Your e-Sourcing Pilot I: The Perfect Pitch

You’re an over-worked, under-paid procurement professional unlucky enough to be employed at one of those companies still in the dark ages where ERP is the magic fire that’s going to solve all your problems and you’ve just been charged with reducing spend by 10%. Your company is a contract manufacturer, all your contracts are coming due, and you know that all of your suppliers are about to demand significant price increases due to rising raw material costs above the board. You’d be happy to be stuck between a rock and a hard place because, right now, you feel like your ass is already in the fire … heck, you’d be happy if you were just in the frying pan.

Although you don’t really understand the power that lies within the lightening that modern man has captured in the world that lies beyond your cave, you know you need an eSourcing tool to help you manage more projects, open more contracts up to competition, and be more productive. However, despite your best effort, your technology-inept (or, if you’re really unlikely, just plain inept) CFO won’t even consider allowing you to buy such a tool – because that costs money, and your job is to save it – not spend it. You’re an unrecognized genius and you know that without help you’re doomed to fail. But you’re getting more response from the squirrel outside your window then you are from your superiors. What can you do?

You can deliver “The Perfect Pitch”. I will not claim to know what this is (if I did, I’d be a sales guy, not a process and technology supply chain [information] technology consultant), but fortunately for you there are those that do (or at least claim to) know what this is, and even a few willing to share their advice. One such individual is David L. Anderson, A VC in Vacationland, and Managing Director of Supply Chain Ventures, LLC.

Last September, he delivered the keynote address at the Procuri’s (acquired by Ariba, acquired by SAP) User Conference and this led to the Procuri sponsored white-paper “The Perfect Pitch: How to Succeed in Selling and Doing Technology Initiatives”. In this white paper he not only describes a perfect pitch, but gives you ten simple rules to follow in your quest to create one.

The ten simple rules are:

  1. Know your friends and enemies.
  2. Clearly define your value proposition and business plan.
  3. Credentials – you better have lots of them!
  4. Why an elevator pitch is critical!
  5. Prepping the Players.
  6. Finding the Big “No” early.
  7. It’s all about the pizza, not the delivery person.
  8. Socializing your friends and enemies.
  9. Selling the deal.
  10. It’s all about the process, not just the presentations.

Simple, right? Wrong! It’s more than just these basic rules of business – it’s understanding how they fit together and evolve into not only a pitch, but a plan of attack that will allow you to sell the project you need to succeed. So check out “The Perfect Pitch: How to Succeed in Selling and Doing Technology Initiatives”. It will be worth the time it takes to read it.

Charge into Contract Manufacturing!

A few months ago, Geraint John penned a great article over on Supply Management where he urged CPOs to take the lead in contract manufacturing and understand the differences between contract manufacturing and other types of supplier relationships.

According to the article, contract operations have unique characteristics and differ from other types of strategic sourcing in several ways. First of all, products are typically shipped straight from a contract manufacturer to your end customer. Secondly, the supply market for contract operations tends to be very fragmented and many of the firms are small or medium sized with only a local, rather than global, presence.

Success factors include a good legal agreement, performance metrics, regular senior-level joint management reviews, the use of only appropriate tools and processes, and “externship” where your company’s employees work side-by-side with those of your partner to ensure you don’t lose vital knowledge as a result of outsourcing.

Furthermore, these relationships, which often require creativity, need to be managed by highly skilled individuals, but finding and developing the right people can be a major challenge with the current talent crunch.

So what’s a CPO to do? Take Charge and lead the way – it’s the only way to guarantee success. But remember CapGemini and CFO Research Services’ nine best practices for successful outsourcing relationships (as summarized in the Outsourcing Journal).

  • Visit the supplier’s site.Consider visiting supplier’s customers to assess the supplier’s true capabilities.
  • Define and document all performance metrics; then capture and report them.Deciding what factors you’ll measure helps both you and your outsourcer understand what’s important in your relationship.
  • Capture and report qualitative reaction to supplier performance.Stay in touch with the users and make sure they are being satisfied.
  • Conduct formal audits of the supplier’s processes and performance.Remember that section 404 of the Sarbanes-Oxley Act requires companies to document the effectiveness of their internal controls. When they outsource, they must do this themselves or obtain a Statement on Standards No. 70 report.
  • Allow or encourage company managers to join the supplier’s team.The closer your personnel are to the supplier, the better their outsourcing experience.
  • Include incentives for excellent performance and impose penalties for poor performance.
    Suppliers given incentive to provide excellent service are more likely to provide it.
  • Be willing to revise performance objectives during the contract term.Companies willing to adapt to change are generally happier with their outsourced activities than those who lack such flexibility.
  • Consolidate work with a few strategic suppliers.It’s easier to manage a few relationships than many.
  • Use a formal governance process for outsourcing.It’s the only way to ensure all the pieces are being addressed.

Six Sigma NOT a Silver Bullet

Shout if from the rooftops! Six Sigma is NOT a Silver Bullet! And now you have research from business advisory firm The Hackett Group to back it up. According to Hackett Senior Business Advisor Penny Weller (who is a Motorola Certified Black Belt), as quoted in a recent Supply & Demand Chain Executive, Six Sigma is great, particularly for companies seeking to streamline operations and eliminate variation in processes, but, like any tool, it can be used properly or improperly, to varying results. The goal is to create a continuous improvement mindset that is embraced at all levels of the organization.

I’m not trying to put down Six Sigma (as I chronicled over on e-Sourcing Forum [WayBackMachine]), as I’ve been known to promote it on occasion, but simply the stigma that goes with the sigma – that it is the silver bullet, the ultimate solution for all of your business problems. Not only is there no silver bullet for all of your business problems, there is no silver bullet for even one of your business problems. There is no 100% solution. There are solutions that work the vast majority of the time, maybe even more than 99% of the time, but the unpredictable, sometimes chaotic, nature of business indicates that there is no perfect solution, and the only true way to be a market leader is to identify when a solution will and will not work, and where it will not work, identify an alternate solution and keep building toward that perfect solution, knowing that you’ll never truly get there.

The second paragraph of the Supply & Demand Chain Executive article makes a great point. Many executives use Six Sigma or other continuous improvement programs to drive enhancements in finance, information technology (IT), procurement, human resources (HR) and other selling, general and administrative (SG&A) functions. But according to Hackett research, many executives fail to realize the benefits of these initiatives because Six Sigma is, by definition, an incremental process improvement methodology and is not appropriate for situations that require significant transformational change.

If you don’t have the right process to begin with, no amount of improvement will make it right. It all comes down to understanding the problem, identifying the right solution, implementing that solution, and continually striving to make it better. Six Sigma is just one methodology you can use to make it better, there are others.

Five Types of Supply Risk, and How to Mitigate Them

Today I’d like to welcome Jim Lawton, VP and General Manager of Open Ratings, a D&B company with a range of supply risk management solutions for automotive, aerospace and industrial manufacturers.

Risk is a painful reality in manufacturing today. Strategic initiatives like low-cost-country sourcing and supplier rationalization programs only increase manufacturers’ exposure and vulnerability to the risk of supply chain disruptions.

Working with Open Ratings’ Fortune 500 manufacturing customers, I’ve come to realize that even the most sophisticated companies need a reminder for the different types of risk, and how to mitigate each. As I see it, the best way to avoid the inevitable is to understand the many sources of potential risk – which can be defined in five broad categories – and put strategies in place to mitigate each one:

  1. Strategy Risk = Choosing the right supply management strategy.Know that what’s right for one business might not be right for yours. For example, a small family-run business may opt to source locally because they don’t have the resources needed to keep an eye on global suppliers.

    Mitigation and Management Approach: Define the right up-front strategy, and identify and qualify the right suppliers, using reliable market intelligence to drive decisions.

  2. Market Risk = Brand, compliance, financial and market exposure.When outsourcing part production or even entire product lines, you’re putting your company at the mercy of your suppliers. If they deliver a sub-par product, or fail to deliver completely, your customer will be looking to you – not them – for an explanation.

    Mitigation and Management Approach: Pinpoint the product line’s quality standards tolerance, and determine the possible impact of a compromise. Monitor those lines closely to detect early-warnings before issues wreak havoc with your firm’s brand, ability to meet compliance regulations and the bottom line.

  3. Implementation Risk = Supplier implementation lead-times and production/performance ramp.Know who you’re working with and what their capacity issues are before signing on with them. Working with a supplier for whom your business only represents a fraction of their revenue means you may not get the level of attention that you want.

    Mitigation and Management Approach: Ramp new suppliers quickly to gain early visibility into any risk factors that might hinder production, lead-times, initial performance, etc.

  4. Performance Risk = Ongoing supplier quality and financial issues.Now that you’ve selected a supplier, there’s still a lot of work to be done. Businesses are acquired, go out of business or shift strategy every day, so constant vigilance is needed.

    Mitigation and Management Approach: Continuously monitor all of your suppliers to avoid disruptions caused by bankruptcies, performance issues, ownership changes, labor strikes, geopolitical changes, etc. You may need to tap technology to effectively achieve this level of monitoring.

  5. Demand Risk = Demand and inventory fluctuations and challenges.While some suppliers jump at the chance to take on new opportunities, enthusiasm doesn’t necessarily mean they’re in the best position to excel.

    Mitigation and Management Approach: Watch your suppliers carefully for signs that they are overwhelmed with new business. Don’t let their desire to grow their business affect your commitments.

Risk will always be inherent in the supply chain. By implementing a comprehensive, proactive approach and working with your suppliers to define a strategy based on shared business goals, you will reduce your exposure to risk – and the catastrophic impact it can have.

Not only will you gain new ability to mitigate issues before they wreak havoc on the supply chain, your brand, and the bottom line – a supply risk management framework also supports more informed supplier development, and total-cost decision making to further reduce inventory levels; improve supplier quality; and remove additional cost and waste out of your supply chain.

The best-laid strategies require your team to shift their mind-set, to divide their attention equally between cost-reduction efforts and risk mitigation considerations, but the rewards are well worth the effort.