Category Archives: Best Practices

Show Me The Money! (Supply Chain Cost Reduction Opportunities)

Show Me The Money!

Sorry to disappoint you, but this isn’t a post about Cuba Gooding Jr., whom all of you action fans will remember as recurring minor character Billy Colton in MacGyver near the end of the series.

Instead, this is a post about how you can Show Me The Money by applying the proper technology at the proper places and proper times in your supply chain to save big, even with rising material costs, inflation, and the global talent war.

The reality is that unless you are best-in-class, and the harsh reality is that, by definition, the vast majority of you are not, your supply chain is hemorrhaging cash. And in all likelihood, lots of cash. Where?, you ask. Everywhere!

Let’s take a simplified PC supply chain for example. Raw materials are mined and shipped to a processing plant where they are refined and shipped to base part manufacturers. These base parts (such as chips, wires, etc.) are then shipped to component manufacturers who produce circuit boards, hard drives, cables, etc. These base components are then shipped to an assembly plant where the PC is assembled. From the assembly plant it is shipped to a central distribution center where it is then shipped to either a regional distribution center, store, or your home, depending on the sophistication of the distribution center.

Furthermore, the specifics of your supply chain depend on who you choose to buy from, who your suppliers choose to buy from, who is chosen to handle your transportation requirements, and who you choose to sell to.

From this example, we derive the following fundamental sources of cost:

  • Labor (inc. raw material collection, processing, & subsequent part and component handling)
  • Parts (inc. design, component raw materials, & built in production operations)
  • Operations (inc. part production, handling, & overhead)
  • Transportation (inc. raw materials, parts, components, & finished product)
  • Buying (who you buy from, where, & when)
  • Selling (who you sell to, where, & when)

However, from a savings viewpoint, not all of these are equally important, since only some of these are really hemorrhaging cash, despite their absolute value on the cash flow statements.

  • Labor is more or less defined by market rates. Moreover, companies that pay more for more productive people often have a higher ROI per person than those that pay less.
  • Selling is marketing, materials, and labor. The first is generally not under your purview, and again the issue is not cost, but results; the second is covered by buying; and the third we just discussed.

This tells us that the fundamental sources of cost, and thus the fundamentally sources of unnecessary costs, ripe for saving, have to do with:

  • Parts
  • Operations
  • Transportation
  • Buying

And those of you reading regularly will know what the answers are.

But back to the point – how do you Show Me The Money? You use these solutions to identify where you are hemorrhaging cash, tackle the issues head on, and stop the leak. And then you point to the big, fat increase on the balance sheet as your doing. And that’s how you Show Me The Money!

It’s also why I keep talking about companies like the following:

  • Apriori, Akoya (acquired by I-Cubed), etc.
  • Informance (merged with QlickiT, acquired by Catalyst IT), Apexon (acquired and merged with Infostretch), etc.
  • CombineNet (acquired by Jaggaer), i2 (acquired by JDA, rebranded Blue Yonder after the acquisition thereof), etc.
  • Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric), Procuri (acquired by Ariba, acquired by SAP), BIQ (acquired by Opera Solutions, rebranded ElectrifAI), etc.

They may be small, they may be new, but they are trying to build a solution that will help you find those savings leaks that you are not likely to find on your own. So keep reading!

Spend Analysis I: The Value Curve

Today I’d like to welcome Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI) who, as I indicated in my There’s No Spend Analysis Without the Slice ‘N’ Dice post, is going to be authoring the first part of this series examining what is required for a true spend analysis system, spend analysis 2.0 if you are part of the 2.0 movement, as opposed to just a basic spend visibility system.

Spend Analysis has always suffered from what the late British humorist
Stephen Potter might have called the “So What Diathesis.” In other words,
now that you have your spending loaded and classified, what next? Well,
if you’ve never seen your purchasing data loaded into a spend analysis
system, you’re in for a treat, because you can find savings opportunities
just by drilling around. It’s often that easy — drill around; find
opportunities.

However, once the low-hanging fruit is harvested, which can take
anywhere from 6 to 12 months, the value of the spend analysis system
declines steeply — at which point Mr. Potter’s observation comes home
to roost. As illustrated below, there is a moment at which the cost of
the spend analysis system begins to exceed its ongoing value.

It is shortly after this time that (1) usage of the product drops to low
levels; (2) the rest of the organization begins to question the value of
the software; and (3) stakeholders come under pressure to justify continued
high expenditures.

That’s why it’s odd to hear people talk about “The Spending Cube” —
in capital letters — as though there were only one data cube ever
to be built. Actually, there are many different ways to look at spend,
and there’s lots of spend data that simply can’t be organized into a
single data cube anyway. How about a compliance cube, oriented around
invoice level data? A purchasing card cube, specific to p-card idiosyncrasies?
A T&E cube, built from travel agency data on “best price” versus
“actual price,” tracking employee travel and the reasons for the discrepancies?

In fact, it’s obvious to anyone who has worked with multiple datasets at
the A/P, PO, and invoice level that there are many, many different kinds
of data to analyze. Each dataset addresses more opportunity, and presents
another chance to apply a sophisticated analysis tool. Some of these
datasets aren’t “spending” datasets at all, but consist of demand-side
information — for example, cell phone or fleet vehicle usage records,
or operational data such as equipment recovery and maintenance logs.

If a spend analysis system makes it easy to load data and create new datasets,
which it should; and if the system supports as many datasets as you’d like,
as it ought; then there really isn’t any limit to how often the system can
be used, or to how many different kinds of data it can be applied. Which
means that a full-utilization spend analysis system value curve looks more
like this:

In other words, each use of the spend analysis system provides high
initial value, as well as residual value; but the system is used again
and again for new sets of data. The value of the spend analysis
software therefore remains high over time.

Next installment: The Psychology of Spend Analysis

Sometimes 80% is enough … (when employing Decision Optimization)

Over on Spend Matters [WayBackMachine] today, Jason put up a shot post titled: “Why 80% is not enough”*.  Of course, I couldn’t leave this one alone, since sometimes 80% is enough.  The comments, which could form a post in themselves, are reprinted below.

Jason:

Obviously not an Optimization Post! Because, with optimization, often 80% is enough! Let’s say you’re operating at 90% efficiency. That says you have 10% to go. If you can achieve 80% of this goal, and get to 98%, and do it affordably (and increase cash flows and profit in the process), that is downright phenomenal regardless of the industry you’re in!!!

For another example, let’s say your primitive spreadsheet model will give you an award allocation that is 80% optimal. Let’s also say that your Platform Optimization Engine (POE), bundled with your cutting edge e-sourcing suite, will give you a solution that’s 96% optimal (80% better than what you would otherwise get). Let’s say this event is for a 10M spend, that the amortized cost of the POE for this event is 20K, and the cost of a one-time use of a Best-of-Breed ( BoB ) solution, guaranteed to achieve 100% of optimality, is 200K. The POE saves you 16% of 10M minus 20K, or 140K. However, BoB won’t save you anything since the 20% of 10M, or 200K, “saved” by BoB is just enough to cover it’s cost, leaving you with a net savings of 0.

In other-words, when you’re talking about Optimization, Often 80% is Enough.

For more insight into decision optimization (particularly as it relates to strategic sourcing), Part VII of my CombineNet Series went up over on Sourcing Innovation today.

Dan:

Precisely. I was referring to a single event, initiative, etc.

The reality is thus: Sometimes 80% is enough, and Sometimes 80% is not even close. It’s all relative.

If you’ve got 80% of spend under management, that’s a big win. (Most companies struggle to get 50%!) But if your total spend is only 80% of optimal, that’s a huge loss.

The truth is the following:
* you need to get as much spend under management as possible
* you need to actively manage it (contract management, compliance management, spend analysis and maverick spend identification, invoice verification, etc.)
* you need to improve your operations constantly
* but you should be satisfied with improvements that close 80% of the gap – you’ll never be perfect at anything, but getting 80% closer to optimal from where you are today is a huge cost savings. Moreover, if you haven’t already, you’ll quickly find out that the 80/20 rule holds in technology too – emerging best of breed solutions that get you 80% closer are readily affordable (e.g. Procuri & Iasta vs. Emptoris & Ariba), but solutions that go beyond 80% improvement are very costly.

So take your 80% win in each category with emerging best-of-breed on-demand offerings, and wait for improvements to come along to get you 80% closer again in the next iteration. (And if they don’t, it’s on-demand, junk it and move to the next on-demand solution if that’s what it takes.)

Consider this: Let’s say I’m spending 500M on acquisitions, and it will cost roughly 10M in on-demand software, systems, and labor to reduce that to 430M where as it will cost 40M for high-end best of breed products and consulting armies to get that spend down to 400M. Which should I choose? The 10M (80%) solution, as it saves me just as much as the 40M (100%) solution: 60M. (500M-430M+10M = 500M-400M+40M)

And that’s why I preach TVM – Total Value Management – based strategic sourcing efforts. Don’t just look at your inbound cost or even your total cost of ownership to produce the product, look at your outbound costs as well. (You have to in turn ship your products to your clients, poor quality will generate returns that will eat away your savings, etc.)

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

 

Real Risk (in the Supply Chain)

As evidenced by the considerable number of posts in my Risk Management category, including my posts on Managing Business Risk and Disaster Recovery Planning, Risk is one of my favorite topics since I believe that with innovative thinking, much can be done to reduce risk and prevent significant disruptions regardless of what form they arise in or how unexpected they are.

I’m not alone in this non-revolutionary form of thinking and it was nice to see the onslaught of risk-related articles in the supply chain media in recent months. Three articles in particular that stood out to me were Line 56’s “Managing Global Supply Risk”, ISM’s “Mitigate Risk, Sustain Supply”, and Knowledge @ Wharton’s “Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption”.

The Line 56 article points out that global sourcing needs a different set of management guidelines, metrics, and skill sets that focus on addressing the five key sources for supply risks, which it defines as:

  • longer lead times
  • quality control is different in each country, if there is control at all
  • financial data on global suppliers can be inaccurate or unavailable
  • cultural differences prevail overseas
  • laws and regulations differ significantly from those in the U.S.

The article offers three sound suggestions for managing global supply risk:

Executive-Level visibility into exposure and dependency
If they see the risk, they’re more likely to provide support and budget for the development and implementation of risk mitigation plans.
Continuous Monitoring of all Suppliers
You want to catch wind of a potential disruption BEFORE it occurs, not after!
Complete, Accurate, Forward-Looking Supplier Information
It’s not just the business you plan on doing with your supplier tomorrow that is important, but the business you plan on doing with them next year. Make sure that they have the capability and sustainability to deliver before signing the contract.

The ISM article notes that remaining competitive requires mitigating potential risks by understanding supply chain interdependencies and discovering alternative solutions for areas with high exposure. After all, for the past five years a potentially catastrophic event to an organization’s supply chain has occurred and natural disasters, terrorism, and political unrest is not going away.

The ISM article also points out that the key barrier to addressing risks is the lack of a clear return on investment – executives are not receiving credit for preventing problems, only for leading their organizations to achieve superior financial performance. Senior management needs to understand that superior performance requires plans for sustained financial success, and those plans require both innovation and risk mitigation components. Maybe “amortized expected loss” needs to become part of the annual budget where the loss is the average financial loss experienced by an organization of equivalent size and geographical diversity over the last five years to unforeseen supply chain disruptions and disasters. Then, any plan that can be used to reduce that number could be hailed as a success and managers would be hailed for the risk prevention efforts instead of chastised for not spending more time on sales and marketing or beating up their suppliers for cost concessions (which we all know is a losing strategy in the long term).

The ISM article also has some good advice on how to identify potential supply chain risks and mitigate their potential impacts:

  • evaluate high-margin, high-revenue products to identify which disruptions would have the greatest financial impact
  • modify the strategic sourcing approach to include risk analysis
  • establish leading indicators to help identify emerging problems
  • conduct supply chain process mapping to understand dependencies and potential causes of a supply chain failure cascade
  • use impact modeling to determine (catastrophic) breakage points or single points of failure (and remove them)

This brings us to the Knowledge @ Wharton article which notes that experts from BCG and Wharton generally agree that managing supply chain disruptions revolves around two goals: first, to thoroughly understand the potential of identified risks; and second, to increase the capacity of the supply chain — within reasonable limits — to sustain and absorb disruption without serious impact and that risks fall into three main categories: operational contingencies, abrupt discontinuity of supply, and natural hazards.

In addition to noting that in order to mitigate and manage a disruption risk, you must first understand the vulnerabilities, it presents a multi-step approach to disruption risk management that you can use as an outline to develop your own risk mitigation planning process.

  1. Obtain senior management understanding and approval and set up organizational responsibilities for managing the disruption risk management process.
  2. Identify key processes that are likely to be affected by disruptions and characterize the facilities, assets and human populations that may be affected.
  3. Undertake traditional risk management for each key process to identify vulnerabilities, triggers for these vulnerabilities, likelihood of occurrence, and mitigation and risk transfer activities.
  4. Report on, periodically audit, and conduct management and legal reviews of implementation plans and results on an on-going basis (e.g., of near-miss management and other disruption risks).

Great companies create supply chains that respond to sudden and unexpected changes by building “Triple-A” supply chains that are agile, adaptable and aligned. Triple-A supply chains satisfy the following Triple-A goals:

  • Agile supply chains respond quickly to sudden changes in supply or demand.
  • Adaptable supply chains adjust supply chain design to accommodate market changes.
  • Aligned supply chains establish incentives for supply chain partners to improve performance of the entire chain.

Also, for more reading on supply risk management, my original weekend series is still up over on e-Sourcing Forum [WayBackMachine]. (Introduction, Risks and the Need for Resilience, Managing Risk, and the bonus SI post WisdomNet’s Point of View.)

Don’t Buck the Brand

A few months ago, CPO Agenda published an article entitled Backing the Brand that stated aligning procurement and supply strategy with brand building and marketing is vital for long term success. A couple of weeks ago, the Frasers/PMAC Newsletter published the article Wising up to Marketing Costs that stated that marketing seems to be one of the final frontiers in strategic sourcing and that some companies are using sound strategies to save millions of dollars on marketing, without missing deadlines or diluting the creative intent. In other words, not only can the logic work with the magic, as outlined in my Magic & Logic Posts (Part I and Part II), but that Procurement can Back the Brand profitably.

Backing the Brand states that a successful brand can

  • differentiate a product or service
  • enhance a product’s competitiveness
  • influence the price-elasticity of demand
  • ease the introduction of new products and services
  • create customer recognition and loyalty
  • enhance leverage over upstream and downstream supply chain partners
  • create long term shareholder value

In addition, it states that even though procurement and supply chain may not always dictate a successful advantage on their own, it is clear that differentiation and customer retention might be impaired if they are not aligned with marketing and brand strategies and that only those organizations that can institutionalize continuous cross-functional implementation of a linked brand and sourcing strategy are likely to be successful in the future.

The article then goes on to offer five steps to successful alignment, as well as three case studies of organizations that have succeeded in successfully linking procurement and marketing and three organizations that have failed, but like other articles extolling the virtues of a procurement and marketing partnership, it skips over the simple first steps to success.

That’s where the article Wising up to Marketing Costs comes into play. It describes how your procurement department can make use of a category specialist model for buying and outsource acquisition of marketing categories such as print management that not only costs large organizations millions of dollars annually, but often costs those same organizations in excess of a million dollars of unnecessary spend. It also describes how the deployment of eProcurement solutions can save you money while giving Marketing the speed and flexibility they require.

So Back the Brand – and be the only department in your organization to have a double impact on the balance sheet. Make Charles proud.