Category Archives: Best Practices

Supply Market Intelligence … Harder than it Looks Part II

In yesterday’s post, we turned our attention to supply market intelligence which, as the maverick points out, is critical as much for supply risk as it is for value creation. But, as we also pointed out in yesterday’s post, despite the plethora of options, finding the intelligence you need can be difficult. All sources have strengths and weaknesses, so you need to be selective to achieve success. Where should you start?

Suppliers

      • financial statements: if the company is public, they must release a reasonably sufficient level of information for a sound financial assessment
      • customer interviews: if you really want to find out how good a supplier is at providing a product or service, ask a customer!

Internal Sources

      • performance reporting: gather all the hard metrics you can!
      • internal stakeholder interviews: any data they have is real company intelligence data

External Sources

      • price index data: and roll your own forecasting!
      • research services: which collect data relevant to your needs
      • blogs and social media: which offer unsolicited third party opinions and reviews
      • public consumption data: from government contracts and import registries which allow you to understand supply vs demand dynamics

This data will give you a mostly factual, relatively unbiased third party picture of the market and supplier performance in the market. All you need is a platform that can automatically gather, consolidate, project, and advise on it all.

Supply Market Intelligence … Harder than it Looks Part I

Building on our recent risk focus, we turn our attention to supply market intelligence which, as the maverick points out, is critical as much for supply risk as it is for value creation.

It’s critically important, but where do you find the intelligence you need? As pointed out in a Spend Matters (main site) post, there are a number of sources that might yield intelligence, including:

Suppliers

  • company websites
  • financial statements / reports
  • request for information
  • supplier interviews

Internal Sources

  • internal stakeholder interviews
  • performance reporting
  • supplier relationship management (SRM) programs

External Sources

  • news feeds and alerts
  • price index forecasts
  • blog and social media
  • peer companies
  • research services
  • advisory programs

But what’s the right source?

Consider the following downsides:

Suppliers

  • company websites display only what the supplier wants you to see
  • financial statements / reports only display high level summaries, they don’t allow you to identify high spend or high risk suppliers or categories
  • request for information only capture what you ask for, and only what the supplier shares
  • supplier interviews again only capture what you ask for, and only what the supplier representative shares

Internal Sources

  • internal stakeholder interviews capture their expertise and bias
  • performance reporting captures hard metrics, but only what you take the time to capture
  • supplier relationship management (SRM) programs vary by company and supplier

External Sources

  • news feeds and alerts – cover the angles exposed or available to journalists
  • price index forecasts – use in-house algorithms that may or may not be right
  • blog and social media – cover the angles seen by bloggers
  • peer companies – may cover the views of the peers, or may cover the perceptions they want to pass on
  • research services – tend to provide hard data, but on the areas they cover
  • advisory programs – are limited to the expertise of the advisors

So what’s right?

How Should You Define Procurement Success?

This question is encased in a nut that’s quite tough to crack. We hinted at the importance of defining it three years ago in our post that asked how do you define Procurement success which noted that if you consider the art of the Strategic Sourcing Process, the Category Management Process, or the Contract Management Lifecycle, you [not only] see that they all start about the same at a high-level but that a key requirement of each step is an acceptable definition of success.

This means that if you want to be successful, you need a good definition of success but what should it be?

If you ask the CFO, she will say it should be cost savings! Reduce the outflow!

If you ask the Chief Engineer, it should be the best quality and reliability money can buy!

If you ask the Production Chief, it should be rock solid supply availability.

If you ask the CMO, it should have the most unique gee-whiz features on the market for the biggest marketing splash.

If you ask the VP of Sales, it should be the product that comes with the most value-adds so they can command the greatest price.

And so on.

On SI, we have repeatedly said the definition of procurement success should always be the outcome that brings the most value to the organization, but this can be hard to define when there are a number of competing viewpoints on what value is.

However, we can define Value as the outcome that balances the tradeoff between the goals of the respective stakeholders for maximum return against an agreed upon value scale that normalizes a dollar of savings (for the CFO) against a reliability metric (for the Chief Engineer) against an expected availability metric (for the Production Chief) against a feature differential against the market average (for the CMO) against a value-add differential (for the VP of Sales) [etc].

Now, you might be wondering how you do that? The answer is simple: define an expected dollar value. It’s not as hard to do as you think (as long as you have the [big] data and the model and the software to calculate it)!

The CFO metric is easy, a dollar of savings is a dollar of savings.

The reliability metric is not that much harder. A failure rate of 90% vs 93% during the warranty period has an incremental cost equal to 3% of the units times replacement cost (which is base product cost + processing cost if outside of supplier warranty or processing cost + return cost if inside supplier warranty) and this cost can be amortized per unit.

The supply availability metric is involved, but still easy to define. First you have to calculate an expected chance of disruption based on it. Once you do, the cost can be approximated as follows: (% chance of disruption * % length of disruption x cost per day of disruption) amortized by units. If there is 10% chance of disruption, then you expect one every 10 years, for the estimated length of time, at the estimated cost per day, and amortize that cost over each unit purchased each year. Not perfect, but a good approximation. To find the conversion from expected availability percentage to chance of disruption, you mine your data and extrapolate the multiplier. Easy peasy (with a modern cognitive or deep analytics platform).

The CMO metric is tricky. Just how much better is that gee-whiz feature? Probably not nearly as important as the CMO claims. To figure out an approximate dollar value per unit here, you will have to mine historical data to see the incremental marketing value from the company’s “most differentiated” or “feature rich” products compared to its “least differentiated” or “feature poor” products as compared to the estimated market share each product obtained. If “feature rich” products typically command an extra 10% of market share, each unit is valued at a premium of 10%.

The value-add is easy — mine the historical data to extract the dollar value of each “value-add” available to the company.

Then, to find the optimal trade-off during a sourcing event, build a multi-objective optimization model that maximizes the overall value generated from these goals.

In other words, what used to be downright impossible is now pretty straight forward with strategic sourcing decision optimization and cognitive sourcing.

The Snares of Sourcing

Sourcing is the key to supply management success, but only if it is executed in an effective manner. Otherwise, there is a risk that the sourceror will make a decision that makes the situation worse, not better.

For sourcing to be effective, it has to add value. Otherwise, there is no benefit to sourcing compared to a procurement spot buy. Value can come in many forms, including, but not limited to, better quality, lower cost, more value-added, services, and guaranteed availability. However, especially from the CFO’s view, lower cost and supply availability are generally the priorities as bottom line improvements depend on cost reductions and sales for profit.

But for sourcing to be effective, the sourceror has to avoid the traps, traps which come from their lack of market knowledge, supply market knowledge, and e-Sourcing expertise. Specifically, if a sourceror has:

  • lack of market knowledge

    and does not understand whether supply exceeds demand or demand exceeds supply, the sourceror can choose the wrong event type — an auction when supply is scarce, a strategic negotiation with the incumbent when supply is plentiful, and so on

  • lack of supply market knowledge

    and does not seek out more knowledge, she could pass over inviting the best suppliers to the event or eliminate supplier with seemingly high or low price points without understanding the additional value they can bring with commitment and buyer expertise

  • lack of e-Sourcing expertise

    and does not know the ins and outs of refined sourcing process and the best way to engage suppliers, extract detailed cost models, or determine the right supply base split, inferior decisions will be made

So how can the sorceror avoid the traps? Especially if she does not have the knowledge? Cognitive sourcing platforms that can fill in the gaps.

A good cognitive sourcing platform will:

  • provide the buyer with up-to-date market knowledge that allows a user to always understand the supply/demand balance or imbalance in the market
  • provide the buyer with a good overview of the current and potential supply base
  • provide the buyer with the typical sourcing strategy for the category and (supply) market dynamics to help the buyer make a decision

Will the cognitive platform always be right? No. But it will be most of the time, and that will help the buyer make better decisions more often. And avoid most of the sourcing snares.

Category Management Savings Drying Up? Time to Cross-Optimize!

Leaders know that the best way to savings success, especially when the CFO and CEO demand savings today (even though this could sacrifice value tomorrow), is category management — a razor sharp focus on buying like products from like suppliers that allows for apples-to-apples comparison across products on key dimensions of price, quality, warranty, lead-time, etc. so that the best buy that meets the mandatory savings target can be made every time (and as much value preserved in the category as possible).

But Leaders also know, just like the third auction in a row increases costs, good category management sees savings fall rapidly as the fat is quickly squeezed out of the margin and the waste quickly squeezed out of the production, delivery, and inventory process as everything is optimized. This means that as soon as raw material costs go up, category costs go up, and not down.

This can be problematic when (unrealistic) expectations are placed on the Procurement department year after year and savings need to be found even when, apparently, none exist. But here’s the thing, while they don’t exist in the raw materials, or even the overhead, of production, they do exist in the distribution and inventory and still exist in the volume. But only in volume beyond what’s in the category.

This means that the only way to extract them is to increase the volume, which means that you need to simultaneously cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

This also works in CPG — a supplier may supply computer devices, audio devices, and home security devices — and while you may want to manage these separately, you want to source them simultaneously. And it will work across seemingly unrelated categories if you are buying from suppliers that are essentially distributors (like office supplies vendors, MRO vendors, etc.). All you need to do is find a set of categories where the majority of products come from the same supply base. How do you do this? Simple: use a modern spend analysis tool.

And how do you source multiple categories simultaneously and cross-optimize logistics, inventory, and discounts for the lowest overall total cost of ownership (while maintaining value)? Strategic sourcing decision optimization — the technology SI has been telling you to acquire for a decade. Which vendor? Whichever one suits your needs best. Coupa, Jaggaer ASO, Jaggaer Bravo, and Keelvar are all great. Determine is re-building the Iasta capability on the b-pack platform, and when complete, will join the A-list again … and BidMode is about to hit the scene. Just get one, so you’re not left behind.