Category Archives: Cost Reduction

Next Generation Sourcing

As stated in yesterday’s post, for Sourcing to continue to have an impact in a modern Supply Management organization, it needs to be taken to the next level. And I’m not just echoing the statements of The Altimeter Group, AMR, CAPS, Greybeard Advisors, The Mpower Group, Purchasing Practice, or my own persistent ramblings over the years (as I have been pushing for Total Value Management and Next Generation Sourcing strategies since day one). A modern supply management organization truly needs to take their sourcing practices to the next level if they are going to continue to distill value from Sourcing.

When you consider that:

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), or additional demand (that increases the economy of scale).
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no more on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no more off-contract leakage to be stopped.
  • And once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker.

As a result, in order for a mature Supply Management organization to continue to extract considerable value from (e-)Sourcing, e-Sourcing needs to be taken to the next level. Whether you call it DDSN2 (Demand-Driven Supply Networks), Next Practices, or Total Value Management, the message is the same. Take your Sourcing to the next level, or risk decreasing returns.

So where does one start? Upgrade or bring in a modern e-Sourcing platform. For some organizations, who are already using a top-tier provider and who have purchased a suite license, this will just mean learning how to take full advantage of the end-to-end integrated functionality and improving processes. For others, using point solutions from top-tier providers, this will mean buying licenses to the whole suite and/or integrating the point solutions with other solutions they already have. For the market majority, this will likely mean either replacing existing first generation systems (from providers who haven’t made any updates to the base functionality in the last five years) or, in laggard cases, skipping first generation e-Sourcing systems entirely and starting off with modern systems that have better, integrated, functionality.

And then, once these systems are in place, processes are updated to capture more data and consider more information in sourcing decisions, in a process that one vendor on the leading edge likes to call High Definition Sourcing.

Since this process is the closest to what Sourcing Innovation believes is necessary for organizations that want to take their sourcing to the next level (and, in the words of CAPS, become value-focussed), this will be the subject of the next series of posts (starting next week). Stay tuned!

Information … Information … Information

Yesterday’s post discussed the lack of realistic starting points for an average organization that wants to merge onto the value focussed path and the need for information. Then the post discussed e-RFX applications and how they are not always the answer as most are not configured for collecting more than a moderate amount of data, and the information required to make the right decision might require a large amount of data to be collected.

For example, consider the information required to make the right decision in a global freight bid where the company has over 5,000 lanes across five continents that are currently being serviced, in part, by almost 500 carriers. Not only will there be a need to collect up to 1,000,000 LTL and TL bids to know what the lowest rates are, but there will be a need to collect data on capabilities (refrigerated, freezer, hazardous martial, etc.), capacities, and serviced lanes. And then, once all of the information has been collected, past performance, guaranteed service levels, (commitments to) sustainability (such as biofuels and hybrid vehicles) will have to be considered in addition to costs and on-time-delivery capabilities. And if multiple carriers are almost equal, long term viability, strategic partnerships, and/or commitment to social responsibility might also need to be considered.

All-in-all, this represents a significant amount of data that needs to be collected, analyzed, and distilled into useful information — data that is not even going to be collected if a firm is still using a first-generation e-Sourcing platform. This is because:

  1. Traditional RFX tools, which are now a commodity (as every provider and their dog has one — trust me), are not built to collect that much information.
  2. Most of the RFX tools that can handle that much information, typically by way of Excel import and export, are not designed with supplier usability in mind. No supplier is going to quote 5,000 lanes at multiple LTL and FTL levels if they only service 3,000 and 2,000 can be broken into 20 cross-regional groups where each lane in the group is priced the same by mile.
  3. Of the few tools that allow for generic pricing and (typically) single-dimensional overrides, most won’t designed with the ability to easily design multiple levels of overrides and the OLAP-like navigation that’s really need to quickly zoom in on the relevant data items (which need to be viewed or altered).
  4. And while most of the better RFX tools allow a user to define as many RFIs, RFPs, and RFQs as the user desires, these generally have to be crammed into rigid workflows that may or may not fit the scenario at hand.
  5. Plus, while most of the tools can push data out into an auction or a SIM tool (that is the foundation for SPM and/or SRM), most don’t allow data to be pulled back in, since the first generation e-Sourcing model was a linear RFX -> Auction -> Decision Optimization -> Award -> Contract Management -> SPM flow.

And then, once you get past all that, you still have to analyze the data to distill the information required to make a good award decision. Because even the best strategic sourcing decision optimization on the market will fail if it’s not provided with the right data AND the right constraints (or, depending on your choice of terminology, rules). The right constraints can only derived by a knowledge individual that has the right information at her disposal.

So how do get the right information? You take your sourcing to the next level. So what does this Next Generation Sourcing look like? Stay Tuned.

VFS: Are You Ready?

Last week explored the four levels of Value Focussed Supply (VFS) as put forward in CAPS’ recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

There were a lot of good suggestions in the four levels of value focus put forward by CAPS, but a lack of realistic starting points for an average organization that needs to merge onto the value focussed path. As per the second post on the elimination of value leakage, it’s hard to protect revenue if the key revenue streams are unknown. It’s hard to reduce cost if cost has not been baselined. It’s hard to reduce working capital requirements if they, and the reasons for, aren’t understood. And it’s hard to protect corporate reputation if the risks are unknown. But how do you identify key revenue streams? How do you baseline costs? How do you document working capital requirements? And once costs are baselined, how do you go about reducing them in such a way that working capital and corporate reputation are not negatively affected?

You start with information. Information helps an organization baseline costs. Information tells the organization what its working capital requirements are. Information tells an organization what its corporate risks are. And, most importantly, information tells an organization what options it has for reducing costs that won’t negatively affect working capital and corporate reputation.

So where does this information come from? Data, and an analysis of that data. Where does the data come from? Some of it should come from internal systems, from which it will be amalgamated with a spend analysis system into meaningful reports. But the rest should come from (prospective) suppliers, who have access to data that the organization does not.

But how does an organization get that data? The obvious answer is through an e-RFX application, but it’s not that easy. Why not? It’s one thing if the organization is spot buying silver and there are only three suppliers with a surplus available within the immediate area of the factory that needs it within three days and the only information that needs to be collected is the purity, price per pound, and cost of transportation if the supplier delivers, but it’s another thing completely if the organization is renegotiating it’s global transportation contracts. The first situation is a few dozen bids. The latter could be a few hundred thousand bids. Assuming the organization can identify all of the bids that it desires, how does it get the suppliers to provide that much information? No supplier wants to get a bid sheet that requests multiple LTL rates and TL rates for 5,000 lanes … especially if it only services 2,000 of them. A simple RFX isn’t going to solve the problem. So what is?

Tune in tomorrow because, as Number 2 would say, “we want information … information … information“.

VFS Level 1: Eliminate Value Leakage, Part II

As indicated in yesterday’s post, this week will explore the four levels of Value Focussed Supply (VFS) as put forward in CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Association.

According to CAPS, this starts with the elimination of value leakage, and, for the most part, SI is in full agreement (with the disagreements being around where an organization starts plugging the holes). In CAPS’ view, this starts by focussing on four primary components of the balance sheet — revenue, cost, assets, and intangibles — in an effort to find ways to improve them such that the overall corporate position is improved. At this first level of VFS, this means that a company would:

  • Protect Revenue
    by improving quality and stability of supply
  • Reduce Cost
    by reducing unit cost and managing demand
  • Reduce Working Capital Requirements
    by improving working capital management
  • Protect Corporate Reputation
    by taking steps to prevent the media fiascos that would result if
    tainted food or dangerous products were released into the marketplace

and CAPS goes on to give the following examples of:

  • working with key suppliers,
  • looking at alternate fee arrangements,
  • adding better inventory management strategies or early payment discounts, and
  • improving testing and quality inspection process.

These are all valid, and great ways, of eliminating value leakage, but, at least in SI’s view, there are some basic steps a company needs to take before it starts these processes. In particular, SI feels that a company needs to start by:

  • Identifying Key Revenue Streams
    Before revenue can be protected, it has to be identified. Start with a sales analysis to identify the products that are generating the most revenue and then do a cost analysis to determine which of these are, or could be, the most profitable and then focus on these categories as improvements to key revenue streams will be the most effective.
  • Understanding Current Cost, Demand, and Actual Spend
    Before cost can be reduced, it has to be baselined. Do a spend analysis to determine where money is being spent, what the current demand is, and how much the demand is costing you. This will help you identify which categories need the most effort and which suppliers are really key to your success.
  • Understanding and Optimizing Working Capital
    Before working capital requirements can be reduced, they have to be understood. What is the current level of working capital required? Why? And how long is it being tied up for, on average? If capital is moving quickly, inventory optimization might not buy the organization much in terms of working capital reduction, in which case it will have to focus on early payment discounts or baseline cost reduction. But if significant amounts of working capital are tied up in inventory, that is the only thing the organization should focus on until the product is fixed.
  • Identifying the Risks to Corporate Reputation
    If the primary risks aren’t identified, they can’t be protected against. Depending on the type of product being produced, quality might not be the biggest risk to corporate reputation. So a batch of cleaning solution was accidentally watered down by 10%. Is anyone going to notice? Probably not. But if the chemicals used may pose a danger to the environment, then the company has to focus on finding safer alternatives.

SI feels that an organization cannot effectively stop value leakage until it has a good handle on its current situation and has identified where the greatest leakages are. Otherwise, its efforts will likely find only limited success (as the chance of a category having minimal value leakage is just as great as the chance of a category having high value leakage when a category is chosen at random). And even then, there are a few more basic steps a company might have to take but these will be discussed in subsequent posts.

VFS Level 1: Eliminate Value Leakage, Part I

This week will explore the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Association.

According to CAPS, you start with the elimination of value leakage. While this is a good place to start in theory, in practice, at least until now, most organizations increased value in supply management purely by accident. They were given a mandate to reduce cost and when they were no longer able to negotiate better prices or optimize incurred costs (logistics, storage, VAT, etc.), they looked for new ways. Not knowing any, they got creative, and sometimes they got lucky and found strategies that not only lowered costs but increased the overall value of supply management to the organization. At this point, the organizations began an effort to find more value, and began their progression up the supply management value curve, which, in the view of CAPS, and the author, starts with the elimination of value leakage (although the author believes one or two critical steps were overlooked in the report).

According to CAPS, value is obtained at each level of the value curve by focussing on four components of the balance sheet — revenue, cost, assets, and intangibles — and finding ways to improve them such that the overall corporate position is improved. At this level of VFS, this means that a company would:

  • Protect Revenue
    by improving quality and stability of supply
  • Reduce Cost
    by reducing unit cost and managing demand
  • Reduce Working Capital Requirements
    by improving working capital management
  • Protect Corporate Reputation
    by taking steps to prevent the media fiascos that would result if
    tainted food or dangerous products were released into the marketplace

Furthermore, such a company might go about these actions by:

  • Working with Key Suppliers
    to implement Lean, Six Sigma, or TQM (Total Quality Management) processes to reduce defects, streamline production, and increase schedule accuracy like Powercon worked with a key supplier to correct dismal delivery performance and increase customer loyalty in the process
  • Looking at Alternate Fee Arrangements
    like Pharmacare did with ancillary legal services which could be contracted on performance-based fee arrangements and other ABM (alternate billing methods) to reduce costs by 20% to 40%
  • Adopting Better Inventory Management Strategies or Early Payment Discounts
    as reduced inventory translates into a reduction of cash locked up in inventory (as well as reduced storage costs) and early payment discounts not only reduces invoice payments, but reduces a supplier’s need for financing (which is often at higher rates), which reduces future costs
  • By Improving Testing and Quality Inspection Practices
    even though this might increase costs slightly up front since having a better brand increases revenue in the long term and the up front cost quickly translates into long-term savings

These are all great strategies, and, for the most part, great starting points for any supply management organization that wants to increase the total value it provides (and do true “Total Value Management” [e-SourcingForum] [Sourcing Innovation]), but a few of them seem to skip the starting points, at least in SI’s viewpoint. This will be the focus of Part II.