Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 11 August 2006

One of the hot topics in sourcing today is the trend toward center-led procurement organizations where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization, especially in large enterprises (>1B).

Today we are going to compare and contrast center led procurement with the traditional centralized and de-centralized models of procurement and overview some of the advantages of the center-led model. Tomorrow we will delve in to the role of a sourcing professional in a procurement center of excellence and overview some of the challenges you and your company will face in shifting to a center led model. We will wrap up on Sunday with an overview of some best practices and strategic focal points that will help you get the most out of a center led organization.

A classic decentralized model of procurement, where each business, functional, or geographic unit is responsible for its own purchases, has a number of advantages. It empowers individual business units with autonomy and control over their process and design decisions and improves their overall satisfaction. It speeds process and issue resolution and allows your organization to take advantage of expertise in the local market. However, it has a number of significant disadvantages. It does not allow you to leverage your corporate spend or align the business unit objectives with the objectives of your organization. There is little coordination or information sharing between divisions, best practices are not shared, and supply costs and performance are uneven across the enterprise. Furthermore, your operating costs are often quite high.

A newer, centralized model of procurement, where all procurement goes through a single, central organization, has many advantages. First of all, unlike the decentralized model, it allows you to fully leverage your corporate spend across the enterprise and drive standardized sourcing processes through the organization. The inherent economies of scale allow you to wield the full power of your spend, enhance operational efficiencies, and improve knowledge sharing and best practice execution. However, it too has disadvantages. You lose the extensive knowledge of the individual local supply markets and consumption patterns of the decentralized structure, which often results in sub-optimal buys for many regions. The risk of maverick buying increases when your geographically dispersed site managers do not agree with centrally mandated decisions and this impacts local supply, quality, or reaction times. Forcing centralized buys of commodity or service categories not suited for centralized buying can actually increase cost or service quality. Reaction times to unexpected changes in supply or demand suffer, which is critical if your profit margins depend on demand-driven supply strategies.

However, a center-led model of procurement, where a procurement center of excellence (COE) focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing while leaving individual buys and tactical execution to the individual business units gives you the best of both worlds – all of the advantages of the centralized and decentralized models with minimal disadvantages.

The center led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. You increase operational efficiencies and decrease overall operational costs while maintaining the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.

Furthermore, a recent study from Aberdeen Group demonstrated that organizations with center led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management. That’s probably why more then 75% of companies surveyed expect to have either completed, or started a transition to, a center led procurement organization by 2008. However, with that volume of savings, why wait?

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 30 July 2006

Friday we introduced you to supplier performance management and yesterday we discussed some of the challenges in developing and implementing a supplier management program. Today we will discuss some best practices and steps to success.

Many of the eight best practices that we discuss below grow out of the C5 (connect, coordinate, check, control, and cultivate) Aberdeen operational supplier management framework, as discussed in Aberdeen Group’s recent “Supplier Performance Measurement” Benchmark Report.

The first best practice is open communication and data sharing between parties to make sure that everyone is on the same page.

The second best practice is strategic supplier selection (often known as supplier rationalization) for strategic engagements. This generally means concentrating purchases with a small set of suppliers to provide the buyer with greater leverage and fewer suppliers to proactively manage in performance and quality improvement initiatives. This does not mean single sourcing, as that is wrought with risk.

The third best practice is the definition of mutually agreed upon performance targets and mutually agreed upon metrics. Create joint action plans with your suppliers to meet these targets.

The fourth best practice is continual scorecarding to insure that the metrics are continuously up to date. Scorecarding should be done at least monthly, data tracked at a granular level by location, trade lane and product family, and linked to customer facing metrics. Linking primary KPIs across processes helps supply managers understand how their metrics link up with those of their customer facing peers.

The fifth best practice is proactive monitoring of the supply chain on a regular basis. This is usually done by way of business process management (BPM) technology that can alert stakeholders to exceptional conditions, assign accountability, track resolution progress, and automatically update affected systems.

The sixth best practice is the implementation of cross-functional problem resolution consistent with overall business objectives. Considering that there is a huge opportunity cost associated with human productivity losses from resolving supplier performance problems, it is vital that problems are resolved quickly and correctly. Leading companies use pre-programmed rule-management systems to guide them through intelligent resolution strategies. These systems are updated regularly with best practices.

The seventh best practice is the implementation of control points at suppliers to minimize mistakes. Utilize technology to check that items and quantities on supplier’s shipping documents on open order lines reflect those on the most up-to-date purchase order.

The eighth best practice is the use of predictive analytics and KPIs to transform supplier scorecards into forward looking risk management instruments to identify potential problems well before they materialize. Best in class firms scorecard, but leading firms are now using predictive analytics to spot inflection points and KPI correlations that identify potential capacity issues, lead time variability, quality, or supplier financial issues before they show up as a metric on a scorecard.

In Aberdeen’s “Supplier Performance Measurement Benchmark Report”, they identified Steps to Success for laggards, average performers, and best-in-class enterprises alike. These steps were thought out, generally applicable and on-target so we will repeat them as-is and refer the reader to Aberdeen’s report for additional insights.

Laggard Steps to Success:

1. Measure supplier performance constantly, and at least monthly. This is one of our eight best practices and key to continued success.
2. Improve visibility into supplier activity and inbound shipments. This will insure that your data is not only up to date but reliable.
3. Measure the downstream impact of supply disruptions. This will help you create actionable contingency plans that will minimize the cost of such disruptions when they can not be avoided.
4. Create a cross-functional review team. A key to sourcing success in general, it is especially true in supply risk management and supplier performance management.

Industry Norm Steps to Success:

1. Transform procurement and material managers into supply base developers. This is the essence of strategic sourcing best practices and improves your supplier performance management efforts across the board.
2. Implement supply chain management technology and manage supply disruptions based on business goals. This is another one of our best practices and ensures that downtime and costs associated with a disruption are kept to a minimum.
3. Insert control points at suppliers. Yet another one of our best practices, this helps catch potential mistakes that could be costly before they happen and streamlines operations.
4. Make scorecarding more granular. Good scorecards are granular scorecards and allow you to quickly zoom in on the root cause of a problem.

Best in Class Next Steps:

1. Apply statistical process control techniques. Take your processes up a notch with statistical control theory.
2. Adopt business process management technology. A best practice that allows you to catch exceptions as soon as the relevant data enters your system and stop small problems before they blossom into large problems.
3. Evolve your scorecard into a forward-looking risk management instrument. A best practice which helps you predict potential supply chain problems and take corrective action before your monitoring systems even notice a blip is the ultimate evolution of supply performance management.

For everyone:

1. Ask an expert. As the great Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” The best learn from the best. Look externally for best-in-class providers to help you become best-in-class in supplier performance management.

For more information on supplier performance management, see the “Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 29 July 2006.

Yesterday we introduced you to supplier performance management, a methodology for reducing supply risk, driving continuous cost reductions and performance improvements, and accelerating savings. Proactive supplier performance management programs can improve service levels by 10 to 30%, improve invoice accuracy by 10 to 20%, and reduce inventory levels while increasing on-shelf availability. (For more advantages of supplier performance management, check out Aberdeen Group’s recent “Supplier Performance Measurement Benchmark Report”.)

Today we are going to talk about the road to success, some of the challenges you will face, the requirements you will need to address, and the operational framework that will get you there. Tomorrow we will continue with a discussion of some best practices and steps to success.

Successful supplier performance management is a continuous cycle of supply and capability assessment, performance monitoring, and improvement identification. A good starting point is the Aberdeen C5 operational supplier management framework: connect, coordinate, check, control, and cultivate. (Aberdeen uses monitor and improve, but I prefer check and cultivate.)

The cycle starts with integrating suppliers into an exchange, proceeds to a synchronization of buyer requirements with supplier capabilities, implements scorecards and metrics to measure performance, tracks performance against SLAs, identifies exceptional situations, resolves problems and disruptions according to business objectives, and employs analytics to identify defect patterns and unpredictability to eliminate root causes and identify new opportunities to remove cost from the supply chain.

The cycle defines a number of requirements that must be met before a good performance management methodology can be put in place. Collaboration systems are required to successfully integrate suppliers into your systems and processes, visibility is required to properly align supplier capabilities to your requirements, well-defined metrics need to be defined to asses performance, and monitoring systems that support granular data need to be implemented to automatically detect deviations and exceptional events. Data needs to be timely and reliable in addition to your suppliers.

These requirements are wrought with challenges. Without good data collection and analysis systems, the detection of defect and supplier unpredictability patterns can take weeks or months. Without good collaboration systems, coordinating internal functions is challenging enough without trying to coordinate internal functions and external schedules. Thus, the selection of appropriate technologies is critical.

A synchronized view to the data for all internal and external shareholders is critical. There can be no meaningful discussion about performance improvement if different users are measuring data points against different metrics. However, this is challenging since every company operates differently, follows different processes, and interprets data in different ways. Again, good technology choices will help you in this endeavor.

So, how do you get to a synchronized view with shared scorecards and metrics? Hardwork, dedication, and outside expertise. I firmly believe that this is not an area that you should attempt to master on your own. Bring in consulting experts to get you on your feet quickly and deploy best of breed solutions. Although I’m not going to recommend a specific solution, I will point out three companies in the space, in alphabetical order, that you could start with in your search to meet your technology and consulting needs: Apexon, Nexprise, and SupplyWorks. Just make sure that whomever and whatever you select for supplier performance management integrates well with the e-Sourcing and e-Procurement systems you are using, since SPM tools are another piece of the framework, and not a be-all end-all solution.

For more information on supplier performance management, see the “Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 28 July 2006

Last weekend we discussed supply chain risk and how important it is in today’s efficiency based supply chains where a single disruption can cost a corporation six, seven, or even eight figures and when more than 80% of supply managers reported in a recent Aberdeen study on “Supply Risk Management” that their companies experienced supply disruptions within the last 24 months. We discussed the need for resilience, flexible processes, and risk management.

One of the major strategies we cited for risk management was the adoption of risk mitigating sourcing strategies aligned with your supply base management strategies. We formally defined supply base management as the process of determining not only what the right number of suppliers are but who the right suppliers are, and indicated that it doesn’t stop there. Good supply base management includes continual proactive supplier development where you work with your suppliers to drive continual performance improvements.

This brings us to this weekend’s topic: supplier performance management. Best-in-class organizations have best-in-class supply bases that continually exhibit best-in-class performance across the supply chain. Since performance improvement is a continual process, and not a one-time deal that happens by chance, it needs to be managed and best-in-class sourcing organizations manage their performance and that of their suppliers.

Supplier Performance Management (SPM) is a business practice that is used to measure, analyze, and manage the performance of an organization’s performance in an effort to cut costs, alleviate risks, and drive continuous improvement. The ultimate intent is to identify potential issues and their root causes so that they can be resolved to everyone’s benefit as early as possible.

Considering that Aberdeen found that companies with formal performance measurement programs were able to improve supplier performance by 27% and that enterprises that shared performance data with suppliers generated 61% greater improvements in supplier performance than enterprises that withheld this data, the benefits of supplier performance management compared to the costs of trying to recover from a preventable disruption are phenomenal.

For more information on supplier performance management, see the “Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 23 July 2006

Friday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises. Yesterday we discussed the different types of supply chain risk that an organization needs to prepare for, the need for resiliency in its daily operations, and the classic strategies used to prepare for risk. Today we will discuss modern strategies for supply chain risk management and supply network planning.

The good news is that it is possible to design supply chains that are robust enough to profitably continue operations in the face of expected deviations and unexpected disruptions and quickly recover from disasters. The foundation is a strong, stable supply network forged from good supply base management, strong supplier links, and continuous improvement and a corporate culture that embraces change and flexibility.

In fact, the factor that has been found to most clearly distinguish companies that bounce back quickly from a disruption from those that do not is a corporate culture geared towards flexibility. A flexible culture is one where communication is pervasive and continuous. Low-level employees have the power to make decisions and the end goal is continuous improvement. (See the recent article in CPO Agenda entitled “Supply Risk Management”.)

True resilience comes from attacking supply chain risk from all the angles and having operational, tactical, and strategic plans to deal with it. Operationally, companies need to be able to quickly fill in gaps that result from disruption and reschedule activities so that business processes remain synchronized and deliveries are made within customer delivery windows. Tactically, plans need to have redundancies in terms of human resources, machine resources, logistics and supply organizations to allow for this flexibility. Strategically, companies need reliable partners with intrinsic capabilities in deviation and disruption handling, and the skills and ability to adapt to changing market conditions.

Four strategies for building resilience into your supply chain and mitigating risks are production versatility, concurrent processes, decision postponement, and risk-mitigating sourcing strategies aligned with your supply base management strategies.

Production versatility is the ability to move production between plants, use interchangeable and generic parts (Build to Order), and apply employees to different tasks. The ability to move production between plants minimizes risk of complete supply disruption with respect to a part or product, the use of a small number of commodity parts simplifies operations and concentrates procurement outlays and creates the flexibility to move the business among suppliers, and flexible cross-trained employees will be able to step in and get you back on track when something goes wrong.

Concurrent processes with respect to product development, ramp-up, and production/distribution allow you to reduce time to market, decrease the time required to recover from supply disruptions, and improve overall operating efficiency.

Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain, thereby enabling build to order operations, allows for the diversion of parts and semi-finished material from surplus areas and products to satisfy shortages.

Risk-mitigating sourcing strategies aligned with supply base management initiatives minimize the possibilities of preventable disruption, maximize your response time, and allow you to define contingency plans for immediate execution upon a supply chain disruption. There should be a contingency plan for each priority disruption that includes both a detailed description of the procedure to follow and a definition of roles and responsibilities in the event of the disruption.

Designing a robust supply chain and a resilient supply base is a straight-forward five-step process that starts with defining risks and ends with the definition of mitigation and monitoring activities. Specifically:

1. Assess Risk Probabilities and Risk Impacts
2. Select the top n high-probability high-impact risks
3. Identify Risk Mitigation Strategies
4. Implement the strategies
5. Monitor the supply chain

Risks can be classified according to how likely they are to occur and how devastating the consequences can be. Contingency plans must exist for every risk that is both likely and known to have a significant impact. Remaining risks should be prioritized and contingency plans outlined for the top 10 or 20, depending on how many make sense from a cost-benefit analysis. All potential risks from an organizational, network, industry, and environmental perspective should be considered.

Once a risk is identified, risk mitigation strategies should be identified and the best ones implemented. This will include a modification of internal processes or defining a contingency plan, depending on the type of risk and its severity. For example, demand fluctuations would probably be dealt with by implementing order visibility systems that monitor consumption and spending levels and analyzing trends for unexpected changes whereas a disaster that took out suppliers and distributors within a region would require a contingency plan that specified the ramp up mechanisms for alternate suppliers and distribution centers in an unaffected region.

The supply chain will need to be monitored on a regular basis to detect deviations and disruptions quickly to insure that contingency plans, when required, are initialized and executed as efficiently as possible. Effective management and monitoring is a core business discipline that defines and enforces standard performance and risk measures and assessments, collaborates with suppliers to detect and mitigate risks, and leverages sourcing technologies and information services to improve risk planning, monitoring and response. It consists of appropriate supply chain and sourcing strategies that balance cost, performance, and risk and strong supply base management focused on continual improvement.

Proper supply base management is the process of determining not only what the right number of suppliers are but who the right suppliers are. It’s the right balance between supply base reduction to reduce administrative overhead and cost and supply base expansion to mitigate single source or dual source risks. It requires a good understanding of supplier capabilities and supply market dynamics. It includes continual supplier development which is not just a reactive process that identifies and fixes problems but a proactive process where you work with suppliers to drive continual performance improvements to make sure your supply base stays best in class. This is generally accomplished by performance incentives, direct involvement, which may take the form of training and education or collaborative projects, and regular supplier monitoring and assessment.

Effective supplier assessments are multi-dimensional and examine overall quality, performance, and service levels. They are linked to strategic goals and are objective and fact based. They are on-going and include supplier feedback and two-way communication. At regular intervals, you monitor the actual and relative performance of each of your suppliers with respect to goals and targets and establish a dialogue. You also establish consequences for failure / lack of improvement and stick to them. They are a fundamental tool of Supplier Performance Management, our topic for next weekend. Whereas the strategies above are your mechanisms for reducing risks, supplier performance management is your mechanism for keeping risks down. To be continued.

For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki [WayBackMachine].