Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 22 July 2006

Yesterday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises with some recent statistics. Today we are going to discuss 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.

Risks arise at many levels. They can be internal risks that result from daily operations, network risks within your supply chain or partner interactions, industrial risks common to all companies operating in your industry, or environmental risks beyond anyone’s control. They range in severity from minor deviations in supply and demand through supply chain disruptions that can knock out part of your supply chain to serious disasters that will force a temporary irrecoverable shutdown of (a substantial) part of your supply chain.

We use the definitions of R. Gaonkar & N. Viswanadham of The Logistics Institute (Asia Pacific) at the National University of Singapore, as found in their Indian School of Business Working Paper “A Conceptual and Analytical Framework for the Management of Risk in Supply Chains”. Specifically, a deviation is when one or more parameters stray from an expected value without any changes to the underlying supply chain structure. A disruption is when the structure of the supply chain is radically transformed through the unavailability of certain facilities, suppliers, or transportation options. A disaster is when a temporary irrecoverable shutdown of the supply chain network occurs due to unforeseen catastrophic system wide disruptions.

Within your organization, you face machine related issues, quality problems, materials and parts shortages, and communicable illnesses among you staff on an almost daily basis that could lead to deviations. Furthermore, unexpected employee strikes and opportunistic behavior by senior management could lead to significant supply chain disruptions in the long term.

From a network perspective, you are subject to the risks associated with increasing customization, outsourcing, and collaboration. A disruption to your supplier or third party logistics carrier is a disruption to you. Their organizational risks and performance problems become your network risks. Furthermore, you risk deviations due to fluctuating transportation capacity constraints, disruptions due to failures in your lines of communications, customs delays, port slowdowns, supplier bankruptcy, and government (over) reactions to crisis situations (such as border closings).

From an industry perspective, the emergence of a new technology or a new business model could cause considerable deviations and disruptions to your business across the spectrum.

From an environmental perspective, you are subject to variations and deviations in expected demand, supply, and lead times that can result from shifts in consumer spending, inflation, and unpredictable economic changes such as foreign exchange fluctuations, governmental policy changes, and free trade zones. You are also subject to disruptions from human perpetrated acts such as sabotage, theft, strikes, and slowdowns and disasters that result from terrorist attacks, large scale natural disasters, and major geopolitical events.

In order to effectively manage these disruptions when they occur and maintain profitability and effective operations, your organization needs to be resilient to predictable and recoverable supply chain risks. Resilience is the inherent ability of an enterprise to return to normal performance levels following a supply chain disruption. Resilience can be achieved through classic redundancy mechanisms or built-in flexibility.

Classic mechanisms for dealing with unforeseen supply chain deviations and disruptions included adding safety margins to lead times, maintaining extra “just in case” inventory, frequent queries of order status, reserving capacity, lining up distribution alternatives, dual sourcing, and order expediting when a disruption occurred.

However, most of these margins come wrought with disadvantages. Adding safety margins to lead times and maintaining extra “just in case” inventory increases costs and decreases an organization’s ability to respond rapidly to demand changes or shifts in consumer preferences. Frequent querying of order status wastes everyone’s time and decreases operational efficiency and reserving capacity decreases the value of, and return on, your investment. Order expediting drives up costs and diverts capacity away from other products. In fact, the only classic mechanisms that make sense are dual sourcing, which is a fundamental strategy of good supply base management, and lining up distribution alternatives, which is a principle of good network design.

Tomorrow we will discuss modern strategies for supply chain risk management and supply network planning.

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].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 21 July 2006

Supply chain risk can formally be defined as the potential loss resulting from a variation in an expected supply chain outcome. It is the mismatch between supply and demand.
Traditionally, supply chain risk was often the result of inadequate spend visibility, lack of deep supplier and market information, poor inventory management, poor supplier collaboration, and inefficient coordination heightened by a lack of infrastructure, skills, resources, research, and technology as well as language and cultural barriers.

Today, matters are much worse. With today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralized distribution, more and faster product launches, low cost country sourcing and supply chain globalization in a highly volatile global market place, companies are at greater risk than ever before. When you consider that 10% of active suppliers represent 80% of spend in many of today’s enterprises, and that many companies lack visibility into their supply chains beyond their tier one suppliers, supply risk management is becoming key to ensuring continued operations in a profitable manner.

After all, the effect of a supply chain disruption goes beyond just late shipments, lost production time, and delayed execution times. It can cause stock outs and lost sales, missed customer expectations, quality and safety concerns, project failure, market exposure, and lost credibility. It can increase costs, reduce your bargaining power, and even influence poor supplier selection as you struggle to correct the imbalance. (It can even devastate your stock price. A recent study in the Journal of Production and Operations Management that analyzed the effect of supply chain disruptions on long-run stock price performance over a three year period found that stock returns of companies experiencing significant supply chain disruptions trailed returns of peers by 33% to 40%.)

The importance of supply chain risk management cannot be ignored. According to Aberdeen’s recent study on “Supply Risk Management” (October 2005), more than 80% of supply managers at 180 global enterprises reported that their companies experienced supply disruptions within the past 24 months. Supply glitches negatively impacted their companies’ customer relations, earnings, time-to-market cycles, sales, and overall brand perception. Furthermore, it found that more than 75% of companies expect supply risks to increase over the next three years.

However, enterprises that have adopted comprehensive supply risk assessment and management programs, which include leveraging deep supplier and market information, have reduced the frequency of supply risks and outperformed their peers in supply performance and costs.

Tomorrow we will discuss the various types of supply chain risks, which extend well beyond simple supply disruptions, the need for resilience in your daily operations, and the classic strategies for dealing with such risks. Sunday we will conclude with a discussion of some modern methodologies for building resilience into your supply chain, risk management programs, and associated processes.

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].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 15 September 2006

This is the last full weekend of the summer, and, thus, the last summer weekend series on eSourcing Forum. This summer we discussed, in detail, twelve topics in process and technology, supply management, and innovation that we hope you can use to aid you in your design of better sourcing methodologies. Today we are going to review the process and technology topics.

This summer, we talked about:

• On Demand
  • I: The Good
  • II: The Not-So-Bad
  • III: And the Coming Pretty …
• Demand Driven Supply
  • I: An Introduction
  • II: Stages and Implications
  • III: Challenges and Implementation
• Optimization
  • I: A Powerful Tool
  • II: Why it was Relegated to the Shadows
  • III: Why it’s time is finally here
  • IV: POE or BoB?
• Six Sigma
  • I: An Introduction
  • II: Innovative Quality
  • III: Value Based Strategic Sourcing

Our on-demand posts highlighted the benefits of on-demand software-as-a-service solutions over traditional installed approaches, which include:

• Pay As You Go
• Instant Deployment
• Single Instance
• Economies of Scale
• Provider handles administration, maintenance, and headaches
• Free Upgrades
• You, the customer, have the leverage
• Anywhere access
• Buy what you need, and only what you need
• Single Accountable Entity
• Regular, Automated Data Backup
• Built for Change
• Unparalleled Collaborative Capabilities
• Integration with office applications
• Security
• Uptime
• Low Total Cost of Ownership (TCO)

Our demand-driven supply posts highlighted the importance of a strong focus on a pull-based customer centric approach to demand and supply chain planning. The goal is to help you identify the best mix of customers, products, channels, geographies, and prices for the dynamic marketplace, as this is key to maximizing your efficiency and profitability. This is because traditional Supply Chain Management deals poorly with rapid change as it relies heavily on up-front forecasts and does not incorporate regular forecast revisions or the demand signals necessary to determine when a shift in demand is needed.

Our optimization posts emphasized the importance of using decision optimization in award determination (as it will save you an average of 12% over and above a price-focused auction), despite the fact that its usage is not yet common in the marketplace, which is likely due to the dearth of vendors offering such technology. In addition, we pointed out that despite its limited acceptance up until now, we believe its time has come due to the convergence of the following factors:

1. Extensive use of e-Auctions over the last 3-5 years by early adopters.
2. Optimization Technology has evolved.
3. Solution Providers are integrating optimization into their platforms.
4. Solution Providers are recognizing that there needs to be a significant amount of sophistication under the hood.

Our Six-Sigma posts defined Six Sigma – a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology with the ultimate goal of producing at most 3 defects per million trials (in the long run). The goal of Six Sigma is to prevent defects before they happen via process improvements. To do this, Six Sigma uses a toolbox of statistical tools and frameworks to:

• identify which defects impact customer requirements,
• determine why each defect was caused and uncover the hidden factory, and
• improve the process parameters and product designs to reduce defects.

Six Sigma practitioners look for ways to decrease the overall amount of variation in a process, since process variation is often the primary cause of defects. It does this by way of its DMIAC, Design-Measure-Improve-Analyze-Control, methodology which generally executes as follows:

1. define each process step, inputs, and outputs
2. map the customer requirements to process inputs and outputs
3. identify key metrics to measure performance
4. establish defect root causes for, and relationships between, inputs and outputs
5. analyze and improve the process to optimize performance metrics
6. provide controls to ensure sustainability of improvements

Since Six Sigma is a generic methodology, it can be applied across your supply chain, and to your supply management and spend management initiatives. Six Sigma Strategic Sourcing (SSSS) and Value Based Six Sigma (VBSS), which stem from Total Quality Management (TQM) initiatives and focus on Total Value Management (TVM), are two examples of Six Sigma frameworks for sourcing. They are based on best practices, which are nothing more than the everyday sourcing best practices that eSourcing Forum has been describing for the past year, but documented, standardized, and applied regularly and consistently across your sourcing organization.

The real killer sourcing application, however, is not on-demand software-as-a-service, demand-driven supply, optimization, or the six-sigma toolbox, but the integration of all of these processes and technology into one. In other words, a leading procurement organization is one that uses a six-sigma (best-practice) based demand-driven sourcing methodology that uses best-of-breed software and service offerings on-demand to determine optimal awards using market-leading decision optimization. Alone, each of these technologies and processes are great, but together, the whole is truly greater than the sum of the parts.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 3 September 2006

One of the application areas of Six Sigma, the relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology, is supply chain, which includes supply management, spend management, and strategic sourcing. A number of firms are peddling six sigma initiatives designed to improve your supply chain operations, including KPMG with their Six Sigma Strategic Sourcing (SSSS), but the best processes are those focused on value, such as Value Based Six Sigma (VBSS). These process stem from TQM (Total Quality Management) initiatives, but since they focus on TVM (Total Value Management), the focus is on the solution of those problems that directly support business goals and have the highest potential impact.

With VBSS, you apply a small-number-of-projects-at-a-time mentality to finish the projects as efficiently as possible to enjoy the benefits as soon as possible. You follow generally accepted Six Sigma Strategic Sourcing best practices, but you select the projects based on a value (cost/benefits) analysis aligned with your business objectives (which should in turn be aligned with your customer requirements).

So what are six-sigma strategic sourcing best practices? Simply put, they are every day sourcing best practices applied regularly and consistently across your sourcing and procurement organizations! There’s nothing special or fancy – the key is to adopt the best process you can get your hands on, automate it, follow it consistently, and improve it on a regular basis. Where do these best processes come from? The e-Sourcing providers that built your current systems and the supply chain and supply risk consultants who helped you design your supply chain. (Including Iasta, your e-Sourcing Forum sponsor.)

Six Sigma merely provides the DMIAC methodology that tells you, in sourcing terms, to define, measure, analyze, design, verify, control, and improve.

Specifically, as per KPMG’s Six Sigma Strategic Sourcing:

• Define
  • business case
  • business goals and objectives
  • procurement strategy
  • resource allocation
• Measure
  • identify key metrics
  • validate/cleanse data
  • benchmark against best in class
• Analyze
  • review data
  • identify gaps
  • obtain customer / end user feedback
  • identify opportunities for cost & price reduction
  • assess technology and organization effectiveness
• Design
  • design process improvements
  • develop implementation plans
  • develop new contracts
  • identify technology upgrades
• Verify
  • pilot recommendations
  • pilot performance metrics
  • rework/redesign as required
  • implement

So is six sigma worth it? Yes. Do you need it? That depends. If you can consistently identify and successfully implement best practices and draw from a large quality and innovation toolbox on a regular basis, then, no, since six sigma is just the consistent application and improvement of these tools and processes until you have, in laymen’s terms, essentially six nines reliability. However, if you don’t know where to start, then a Value Based Six Sigma Strategic Sourcing Program can get you on track and usher in considerable savings at a phenomenal rate compared to other initiatives. It’s certainly worth a look, but I personally do not think that your business depends on it.

For more information on six-sigma, see the “Six Sigma: Improve Supply Chains through Methodology” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 2 September 2006

Six Sigma is described as a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology. Since this should be the ultimate goal of any organization, this is a good start.

So how does Six Sigma improve quality? Six Sigma advocates proclaim that the Six Sigma philosophy is to prevent defects before they happen upfront via process improvements. This is the best way to attack a problem, prevent the conditions that allow it to occur in the first place.

So how does Six Sigma accomplish this task? It uses a toolbox of statistical tools and frameworks to:

• identify which defects impact customer requirements,
• determine why each defect was caused and uncover the hidden factory, and
• improve the process parameters and product designs to reduce defects.

Instead of focusing simply on meeting design specifications, six sigma practitioners look for ways to decrease the overall amount of variation in a process subject to critical target values, since process variation is often the primary cause of defects in a well designed product. Decreasing variation is no simple matter when you consider that variation can stem from variation in your internal processes, inconsistencies in material or information from suppliers, part and product designs that are not robust, and overly conservative design specifications, with both common causes (defined as system faults) and special causes (defined as fleeting events). In addition, these variations can be caused by any of the six Ms: man, machine, material, methods, measurements, and mother nature.

Six Sigma accomplishes this feat by careful application of its DMIAC problem solving methodology and its toolset. DMIAC stands for Design-Measure-Improve-Analyze-Control and the process generally executes as follows:

1. define each process step, inputs, and outputs
2. map the customer requirements to process inputs and outputs
3. identify key metrics to measure performance
4. establish defect root causes for, and relationships between, inputs and outputs
5. analyze and improve the process to optimize performance metrics
6. provide controls to ensure sustainability of improvements

The analysis, root cause identifications, and improvements often come about using one of the following toolsets of a six sigma practitioner:

• pareto principle
• experimental design
• Quality Function Deployment (QFD)
• thought process maps
• process flow charts
• graphical techniques
• cost analysis
• scrap reports
• cycle time fluctuations
• Failure Modes and Effects Analysis (FMEA)

The basic DMIAC process and six sigma toolbox is also the basis for the three fundamental types of innovation projects identified by advocates:

• creating new products, services, or markets
• extensions or feature improvements to products, services, or markets
• increased efficiencies in existing products or services

In other words, DMIAC is quite powerful, but so is any good problem solving methodology when properly applied. Speaking of application, a successful Six Sigma project will always have the following characteristics: strong leadership, clear definition, strategic alignment with the business, (more than) adequate management support, and practical transferability.

Six Sigma projects require strong executive support and support from the functional and project leaders. Incentives must be aligned to insure that they devote enough time to the project. The project must have a clear definition that includes the precise problem definition, goals, “stretch” goals, financial targets, and team structure. The project must be strategically aligned with business objectives and everyone must be on the same page. Management must support the project from inception through completion and it must be transferable to other users and business units.

In short, six sigma requires all of the elements of success that any other improvement project requires, including the dedication and the know-how. It also requires an extensive knowledge of best-practices and best-in-class techniques. It is essentially an evolution of business process management (BPM) best practices that have been discovered since the dawn of the organizational era by operations management researchers. (I will be making occasional posts on operations management on Sourcing Innovation.)

For more information on six-sigma, see the “Six Sigma: Improve Supply Chains through Methodology” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].