Category Archives: Guest Author

8 Key Design Considerations for Optimizing Your Demand Planning Process: Part I


Today’s guest post is from Josh Peacher, a Senior Consultant in the Operations Practice of Archstone Consulting, A Hackett Group Company.

Demand Planning was once an overlooked element of supply chain management. However, more and more companies are beginning to understand how essential this component is to overall operational well-being. After all, a demand forecast is the genesis of the supply chain process. If poor demand signals are being sent through the system, it becomes extremely difficult to manage raw material and finished goods inventories, execute an efficient manufacturing process, effectively service customers, and ultimately drive an accurate financial forecast. So if your organization hasn’t already taken a long, hard look at improving its demand planning process, it’s time to begin. As a starting point for your journey, let’s take a look at the 8 key design considerations for optimizing your demand planning process. In this first installment, we’ll focus on the 4 most basic design considerations and then move to more advanced principals in the second installment.

1. Start with Statistical Forecasting and Exception Management

  • Statistical forecasting should always drive the original forecast. A simple set of formulas such as exponential smoothing, weighted moving average, and Holt-Winters can deliver more accurate, reliable, and efficient forecasts across the entire sku base than manual forecasts. This can often be a change management challenge for many organizations as demand planners feel a pride of ownership over their forecast and have trouble with relinquishing control to a set of arithmetic functions. This is where exception reporting comes into play.
  • Exception reporting utilizes a set of pre-defined criteria to identify skus that are not ideal candidates for statistical forecasting. Since the strength of statistical forecasting comes from identifying patterns in demand history, highly erratic and/or variable skus are not good candidates and require manual intervention of the forecast. While exception criteria are customizable, common filters include frequent zero demand periods, high variance between last 6 months history and next 6 months forecast, high variance in month-over-month demand history, and frequent shortages. Exception reporting is also an excellent way for demand planners to prioritize their time across the sku set and focus their efforts on the skus that truly require attention.

2. Select the Right Software Tool

In today’s environment of sku proliferation and real time information, it’s become a necessity to utilize a demand planning tool to assist with the demand planning process. Software solutions such as Manugistics, SAP APO, and Logility all have their strengths and weaknesses. Key criteria to evaluate when selecting a solution include:

     
  • Customer service reputation of the provider
  • The tool’s ability to handle forecasting nuances (i.e., 5-4-4 calendar recognition and promotional forecasts)
  • Transparency and reliability of the generated statistical forecast
  • Forecast performance reporting and exception reporting capabilities
  • Flexibility to forecast at multiple levels (e.g., sku, customer, category, business unit)

3. Track the Right Metrics

Demand planning metrics should serve two purposes:

  1. Identify improvement opportunities and
  2. Drive accountability.

The appropriate metrics will vary based on the characteristics of the industry and company in question. However, a few core, agnostic metrics are routinely found in leading organizations. These include:

     
  • WAPE (Weighted Absolute Percent Error) – In my opinion, WAPE is the most balanced and telling measure of forecast error. Some professionals will advocate for MAPE. However, MAPE doesn’t effectively account for volume as the forecast error % for each period is treated equally.
  • BIAS – Bias is similar to forecast error. However, bias provides a measurement of whether your forecast tends to be above or below actual demand thus signaling a forecasting over/under “bias”.
  • Period-over-Period Error Trend – You’ll want to understand whether your demand planning process is improving or digressing. Measuring the forecast accuracy over time will also help to identify meaningful changes occurring in the business.

4. Leverage the Correct Data

Statistical forecasting and exception management will help to get a reasonably accurate forecast. However , to drive forecast error down to best-in-class levels, demand planners must leverage external information.

As the graphic above shows, there is an abundance of information that demand planners could call upon to help them adjust their forecast. The real art of demand planning is knowing which of these data sources to use and when. Over time, your organization will get a sense for which information streams are most relevant and can begin to build a rules-based process around the use of external information.

Thanks, Josh! We look forward to Part II.

The Most Important Word In Supplier Relationship Management Is Not What You Think It Is


Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC. Joe co-wrote the book on Managing Indirect Spend: Enhancing Profitability through Strategic Sourcing.

It may be an old story, but it is still an important story in any discussion of Supplier Relationship Management (SRM). According to Business Insider, with about six weeks to go before the launch of the iPhone in 2007, an angry Steve Jobs pulled his senior team into an impromptu meeting on a Monday morning. His plastic-screen’d iPhone prototype was scratched, and he demanded a glass screen be fitted to the iPhone. Specifically, he is quoted as saying “I want a glass screen. And I want it perfect in six weeks“.

If you read the Walter Isaacson biography on Jobs, you can imagine a few other words were in those two sentences. But that is not critical to this story.

Here is the important part. Once Apple and Corning perfected the art of cutting glass so intricately on a massive scale, they had two weeks to get the new glass faces on the phones. Their assembler, Foxconn, woke its employees when the first glass shipments arrived in the middle of the night, and arranged for production to run non-stop.
Not every supplier is going to wake its staff in the middle of the night to cater to your needs, but when you maintain a close relationship with them, and firmly establish the ways in which each party is critical to the other’s success, then the proverbial (and in Apple’s case, actual) doors open. This is the critical takeaway from any talk on Supplier Relationship Management: those in-depth relationships with your suppliers can lead to competitive advantages ranging from moving up in that supplier’s priority list to getting first dibs on their innovative practices and products.

The importance of Supplier Relationship Management is not lost on sourcing professionals and the industry at large, but the most important aspect of SRM seems to have been lost; or if not lost, then effectively drowned out by savvy marketers. A Googling of “Supplier Relationship Management” produces more than eight million results, but the first page is dominated by companies selling SRM software. When I googled, seven of the first page’s organic results, and all of the ad space, are dedicated to software solutions. While “Management” is an important aspect of “Supplier Relationship Management”, and having a clear view of your organization’s entire supplier pool is critical to effectively working with them, the value of SRM comes from the “Relationship” portion. Worded another way, no supplier has ever given a customer exclusive access to a new product because that customer put them in a database!

I should probably stop here to note that SRM software is a great way to manage all of your suppliers, and relatively easy to implement across all of them. Relationship-building, by comparison, is an impractical across-the-board practice returning minimal results for maximized efforts for all suppliers outside those producing critical, hard-to-obtain, or otherwise-important materials for your organization.

That said, “Relationship” is the critical term of SRM when dealing with critical suppliers. Period. Supplier relationship software allows you to track purchases, organize data, and better understanding of your organization’s demand for a supplier’s goods — all of which are tactical, short-term measures. Building relationships, on the other hand, is crucial for your organization’s critical suppliers, as it allows you to talk frankly with them and develop the long-term strategies necessary for mutual success. And it provides critical benefits.

So what are those critical benefits? For starters,

Preferential Access to the Supplier — Much like Apple was able to rouse Foxconn’s employees in the dead of night for glass screens, a thoroughly developed relationship with a supplier can gain your organization preferential access to them. The benefits of a healthy relationship can be leveraged to obtain priority access to product capacity, better pricing, and, depending on the supplier and product or service needed, access to the supplier’s best people.

Supply Chain Stability — With a relationship developed between your organization and a supplier, it is possible to talk frankly about their risks. Weather and disaster vulnerability, political events, logistics concerns — anything that could potentially impact the supply of their products to your organization. Additionally, these discussions allow you to get a better understanding of the supplier’s supply chain and the potential hiccups within it. Most importantly, these discussions provide the foundation for your organization and a critical supplier to jointly develop solutions to potential problems, ensuring that a mutually beneficial solution is reached in the creation of a better understanding between the two organizations.

Input Into Innovation — Another area where Apple capitalizes on its strong supplier relationships is in the joint innovation of new technologies, strategies, or processes. The company routinely puts out the cash to fuel a supplier’s development of an improved or revolutionary product or process in exchange for exclusivity. Recent examples include the company’s lockdown of capacitive touch screens following the iPhone’s launch and their joint development of the highly precise lasers used to perforate the aluminum MacBook frames to allow for hidden status lights. Even if your organization lacks the capital to fund supplier improvements, enhanced relationships can still get your organization input into a supplier’s next product, leading to design changes that can lead to more efficient production, or a lower cost, on your side.

Knowing that a partnership can lead to a reduced total cost of goods through shared responsibility, assistance in the product development process through shared expertise, and long-term stability through the forming of a bond with a customer are key incentives that can persuade reluctant suppliers to come onboard and sweeten the relationship on an ongoing basis.

If your supplier is critical, a deep and mutually beneficial relationship with them is critical too.

Thanks, Joe!

Perks and pitfalls of knowledge diffusion in the supply chain


Today’s guest post is by Professor Ralf W. Seifert & Olov H. D. Isaksson.
Ralf W. Seifert is Professor of Operations Management at IMD and he teaches in the “Leading the Global Supply Chain” (LGSC) program.
Olov Isaksson is a PhD candidate at the Chair of Technology and Operations Management at EPFL, specializing in buyer-supplier relationships. He previously worked at Henkel as a supply chain project manager.

Do you collaborate with, and learn from, your suppliers, or are you serving them the knowledge to compete with you head-on on a silver platter? This question is increasingly relevant in today’s global competitive environment. Firms are routinely leveraging global sourcing to gain cost advantages but competition nowadays occurs between supply chains, rather than businesses. Thus keeping an eye on your supplier’s ambitions is vital.

Case in point, just look at the ongoing patent infringement lawsuits between Apple Inc. and Samsung Electronics Co. Apple turned to Samsung as a supplier for its new iPod and iPhone products back in 2005. At first the two companies jointly developed the components, which gave Samsung an insight into Apple’s technology and operations. Being the only supplier for the processors, Samsung also gained critical knowledge on Apple’s prediction of the market size for the iPhone. In 2010, Samsung launched its own smart phone and has since become Apple’s largest competitor. Today, Apple still remains dependent on Samsung, but it is trying hard to diversify its supplier portfolio.

The above situation exemplifies the negative aspects of knowledge spillovers in the supply chain — i.e. how important knowledge that exceeds the scope of the formal transaction can be diffused between customers and suppliers, and then be used in a rivalrous manner. At the same time, spillovers can also have positive effects and lead to a competitive advantage for the supply chain as a whole.

How does your desire to draw on trading partners for innovation balance with the need to protect strategic knowledge? And, to what extent do you take co-competition from suppliers into account in your supplier assessments? We engaged 34 executives from different high-tech firms and asked them about their opinion. Their consensus: recognizing knowledge spillovers is a critical issue in today’s supply chains. Both suppliers and customers are seen as important sources of information for innovation (see Fig 1).

“We get plenty of valuable information about the market, its players in the value chain and its main drivers from our customers and suppliers. My business relies on it. It is a great input for our R&D portfolio,” said Dr. Ir. Kees Joziasse, Director of Innovation at Corbion Purac.


Figure 1
While most high tech firms protect their innovations through patents, most of the executives stress that knowledge spillovers occur outside formal collaborations — to a large extent via personal interactions between employees of the firms (Figure 2).


Figure 2
Greg Nelson, Sr. Director R&D LED Systems at Philips highlights that employees possessing important knowledge must be conscious of the risks and rewards of knowledge spillovers when interacting outside the firm:

“Knowledge spillovers in the supply chain are a clear attention point. There is a need to create awareness up front with people who have these contacts and to have an explicit policy regarding what can be transferred. Policy restrictions must be balanced with the potential benefits that can be derived from collaboration and not hinder speed in the process. While policies and procedures are not always 100% effective, they do help create awareness in the organization to guard against unintended transfers.”

The Supplier Perspective

While a supplier can learn from its customers, it cannot choose who wants to buy its products/services. Still, Ted Smith, EMEA Sales Director at ON Semiconductor suggests that firms can leverage knowledge spillovers and gain a competitive advantage by carefully choosing collaboration/innovation partners.

“We typically don’t select which customers to do business with, but we do select customers to innovate with. We work with selected alpha-customers, or early adopters, who support supplier innovation in return for a head start in the market.”

The Supply Chain Perspective

Good and enduring partnerships can lead to a competitive advantage for the supply chain as a whole: Mukesh Singh, Senior Regional Manager at BASF explains that “Suppliers easily share their new learning/knowledge if the customer has a strong supplier relationship management program.”

However, it is important to agree upfront how innovative output that is generated in a collaboration should be divided. Dan Negrea, Managing Director AEMtec GmbH and Chief Technology Officer at ECMS exceet, elaborates:

“We strictly consider the background and foreground intellectual property (IP) in our cooperation with partners. The background IP is a source of information “for free.” The foreground IP is normally shared between our company and the customers. Product related IP goes to the customer and process related IP stays with us. In most cases, cutting edge products require the parallel development of a product and a manufacturing process.”

The Customer Perspective

Most executives viewed knowledge spillover as a positive phenomenon. Reflecting on the Apple-Samsung example, others might beg to disagree. Managers do need to protect important knowledge from potential competitors and patents offer only limited protection. Thus, strategic supplier assessments and a detailed supply chain contract are vital to mitigate this risk. If the knowledge in question is critical, in-house production or vertical integration of the supplier might still outweigh short-term gains.

Takeaways

Knowledge spillover readily occurs in your supply chain. Managers need to be aware of the risks of negative leaks, which can have detrimental consequences for the firm. At the same time, knowledge spillover can offer significant benefits for your supply chain if suppliers leverage newly acquired competences to your advantage. These are our recommendations:

  • Explicitly recognize the potential of knowledge spillovers in collaboration and sourcing decisions up-front! What do you need to protect from your competitors? Are there limitations in your supply chain contract? To what extent can your enforce non-use, non-disclosure and non-competition clauses in a global marketplace?
  • People buy from people. Make sure that employees are aware of the risks and benefits of knowledge spillovers! Create an appropriate policy regarding disclosures and interactions outside the firm!
  • Have a clear strategy with regards to each supply chain partner! Do you want a win-win situation or to squeeze a supplier? In collaborations, clearly agree upfront how innovative output shall be divided! If the knowledge is strategically important, in-house production or vertical integration of the supplier might be the safer option.


Thanks Ralf and Olov for this interesting take on Supply Chain collaboration.

The Evolution of Procurement, and Where It Is Headed

Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC and co-author of “Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing”.

While strategic sourcing and procurement groups around the globe continue to make headway into new departments and address categories previously off the table, their popularity with business owners and stakeholders has never been lower. Headlines and titles like “Everybody Hates Procurement: Here’s How To Fix It” and “The End of Procurement, Forever!” and “The Problem with Procurement: Misalignment” seem to pop up every day.

I attribute these headlines to the growing pains strategic sourcing and procurement will naturally experience as the role of this group continues to expand and evolve. And evolve it has! In the 11 or so years I have been at Source One, I have seen Strategic Sourcing transition from rarity, to necessity, to commonplace, to part of a larger spend management strategy. In its current form, and as it heads into the future, it looks to me that modern procurement has developed to be just as much about negotiating with an organization’s leadership as it is negotiating with a supplier base. In fact, I tell most college grads entering this industry to be prepared to challenge those within their organization, learn how to market their group, and sharpen their debate skills. Getting savings is the easy part, getting your organization to act in their own self-interest is the challenge. This is not a job for the weak-willed or thin-skinned! To explain what I mean, here is a quick rundown of the change I have witnessed.

The Reactive Buying Era

When I first started at Source One, most of the purchasing groups in the companies we worked with dealt exclusively with raw materials. If the personnel had “sourcing” in their title, it was rare, and many of our customers did not have any sort of sourcing initiative for their indirect spend items. Stakeholders and the department heads responsible for budgeting conducted the purchasing for their needs.

In those days, we did a lot of explaining to potential customers just on what Strategic Sourcing was. It wasn’t a commonplace concept even within Procurement, so those outside of it — Finance and IT, for example — had very little knowledge of it. Especially in the mid-market, any group with spend management tactics that were more advanced than three bid purchasing or preferred supplier relationships were the exception, not the rule.

The Sourcing Era

Slowly, Strategic Sourcing became more and more familiar until it ultimately blossomed. Strategic Sourcing practices were first used by a limited number of organizations as they purchased their raw materials. Seeing the successes in that category, organizations then asked these “sourcing” teams to look into areas like packaging and shipping. Strategic Sourcing’s applicability continued to grow as success after success was reported. Subsequently, most departments were soon asked to start implementing strategic sourcing practices, and procurement departments began to be more directly involved in buying decisions.

The Category Management Error

In its latest form, Strategic Sourcing is now tied into category management, meaning companies are hiring or developing sourcing experts for their individual spend categories — telecom, media buys, office equipment — or departments — Capital Projects, Marketing, IT — and restructuring their departments with the goal of achieving near 100% spend under management. With dedicated sourcing experts managing each category and an intense focus on supplier relationships, those sourcing departments effective in category management are not only able to take advantage of market conditions today, but are better able to predict future market conditions and opportunities within the managed categories.

Even utilizing these strategies, a common problem remains. These sourcing teams lack the institutional clout within their organization to be effective in managing spend. SOPs are reluctantly followed, if they are followed at all, by the end users, and the majority of the end users and stakeholders do their best to avoid involving the sourcing team. Additionally, sourcing initiatives are often dead on arrival, killed in the name of deadlines or supplier relationships

The Change Management Era

So, that’s a short history of Strategic Sourcing’s development. So where is the industry going from here?

From what I have seen in the work we perform for the clients of Source One, category managers must now become “change managers”. “Change managers” are those leaders who can navigate their organization’s structures and barriers to be effective, and transition their department’s role from that of a reactive-tactical resource to one that is proactive and strategic.

“Navigate” here means “maneuvering around” objections or otherwise getting things done, and there are a few ways that I have seen different sourcing groups approach this. At the last conference I attended, I heard some sourcing teams discussing their use of a “bell cow” — a single resource within their group that is skilled in working with department heads and generating acceptance from end users for their group’s sourcing activities. In other cases, I have witnessed sourcing departments working through an executive sponsor, often times a CFO, to help push their group’s agenda items. A third, slower method I’ve seen used to promote sourcing initiatives is the granular approach, meaning the sourcing group is using any quick-and-easy method available to build credibility and support, end user by end user and department by department. Not surprisingly, this third method is high resource-low return, and often causes some areas ripe for sourcing to go untouched. Of these, the proper solution is the one that works best within a particular organization.

When sourcing groups improve their internal relationships, the stakeholders are better encouraged to participate and end users are better encouraged to comply with sourcing activities, increasing their chances of success. These project successes give Procurement something tangible to market internally and use as leverage in drumming up support for future initiatives, and also exposes their unique skills to the organization as a whole. Through continued project success and internal relationship-strengthening, Procurement will slowly be seen as an integral and centric resource to the company; its unique skillset prized not only for its ability to identify cost savings for the organization but for its ability to generate value for the organization as a whole.

Summary

As the need for more strategic spend management practices increases, procurement departments are evolving to meet these newfound challenges. But rest assured; the industry’s progress is not slowing or stopping. Adapting to the industry’s modern changes and challenges is only setting the stage for the next evolutionary step, which will be to become a revenue center for the organization. The better equipped a procurement team is now at handling the challenges of the current market, the better prepared it will be to predict and stay ahead of future trends

Thanks, Joe.

Building and Ground Maintenance Outsourcing: A Maturing Cost Reduction Trend That Requires a Disciplined Approach


Today’s post is from Howard Gutman, a Manager in the Hackett Group’s Strategy and Operations Practice who consults to Fortune 1000 clients in operations improvement, sourcing and procurement, supply chain, and cost optimization. He was previously associated with MMG, KPMG, and PWC PRTM.

Many companies currently have their building and ground maintenance function (e.g. security, janitorial, and HVAC) managed by their own employees and/or a set of local suppliers for individual offices/ manufacturing sites. However, the success of companies such as AT&T and BMW, who have outsourced their building and ground maintenance function to integrated facilities management firms such as Jones Lang LaSalle and ABM, has caused many companies to question whether they should change their approach to the building and ground maintenance (BGM) function. Based on our recent client work, the outsourcing of BGM is an increasingly maturing trend across several industries but it requires a disciplined approach to develop an understanding of a company’s current demand and specifications in order to maximize the overall savings opportunity.

Before a company can consider outsourcing this function, a company should utilize a disciplined approach to understand demand for BGM by collecting the following information:

  1. Number of building sites;
  2. Basic information about each site (e.g., address information, total square footage, building population, number of bathrooms, outdoor square footage);
  3. Total spend for each major building and ground maintenance category by site (e.g. janitorial, HVAC, and environmental services).

Once this basic understanding of a company’s demand is established, a company must work with their operational leads to gather detailed specifications for each of their BGM services (e.g., frequency and requirement for HVAC maintenance at each site). After the development of the demand set and specifications, a company can pursue a strategy of outsourcing this function as the information mentioned above is essential for any RFP process involving integrated facilities management companies.

Two recent clients utilized the above approach to outsource their BGM function but each had initial concerns about outsourcing this function due to business culture and regulatory reasons.

Our first client, a Fortune 500 telecommunications company, liked the operational benefits of moving to a single integrated building provider, which includes centralized reporting and 24-7 support. However, they had concerns about regulatory issues such as maintaining continuous 911 service at rural locations. Through the RFP process, our client discovered that all of its major competitors had moved to an outsourced BGM solution, particularly at their rural locations.

Our second client, in the manufacturing space, had concerns about moving control of building management from their plant managers to an outside building and ground maintenance provider. Through the RFP process, it discovered that many of its competitors had moved to integrated facilities management companies who were deeply experienced in the manufacturing space.

The results of these two projects are projected to result in cost savings of 10% to 12.5% over the next two years along with increased maintenance standards and visibility into building issues through 24/7 online reporting. However, the main benefit for these organizations was that they could better focus on their core business functions, while delivering continuous savings through a disciplined approach for outsourcing BGM that has already been implemented by their peers.

Thanks, Howard for some insight into this often overlooked spend category!