Category Archives: Knowledge Management

Knowledge Based Sourcing II – The Philosophy

Yesterday’s post introduced us to Knowledge Based Sourcing, the Next Level Supply Management proposal put forward by Booz Allen as its entry into the Next Level Ring. Described as a competency consisting of a set of powerful techniques used to identify high impact value drivers that result in increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, and gain an ongoing business advantage, Knowledge Based Sourcing (KBS) is defined by its characteristics, which were reviewed in detail in yesterday’s post.

Today’s post is going to discuss the basic philosophy of Knowledge-Based Sourcing, which is a simple, four-step continuous improvement cycle:

  • Cost Model Generation
    a detailed cost model that captures the majority of component costs, including all of the cost drivers
  • Gap Identification
    which identifies where costs are higher than they should be based on raw material costs, realistic production costs, and market averages
  • Gap Closure Plan
    which outlines a plan to attack and reduce costs that are too high
  • Standard Cost Revision
    which updates the costs in the cost model to current costs and updates the baseline according to new information

This continuous improvement cycle incorporates the following aligned behaviours:

  • cost standards for major processes based on physical realities and best-in-class data points
    as a goal towards reducing costs below known minimums for a given process with defined equipment and resources is not just unrealistic, but stupid
  • best-in-class performance compared with known (supplier) costs
    as exceeding best-in-class cost performance will generally not be possible unless the process is changed
  • dialog around cost improvement ideas relative to best-in-class pricing
    as many heads are better than one
  • agreement on a realistic improvement plan
    as all parties need to be on-board for success
  • supply management as a learning opportunity

    • that improves based upon a better understanding of cost, best-in-class performance, and past improvements

And, most important, promises the suppliers that:

  • no requests will be made to undercut cost structures
    as this is unfair
  • a fair profit and SG&A allowance will be incorporated into target cost models
    as all supply chain partners need to profit
  • comparisons will only be made with peer-group suppliers using real, validated data
    as other comparisons are invalid
  • detailed feedback will be provided on cost elements that need to be improved
    as improvement does not happen in a vaccum
  • collaboration on waste removal will occur
    as waste is quickly becoming one of the most significant contributions to unnecessary costs (thanks to rising raw material, power, and water costs)
  • business will be rewarded to those that open their books and demonstrate best-in-class costs
    as the goal of KBS is to collaborate on cost improvement
  • information will be protected as confidential
    as it’s only fair
  • knowledge gained can be applied to other business
    as this is a great incentive for collaboration and improvement

It’s a good philsophy, and a good foundation for improving supply chain relations. Tomorrow’s post will dive into the cost modelling process.

Knowledge Based Sourcing I – Booz Allen Steps into the Next Level Ring

BravoSolution. CAPS. Greybeard Advisors. The MPower Group. Purchasing Practice. Tompkins Associates. Sourcing Innovation. And now Booz Allen. The Next Generation Sourcing Ring is staring to get a little crowded with combatants each offering their own take on “Next Generation” Supply Management. But that’s a good thing. Until recently, there weren’t even enough combatants to have a tag-team match!

So what is Booz Allen bringing to the Next Generation Sourcing Rumble? A competency consisting of a set of powerful techniques used to identify high impact value drivers that result in increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, and gain an ongoing business advantage. This is a good goal.

In addition, Booz Allen claims that this approach is fundamentally different from traditional “market-based” sourcing approaches that are focused on embracing supply markets’ competitive context and/or obtaining the best competitive outcome possible, primarily through pricing. According to Booz Allen, its “Knowledge Based Sourcing” (KBS) approach is predicated on a deep understanding of cost drivers, the supply market, and spend category context. This is a good foundation. After all, it’s not spend that matters, but the underlying cost. Shaving 10% off the top is dismal if the organization is overpaying by 40%. And telling your team to save 10% again this year when underlying costs have gone up 40% and the production cost is now 10% more than what you are paying is foolish.

So how does Booz Allen define KBS? By its characteristics. According to Booz Allen, Knowledge Based Sourcing:

  • uses the supply base as a key competitive advantage
    (presumably) because this enables long-term success through (financial) supplier stability instead of unstable short-term gains from supply base exploitation
  • continuously improves to eliminate supply chain waste
    because raw material and environmental costs (associated with water and power) are going through the roof and waste is costly
  • integrates (internal & external) relationships
    because this leads to collaboration, which in turn leads to innovation, that is not possible with combative arms-length relationships
  • shares knowledge
    because all partners need to profit in a successful supply chain
  • sets and meets targeted costs with supply partners
    as success relies on continual cost control and cost reduction
  • is improvement focussed
    as an organization that stands still will soon be over-taken by the competition
  • ensures suppliers are at an advantage over market
    as this is the foundation for using the supply base as a key competitive advantage
  • continually drives best practices through the supply base
    to ensure that all supply chain partners improve in lock step
  • is driven by knowledgeable procurement professionals
    as talent is the ultimate key to success
  • aligns suppliers with customer success
    as Supply Management must enable its customers to succeed if it is to succeed

It’s a good definition for Knowledge Based Sourcing (KBS) and a solid entry into the Next Level Ring. Now, if only we could get the combatants to agree on a name. So far we have “High Definition Sourcing”, “VFS” (Value Focussed Supply), “Next Level Supply Management”, “Next Practices”, “Supply Management Transformation”, “Supply Chain Leverage”, “Next Generation Supply Management”, and “Knowledge Based Sourcing”. But the foundations of each message appear to be the same — in order to continue to extract value from supply management, it needs to be taken to the next level. A next level that is knowledge-based, analytics driven, and result-focussed.

So who’s going to throw their hat in the ring next? Hard to say. For now, we’ll explore Knowledge Based Sourcing further over the next few days.

How to Deliver Superior Customer Service

A recent article over on Chief Executive had some great tips on How to Deliver Superior Customer Service that apply equally well to Supply Management as Service Delivery. These tips are important because if you figure out what your customers want and how you can adapt your offerings to best serve their needs, you will raise your profile in their eyes. Since the lifetime value of their support is much more than that of your average supplier, this is a good thing. So what was their advice?

  1. Always Ask What You Can Do Better
    More feedback means more opportunities for improvement, from the first consultation to the final delivery of product. Remembering that the best way to reduce spend and increase value is to be involved from the time of product or service design, and not after the requirements have been locked in leaving you nothing to do but run a bid between the only two suppliers who can meet the demand, you need to figure out how you can provide value as early as possible — just like a consultant trying to maximize an engagement who knows that a smart customer only keeps her around as long as she provides value. For some customers who understand your value, it might be introducing them to multi-round bids and optimization as an alternative to auctions. For those new to Supply Management, it might be showing them how to speed up information gathering with RFIs. And for those who think Supply Management only comes into play when the need is met, it might be educating them on cost and how you can take cost out. And for those who need to work with a preferred supplier (do to long term contracts or very special needs), it might be teaching them the basics of SRM so they can get more out of the relationship.
  2. Bottoms Up
    Customer driven organizations understand and embrace the idea that their success depends solely on the customer’s satisfaction and must be willing to do whatever it takes to deliver on the promise. This means listening, and responding, to the needs of the client organization. If a certain organization makes a request for help on an RFx every six months, have it at the ready when they come back to you at the expected time.
  3. Win Back At-Risk Customers
    Sometimes a business unit is going to have a “bad experience” no matter how much good effort you put into helping them. They might come to you with expectations of double digit cost savings in a market where commodity costs are skyrocketing and suppliers hold all the power. They might get the rug yanked out from under them because the new supplier you helped them find suddenly goes out of business when a natural disaster wipes out their primary plant. And so on. Even if this only happens one in one hundred events, these internal customers are at risk because the bad experience will be ten times as memorable as the best experience to date. So even if the overall value the business unit gets is high, there’ll still be some animosity due to the failure if you don’t go the extra mile to make them extra happy on another equally important project. As long as there is lingering animosity, you risk resistance on any future project that brings back memory of the failure. This could hinder your success in the future.
  4. Make Your Intentions Clear
    Let them know that even though corporate has given you a mandate to cut cost, your number one concern is to provide them with value, and that since you understand total cost and total value models, you know that if you don’t at least maintain quality and service, overall costs will go up year-over-year even though unit costs go down. As a result, you are there to get them value first and any actions you take or requests you make will be to help the organization get that value, even if sounds like you may be putting your organization or goals first.

It’s great advice, and it only missed one important point (which is as true from a Supply Management perspective as it is from a Customer Service perspective), and that’s:

  • Your definition of value is not necessarily your [internal] customer’s definition of value.
    As Lamar Chesney, CPO of SunTrust pointed out in his presentation on Value Perspectives at the Next Practices Xchange* this spring (as summarized in SI’s post that wanted to know whether you are really focussed on value), what often takes place is an exchange, but never an interchange, of words [that] is fragmented and restricted [in] expression because both sides talk past each other because our view of value (as Supply Management Professionals) is not their view of value (as Finance, Manufacturing, Logistics, Marketing, etc. Professionals). Make sure you understand their definition of value before promising that you can help.

* The Fall Next Practices Xchange takes place at the Oak Brook HIlls Marriott, in Oak Brook, Illinois on Friday, November 4, 2011.

Better Data On Its Own Will Not Ensure Success

A recent post over on the HBR Blogs by Daryl Morey that stated that “Success Comes From Better Data” is on the right track, but not quite right. Better data is a necessary condition for success, but not a sufficient condition. In order to make good decisions, you need:

  1. Better Data
  2. Better Tools
  3. Smarter Analysts

When Daryl says that you need raw numbers, not the people and programs that attempt to make sense of them, he’s missing the point that raw numbers need to be distilled into information through the use of good tools that can be distilled into knowledge through smarter analysts. Without the right knowledge, a business leader will not be able to make the decisions that lead to success. While it is true that real advantage comes from unique data that no one else has, this data must be transformed into knowledge. It’s a Knowledge Economy, not a Data Economy.

It’s a Knowledge Economy – Are You Ready?

Today’s economy is a knowledge (driven) economy, “one in which the generation and the exploitation of knowledge has come to play the predominant part in the creation of wealth. It is not simply about pushing back the frontiers of knowledge; it is also about the more effective use and exploitation of all types of knowledge in all manner of economic activity“. Very little has changed since the Department of Trade and Industry of Great Britain penned these words in 1998.

In fact, the importance of knowledge in wealth creation is accelerating by the day now that global trade, information technology, new media, and, in particular, the social web is increasing in innovation, size, and market penetration on an exponential basis. Leading organizations now “follow the sun” and operate core business processes 24/7/365 on a global basis. Product and service pricing are increasingly being driven by value first and cost second. Organizations have to either accept the new economic reality created by the knowledge economy or fall further behind their peers in sales and market size.

From a supply chain vantage point, not only have the last twenty-five years produced an explosion in the application and availability of computing and communications technology in all aspects of life and business, which was only hastened by the wide-spread adoption of the internet, but they have also produced a revolution in supply chain theory and best practices. In lockstep we’ve gone from MRP to MRP II to ERP to a mix of Best-of-Breed Supply Chain and Global Trade solutions on the technology side to decentralized tactical buys based on hardball price negotiation to centralized global strategic supply negotiations on the process side.

In today’s fast-paced knowledge economy, only the strong survive, where the strong are those organizations with modern processes and technology and the wherewithal to use them. The question is, does your organization belong to this group?

To find out more, download the latest white paper by the doctor of Sourcing Innovation, sponsored by BravoSolution.