Category Archives: Manufacturing

Are You Doing Your Own Quality Spot Checks? And Should You Be?

By now, if you haven’t heard of the Kobe Steel Scandal, you’ve been living in a cave. (Which, in some organizations, is highly probably given that one of the tricks the CFO likes to do to Procurement when fiscal year end is approaching is to lock them in the basement until the mandatory savings objective is reached … hence our post yesterday on why every day is Halloween for some Procurement departments.).

This scandal is scary. Not only because the data falsification on strength could go back as far as 10 years on some batches, and who knows what bridges, high-rises, and busses that steel has gotten into (and even a .1 degradation, while not enough to jeopardize immediate safety, can impact expected life span and increase susceptibility to decay, making safety a concern down the road before inspection and maintenance schedules kick in).

But this brings up a good point? If more companies were doing more spot checks on shipped product and quality, instead of just trusting Kobe, would it have been 10 years before the scandal was exposed. Even if only a small percent of batches are affected, I highly doubt this would have been undetected for 10 years, even if only one bar or sheet in multiple shipments were tested.

This is an example of what happens when finance tries to get too greed or supply chains to lean by centralizing a function downstream. When one party is responsible for everything, one failure can reverberate up multiple chains undetected — and have potentially disasterous consequences. Now one might say this problem is solved by co-locating people on-site, but if those people never leave the site, even though you pay their salary, their work family is the people they work with day in and ay out and the existence of that company is their livelihood. Are you sure they won’t bow into the local culture and, if the culture dictates, defer to authority or collectively hide the shame?

Just like third party audits are needed, for critical materials, so are third party quality tests. Doesn’t have to be you, could be an independent organization set up between your co-opetition that does random independent quality spot-checks on 1 in 10 shipments and shares the data with everyone.

Just like a good Chef would never use an ingredient without insuring it’s quality, a good Procurement organization should never let a shipment be accepted without a high degree of confidence that it’s a quality shipment. And confidence like that only comes from organizational testing or trusted third-party independent testing. So don’t get too lean or too cheap — your organization, and the lives of its customers, could depend on it.

Cognitive is the New Buzzword. But what does it mean?

It seems that everyone is talking about Procurement these days. A Google search for cognitive procurement returns about 650,000 results that include news sites, analyst firms, and vendors ranging in size from Old St. Labs to SAP Ariba to IBM.

Definitions are varied as well. Quora defines cognitive procurement as the application of self-learning systems that use data mining, pattern recognition and natural language process (NLP) to mimic the human brain to around the processes of acquiring, buying goods, services or works from an external source. IBM’s Vice President of Global Procurement defines cognitive procurement as the use of systems and approaches that are able to learn behaviour, manage structured and unstructured data, and unlock new insights to enable optimized outcomes. Vodafone defines cognitive procurement as augmented intelligence capabilities that allow a category manager to make faster and smarter data driven decisions that deliver competitive advantage.

But what does this all mean? First of all, the only commonality is using systems to do a task better. Which systems? Which tasks? Who gets the benefits? And what precisely are the benefits?

To figure this out, we have to go back and define what makes for better Procurement. The first step is good Sourcing. What are the keys to good Sourcing?

There are a number of keys to good Sourcing. Some of the most important include:

Visibility. Who are your potential suppliers? What do they provide? Where are they? What do you know about quality, reliability, delivery, etc? What are the risk factors with dealing with them? What data can you get on finances and sustainability? You need good information.

Analytics. Once you get the information, you need to make sense of it. Roll up component and material costs across bill of materials. Amalgamate risk ratings into meaningful scorecards. Aggregate demand across categories. Determine what you need, when, in what quantities, and how much it should cost before you start a negotiation.

Modelling. The ability to define detailed should cost models based on components or materials, production costs that include energy and labour and overhead, and other relevant cost factors. To define how those costs change with market data or production volumes. And so on.

Optimization. Once you get the data, you need to figure out the baseline costs and what the optimal awards are assuming nothing changes. Then how those change as costs change as bids change. Also, what are the optimal logistics strategies and costs. How does logistics impact the award decision? How should the logistics supply chain be designed?

Negotiation Support. At some point, the analysis needs to turn to negotiation, because the goal of sourcing is to acquire the products and services the organization needs to support its operations and satisfy its customers. All of this capability needs to be brought to bear in a cohesive, assistive, fashion that can help a buyer make the right decision.

That’s what cognitive procurement is — presenting a user with the information they need when they need it to make the right decision. Not automated buying. Not artificial intelligence which doesn’t exist. Not trying to mimic the human brain, as we don’t even fully understand how that works now.

So, does any application meet these requirements?

Consumer Sustentation 74: Demand Planning

Demand Planning is a damnation. Why? As per our original damnation post,

  • traditional demand planning models require historical data
  • traditional demand planning models require market predictability
  • traditional demand planning models require market foresight
  • traditional demand planning requires knowledge of the expected price point

And how often in today’s constantly changing consumer marketplace, with new product releases coming faster and faster (to the point where your phone, laptop, and music device is out-of-date by a whole new release within a year), do you have good historical data, market predictability, and foresight? And how often can you be confident in the price-point, as a skunk-works product release by a competitor between sourcing and sale can force a price reduction to prevent inventory sitting on the shelves indefinitely.

So what can you do? (Besides burying your head in the sand like an ostrich?)

1. Get as much market data as you can.

Collect as much data as you can on your competitors imports, sales, and revenue using publicly accessible import data, analyst data, and company annual reports. It won’t be accurate, but with enough data you can often identify better trends than you could on the most similar product in your own inventory (which might not be similar, or recent, enough to be sufficiently relevant).

2. Have third parties conduct surveys on your behalf.

Sometimes the best way to gauge a market forecast is to actually conduct customer surveys and have a third party use the data to estimate demand for you. If you have no clue, the best thing you can do is admit it and get an expert to help you come up with a realistic demand forecast range.

3. Don’t focus a number, focus on a range and a potential rate of ramp-up or ramp-down.

If you know the demand is expected to be in the 100K to 200K units a month range, and the demand could double overnight, then you know that you need to contract for the low-end, but with a supplier that could ramp up to double production in a matter of weeks if necessary. And you have to negotiate a contract that allows orders to escalate, with pre-defined increases if the supplier is forced to work overtime (so you don’t get any billing surprises or animosity down the road).

4. Keep on top of sales data in real-time.

Be sure to get at least weekly PoS updates, and re-run the projections on a regular basis to detect an upswing or downswing early, so that you don’t get caught with your pants down, or, even worse, your pants off.

If you follow these tips, then you can get a reasonable grip on demand planning while your competitors flounder with the flounders.

Boost Your Procurement Value Engine

As per our last post on the subject, Procurement does not exist to buy stuff (which was its origins, but thanks to the Internet, everyone can buy stuff), but to provide value to the organization. But the identification of organizational value is not always straight-forward. Every organization is different, and every Procurement function has a different level of organizational maturity. As per the classic Hackett Hierarchy of Supply, a supply organization could still be at the level of supply assurance, could have moved on to analyzing landed cost, may have begun its entry into the modern era with an analysis of TCO, might be poised to become a leader with a foray into demand management, or, and this is the highest level of maturity, may be focussed on the art of value management.

But delivering value first requires understanding what value is to the organization (and how Procurement can contribute to it) and then requires getting a mechanism in place to repeatedly deliver that value at regular intervals. There are various mechanisms that can be considered, but regardless of the mechanism you choose (and whether it is process-based, platform-based, or a hybrid approach), it needs to be powered by an engine. And in particular, that engine, which needs to keep on churning out value like a real engine keeps churning out power, needs to be efficient and effective.

One has to keep the productivity plateau in mind. An organization that only focusses on efficiency will, at best, fail slowly. Similarly, an organization that only focusses on effectiveness will, at best, survive. But what an organization really wants to do is excel, and that requires the right intersection of efficiency and effectiveness. In particular, the organization has to focus on effective goals, implement them as efficiently as possible, and then use the savings to take on even more effective goals.

So how does a Procurement department improve its productivity? Generally speaking, the Procurement organization increases its value (for money, VfM), and the basic formula for that is simple:


Value Increase = Reduce Input + Increase Output + Reduce Energy
 

while focussing on categories important to the business

And how can it do that? In a category-agnostic way, it can:

  • reduce demand
  • increase Spend Under Management (SUM)
  • decrease contract costs
  • increase contract compliance
  • decrease storage and utilization costs
  • reduce risk

And how can it do this efficiently? In a general way, it can:

  • implement systems to improve cycle times
  • implement processes to reduce maverick spend
  • manage market dynamics better

And how can it translate the general to the specific? That’s a harder question to answer, but one that is addressed in considerably more detail in a new white paper co-authored by the doctor and the procurement dynamo, sponsored by Pool4Tool, on how to Boost Your Procurement Value Engine. Part I of a II-part series (with Part II coming out in Q3), this paper will give you the insights you need to understand the various levers you have to deliver true value and how you can do so in an efficient, effective, and sustainable manner.

It’s Time To Rev Up Your Procurement Value Engine. But Do You Know How?

Procurement doesn’t exist to just buy stuff. Procurement exists, at least if it’s a modern Procurement organization, to identify and deliver organizational value. Long gone should be the days when Procurement, staffed by the island of misfit toys, existed only to process the paper work that allowed manufacturing to buy the parts it needed or the back office the paper and calculators required to do the day-to-day accounting.

But the identification of organizational value, as long-time readers of SI know all too well by now, is not always straight-forward. Every organization is different, and every Procurement function has a different level of organizational maturity. As per the classic Hackett Hierarchy of Supply, a supply organization could still be at the level of supply assurance, could have moved on to analyzing landed cost, may have begun its entry into the modern era with an analysis of TCO, might be poised to become a leader with a foray into demand management, or, and this is the highest level of maturity, may be focused on the art of value management.

However, delivering value takes more than just realizing that your function is to deliver value. It is understanding what value is to the organization and how Procurement can contribute to it. Simply put, one way of defining value to the organization is whatever allows the organization to increase its revenue potential. (More sales, more market share, more brand recognition and brand love, and so on.) One way of assisting the organization in the capture of this value is to deliver products, services, and knowledge that will assist the organization in strengthening its Unique Selling Points (USPs) or Unique Value Propositions (UVPs) that give the organization the competitive advantage it needs to increase its revenue (or profit) potential.

It is not easy to do, especially since a Procurement organization has to understand not only what it must do, why it must do it, and how it will achieve it, but how to be good at it. Few organizations get demand management under control and step up to the highest level of the pyramid. Fewer still can stay there as they will struggle with the how. And even if they occasionally understand the how, they may never master the art of being good.

If one wants to be good and drive to success, one has to have a vehicle powered by a finely tuned engine that can deliver value lap after lap around the sourcing track. Such an engine must be efficient, effective, and sustainable. Only then will Procurement be able to get good and stay good. So what does such an engine look like, what sort of value will it deliver, and how will it deliver that value?

For the answer, check out the new white paper co-authored by the doctor and the procurement dynamo, sponsored by Pool4Tool, on how to Boost Your Procurement Value Engine. Part I of a II-part series (with Part II coming out in Q3), this paper will give you the insights you need to understand the various levers you have to deliver true value and how you can do so in an efficient, effective, and sustainable manner.