Category Archives: Manufacturing

It Was the Most Wonderful Time of the Year. Could it Be Again?

A couple of months ago we published an article on how ‘Tis the season … to bring an end to seasonality! (And JIT!) because, while consumer shopping may be seasonal, supply chains no longer support seasonality. The pandemic finally broke globally over-stretched supply chains and with the continued issues (lack of ships, due to scrapping; containers; due to trade imbalances; lack of capacity, due to extended shipping times now that the two major canals are not available and ships have to sail around both capes), the situation is not going to be fixed anytime soon.

In the article we noted that if you didn’t want to seasonally stock out, you needed to stop trying to stock seasonally and start planning for sustained stock up over time. Stock at the rate products are normally produced and able to be shipped. And stock to what you forecast.

But don’t stop there. If, even spacing out the orders and shipments, you can’t reasonably stock to demand, or, if the demand may not be high enough to minimize your logistics costs (via full container shipments), then you need to work on demand shaping as well as demand forecasting. Don’t over market / promote / sell a product you’ll have trouble delivering, and don’t maintain a product that isn’t going to optimize your economic order quantity.

Not everyone needs the newest product, or the top of the line product, some just need a product that works, which can be last year’s product, or the mid-line product. If you shape demand properly, through targeted marketing, targeted selling, or proper account management, you can make sure that you can meet all of your demand and keep each product line you should be maintaining profitable. And while we admit demand shaping can be harder than forecasting, sometimes it needs to be done. But it needs a lot of advance planning, so it’s critical that Procurement work hand in hand with Marketing and Sales to help identify the demands it can safely meet, when, and what demand levels are optimal for each product line. But if you integrate your planning, marketing, forecasting, sales, and supply chain planning, then maybe the holiday season will, in 2024, be the most wonderful time of the year.

Are Vendors Demanding Ridiculous Cost Increases due to “Inflation”? Maybe you should tie them to an index when you ask What’s The Price!

Buynamics WTP was founded by two former CPOs and a Purchasing IT Guru back in 2015 after they had spent years being stymied at every reasonable request for open costing and reasonable justifications for significant price increases from opaque vendors where the salespeople did everything to prevent cost insight so they could maximize their margin, and their bonus. Tired of being forced into 20% cost increases when only 2% were justified, the founders of Buynamics WTP decided to do something about it and started Buynamics to build a solution that would provide them with insights into the cost drivers, and actual material costs, that they could use to start fact-based negotiations. [ In other words, the solution we are about to describe in this article was designed and built by buyers, who know exactly what output is needed to negotiate. ]

Since their founding, Buynamics has hired only two types of people: Procurement People (who know how to buy and have expertise in the categories they bought to help Buynamics design a better solution and explain it to interested buyers) and IT People (to build it). They don’t sell (consultant) services, they sell subscriptions to a platform that can provide deep insight into just about any product you buy and, as of this year, many standard services as well. Plus, if you pay for the Upply data subscription, you can get deep insight into current freight costs in different regions and, in 2024, there will be extended cost modelling support for logistics, which we’ll discuss later.

Their primary product offering is Buynamics What’s the Price which is their index-based negotiation support product that, in their words, “gives [you] access to the one-pager that your supplier never wanted to share“. You are able to see it all: the commodity costs, the change over time, the cost breakdown (materials, labour, energy, transportation, and overhead) and the appropriate (estimated) margin calculation. You can verify whether their steel cost actually did go up 20% over the past year, and, even if it did, if it justifies a 20% increase. (If steel is only 30% of the total cost of the product, than the most the cost should increase is 6% unless there is also a transportation or energy cost increase, which could be the case in the EU right now [since the sanctions on cheaper Russian Oil and Gas].) It could be that only an 8% increase is justified, and that’s a lot easier to argue with the data.

The What’s the Price module is extremely straightforward with only 6 areas of functionality: cockpit (the entry dashboard), the prices & indices, the industry cost profiles, the cost models, the reports, and the settings. The platform is designed to help a buyer get to the point, and it does that, which is why it’s so great. (Buyers need insights, not complicated tools — those are for cost engineers in the plants.)

In the Prices & Indices Section, the buyer can pull up the prices and changes over time for any commodity, salary, or freight rate tracked by the system. For a commodity, they just have to select the commodity/salary/freight rate (using easy search) and define a date range and up comes the start and end price, average price over time, % change, and a detailed line chart (which can be swapped or overlaid with a mutation chart, moving average, or index). For a job description, they just select the job title(s) and it brings up the average price and typical range (per month). For freight, you simply select the index by country and type (contract, spot, domestic, cross-border, long-distance, etc.).

In the Industry Cost profiles, you can pull up any NAICS code or keyword and see the typical cost breakdown for all products in that category using industry census data — specifically, the direct materials, direct labour, manufacturing overhead (contract work, CAPEX depreciation, energy, MRO, rentals, waste removal, etc.), GSA & Other Expenses and Profit at a high level, with drill in capability to the labour, manufacturing overhead, and GSA. By selecting the country of origin, the data is then complemented based on labor costs and energy rates prevailing in that region.

In addition, you can dive in and the software will calculate the economies of scale based on your growth potential that you are entitled to claim from repeat orders (since you should only pay for so much CAPEX depreciation, etc.) by simply estimating the fixed overhead and G&A of your vendors. (In 2024, you’ll be able to select the transportation index of choice, and get a complete cost model with freight.)

Prices & Indices are useful when you are looking at contract renewals (for quick insight into negotiation with an incumbent), cost profiles are incredibly useful when you’re looking at shifting more business to an incumbent (to negotiate a bigger discount), but the core of the product is in the cost models. You pull in (or enter) your bill of materials, select the NACIS code and the country, and using the current prices and the most recent industry cost profile breakdown, the platform will calculate the estimated total cost of a product using all the data it has. (So if materials account for 33.3% of the cost and add up to $10, then the platform knows the that the total product cost is expected to be $30 and estimates the cost breakdown across labour, overhead, GSA, and typical profit using the region-specific cost data and industry cost profile.

The buyer can build as many cost models as she likes, set up alerts to get updates on a regular basis or when a change occurs in the price that surpasses a threshold (be it due to material cost, energy cost, labour cost, or other significant factor), and see how the cost models have changed over time (since the time they last sourced, for example). (Also, the alert can be set to a percentage change or a financial impact within your organization.) And if you provide the price you are currently paying, it will also calculate how much you are likely overpaying per unit by cost component.

With respect to settings, besides defining system alerts, a user can also maintain their own settings to not only see their interface the way they want to (currency, formats, auto-tracked prices, cost profiles, [active] models, etc.), but reset them on the fly (so they can see prices in Euros when they are negotiating with European suppliers, Yuan when they are negotiating with Chinese suppliers. etc.).

With respect to depth, it tracks index data for over 3000 raw materials and commodities across over 160 countries and uses this to power over 360 built-in industry cost structures. When it comes to services, it tracks salaries for over 750 positions across 37 industries, and over 115 cost profiles, for over 170 countries and regions. Buynamics integrates with the full extent of Upply data (which built their cost indexes from neutral freight pricing from over 750 million invoiced freight transactions) and has detailed up to date market pricing for air (freight; worldwide), land (road, esp. EMEA and North America), and sea (worldwide).

It’s literally everything a buyer needs to start a fact-based index-based negotiation as the buyer understands what the cost should be unless the supplier has a unique situation where certain costs are higher than average (and the supplier is willing to prove it). It also helps the buyer understand when they are getting a reasonable deal and when they are truly paying actual cost increases only, and not just claimed cost increases.

So if you want to understand what you should be paying before you start a negotiation; the extent to which commodity, energy price, labour, or transportation price changes really affect you; and what the real cost drivers are (or where the supplier truly isn’t competitive), then the buyer should acquire Buynamics WTP today. It’s really the only platform that does index-based negotiation support (vs. stochastic analytics, CAD driven analytics, process model analysis, or hand-built cost models that typically require cost engineers and sometimes even PhDs).

Consumer Dynamics are shifting like never before. But how does that affect Procurement?

Beyond the obvious, of course. But let’s backtrack.

A recent article over on Fortune noted that consumer dynamics are shifting like never before while purporting to give us some insights from Executives from Instacart, Atlassian, Nordstrom, and Black & Decker [who] share their strategies. However, the insights it shared related to the challenging technology environment the companies, and teams, face daily and not the consumer market in general, which is a very important topic not covered much by most of the publications and analysts that focus on how great the technology (especially AI-backed technology that may or may not work at all) is, but not how it helps you address the consumers that your organization is in business to serve.

Now, it’s easy to track change in demand if you have a good POS system, a good inventory system, at least weekly (if not daily) synchs, and a good DiY (Do-it-Yourself) Analytics system with baseline trend analysis capabilities that can signal changes in demand, the need for rapid reorders to prevent stock-outs, and increasing changes in demand as a result.

It’s not always as easy to track why. Sometimes there’s a strong correlation between the sales and a particular campaign, between the sales and a sustainability initiative, between the sales and recent price decreases in the product line or price increases in a competitor’s product line, or between the uptick in sales and competitor stock-outs, and in this case it can seem obvious, even if it’s not. For example, the campaign may have had nothing to do with it, it could have been the result of a single influencer promoting the product. The sustainability initiative may have had nothing to do with it, as customers may have known it would only impact the next generation of the product. The price decreases may have had little to do with it because it may have already been one of the lowest priced products available at the time as well as the one with the best brand reputation. The competitor stock outs may not have had anything to do with it because those might have been the higher priced products that were only stocked in low quantities anyway.

Moreover, even if you can determine the why with some statistical confidence, that still does not identify the underlying root cause as to why customers reacted to the campaign, the sustainability initiative, the price decreases, or the stock-outs. Are customers shifting towards your brand, adopting a preference for certain products, responding to certain messaging, or just veering away from certain competitors (or at least certain competitor products).

More importantly, how can you predict these trends early, when they are just starting, so that you can make the appropriate Procurement decisions in time to meet the shift in demand better than your competition. Certainly predictive trend analysis (using traditional machine learning fine-tuned to your problem domain) will help, but only if you can identify the right data sets and indicators, which will also mean being able to detect shifts in early sentiment early. So sentiment analysis (not overblown generalized error-prone Gen-AI) will also help.

But that’s just the beginning. Technology indicates possibilities, maybe even probabilities, but not guarantees. For that, you will need a human based assessment of the situation. And possibly an anthropological one. If you want to get ahead, you will need to think ahead of the crowd.

Source-to-Pay+ Part 7: Multi-Tier Risk

In Part 1 we noted that Risk Management went much beyond Supplier Risk, and the primitive Supplier “Risk” Management application that is bundled in many S2P suites. Then, in Part 2, we noted that there are risks in every supply chain entity; with the people and materials used; and with the locales they operate in. In Part 3 we moved onto an overview of Corporate Risk, in Part 4 we took on Third Party Risk (in Part 4A and Part 4B), in Part 5 we laid the foundation for Supply Chain Risk (Generic), and then in Part 6 we addressed a major supply chain risk: in-transport.

As part of (generic) supply chain risk, we highlighted multi-tier risks that arise when multiple suppliers need to process materials, make sub-components, build components from those sub-components, and then assemble those components to make your product. When it takes 10,000 suppliers to make your product (which is the case with some complex electronics products), the risks are beyond what most minds can comprehend. Multi-tier risk management systems for direct supply chains must address a number of specific requirements outlined in Part 5.

Capability Description
Connections & Relationships It is incredibly important to keep track of all of the connections in the supply chain, not just the links that represent the paths of raw materials from the source into the products that your tier 1 suppliers supply you. You need to know who else your suppliers supply, any risks that poses to you (if your competitors have more influence and can steer the direction, process, and quality of the supplier); who supplies your suppliers, any risk that poses to them, and thus to you; who owns your suppliers, and any risk that creates to your organization in different countries of operations due to sanction lists; and who your suppliers contract out too, and any risks that may pose.

It is thus critical that a multi-tier supply chain risk management solution support connection graphs that can be re-oriented around any entity at any time for a quick inspection of risks posed by that entity and all entities it may in turn affect. It is also critical that the solution support drill-in at each entity for deep insights and analysis.

Bill-of-Materials The platform must support multi-level bill of materials (BoM) support. You can’t track the full supply chain if you can’t track the full product inputs all the way down to the raw material inputs for each component, sub-component, and primary part. You also need to be able to trace any product with an issue down to the supplier who made the part/sub-component/component with the issue.

The platform must make it easy to define, maintain, alter, and otherwise work with the bill of materials. It shall be easy to instantiate an instance for each supplier of a product and trace all the way down to the mine or fields the raw materials come from, or the recovery/recycling plants if the materials are being re-used in a sustainable fashion.

Manufacturing Visibility The visibility doesn’t stop at the BoM. It begins at the BoM. For each product you buy from each supplier, you need to track the supplier’s production capacity at the plant, as well as how that capacity is influenced by other products, and switchover time. (If you buy multiple products that use the same production line, then you can’t get full capacity of both.) It must be easy to see all manufacturing information related to a plant of a supplier, how many products it is associated with, and what tradeoffs are in effect when you order a specific product from a supplier.

The platform must be capable of calculating the units per hour/day/week, the switchover time, and how many units of each could be produced given a requirement for one product. (And the same must hold true for three or more different products/configurations.)

It’s critical that the platform allow for easy definition and manipulation of BoM instantiations, supplier plant nodes, manufacturing details, production line capability, and associated timings.

Public vs. Private Differentiation The platform must be able to maintain the distinction between public and private entities, specific to the countries the entities are located/headquartered in, as well as the different types of information the organization needs to keep on both from a risk perspective. In some countries, public entities are more rigorously regulated and in other countries, private entities could be more heavily regulated. The platform needs to allow a buying organization to ensure that the entities are acting appropriate to their type. Also, investments and sanctions can sometimes work differently depending on entity type.

The platform must be capable of tracking entity type, associate the entity with the relevant regulations and requirements based on the type, and alert the organization if anything changes with respect to the type or any change that could impact the type classification.

Predictive Sub-Tier Mapping A supplier may not always disclose it’s sub-tiers. In such a situation, the platform must predict which sub-tier suppliers are being used based on product type, raw material, raw material availability, available transport networks, and so on.

The platform must contain an adaptive algorithm that learns as new information becomes available, continuously updates its knowledge from market data feeds (import/export logs are often public information), and integrates with third party (commodity) markets that can predict changes over time.

Strengthening Supply Chains is Simple …

It just takes proper people, planning, processes, and platforms. But let’s backtrack.

Forbes recently ran an article on how companies can improve supply chain management to strengthen business operations in 2023 which gave some great advice on various ways a business can improve their supply chain management, which included the following suggestions:

  • align partnerships to prepare for supply chain disruptions,
  • prioritize Learning & Development when it comes to automation in quality-focussed procurement, and
  • look ahead

… and these are really great suggestions, but they skip the starting point — and if an organization does not start off right

  • you’ll never be able to align the wrong partnerships,
  • no Learning & Development program will deliver fast enough if your people don’t have the right educational and experiential background, and
  • looking ahead will be impossible without the right platform.

You see, before you can jump into partnerships and learning and development, you have to go back and make sure you get the basics rights.

  1. Define proper procurement processes, including what will be strategically vs. tactically purchased, this will help you
  2. Hire the right people with the right backgrounds for the categories — not necessarily experienced buyers, but possibly experienced engineers with the insights to know what is needed, what makes a supplier who can meet the needs, when the cost models/quotes are accurate, etc. as it’s often easier to teach an engineer proper purchasing than teach a business grad the basics of electrical engineering
  3. Select the right platforms, which will allow you to qualify and select the right suppliers with whom you can build productive partnerships and
  4. Build the right models, which will allow you to do proper predictive analytics for demand, supply, and related planning

When you get the foundations right, it’s easy to build on those with partnerships and advanced training (to make your good buyers even better), but if you don’t have the foundations right, any attempts to polish partnerships and buildup better buyers will be for naught. (For more on foundations, see past articles on this blog, including The 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay.)