Category Archives: Sourcing Innovation

The Snares of Sourcing

Sourcing is the key to supply management success, but only if it is executed in an effective manner. Otherwise, there is a risk that the sourceror will make a decision that makes the situation worse, not better.

For sourcing to be effective, it has to add value. Otherwise, there is no benefit to sourcing compared to a procurement spot buy. Value can come in many forms, including, but not limited to, better quality, lower cost, more value-added, services, and guaranteed availability. However, especially from the CFO’s view, lower cost and supply availability are generally the priorities as bottom line improvements depend on cost reductions and sales for profit.

But for sourcing to be effective, the sourceror has to avoid the traps, traps which come from their lack of market knowledge, supply market knowledge, and e-Sourcing expertise. Specifically, if a sourceror has:

  • lack of market knowledge

    and does not understand whether supply exceeds demand or demand exceeds supply, the sourceror can choose the wrong event type — an auction when supply is scarce, a strategic negotiation with the incumbent when supply is plentiful, and so on

  • lack of supply market knowledge

    and does not seek out more knowledge, she could pass over inviting the best suppliers to the event or eliminate supplier with seemingly high or low price points without understanding the additional value they can bring with commitment and buyer expertise

  • lack of e-Sourcing expertise

    and does not know the ins and outs of refined sourcing process and the best way to engage suppliers, extract detailed cost models, or determine the right supply base split, inferior decisions will be made

So how can the sorceror avoid the traps? Especially if she does not have the knowledge? Cognitive sourcing platforms that can fill in the gaps.

A good cognitive sourcing platform will:

  • provide the buyer with up-to-date market knowledge that allows a user to always understand the supply/demand balance or imbalance in the market
  • provide the buyer with a good overview of the current and potential supply base
  • provide the buyer with the typical sourcing strategy for the category and (supply) market dynamics to help the buyer make a decision

Will the cognitive platform always be right? No. But it will be most of the time, and that will help the buyer make better decisions more often. And avoid most of the sourcing snares.

The Key to Successful Supply Management? No MoBAs, no PiMPs, and no Paper Pushers!

SI has said it before (back in our post on the key for a successful supply management center of excellence? No M(o)BAs and no P(i)MPs!), and will say it again. Successful Supply Management relies on supply management expertise and experience, not on meaningless business models and knowledge-free project management frameworks. (SI believes that individuals who only have MBAs are just Master of Business Annihilation!)

Remember, not only is it the case that you can’t manage what you can’t understand, but all you can do if you try is make it worse! Supply Managers are overworked and under-resourced, and any misstep has a ripple effect throughout the supply chain — one that can go from a minor delay to a major catastrophe. Management knowledge and project management skills are good things, but whereas supply chain is concerned, only if this knowledge and skill is added to a fundamental understanding of the supply management process that needs to be performed.

But simply eliminating the unknowledgeable MoBAs and PiMPs is not enough anymore. You must eliminate the paper pushers as well. You see, in a modern fast moving supply chain, there is no time for tactical people who only receive, process, and send e-paper. Especially when the majority of this work can be automated by modern machine learning / automated reasoning systems. In a modern supply management organization, personnel need to be educated and experienced in their roles and focus on making sound, strategic decisions. They need to identify potential problems as soon as they arise and resolve them. They need to identify a changing market landscape as the change begins and the potential impact on the supply chain and the organization. They need to assure supply and regulatory compliance. And so on.

And they need to be able to identify, implement, and make use of modern cognitive systems that can help them identify what needs to be analyzed, what needs to be addressed, what needs to be done, and the best ways to potentially go about it. The individuals who can do this are not PO paper pushers or AP invoice processors. They are knowledgeable and capable sourcing, procurement, and supply management experts who know their domain, and the tools, first and the business and project management second.

Will this be the year we traverse the supply chain plateau? Part II

In yesterday’s post, we noted that five years ago we covered a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. And while SI did not agree, SI agreed that progress had completely stalled. And SI believed that the root cause of the issue was manpower capability. Precisely, the fact that most executives do not understand the supply chain from a holistic perspective, treating each step as its own function (and disassociating NPD/Design from Sourcing (a manufactured product) from Logistics and Distribution, when they all have to be examine and managed as part of an integrated supply chain. And the fact that neither do the function managers. Moreover, these function managers often do not even understand the best practices associated with their job.

And SI believed the root cause of this was a lack of education — most Supply Chain / Supply Management / Sourcing / Procurement / etc. managers don’t leave college or university with a solid supply chain background, as few institutions offer such programs, and they haven’t been properly trained. Add this to the fact that year over year training budgets are slashed and leaders are run ragged fighting fires and dealing with tactical issues instead of being given time to focus on long-term strategy, how the supply chain works, and how it should work for optimal performance and optimal corporate gain.

Now, it’s true that the education issue hasn’t improved much in the last few years, but what has improved is the technology to provide executives and function managers both with a more holistic view and guidance as to directions they can take. Modern cognitive technologies backed by machine learning and automated reasoning, which can process millions of data records in near real time, identify trends, identify outliers, identify normal behaviour, identify typical responses, and so on, can present executives and managers with holistic views that let them understand not only what their options are, but what impact it has on the immediate problem and the supply chain as a whole. Ripple effects through the organization and the chain can be predicted and an informed decision made with the known impacts in mind.

Companies will know not only the impact of a delayed payment, but the benefit of an early payment as well as the trade-offs between JIT delivery and maintaining raw material inventory or the benefits of combining volume with a single supplier for more cost-effective shipments from a closer supplier. And so on.

If we can’t fix the education, at least we can fix the holistic understanding of the impact of a decision. And while we don’t have systems for all situations yet, you can bet they are in development. Maybe 2020 will indeed bring 2020 vision to some supply chain areas!

Will this be the year we traverse the supply chain plateau? Part I

Five years ago today we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. While SI always believed there is innovation to come, the Shaman presented some pretty damning evidence. Analyzing the balance sheets of process companies over the course of a decade, she found that the average process manufacturing company has reached a plateau in supply chain performance. As she stated:

Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

And it’s certainly the case that delaying payments and squeezing suppliers is NOT progress!

And while SI believed, at the time, that we had not reached the plateau, SI certainly believed that growth had stalled. But why?

The Shaman conjectured that while complexity has increased, many well-intentioned executives lack the understanding of the supply chain’s potential or how to manage the supply chain as a system. So, while individual projects are getting great results, departments as a whole are not performing as well, and being managed even worse. SI had to agree.

And while SI also had to agree with the Shaman that there is a discontinuity and we need to declare the APS and ERP systems of the 1990s obsolete and start again, SI did not believe it was the core problem. SI believed the core problem was manpower capability. Not only do most executives not understand the supply chain from a holistic perspective, treating each step as its own function (and disassociating NPD/Design from Sourcing (a manufactured product) from Logistics and Distribution, when they all have to be examine and managed as part of an integrated supply chain, but neither do the function managers. Moreover, these function managers often do not even understand the best practices associated with their job.

SI conjectured the manpower capability issue was a lack of education, and hasn’t changed it’s belief. But even though little has changed on this front, there is a light in the sky now … we can see the day when we cross the plateau and see the peak ahead. How?

Your Supply Base Is Too Big – But That Does Not Mean You Should Consolidate

You should right-size, but right-size doesn’t mean down-sizing the supply base like consultants in the 90′s used the term right-size when they wanted their customers to down-size their work-force. It means identifying the right number of suppliers for the category, and the right suppliers to fill those slots. If you are sole-sourcing or dual-sourcing a category, and the one or two suppliers are risky or in at-risk regions, you might need more.

The right number of suppliers is not a magic number, it’s the right number of suppliers you end up with after you have identified the right suppliers for each category. For a large organization, that has 60,000 suppliers, that’s probably a substantially smaller number (by a factor of 2 or 3), but it’s not consolidation and cutting across the board.

The reality is that most of the unnecessary supplier proliferation is in the tail spend, not the strategic spend that is analyzed every few years. There are a few extra suppliers in the strategic spend, particularly when organizational units or individual buyers go rogue and don’t buy off of contracted or preferred suppliers, but the majority of needless supplier sprawl is in the tail spend. (Where, as we noted earlier this week, you should be auto-buying.)

So how do you go about right-sizing? First of all, for each product or service in the tail spend, select preferred suppliers and make sure that they are only suppliers available in any and all solutions the buyers can use. Then, make sure that the organization puts in place a no PO, no pay policy and communicates that to all suppliers, and, in particular, the suppliers that are no longer preferred suppliers. This will minimize the suppliers who will respond, especially if the organization refuses to pay invoices that are unmatched to POs.

Then, use auto-class solutions on the transactions to try and identify products or services that could come from the same supplier and try to reduce the supply base further by eliminating those suppliers that can only supply one product or service when there are enough suppliers that can supply that product or service that can also supply other products and services.

And then stop there. While this won’t necessarily get down to the optimal number of suppliers, or ensure the optimal supplier is in each category, it will likely reduce the number of suppliers in the tail by a factor of 2 or 3 and make the tail a lot more manageable. And that’s what’s key – manageability, especially when you want your auto-buy to work quickly and efficiently and eventually consolidate enough volume that you can negotiate with the supplier in the future if you need to.