Category Archives: Strategy

Take Your Eyes Off Of The Yellow Brick Road and Follow The Car

A recent article in Strategy + Business which tells us to Follow the Customer, Follow the Car makes a great point: when customers are scarce resources, you need to focus on your current customers, do more with them, and not churn your customer base.

A prime example of how to succeed is given by the Japanese auto companies who adopted “follow the customer” as a core strategy decades ago. When demand for new cars declined in their home market, they emphasized products that accompanies the car — insurance, loans, inspections, maintenance, parts, and accessories — with revenues that remain stable in recessionary times. This allowed them to survive the recession, and then grow when the market rebounded.

This strategy doesn’t just work for the automotive industry. In the last recession in Japan, it worked just as well for other machinery industries as well. Construction machinery, plant machinery, and aerospace are all prime examples that can benefit. In a recession, people want to keep their assets running longer, and anything you can do to help your customers maintain their hardware longer is a stable, and profitable, industry for you.

And if you’re in sourcing, that means you can expect to be sourcing more parts and services, and anything you can do to reduce these costs will benefit the company immediately.

Cut, Cut, Cut is Not a Strategy (for Supply Chain Cost Reduction)

Jim Tompkins (of Tompkins Associates), who gave one of the best presentations I’ve ever attended at last year’s SCL Conference on Creating a Resilient Supply Chain when he said that his top three tips to bold leadership success were:

  • Don’t Do Anything Stupid,
  • Focus, and
  • Kill the Left Suckers

recently contributed a great article to Supply Chain Brain on the riddle of supply chain cost reduction. In it, he notes that you should not simply “follow the leader” and cut [payroll], cut [advertising], cut [consulting], cut [strategic initiatives] like many (supposedly) “smart” companies are doing, because cutting is NOT a strategy that leads to success.
Across the board cuts, without understanding where your company’s real profitability lies, results in average performance at best and leaves your organization wide open to failure at worst (and gives you a failing grade on the doctor‘s Corporate Intelligence Rating).

The key to cost reduction is to break down your costs into

  1. capital and operating costs,
  2. talent costs, and
  3. strategic costs (for profit improvement initiatives)

and align your costs with your vision and model for success. When you do that, you see that category 1 costs are ripe with opportunities, category 2 costs need to be carefully analyzed, and category 3 costs need to be protected. Did you negotiate your lease during a boom? Is a multi-million dollar enterprise system contract nearing expiration? When was the last time you looked at your outsourcing / support agreements? Operating costs are ripe with opportunity! In comparison, talent costs are a different story. Although many companies are quick to ditch high cost talent, the reality is that doing so usually leaves them in a situation where they are unable to pursue million-dollar savings opportunities because they failed to realize that top talent was paid top dollar for a reason — they were the individuals capable of implementing strategic cost savings opportunities, which should be protected at all costs.

So how do you achieve true cost reduction? Jim recommends you take a holistic-view of your supply chain and focus on Buy-Make-Move-Store-Sell(-Right_Size-Outsource). Specifically, start with:

  • Buy Sourcing
  • Make Lean Manufacturing (Waste Reduction)
  • Move Internal and Domestic Transportation
  • Sore Distribution Centers
  • Sell Inventory Management
  • Right-Size IT Systems
  • Outsource Non-Core & Strategic Operations

And don’t forget to take advantage of the many service providers who are capable of helping you reduce your category 1 costs (often on a contingency / no up-front cost basis). As Jim points out, transportation costs, purchase costs, customs and duty costs, inventory carrying costs and distribution center costs are all very, very important expenses that in these difficult times need to be reduced, and you should do so aggressively and intelligently. The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.

Great advice — and you can get more by reading reading the article and consulting the Tompkins Associates Publication Library.

Crossing the “Valleys of Despair” in Advanced Planning and Scheduling

Last summer, the Supply Chain Management Review ran a good article on “How to Succeed with Supply Chain Planning” that is very timely now as smart companies acquire advanced software systems to help them save money in this downturn while their dumb counterparts cut the budget and stick their heads in the ground like ostriches waiting for this golden opportunity to just pass them by.

APS tools are not a new invention, having been around in one form or another for at least ten years. The difference is that today, you have on-demand best-of-breed options from companies like Kinaxis, MCA Solutions, and Servigistics in addition to the old standby solutions from the big ERP players like Oracle, SAP, and SSA Global. However, enterprise deployments are still time consuming, typically requiring three to six months for the on-demand options for mid-size manufacturers and nine to eighteen months for the on-premise options for large manufacturers. However, many implementations, especially on-premise installations on top of on-site ERP installations, still follow a well-defined pattern with periods of difficulty that the authors identify as “valleys of despair”.

APS tools are important, especially for organizations that manufacture or supply products to end-customers, because, as the article points out, they can significantly decrease operational costs and noticeably increase on-time delivery and customer responsiveness. For example, after implementing APS, one electronics company found that it could respond to demand changes in minutes, as opposed to weeks, and increase on-time delivery by 15%. However, the improvements are only realized if the tools are properly implemented. While proper implementations can save millions, improper implementations can cost millions and, if you’re really unlucky, cause bankruptcies. (Remember the Nike fiasco? Or the Aris Isotoner kerfuffle? Or the Foxmeyer implosion?)

So what are the valleys of despair and how do you react to them?

  1. The Solution Doesn’t Work
    The first crisis occurs right after the design phase when expectations collide with reality. When the solution is run for the first time with a production data set, the project team is likely to get an unwelcome surprise: seemingly unintelligible output, often accompanied by system performance problems. APS systems are complex pieces of software and it takes time to properly configure the solutions, to load all of the data, to tweak performance so that run times aren’t excessively long, and to work out the kinks. Even with the best efforts, it will take a few iterations before performance enters the expected range. The key is to remember the great advice given to us by The Hitchhiker’s Guide to the Galaxy and Don’t Panic.
  2. No One is Using the Solution
    The second crisis occurs right after the solution moves into production. The business users — the supply planners in the supply chain organization — find it difficult to interpret the output and are confused by the planning model and solution behavior. After a brief struggle, many users revert to the comfort of familiar spreadsheets and abandon the solution altogether. The key to success is to establish a comprehensive training program that starts before the design phase (allowing the supply planners to provide input into model formulation), continues through development (allowing the power users to perform user testing), and goes right up to deployment (ensuring that the planners will be able to fully, and properly, use the system).
  3. The Business Has Changed
    The final crisis occurs after one or more business conditions change and the models in the APS no longer reflect operational reality. If the planners don’t understand how the changes affect the APS model and outputs, they will “drift” away from the solution. The key to crossing this valley is to form a permanent support team and insure that they work with planning regularly to update and adjust the model as needed.

It’s a great article and I highly recommend you read it in its entirety.

Even in Night, Procurement Shines Bright

The Winter Edition of CPO Agenda had a great article on how stand-out procurement functions are continuing to extend their reach and value despite volatile market conditions. In “How the Stars Shine Brighter”, the authors reviewed the 2008 Assessment of Excellence in Procurement from A.T. Kearney (AEP) that surveyed and benchmarked almost 500 respondents against their industry and geographic peer groups as well as best-in-class companies.

The study identified three key trends from leading procurement practices that can be directly linked to the attainment of sustainable competitive advantage:

  • Leaders achieve a broader mandate to drive change,
  • Leaders develop dynamic new value-creation strategies to satisfy ever-increasing customer demands, and
  • Leaders continue to develop and maintain robust enabling capabilities in performance management, knowledge and information management, and human resources management.

Leaders Drive Change

In direct materials leaders typically control two-thirds of external expenditure — twice that of the average firm. In indirect materials, the proportion is 73% for leaders, 42% for followers. By addressing a larger portion of the total corporate spend, leaders are yielding overall procurement-related savings that are 2.3 times greater than the followers. For a $20 billion company that could represent a 21% advantage in earnings per share versus its competition.

How do they do this? They:

  • Align with Corporate Strategy
    The CPO maintains a close relationship with senior management to help him or her align procurement strategies with the overall corporate strategy.
  • Refine the Organizational Structure
    Today’s procurement organizations frequently follow a center-led model that features common policies, approaches and practices for purchasing company-wide.
  • Increase Strategic Focus
    Leaders focus on strategic initiatives, not transactional activities that are best left to automated systems.

Leaders Develop New Value-Creation Strategies

Leaders go above and beyond the basics, initiate supplier collaboration, and differentiate themselves through superior approaches to risk management, best-cost country sourcing, and sustainability. They

  • Take Sourcing Practices to New Heights
    Leaders take a highly systematic approach to the application of traditional sourcing strategies, including volume concentration, best-price evaluation and global sourcing, as well as more relationship-orientated approaches such as product specification and joint process improvement, and relationship restructuring. Leaders also create value by using sourcing and category management methods such as innovation network leveraging, product “teardown” (a common method of analysing competitors’ products), collaborative cost reduction, expressive bidding and price benchmarking, to name but a few, to a far greater extent than followers. As a result, they attain higher levels of cost savings and value.
  • Drive Supplier Collaboration and Innovation
    Leaders are redefining boundaries and reaping the benefits of true partnerships, such as more product and service innovation and faster time to market.
  • Unlock Value through Risk Management
    The majority of leaders systematically use internal risk mitigation strategies to ensure supply continuity, develop category management contingency plans, align supply security with their overall business risk tolerance goals, and define, measure and track risk management and supply chain key performance indicators (KPIs).
  • Source from Emerging Markets
    Leaders arrive to the party early, while the savings buffet is full and plentiful. Leaders demonstrate that potential obstacles around emerging market sourcing can be overcome by actively engaging with and investing in suppliers. The ability to manage risk — through supplier process auditing, process risk assessment, high-quality data reporting and analysis, and the placement of key procurement executives in offshore locations — gives the leaders confidence that their emerging market sourcing activities will bring cost improvements without introducing excess risk.
  • Follow Sustainability and Corporate Social Responsibility Best Practices
    Finding the right balance between economic viability, environmental awareness and social well-being is a significant challenge, but a competitive advantage can be gained by companies that locate intersection points for all three. Sustainability leaders are differentiating themselves in a number of ways, be it through reductions in energy use and waste, taking on a holistic, future-orientated focus, or extending sustainability outward to the extended enterprise.

Leaders Employ Robust Enabling Capabilities

Leaders measure actual benefits, perform audits of procurement benefits, examine the function’s impact on profit and loss, and track productivity performance indicators. Leaders

  • Employ Best-of-Breed Technology
    Leaders have taken spend visibility to the next level, linking systems to product development and product lifecycle management tools to further improve control and influence procurement decisions earlier in the design and decision-making process. Leaders are improving their business intelligence capabilities with respect to spend management, using techniques such as predictive modeling at a much faster rate than followers. And leaders hold, on average, more than five e-sourcing events per business day — a rate four times greater than that of the followers.
  • Win the Fierce Battle for Talent
    Leaders realise that continued success depends on their ability to attract and retain the right people.

Getting the CFO on the Side of Supply Chain

A recent article in i2’s Supply Chain Leader on “linking the CFO to supply chain execution” made a great point when it notes that a company needs to have a good understanding of its total costs and sources of value to align business strategy with the supply chain. It made an even better point when it noted that sometimes the best person to help you do this is the CFO, whose skill set is a competitive asset in its own right. After all, who else in the organization is as focused on reducing cash-to-cash cycle times, achieving profitable growth, delivering predictable profit margins, and reducing the company’s risk profile?

So how do you get the CFO on your side? Take some tips from the i2 article and explain to the CFO how good supply management:

  • Reduces Cash-to-Cash Cycle Times
    Through the perfect orders and accurate purchase orders that result from properly implemented and utilized e-Procurement systems, companies can optimize purchases and eliminate overpayments through the invoice matching capabilities that are built into leading best-of-breed systems.
  • Reduces the Company’s Risk Profile
    Effectively optimizing total landed cost, despite global supply chain uncertainties, helps in the management of corporate budgets and gross margin erosions. Without good supply management, companies will frequently consider the lower unit costs in choosing global suppliers and fail to consider the uncertainties inherent in global supply chains. Several factors impact the total landed cost, including:

    • elevated transportation costs
    • longer lead-times that increase in-transit inventory
    • lost business due to customs delays or unexpected demand surges
    • increased inventory holding costs
  • Achieves Profitable Growth
    Good supply management systems not only measure and model cost reductions, but also track the KPIs necessary to quantify the impact on revenue.
  • Delivers Predictable Revenue
    Supply management helps to deliver predictable revenue and profits on a continuous basis as it utilizes systems that maintain accurate future supply and demand information and make it available on a timely basis.