Category Archives: Supply Chain

Show You The Money, Part II (Supply Chain Cost Avoidance Basics)

Yesterday we talked about the fact that the best way to save money is to avoid spending it in the first place and introduced you to the 4 F’s of Cost Reduction: Failure, Facility, Focus, and Finance. Today we are going to discuss focus and finance and point out the specific solutions and methodologies you can use to meet your goals of increased cost avoidance.

Focus
This refers to your market focus and how you address the market. More specifically, it refers to your marketing and sales costs. Don’t just let marketing outsource a campaign – there’s no guarantee the agency they select are going to get anywhere near the best prices for print and media production. If you need to bring an agency to help with your message – do so – it’s often a great idea, especially if they understand your target audience. But make sure they’re service costs are decoupled from the print and media production costs you can control and often save big on. Also, if your sales people don’t have the right message, or don’t attack the right audience, they will be wasting a lot of the companies money. It may sound like it’s their problem, and not yours, but the reality is that if they do not make their sales numbers, then your company’s demand will not hit its forecasts. This means that you will not be ordering as much as you thought, and if you cut a great deal that came with a big rebate once you ordered one million units, and you only order 900,000, you don’t get your rebate, you don’t hit your savings number, and all of a sudden it looks like its your fault. So make sure you have systems in place that allow sales to collaborate with engineering, marketing, and procurement and truly understand what they have to sell, what it can do for the customer, and who they should be targeting in their efforts. Also, if they sell more than they expected, they need to be able to inform you quickly so you can adjust your orders to meet a demand surge.

Finance
They say money talks and money walks. But they often fail to tell you that it’s easily the most expensive asset you have. You have to collect it, disburse it, protected it, pay taxes on it, and, more often than not, finance it. And that last one can really cost you a lot of money – even when you are not actually financing it yourself. The fact of the matter is this: if anyone, anywhere in your supply chain has to borrow a lot of money to meet the demands placed on them, they are probably paying a large financing charge, which is being rolled up into their price, which is inflating your price. Therefore, it is vitally important that you understand your supply chain, especially your tier one suppliers, and do what you can to mitigate financing whenever you can. If paying up front will mitigate the need for your selected supplier to take out a loan that costs them 5%, then they will be able to reduce your price by 5%. Unless you have an investment that will absolutely guarantee over 5% return, and that’s unlikely given the unstable nature of investments, then simply paying early can avoid 5% of otherwise non-avoidable costs.

Disbursing your money can also cost you a lot of money, especially if you have people who aren’t buying on contract and using the absolute best price that you spent a lot of time and effort negotiating and securing. Make sure you have a good contract and compliance management system in place to allow you to track your contracted costs, track purchases against those contracts, prevent, or at least alert you to maverick spend (sometimes it might be necessary, in order to prevent a disruption), and insure that suppliers are billing you what they agreed to.

To summarize, you can also save money by avoiding spend in the first place, and you do that with the right strategies supported by the right technologies and methodologies. Therefore, in addition to the nine technologies and methodologies I outlined in Show Me the Money!, make sure you also have the following technologies and methodologies in place to help you avoid spending that cash in the first place!

And now you also understand why I (will) also (keep) talk(ing) about companies like:

  • Austin Tetra (acquired by Equifax),
    Aravo,
    Connect4Growth,
    Open Ratings (acquired by Dun & Bradstreet),
    VendorMate (acquired by GHX, acquired by Thoma Bravo)
    Vinimaya (rebranded Aquiire, acquired by Coupa),
    etc.
  • Browz (merged with Avetta),
    CT Space (acquired by idox),
    Logility,
    New Momentum (acquired by Market Track, acquired by Vista Equity Partners),
    Quadrem (acquied by Ariba),
    Sockeye Solutions (rebranded Vecco International),
    etc.
  • Salesboom.com,
    SalesForce.com,
    etc.
  • Fogbreak Software (defunct),
    i-Many (acquired by LLR Partners),
    International Trade Bureau,
    Nextance (acquired by Versata Enterprises),
    Upside Software (acquired by SciQuest, rebranded Jaggaer),
    etc.

Show You The Money, Part I (Supply Chain Cost Avoidance Basics)

Last week, in Show Me The Money! I asked you to apply various technologies, methodologies, and strategies to stop your supply chain from hemorrhaging cash and Show Me The Money! And if you did everything I asked you to do, it would be a great start, as it would provide you a big, fat, increase on your balance sheet, but it’s not the whole solution. Even though I only addressed every aspect of your physical supply chain from raw material mining through final delivery to the end customer, I only addressed the physical supply chain. Furthermore, I only talked about cost reduction technologies, strategies, and methodologies – and the fact of the matter is the best way to save money is to avoid spending it in the first place!

So today, we’re going to talk about the other half of the supply chain, and for those of you who want a very simple classification, the cost avoidance half of the supply chain. Just like there are four areas where the right technologies, methodologies, and strategies will save you a lot of money, there are four areas where the right technologies, methodologies, and strategies will help you avoid spending money in the first place. They are the 4 Business F’s of Cost Avoidance (as opposed to the 4 F’s of Product Design, as brilliantly laid out by Eric Hiller in his “The Fourth F”* post on Spend Matters [WayBackMachine]).

The Four F’s

  • Failure
  • Facility
  • Focus
  • Finance

Failure
According to Aberdeen’s “Global Supply, Visibility, and Performance Benchmark Report”, the average company has had an average of two major supply chain disruptions per year and industry average and laggard companies are only able to meet customer-requested ship dates 40% of the time. Every time something goes wrong, it not only costs you revenue (lost sales, etc.), but it costs you had cash as you usually have to take expensive action to fix it. Thus, if you could prevent failure, you could prevent costly expenditures and revenue loss that, when combined, can easily break six, seven, and even eight digits.

So how do you prevent failure? You manage your suppliers and you manage your risk. How do you do this? Through visibility, enablement, and risk-mitigation strategies. Invest in a supply chain visibility system to always know where your parts are, where your parts’ components are, and where the raw material is coming from. If your supplier has a temporary shutdown, you need to know. If their supplier runs into a problem, you need to know. And if the mining company had a shortfall, you need to know. With enough lead time, you can relay an order to another preferred supplier, inform your supplier that they may need to follow up with their supplier to make sure they have the components when they need it, or lock up additional raw materials in a different part of the world – preventing a supply chain disruption long before it happens. With a supplier enablement system, you can not only help them inform you of potential problems before they happen, making sure that such problems are resolved before they occur, but you can help them improve their efficiency, which will ultimately lower your costs even more. Risk mitigation doesn’t require a system, just good planning. Make sure you have at least two suppliers for key purchases – or if they are custom made, and dual-sourcing is difficult, make sure your chosen sole-source supplier has multiple plants where the components could be produced – preventing against disruption by natural disaster or political unrest in a specific region.

Facility
Facility can be defined as readiness or ease due to skill, aptitude, or practice, in other words, facility relates to your level of productivity. Just because you can’t do much about your labor costs, as wages are more-or-less set by the market, that doesn’t mean that you can’t maximize your return. Maximizing your productivity will allow each of your resources to do more, effectively lowering your overall cost for each unit or service you offer. In addition to the strategic sourcing, spend analysis, and award optimization systems I highly recommended you provide to each of your buyers (as such systems have been proven to reduce cycle times by an average of 66% or more), I also recommend providing them with good collaboration, e-Procurement, and Procure-To-Pay systems. Collaboration systems allow remote groups to work together more effectively and e-Procurement and PtP systems greatly simplify the actual ordering and payment processes, allowing your users to spend less time on tactics and execution and more time on strategies to reduce and avoid costs.

Come back tomorrow for a discussion of focus, finance, what-to-do, and where-to-go!

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Show Me The Money! (Supply Chain Cost Reduction Opportunities)

Show Me The Money!

Sorry to disappoint you, but this isn’t a post about Cuba Gooding Jr., whom all of you action fans will remember as recurring minor character Billy Colton in MacGyver near the end of the series.

Instead, this is a post about how you can Show Me The Money by applying the proper technology at the proper places and proper times in your supply chain to save big, even with rising material costs, inflation, and the global talent war.

The reality is that unless you are best-in-class, and the harsh reality is that, by definition, the vast majority of you are not, your supply chain is hemorrhaging cash. And in all likelihood, lots of cash. Where?, you ask. Everywhere!

Let’s take a simplified PC supply chain for example. Raw materials are mined and shipped to a processing plant where they are refined and shipped to base part manufacturers. These base parts (such as chips, wires, etc.) are then shipped to component manufacturers who produce circuit boards, hard drives, cables, etc. These base components are then shipped to an assembly plant where the PC is assembled. From the assembly plant it is shipped to a central distribution center where it is then shipped to either a regional distribution center, store, or your home, depending on the sophistication of the distribution center.

Furthermore, the specifics of your supply chain depend on who you choose to buy from, who your suppliers choose to buy from, who is chosen to handle your transportation requirements, and who you choose to sell to.

From this example, we derive the following fundamental sources of cost:

  • Labor (inc. raw material collection, processing, & subsequent part and component handling)
  • Parts (inc. design, component raw materials, & built in production operations)
  • Operations (inc. part production, handling, & overhead)
  • Transportation (inc. raw materials, parts, components, & finished product)
  • Buying (who you buy from, where, & when)
  • Selling (who you sell to, where, & when)

However, from a savings viewpoint, not all of these are equally important, since only some of these are really hemorrhaging cash, despite their absolute value on the cash flow statements.

  • Labor is more or less defined by market rates. Moreover, companies that pay more for more productive people often have a higher ROI per person than those that pay less.
  • Selling is marketing, materials, and labor. The first is generally not under your purview, and again the issue is not cost, but results; the second is covered by buying; and the third we just discussed.

This tells us that the fundamental sources of cost, and thus the fundamentally sources of unnecessary costs, ripe for saving, have to do with:

  • Parts
  • Operations
  • Transportation
  • Buying

And those of you reading regularly will know what the answers are.

But back to the point – how do you Show Me The Money? You use these solutions to identify where you are hemorrhaging cash, tackle the issues head on, and stop the leak. And then you point to the big, fat increase on the balance sheet as your doing. And that’s how you Show Me The Money!

It’s also why I keep talking about companies like the following:

  • Apriori, Akoya (acquired by I-Cubed), etc.
  • Informance (merged with QlickiT, acquired by Catalyst IT), Apexon (acquired and merged with Infostretch), etc.
  • CombineNet (acquired by Jaggaer), i2 (acquired by JDA, rebranded Blue Yonder after the acquisition thereof), etc.
  • Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric), Procuri (acquired by Ariba, acquired by SAP), BIQ (acquired by Opera Solutions, rebranded ElectrifAI), etc.

They may be small, they may be new, but they are trying to build a solution that will help you find those savings leaks that you are not likely to find on your own. So keep reading!

Forecasting

No doubt about it – despite being critical for effective business planning, accurate forecasting is complex and challenging and still remains elusive for many organizations. However, as the recent issue of APICS Magazine points out in their article “Outlook Warm and Sunny”, one can create good forecasts through the proper combination of judgmental and statistical methodologies and use them to identify new market opportunities, anticipate future demands, effectively schedule production, and reduce inventories.

What’s interesting about this article is that it is well known that neither technique on it’s own can be very effective. Most of us lack the ability to accurately judge future demand due to limitations in human cognitive abilities, the restricted amounts of information we have at our disposal, and unknown causal relationships. Similarly, statistical forecasts are limited with respect to the models they are based on. Although a statistical model is much more accurate than any intuitive model we could come up with, it is built on assumptions and causal relationships which may change over time. The best example of a statistical model gone bad is Nike’s $400M failure in 2000 due to demand forecasting software. Nike relied exclusively on automated forecasts without any judgmental checks, but the newly implemented models were not yet fine-tuned and accurate enough to be deployed in a fully automated mode.

The best forecasts are those that leverage the strengths of both judgmental methods and statistical methods. However, as the author points out, well-established rules must be followed in order to effectively combine these techniques.

The following table summarizes the strengths and weaknesses of each approach.

Judgmental Forecasts
Strengths Weaknesses
Responsive to latest environmental changes

Can include “inside” information

Can compensate for “one-time” or unusual events

 Human cognitive limitations.

Biases
Statistical Forecasts
Strengths Weaknesses
Objective

Consistent

Can process large amounts of data

Can compute many variables and complex relationships

 Slow to react to changing environments

Only as good as model formulation and available data

Can be costly to model “soft” information

Require technical understanding

According to the article, judgmental and statistical forecasts can be combined in different ways to take advantage of their individual strengths but the most popular method in practice appears to be the managerial adjustment of statistical forecasts where managers adjust the statistical forecast in a “managerial override”. Managerially adjusted forecasts can often improve forecast accuracy by including information not available to the statistical model. However, if performed incorrectly, adjustments can cause inaccuracy due to inherent human bias. Thus, established rules should be followed for effective adjustments.

The rules outlined by the article are the following:

Only practitioners with domain knowledge should adjust statistical forecasts.
Judgmental adjustment is more likely to improve accuracy when the adjustment is based on domain knowledge. Generally, only domain practitioners will be aware of the relevant contextual information that should be used to adjust a forecast.
Adjust statistical forecasts when there are known changes in the environment.
The adjustment should compensate for specific events not captured by the statistical model or time series. It should not be based just on intuition or bias.
Structure the judgmental adjustment process.
Use a documented or computationally consistent methodology. This will allow you to repeat successes and insure that failures are caught, corrected, and not repeated.
Document all judgmental adjustments made and measure forecast accuracy.
Records must be kept of all adjustments made, and the reasons therefore, and the results of the forecast must be measured so the process can be improved over time and the underlying statistical models updated when relevant observations are made.

When good, quantifiable, and historical data is available, reliance should be placed primarily on statistical forecasts. Only when the domain practitioners know of relevant contextual events or information not contained in the model should judgment be used to adjust the forecast.