Category Archives: Supply Chain

Do You Know the Difference Between Direct and Indirect?

Direct materials are typically classified as raw materials, standard or specialized parts, and sub-assemblies required to manufacture a product. As a result, direct goods and services are typically classified as those goods and services that are strategically important to the organization. For example, for a CPG it is the goods it sells, for a Pharmaceutical it is the chemicals and biological materials it uses for research and drug production, and for a Bank it is the systems and market intelligence feeds it uses to run.

Indirect goods are those goods and services that are not strategically important to the organization. For example, for a CPG it is back office systems, for a Pharmaceutical it is office suppliers, and a and for a Bank it is office supplies.

However, these back office systems for the CPG are strategic for a software and services reseller. Office supplies are strategic for the office supplies vendor and janitorial services are strategic for the janitorial services provider.

But it’s not just the type of organization that determines whether a good is direct or indirect, it’s the organization’s place in the supply chain. What’s direct at one level is indirect at the next. And knowing where you are in the chain not only lets you know how to approach the category but how your supplier approaches the category. And, more importantly, where in the chain the most savings can be obtained.

Easy Question. Easier Answer.

A recent post over on Strategic Sourcing that asked “Executives:Do You Have the Right Resources” asked an easy question with an even easier answer. NO.

How does the doctor know this?

1) Not only did The Hackett Group 2014 Procurement Key Issues survey report that 76% of companies stated that they needed to expand Procurement’s scope/influence, but previous studies have shown that as little as 8% of organizations are world class.

2) Large organizations that embark on a Procurement transformation journey generally take 5 years or more to become world class, and by the time they reach this point, a number of technologies or processes that were upgraded in the first stage remained untouched for three years, meaning that these organizations have to go back and start a transformation journey all over again just to stand still.

3) Since the definition of the right resources changes with operational changes, product and services changes, market changes, and new developments in talent management, technology, and operations research, even if you had the right resources yesterday, you may not have the right resources today.

When you put all this together, the chances of a large organization having all the right resources are so astronomically small that they are effectively zero. A few organizations, which fall into the Hackett Group’s world class organization bucket, are close, but the vast majority, which make up the average or laggard category, are nowhere close.

So what are these resources? For a start, as pointed out in Mickey’s post, they are the right talent, technology, and transformation (capability) resources — the 3Ts that form the base of a successful, aligned*, organization.

Talent

Even though everything changes as time goes on, one thing has been the same since global trade began. Ever since goods first floated down the Nile or first travelled the Silk Road, people ran the supply chain. And even though they may employ a wealth of tools and be hindered and aided by a plethora of government regulations, they still do. You need the right talent to succeed.

Technology

Always in a state of change, and sometimes flux, you have to not only identify the best products for your organization, but implement and utilize them properly.

Transformation Capability

Remember, it’s not people, technology, process; it’s talent, technology, and transformation because you need the ability to constantly evolve your process as needed to meet the current needs of the supply chain. If you don’t have transformative capabilities, buying the best processes and practices from a big 6 consulting firm won’t do you any good.

You need to not only acquire the right talent, technology, and transformative capability but you also need to maintain the talent, technology, and transformative capability as time goes on to truly succeed. And if you ever say you have the right resources, in today’s economy, you’ve lost the supply chain battle before it has even begun.

* More to come on this!

Could You Be Doing It Right? Part II: Risk Monitoring

In last Friday’s post, we asked if you were doing it wrong. In particular, we mentioned category management, supply chain risk monitoring, and big data, and asked if you were doing them wrong. We noted that even though a number of companies have jumped on these runaway bandwagons, most have yet to grasp the reigns and take control of the wagon and get it on the right track.

Why is that?

Fundamentally, it’s the same reason that there are no world class Procurement Organizations in Asia Pacific — the classic Triple-T problem.

  • Talent
    the organizations don’t have the right talent to properly manage the initiative
  • Technology
    the organizations don’t have the right platforms to capture the right data and support the right processes
  • Transition Management
    the organizations don’t have the right processes in place to handle the necessary organizational shift to properly manage the initiative

Once the talent, technology, and transition management is in place, the organization has what it needs to fully embrace the initiative and take it to the next level. And do it right.

Where should your Supply Management Organization start? By identifying the core capabilities that are required in each “T” category and finding the right talent, technology, and transition management for the initiative, the organization will be well on its way.

In the rest of this post, we’re going to talk about the requirements for an organization to get on the right supply chain risk monitoring track.

Talent for Supply Chain Risk Monitoring

Good risk managers need the following hard and soft skills:

  • Analysis
    On what services, products, components, and raw materials is the organization (most) dependent and which of these are sole-sourced and/or in scarce supply.
  • Mapping and Modelling
    What does the multi-tier supply chain look like and how can it be represented in software?
  • Mitigation Planning
    If a certain raw material, component, product, or service becomes temporarily, or even permanently, unavailable, what other options can be put into action?
  • Insight
    The greatest risk is always where you least expect it. You will need someone with great insight to not only determine what types of risk you may face, but how your organization can most effectively monitor for them.
  • Sportsmanship
    You will need a great team player to bring it all together.
  • Crisis Management
    When the proverbial sh!t hits the fan, and the organization goes into panic, you need a strong, level-headed crisis manager to get them back on track quickly, and without loss.

Technology for Supply Chain Risk Monitoring

Appropriate technology platforms for risk monitoring will have at least the following features:

  • Supply Chain Mapping
    the platform should map your supply chain multiple tiers down to the source raw materials for any raw materials you are dependent on
  • Event Monitoring
    the platform should identify any natural or man-made disasters that can disrupt your supply chain
  • Mitigation Planning
    the platform should allow the risk manager to put together plans of action should any required part or raw material become unavailable
  • Response Management
    the platform should allow the incident management team to manage the response to a disaster when it occurs
  • Mobile Interface
    as people need to be able to access the platform from anywhere, wherever they are, as the disaster could take out your primary offices

Transition to Supply Chain Risk Monitoring

In order to transition to a proper supply chain risk monitoring framework, the organization needs to hire someone with good change management skills and give that person the tools and C-suite support he or she needs to get it done. That person also needs to be a natural born leader and someone who can work with teams to get it done.

This isn’t a complete (laundry) list of what is required for proper supply chain risk monitoring, but it’s a good starting point. Get the right talent, technology, and transition management in place, and your organization will be well on its way to risk management success.

SIM? Is It Old News or a Shiny New Pair of Shoes? Part II

As per our last post, SIM (Supplier Information Management) is a mature and stable technology with a large number of suppliers not only providing the tools and best practices to manage supplier life-cycles, but to manage risk, compliance, receivables, and even spend repositories for spend management. It’s almost a commodity in the Supply Management Space, and an acquisition thereof is not likely to get baby that new pair of shoes anytime soon. Or is it?

As great as they are, most SIM products — stand alone best-of-breed or integrated suite offerings, have at least one weakness — and often two. In particular, the data model and the workflow. Just like early spend analysis solutions were often tied to one, rigid, UNSPSC data model, most current SIM solutions are also tied to one, rather rigid, data model. In addition, most of those solutions with some SLM (Supplier Lifecycle Management) also have rigid workflows.

This worked well when business processes were predictable and stable and corresponded to products with long life-spans. But the times they-have-a-changed. These days, product life-spans are measured in quarters, and not years, if we are lucky. Associated processes change to not only accommodate the new product demands but to adapt to new technologies and new business requirements. If the workflow can’t adapt, the capability, and overall usefulness, of the tool is limited.

A SIM product that could not only allow a user to define, and redefine, data models as necessary but define, and redefine, workflows as necessary would offer more value than current SIM platforms. And if that product could also maintain full audit trails, which not only track data changes but model and workflow changes, and insure that old records and workflows can still be seamlessly accessed when the data model or workflow changes, then that would be even better.

And if that SIM product went even further and allowed for dynamic organizational, supply base, and user-defined hierarchies, that would be icing on the cake. Supply Chains are not boring because they are not static. They are constantly changing. The supply chain can not only change from product to product, but batch to batch as a primary raw material or part supplier runs out of material, becomes unreachable due to a political or natural disaster, or simply gets greedy and forces the higher tier supplier to find a new source. A good SIM solution will allow the supply chain map to evolve in real-time as the supply chain evolves. Moreover, with acquisitions, mergers, and spin-offs being the normal modus operandi for many businesses, a SIM solution that can easily adapt the organizational data model is also required. Finally, for maximum productivity, a user needs to be able to maintain their own view of the supply chain, back and front, relevant to them. They need to maintain their view of the relevant multi-tier supply base and the relevant hierarchies in their organization that they have to report to and serve.

In other words, a SIM tool that allowed for a truly dynamic data model, workflow, and supply chain organization map could bring a new wave of value to a modern Supply Management organization and the individual with the foresight to acquire such a tool might just get baby a new set of shoes. But is there such a solution?

Stay tuned!

SIM? Is It Old News or a Shiny New Pair of Shoes? Part I

Supplier Information Management, also known as SIM (but which has almost nothing to do with your Subscriber Identity Module card in your cell phone), is not new. The early leader in this space, Aravo, which boasted the likes of GE and CISCO as clients, was formed in 2000 and followed not only by a slew of companies trying to be best of breed in SIM (including AECSoft, now owned by SciQuest, Hiperos, and Lavante, to name a few) but by a slew of suite vendors that began to implement enhanced SIM into their platforms (including Ariba, Iasta, and Zycus).

And most of the basic features are now commodity. Try to find a vendor that sells SIM that doesn’t track all headquarter location, financial, core product, service, insurance, and third party risk information associated with a tier 1 supplier. Most of the good vendors also track third party credentials, compliance information against all relevant laws and directives, internal performance metrics and third party ratings, and even integration with third party supplier directories and databases.

And the uses are well known.

  • Where are the bulk of my suppliers located?
  • What is the financial health (risk score) of my top 100 suppliers?
  • Are any of my products out of compliance with regulations in one or more countries?
  • Do all of my suppliers have their relevant insurance certificates up to date?
  • Who are my riskiest suppliers?
  • Have all of my suppliers verified their primary contacts in the last six months?

And the more mature companies, to try and maintain an edge, maintain their customer base, and expand into new companies and additional verticals have started to integrate additional, and related, functionality. Aravo evolved into a full Supplier Lifecycle Management solution that balanced compliance, performance, and risk management. Hiperos is focussing on Third Party Management and on Compliance and Risk Management in particular. For example, their compliance management solutions include code of conduct, diversity management, insurance attestation, social accountability, and sustainability. Lavante is focussing on on-boarding and integrating SIM with audit recovery services.

When all is said and done, SIM seems like a mature space that is old news in Supply Management. And betting on it probably musters the image of an old gambler clutching dice in one hand and his last dollar in the other mumbling “baby needs a new pair of shoes“. But is it a bet you would lose?