Category Archives: Supply Chain

For Proper Direct Sourcing, Different Organizational Thinking is Required

In our last post we noted that standard sourcing solutions don’t work for direct and referred you to our seven part series with Bob Ferrari of Supply Chain Matters at these links:

And we noted the reason was that direct sourcing doesn’t work isolated from supply chain. Fortunately, direct sourcing and supply chain planning can work together, but only if we

Think Different

This is the only way we are going to realize business and operational planning alignment from source to supply. Right now, it takes too much time across the various strategic, tactical, and operational decision making processes in the gathering, assimilation or transcribing of the most up to date line-of business, functional or operational focused data and information into spreadsheets and antiquated tools to support forecasting, sourcing, supply chain, and logistics systems.

This is primarily due to the fact that not only are each of these processes for different timeframes but they are typically conducted using different business processes. Long term strategic planning is typically conducted using IBP methodologies, mid-term tactical planning is typically conducted using S&OP methodologies, and short-term planning is typically conducted using exception planning, materials replenishment planning, logistics re-routing, etc.

Each plan requires information on the connecting layers in order to make a decision. IBP requires knowledge of what S&OP can do and the best historical results from S&OP to come up with the plans most fit for execution. S&OP requires knowledge of the overriding IBP goals as well as the operational systems used for day to day procurement, inventory replenishment and management, logistics and trade management, and production. Since most of these systems don’t talk, it’s a lot of manual data collection, processing, and pushing up and down the levels and the chain.

These processes need to be connected in integrated planning loops that span:

  • Plan, Source and Procure
  • Plan and Analyze
  • Plan and Produce
  • Execute and Fulfill

Moreover, these planning process frameworks need to be enabled by more effective data management, data harmonization, and analytics that enables these loops to constantly be executed and re-executed as needed to ensure each level of planning and each step of the process has the data it needs to suggest the right answer for the human to make the right decision.

Finally, this will only happen if organizational employees think different and adopt new processes, frameworks, data models, and strategies to integrated planning from source to supply. For some insights in to how this might happen, see part three of our joint series on how today’s Organizational Thinking is Wrong.

Standard Sourcing Solutions Don’t Work For Direct

the doctor recently teamed up with the Supply Chain Master Bob Ferrari over on Supply Chain Matters to bring you an initial seven part series on why Standard Sourcing Technology Solutions Don’t Work for Direct, which you can find at these links:

If you read Parts I and Part II in detail, which you most definitely should because we’re only going to summarize a few highlights here, we detail some of the big reasons they don’t work, besides the fact that most were designed for indirect and can’t even do the basics of direct sourcing. The reasons we put forward included:

  • Direct Material Sourcing is Hard
    • substitution (like satisfaction) is not guaranteed
    • substitution is always conditional when available
    • demand is not easily aggregated
    • delivery time guarantees are often significantly more important
  • Sourcing Platforms Don’t Do Direct Well (as most were designed for indirect)
  • Most Sourcing Platforms Don’t Support Bill of Materials
  • Most Sourcing Platforms Don’t Support Optimization

Then we dove into why direct solutions don’t work either:

  • It’s Not Just Landed Cost, It’s Total Cost of Acquisition
  • It’s Not Just Cost, It’s Supply Assurance
  • It’s Not Just Supply Network Assurance, It’s Timing

That’s just the baseline sourcing side of the equation. We still haven’t talked about the supply assurance side:

  • They Aren’t Designed for Multi-Stage NPD/NPI Sourcing and Quality Assessments
  • They Aren’t Designed to Capture Network Performance and Carrier Risk
  • They Aren’t Designed to Capture and Assess External Risks

That last point is key. If you’re not considering the geopolitics of where you are sourcing from and where you are sourcing to, and how those might change in the near future, you could be in for quite a shock, as many of you in the USA found out this year. If you had been paying attention to the election, noted how much a certain Tech Bro donated to a certain campaign, and compared that number to past campaign contributions, you would have known the election, which appeared neck and neck, was being bought and paid for, which party was going to win, and who was going to be President.

If you did your research, analyze everything he said publicly in the decades leading up to his first campaign for political office, look at what he actually did in his first term, and read Project 2025, you would have known something was coming on the trade front, especially where certain countries were concerned. And you would have known that what was coming was not going to be good for your business if you were sourcing from China.

But it’s not just the “to” destination you have to worry about, especially if the only thing increasing is cost. It’s also the “from” destination, which could be cut off entirely by a new regime that imposes sanctions or embargoes, or could undergo a rapid economic decline due to bad government decisions, external third party sanctions and embargoes, or global shifts in trade. A great discussion of this can be found in Koray Köse’s recent LinkedIn post on on Poland’s Economy: Reslient Amid Political Storms and how it faces a test under it’s new President — and how, should it fail that test, supply chain leaders need to be prepared. It’s the perfect example of why supply chain considerations need to be pulled back to sourcing, because there’s no way an average sourcing professional today would consider any of this when evaluating suppliers for a direct sourcing project.

Financial Business Risk Prioritizes Supply Chain Vulnerabilities …

… but it does not identify those vulnerabilities, although it can tell you where to start looking. So while an article in the SCMR last year provided a good overview on how to evaluate, and quantify, supplier risk, the title was misleading when it said they were calculating business risk to identify supply chain vulnerabilities.

The article, which described an approach by the authors to find a way to improve the evaluation of risk impact on a business, culminated in four main findings. The approach, which looked at the total financial impact a supplier failure would have, yielded two findings that we’ve known for over a decade, ever since Resilinc pioneered the approach of assessing the financial risk associated with a supplier failure (based on mapping where all of their parts are used and which of those are single source)

  • procurement spend with a supplier is NOT correlated with the financial risk of a supplier
  • part standardization can increase business risk impact

As well as two insights that are rather new:

  • procurement spend is not correlated with the revenue of the company (the Resilinc model could have shown this, but they did not focus on this or collect those metrics last time SI was made aware of their methodology)
  • true high-risk impact suppliers are a substantially smaller amount of spend than an organization might think; in the authors’ study, they represented only 28% of total spend (whereas most companies will highlight the high spend suppliers as high risk and identify the suppliers that represent almost 3 quarters of spend, or 73% in this study)

The reason for this is that they linked all of the organization’s data sources that contained information related to the BoM for each SKU, the revenue for each SKU, and the suppliers for each BOM. By creating a network of connections between components, products, and suppliers, and identifying single source parts, the link between the criticality of a supplier and the revenue became clear. Consider the supplier who supplies that custom control chip for the fuel injection management, cruise control, or even for the monitoring of the tire pressure. If they were to fail, the absence of a single, $10, custom control chip can bring down a multi-million dollar production line, and close down an entire production plant, as the recent semiconductor shortage did to many plants during COVID. Given that these were being put into $10,000 to $100,000 cars, these suppliers would never have blipped on a spend-based risk assessment. And this is just one example.

But it is an example that demonstrates the blind spots companies have with respect to small and specialized suppliers that aren’t in the top 80% of spend but yet supply sole-sourced and/or custom parts or products. This means that when doing a risk assessment, it’s not just risky suppliers or risky supply chains that need to be assessed, it’s any supplier that supplies something that isn’t easily replaced by another source should something happen to the current supplier. The risk could be low that they will fail, and lower still that you couldn’t quickly modify a design to use an alternative, but you don’t know until you assess. And that assessment must be revenue and criticality based, not spend based. Spending $100M with a steel supplier to acquire the raw material for a frame assembly makes the supplier strategic, but doesn’t make using that supplier super risky when all their competitors offer the same grades of steel. But if you need a custom chip for that car, power transformer, etc., and you currently only have one supplier to supply it, then that supplier, no matter how stable and how low-risk its profile looks, is a risk even if it only gets one hundredth of the spend. And you need to determine if it has any vulnerabilities and, if so, monitor them so you won’t be surprised by a sudden failure.

Why Your Standard Sourcing Solution Doesn’t Work For Direct

Too many of you have been there. You sign that seven figure deal for that end-to-end Source-to-Pay suite, spend another seven figures and 18 months integrating with the ERP, PLM, AP, BI and existing Legal CR solutions, and then try to source your first NPI project natively only to … fail. Why is that?

They just weren’t built for direct.

And it’s not just something you can add in later. If the platform wasn’t designed from the ground up for direct sourcing, there’s zero chance it will ever do a decent job at it. (And, FYI, the majority of the S2P suites the big analyst firms are drooling over in their annual quadrants and waves started out as simple indirect Sourcing or Procurement tools.) People who don’t understand the nature of software don’t get this, but software has to be constructed like a building. You might hear vendors and techies throw around MVC model, which stands for Model-View-Controller, when they talk about how new and well architected their solution is, but that just means it’s built in a maintainable web-friendly way for what, and only what, it was initially designed to do.

It all comes down to the data model and the software architecture of the controller, and neither can be a black box. The data model has to be designed from the ground up to support bill of materials and direct sourcing and procurement data requirements. The controller has to provide the infrastructure to support the complexity of the application that is required. For those who don’t understand software, I like to put it this way. If you pour the foundation for a two story house, and buy wooden beams for all of your structure and supports, you can’t build a 10 story apartment building. You need a foundation for an apartment building and steel and concrete supports. (Even though you can theoretically build a 10-story structure on a two-story foundation if you have the right steel and supports, it won’t be stable. The slightest tremor on the Richter scale [which might not even be detectable by a human] or a strong wind will send it crashing down.) You need both. And just like you can’t replace the foundation under a building or replace the entire support structure in real life, you can’t do the same in code. You have to rebuild, usually from scratch.

So why weren’t they built for direct? Well, there are a number of reasons (besides they wanted to get a product to market fast and/or just weren’t smart enough to build a direct sourcing solution). They include:

  1. direct material sourcing is hard
  2. substitution is not guaranteed
  3. demand aggregation is not straight forward
  4. delivery time guarantees and on-time arrival is significantly more important

To understand these, and learn about the rest of the reasons the majority of sourcing solutions were not built for direct, dive into Standard Sourcing Technology Solutions Don’t Work for Direct – Part One and Standard Sourcing Technology Solutions Don’t Work for Direct – Part 2 over on Supply Chain Matters.

One Supply Chain Misconception That Should Be Cleared Up Now

This originally posted May 14 (2024).  It’s being reposted because this definitely needs to be cleared up before the new year (due to the constant proliferation of AI, which is, when all is said and done, just another technology).

Not that long ago, Inbound Logistics ran a similarly titled article that quoted a large number of CXOs that made some really good observations on common misconceptions that included, and are not necessarily limited to (and you should check out the article in full as a number of the respondents made some very good points on the observations):

The misconceptions included statements that supply chains should:

  • reduce cost and/or track the most important metric of cost savings
  • accept negotiations as a zero-sum game
  • model supply chains as linear (progression from raw materials to finished goods)
  • … and made up of planning, buying, transportation, and warehousing silos
  • … and each step is independent of the one that proceeds and follows
  • accept they will continue to be male dominated
  • become more resilient by shifting production out of countries to friendly countries
  • expect major delays in transportation
  • … even though traditional networks are the best, even for last-mile delivery
  • accept truck driver shortage as a systemic issue
  • accept the blame when anything in them goes wrong
  • only involve supply chain experts
  • run on complex / resource intensive processes
  • … and only be optimal in big companies
  • … which can be optimized one aspect at a time
  • press pause on innovation or redesign or growth in a down market
  • be unique to a company and pose unique challenges only to that company
  • not be sustainable as that is still cost-prohibitive
  • see disruption as an aberration
  • return to (the new) normal
  • use technology to fix everything
  • digitalize as people will become less important with increasing automation and AI in the supply chain

And these are all very good points, as these are all common misconceptions that the doctor hears too much (and if you go through enough of the Sourcing Innovation archives, it should become clear as to why), but not the biggest, although the last one gets pretty close.

 

THE BIGGEST SUPPLY CHAIN MISCONCEPTION

We Can Use Technology to Do That!

the doctor DOES NOT care what “THAT” is, you cannot use technology to do “THAT” 100% of the time in a completely automated way. Never, ever, ever. This is regardless of what the technology is. No technology is perfect and every technology invented to date is governed by a set of parameters that define a state it can operate effectively in. When that state is invalidated, because one or more assumptions or requirements cannot be met, it fails. And a HUMAN has to take over.

Even though really advanced EDI/XML/e-Doc/PDF invoice processing can automate processing of the more-or-less 85% of invoices that come in complete and error free, and automate the completion and correction of the next 10% to 13%, the last 2% to 5% will have to be human corrected (and sometimes even human negotiated) with the supplier. And this is technology we’ve been working on for over three decades! So you can just imagine the typical automation rates you can expect from newer technology that hasn’t had as much development. Especially when you consider the next biggest misconception.