As per our last two posts on the nature of supply dynamics, anything that is unknown is unmanaged, and any information that is incomplete is misleading, distracting the analysts into barren, abandoned mines instead of yet undiscovered mines bristling with veins of gold. In the Procurement of manufactured products, if an organization is using systems originally designed for indirect (and/or services) spend, much of the information is incomplete and many of the opportunities identified by the system are misleading. This means that Procurement is likely to waste time pursuing opportunities that aren’t as valuable as they appear and, moreover, even when they strike gold, they won’t necessarily profit of it as they won’t have the visibility into how much of the gold is actually ending up in the organization’s vaults vs. how much is being lost as it is smuggled out by traitorous workers in league with the foreman who takes a cut [as in the classic Have Gun Will Travel episode “The High Graders” 1-19), which is exactly what happens when the supplier continues to buy off-contract from their preferred supplier (and not yours) in exchange for favoured treatment to them (and not you)]. Just because we’re not in the old west doesn’t mean that the long standing tradition of high-grading has not continued where the supplier’s personnel feel they can get away with it. (Remember, in some countries, finding creative ways to profit is applauded, whether or not it is ethical in the country of the buyer.)

But Supply Dynamics, a new-again stand-alone player (but a mature and seasoned offering that was recently spun out on its own from O’Neal Industries which bought it years ago when it was stand-alone for exclusive use before realizing Supply Dynamics was more valuable as a separate company) in the direct procurement space wants to change all that. Realizing that, like Claritum did for tail spend, cost control requires multiple checks and balances (which is why Claritum designed a multi-party system and not just a buyer system with limited supplier access through a portal), Supply Dynamics designed a system where buyers, suppliers, and third party distributors can all share information with each other. This way, the buyer sees exactly what raw materials are required, with their associated specifications, who they are being bought from (as reported by the organizations the suppliers have been authorized, or contractually obligated, to buy from), exactly what negotiated cost savings are being realized, and exactly what their untapped opportunities are (both from a volume leverage and a standardization viewpoint).

How does it do this?

First of all, it pulls in data from the (contract) manufacturers, their component and part suppliers, the raw material suppliers they are supposed to be buying from, and the distributors that manage the organizational inventory on a regular (monthly or weekly) basis. This allows an organization to track, for each part they have complete specifications on, the lifecycle of the part from the raw material to the finished product and whether the inflows and outflows match and are as expected. They can see the raw material shipments from the raw material suppliers to the component suppliers, the shipments from the component suppliers to the contract manufacturers, and the shipments from the contract manufacturers to the buyer’s warehouses.

This allows the Supply Dynamics solution to track not only supply chain costs but supply chain contract fulfillment — if the parts manufacturers are using the right raw materials from the right raw material providers, if the contract manufacturers are using the right parts from the right parts providers, and if the warehouses are ordering the right products from the right suppliers.

And you’re probably thinking this is all fine and dandy, because the real problem is not the tracking (since you could conceivably just ask each party to send shipment information and match it yourself, although that’s much easier said than done), but figuring out what to track in the first place. Even if you have a system that can track all of the appropriate bill of material and product attributes, how do you get all of the relevant bill of materials and product attributes in the system in the first place when the average manufacturing organization has tens of thousands of parts where the majority have not been strategically sourced or sourced with a cost breakdown beyond unit cost, tariff, transportation, and warehouse cost.

But, fortunately, Supply Dynamics has solved this problem too. They have an automated Part Attribute Characterization (PAC) process that allows them to quickly and inexpensively load the required information into the application. They do this by first extracting the bulk of the information from the blueprints (in CAD/CAM) format that the buying organization uploads. They have spent years developing and customizing this in-house software to extract and format as much information as possible and then, when the blueprints are uploaded, they automatically create accounts that give the manufacturers access to review and verify the PAC — as these manufacturers will be held accountable to buying and manufacturing against that PAC — and work with the buying organization to make sure the manufacturers do the necessary review and fill in any identified gaps. Then their in-house team of expert engineers does a quick manual sanity check, pushing any products into a review queue that don’t look quite right. (If the blueprints are complete and the manufacturers did their job, the bulk of projects will be okay.) Finally, the in-house experts complete the PACs and the system is ready to go. The software is quite efficient and the process is so refined after 13 years of refinement that most of the time it takes Supply Dynamics longer to get the files from the buying and supplying organizations than to process the files and verify the processing (which is all done in house by US persons for those concerned with IP and security).

Supply Dynamics is very good at this process. Over the years, they have performed Product Attribute Characterization on over 191,000 parts for 35 OEMs, including names like GE and Westinghouse, which cross over 378,000 detailed bill of material records. In addition, they maintain master specifications and detailed chemistries on over 39,000 raw materials that are used in the production of the parts used in the bill of materials. As a result, chances are they’ve already seen, and know the specs for, most of the raw materials you use, which means data load and completion is very fast for new organizations.

But they’ve built more than a system that just solves these two problems. We’ll cover Supply Dynamics, and their solution, in more detail tomorrow in Part II.

You’re partof a progressive Supply Management organization that has strategically sourced the top 10 categories by spend, supplier, geography, and department. The low hanging fruit has been picked, the big fish have been fried, and you’ve even implemented a catalog-based tail spend solution to make sure all spend is at least visible, if not managed or minimally sourced. There are no more obvious avenues for big savings, yet the CFO and CEO are still screaming for savings (despite the fact that you should be focussed on working with Sales to identify low-cost value-adds and NPD to take cost out before those unnecessarily fussy and short-sighted engineers bake it in), so what do you do?

You take a hint from your forward thinking peers, start doing cost break-downs on your more expensive categories and products, and look for raw materials with a high-spend that could potentially be reduced by consolidation on behalf of your suppliers. But are the opportunities real?

Just because your organization spends $20 million on steel doesn’t mean it spends $20 million on steel. It might spend $3 million on carbon steel, $2 million on nickel steel, $4 million on nickel chromium steel, $1 million on chromium steel, $5 million on molybdenum steel, $3 million on tungsten steel, and $2 million on silicon-manganese steel. While that’s $20 million on “steel”, it’s not the same “steel”, and might require half a dozen different suppliers in an area to provide at acceptable quantity and quality levels. Not the leverage an initial spend analysis might suggest.

Moreover, even that $4 million of nickel-chromium steel might not be $4 million of nickel-chromium steel. You could easily be buying four primary grades: 1.25% Nickel, 0.8% Chromium (31xx); 1.25% Nickel, 1.07% Chromium (32xx); 3.5% Nickel, 1.5% Chromium (33xx); and 3.0% Nickel, 0.77% Chromium (34xx) in roughy equal quantities, with a few other grades thrown in. This means your “volume” leverage is at most $1 million per grade of steel. Not a huge volume leverage at the end of the day.

A cost model tells you where your money is going, but not necessarily where your opportunities are. You need to drill into the bill of materials for the product, extract the specs, and see where there is enough standardization for negotiation leverage. And then you need to work with engineering to see where greater standardization can occur so that, as new designs come in and old designs phase out, you have more and more negotiation leverage over time.

And that’s why you need good visibility into your product information, which is not something your average sourcing or procurement system captures. It’s the detailed BoM with material composition specs, fabrication requirements, and so on that really allow an analyst to identify the real raw material (or even energy in deregulated markets) volume leverage savings opportunities, not the phantom opportunities that arise when a superficial spend analysis using systems designed for indirect spend are used.

And you need this information on an ongoing basis. Just because you spent $4M this year on nickel-chromium steel doesn’t mean you’ll spend $4M next year on nickel-chromium steel. Maybe most of the buy was in cancelled product lines and the new product lines have all switched to molybdenum steel, which means that could be where the real opportunity lies — if the grades can be standardized and agreed on by the various engineering teams. With regular updates, trends can be projected and predicted, even if sales or engineering forgets to inform Procurement that a product line was suddenly cancelled at re-sourcing time.

In other words, the nature of supply dynamics is that for both real supply assurance and real supply chain savings you need detailed product information that goes beyond a cost model and even a high level bill of materials, and an ability to work with that data.

Despite the constant pressure from the CFO to squeeze every peso out of the supply chain (not penny, that’s not good enough any more, they want to squeeze tenths of a penny now), the primary purpose of Sourcing is not cost reduction — it’s assurance of supply. (And that’s why Sourcing Innovation prefers Supply Management terminology over Procurement and Purchasing, but that’s another post.)

Assurance of supply is no easy feat. Just because you do a sourcing event, identify a supplier, cut a contract, send a purchase order, and arrange a delivery date, it doesn’t mean the product is going to show up. The product might not be manufactured on time due to a a raw material shipment delay on behalf of a tier 2 supplier or a production line breakdown. The shipment might be lost, stolen, or under 3 km of water. Or, the supplier might go bankrupt. Either way, no supply.

But this is a risk that can be fairly well managed through proper supplier qualification, production tracking, shipment tracking, and dual-supply. However, a bigger risk, and one that keeps the CFO (vs. the COO) up at night is the cost control measures you put in place during negotiations to keep supply affordable so the company (knowing that there is always a ceiling to what customers will pay) can maintain profitability.

If you are in an advanced Supply Management organization, one measure you are probably taking is aggregating raw material supply needs across products and categories and buying the raw materials on behalf of the supply base as your volume can often net a better deal than individual suppliers that supply products purchased in lower volume or that use lesser amounts of expensive raw materials (like steel and rare earth metals). This measure can save an organization a lot of money in markets where prices can fluctuate 50% or more in a few months, but only if the suppliers buy off of the contracts you tell them to when they are supposed to.

But how do you insure this? And more importantly, how do you even know what they are doing? Your organization can put in the contract that they have to buy off of any raw material contracts your organization mandates and your organization can ask them to report regularly, but how does your organization really know? The account rep might report 95% compliance and claim only a few “off-contract” purchases due to the need to buy emergency supply as a result of a late shipment, but the reality could be the exact opposite. And you can ask for records, but will you get the right ones?

If you don’t have anyway of keeping tabs on the situation, and managing it to whatever extent it can be managed, it’s completely unknown. It’s the nature of supply dynamics, and why visibility is needed both into, and across the supply chain. So how do you get it? More on that later in a later post. But first, how do you know the analytics is right and the master contracts are appropriate in the first place?