The Strategic Category Management Lifecycle: Getting it Right; Part II

In our last post we noted that study after study has shown that, on average, 30% to 40% of negotiated savings never materialize and this is because the “strategic” element is usually forgotten once the sourcing exercise is over. True value can only be created through category management if the entire category lifecycle is addressed and properly managed as part of a strategic category management plan. In our last post we noted that a strategic category management lifecycle consisted of at least nine phases, and labelled each of these phases. In this point, we are going to discuss, at a high level, what each phase is.

In the rationalization phase, the category team identifies the category or verifies that the category still makes sense from a sourcing / management perspective. Sometimes, categories need to be changed up a little. For example, let’s say that you had an office supplies category and you were grouping printer ink in the category but not printers, which were grouped in electronics. This may or may not still be a sensible category from a value management perspective. On the low end of the price scale, it costs more for cartridges than it does for the printer. It may be possible to negotiate a better deal from the office supplies vendor on the printers than it would be with the manufacturer. When you consider that the office supplies vendors often buy in much greater volumes, have already negotiated great volume discounts with the manufacturers, and know they are going to make a lot of money on the cartridges over time, they have a strong incentive to give you the printers at their cost. Manufacturer’s don’t!

In the supplier identification phase, you identify the suppliers who could service the category as a whole, or at least significant portions of it so that you do not have to work with more than an optimal number of suppliers (as per the strategic category plan).

In the sourcing phase, you analyze the category and come up with an optimal category sourcing and management plan, the strategic plan for the category, and then you conduct the appropriate sourcing event. It may be a simple RFX, an automated auction, a multi-round optimization-supported negotiation, or participation in a pre-existing GPO contract that leverages total volume. It depends on the category, market conditions, and specific organizational needs.

In the contract award phase, the contract is awarded and the specific service levels, performance metrics, and execution requirements are laid out.

Then the supplier management phase begins, and doesn’t stop until the last unit is not only delivered but recovered or returned. If the products come with a three year warranty, this phase could go for three years beyond the initial sourcing period.

Shortly after the contract is awarded, the procurement phase begins and delivery of the products, services, and/or product/service bundles begin.

Once the first delivery is taken, the inventory has to be managed and prepared for distribution to the end consumer at the appropriate times. In other words, the needs of the outbound supply chain have to also be identified and balanced with the savings achievable through the optimization of the inbound supply chain.

At some point, some of the products will break down and need to be recovered, repaired, refurbished, or recycled. This returns management process also has to be efficiently managed or all of the savings achieved in the sourcing will disappear in the warranty management.

Finally, if the product was returned because of a manufacturer’s defect that cannot be repaired, the product will need to be returned to the supplier for credit and/or working components (that can be reused) may have to be recovered as part of final recovery management.

This is the category management lifecycle in a nutshell. In our next post in the series, we will discuss some tips for maximizing your return.

Should you “Mandarin-ize” Your Supply Chain?

After reading a recent post on the HBR Blog Network on how to unify your global company through a common language, which discussed Hiroshi Mikitani’s attempt to unify Rakuten, the third largest e-Marketplace company in the world (with a presence in the Americas, Europe, Asia, and Oceania) through a common language, this question surfaces.

In 2010, Mikitani, founder and CEO of Rakuten, decided that he was going to unify the global company through Englishnization — a commitment to make English the company’s official language. This commitment had three phases.

  1. All workers were required to take a 2-hour 200-question test (TOEIC) to assess their reading and listening comprehension of business English, and continue to take the test until they passed. (Failure to do so could result in demotion.)
  2. Outside help was brought in to coach employees on how to study and manage the process of learning English.
  3. English was made the language of meetings.

Why English? Practicality. Many of the most talented individuals in the industries important to Rakuten, such as technology and finance, already spoke English as a first or second language. Many of these individuals were educated in English-speaking institutions. Thirty percent of new hires in Rakuten are non-Japanese, with 50% of new engineer hires non-Japanese. The vast majority do not speak Japanese, but the vast majority do speak English. Their top engineers all over the world can communicate with their top engineers in Japan, who (now) speak English, with the average company TOEIC score having reached 737.3 out of a possible 990 (or 74.5%).

A common language will allow an organization to achieve a true unity of corporate purpose, because it will allow a unity of understanding. And then the organization will be able to manage and innovate as one with speed and precision and truly be global.

But should the language be English? For some multi-nationals, I am beginning to think it should be Mandarin. Despite the fact the cost of fuel keeps rising, that wages in China keep rising, and that supply chains have to adapt and respond faster and faster, outsourcing to China is still rapidly increasing. As per SourcingLine, China’s current outsourcing market is growing an estimated 30% annually, and many companies (like IBM) have relocated division or global headquarters to China to grow and strengthen their global business (and to try and get a dominant foothold in the market that consists of 1.3 Billion potential consumers).

In other words, these companies are sourcing from, managing in, and selling to China, where the dominant language is Mandarin – the language with the most native speakers in the world (that outnumber native English speakers almost 3 to 1). Plus, China is on the fast track to become the dominant economy in the world, an event that could happen in as little as three years (according to recent data from the International Monetary Fund, see the China Digital Times), and will most definitely happen in the next five to ten years if China’s economy keeps growing by leaps and bounds and America’s stays stagnant.

I will admit it will be much harder to Mandarin-ize your Supply Chain that it will be to English-ize, especially since Spanish, Portuguese, and French, which are other dominant global languages, use the same character set (A to Z) while Mandarin uses logograms known as hanzi (which are the counterparts to the Japanese kanji for those of you who speak Nihongo). Furthermore, there’s the special grammar rules for Germanic language speakers who are used to inflection, affixes that denote plurality and tense, and different rules for topic-prominence. However, if China is the heart of your Supply Chain, and thus the heart of your organization, it’s certainly worth considering!

The Strategic Category Management Lifecycle: Getting it Right; Part I

Two days ago, when we asked if there was a difference between strategic category sourcing and strategic category management, we noted that there technically was a difference but that, for all intents and purposes, strategic category sourcing and strategic category management should be treated as one and the same. The reason? Study after study has shown that, on average, 30% to 40% of negotiated savings never materialize and this is because the “strategic” element is usually forgotten once the sourcing exercise is over. For savings to materialize, the strategic plan has to be followed from the time the award is granted, through the time the last unit is sourced, and to the time the last unit is reclaimed and/or the last warranty expires (depending on the strategic plan).

Sourcing only identifies savings opportunities. These opportunities are only realized through the execution of the strategic plan which occurs in the Procurement, Logistics, and Warranty/Returns management function. The entire lifecycle of the category has to be managed in order to achieve the potential savings from managing a well designed category. This is the first step to getting it right.

Thus, the first thing one needs to understand is the entire lifecycle of a category-based supply chain. At a minimum, the strategic category management lifecycle consists of at least the following nine phases / tasks:

  1. Rationalization
  2. Supplier Identification
  3. Sourcing of the (Servitized) Category
  4. Contract Award(s)
  5. Supplier Management
  6. Procurement
  7. Logistics / Inventory Management / Distribution
  8. Inverse Logistics / Repair and Recycling
  9. Credit / Material Recovery

Each of these phases must be addressed, and skipping any one phase can jeopardize the entire strategic plan and the savings you hope to capture and/or the value you hope to create. In our next post, we will describe each of these phases in more detail.

What Costs Your Supplier More? Their Warehouse or Your SIM Practices?

I know this question is a little out of left field, but it’s an interesting question in that both are costing your supplier money and, therefore, both are costing you money (as all costs get passed up the supply chain in the end).

According to an article in DC Velocity last fall on how distribution centers lose thousands of hours a year on unproductive workflows, each worker loses an average of 15 minutes of productivity in an eight-hour shift due to process inefficiencies. Assuming these are union workers who get an hour for lunch and thirty minutes for breaks, that says that almost 4% of the work-day is being wasted. In a warehouse with 50 workers, it adds up to about 500 days of lost productivity, which is significant as this equals the salary of 2 workers, which costs the average company about $60,000 annually in the US.

Gartner estimates a typical company spends an average of $1,000 in supplier management costs annually per supplier. Part of this cost is Supplier Information Management, and, specifically, the (initial) creation and maintenance of supplier profiles consisting of contact information, insurance certificates, compliance tracking, and product catalogs, just to scratch the surface. While the amount of time to create and maintain this profile, and thus the associated costs, vary, on average it can be estimated to be about $700 as all of the major vendors and analysts seem to agree that a good SIM solution reduces supplier management costs, on average, by 70%.

Now, at this point, you’re probably asking what’s the point of this article as 60,000 is clearly much greater than 700 and there seems to be no comparison — but hold on! You have to remember one very important point — you’re not the supplier’s only customer. The supplier has other customers who, if they are implementing SIM, will also be delegating this work to the supplier who will have to create another, almost identical, profile, and upload all of the relevant information, etc. And today, you can assume that any major customer of the supplier is implementing at least some basic level of SIM given that they will be sued and/or fined seven ways from Sunday by the U.S. Government if they don’t insure the organization is not on a watch list, that payments are properly reported, etc.

If the supplier is a small contract manufacturer who only has 50 customers, then the supplier would be spending $35,000 just creating and maintaining SIM profiles. That’s one person’s salary. But if the supplier is a large office supplies vendor with 500 customers, that could theoretically be $350,000 worth of man hours to properly maintain all of the requested profiles. Ouch! (Needless to say, not all profiles are going to be accurately maintained in this instance!)

In other words, a sudden surge in the popularity of SIM combined with the slew of systems (not all of which are created equal) that are now available and being implemented by various companies will add a costly burden to your suppliers, as you don’t all use the same SIM solution and, even when there is overlap, not all SIM solutions allow a vendor to create one master profile and share the relevant information with each supplier who wants access to the profile. Done right, SIM is a great technology, but the problem with a lot of the (second tier) solutions is it’s not done right. Many of the solutions are built for the buyer and the supplier is a bit of an afterthought, resulting in a solution where a supplier needs to create and maintain an instance of their profile for each buyer. As a buyer, it’s imperative that you don’t buy, and encourage, such a solution because all this does is shift the burden to your already stretched supplier and doesn’t help anyone.

It’s important to make sure that any SIM solution you buy allows a supplier to define a master profile and share the relevant data with all relevant buyers on the platform with just a click of the mouse and allows the supplier to reuse pre-existing information whenever relevant. A supplier should never have to enter the same piece of information more than once. Otherwise, you’re wasting his time and your money. (A really good SIM solution would allow a supplier to import a profile he already created in a competitive product, but SI hasn’t seen that ability in the SIM solutions of any of the major players yet.)