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

In our first post, we noted that 30% to 40% of negotiated savings never materialize during strategic category sourcing and this is because the “strategic” element is usually forgotten once the sourcing exercise is over. Strategic category sourcing is not enough to realize results, an end-to-end strategic category management lifecycle, which consists of at least nine phases, needs to be followed. In our second post, we defined each of the phases and the key activities in each phase.

In this post, we’re going to present some tips to getting the most out of each phase.

Phase 1: Rationalization

When analyzing a category, be sure to analyze it from multiple perspectives. Look at the products, the (potential) suppliers, the (potential) customers, and the level of spend. As per our last post, when looked at from a product perspective, you might put printers in with computers, but when looked at from a supplier perspective, pairing it with toner in an office suppliers (sub) category can sometimes get you a better deal.

Phase 2: Supplier Identification

Don’t just look at the major competitors to your current suppliers, or at (potential) suppliers who have called you, but open up an RFP to see who might be able to service your needs.

Phase 3: Sourcing

If you’re not sure of the best approach, call in a category expert. As per our last post, the best approach will depend on the category, market conditions, and specific organizational needs and might change from one sourcing event to the next for the category.

Phase 4: Contract Award

Once the negotiations are complete, the next step is to make sure that all of the terms and conditions are defined, not just price and delivery. It’s important to also define return and recovery, (satisfactory) performance metrics, and other factors critical to success.

Phase 5: Supplier Management

Supplier Management is not just an up-front meeting and an annual site-visit, it’s regular communication and joint problem solving. It’s working together to find ways to improve product quality and service delivery. It’s building a strong relationship that will insure quick recovery in the face of a significant supply disruption.

Phase 6: Procurement

Make sure to send a purchase order, issue a goods receipt, and demand an invoice for every shipment and do an-way match. In order to make sure savings are captured, it’s critical to make sure you are not overcharged. Also, track every return and require a credit memo from the supplier on a monthly or quarterly basis.

Phase 7: Inventory and Distribution

Optimize the warehouse layout for inventory management. It should be easy to locate, count, pick, package, and re-ship available inventory as required. Use the services of a 3PL to optimize distribution if that is not your specialty.

Phase 8: Returns Management

Implement a returns management solution to insure returns are appropriately managed.

Phase 9: Recovery Management

Implement a Supply Chain Finance solution that can accurately track returns, refurbished goods, and credit recovery.

Poor Working Conditions in the Supply Chain Start at Home!

Last month, we told you that new estimates put the driver shortage at 240,000 drivers and that it’s all our fault. Why? Despite the fact that 40,000 new commercial licenses are granted annually by the DOT (Department of Transportation), turnover is 100+ percent per year due to poor working conditions.

But it seems that poor working conditions aren’t limited to our drivers. It seems that our dock and warehouse workers are also getting the short end of the shaft when it comes to working conditions (to the point where the high salaries commanded by the dock workers, which can exceed $120,000 in the Port of LA for example, might not be worth it). As per this article in the National Business Review on why we should “stop hurting our container opening dock and warehouse workers”,

  • imported sea containers increasingly have toxic substances in them
    such as glues (from shoes), emitted gasses (from wood or MDF), and residue from fumigants,
  • unprotected workers who enter these containers can die
    and those who don’t typically get very sick and some develop long term health issues, including cancer, and
  • up to 30% of shipping containers contain dangerous levels of toxins
    with 18% of containers containing toxins at a level legally reportable as unsafe and almost 90% contain some toxic fumigant or volatile organic compound. WTF?

Kind of puts the salary demands in perspective when you consider that their jobs contain more potential dangers than a coal mine!

And if this isn’t bad enough, we also have the warehouse workers who, according to this recent infographic on Warehouse Safety and BLS data,

  • have a 14% of being injured on the job,
  • have a 3% chance of being seriously injured in a forklift accident on the job, and
  • have a 0.02% chance of being killed, most likely from a forklift accident!

Ouch! Our dock workers have it bad. Our drivers have it bad. And our warehouse workers have it bad. I think it’s time to stop focussing exclusively on the outsourced supply chain in a search for poor working conditions. There’s plenty of poor working conditions to fix here at home!

How Do You Increase Internal Demand for Supply Management?

Supply Management needs to be reinvented as the “go-to” organization because, when you get down to it, it does support every department, engage every service provider, and, in a leading organization, influence every four out of five dollars that leave the organization. It is, after all, the secret agent of business improvement and the key to increasing organizational value.

However, in the average organization, with the exception of the CEO and CFO constantly screaming at it to “cut costs“, there is little internal demand for its services. And the sacred cows of Legal, Marketing, and HR don’t want to touch it with a 10-foot cattle prod. And it’s a damn shame.

So what’s an average organization to do when Supply Management is the proverbial black sheep of the organization?

It’s a tough question, especially when the usual tricks of learning the language of the client organization, presenting wins obtained by other organizations in similar circumstances that could be transferred, and explaining how, at least initially, you’re just there to support them and how the technology and process you can bring to the table can make their lives easier don’t work.

But there may be an answer, and that answer might be to approach the problem the same way you would when you’re trying to start a two-sided marketplace. A recent article over on VentureBeat about launching a two-sided marketplace had a very interesting quote from Oisin Hanrahan that provides the insight you just might need to succeed:

One element of launching a successful two-sided marketplace that is often overlooked is the initial spark, or the little drop of supply and tiny inkling of demand you need to kick your whole idea off into a successful market. There is an over-reliance on using technology to secure these wonderful drips of interest that will eventually turn into the transactions responsible for driving your business.

In other words, while the real value you bring to the table is better processes enabled by technology, this isn’t what’s going to get the interest of someone who thinks they know how to procure their goods and services better than you. The only thing that’s going to get their interest is if you come with an answer to what they see as their problem, and only what they see as their problem.

If Legal’s problem is that they can’t understand the differences between discovery offerings from different parties, you come to them and explain you can help them construct feature/function RFPs that will let them compare apples to apples and analyze them automagically. If Marketing doesn’t understand how to analyze hard costs vs. creative costs in proposals, you explain how you can help them do that, and even separate out hard print costs and let them aggregate print orders to save money for creative services. If HR doesn’t understand how to find new consulting service providers and how to compare their bids and offerings you tell them you can help them find new potential providers and gather information in a standardized fashion. Not once do you come forth with claims of better processes or technology or claims of great cost savings, which they will automatically assume will mean cheaper providers and lower quality work. You find out what their problems are, and offer to help do only what they want help with. Every time you help them, value will be increased and they will slowly trust Supply Management with more and more responsibility as time goes on. And, at some point, Supply Management will become the go-to organization. But only if it starts by finding the spark that will set of the conversation.

Why Does Shipping Cost so Much?

Oil, of course. Most trucks run on diesel, the fractional distillate of petroleum fuel oil, and the cost of oil, which is almost 100 times what it was 50 years ago, keeps rising at an average rate that is over 10 times the rate of inflation, as calculated using the consumer price index over the last 50 years.

But is that the only reason? No. Someone has to drive the truck, and labour costs go up, albeit not as quickly every year.

And someone has to buy the truck, which contains a lot of steel, which has also been rising over the last 30 years. The inflation adjusted hot rolled coil transaction value has more than doubled over the last 30 years, which partially explains why trucks are so expensive.

Are these the only reasons? From a simplistic point of view, you need a truck to carry your goods, fuel to power the truck, and a driver to get it to the destination. You have maintenance, but that can be built into the cost of the truck, and you have administration, and that can be built into the cost of the driver. So one might think these are the reasons and there’s no way to decrease the cost of shipping, as none of these costs aren’t going down soon, but if one did, one would be wrong on both counts.

There’s one more reason shipping costs so much. Empty pallets and empty loads. What typically happens when you ship a product is that your 3PL shows up with an empty truck, loads your pallets of merchandise onto the truck, and delivers them to the destination, where the truck is again emptied. It then drives empty to its next pickup which, if it’s lucky, is in the same city, but could be half a state away. At a later time, it returns to your supplier, picks up the empty pallets, and either carries them back to you for reuse, or, if you are part of a pallet-exchange program, the nearest manufacturer. In either case, the truck is completely empty before pickups and after delivery and effectively empty when it is carrying empty pallets. This takes driver time, fuel, and wear-and-tear on the truck. This cost money, and this cost has to be recovered – from you!

This is a big reason why shipping costs so much and your biggest chance to lower costs. If you want the best rates you can, you need to select a 3PL that does a lot of business in your area so that it’s trucks aren’t empty for long and that minimizes the distances that empty pallets are carried.