How do you achieve allocation success? Focus on demand.

A recent article in Supply & Demand Chain Executive on “5 secrets to allocation success” hit the nail on the head when they focussed in on a demand driven strategy built on product life-cycles. The key to success in the consumer market is to fill real demand at the source, not fictional demand in cluster-based model. It’s not what you think will sell, but what customers actually want to buy. Honing in on that makes all the difference.

The tips detailed in the article were:

  • Use Demand to Drive Allocations
    Last year’s numbers don’t matter, especially if the current instantiation of the product is different, if the economy has soared or tanked, or the market has moved to a new platform. For example, if you’re selling software that runs on discontinued computers or smart-phones, you’re out of luck.
  • Think Locally
    Many retailers allocate product to store clusters in small geographic areas. While this sounds great in theory, since it’s easier to forecast demand based on regional averages, it’s lousy in practice since there can be micro-pockets of customers with similar desires that can result in significantly different demand levels at each individual store due to local economics and cultural factors.
  • Adopt a Push-to-Pull Strategy
    New products should be pushed based upon attribute-based demand profiles and then pulled based upon revised demand forecasts.
  • Hold Some Inventory Back
    Even though most product should be pushed and pulled using just-in-time deliveries, some inventory should be held in reserve, especially for new products, until the demand levels are understood.
  • Make Allocation Management a Priority
    Otherwise, it will go by the wayside.

Are You Willing To Go Out On A Limb?

A recent Industry Week article on how “Manufacturers are Redfining Themselves” had a great quote by Michael Collins who said you can’t cost-reduce yourself to growth. “I look at some of these companies that have been successful and see what they’re doing differently from those that are just floating along. You know what I see? They’re willing to go out on a limb and develop unique strategies. That’s what separates them. And whether you’re trying to grow a business or a supply chain, the net requirements are the same — if you want your supply chain to be successful, you have to invest in it and take chances every now again. New technologies, new processes, and new distribution models will be key to future growth and success.

And you have to rethink the value that the supply chain contributes (from a value-focussed or high-definition perspective). The sidebar provided in the article lists some good starting points, once appropriately translated to the supply chain.

  • Identify “Blue Ocean Space”
    Where are the real savings opportunities that supply chain has not yet tackled. Are there any sacred cows such as marketing, legal, or HR spend where supply chain could make a huge impact? Is supply chain involved in NPD, or only in sourcing after the design has been approved and expensive single-source components locked-in?
  • Think Beyond Processor Mentality
    Real savings come from strategic planning, sourcing, and network design – not tactical PO processing.
  • Offer a Value Proposition that Goes Beyond Sourcing the Cheapest Part
    What about quality, sustainability, and end-customer value? Customers will pay more for high-quality products that give them a (perceived) value end, and since profit is revenue minus cost, any contributions to revenue also have a huge impact on overall business performance.
  • Ask the Right Questions that Identify Risks and Opportunities
    Don’t just focus on opportunities or risks. The greatest success will come from a careful balancing of risk vs. reward.
  • Offer specialized high-value services that can’t be easily duplicated.
    Find ways to save other departments money that they can’t duplicate without your help. For example, better e-negotiations, deeper spend analysis, or better JIT inventory management with 3PL support.

Demand for Procurement Systems is Up In General

But, as far as I am concerned, the specifics are still in question. Over on Software Advice, Michael Koploy recently published a post on “2011 Market Trends: Procurement Systems” where he noted that the six trends he’s following, namely:

  • Demand
  • Cloud Adoption
  • Application Usability
  • Strategic Sourcing
  • Spend Analytics
  • Contract Management

With respect to the first four, he’s definitely right. After 2-3 years of spending freezes, and displacement of seasoned pros from big shops to mid-tier shops, pent-up demand is nearing an all time high. Also, a lot of shops, especially in the mid-tier, have figured out that they’re not IT, shouldn’t try to be, and want the IT to be someone else’s headache. Today’s generation of workers expects usability, and won’t settle for anything less. And with continuing pressures to cut costs (or lose your job), a number of organizations are finally getting behind strategic sourcing, even if they’re not entirely sure what it should mean to them.

But I’m not sure about the last two. Yes, demand for “BI” and “Analytics” is up across the board, but I’m not still convinced that most organizations have any clue whatsoever as to what real “spend analysis” is.

Spend analysis is:

  • NOT automated cleansing and mapping
    Sorry, but someone else’s rule set will not be anywhere close to 100% applicable to your organization’s data, and a rule set only catches known screw-ups in data entry, not unknown ones. Let’s say you’re in IT. Then HP obviously means Hewlett Packard. But if you’re in construction, it could just as easily mean Harry’s Pumps (or, if you’re in apparel, Hilary’s Pumps).
  • NOT automated Top N reports
    While it’s important to track your Top N suppliers, categories, etc., the greatest opportunities for savings aren’t necessarily going to be in your Top N categories or with your ToP N suppliers. Even without an analytics system, chances are your Procurement people have a pretty good idea who the Top N suppliers are or what the Top N categories are and aggressively negotiating them. In many organizations, the biggest opportunities for savings are in the Next N categories and in better optimization of the Top N categories that goes beyond simply identification. In the first case, let’s say the Top N are 40% of spend and the Next N are 30% of spend. Let’s say the immediate opportunities for savings are 3% in the Top N and 9% in the Next N. That’s 1.2% savings on TCO on the Top N and 2.7% savings on the next N. Which is greater? Also, let’s say a number of categories use a common, pricey, metal or mineral that accounts for 30% of total cost and that, if demand was aggregated across the categories, the average cost could be chopped by over 10%. Well, that’s a 3% savings if you buy the metal or mineral on behalf of your suppliers. A Top N report ain’t gonna show you that!
  • NOT a Freakin’ Dashboard
    A dashboard only tracks progress on identified opportunities. It does not track progress on unidentified opportunities! It only allows you to see that you’re not screwing up something you just fixed, it doesn’t show you that you’re screwing up ten other things.

But when most people make their purchase decisions, this appears to be what they are evaluating based on what they buy and how they implement.

Then there’s Contract Management. To be useful to Procurement, a Contract Management (CM) has to do more than simply store and index contracts for easy retrieval. While it’s important to be able to quickly put your finger on a contract when a dispute arises, that’s not management. That’s e-filing. In the context of Procurement, true management is tracking purchases against the contract in near real-time and insuring that before an invoice is paid, it’s paid at contracted rates. This requires some integration of the CM system with the e-Procurement and/or e-Payment system.

So far, most CM systems are still being bought stand-alone or loosely coupled.

In other words, demand for Procurement Systems is up, but not always for the right reason. And this includes demand for new reverse auction features. I’m getting tired of repeating myself, but I guess I have to say it again.

Listen, bub, a reverse auction IS NOT an advanced sourcing application. If you want real savings, you need a decision optimization system.

Think Canada Can’t Handle Your Distribution Needs? Think Again

As per this recent article in Canadian Transportation & Logistics on how “Canadian firms [are] rethinking logistics business models” that summarizes some of the findings from the Global Business Strategy and Innovation: A Canadian Logistics Perspective, in the last five years total annual investment in distribution facilities in Canada has grown from $674 Million in 2005 to $1.39 Billion in 2010, an increase of 106%.

There’s no need to service Canadian operations from US distribution centres. In fact, with lower operating costs in Canada compared to many traditional US hubs, it might even make sense to service the Northern US from Canadian distribution centres. It’s another option, and one that should be consider in your total costs of operations logistics models.

Six Questions To Ask Yourself When Outsourcing

A recent article over on the Sourcing Interests Group Site on “Rocks to Turn Over in Outsourcing Arrangements” contained a number of questions an organization could ask when looking to maximize value from the relationship. The following six are especially pertinent.

  1. Do we share information the other party needs to be successful?
    One cannot outsource an activity and expect the outsourcing organization to be successful unless all of the information the outsourcing organizations needs to be successful is also shared. For example, if an organization outsources customer support, it must provide the third party with all of its policies, product details, available resolutions and average wait times (for repair, replacement and refund).
  2. How can we encourage more active planning for, and achievement of, innovation?
    An organization that outsources a function and does it right does a process analysis and redesign so that the outsourced organization implements an efficient desired state of the process in place of the inefficient current state. However, while this will be an improvement, it will not necessarily be an optimal implementation of the process. There should be a constant quest for process improvement and innovation.
  3. Is there commitment and follow-through when decisions are made?
    Decisions are ineffective if not acted on.
  4. Are key leadership roles understood and filled?
    Consistent leadership and executive support are necessary for any organizational initiative to be effective.
  5. Are adequate incentives in place to motivate collaborative behaviour and effective performance?
    Chances are that there will be metrics up the wazoo but very little motivation in place to improve them. In order to insure success, there should be incentives in place for the organization to go above and beyond the committed service level.
  6. Do we trust our counterparts to meet their commitments effectively?
    If you don’t trust the outsourcing provider, the outsourcing provider won’t trust you and instead of thinking about how to improve service to your organization, they’ll be thinking about how to make sure they don’t get screwed out of any money they were expecting to get. And instead of spending time trying to innovative and improve a process, they’ll be spending all their time documenting activity and compiling metrics and monthly reports to verify that they met performance commitments and are due to receive (additional) payment.

Outsourcing is not a guaranteed success. In fact, to see any improvement at all, it’s a lot of work. The rewards can be there, but it has to be done right. These are six great questions to ask if an organization wants to determine whether or not it is on the right tracks.