Implementing VFS: A Beginner’s Guide, Part V

In our last post we highlighted some of the key issues associated with the first three steps of the seven-step process for Value Focussed Supply as identified in the CAPS recent report on “Linking Supply to Competitive Business Strategies”. In this post, we will tackle more of the issues that need to be addressed if an organization is going to answer the questions necessary to formulate a good VFS strategy as part of a Next Generation Sourcing effort.

  1. Evaluate the Company’s Strategic Options
    Now that the categories that are central to the current and future business plan are identified, the truly strategic categories and products need to be identified.

    • What are the relevant macro and micro factors that need to be considered? Four types of data will be required to identify these:
      1. Customer Focus
        What are the price to value ratio, overall value chain performance metric, and attributes critical to market success?
      2. Purchase
        What are the specs, cost drivers, technology roadmaps, the anticipated rate of (technology) change, usage patterns, product life cycle, and (amortized) annual spend?
      3. Supply Market
        What are the degree of competition in the supply base, pricing trends (and [raw material] cost drivers), cost structures, supply industry dynamics, major users, and government regulations?
      4. Supplier Data
        What are their business strengths, risk exposure, capabilities, and performance levels?
    • What type of analysis can be brought to bear on the data? Value chain mapping? (Should) Cost and Cost Driver modelling? Cost-to-Outcome Analysis? Segmentation analysis? Risk/Reward Analysis? TCO/TVM (Lifetime) modelling? Purchase pattern (trend) analysis? (Competitor) Supply (Strategy) benchmarking? Revenue Forecasts? Economic Forecasts? Scenario Planning?
    • How will truly strategic categories be identified?
      Most critical problems? Highest TCO? Lowest Value to Cost Ratio? Highest margin (potential)? Supply uncertainty and/or risk? Inventory / asset utilization (or lack thereof)? (Market) Leadership requirements?
  2. Set Holistic Value Focussed Goals
    • How will the top priorities be determined?
      Most critical problems? Highest potential ROI? Implementation difficulty (of new strategies)? (Potential) Future impact? Available value contribution from suppliers?
    • How will the goals be set?
      Where will the primary focus be: the organization, the supply base, or the distribution partners? How will the various goals be weighted: metric improvement, revenue improvement, cost reduction, sustainability, and/or future value?
    • How will the performance levels be tracked and measured?

Our next post will highlight the remaining key issues that an organization must address to insure that it heads down the right VFS path.

More Proof We’re Overworked … and in Deep Talent Trouble

As per this recent article in Industry Week on “building a lean, mean profitable machine”, productivity in manufacturing has jumped by a record 94% during the past two decades while headcount has significantly shrunk. That’s a productivity increase that’s 60% higher than any other U.S. business sector. Since technological innovations have occurred across the board, one cannot attribute all of this productivity increase to new technologies. A good portion of it is due to blood, sweat, and tears — and people working harder and longer than ever before. And while it looks good on the books, it’s not sustainable over the long term.

There’s a reason that 9 out of 10 employees are looking for a new job. They feel like they’ve been worked to death and that there couldn’t be a job that is possibly worse than their current job. Considering that production is becoming more and more specialized and reliant on precision machinery and technology, this is not a good thing as the industry as a whole is facing a dire shortage of skilled production workers, scientists and engineers. Add this to the predicted shortage of up to 100,000 logistics workers by mid-decade, and you see a deep talent shortage looming across the supply chain.

How does your organization plan to manage it … before it’s too late?

Implementing VFS: A Beginner’s Guide, Part IV

In our last post we reviewed some of the key questions for each step of the seven step program designed to get a company on its way to VFS, as described in the CAPS recent report on “Linking Supply to Competitive Business Strategies”. When these questions are answered, an organization will have identified one or more target markets, primary categories, key products, key suppliers, VFS strategies for the categories, products and markets (w.r.t. the supply base), VFS goals, and VFS levers.

However, before an organization can answer the key questions, it needs to understand the issues involved as this will make the difference between good choices and bad choices. In this post, we will outline some of the key issues for some of the key questions to insure that an organization embarking on a VFS journey as part of their Next Generation Sourcing effort heads in the right direction.

  1. Understand Customer & Supplier Markets
    • The VFS team needs to dive deep into each category. For example, knowing that cell phone sales are on the rise isn’t good enough. Burner phones or smartphones? iOS, Android, Windows 7, or Blackberry? The ones that integrate with Facebook, Twitter, or both? When a category is on the rise, it’s usually a small set of products, and, in particular, products with certain feature sets that are causing the surge in demand.
    • Then the team needs to ask if those products are satisfying all of the customer desires or only part of them. Maybe the users want more than a built-in Facebook app. Maybe they want an app that will integrate Twitter feeds, Facebook wall feeds, and other Social Network messaging feeds and group them by contact.
    • Then, once a need has been identified, the team needs to ask if one or more of the organizational suppliers has the capability to assist the organization in the innovation if the organization doesn’t have the skills in-house. If there are no app developers on staff and all of the organizational suppliers are hardware only, then the organization would have to acquire a new set of capabilities or new supplier to either develop the apps the users want or the platform and API to support third party apps.
    • If the organization expects this category to considerably increase sales, does it have access to the raw materials necessary to make more smartphone handsets and the development resources to build and support the software?
  2. Identify Directional Changes
    • Look beyond market share to market trends. For example, iOS phones may be commanding a majority market share in the smartphone market, but Android sales are now exceeding iOS sales and Android may be the dominant platform by the time a new smartphone is designed and released.
    • But maybe instead of developing a new phone, the organization should be developing a new pad. Pad sales are expected to skyrocket, and the fact that so many companies are planning to release Android pads indicates no one has figured out what is going to conquer the Android pad market. And maybe the real key to success is a pad that could support Android apps and Win 7 apps through a hardware VM.
    • Apple has locked up over half of the touch screen supply, limiting the potential supply base. Can the organization lock up enough supply to meet expected demand and/or identify a new supplier who could manufacture touch screens, with investment and support, if the organization decided to try and increase its smartphone or pad market share?
  3. Link Insights into Directional Changes to the Business Strategy
    • Is the business strategy greater market share or greater profit on existing market share? If it’s the first, the strategy will be to go after the greatest demand at a lowest common denominator. If it is the latter, the strategy will be to dominate a niche market that demands higher prices at current volumes.
    • Once the market share strategy is determined, it will be important to select the categories and products with the best financial outlook that fit into the market share strategy.

Our next post will highlight more of the key issues that an organization must address to insure that it heads down the right VFS path.

Don’t Go Gaga Over Global Trade Numbers

Global Trade may be growing, but it’s not growing as fast as the WTO wants you to believe. You have to take the long term view. Global Trade may have increased 13.5% last year, but this followed a year where it dropped 12.2%. Just like an elastic will snap back when released, it is only logical to expect that global trade would snap back to pre-recession levels once the world, and the US in particular (which alone controls 25% of Global GDP) started to work its way out of the recession. And that’s all it did … snap back. (If it was at 100$, and it dropped by 12.2%, then it was at 87.8$. If that increased by 13.5%, the net result would be 99.65$.)

With more and more companies trying to go global and join the outsourcing economy, and with more and more hi-tech manufacturing shifting overseas, it’s only logical to expect that global trade will continue slow, steady growth whether it makes sense or not, but we’re not going to see exponential expansion anytime soon. As a result, while Global Trade Management software (GTM) sales will pick up in the US where advance filing, denied party lists, and other requirements are making GTM almost impossible without software support, GTM software is not likely to see the same sort of increase in demand in other countries. (Security regulation is also increasing in Europe, but not at the rate it is in the US, at least for the moment.)

In other words, GTM is a solid investment for buyers and vendors alike, but don’t look for rapid growth predicted by the ARC Advisory Group, in this article on realizing global trade management potential, just yet.

How Should You Calculate Cost Reduction?

As per a recent article over on Supply Chain Digest on how there are many roads to the same goal when it comes to calculating procurement savings, there are almost as many methods to calculate cost reduction as there are people to do the calculations. And while some will be better than others, many, depending on one’s point of view, will be about the same from an objective (trending) viewpoint. This lead one to ask, independent of organizations and balance sheets, if there is one method, or a set of methods, that are arguably better than the rest of the pack.

Without a stick to measure against, there will be no way to judge effectiveness, so we will start by introducing a set of sticks, namely:

  • Objectivity:
    The calculation should be formula-baesd and (completely) objective, not based on subjective approximations.
  • Trend(& Benchmark)-Compatible:
    The calculation should be repeatable on a monthly, quarterly, and yearly basis and lend itself to the plotting and identification of trends.
  • Index-Based:
    Where market data is required, the calculations should be based on index data, not single supplier bids.

This says that, of the list of 26 methods of setting savings targets, from a recent CAPS survey that was printed in the article, the following six are probably more effective than the others:

  • annual sourcing effectiveness planning that identifies projected spend by commodity, region, etc. and then establishes savings opportunities from consolidated leverage, value engineering, negotiation, etc.
  • based on history and market intelligence
  • based on projected commodity price trends, demand growth, competitive pressure, etc.
  • “bottom up” approach based on projections of new purchases, expiring agreements, and pricing trends
  • historic performance and spend volumes (projected) against corporate overall cost targets
  • historical spend data, and CAPS Utility Industry and Cross-Industry benchmark data