Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 29 July 2006.

Yesterday we introduced you to supplier performance management, a methodology for reducing supply risk, driving continuous cost reductions and performance improvements, and accelerating savings. Proactive supplier performance management programs can improve service levels by 10 to 30%, improve invoice accuracy by 10 to 20%, and reduce inventory levels while increasing on-shelf availability. (For more advantages of supplier performance management, check out Aberdeen Group’s recent “Supplier Performance Measurement Benchmark Report”.)

Today we are going to talk about the road to success, some of the challenges you will face, the requirements you will need to address, and the operational framework that will get you there. Tomorrow we will continue with a discussion of some best practices and steps to success.

Successful supplier performance management is a continuous cycle of supply and capability assessment, performance monitoring, and improvement identification. A good starting point is the Aberdeen C5 operational supplier management framework: connect, coordinate, check, control, and cultivate. (Aberdeen uses monitor and improve, but I prefer check and cultivate.)

The cycle starts with integrating suppliers into an exchange, proceeds to a synchronization of buyer requirements with supplier capabilities, implements scorecards and metrics to measure performance, tracks performance against SLAs, identifies exceptional situations, resolves problems and disruptions according to business objectives, and employs analytics to identify defect patterns and unpredictability to eliminate root causes and identify new opportunities to remove cost from the supply chain.

The cycle defines a number of requirements that must be met before a good performance management methodology can be put in place. Collaboration systems are required to successfully integrate suppliers into your systems and processes, visibility is required to properly align supplier capabilities to your requirements, well-defined metrics need to be defined to asses performance, and monitoring systems that support granular data need to be implemented to automatically detect deviations and exceptional events. Data needs to be timely and reliable in addition to your suppliers.

These requirements are wrought with challenges. Without good data collection and analysis systems, the detection of defect and supplier unpredictability patterns can take weeks or months. Without good collaboration systems, coordinating internal functions is challenging enough without trying to coordinate internal functions and external schedules. Thus, the selection of appropriate technologies is critical.

A synchronized view to the data for all internal and external shareholders is critical. There can be no meaningful discussion about performance improvement if different users are measuring data points against different metrics. However, this is challenging since every company operates differently, follows different processes, and interprets data in different ways. Again, good technology choices will help you in this endeavor.

So, how do you get to a synchronized view with shared scorecards and metrics? Hardwork, dedication, and outside expertise. I firmly believe that this is not an area that you should attempt to master on your own. Bring in consulting experts to get you on your feet quickly and deploy best of breed solutions. Although I’m not going to recommend a specific solution, I will point out three companies in the space, in alphabetical order, that you could start with in your search to meet your technology and consulting needs: Apexon, Nexprise, and SupplyWorks. Just make sure that whomever and whatever you select for supplier performance management integrates well with the e-Sourcing and e-Procurement systems you are using, since SPM tools are another piece of the framework, and not a be-all end-all solution.

For more information on supplier performance management, see the “Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 28 July 2006

Last weekend we discussed supply chain risk and how important it is in today’s efficiency based supply chains where a single disruption can cost a corporation six, seven, or even eight figures and when more than 80% of supply managers reported in a recent Aberdeen study on “Supply Risk Management” that their companies experienced supply disruptions within the last 24 months. We discussed the need for resilience, flexible processes, and risk management.

One of the major strategies we cited for risk management was the adoption of risk mitigating sourcing strategies aligned with your supply base management strategies. We formally defined supply base management as the process of determining not only what the right number of suppliers are but who the right suppliers are, and indicated that it doesn’t stop there. Good supply base management includes continual proactive supplier development where you work with your suppliers to drive continual performance improvements.

This brings us to this weekend’s topic: supplier performance management. Best-in-class organizations have best-in-class supply bases that continually exhibit best-in-class performance across the supply chain. Since performance improvement is a continual process, and not a one-time deal that happens by chance, it needs to be managed and best-in-class sourcing organizations manage their performance and that of their suppliers.

Supplier Performance Management (SPM) is a business practice that is used to measure, analyze, and manage the performance of an organization’s performance in an effort to cut costs, alleviate risks, and drive continuous improvement. The ultimate intent is to identify potential issues and their root causes so that they can be resolved to everyone’s benefit as early as possible.

Considering that Aberdeen found that companies with formal performance measurement programs were able to improve supplier performance by 27% and that enterprises that shared performance data with suppliers generated 61% greater improvements in supplier performance than enterprises that withheld this data, the benefits of supplier performance management compared to the costs of trying to recover from a preventable disruption are phenomenal.

For more information on supplier performance management, see the “Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 23 July 2006

Friday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises. Yesterday we discussed the different types of supply chain risk that an organization needs to prepare for, the need for resiliency in its daily operations, and the classic strategies used to prepare for risk. Today we will discuss modern strategies for supply chain risk management and supply network planning.

The good news is that it is possible to design supply chains that are robust enough to profitably continue operations in the face of expected deviations and unexpected disruptions and quickly recover from disasters. The foundation is a strong, stable supply network forged from good supply base management, strong supplier links, and continuous improvement and a corporate culture that embraces change and flexibility.

In fact, the factor that has been found to most clearly distinguish companies that bounce back quickly from a disruption from those that do not is a corporate culture geared towards flexibility. A flexible culture is one where communication is pervasive and continuous. Low-level employees have the power to make decisions and the end goal is continuous improvement. (See the recent article in CPO Agenda entitled “Supply Risk Management”.)

True resilience comes from attacking supply chain risk from all the angles and having operational, tactical, and strategic plans to deal with it. Operationally, companies need to be able to quickly fill in gaps that result from disruption and reschedule activities so that business processes remain synchronized and deliveries are made within customer delivery windows. Tactically, plans need to have redundancies in terms of human resources, machine resources, logistics and supply organizations to allow for this flexibility. Strategically, companies need reliable partners with intrinsic capabilities in deviation and disruption handling, and the skills and ability to adapt to changing market conditions.

Four strategies for building resilience into your supply chain and mitigating risks are production versatility, concurrent processes, decision postponement, and risk-mitigating sourcing strategies aligned with your supply base management strategies.

Production versatility is the ability to move production between plants, use interchangeable and generic parts (Build to Order), and apply employees to different tasks. The ability to move production between plants minimizes risk of complete supply disruption with respect to a part or product, the use of a small number of commodity parts simplifies operations and concentrates procurement outlays and creates the flexibility to move the business among suppliers, and flexible cross-trained employees will be able to step in and get you back on track when something goes wrong.

Concurrent processes with respect to product development, ramp-up, and production/distribution allow you to reduce time to market, decrease the time required to recover from supply disruptions, and improve overall operating efficiency.

Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain, thereby enabling build to order operations, allows for the diversion of parts and semi-finished material from surplus areas and products to satisfy shortages.

Risk-mitigating sourcing strategies aligned with supply base management initiatives minimize the possibilities of preventable disruption, maximize your response time, and allow you to define contingency plans for immediate execution upon a supply chain disruption. There should be a contingency plan for each priority disruption that includes both a detailed description of the procedure to follow and a definition of roles and responsibilities in the event of the disruption.

Designing a robust supply chain and a resilient supply base is a straight-forward five-step process that starts with defining risks and ends with the definition of mitigation and monitoring activities. Specifically:

1. Assess Risk Probabilities and Risk Impacts
2. Select the top n high-probability high-impact risks
3. Identify Risk Mitigation Strategies
4. Implement the strategies
5. Monitor the supply chain

Risks can be classified according to how likely they are to occur and how devastating the consequences can be. Contingency plans must exist for every risk that is both likely and known to have a significant impact. Remaining risks should be prioritized and contingency plans outlined for the top 10 or 20, depending on how many make sense from a cost-benefit analysis. All potential risks from an organizational, network, industry, and environmental perspective should be considered.

Once a risk is identified, risk mitigation strategies should be identified and the best ones implemented. This will include a modification of internal processes or defining a contingency plan, depending on the type of risk and its severity. For example, demand fluctuations would probably be dealt with by implementing order visibility systems that monitor consumption and spending levels and analyzing trends for unexpected changes whereas a disaster that took out suppliers and distributors within a region would require a contingency plan that specified the ramp up mechanisms for alternate suppliers and distribution centers in an unaffected region.

The supply chain will need to be monitored on a regular basis to detect deviations and disruptions quickly to insure that contingency plans, when required, are initialized and executed as efficiently as possible. Effective management and monitoring is a core business discipline that defines and enforces standard performance and risk measures and assessments, collaborates with suppliers to detect and mitigate risks, and leverages sourcing technologies and information services to improve risk planning, monitoring and response. It consists of appropriate supply chain and sourcing strategies that balance cost, performance, and risk and strong supply base management focused on continual improvement.

Proper supply base management is the process of determining not only what the right number of suppliers are but who the right suppliers are. It’s the right balance between supply base reduction to reduce administrative overhead and cost and supply base expansion to mitigate single source or dual source risks. It requires a good understanding of supplier capabilities and supply market dynamics. It includes continual supplier development which is not just a reactive process that identifies and fixes problems but a proactive process where you work with suppliers to drive continual performance improvements to make sure your supply base stays best in class. This is generally accomplished by performance incentives, direct involvement, which may take the form of training and education or collaborative projects, and regular supplier monitoring and assessment.

Effective supplier assessments are multi-dimensional and examine overall quality, performance, and service levels. They are linked to strategic goals and are objective and fact based. They are on-going and include supplier feedback and two-way communication. At regular intervals, you monitor the actual and relative performance of each of your suppliers with respect to goals and targets and establish a dialogue. You also establish consequences for failure / lack of improvement and stick to them. They are a fundamental tool of Supplier Performance Management, our topic for next weekend. Whereas the strategies above are your mechanisms for reducing risks, supplier performance management is your mechanism for keeping risks down. To be continued.

For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 22 July 2006

Yesterday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises with some recent statistics. Today we are going to discuss the different types of supply chain risk that an organization needs to prepare for, the need for resiliency in its daily operations, and the classic strategies used to prepare for risk.

Risks arise at many levels. They can be internal risks that result from daily operations, network risks within your supply chain or partner interactions, industrial risks common to all companies operating in your industry, or environmental risks beyond anyone’s control. They range in severity from minor deviations in supply and demand through supply chain disruptions that can knock out part of your supply chain to serious disasters that will force a temporary irrecoverable shutdown of (a substantial) part of your supply chain.

We use the definitions of R. Gaonkar & N. Viswanadham of The Logistics Institute (Asia Pacific) at the National University of Singapore, as found in their Indian School of Business Working Paper “A Conceptual and Analytical Framework for the Management of Risk in Supply Chains”. Specifically, a deviation is when one or more parameters stray from an expected value without any changes to the underlying supply chain structure. A disruption is when the structure of the supply chain is radically transformed through the unavailability of certain facilities, suppliers, or transportation options. A disaster is when a temporary irrecoverable shutdown of the supply chain network occurs due to unforeseen catastrophic system wide disruptions.

Within your organization, you face machine related issues, quality problems, materials and parts shortages, and communicable illnesses among you staff on an almost daily basis that could lead to deviations. Furthermore, unexpected employee strikes and opportunistic behavior by senior management could lead to significant supply chain disruptions in the long term.

From a network perspective, you are subject to the risks associated with increasing customization, outsourcing, and collaboration. A disruption to your supplier or third party logistics carrier is a disruption to you. Their organizational risks and performance problems become your network risks. Furthermore, you risk deviations due to fluctuating transportation capacity constraints, disruptions due to failures in your lines of communications, customs delays, port slowdowns, supplier bankruptcy, and government (over) reactions to crisis situations (such as border closings).

From an industry perspective, the emergence of a new technology or a new business model could cause considerable deviations and disruptions to your business across the spectrum.

From an environmental perspective, you are subject to variations and deviations in expected demand, supply, and lead times that can result from shifts in consumer spending, inflation, and unpredictable economic changes such as foreign exchange fluctuations, governmental policy changes, and free trade zones. You are also subject to disruptions from human perpetrated acts such as sabotage, theft, strikes, and slowdowns and disasters that result from terrorist attacks, large scale natural disasters, and major geopolitical events.

In order to effectively manage these disruptions when they occur and maintain profitability and effective operations, your organization needs to be resilient to predictable and recoverable supply chain risks. Resilience is the inherent ability of an enterprise to return to normal performance levels following a supply chain disruption. Resilience can be achieved through classic redundancy mechanisms or built-in flexibility.

Classic mechanisms for dealing with unforeseen supply chain deviations and disruptions included adding safety margins to lead times, maintaining extra “just in case” inventory, frequent queries of order status, reserving capacity, lining up distribution alternatives, dual sourcing, and order expediting when a disruption occurred.

However, most of these margins come wrought with disadvantages. Adding safety margins to lead times and maintaining extra “just in case” inventory increases costs and decreases an organization’s ability to respond rapidly to demand changes or shifts in consumer preferences. Frequent querying of order status wastes everyone’s time and decreases operational efficiency and reserving capacity decreases the value of, and return on, your investment. Order expediting drives up costs and diverts capacity away from other products. In fact, the only classic mechanisms that make sense are dual sourcing, which is a fundamental strategy of good supply base management, and lining up distribution alternatives, which is a principle of good network design.

Tomorrow we will discuss modern strategies for supply chain risk management and supply network planning.

For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 21 July 2006

Supply chain risk can formally be defined as the potential loss resulting from a variation in an expected supply chain outcome. It is the mismatch between supply and demand.
Traditionally, supply chain risk was often the result of inadequate spend visibility, lack of deep supplier and market information, poor inventory management, poor supplier collaboration, and inefficient coordination heightened by a lack of infrastructure, skills, resources, research, and technology as well as language and cultural barriers.

Today, matters are much worse. With today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralized distribution, more and faster product launches, low cost country sourcing and supply chain globalization in a highly volatile global market place, companies are at greater risk than ever before. When you consider that 10% of active suppliers represent 80% of spend in many of today’s enterprises, and that many companies lack visibility into their supply chains beyond their tier one suppliers, supply risk management is becoming key to ensuring continued operations in a profitable manner.

After all, the effect of a supply chain disruption goes beyond just late shipments, lost production time, and delayed execution times. It can cause stock outs and lost sales, missed customer expectations, quality and safety concerns, project failure, market exposure, and lost credibility. It can increase costs, reduce your bargaining power, and even influence poor supplier selection as you struggle to correct the imbalance. (It can even devastate your stock price. A recent study in the Journal of Production and Operations Management that analyzed the effect of supply chain disruptions on long-run stock price performance over a three year period found that stock returns of companies experiencing significant supply chain disruptions trailed returns of peers by 33% to 40%.)

The importance of supply chain risk management cannot be ignored. According to Aberdeen’s recent study on “Supply Risk Management” (October 2005), more than 80% of supply managers at 180 global enterprises reported that their companies experienced supply disruptions within the past 24 months. Supply glitches negatively impacted their companies’ customer relations, earnings, time-to-market cycles, sales, and overall brand perception. Furthermore, it found that more than 75% of companies expect supply risks to increase over the next three years.

However, enterprises that have adopted comprehensive supply risk assessment and management programs, which include leveraging deep supplier and market information, have reduced the frequency of supply risks and outperformed their peers in supply performance and costs.

Tomorrow we will discuss the various types of supply chain risks, which extend well beyond simple supply disruptions, the need for resilience in your daily operations, and the classic strategies for dealing with such risks. Sunday we will conclude with a discussion of some modern methodologies for building resilience into your supply chain, risk management programs, and associated processes.

For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki [WayBackMachine].