Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 15 September 2006

This is the last full weekend of the summer, and, thus, the last summer weekend series on eSourcing Forum. This summer we discussed, in detail, twelve topics in process and technology, supply management, and innovation that we hope you can use to aid you in your design of better sourcing methodologies. Today we are going to review the process and technology topics.

This summer, we talked about:

• On Demand
  • I: The Good
  • II: The Not-So-Bad
  • III: And the Coming Pretty …
• Demand Driven Supply
  • I: An Introduction
  • II: Stages and Implications
  • III: Challenges and Implementation
• Optimization
  • I: A Powerful Tool
  • II: Why it was Relegated to the Shadows
  • III: Why it’s time is finally here
  • IV: POE or BoB?
• Six Sigma
  • I: An Introduction
  • II: Innovative Quality
  • III: Value Based Strategic Sourcing

Our on-demand posts highlighted the benefits of on-demand software-as-a-service solutions over traditional installed approaches, which include:

• Pay As You Go
• Instant Deployment
• Single Instance
• Economies of Scale
• Provider handles administration, maintenance, and headaches
• Free Upgrades
• You, the customer, have the leverage
• Anywhere access
• Buy what you need, and only what you need
• Single Accountable Entity
• Regular, Automated Data Backup
• Built for Change
• Unparalleled Collaborative Capabilities
• Integration with office applications
• Security
• Uptime
• Low Total Cost of Ownership (TCO)

Our demand-driven supply posts highlighted the importance of a strong focus on a pull-based customer centric approach to demand and supply chain planning. The goal is to help you identify the best mix of customers, products, channels, geographies, and prices for the dynamic marketplace, as this is key to maximizing your efficiency and profitability. This is because traditional Supply Chain Management deals poorly with rapid change as it relies heavily on up-front forecasts and does not incorporate regular forecast revisions or the demand signals necessary to determine when a shift in demand is needed.

Our optimization posts emphasized the importance of using decision optimization in award determination (as it will save you an average of 12% over and above a price-focused auction), despite the fact that its usage is not yet common in the marketplace, which is likely due to the dearth of vendors offering such technology. In addition, we pointed out that despite its limited acceptance up until now, we believe its time has come due to the convergence of the following factors:

1. Extensive use of e-Auctions over the last 3-5 years by early adopters.
2. Optimization Technology has evolved.
3. Solution Providers are integrating optimization into their platforms.
4. Solution Providers are recognizing that there needs to be a significant amount of sophistication under the hood.

Our Six-Sigma posts defined Six Sigma – a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology with the ultimate goal of producing at most 3 defects per million trials (in the long run). The goal of Six Sigma is to prevent defects before they happen via process improvements. To do this, Six Sigma uses a toolbox of statistical tools and frameworks to:

• identify which defects impact customer requirements,
• determine why each defect was caused and uncover the hidden factory, and
• improve the process parameters and product designs to reduce defects.

Six Sigma practitioners look for ways to decrease the overall amount of variation in a process, since process variation is often the primary cause of defects. It does this by way of its DMIAC, Design-Measure-Improve-Analyze-Control, methodology which generally executes as follows:

1. define each process step, inputs, and outputs
2. map the customer requirements to process inputs and outputs
3. identify key metrics to measure performance
4. establish defect root causes for, and relationships between, inputs and outputs
5. analyze and improve the process to optimize performance metrics
6. provide controls to ensure sustainability of improvements

Since Six Sigma is a generic methodology, it can be applied across your supply chain, and to your supply management and spend management initiatives. Six Sigma Strategic Sourcing (SSSS) and Value Based Six Sigma (VBSS), which stem from Total Quality Management (TQM) initiatives and focus on Total Value Management (TVM), are two examples of Six Sigma frameworks for sourcing. They are based on best practices, which are nothing more than the everyday sourcing best practices that eSourcing Forum has been describing for the past year, but documented, standardized, and applied regularly and consistently across your sourcing organization.

The real killer sourcing application, however, is not on-demand software-as-a-service, demand-driven supply, optimization, or the six-sigma toolbox, but the integration of all of these processes and technology into one. In other words, a leading procurement organization is one that uses a six-sigma (best-practice) based demand-driven sourcing methodology that uses best-of-breed software and service offerings on-demand to determine optimal awards using market-leading decision optimization. Alone, each of these technologies and processes are great, but together, the whole is truly greater than the sum of the parts.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 3 September 2006

One of the application areas of Six Sigma, the relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology, is supply chain, which includes supply management, spend management, and strategic sourcing. A number of firms are peddling six sigma initiatives designed to improve your supply chain operations, including KPMG with their Six Sigma Strategic Sourcing (SSSS), but the best processes are those focused on value, such as Value Based Six Sigma (VBSS). These process stem from TQM (Total Quality Management) initiatives, but since they focus on TVM (Total Value Management), the focus is on the solution of those problems that directly support business goals and have the highest potential impact.

With VBSS, you apply a small-number-of-projects-at-a-time mentality to finish the projects as efficiently as possible to enjoy the benefits as soon as possible. You follow generally accepted Six Sigma Strategic Sourcing best practices, but you select the projects based on a value (cost/benefits) analysis aligned with your business objectives (which should in turn be aligned with your customer requirements).

So what are six-sigma strategic sourcing best practices? Simply put, they are every day sourcing best practices applied regularly and consistently across your sourcing and procurement organizations! There’s nothing special or fancy – the key is to adopt the best process you can get your hands on, automate it, follow it consistently, and improve it on a regular basis. Where do these best processes come from? The e-Sourcing providers that built your current systems and the supply chain and supply risk consultants who helped you design your supply chain. (Including Iasta, your e-Sourcing Forum sponsor.)

Six Sigma merely provides the DMIAC methodology that tells you, in sourcing terms, to define, measure, analyze, design, verify, control, and improve.

Specifically, as per KPMG’s Six Sigma Strategic Sourcing:

• Define
  • business case
  • business goals and objectives
  • procurement strategy
  • resource allocation
• Measure
  • identify key metrics
  • validate/cleanse data
  • benchmark against best in class
• Analyze
  • review data
  • identify gaps
  • obtain customer / end user feedback
  • identify opportunities for cost & price reduction
  • assess technology and organization effectiveness
• Design
  • design process improvements
  • develop implementation plans
  • develop new contracts
  • identify technology upgrades
• Verify
  • pilot recommendations
  • pilot performance metrics
  • rework/redesign as required
  • implement

So is six sigma worth it? Yes. Do you need it? That depends. If you can consistently identify and successfully implement best practices and draw from a large quality and innovation toolbox on a regular basis, then, no, since six sigma is just the consistent application and improvement of these tools and processes until you have, in laymen’s terms, essentially six nines reliability. However, if you don’t know where to start, then a Value Based Six Sigma Strategic Sourcing Program can get you on track and usher in considerable savings at a phenomenal rate compared to other initiatives. It’s certainly worth a look, but I personally do not think that your business depends on it.

For more information on six-sigma, see the “Six Sigma: Improve Supply Chains through Methodology” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 2 September 2006

Six Sigma is described as a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology. Since this should be the ultimate goal of any organization, this is a good start.

So how does Six Sigma improve quality? Six Sigma advocates proclaim that the Six Sigma philosophy is to prevent defects before they happen upfront via process improvements. This is the best way to attack a problem, prevent the conditions that allow it to occur in the first place.

So how does Six Sigma accomplish this task? It uses a toolbox of statistical tools and frameworks to:

• identify which defects impact customer requirements,
• determine why each defect was caused and uncover the hidden factory, and
• improve the process parameters and product designs to reduce defects.

Instead of focusing simply on meeting design specifications, six sigma practitioners look for ways to decrease the overall amount of variation in a process subject to critical target values, since process variation is often the primary cause of defects in a well designed product. Decreasing variation is no simple matter when you consider that variation can stem from variation in your internal processes, inconsistencies in material or information from suppliers, part and product designs that are not robust, and overly conservative design specifications, with both common causes (defined as system faults) and special causes (defined as fleeting events). In addition, these variations can be caused by any of the six Ms: man, machine, material, methods, measurements, and mother nature.

Six Sigma accomplishes this feat by careful application of its DMIAC problem solving methodology and its toolset. DMIAC stands for Design-Measure-Improve-Analyze-Control and the process generally executes as follows:

1. define each process step, inputs, and outputs
2. map the customer requirements to process inputs and outputs
3. identify key metrics to measure performance
4. establish defect root causes for, and relationships between, inputs and outputs
5. analyze and improve the process to optimize performance metrics
6. provide controls to ensure sustainability of improvements

The analysis, root cause identifications, and improvements often come about using one of the following toolsets of a six sigma practitioner:

• pareto principle
• experimental design
• Quality Function Deployment (QFD)
• thought process maps
• process flow charts
• graphical techniques
• cost analysis
• scrap reports
• cycle time fluctuations
• Failure Modes and Effects Analysis (FMEA)

The basic DMIAC process and six sigma toolbox is also the basis for the three fundamental types of innovation projects identified by advocates:

• creating new products, services, or markets
• extensions or feature improvements to products, services, or markets
• increased efficiencies in existing products or services

In other words, DMIAC is quite powerful, but so is any good problem solving methodology when properly applied. Speaking of application, a successful Six Sigma project will always have the following characteristics: strong leadership, clear definition, strategic alignment with the business, (more than) adequate management support, and practical transferability.

Six Sigma projects require strong executive support and support from the functional and project leaders. Incentives must be aligned to insure that they devote enough time to the project. The project must have a clear definition that includes the precise problem definition, goals, “stretch” goals, financial targets, and team structure. The project must be strategically aligned with business objectives and everyone must be on the same page. Management must support the project from inception through completion and it must be transferable to other users and business units.

In short, six sigma requires all of the elements of success that any other improvement project requires, including the dedication and the know-how. It also requires an extensive knowledge of best-practices and best-in-class techniques. It is essentially an evolution of business process management (BPM) best practices that have been discovered since the dawn of the organizational era by operations management researchers. (I will be making occasional posts on operations management on Sourcing Innovation.)

For more information on six-sigma, see the “Six Sigma: Improve Supply Chains through Methodology” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 1 September 2006

The design of responsive supply chains is becoming a priority for companies who must continually reduce costs and streamline processes to remain competitive in a dynamic global market where companies that do not anticipate challenges and prepare for the unexpected can vanish almost overnight. This means that an organization today must pay more attention to the business environment, get tighter with its customers, analyze performance data better, and avoid disasters.

Six Sigma, which defines itself as a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology, is one methodology that companies can use to make their supply chains more responsive, foster innovation, and improve quality across the board. When properly applied, this ultimately leads to lower costs, greater profits, greater customer satisfaction rates and earnings per share for the shareholders, which is why Six Sigma has caught on at a number of large enterprises.

But it’s no light undertaking – it requires massive commitment from the CEO down, considerable amounts of training and application, master black belts, black belts, and green belts, and operational changes across the board. In addition, it often requires new mindsets, new methodologies, new technologies, new performance metrics, and, most importantly, new incentives. Which leads one to ask, if you’re not a large enterprise with a large spend, large budgets, and the time to transform, is it worth it?

That’s not an easy question to answer. If you just look at the average results, you might think it is a resounding yes. But no decision is ever that easy, especially when you do not really understand what something is and separate the facts from the hype.

After all, we are dealing with a methodology that is promoted as a revolution capable of fixing everything wrong with your corporation, with the possible exception of the clog in the lunch-room sink. (No wait, it has a process to fix that too!) Just one article I read recently said Six Sigma will help you with:

• Globalization
• Mergers and Acquisitions (M&A)
• Supply Chain Design and Planning
• Customer Relationship Management (CRM)
• Brand Building
• New Product Development (NPD)
• Sustainable Growth
• Innovation Management
• Risk Management
• and much, much more by
  • accelerating a company’s learning cycle
  • speeding up research phases
  • speeding up redesign
  • enabling rapid information exchange
  • … and so on.

To fully understand the breadth of this claim, imagine if a smart looking guy in a suit walked into your office and said “I’m the architect, foreman, electrician, plumber, steel worker, heavy equipment operator, drywaller, and project manager for that new office building you’re thinking of. With just a few humble assistants, I’m going to take on that massive project all by myself and finish it faster, better, and at less cost then any of the multi-billion contracting firms you are currently considering.” That’s comparable to the breadth of the claim that Six Sigma often appears to be making.

Theoretically, a universally applicable best practice generic methodology could be applicable to each of your business functions, but just how helpful is it going to be if it is that generic? That’s one of the questions we are going to try to answer this weekend. To do that, we are first going to focus on its potential contributions to quality and innovation, since these are two common qualities that define great operations across organizational functions. Sunday we will discuss its potential value to strategic sourcing.

However, first of all we are going to define what Six Sigma really is. Sigma measures variation, and more specifically, the standard deviation of a data set. Six Sigma refers to a distance of six standard deviations between the mean value of the data set and the nearest specified tolerance limit. A Six Sigma Process is one that produces at most 3 defects per million trials (in the long one).

Furthermore, Six Sigma is concerned with something called the Rolled Throughput Yield of a system, which ensures that the measurement applies to the finished product and not just a step in the process. The rolled throughput yield is calculated by multiplying the yield of each step. For example, a system with five steps and only 99% yield at each step would produce a rolled throughput yield of 0.99^5 = 0.951 or 95.1%. Thus, a six sigma process is one with a rolled throughput yield of at least 99.9997% or almost six nines reliability.

In short, a Six Sigma methodology is one that is designed to eliminate variation from a process to ensure consistent results every time.

For more information on six-sigma, see the “Six Sigma: Improve Supply Chains through Methodology” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Monday, 28 August 2006

When choosing an optimization solution, you generally have two choices: a Platform Optimization Engine that is integrated into a strategic sourcing suite (such as Iasta’s Bid Optimization 1.0 that runs on top of industry standard solvers such as Ilog’s CPlex) or a standalone Best of Breed product (such as CombineNet’s customized optimization platforms based on their proprietary solution algorithms customized for certain problem domains and models). The question is – which is best for you?

As you probably have guessed, it turns out there is no easy answer to this question. It really depends on the problem you need to solve, the complexity of the model or modeling capabilities you need to solve it, the size of the problem, and the effectiveness of generic optimization approaches such as linear programming, mixed integer (linear) programming, and constraint-based programming on your problem. It also depends on what you are looking for in a solution – do you want ease of use or flexibility, low cost or (potentially) high value, off-the-shelf or customized, etc?

Generally speaking, POE is an easy-going, relatively inexpensive date while BoB is a serious, expensive commitment. However, whereas POE is only comfortable in familiar situations, BoB can adapt rather well to new situations with very little effort. POE is often backed up by an extensive support group whereas BoB is a relative loner, with only a small group of close friends there to support him.

In other words, since POE is part of a package deal, the relative cost for POE’s services is usually much (much) less than the cost of BoB’s services. However, POE can generally only solve the problems that fit into the pre-defined set of models that POE comes with. In contrast, BoB can often adapt to handle new models and new variations thereof as time goes on. Since POE makes use of the services provided by third party optimization engines, POE gets better not only when the platform improves, but also when the third party services improve. On the other hand, BoB only gets better when the provider supporting BoB gets better. Since POE is generally designed to solve a small range of problems, POE’s user interface is usually customized to the problems in such a way as to make their definition easy and obvious to even the most inexperienced of analysts. On the other side of the fence, BoB, designed to handle a wide range of complex problems, is often quite difficult to use and often requires a lot of education and experience if you want optimal results.

So where do you start? I’d recommend listening to the advice of POP, Practiced Optimization Practicioner who knows that the majority of your optimization problems in a particular area (generally between 60% and 80%) can usually be approximated very well and solved near-optimally by POE and that POE is an easier, quicker, cheaper entry point into optimization than often anti-social BoB. Therefore, you should start with POE on the problems that POE is most suited for, get comfortable with optimization, and get some quick hits. Once you understand optimization, you can then dive in on your more complex problems and determine whether or not you can use POE, the kind of results you can expect, and whether or not you should bring in heavy hitting BoB to tackle those problems POE can not handle, or may not do well on.

In the future, I think you’ll see the market leaders using both solutions – POE for most of their day-to-day sourcing problems, but BoB for complicated make-or-buy, logistics heavy, or non-standard sourcing-allocation problems where large amounts of savings are there for the taking. (Large being the key decision factor on whether or not you engage BoB, since BoB can easily be 10 times as expensive as POE and you need to approach everything from a value-based ROI perspective.) This means that companies like Iasta (POE) and CombineNet (BoB) should both have a very bright future, since I predict that Iasta’s forthcoming Decision Optimization 2.0 offering will be best-of-breed in its category (on-demand integrated strategic sourcing optimization) and CombineNet is already best-of-breed in many ways in its category (stand-alone logistics, multi-variate make-buy decisions, and non-standard complex-sourcing).

For a more in-depth discussion of decision optimization, what it is, what it is not, how it enables decision support, the benefits it provides, and strategies for success, see the “Strategic Sourcing Decision Optimization: The Inefficiency Eliminator” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].