Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 16 September 2006

This is the last full weekend of the summer, and, thus, the last summer weekend series on e-Sourcing Forum. This summer we discussed, in detail, 12 topics in process and technology, management, and innovation that we hope you can use to help you design better sourcing methodologies. Today we are going to review the supply management topics.

This summer, we talked about:

• Supply Risk Management
  • I: An Introduction
  • II: Risks and the Need for Resilience
  • III: Managing Risk
• Supplier Performance Management
  • I: An Introduction
  • II: The Road to Success
  • III: Best Practices
• Center Led Procurement
  • I: An Introduction
  • II: A Center of Excellence
  • III: Best Practices
• Procurement Outsourcing
  • I: Is it right for you?
  • II: Selecting a PSP
  • III: Getting the most out of your PSP
• Cost Reduction and Avoidance
  • I: An Introduction
  • II: Metrics
  • III: Incentivize for Success!

This set of posts identified the risks in your supply chain and methods for managing them, methods for tracking and managing your supplier performance, the center-led model which is the ultimate in internal procurement organizational structure, procurement outsourcing for when an external third party purchasing organization can get better results on a set of categories than you, and methods for tracking not only cost reductions but cost avoidance, which can be used to accurately measure your performance.

We defined supply chain risk as the potential loss resulting from a variation in an expected supply chain outcome – the mismatch between supply and demand – and supply risk management as the act of managing supply risk. Supply risk management is important because 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. Furthermore, 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.

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. In order to effectively mitigate risk, prevent deviations, and effectively manage disruptions when they occur and maintain profitability and effective operations, your organization needs to be resilient to predictable and recoverable supply chain risks.

The best way to manage these risks is to adopt a flexible culture, employ proven methodologies (which include the classic strategies of dual sourcing and lining up distribution alternatives and the modern strategies of production versatility, concurrent processes, and decision postponement), and align your risk-mitigating sourcing strategies with your supply base management strategies.

Of course, even a risk management strategy worth its weight in gold cannot compensate for a poorly performing supplier, which is why supplier performance management, the process of measuring, analyzing, and managing the performance of a supplier organization in an effort to cut costs, alleviate risk, and drive continuous improvement, is so important.

After all, when you consider 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.

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, which I abbreviate: connect, coordinate, check, control, 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.

Successful supplier performance management is also built on best practices. In our weekend series, we defined eight best practices that we felt were key to your success:

• Collaboration: Open Communication and Data Sharing
• Strategic Supplier Selection
• Mutually Defined Performance Targets and Metrics
• Continual Scorecarding
• Proactive Supply Chain Monitoring
• Cross-Functional Problem Resolution
• Supplier-based Control Points
• Predictive Analytics and KPIs

Center Led Procurement is a procurement organization model where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization. The center led model of procurement gives you all of the advantages of more traditional centralized and decentralized procurement organization models with minimal disadvantages.

The center led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. You increase operational efficiencies and decrease overall operational costs while maintaining the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.

A recent study from Aberdeen Group demonstrated that organizations with center led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management.

Our weekend series also covered some of the best practices for your center-of-excellence led procurement organization. These best practices were:

• Led by a Chief Purchasing/Supply Chain Officer on the executive team
• Cross Functional Teams
• Multi-Year Supply Plans
• Coordinated Metrics and Improvements
• Web-Based Automation and Decision Support Tools
• Ongoing Education
• Speak to your supplier community with a central voice

As an organization, you will find that your performance on some categories is significantly better than your performance on others. Specifically, you will probably see better results on high volume categories in your areas of expertise. However, with strategic use of procurement outsourcing, it is possible to see the same level of results across the board. In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.

Procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party. You should consider it because it is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably than those who do not. You should consider outsourcing indirect or non-critical spend, the management of processes such as requisitioning and compliance tracking, and other competencies that are not core to your business.

It also has a side benefit of contributing to the happiness of your top performers. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.

Finally, once you have revolutionized your procurement organization under the center-led model, implemented risk management strategies, improved your average supplier performance level, and outsourced non-core competencies for increased savings, you need to quantify the results and aggressively market yourself as the heart of the organization. In order to do this, you need to recognize both hard and soft cost reductions. Although a significant amount of focus is on cost reduction, a great deal of supply management effort is on cost avoidance, and with rapid inflation in many key energy and raw material categories, avoiding significant cost increases when average market costs are skyrocketing are just as important as reducing spend in non-inflationary categories. The quantification of cost reduction may be challenging, but it is doable. You can use standard market indexes to determine the inflation since the last sourcing cycle and any increase over the last sourcing cycle that is less than the rate of inflation is still a success.