Initially posted on the e-Sourcing Forum [WayBackMachine] on Saturday, 1 July 2006

Q: What is TRIZ?

A: Teoriya Resheniya Izobretatelskikh Zadatch, better known as the Theory of Inventive Problem Solving, is a methodology, tool set, knowledge base, and model-based technology for generating innovative ideas and solutions for problem solving.

Q: What does it have to do with sourcing?

A: Everything, if you want it to be all that it can be!

Q: Why are we talking about it?

A: Because CPO Agenda, one of the leading publications in the space, finally ran an article on it in their Spring 2006 issue. I always knew CPO Agenda was good – but I never knew it was that good! (Without a doubt, it has earned its place on your tier 1 reading list in my book!)

The tagline for the article is that “CPOs can help their firms escape the clutches of patent-protected, monopolistic suppliers using a process called ‘invention on demand‘“, and this is most certainly true, but what it doesn’t tell you is that TRIZ is so much more. But I’m getting ahead of myself.

It points out that today’s CPOs are faced not only with big and smart and suppliers, but patent-protected suppliers who can often ask almost any price for their products since insourcing or outsourcing to another supplier is not an option thanks to the patent(s). And that these CPOs are just not willing to accept patent-protected suppliers as a way of life.

They are employing an approach called “invention on demand“, an advanced version of TRIZ to combat lock-in to patent-protected suppliers. Invention on demand extends the benefits of TRIZ from component-level mechanical engineering problems to system level problems in general, be they mechanical, electrical, electronic, or even pure software. The goal is not incremental product improvement, but the creation of a completely new product that can replace the predecessor product without giving the incumbent supplier any leverage to claim intellectual ownership.

The basis for the approach is the fact that over 90% of the problems faced by engineers have been solved before – somewhere. The founder of TRIZ, Genrich Altshuller, screened over 200,000 patents looking for inventive solutions to the problems the patents were addressing. He found that only 40,000, or 20%, had somewhat inventive solutions. (As of today, followers of the methodology have screened 10 times this many patents with the same results.) He then categorized these in a five level system according to degree of inventiveness, a 1 being an apparent solution, a 2 being a minor improvement, a 3 being a major improvement, a 4 being a new concept, and a 5 being a revolutionary discovery. Only 4% of solutions contained a new concept and only 1% a revolutionary discovery. This indicates that, in general, less then 1% of patents will actually contain a new concept, and our estimate of over 90% of all problems being solved before – somewhere – is probably very low and quite safe.

The problem solving model is based on four key steps:

1. evaluate a specific problem
2. translate the specific problem into a general (scientific) problem
3. search for general (scientific) solutions
4. translate the appropriate solutions into specific solutions

This allows standard solutions and processes to be reused across disciplines, a hydraulic problem may be solved with a mechanical solution, a mechanical problem may be solved with a software solution, and a software problem may be solved with an electrical solution, for example.

In the first step, the system is broken down into its smallest elements and the functional relationships between the elements are established (and usually represented graphically). Each element is assigned a “function rank” that quantifies its importance or usefulness according to its distance from the central output and the number of useful tasks it performs.

In the second step, key elements of the system, typically those that are the basis of the patent protected offering you are trying to replace, are “trimmed”. This results in contradictions (general scientific problems), which define the goal of the endeavor – how to provide the necessary functions of the trimmed element without the presence of the element.

In the third step, the contradictions are conceptually resolved by experts in the scientific process from various fields that use general scientific solutions. For each trimmed element, there may be a number of ideas, many rather exotic, on how to transfer the required functions to the remaining elements.

Finally, the conceptual solutions are explored and those that are feasible are developed into specific engineering solutions. (For more examples of general problem solving methods that can be applied in the last two steps, see my Problem Solving Series.

The example CPO Agenda provides is that of a yoghurt drink manufacturer that is locked into a supplier that produces the specialized flavored syrups. Following this process, in the first phase the invention-on-demand team would identify the components of the system as the container, the lid, a straw, the plain yoghurt, and the flavor syrup. They would then trim the flavor syrup in the second step and generate the contradiction – how do you provide flavor to the plain yoghurt with just the container, lid, and the straw. In the third step, the conceptual directions of incorporating flavor into the container or straw would be identified. In the fourth step, the team would decide that “teaching” the straw to release flavor when the drink is consumed is the best direction and work on identifying the right time release technology.

Once the specific solution is fully identified, it is patented and the company is free to then either produce the new product internally, license the technology to a preferred supplier in a partnership arrangement, or use the patent(s) as leverage in negotiations with the incumbent supplier, who will often come around if the company is a major customer.

Furthermore, as CPO Agenda points out, invention on demand can do more for a company then just improve terms from a patent-protected supplier or bypass it altogether. “It can replace expensive components with cheaper ones. It can generate product improvements in combination with target costing. It can be applied to any technical problem, whether for reasons of technical improvements, the value-price ratio, or both.”

The process as a whole can considerably boost a company’s performance. As an example, CPO Agenda points out the Korean conglomerate Samsung where TRIZ has become part of Samsung’s culture. In 2000, Samsung’s market capitalization was less then a quarter of Sony’s. Today, it is almost double.

And it’s not restricted to technical problems. You can also apply it to your processes. It will help you weed out unnecessary steps and components and focus in on the key steps and component tasks. These refined processes can them be implemented to save even more time and money for your organization. Invention on Demand, and the TRIZ foundations it is based on, is one of the few generic problem solving approaches ever developed that actually works, and works well, in practice across a wide variety of problems. Getting to know it is worth the effort.

Some good starting points are the Wikipedia definition, Glenn Mazur’s page, and the TRIZ Journal. Happy reading!

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For more ideas on how to innovate your purchasing – and your sourcing – see the “Next Generation Sourcing” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Initially posted on the e-Sourcing Forum [WayBackMachine] on Friday, 30 June 2006

I liked the recent article on SupplyManagement.com entitled “What’s the Big deal?” that quoted Professor John Bessant who stated “Purchasing has an essential role to play in triggering innovation” because that’s precisely what I believe. After all, I did start the Sourcing Innovation blog.

Today, the companies that make the giant leaps forward and stay ahead of the game are those that are continually innovating. Furthermore, as the global marketplace gets more competitive, I believe that the only way most companies will survive is through innovation. But innovation doesn’t always come naturally. Fortunately there are methodologies that one can use to increase the odds.

This article in particular overviews a number of basic approaches that Professor Bessant believes in which include “doing what you do, but better“, “discontinuous innovation“, and “thinking caps“.

The first approach, “doing what you do, but better“, involves using established relationships more effectively. Your suppliers should be innovating with you and become an extension of what you do. The article notes that even businesses with billion-pound research spend (or approximately 1.25 billion US at recent exchange rates), such as P&G, now source half their innovation from outside. The reality is that you only have a limited number of people, a fixed amount of resources, and an ever-shortening window of time to get a product out or miss the window of opportunity. As a former techie, I can tell you that some of the greatest product ideas come from the minds of technology users, not developers. Left to their own devices, many developers will work on products that are technically challenging or “cool”, but not that useful. But the developers that listen to people on the outside who say “if only I had a tool that would help me …” create the greatest products.

The second approach, “discontinuous innovation“, where you brave the unknown, think the unthinkable, and explore the frontier where you might lose some of your glorious history and do something completely different, involves spending time making different connections and building relationships with different people outside your core strengths. The harsh reality is that every so often “something pulls the carpet out from underneath everybody’s feet – all the bets are off and it’s a new game“. Maybe it’s a radical new technology, maybe a new market just emerged, or maybe oil shot up in price again. The companies that survive this turmoil are those ready to make the leap and exist at the new frontier. We can again look to the technology sector for examples. IBM, once one of the biggest producers of computer hardware, now makes 50% more on its services then its hardware. (In fact, its services were 47% of revenue in 2005.)

The third approach, “thinking caps“, involves bringing together a dedicated interdisciplinary team to explore different methodologies for “doing what you do, but better” and “discontinuous innovation” while maintaining a balanced outlook. The challenge is to find partnerships that come with relationships that work for you. This is where Professor Bessant sees a role for purchasing managers as this should be part of their fundamental skill set. I agree, regardless of whether your preferred term is “purchasing manager” or “sourcing professional”.

However, these are not the only approaches that exist for innovation. Over the summer, in a collection of 3-part series, I will be exploring different generic methodologies that you can use for jumpstarting the innovation process. I will also outline the role that I see for Sourcing – the next generation of Purchasing – in the brave new global marketplace that we are entering even as you read this. Stay tuned.

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For more ideas on how to innovate your purchasing – and your sourcing – see the “Next Generation Sourcing” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

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.