Monthly Archives: April 2008

Supplier Metrics that Matter

With skyrocketing costs and stagnant growth, performance is becoming ever more important to your supply chain. But how do you insure you get it? You start with measurements – against good metrics. Today we’re going to tackle supplier metrics.

Back in the fall of 2005, CPO Agenda ran an article titled “Supplier Metrics that Matter” that contained some good advice for developing good supplier metrics – including the following checklist that needs to be highlighted and expanded upon.

  1. Measure
    Specifically, measure what is important – not just what’s easy. For example, prompt invoice delivery is easy to measure, but what’s important is invoice accuracy.
  2. Develop and Utilize
    Metrics and outcome measurement. Utilization is the key. If you see a performance metric dropping, dig in, find out why, engage with the supplier, jointly develop a corrective action plan, and make sure it’s followed through. Otherwise, the metric will likely continue to drop.
  3. Accept approximation
    Some critical dimensions, such as the quality of the working relationship and strategic value, will involve subjective measurements by experts. They won’t be perfect, but without any assessments, you’ll have no foundation for improvement.
  4. Embed the Metrics in your Supplier Management Processes
    This process should include a discussion of how a supplier is to interpret the metrics, how they could go about improving their performance (and becoming or staying a strategic supplier), and about how they can improve the quality of the relationship. Furthermore, this conversation should be two way and the supplier should be able to highlight processes, requirements, or directives that are prohibiting them from doing as well as they could. For an extreme example of how arbitrary directives can greatly increase cost or decrease performance, let’s take Alan Buxton’s example of why project design matters. The UK Ministry of Defence was mandating waterproof matches in boxes of 17. However, most suppliers produced these in boxes of 25 by default. In order to supply boxes of 17, the supplier had to unwrap and repackage boxes of 25 into boxes of 17 which increased costs by 300%!
  5. Jointly Define the metrics.
    This will insure that both parties understand the metrics, what the goals are, and what needs to be done to meet them. It also makes sure that the metrics match the intentions. For example, if you want to insure rapid replenishment, you shouldn’t be measuring just average delivery time, because replenishment will also require the supplier to produce the goods as well. You need to be measuring average turn-around time from the time the order is placed.
  6. Share Competitive Data
    If you want a supplier to understand how well, or poor, it is performing, you need to let it know how well it is doing with respect to its peers, in aggregate and individually. (Just be sure to cleanse the competitive data of identifying information.) If you’re telling your supplier that 93% on-time-delivery is bad, then it needs to understand that average performance is 97%, for example.
  7. Focus on Value
    Don’t define metrics for the sake of defining metrics – make sure there is an associated value to be gained by their definition. You can define a metric on everything – delivery, cycle time, invoice processing time, etc. – but if you define too many metrics, or too many metrics that don’t allow you to improve the overall value of the relationship, then you’ll get lost in the sea of data and not make much progress. Start by defining the major operational areas of importance and identifying the three to five most relevant metrics. If you get them right, you’ll likely find that they’re all you need.

Supply Risk – Seize the Initiative!

Today’s guest post is by Brian Daniels (brian <dot> daniels <at> cvmsolutions <dot> com), VP of Strategic Marketing at CVM Solutions (acquired by supplier.io), a sourcing and procurement content and application solution provider to mid-market and large enterprise companies, including half of the Fortune 500.

In 2007, North American companies began to wake up to the dangers of supply risk. From the bankruptcies of a number of “big name” tier one automotive companies to the scandals of lead painted toys and tainted eels – just to name a few items – hitting the North American shores from China, supply risk changed from theory to reality for many companies. But twelve months later, are they any better prepared to manage supply risk? In many cases, the answer is no. Many companies are just beginning to think about what putting a supply risk management program into action means. In my view, this requires stepping back from some of the news headlines to better understand the specific types of risk which could have the greatest impact on your particular organization.

For example, while quality and labor issues dominate the news when it comes to China-sourced products, in many cases, it is total cost risk and supplier performance risk which should be of greater concern for companies doing business in the region. Consider how the chance of a change in currency value or tax/tariff/import regulations could create significant risk in the savings models that led to a global sourcing decision in the first place. Perhaps the most common risk we see in global – and even local – sourcing initiatives comes down to on-time performance. To this end, on-time performance is not just when an item leaves a factory, but when it arrives at your loading dock. On a global basis, there’s a lot that could go wrong in the weeks this process takes. But in my view, building visibility into past supplier performance – including on-time delivery – is critical to predict and model future supply chain performance – both locally and globally.

Another risk many companies fail to fully consider is their suppliers’ overall financial and corporate stability. Checking a Paydex score or third party credit rating alone is insufficient to develop a complete perspective into whether or not a supplier will be able to stay in business to meet your organization’s continuing needs. Taken alone, these analyses represent a point-in-time snapshot based on information which may or may not be accurate (and timely). These approaches should never replace expert-driven analysis and the direct verification of financial and other information with your suppliers. In my view, it’s essential to conduct customized and expert financial risk assessments based on metrics which matter most to your organization prior to contracting with a supplier. Furthermore, risk assessments should be part of ongoing monitoring and risk forecasting.

In addition, if supply risk information is managed and analyzed within silos inside a procurement organization, it’s critical to insure that this information is available to the rest of the company – or at least to those individuals who need it the most – whether it is via a portal-based system that provides proactive alerts and insights to front-line managers, who can develop mitigation strategies and approaches, or some other mechanism. Some companies and providers might call this supply risk “dashboarding”, but the name is not important. The key is to make sure that these information sources provide the right level of information to the specific individuals who can make a difference if they’re brought into the supply risk loop in time to intervene before a preventable risk rears its ugly head.

Manufacturing Strategies for Controlling Costs

These days, manufacturers are purchasing more and more goods from global suppliers. As a result, manufacturers have to become more sophisticated in their analysis, more accurate in their demand forecasting, and more knowledgeable about the global marketplace and the changes it is undergoing. To this effect, a recent Industry Week article titled “Sources of Strength” attempted to outline the next generation sourcing strategy that manufacturers need to use to remain competitive.

According to the article, the first thing a manufacturer needs to do is insure that it’s processes are appropriate, that it’s goals are aligned with organizational needs, and that it’s people have the necessary skill sets.

The next thing it needs to do, as per the article, is select an e-Sourcing suite. This is not the first step because technology by itself doesn’t do anything unless you understand how to use it and how to organize and take advantage of the data it acts on. What technology does is simplify the process of sustaining benefits because it automates the process and captures decisions and data for future use.

Then, once an organization has streamlined and simplified its sourcing processes, the article indicates that it has to start collaborating with its suppliers. This is because a good relationship provides a manufacturer the opportunity to create flexibility with its suppliers and creates a means to reduce costs at each stage of the supply chain. According to Bob Derocher of Archstone Consulting, this requires selecting providers that will sit down with you and work together on continual process improvement to reduce the total cost of each purchase.

According to Bob, one of the things you see being done between manufacturers and some of their major supply partners is a focus on supply relationship management, creating a collaboration … that way, manufacturers don’t have to just demand a lower price from the supplier. If they can reduce the friction between the two companies and the effort it takes to do business together, the supplier can keep a good margin and give you a good price. Then they’re both better off, which is important because in many ways, their fates are tied together.

Furthermore, as noted by Sanjay Argawal at Deloitte Consulting, when collaboration is done right it addresses one of the biggest challenges companies have today — not having very much visibility beyond their Tier One supply base. When you form a strategic partnership with your supplier, you also get visibility into the supply chain beyond that supplier. And the more visibility you have in the supply chain, the more influence and control you’re able to have to prepare for supply disruptions“. Also, as noted by Bob, the specifications process is not just about the engineering aspects of the components, it’s also about the business relationship between the buyer and the supplier. How will the supplier deliver the product? When do you take financial ownership? How will the supplier know when to ship another batch? If you have a collaborative planning and forecasting process with the supplier, you’ll know all of that up front“.

So, re-engineer and align your processes, obtain a good e-Sourcing suite, collaborate, increase your visibility, look at the total cost – including logistics, and be lean. That’s a pretty good start. Throw in a pinch of six sigma, a pound of scrap and waste management, better energy utilization, and some smart price forecasting to insure that the contract term chosen is the right one, and a manufacturer would be ready to enter the twenty-first century in their sourcing operations.

The Splendors of Scrap

Is it just me, or has the quantity and quality of sourcing and supply-chain related articles on Industry Week significantly increased in the first quarter of this year? I just stumbled upon another great article titled “Table Scraps” that noted that enterprising thieves have figured out that scrap means money, so why does the concept still elude some manufacturers?

The article quotes Mark Ripple of BBk Ltd. that notes that Most of the time, depending on what material you’re using, some plastics can be reground and reused, and some metal can be remelted or sent back to scrap metal suppliers … but a lot of suppliers I see are still just throwing away the bulk in a dumpster.” With some metals now commanding over $2,000 an ounce (like platinum), why would anyone waste even a gram (when it would be worth over $71)?

Supposedly, the scrap is disposed either because it’s not economical to re-use it, it’s not in a reusable form, or it’s just not part of the company’s culture. So what? Sell it to someone else who can reuse it or melt it down. If there are thieves willing to raid construction sites on what seems like an almost nightly basis, or gut unguarded vacant homes for metals – there’s obviously someone willing to pay a pretty two-penny for it. (By the way, a 211 year-old British two-penny coin in very good condition would net you over $30 on e-bay.)

The fact of the matter is that scrap sales can be worth tens of millions of dollars for a large manufacturer. The article notes that Shaw Industries, who made it part of their sustainable business model eight years ago, has recovered tens of millions of dollars just on waste-brokering activities. And on the off-chance the scrap you have really is waste, you could still create a waste-to-energy facility and, if it was based on vaporization, sell the slag that is created as a by-product. There’s just no excuse for waste.

This makes me wonder when government is going to catch on and enforce mandatory recycling of all recyclable materials. Over 90% of materials that is currently ending up in landfills is easily recyclable, but is not recycled because no government wants to be the one further contributing to today’s deficit by building a 9 or 10 digit recycling facility – even though they’d make money hand over fist reselling the materials to local, and global, manufacturers. Where I live, only about half of the plastic and metal containers that pass through an average household WITH recycling grades are allowed to be included in the weekly recycling pickup. Stupid. If the state or province where you live doesn’t have a facility, it should still collect them, compact them, and ship them to the neighboring state with an appropriate plant. Now I know the transportation would contribute to greenhouse emissions, but, unless you were shipping all the way across the continent, not nearly as much as the initial refinement and initial creation of some of these metals and plastics in the first place.

This also makes me wonder why we have junkyards for cars. I know the standard response is because North America doesn’t have an equivalent of the European ELV, but considering how much the metals in those wrecks are worth today, if I were a junkyard owner, I’d be hiring summer students with lots of aggression to work out (while they were waiting for the next sports season to begin) to break them down and then sell the scrap on the global market. But then again, I’m always trying to think logically and rationally and efficiently about problems …

Web Marketer, Don’t Be Misled!

In the spirit of April Fools, I’m going to play a dirty trick on all of the web sites that play a dirty trick on you, by exposing the dirty little secrets they don’t want you to know about. (Why? Because I’m sick and tired of people believing the hype that only “hits” matter, or, more specifically, only the quantity thereof matters. I’d hoped that many of you would have heeded the wise words of The Brain, but it’s clear to me that many of you haven’t. So here it is in layman’s terms.)

A. Hit counts can be wildly inflated – with ease!

Don’t believe me? Here’s a list of ways you can increase your hit count, with very little effort on your part.

  1. Use a web analytics tool that counts every embedded link as a unique hit.
    Some analytics tools will (by default) count every unique request, which includes every image embedded with a page and every embedded page in a frame set, as a unique hit. If you go heavy on images and frames and use such a package, you’ll see your hits spike overnight!
  2. Use a third party e-mail digest service to publicize your RSS feeds.
    Most of these tools can be configured to include images and links directly from your websites, and most people use e-mail clients (like Outlook) that automatically load images in e-mails for preview, whether the emails are actually perused or not. So, lo-and-behold, multiple hits for every e-mail, even if it isn’t even read!
  3. Use paid-per-click advertising on community, link, and warez share sites.
    • Warez communities will support their favorite sites by clicking a paid-per-click link, and then ignoring whatever pops up.
    • There are link-share link-protector sites that people use to share links because they get paid for each page visit — each page includes nothing but an ad, and unless the ad is clicked on, the visitor will have to wait a minimum amount of time to get the link. However, experienced surfers will again click, close the pop-up, and continue to their link.
    • Warez sharing sites support their bandwidth costs by forcing users to click on ads — but, as above, users get very good at closing the pop-ups with hot-keys as fast as they click on the links.
  4. Include content on a popular topic, even if it’s unrelated to your site.
    Nobody wants to read about your love of teddy bears in leather jackets? No problem! Include a few pages about Britney’s love of teddy bears in leather jackets. (Of course, you risk a stern warning letter from her legal team, but you can always take the page down after your hit count skyrockets.)
  5. Allow people to comment on the ire of the day.
    Nobody is interested in a conversation about the foraging habits of lemmings? No problem. Add a post about how even lemmings won’t jump off a cliff for Vista (and be sure to include Vista in the post title), then watch your hit count, and comment count, skyrocket. (Of course, there likely won’t be a single useful comment as it will just be the gripers griping and the Microsoft plants extolling the virtues of Vista, but who cares, you got an exponential increase in hits!)
  6. Offer Free Stuff!
    Some people have nothing better to do than try to collect and win free stuff on the internet. Offering even a single free iPod to one lucky visitor during the month of May will attract a lot of hits if your offer is legit and people trust that it is.
  7. Include a web-cam feed that updates every few seconds.
    This will force part of the page to refresh every few seconds, and generate a new hit. Don’t have a web-cam? No problem. Borrow a feed from a random live public webcam somewhere on the net.
  8. Set-up a bot on your home network to automatically visit the site on a regular basis.
    And while you’re at it, if you’re like most subscribers on cable ADSL service, set up your router to drop and request a new IP address on a regular basis. Watch your hit count explode!
  9. Link-Share Mania!
    Find as many link-sharing sites as you can and trade links. Focus on those that have a “link of the day” and agree to cross-promote using your own “link of the day”. A single link-share won’t do much, but an aggressive campaign will keep a revolving door of visitors rotating in, and out, of your site.

I could go on, but this e-mail is getting long …

B. A hit from just any boor isn’t going to do you a damn bit of good.

If you’re a vendor perusing this blog, chances are you’re selling enterprise software and services – not selling CDs and DVDs to web surfers who make the occasional impulse buy. Although the same person who signs the enterprise software check might also buy the occasional CD and DVD online, 99.9997% of random web-surfers are not CFOs with check signing authority. And of the 0.0003% who are, they’re not going to click an “add to cart” and buy your product on-line. It’s not a numbers game. 100,000 clicks from boors aren’t going to result in a single lead for you, direct or indirect. Contrariwise, 10 clicks from people genuinely interested in the types of solutions you have to offer are.

Enterprise software buying decisions are made in boardrooms – where proposals from identified and subsequently qualified vendors are evaluated. Vendors aren’t even invited to submit a response to an initial RFI unless someone at the company indicates that their knowledge of the vendor leads them to believe that the vendor might be able to offer an appropriate solution.

Enterprise software buying decisions are made by busy people – many of whom don’t have a lot of time to do a lot of web surfing. These people visit a select few trusted sites every day, and only branch outside that domain when forwarded a link from a trusted colleague or subordinate – and only if they think the link will be of relevance.

C. You need consistency.

A site that employs many of the above tactics will get a lot of visitors every day, but how many of them will be repeat visitors? The age we live in should probably be called the advertising age because we’re now blasted with more ads per minute than advertisers of last century ever thought possible. A single impression of your ad is not going to be that memorable – especially when you’re selling a product that is only bought once every few years. You need to be sure that you’ll be remembered when the appropriate buying cycle comes up – which might not be for six, nine, or even eleven months if the buying window just passed. It’s going to take multiple impressions to get into a potential buyer’s long term memory – and that takes regular, repeat visits.

As you have probably figured out by now, Sourcing Innovation doesn’t play any of the hit-increasing games above. Here’s why:

  • SI is interested in not only how many visitors it gets a day, but how this number holds up over time.
    Although deploying the above tactics would get considerable short-term traffic bursts, not only would most of this traffic not come back, but it could also alienate some regular readers who constitute the very market you should care about.
  • SI wants visitors who care about sourcing and procurement and supply and spend management and want to do it better.
    Isn’t that the type of customer you want?