Monthly Archives: July 2009

Reducing the Footprint of Your Supply Chain EcoSystem

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A recent article in Industry Week contained an interview with Christian Verstraete, the CTO of Worldwide Manufacturing & Distribution Industries of Hewlett Packard Co. who is pushing the lean frontier to see “how it can be incorporated into the wider view of the complete ecosystem”. This is because companies must have a handle on risk management and mitigation across the supply chain while simultaneously reducing the variants. Rather than do Six Sigma within the company, do Six Sigma across the supply chain“.

HP, which actively models proposed changes to its supply chain in modern simulation software before making any significant changes that could have (significant) repercussions, won Wal-Mart’s 2008 Home Entertainment Design Challenge which revolved around reducing the amount of packaging material in an effort to be environmentally responsible. HP was able to design one package to meet shipping needs for PCs and laptops from China or Thailand that reduced shipping material by 97%.

While the article was short, Christian did make one very good point … a company is a community of human beings and everyone is responsible for doing their part. And today, that means being socially responsible. So before you make a new (global) sourcing decision that’s going to require significant changes to your supply chain, when you’re running that Total Value Model, be sure to take into account the carbon footprint as well. It might not be a very valuable decision after all, especially once carbon credits become mandatory.

Plugging the Leaks in Your Contracts that Erode Your Savings

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A recent article in the CPO Agenda on how to “keep the value attached to your contracts” started of by noting that purchasers and suppliers are often disappointed by the results of strategic sourcing, as over half of the negotiated savings never materialize the vast majority of the time.

Over the past year, the CPO agenda has been conducting a global study across more than 600 companies (and 800 respondents from buy-side and sell-side executives and professionals). Based on the results of this research, they have devised a number of recommendations that they believe will help procurement leaders weather the challenges of today, position themselves for success and, most importantly, plug the leaks in their contracts. And some of their recommendations are pretty good.

In a nutshell, they recommend the following:

  • focus on developing sophisticated negotiation and supply chain management strategies and capabilities
    spend consolidation and e-auctions alone don’t cut it
  • take a more collaborative approach
    over 80% found their negotiations adversarial; furthermore, those who believe they were taken advantage of operated defensively, refused to share information, focussed on compliance rather than execution, and actively looked for ways to “make up losses”
  • balance the use of competitive sourcing and bidding with negotiation strategies that are more collaborative, fair and sustainable
    63% of the top performing buy-side study participants described their negotiations as collaborative
  • effective preparation is key
    leverage in negotiations is largely a matter of perception and structural factors have far less impacts on leverage than effective preparation
  • systematically assess leverage from multiple angles
    it’s just as important to understand your trading partner’s business model and strategy as it is to understand your own
  • take a structured approach to negotiations
    67% of top performers characterize their negotiations as structured and predictable while 69% of bottom performers characterize their negotiations as unstructured and unpredictable
  • adopt a formal supplier relationship management program
    organizations with these programs were found to realize 17% more value from their strategic sourcing efforts
  • align your internal stakeholders
    lack of internal stakeholder alignment was consistently touted as a top barrier to success
  • involve business and technical stakeholders
    a lack of involvement leads to internal stakeholders, and suppliers, trying to work around procurement processes and policies

Good advice. For more, see the article.

Remember The Three Key Objectives of Supply Chain Risk Management

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As emphasized in an article in Industry Week from last fall on “Supply Chain Risk Management”, from a risk manager’s point of view, the following are the three key objectives of an effective supply chain risk management strategy:

  • identify and prioritize critical business elements,
  • map the entire supply chain to determine interdependencies, and
  • identify the potential failure points along the chain.

Not only is it important to keep these objectives in mind as you are analyzing your current supply chain for risks, especially those that could result from the failure of one or more suppliers or logistics providers, but it is doubly important to keep them in mind when you start re-evaluating your global sourcing strategy in the forthcoming upswing. Otherwise, you could make decisions that will put you right back where you are today when the next inevitable downswing rears its ugly head.

Myths and Realities of Services Procurement

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A recent article in the Supply Chain Management Review did a good job exposing some of the myths, and realities, of service procurement.

Myth: You can manage costs through RFPs.
Reality: Sourcing is only the beginning. Over half of all negotiated savings can be leaked during Procurement.
Negotiated savings aren’t realized until a transaction occurs … and they only happen if you pay the right price for the right quantity of the right product at the right time. That’s why you need a good e-Procurement system and someone monitoring all the alerts and running queries and random spend analysis-based audits monthly (for what can’t be caught automatically).

Myth: Managing services spend is complicated and expensive.
Reality: It’s never been easier … and it was never hard to begin with if you approached it properly.
If you know what you’re doing, have a checklist, and have a solution that supports that checklist, it’s a breeze. If a pre-surgery checklist can cut serious complications by over 35% and inpatient deaths by over 40% (Vitabeat.com), imagine what a good solution can do for something, like transaction management, that is a lot simpler!

Myth: It’s just temp labour … let HR handle it.
Reality: Most businesses start with temp labour, but there’s also marketing, legal, and other areas to address.
And don’t forget about print spend, which often presents one of the biggest savings opportunities, at least percentage wise.

Myth: If you build a system, your staff will use it.
Reality: Users find a way around any system they don’t like.
At a minimum, any system you intend to use to manage services spend must include:

  • A consumer-like user interface and requisition process.
  • Single sign-on for any purchase request, goods or services.
  • Visibility into the status of all orders that are in process by the user.

Myth: The best way to cut costs is to cut services.
Reality: It’s sometimes the worst way … the best way to achieve a significant cost reduction is to employ effective spend management practices.
Maverick buying is often the biggest loss of spend in your organization, and the reason that over 50% of negotiated savings are never realized. Manage the spend, and savings will materialize almost instantaneously.

Myth: Any e-Procurement solution can handle services.
Reality: Most e-Procurement solutions were not designed for services.
While you can fit a square peg into a round hole if you trim it down and force it … it’s not always the best idea. Especially when there are solutions defined specifically for services procurement.

Myth: Services are unique …we need point solutions for each one.
Reality: Any service solution should be part of an overall strategy … and some solutions are built to handle multiple types of services.
Multiple solutions can create more chaos, not less.

Myth: Vendor-funded software is Free!
Reality: The hidden costs of vendor-funded software could bankrupt your supplier.
Every time you use a vendor funded solution, you’re costing the vendor money. That means they have two choices, raise their prices to you to cover the cost, or take the hit in hopes that they’ll make it up on volume, which they never do, and this approach, ultimately, takes them closer to bankruptcy than to profit.

Your Manufacturing Supply Chain is Filled with Waste

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If your supply chain is misaligned, as per a recent AT Kearney white paper on “Aligning the Misaligned Supply Chain”, it’s probably filled with waste that might include, but not be limited to:

  • excess buffer capacity built into the system,
  • overtime and suboptimal changeovers,
  • too much safety stock,
  • excess inventory to keep the lines running, and
  • line shut down.

Of course, all of this costs you money and, if things are really bad, a lot of money. More specifically, if your supply chain is misaligned, once you fix it, you can realistically expect a 20% reduction in costs. Furthermore, you’ll require less capital up front, produce higher quality products (as suboptimal changeovers decrease quality and increase errors), improve service levels (as your service will be more predictable), understand true demand, and improve the overall visibility of total supply chain cost.

More specifically, better alignment will:

  • improve asset utilization (and reduce costs 6%),
  • reduce overtime (and reduce costs 5%),
  • increase utilization of transportation cubes (and reduce costs 5%),
  • decrease expedited shipments (and reduce costs 3%), and
  • reduce inventory levels (and reduce costs 3%).

And, like it has done for Toyota many times, it might even keep you in business. Why? How? Check out the white paper and find out.