Monthly Archives: May 2011

Cost Reduction Success Requires More Than a Reverse Auction

As more and more companies have found out over the past few years, it takes more than a well-structured reverse auction to cut costs, especially during a recession. If your organization is not yet a next level supply management organization, here are a few tips to get you on your way.

Understand the Need
The current market environment is to do more, and grow more, but spend less. It’s an economic paradox, but it’s the reality for the time being. As a result, any company that fails to achieve continual cost reductions might find themselves the next victim of the jobless recovery.

Accept the Reality
Despite what South Park might suggest, it is not possible for an entire company to bury its head in the sand to get through some trying times. Nor is it possible to ignore the need for continual cost reductions even if there are no obvious “low hanging fruit” opportunities left to pick.

Negotiation is Not Enough
The days of yelling, table banging, and threatening to take the business elsewhere are long gone. Margins are tight across the board and no supplier is going to risk survival for a customer who may, or may not, be around next year. A moden organization needs a number of tools at their disposal, including good spend analysis and e-Negotiation solutions.

Make The Business Case (to be a Technolgy Ace)
Given the do more but spend less mantra, the C-Suite will probably want Procurement to get by with whatever tools they have now, even if those tools aren’t more powerful than a pencil, paper, and abacus. Fortunately, numerous studies exist documenting the ROI of Spend Analysis and Decision Optimization solutions that prove that these two solutions, on average, each deliver a year-over-year return of over 10% (and are the only e-Sourcing solutions that fall in that category). Thus, if Procurement focusses on Spend Analysis (to identify its most profitable opportunities in the short-term and the long-term) and an e-Negotiation suite that contains Decision Optimization (in addition to modern RFx and e-Auction technology), it has a lot of ammunition.

Focus on Erosion of Savings
Generally, 40% (or more) of negotiated savings in an average organization are never realized due to maverick spending and non-compliance on the part of the supplier. Implement e-Procurement policies and solutions that can ( a) prevent the approval of POs to non-contracted suppliers without appropriate executive sign-off and ( b) automatically m-way match each invoice to goods receipts and purchase orders (verified to be at contracted rates) and prevent payments until all items have been delivered and billed at contracted rates. While not perfect, as there will always be emergencies that require off-contract spend, such a solution will get an average organization from 60% to 90% compliance, and if the negotiated savings was 10%, increase implemented savings by 50%, which is a substantial amount on a multi-million category.

Work as an Interdisciplinary Team
It’s important to work with the joint S&OP team to insure negotiations, and buys, are based on good forecasts and with engineering to not only make sure the raw materials and component parts but to help them, during NPD, select alternate sources of supply that can reduce costs from step one.

Communicate, Communicate, Communicate
Procurement requirements change everyday, and if the organization is buying last year’s materials on last year’s forecasts, one can be sure that opportunities for savings are lost.

Is China Hampering Its Own Growth?

A recent article over on SupplyManagement.com on how “US firms [are] criticising ‘unclear’ Chinese purchasing rules”, just like their “EU counterparts did last month”, had a fairly shocking number: the EU states that inconsistent and poorly implemented legislation caused China to miss out on 1 Trillion of new Business. In other words, it missed out on business equal to 20% of its GDP! For a country that is obviously seeking to regain global dominance, that’s a lot to lose out on.

The blame is being placed on government procurement policies that favour domestic or “indigenous innvation” and the need for foreign firms to transfer IP, licenses, or technology to domestic firms to win business, a requirement looked upon very unfavourably by western firms. And while China may argue strongly for the “protectionist rule”, just like certain American politicians argue strongly for the Buy American provisions in the recent stimulus bill and the Buy American Act passed in 1933, there is a price to be paid. Every dollar of foreign investment that is deterred to another country in the BRIC keeps them one step further from GDP dominance and every opportunity missed to use a foreign firm makes it that much harder for them to get their hands on leading innovations from around the world.

It’s their country, their choice, and a tough call either way with two thirds of their country still considered poor by global (world bank) standards.

Advantages of Home Country Sourcing

In some industries, the US is now a low-cost country due to high transit costs, rising low-cost country labor costs, and high productivity when compared to certain low-cost and emerging economies. As a result, it is not only making sense to pull manufacturing back from China to Mexico for many North American operations, but to also pull manufacturing back to the US. Why is this? In a nutshell:

  • Lower Freight Costs
    With oil rices back to $100 a barrel and rising again, the cost of ocean freight is climbing again, transportation and logistics providers are slapping fuel surcharges on your invoices again, and air is out of the question for anything but high-value, high-density, short life-span goods (like laptops and smartphones).
  • High Speed-to-Market Times
    Insetad of waiting an averge of 3 weeks for the container ship to come in, you’re generally at most 3 days, by road, to get your product from your DC to your most remote store or customer location.
  • Lower Inventory Times
    No need to have product in intermediate warehouses waiting for enough product to fill a TEU or to carry a month (or more) worth of safety stock in the event that an ocean shipment is lost or a supplier misses a ship date.
  • Time Zone Advantages
    Follow-the-sun might be good for service operations, but it’s not good for managers who have to quote production in multiple time zones, work twelve hours a day, and never get enough sleep.
  • Lower Labor Costs per Unit
    A modern factory with a significant amount of automation and highly skilled workers can produce more units per worker hour than an off-shore factory that is only patially automated and run by poorly educated low-skilled workers. So even though the workes might be making 15 – 25 an hour compared to the 3 – 5 an hour, US, that you’d be paying a foreign worker, if they can crank out 5 – 10 times as many units per worker hour, it’s actually cheaper to produce at home. And in many US small towns hit hard by the recessions in recent years, labour really isn’t that expensive to begin with — and loyalty is higher than bustling India industrial centers where your workers leave as soon as a job across the street where they can get 5% more opens up.
  • No Culture Clashes
    If an organization has a low CQ (cultural quotient), working with offshore teams can be a challenge and overall efficiency can be low, and if the organization is not selling its products and services abroad, it’s sometimes not worth the effort to manuacture offshore.
  • Low-Cost Factory Repair
    If the product is complex or requires specialized machinery to repair, that is typically only available on a factory floor, and the factory is half a world away, chances are that a faulty product is just going to end up in the trash and increase overall costs. But if the product can be cheaply shipped back to the factory, chances are it will get repaired or refurbished, and losses will be minimized.

Apple Dominates The Portables Market Because

Apple dominates the supply chain. While Sony and RIM had to delay products, Apple trucked ahead with the iPad2 right on time, and even though the backlog was a little bigger than they expected, they’re still doing fine. But how can you argue with over 60 Billion in Cash? Especially when “Apple could survive on current cash alone until 2018” (TUAW.com).

And that’s another reason why your company needs to be a supply chain leader.

McKinsey’s Seven Steps to Better Brainstorming

How do you generate better and more creative ideas for innovation, CI (Continuous Improvement), and BPR (Business Process Re-Engineering)? According to the McKinsey Quarterly, you need “better brainstorming” instead of the familiar brainstorming process where the company brings in an outside moderator who knows little about the business and offers little motivation to the employees who do not think that the session is a good use of time.

This process, that the authors call “brainsteering”, is a more advanced form of brainstorming that requires more preparation, the ability to leverage how people typically think, and the leadership to steer the energy wasted in a typical brainstorming session into a productive direction. The preparation starts with the following seven steps:

  1. Know Your Organization’s Decision Making Criteria
    It’s useless to think outside the box if the organizational policies create boxes that cannot be escaped. Make sure any absolute criteria are known and outlined in advance. This allows participants to avoid wasting time on ideas that will not be accepted and makes for a more productive session.
  2. Ask the Right Questions
    Decades of research has shown that traditional, loosely structured brainstorming techniques, are inferior to approaches that provide (some) structure. One of the best techniques is to use (well-designed) questions as the platform for idea generation. The “right” questions, of which there should be about one per person, are those that force participants to take a new, unfamiliar perspective while still limiting the conceptual space the team will explore (to the organizational box of the first step).
  3. Choose the Right People
    Specifically, pick people, with “in the trenches” knowledge, who can likely answer the questions you’re asking. Don’t bring an MBA to help you with CI on the NPD process for electronic component design.
  4. Divide and Conquer
    Conduct multiple, discreet, highly-focused idea generation sessions among subgroups of 3-5 people that focus on a single question, or a small set of related questions, being sure to isolate “idea crushers” in their own subgroup. This will ensure that everyone speaks up and contributes.
  5. On Your Mark, Get Set, Go!
    Before you break the participants into subgroups and set them off, take the time to clearly explain your expectations, which revolve around a deeper consideration of key questions than traditional brainstorming sessions. Explain that, given the restrictions, a group may only generate two or three worthy ideas and that any ideas outside the scope of the current discussion should be written down and saved for the appropriate time.
  6. Wrap it Up
    While each subgroup should share all of its leading ideas with the entire group to motivate and inspire participants, the group shouldn’t pick a winner. Since the participants won’t always have the executive-level or subject matter expert understanding of the criteria and considerations that must go into prioritizing ideas, picking winners is not a fruitful exercise. Instead, describe what steps the organization will use to pick the winners and how, and when, the winning ideas will be announced.
  7. Follow Up Quickly
    Decisions and announcements should be quick and thorough. Team members won’t be demoralized if their idea wasn’t chosen, instead, their morale will be increased when they get feedback as to why the winner was picked that they can use to generate better ideas next time.

Some of these steps contain some good advice, and the McKinsey Quarterly article on “seven steps to better brainstorming” contains some great examples. Check it out.