Monthly Archives: October 2011

Knowledge Based Sourcing V – The Verdict

This week examined Knowledge Based Sourcing, Booz Allen’s entrant into the Next Level Arena. Described as a competency consisting of a set of powerful techniques used to identify high impact value drivers that result in increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, and gain an ongoing business advantage, KBS turns out to be a sourcing paradigm largely based on advanced cost modelling and associated analytical techniques.

Since advanced cost modelling is a solid foundation for both strategic sourcing decision optimization and spend analysis, KBS is a good foundation for any sourcing effort, but does it go far enough to truly be a next level supply management paradigm? Let’s look at some of the key tenets of the other entrants into the Arena.

  • High Definition Sourcing (HDS)
    Category Excellence. Adoption. Stakeholder Partnership. Decision Monitoring. BI Focus.
  • Value Focussed Supply (VFS)
    Working Capital Optimization. Revenue Enhancement. Corporate Reputation Protection. Increased Supplier/Customer/Stakeholder Loyalty. Strategic Advantage. Intellectual Capital. Sustainable Value Chain.
  • Next Level Supply Management (NLSM)
    Leadership. Transformation. Corporate Finance Focus. Talent Management. Collaboration. Energy Management. Idealized Design. (Lean) Supplier Development. Complexity Reduction. Working Capital Management. Early Involvement.
  • Next Practices (NP)
    Talent Management. Adoption. Execution. Implementation. Optimization. Utilization. Customer Value Focus. Risk Focus. Mind Share. Information. Alignment.
  • Supply Management Transformation (SMT)
    Innovation.
  • Supply Chain Leverage (SCL)
    Value Creation Framework. Market share. Diversification. Productivity. Tax Effectiveness. Demand Management. Lean.

Hmmm. While most of these start with a foundation of modelling and cost management, that’s as far as the similarity goes. In most of these models, modelling to understand current costs is simply the first step on the path to category excellence, revenue enhancement, working capital optimization, or customer value improvement. It is not an end in and of itself. Furthermore, most of these next generation methodologies start with TVM (Total Value Management), realizing that TCO doesn’t go far enough for most categories — and KBS seems quite content with TCO.

Verdict? While KBS might last a few rounds against SMT, against HDS, VFS, NLSM, NP, and SCL, it wouldn’t last three rounds before getting KO’d. I guess it’s time for Booz Allen to update their model!

Do You Know Your Legal Risk In An Acquisition?

Chief Executive just ran a great article on “how to evaluate legal risk in acquisitions” that I believe is a must read for any Supply Management department asked to consult on a Merger or Acquisition. Especially since, like the article states, it is nearly impossible to find a company not involved in some sort of litigation. The traditional analysis of the management team, cash flow, and market share is not enough — a risk assessment on pending litigation must also be made.

So how do you assess legal risk? The first thing you do is get an expert advisor, and a litigation manager in particular. Once you have this individual, who is an attorney with a significant business background as well as a litigation background, you work with her to evaluate the:

  • materiality of the litigation, the
  • potential for future suits, and the
  • connection between the litigation and the business plan.

The materiality is important not just from a relevancy perspective (that attempts to define the validity of the claim and the chance of success by the claimant) but from a cost perspective. If the cost of defending the litigation, regardless of expected outcome, will cost the company more than it can afford, the company will be bankrupted. The potential for future suits is also important because if the business model, or technology platform, opens the company up to other potential litigations based on equally (in) valid claims, the company could be bankrupted as it grows (and becomes a target by patent pirates). Finally, it is critically important to understand if the litigation exposes a problem with the core business model. If this is the case, and there is no easy, or at least manageable way, to correct the model, there is not only a great potential for further suits but a great potential for failure and bankruptcy.

However, if a litigation manager properly evaluates the potential for materiality and future litigation, and the connection between the litigation and the business plan, and finds no significant risks, then investors, who can make informed decisions, with a full understanding of the legal risk associated with a potential company, can confidently invest in the acquisition.

Be sure to check out the article on how to evaluate legal risk in acquisitions. It has a lot of great advice and a great case study on how a residential and commercial brokerage firm sized up the risk of an acquisition.

Knowledge Based Sourcing IV – Focus Areas

Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Tuesday’s post introduced us to the philosophy of the KBS approach that is focussed on gaining an increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, to gain an ongoing business advantage. This philosophy revolves around a four-step continuous improvement cycle that starts, and ends, with Cost Model Generation. Yesterday’s post described the cost modelling process in detail. Today’s post will conclude our series on Knowledge Based Sourcing by describing some of the focus areas of Knowledge Based Sourcing.

As per Booz Allen’s recent article in SIG on “Achieving Greater Impact Through Advanced Sourcing Approaches”, Knowledge Based Sourcing is focussed on developing a deep contextual and analytical understanding of several critical areas associated with the spend category, including:

  • Supply market economics and cost drivers,
  • Drivers of price in the supply market (beyond costs),
  • Variation in supplier capabilities and cost structure (and its drivers),
  • Spend category economics, including internal usage economics as well as cost/performance trade-offs, and
  • Spend category impact on broader business objectives.

An understanding of these areas is critical because:

  • without an understanding of cost drivers, the true sources of cost can never be attacked,
  • without an understanding of costs beyond raw materials, processes can never be improved,
  • without an understanding of variation in supplier capabilities, it will be difficult to determine which suppliers are high performers and which suppliers are low performers,
  • each spend category has its own distinct cost drivers, and
  • controlling cost is only one component of the overall value equation — and the customer wants value.

Furthermore, the most appropriate spend categories for KBS are those with:

  • highly volatile market prices,
  • a large number of component inputs,
  • highly variable product specifications,
  • large fixed costs in production process,
  • scale and utilization cost sensitivity, and/or
  • complex multi-tiered supply chains.

These categories are typically tackled with:

  • Industry value chain analysis,
  • Analysis of supply-demand dynamics,
  • Production process mapping,
  • Bottom up cost build up — by component, plant or supplier,
  • Parametric modelling and regression analysis,
  • Comparative factor cost analysis across suppliers and locations,
  • Analysis of scale and utilization impact on costs, and
  • other advanced analytical techniques.

And the end result is that insights beyond price materialize, including:

  • the identification of cost-advantaged suppliers,
  • the identification of appropriate order quantities,
  • the identification of trade-offs between cost and product performance, and
  • improved transparency of underlying cost drivers that drive “win-win” outcomes.

And in the end, not only does the Supply Management organization get price under control, but it is better able to support strategic business objectives which gives it stronger positioning and credibility within the organization as a whole.

Want More C-Suite Support? Change Your Message!

Cost Reduction and Value Enhancement are important messages, but if the CEO/CFO aren’t smart enough to understand the message, or don’t believe the message, start by focussing on their vanity. Specifically, as this recent CPO Agenda article on “the multiplier effect” points out, a CPO should focus on how the CEO and CFO can use Supply Management as a growth and career-enhancement ‘lever’. Money saved through the traditional tactics of aggregation, rationalization, negotiation, and optimization — core tools in the Supply Management toolkit — drastically increases profitability. And since increased earnings lead to market rewards, the CEO and CFO can look forward to accolades, and commiserate rewards, in their annual review. With little effort on their part.

Remember to point out that, without solid supply management, the company will be giving away 30 cents on every dollar that it could be keeping, and using to fund market expansion efforts in developing economies. Expansion efforts that will be key to continued corporate success given the stagnant sales environment in most of the developed economies. So appeal to their vanity. The important thing right now is to get the support the organization needs to take its supply management to the next level.

Knowledge Based Sourcing III – The Cost Modelling Process

Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Yesterday’s post introduced us to the philosophy of the KBS approach that is focussed on gaining an increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, to gain an ongoing business advantage. This philosophy revolved around a four-step continuous improvement cycle that started, and ended, with Cost Model Generation.

Today’s post is going to drive into the five-step process that is used to generate the cost models that drive Knowledge Based Sourcing.

  1. Engage Suppliers
    Introduce them to the KBS methodology that will be used to drive the supply management process going forward. Explain the benefits to both sides and review the promises that KBS makes to the supply base. Make sure they know that the goal is to reduce underlying cost (driver)s, not their profit, and provide continual advantages to all parties going forward.
  2. Collect Cost Information
    Start with conference calls to validate cost component templates and starting costs. Follow-up with on-site visits to validate general ledger information and confirm cost information with controller/CFO.
  3. Develop Starting Cost Models
    Detail component raw materials and processes required to build the product from the component level upward. Then identify a best-in-class cost structure and operational model based on market research. Finally, evaluate impact of cost drivers and fine-tune the model appropriately.
  4. Calibrate Cost Models
    Test the sensitivity of critical assumptions, internal demand scenarios, and cost models against current products. Include other TCO/TVM parameters as appropriate (to account for defects, brand power, etc.) and fine-tune the model(s) as appropriate.
  5. Communicate Gaps
    For each supplier, provide cost element performance breakdown detail, focussing on those areas where the supplier is weakest. Classify the savings opportunity based on projected spend/volume, and then work with the supplier(s) to create collaborative action plans to close the gap.

Once the gaps are identified, the Supply Management department works with the supplier to reduce costs. This often involves the identification of appropriate lean manufacturing techniques to decrease setup time, reduce process steps, reduce delays between process steps, reduce variation, reduce manufacturing footprint, and reduce lead-time while increasing quality and reliability (as this decreases defect rates and return costs).

It’s a solid process, and correctly applied, will yield solid results.