Yesterday’s post introduced us to Knowledge Based Sourcing, the Next Level Supply Management proposal put forward by Booz Allen as its entry into the Next Level Ring. 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, Knowledge Based Sourcing (KBS) is defined by its characteristics, which were reviewed in detail in yesterday’s post.

Today’s post is going to discuss the basic philosophy of Knowledge-Based Sourcing, which is a simple, four-step continuous improvement cycle:

• Cost Model Generation
  a detailed cost model that captures the majority of component costs, including all of the cost drivers
• Gap Identification
  which identifies where costs are higher than they should be based on raw material costs, realistic production costs, and market averages
• Gap Closure Plan
  which outlines a plan to attack and reduce costs that are too high
• Standard Cost Revision
  which updates the costs in the cost model to current costs and updates the baseline according to new information

This continuous improvement cycle incorporates the following aligned behaviours:

• cost standards for major processes based on physical realities and best-in-class data points
  as a goal towards reducing costs below known minimums for a given process with defined equipment and resources is not just unrealistic, but stupid
• best-in-class performance compared with known (supplier) costs
  as exceeding best-in-class cost performance will generally not be possible unless the process is changed
• dialog around cost improvement ideas relative to best-in-class pricing
  as many heads are better than one
• agreement on a realistic improvement plan
  as all parties need to be on-board for success
• supply management as a learning opportunity

that improves based upon a better understanding of cost, best-in-class performance, and past improvements

And, most important, promises the suppliers that:

• no requests will be made to undercut cost structures
  as this is unfair
• a fair profit and SG&A allowance will be incorporated into target cost models
  as all supply chain partners need to profit
• comparisons will only be made with peer-group suppliers using real, validated data
  as other comparisons are invalid
• detailed feedback will be provided on cost elements that need to be improved
  as improvement does not happen in a vaccum
• collaboration on waste removal will occur
  as waste is quickly becoming one of the most significant contributions to unnecessary costs (thanks to rising raw material, power, and water costs)
• business will be rewarded to those that open their books and demonstrate best-in-class costs
  as the goal of KBS is to collaborate on cost improvement
• information will be protected as confidential
  as it’s only fair
• knowledge gained can be applied to other business
  as this is a great incentive for collaboration and improvement

It’s a good philsophy, and a good foundation for improving supply chain relations. Tomorrow’s post will dive into the cost modelling process.

BravoSolution. CAPS. Greybeard Advisors. The MPower Group. Purchasing Practice. Tompkins Associates. Sourcing Innovation. And now Booz Allen. The Next Generation Sourcing Ring is staring to get a little crowded with combatants each offering their own take on “Next Generation” Supply Management. But that’s a good thing. Until recently, there weren’t even enough combatants to have a tag-team match!

So what is Booz Allen bringing to the Next Generation Sourcing Rumble? 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. This is a good goal.

In addition, Booz Allen claims that this approach is fundamentally different from traditional “market-based” sourcing approaches that are focused on embracing supply markets’ competitive context and/or obtaining the best competitive outcome possible, primarily through pricing. According to Booz Allen, its “Knowledge Based Sourcing” (KBS) approach is predicated on a deep understanding of cost drivers, the supply market, and spend category context. This is a good foundation. After all, it’s not spend that matters, but the underlying cost. Shaving 10% off the top is dismal if the organization is overpaying by 40%. And telling your team to save 10% again this year when underlying costs have gone up 40% and the production cost is now 10% more than what you are paying is foolish.

So how does Booz Allen define KBS? By its characteristics. According to Booz Allen, Knowledge Based Sourcing:

• uses the supply base as a key competitive advantage
  (presumably) because this enables long-term success through (financial) supplier stability instead of unstable short-term gains from supply base exploitation
• continuously improves to eliminate supply chain waste
  because raw material and environmental costs (associated with water and power) are going through the roof and waste is costly
• integrates (internal & external) relationships
  because this leads to collaboration, which in turn leads to innovation, that is not possible with combative arms-length relationships
• shares knowledge
  because all partners need to profit in a successful supply chain
• sets and meets targeted costs with supply partners
  as success relies on continual cost control and cost reduction
• is improvement focussed
  as an organization that stands still will soon be over-taken by the competition
• ensures suppliers are at an advantage over market
  as this is the foundation for using the supply base as a key competitive advantage
• continually drives best practices through the supply base
  to ensure that all supply chain partners improve in lock step
• is driven by knowledgeable procurement professionals
  as talent is the ultimate key to success
• aligns suppliers with customer success
  as Supply Management must enable its customers to succeed if it is to succeed

It’s a good definition for Knowledge Based Sourcing (KBS) and a solid entry into the Next Level Ring. Now, if only we could get the combatants to agree on a name. So far we have “High Definition Sourcing”, “VFS” (Value Focussed Supply), “Next Level Supply Management”, “Next Practices”, “Supply Management Transformation”, “Supply Chain Leverage”, “Next Generation Supply Management”, and “Knowledge Based Sourcing”. But the foundations of each message appear to be the same — in order to continue to extract value from supply management, it needs to be taken to the next level. A next level that is knowledge-based, analytics driven, and result-focussed.

So who’s going to throw their hat in the ring next? Hard to say. For now, we’ll explore Knowledge Based Sourcing further over the next few days.