Originally posted on on the e-Sourcing Forum [WayBackMachine] on Wednesday, 20 June 2007

Aberdeen just released its report on Supplier Enablement, “Connecting with Suppliers to Build Lasting Relationships” which found that supplier enablement continues to be “one of the top three challenges for procurement professionals looking to transform their procurement organizations, gain better visibility into their supplier enablement processes and supplier relationships, and increase spend under management”.

According to the study, best-in-class enterprises demonstrate that supplier enablement can positively impact the business when the right technologies and practices are employed. Best-in-class enterprises, which have 78% under management compared to an average of 44% for all other peer enterprises, enable 50% of their suppliers versus the 23% enabled by their peers, are 25% more likely to document and share their best practices, and are almost twice as likely to have full visibility into enablement activities, realize transaction processing costs 47% lower than their peers. Thus, this study confirms which many of us were starting to suspect, that supplier enablement not only makes suppliers feel good, but generates significant bottom line savings for an organization.

Aberdeen defines an enabled supplier relationship as one that includes one or all of the following capabilities:

• automated exchange of documents and communications
• on-line catalog management
• active management of supplier information through a self-service process

Of these activities, the third is the most important. When it comes time to source a category, it takes little effort to click the “send” button to send a document to a supplier, and you do not care about the entire catalog – just the product(s) in question. However, if you do not know who your suppliers are, what they can provide you with, and how to contact them, and the relevant individuals in the organization, you will not be very productive. Moreover, with large companies typically having tens of thousands of suppliers, managing this information is an onerous task – but if you are a large customer, it takes very little effort for a supplier to manage their information for you – especially if they want your business.

So what’s the best way to achieve supplier enablement? If at all possible, select a sourcing suite that has, or is about to have, supplier (self) management capabilities (like your forum sponsor, Iasta, that will be releasing an initial version of Supplier Management with a Supplier Self-Service portal in the fall), or a solution that integrates into the sourcing and/or procurement suites you already use. If this is not possible, I’d recommend going with a specialty provider of supplier information management (SIM) services, like Aravo who specialize in integrating SIM management applications into the sourcing, procurement, and / or ERP tools that you already have.

Then, as Aberdeen so eloquently states, “include suppliers in the enablement process – leverage their experience and technologies to ensure collaborative and efficient interactions during enablement and through the lifetime of the relationship”.

Finally, as Aberdeen also points out, be sure to standardize processes along the way that leverage leading technologies, like XML (eXtensible Markup Language) and SOA (Services Oriented Architecture), and leading 3rd party services, such as Ariba’s Supplier Network, Austin Tetra’s integration services, or Integration Point’s Global Trade Management software.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on April 23rd, 2008.

Another good article in the recent edition of CPO Agenda is “Collection Action” by Nick Martindale. (It should be no surprise that I’d pick up on this one, as I’ve been known to preach the “Collaborate, Collaborate, Collaborate, Collaborate” mantra – see my 5-part series on Sourcing Innovation, for example.)

The article starts off by noting that collaborative buying has yet to recover from the hefty blow that it was delivered in the nineties, after a number of GPOs quickly sprang into existence, and then failed even quicker, and that Group Purchasing Organizations are going to have to overcome some formidable obstacles if they are to grow and succeed.

One of the major problems with the original GPO model, which is still used by many of the GPOs still in the market today, is its myopic focus on cost savings. Organizations join because they think that volume-based buying will allow them to get their office supplies, energy, and contract labor cheaper, but end up saving very little and then develop a bad taste for the GPO model. Furthermore, many suppliers loathe GPOs because they believe that the whole point of a GPO is to compress prices and choose the lowest-priced supplier, and this means that it’s often hard to get your best suppliers to bid on the collective contract.

Just like Procurement needs to focus on total value on each and every buy they make, a GPO also needs to focus on total value on each and every buy they make on behalf of its customers. They need to look at the supplier from all relevant angles – cost, capability, service, and value-add. However, even more importantly, the GPOs need to encourage and enable their members to collaborate and share knowledge and best practices so that their interaction with the GPO does more than just save a few dollars on outsourced categories. With the right GPO, a member company should gain as much value from networking opportunities and shared knowledge as it gains from the cost savings associated with having a third party manage select spend categories.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on February 27th, 2009

This two part post originally appeared last summer, but I thought would be good to review, as we just saw a Fortune 50 client auction, with 74% reduction in strategic IT services, last week – David Bush.

In our last post, I reminded you about “Strategic Service Management” and “The complexities of Strategic Service Management”, as well as about “Strategic Service Parts Management” and “Strategic Workforce Management” in my efforts to give you an answer to when do I source that?. Now that you know when you should be considering strategic services management and when it enters into your sourcing projects, let’s move on to the question that first comes to mind, how do I source that?.

The first thing you do is separate out the different types of services that are available into those you can do effectively in house and those you cannot. Then, for those services you can manage in-house, you figure out the average cost of offering those services, as well as the average resolution time. The reason for this is that even though you can do the work in house, if it’s not your core competency or core offering, if your provider can do it cheaper and better, you should outsource it.

Then you insure that your supplier not only breaks out it’s value added services from its core product offerings, but breaks down it’s services into as many discrete offerings and quotes each service offering separately. It’s true that you will get a better deal if you buy service packages, but you first need to figure out what the right service packages are for you and, more importantly, whether or not the supplier is capable of offering at least the services you absolutely need at the levels you need them.

For example, let’s say that you are a Technology Consulting and Services Firm that supports big clients with their technology needs, be it desktop needs or data center needs, including outsourced data center management. Let’s also say that some of your customers have mission critical services that need to be available 24/7 and that your technicians are certified on HAL and IQ but not on Moon, and that you only have enough HAL technicians on staff to confidently service the percentage of your customer base with platinum SLAs (Service Level Agreements) in house. This says that if you set up a customer’s new data center on HAL technology, you probably won’t need many services, but that you will take them if they are more economical than maintaining those services in house (which might require overtime or adding staff), that if you go with IQ, you will probably need some of their services and support, and that if you go with Moon, you will probably need a lot of their services. The following table breaks down what services you might need from each vendor:

Now that you know what services you can do in house, you need a cost. Let’s define the costs as average cost per year, based on your internal metrics. Now our table might look like:

Now that you know what you will need, and might need, from each supplier, you can ask for quotes on what you will need by individual service and service package, by each vendor, and do an informed total cost of ownership analysis on each bid and select the right product and service package for your business.

In this simplified example, you’d ask Moon to quote on each service individually and as a package; you’d ask IQ to quote on each service individually, a package for the two services you need, and a package for all three services; and you might ask HAL to quote on each service individually, a package for the service call and 4 hour part replacement, and a package for everything. After this, you would have something along the lines of the following:

You’d then compare these total costs to hybrid costs where you kept some services in house, which would give you:

And finally combine these costs with the hardware costs, which might be 240K for Moon, 270K for IQ, and 250K for HAL to get a total acquisition cost:

And conclude that, if all things were equal, the best deal would be to single source all hardware and services from IQ. However, we are talking hardware, where the total cost of operation usually exceeds the cost of acquisition when you add up all the energy requirements to run a server for a year AND keep it cool, so you’d also have to add an adjustment cost for expected energy consumption to find the very best deal, but you get the point.

I should also note that, as you saw from even this simple example, this is calculation heavy, error-prone if done by hand, and not spreadsheet friendly. That’s why you’d use strategic sourcing decision optimization software, such as Iasta’s Smart Optimization software, to do this analysis, as you could define, for each supplier, which services you’d need fro that supplier if the supplier was selected (because you can’t do them in house), and which services could be done in house. You can also define the cost of each service individually and then define discounts for different packages offered by the vendor. And building in cost adjustments for the differences in energy consumption is a snap.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on February 26th, 2009

This two part post originally appeared last summer, but I thought would be good to review, as we just saw a Fortune 50 client auction, with 74% reduction in strategic IT services, last week – David Bush.

You’ve probably been following my posts on “Strategic Service Management” and “The complexities of Strategic Services Management” , as well as my pieces on “Strategic Service Parts Management” and “Strategic Workforce Management” and, by now, you’re probably wondering, how do I source that? Well, that’s a good question, but I think the first question you need to ask is, when do I source that?

To answer the when question, you start by looking at the products you are sourcing and asking the following questions:

• How strategic or mission critical are they?
• Are they for us or an end-customer?
• Are they simple or complex?
• What expertise do we have with respect to their maintenance and repair?
• What is our capacity?
• How cost-effective is it for us to service these products?

If you were to answer:

• Not strategic or mission critical.
• Internal use only.
• They’re standard products available from half a dozen vendors.
• It’s more cost efficient just to replace them when they wear out.
• We have enough support staff to handle replacement when necessary.
• We need the office manager for other tasks anyway, so there’s no real cost.

… as you might if we were talking about off-the-shelf laptops, then you would not need strategic services. But if you were to answer:

• If it fails, a customer’s production line goes down.
• They are for our end customer.
• It is very complex electronics.
• We have two technicians who understand the products, and that’s it.
• Low (capacity). Our technicians spend most of their time doing initial installations and quality assurance testing.
• Not very (cost effective). Our technicians are at the home office and most of our customers are in different cities.

… as you would if it was a custom-made control board for your custom-made machinery that ran part of a customer’s production line, then you would definitely need strategic services. But if you were to answer:

• They are strategic assets, and they would temporarily prevent the delivery of certain services if they go down, but they are not mission critical.
• They are for our internal use.
• They are moderately complex.
• At least half-a-dozen of our technicians can repair them.
• Our technicians have system maintenance as their primary jobs and with typical failure rates, we have the capacity to service these products ourselves.
• Our costs for service are industry average.

…, as you would if we were talking about servers, SANs, and rack components in your data center, you probably wouldn’t need the vendor’s technicians, but you would need quick replacement of parts when they failed, as some of your internal, and external, services, as well as service levels, would be affected. In this case, you would need some strategic services, but not all of the strategic services the vendor was offering you.

Only once you figure out what you need with respect to strategic services management, you know the answer to when do I source this, which is when I figure out what I need, and only what I need, and only then can you begin to address the how do I source this question, which is the subject of part II.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on February 6th, 2008

Optimization can not only be used to reduce cost, but it can also be used to reduce risk. In this post I’m going to overview how you can effectively support seven common risk mitigation strategies in a proper strategic sourcing decision optimization solution (including the solution offered by Iasta, if you’re wondering).

Capacity Assurance

You can create exclusion constraints that restrict supply to suppliers with a minimum amount of capacity to insure that the suppliers can handle the award they receive. Furthermore, you can create qualitative constraints that restrict award to suppliers with spare capacity to insure you can cope with unexpected demand surges. Although forecasting significantly more demand than you actually have is bad, especially if you stockpile inventory and don’t dynamically order and pull as needed, forecasting significantly less demand and not being able to meet that demand is much worse – because then your brand takes a big hit in the public market, which is much harder to recover from.

Compliance

These days, there are a dizzying array of regulations that may need to be complied with such as REACH, RoHS, Part 11, ITAR, and SOX (etc., etc., etc.), and failure to comply with any one of these regulations can result in huge fines, delayed or stopped shipments, or confiscation and destruction of inventory. Thus, it’s key that you insure that each product you source meets the regulations that you have to meet. Optimization supports this by allowing you to exclude suppliers that don’t meet any of the requirements, and limit supply to suppliers that only meet the standards of some of the countries you ship product to.

Distribution Alternatives

A strategic sourcing decision optimization solution that supports freight lanes can support multiple carriers, allowing you to select the lowest carrier, and lowest cost shipping lane per carrier, between a supplier warehouse and a buyer distribution center. (If the product doesn’t support multiple shipping lanes per carrier for each warehouse-distribution_center pair, you can always create a second instance of the carrier and associate that with alternate routes. You can then account for total volume discounts offered by the carrier by defining the discounts on all instances of the carrier.)

Dual Sourcing

From a risk mitigation perspective, sole sourcing is a bad idea. A really, really bad idea. With decision optimization, you can use allocation constraints to force an award to at least two carriers, and even specify an approximate award breakdown, such as a 20-30-50% split between the three lowest cost carriers.

Incentives / Performance Based Contracts

Let’s face it, some suppliers will perform much better if they get a bonus for good performance. By using negative discounts, you can determine how much a given award would cost you if the supplier performed exemplary under an incentive structure, and by using penalties, you can determine how much an award would cost if the supplier performed poorly (providing you also factored in an adjustment for the higher cost of processing more returns).

Lead Time Reduction

You can use a qualitative constraint to capture the average amount of delivery time for each carrier on each lane and limit awards to a given distribution center, set of distribution centers, or all distribution centers to product from supplier warehouses that can reach the destination(s) in a maximum (average) timeframe. Thus, if you’re selling a product for which demand can fluctuate significantly, you can make sure you can always restock within a given timeframe as soon as the sales data starts to spike unexpectedly.

Price Hedging

Strategic sourcing decision optimization can help you figure out what contract length might be optimal for a given commodity. For example, if your predictions are that oil is going to keep rising for the next year, with a peak price that’s $20 per barrel above what you’re paying now, and your main supplier thinks that it’s going to top out at a peak price that’s only $10 per barrel more than what you’re paying now, and is willing to give you all the oil you need at only $5 more per barrel than the current market price, you can run scenarios for a 6 month demand window and a 1 year demand window at different price points. Then, you can see that if cost keeps increasing at a rate that is only two thirds of your prediction, it’s probably better to hedge for a full year.

And, of course, proper strategic sourcing decision optimization also gives you:

Total Value Management

Since it allows you to capture all your costs – unit, freight, utilization, and impact costs (by way of adjustments) – as well as any discounts available to you from a supplier for the purchase of certain products in sufficient quantities. This means that you’ll always get the lowest total cost of ownership with respect to your business constraints.