Category Archives: Guest Author

Quantifying Quality in Lean Sourcing Initiatives

Today I’d like to welcome guest contributor Lisa Reisman, the Managing Director of Aptium Global, a direct materials advisory sourcing advisory firm. Lisa Reisman, now the CEO of MetalMiner, can be reached by email at lreisman<at>metalminer<dot>com.

I’m sure that a good number of readers of this blog are familiar with the basic concepts of lean manufacturing, which is all about eliminating waste and removing any steps in a process for which a customer would not explicitly pay for. But even more readers of this blog are schooled in the art of strategic sourcing.

Lean Sourcing blends both lean and strategic sourcing. In our view, the result is total enterprise cost reduction, as opposed to line item or category cost reduction which typically does not include many operational and quality factors that add costs outside of procurement. If you aren’t measuring quality from your supply base, you aren’t practicing Lean Sourcing.

Many organizations use supplier scorecards — but few really establish baselines of performance from their incumbent suppliers. The reason incumbent suppliers typically win “bids or ebids” is because buying organizations think they have a good handle on quality. Or, they choose to deploy the “I’d rather work with the devil I know vs. the devil I don’t.” But if you don’t measure, you don’t know. And if you don’t know, you have no idea if your current vendors are your lowest total cost suppliers.

From a Lean Sourcing perspective, at a minimum, companies should deploy a scorecard which measures the following: Material Acceptability (NPT’s — Non Conforming Product Tickets Issued), Quantity/Purchase Order Reliability, Timeliness, CAR Response time (Corrective Action Request), and Packaging. These metrics certainly cover the basics. But the question becomes: how do companies use this data to weight suppliers when making award decisions?

Many companies use the scorecard for on-going quality assurance and certainly as a means for addressing potential problem issues. But few create a linkage of supplier quality and performance as a factor into sourcing decisions. True, most sourcing platforms take into consideration quality elements (e.g. most platforms allow the buyer to “weight” quality performance parameters). In the real world, however, many of these methods end up being quite qualitative and in some cases, arbitrary. Let’s face the facts — buyers like to use their incumbent suppliers not only because they have a relationship with them but because they feel their operations folks are content and/or pleased with the quality levels received from their current suppliers.

But let’s take a look at this in a little more detail. Automotive companies rely heavily on PPM (or Parts Per Million) or DPMO (Defective Parts per Million Opportunities) data. By examining a year’s worth (or more) of supplier scorecards which measure NPT’s (above) a sourcing professional can assign a sigma value or DPMO value to any incumbent supplier. A six sigma supplier would be supplying parts at a rate of <3.4 DPMO, or less than 3.4 defects per million parts received.

The truth is that while many companies claim their suppliers are “six sigma”, when one really tracks the data over a 12 month period, in reality PPM numbers are actually much higher. In the case of low cost country sourcing, it is not uncommon to receive a couple of defective parts per shipment (and there aren’t too many parts that are shipping at the rate of over 1,000,000 pieces per shipment!) These defects can begin to add substantial cost quite quickly. More sophisticated organizations have conducted activity based costing analyses to quantify the cost of poor quality from every step within the production process. Of course an error caught earlier in the process (e.g. during incoming inspection) is a lot cheaper to correct than identifying an error caught later in the process say after production (e.g. when the part would likely need to be re-made).

In our view, manufacturing organizations of all sizes can better incorporate quality into the sourcing process. As a foundation, we recommend:

    1. Implementing supplier score-cards, and at a minimum, tracking every shipment using the 5 metrics discussed above. If you have been using supplier scorecards already, assign a sigma value or a DPMP/PPM number to all of your suppliers to understand your baseline.
    2. Communicating to your supply base your quality intentions. For example, if you are in the automotive industry, you are probably being told by your OEM customers that you need to be shipping 0 ppm parts. Hold your supply base accountable to the same standards.
    3. When deploying sourcing initiatives, look at your largest categories by dollars and by quality and focus Lean Sourcing efforts on those categories where your cost of quality has eroded organizational cost savings on a total cost basis.

If you want to dig further into the concept of Lean Sourcing and how it can reduce your total enterprise costs, let me refer you to a whitepaper that I co-wrote on the subject that is available for free download on the Aptium Global Site.

The CPO Tales

Last week, over on supply excellence, Tim Minahan posted three interviews he did with three leading supply management executives on behalf of eyeforprocurement, which is hosting the Supplier Management Forum next April in Miami. (Register before year’s end to save $400 of the registration price, and quote “Sourcing Innovation” in the discount code area of the registration form to save another $100.)

These interviews were published on SupplyExcellence [WayBackMachine]:

  • Tale of Three CPOs: Coors Brewing Company November 21, 2006
    Tale of Three CPOs: Alltel November 22, 2006
    Corus: The Final CPO Tale…err…Short Story November 24, 2006

They are worth the read.

The Sourcing Innovation Series: Part XI

Today I’d like to welcome guest contributor John Martin of Building SaaS to Sourcing Innovation with a guest post on The Future of Sourcing … for Services. If you followed the On-Demand series, you might remember that I discussed his article “How True Software-as-a-service Delivers More Value” extensively in the fourth installment of my On Demand series.

Our focus is on purchased services: consulting services, contingent labor, outsourcing services, field services, legal services, etc. What we’ve found, in providing our Services Procurement solution to dozens of Fortune 500 companies, is that companies gain the best results by managing the entire end-to-end lifecycle of purchased services.

The primary characteristic of service categories is that they are all different. However, I’ll mention a few commonalities about managing purchased services, then suggest a few ways we’re seeing our leading-edge customers manage and optimize services spending.

First, here are some generalized characteristics about purchased services:

– Services spending is growing: With the increases in business process outsourcing and focus on core competencies, services spending is increasing twice as fast as that on indirect goods spending, according to CAPS Research. Economically, the prices of services are also inherently inflationary since they are closely tied to labor costs, which increase over time faster than goods costs, on average – the Federal Bank of New York’s analysis shows that services’ inflation rate has stayed consistently 2.6% over that of goods over the last three decades.

Core PCE Goods and Core PCE Services Inflation 1968:1-2002:4

– Services spending is often difficult to manage centrally: For some services categories such as marketing services and legal services, functional executives “own” the supplier relationships and spending. For others such as contingent workers and facilities management services, the sourcing and purchasing activities are dispersed throughout the enterprise.

– There can be many unknowns at sourcing time: Some services such as contingent workers and print services have unique requisitions every time, so up-front pricing is difficult to establish. In other cases, the needs of the enterprise change more quickly than anticipated at sourcing time, which has led many multi-year outsourcing engagements to fail.

– Services spending involves a lot of uniqueness: every contract is unique with terms in the statement of work text, requisitions are often unique, services deliverables are different for every contract, and the quality and acceptance measures differ by category, contract, and deliverable.

– “Value delivered” is often a key concept for purchased services: When a services provider touches your customers directly (such as call-center outsourcing or field installation services) or can positively impact your business results (IT application development services, marketing services), the potential value of those services becomes a multi-dimensional concept (including multiple flavors of “quality”) to continuously measure and improve.

– Finally, services involve many additional risks: When a supplier’s workers come onsite to deliver the services, now there are risks to manage regarding security, safety, confidentiality, etc. For contingent workers, there are HR-related risks such as co-employment and worker classification, as well as tracking the results of prior work performed by the worker.

As a result of these characteristics of purchased services, sourcing becomes an ongoing process rather than an event. For example, in some categories such as contingent workforce and print, the sourcing event creates the marketplace of preferred suppliers, and each requisition is sent out to the suppliers for bid – sourcing at procurement time. For almost all services categories, the delivery phase produces information that allows better sourcing and contract negotiating in the next sourcing phase.

After managing this iterative process for a few years, it’s almost impossible to continue to improve the cost basis of services through sourcing, at least since wage pricing started firming up a couple of years ago.

So we’re seeing companies turn to other ways to improve services sourcing, as hints to the future of sourcing. Extending Eric Strovink’s compliance comments and Tim Minahan’s “frontline sourcing” concept (explained over on Supply Excellence [WayBackMachine]), here are some trends that we see improving services sourcing going forward:

– Link sourcing with procure-to-pay and spend analysis: Some would say that for services, contract execution and compliance are everything. The cost savings and value from contracted deliverables are on paper after sourcing, but are actually captured only through a tightly coupled procure-to-pay program. Then, spend analysis on the detailed requisition, deliverable and invoice activities allows improved re-sourcing the next time, in a cyclical sourcing-improvement process.

– Actively use learning strategies throughout the cycle to improve sourcing: Since services have many unknowns at sourcing time, and much of the services value is determined during the delivery phase, companies are engineering their supplier relationships and processes to maximize learning. For example, multi-sourcing sets up a competition among service providers, and spending can be directed to the better-performing suppliers. Companies are starting to track every touch-point with a supplier, gathering qualitative information through surveys to gain much more insight into value and transaction costs. Service-level metrics are becoming much more detailed and continuously monitored (with direct data feeds from the services supplier) to gain insight into the supplier’s processes and capabilities that underlie their delivered quality and value.

– Manage and shape demand: The demand drivers for many services are fragmented and hard to pin down – definitely not available in a production forecast. Since service prices tend to rise over time, it pays to focus on controlling costs through internal demand management, rather than just increasing pressure on suppliers each year. Demand for services is also malleable, as which tasks performed internally versus by the supplier can be changed if needed. Investigating internal demand drivers and supplier interaction processes can lead to ways to reduce time and costs by shifting activities to/from the supplier, redrawing the process boundaries, and eliminating non-value-add tasks performed by either party.

– Build tighter linkages into suppliers’ systems: In the direct goods world, linking into the suppliers’ inventory, logistics, and production systems is a now-common practice. In services, however, this is much less prevalent. In addition to pulling service-level metrics from the supplier (such as call and incident tracking information for call-center outsourcers), companies are adding system integrations for requisitions, deliverables, and invoices to greatly reduce transaction costs and eliminate the “echo-chamber” interaction costs of haggling over invoices post-delivery. Going forward, there is emerging interest in linking into suppliers’ availability, skill capability, and project tracking systems to better optimize delivery processes, and a desire for better collaboration tools throughout the lifecycle of interactions with the supplier.

– Invest more in supplier discovery and development: Most large companies have too many services supplier relationships, so supplier consolidation is the first effort. However, in order to keep up with the state-of-the-art in purchased services, we see a need to provide better tools for finding and starting up relationships with high-quality emerging services suppliers. Along the same lines, companies will need to more proactively develop niche and high-performing services suppliers in the upcoming years.

Thanks again to John Martin for this insightful post on The Future of Sourcing … Services.

The Sourcing Innovation Series: Part VIII

Yesterday, Charles Dominick of NextLevelPurchasing (acquired by Certitrek and now the NLPA) jumped in with an initial post on “Sourcing Innovation for Single-Customer Contracts” on his “Purchasing Certification” Blog (now the NLPA blog) where he offered his insights on the affect of the forthcoming innovation on purchasing professionals and the skill sets required for the future. For more details on the post, and my thoughts on it, check back Sunday.

Today I’d like to welcome Kevin Brooks of Apexon (acquired and merged with Infostretch in 2022) who has been kind enough to provide us with his commentary on the Future of Sourcing. Note that Kevin was also kind enough to provide his insight on “Supplier Performance Management” in response to one of my weekend series over on e-Sourcing Forum [WayBackMachine].

My take on the topic is a bit more abstract. In particular, I suspect that innovation in sourcing will trend toward doing less rather than doing more.

When I look at other industries, I notice that innovation seems to move along a path that makes things easier and simpler for end users even if there is tremendous sophistication under the hood. (Microsoft Windows might be an exception to this rule!) I don’t need McKinsey slide decks to convince me that true strategic sourcing is complex, but the same thing could have once been said about any number of things that are now commonplace. Driving across the country. Getting a knee replacement. Online banking.

I suspect that the tools to enable sourcing will move toward simplifying a complex process, and put the capability in the hands of a much wider group. Sourcing will become a standard business skill set you’d expect from any decent business school graduate. At the same time, more of the responsibility for delivering against expectations will fall on the heads of suppliers themselves, or their proxies (as in the case of contract manufacturing or outsourcing).

Obviously, big strides need to be made in sourcing technology and in clearing the pesky master data management briar patch. And I’m sure there are a few innovative strategies yet to be discovered – Jason’s global capacity marketplace, for example — but they don’t affect the ultimate trend line. In the end, I suspect successful companies will tend to prioritize customer sales and service over internal operations or supply sophistication. Yes, the two are connected, but not in the eyes of most CEOs or even the customers themselves. The less time and effort a company puts into sourcing, the more they put into customers. Ergo, sourcing innovation will trend toward doing less, not more.

Thanks Kevin! I look forward to future guest posts from you!

The Sourcing Innovation Series: Part V

Today I’d like to welcome a special guest columnist to Sourcing Innovation, Eric Strovink, President and CEO of biq. Eric has some interesting takes on the future of sourcing. I hope you enjoy them.

Thanks for inviting me to contribute to your round table discussion.

I try to spend time with our customers and our consulting partners, understanding what they are doing, how successful they’ve been, and what techniques and software products have or haven’t worked for them. Here are a few “future of sourcing” predictions that I’ve (correctly or incorrectly) internalized from those discussions.

  1. With respect to consulting, the end of “credenza-ware” is in sight. It will no longer be possible for sourcing consultants — no matter who they are — to put savings recommendations into a binder, deliver a presentation, and walk away. They will have to manage the implementation of their recommendations, as many are already doing today. Smarter firms will price for procurement re-engineering approaches, i.e. sustainable longer term savings as opposed to one off sourcing events.
  2. As a corollary to (1), gain-share compensation models will become more widespread. This will require innovative compensation models that provide for equitable outcomes when fee calculations are excessive (i.e., when savings are above maximum anticipated levels), or when savings are partially attributable to changes in market conditions that are unrelated to the sourcing initiative.
  3. Price erosion in e-sourcing and e-commerce software will continue, driven both by decreased tools costs and by a new generation of rapidly-maturing and far less expensive solutions. Mainstream ERP vendors, who previously perceived significant revenue opportunity in the sourcing space, may become disinterested as margins fall.
  4. Knowledge is the dog; software is the tail. E-sourcing vendors who place a primary focus on knowledge management and on innovative technologies to improve data visibility will trump vendors who focus on process. For example, many consultants still use Excel spreadsheets and the email system as their RFx mechanism, yet they achieve remarkable results. Clearly, the job can be done without software-assisted process management — what’s required is the knowledge of what to ask, how to ask it, and how to measure and evaluate the responses. Creating mechanisms to help companies derive value from data, and then combining that with well-engineered knowledge transfer, will win the day.
  5. In-house sourcing consulting services at e-sourcing and e-commerce vendors will be hard to maintain. It’s difficult structurally for vendors to pay consultant-level wages/bonuses to an FTE, and they typically won’t — so thought leaders in the sourcing space tend to drift back to the consulting sector. I therefore suspect that vendors who succeed in building partnerships with independent consulting firms will be able to provide higher value to their customers than vendors who try to maintain an in-house consulting capability.
  6. Compliance will become a more important source of savings. The way that compliance is done today — “Do we have a contract with this supplier?” — is not effective. We need to confirm that the terms of the contract are being followed. Is anyone checking line item charges on the invoices? Is the rate card being compared to the actual charges? If we’re buying office supplies, who is auditing the item substitution logic that we so carefully negotiated? Is our price for an off-contract item higher than current retail? I’ve seen an off-contract Palm Pilot for $700 on a supplier’s invoice, at the same time that it was listed on their web site for $325. Conventional A/P audits, when they can be performed, will find rate card variances, but they miss inappropriate charges. There may be a valid rate card entry for a five-pound package, and an automated audit will verify that the package was billed at the correct rate. But was it, in fact, a five-pound package, or was it really a five-ounce letter? The key to success will be to identify mechanisms by specific commodity that lead to effective identification of invalid charges, along with sustainable means for controlling the issues operationally.
  7. Demand reduction is an under-utilized savings mechanism that will become increasingly important. Sometimes demand reduction can be achieved with simple measures. For example, it’s said that deploying a T&E system reduces demand by about 10%, because employees self-regulate spending if they believe they can be audited. So, even if we stipulate that no other benefit is forthcoming, deciding whether to deploy a T&E system is straightforward. A similar argument can be made around the implementation of e-commerce systems. There are other actions that can be taken to reduce demand, such as asset management and re-use (which includes, as a component, intelligent purchasing — buying near the top end of the PC market, for example, results in an asset that is useful three years out). Internal benchmarking and measurement are some way from realization, but provide the best means of controlling spend in all categories.
  8. The Balkanization of sourcing by category will accelerate, and highly specialized approaches will evolve in key commodity areas. In some categories, aggregation may be the answer; in others, such as commercial print, point software solutions may be appropriate. Specialty outsourcers already exist for contract labor, mailroom, and other categories. Consulting firms as well as e-sourcing vendors will increasingly find themselves “brokering” category-specific approaches on behalf of disclosed or undisclosed specialty partners.

I could go on, but I’ll leave it there. Some of the predictions I haven’t included are related to innovative work that is underway in various places, which I’m not able to discuss. Suffice it to say I think there will be some interesting surprises in our space.

Thanks for the great post, Eric!

Stay tuned … I have a feeling there are more great guest posts to come!