Category Archives: Manufacturing

The Sourcing Maniacs 2008 Vendor Tour Part III: Apriori

At the end of Part I, the Sourcing Maniacs had just completed their Aravo visit, the first stop on their journey. After Aravo, they took a trip to Massachusetts to visit their old friends Pinky and the Brain, but were unsuccessful as their friends were under lockdown until the annual user conference. However, being in the Boston area, they decided to continue their vendor tour through the sourcing alphabet and decided to pay a visit to Apriori, home of the Wizard of Cost, before moving onto the B’s. We join them on their hearty jaunt up Baker Avenue in Concord, MA.

Yakko, Wakko, & Dot We’re off to see the Wizard, the Wonderful Wizard of Cost
We hope he is a Whiz of a Whiz if ever a Whiz there was
If ever, oh ever, a Wiz there was, we hope the Wizard of Cost is one because
because, because, because, because, because
of the wonderful things a cost wizard does
We’re off to see the wizard, the wonderful Wizard of Cost!
Yakko We’re here!
Dot Where?
Yakko At Apriori, of course!
Wakko Are you sure?
Yakko As sure as a Massachusetts black bear does his thing in the woods.
Wakko But where’s the big neon sign?
Dot And the big corporate headquarters?
Yakko Not all companies own their own buildings, Dot. And not all companies feel the need to throw up flashy 1950’s neon signs to advertise their business. After all, those signs cost money. And I think cost management is supposed to be about not spending money you don’t need to spend. But that’s what we’re here to find out, isn’t it.
Dot I sure hope the Wizard of Cost can see us!
Wakko And that we don’t get shut out again. I mean, we were wako’d by Ariba, but we were almost wak’d yesterday!
Yakko I don’t think we’ll be shut out here. the doctor tells me that Apriori are very friendly and open people.
Wakko But will they welcome us with open arms?
Yakko Well, I never really asked if they’d welcome us. But we’re solo now … and I don’t think they ever competed with Ariba anyway. I’m sure they’ll talk to us.
Dot After all, who can resist pretty lil me.
Dot strikes her cutest pose and starts fluttering her eyebrows shamelessly.
Yakko So who wants to knock on the door?
Wakko I do! I do!
Wakko takes out his mallet and waks on the door.
long pause … door opens
The Wizard of Cost Hello?
Wakko, Yakko, & Dot We’re the sourcing-maniacs
And we’re zany to the max
Dot I am cute …
Yakko  and I like to yak
Wakko while I pack away the snacks
Wakko, Yakko, & Dot We’re the sourcing-maniacs
Dot I’m Dot,
Wakko I’m Wakko,
Yakko  and I’m Yak…
The Wizard of Cost Yes, I know who you are. Can I help you?
Yakko We want to learn about enterprise cost management!
Wakko And beg for food!
Dot And find a job!
The Wizard of Cost Well, I can certainly help you with the first topic. I’ve made it my personal mission to spread the word of enterprise cost management and how it can help direct sourcing organizations, as well as manufacturers, save money in these troubling times.
Wakko, Yakko, & Dot That’s great!
The Wizard of Cost But you have to promise me something first.
Yakko What’s that.
The Wizard of Cost That you’ll sit down …
Wakko No problem!
Wakko plops down on the floor.
The Wizard of Cost listen …
Wakko We’re all ears! Wakko stretches his ears in his best Dumbo impersonation.
The Wizard of Cost and behave. You have a bit of a reputation, and we’re a no-nonsense operation here at Apriori.
Yakko We can behave!
The Wizard of Cost Promise?
Wakko, Yakko, & Dot We promise.
The Wizard of Cost Then take a seat and let’s begin.
The Wizard of Cost Let’s start with the basics. Every business is in business to make a profit. Profit is defined as the difference between revenue and cost, or, the difference between the money you take in from sales and the money you spend on supplies, overhead, and taxes. That says there are fundamentally two ways to increase profit – increase sales, which falls under the purview of Sales and Marketing, and reduce costs, which generally falls under the purview of supply & spend management. We focus on cost.

However, not all costs are equal. If we look at a balance sheet, we see there are three main types of costs: COGS (Cost of Goods Sold), SG&A (Selling, General, and Administrative Expenses), and D&A (Depreciation and Amortization), and that COGS usually represents 80% of the costs under enterprise control. So, unlike many e-Procurement firms that just try to reduce the cost of the transaction, which only serves to reduce SG&A expenses, we focus on reducing COGS, as every dollar reduction in COGS has five to six times the impact of a dollar reduction in SG&A.

To reduce COGS, we start with the understanding that COGS is a combination of raw material costs, labor costs, production overhead costs, and margin. All of these costs can be reduced with the right insight — and this is where we are different than a standard sourcing application that just tries to get you the lowest price per unit through a volume buy or leverage-based raw material buy. Then we help you identify the right product, produced by the right process, to meet your needs at the lowest possible cost.
Wakko How do you do that?
The Wizard of Cost We have software that implements a virtual production environment that not only allows us to model a part, but an entire production process. This allows us to calculate not only how much a modeled part should cost, but whether or not there are other processes that could be used to create that part. For example, if you have a door hinge, you have a bend, a cut, and some hole punches. And there’s more than one way you can order the steps.
Yakko But you still have to do the steps, so how does reordering save money?
The Wizard of Cost Well, reordering allows you to do three things. First of all, it allows you to plan your production so that you don’t have multiple production runs waiting on the same machine at the same time. This increases your production throughput, which lowers your cost of production per part as you produce more parts in a day. Secondly, if you punch before you cut, and you have a machine capable of doing multiple hole punches simultaneoulsy, you might be able to punch four or eight hinges on a sheet of metal simultaneously, which would increases your productivity eight-fold. Finally, it allows you to consider different machines given the partial state of completion the part is in at any one time. And this is where a lot of the power of the VPE comes into play. Maybe instead of a punch, you can use a laser drill that can drill 10 pieces simultaneously if they are stacked, but only if you have enough extra metal around the edges for the grips to hold the stack in place. If the laser drill costs you half as much to operate as the old punch, then you want to use it — which is something you can do if the hole creation step comes first, but not if the hole creation step comes last.
Dot That sounds really neat!
The Wizard of Cost It is, and it’s quite powerful.
Yakko But how does the buyer know what the costs are? And doesn’t this take the supplier, who’s supposedly an expert in part manufacturing, out of the picture?
The Wizard of Cost Good questions. Fortunatley, we have some good answers.

The platform plugs into market feeds and our database of standard pricing that we have built up for North America and China, and this gives us a first level estimate. Secondly, it allows the buyer to enter their costs, or their supplier’s quoted costs, for each variable and refine that cost model further. Finally, it allows them to use a supplier’s VPE to calculate precise cost or set up a VPE specific to their supplier if their supplier does not already have one.

In addition, we realize that the best results often come from collaboration and from taking advantage of expertise on both sides of the table, so we have been working hard on improving our supplier interface that allows buyers and suppliers to share designs and data back and forth, through a new CAD-independent viewer that’s coming out in our next release, so that both parties can work together. And, unlike some vendors, who shall go unnamed, that force suppliers to pay a registration fee to be listed in, or gain access to, their system, our basic viewer is totally free to the suppliers of any buyer who licenses our system. This keeps the supplier in the picture, in a non-cost prohibitive fashion, and helps the buyer find the best product at the best price, produced from the best production process, for their needs. In our view, that’s what enterprise cost management is all about.
Dot That’s a really cool take.
Yakko Not at all what we’re used to … coming from a sourcing world that has traditionally focussed on e-RFx, e-Auctions, contract management, and spend visibility to reduce cost.
The Wizard of Cost It is a bit different, and we think it plays very nicely with those traditional approaches. Whereas they primarily reduce SG&A, and in the case of contract management, insure that agreed upon costs are adhered to, we primarily reduce COGS. It’s a big sandbox, we can play nice, and when we do, we think everyone wins. What do you think?
Wakko I think I’d like to see more.
The Wizard of Cost All in good time. Our next release, v6*, is slated for next quarter.
Dot Then I guess it’s time to go!
The Wizard of Cost Thank you for stopping by. And by the way, when you recount this story to the doctor, which I’m sure you will do, try not to leave anything out. Enterprise Cost Management is about a whole, and if you leave out any parts, it doesn’t really make sense.
Wakko We’ll try.
The Wizard of Cost Promise?
Wakko, Yakko, & Dot We promise.
The Wizard of Cost Farewell and safe travels!
Yakko Well that was different!
Dot Not at all what I expected!
Wakko And they didn’t feed us baloney sandwiches. I like baloney sandwiches. I’m hungry!
Dot You’re always hungry!
Yakko Let’s go eat.
Wakko So where are we going next?
Yakko On to the B’s!
Dot Bearing Point?
Yakko They’re a consulting firm. We do products.
Wakko Bravo Solution and their VerticalNet suite?
Yakko We’d have to hike all the way to Pennslyvania, wouldn’t we? There are B companies locally. Let’s go visit BIQ! They’re just a few miles away in Southborough!
Wakko What do they do?
Yakko Spend Analysis.
Dot But we already did that at Ariba. That’s old news.
Yakko the doctor says BIQ is different, and that how we define “spend analysis” is not the right way to define spend analysis.
Wakko Why not?
Yakko I don’t know. Let’s go find out!
Wakko & Dot OK!
Yakko, Wakko, & Dot We’re off to BIQ
To see what they do for you
Wakko And maybe find a clue
Dot To dealing with data times two
Yakko, Wakko, & Dot We’re off to BIQ
…

Tomorrow we recount the Sourcing Maniacs’ tale of their visit with BIQ. Stay tuned!

*Editor’s note. Apriori released v6 in early October.

Identifying the Right Local Supplier for You

Not that long ago, in Local Suppliers, Your Opportunity is Now!, I echoed Tim Cummins’ sentiments when he stated that the current market should offer the perfect storm for local suppliers to make their case that, when everything is factored in, they are often the best choice for your business as they are often able to offer lead time reduction, quality, compliance, and innovation advantages that their offshore peers cannot. In other words, I noted that you, as a buyer, should be looking hard at local suppliers, who just might be the right choice for your business.

However, what I did not point out was that not all local suppliers are equal. Not all are able to offer all of the advantages listed, and each of the advantages offered by a specific supplier will differ in degree, if not in kind, with respect to the particular advantage offered. Thus, even though I believe many of your needs can be met locally, I don’t necessarily believe that any old local supplier will do — it has to be the right supplier for you.

This seems rather straight-forward, but it doesn’t provide an answer as to why some suppliers are more cost effective, why other suppliers are more innovative, and why yet other suppliers strive to straddle the middle. I’m not sure anyone has a good answer for this, but I have to say I do believe that it has to do with the relationship between the buyer and the supplier, the goals of the relationship, and, differentially, the trust between the buyer and supplier, or lack there of.

Why? In a recent post on Commitment Matters, Tim Cummins tackles the question of why buyers and suppliers must work together. In his post, he notes that a relationship can span the spectrum between a focus on cost and a focus on innovation. In the beginning, a buyer tends to focus narrowly on cost, at the expense of commitment and innovation, because that’s the issue that led to a shift in supply. However, the lack of innovation starts to hurt the buyer as competitors introduce better products into the marketplace, so the buyer switches to a long-term relationship based on trust in order to collaborate and inspire innovation. But after a while, the partnership becomes too comfortable, the buyer finds itself at a competitive disadvantage, and it reacts by switching back to a cost-focus in an effort to “right the ship”. In other-words, the relative trust determines the relative level of collaboration and the merits of the relationship in question.

Thus, depending on the current levels of trust between a supplier and its buyers, it is likely that it will either be tightly focused on cost, tightly focused on innovation, or somewhere in a comfortable middle.

So how can you tell where a supplier’s focus is? Tim gives us more insight when he tells us that buyers not in a position of power tend to seek out collaboration but those in a position of power tend to seek out cost reduction, because they don’t feel the need to collaborate. Thus, if you know the buyers that constitute the majority of a supplier’s business, and you know where their focus is, you can likely determine where a supplier’s focus is. And I hypothesize that this could go a long way to helping you find the right local supplier for you — the one with the right relative focus on cost, innovation, and quality to take your sourcing initiatives to the next level.

Local Suppliers, Your Opportunity is Now!

The media is full of stories about the failings and weaknesses of global supply chains. It seems we have suddenly discovered that China is far away (and not in fact a remote US state); that ’emerging’ markets do not share Western value systems; that business rules and practices are driven by culture and cannot simply be overridden or suppressed; and that historic economic muscle does not automatically translate to limitless power and control.

So now the body of experience is growing. The war stories are proliferating. And as costs rise, supply constraints kick in, quality failures become visible and threatening, [and] we find [ourselves in] an environment in which fundamental questions are being asked over supply strategies. Perhaps local sourcing makes sense. Maybe those old suppliers were not so bad after all.

So states Tim Cummins in the beginning of his blog post on how Buyer Misery Equals Supplier Opportunity where he essentially states that the current market should offer the perfect storm for local suppliers to make their case that, when everything is factored in, local suppliers are often the best choice for your business.

As Tim notes, in tough times, local suppliers can offer the following advantages:

  • lead time reduction
    You can get products next week, not next quarter. This reduces your costs and increases your profits in multiple ways:

    • reduced transportation costs
      It costs less to truck across a few states then to truck across a few provinces in China, ocean freight across the entire ocean, and then truck across multiple states through multiple regional distribution centers.
    • reduced inventory costs
      You only have to store a few weeks worth of inventory, not a few months. Considering 10% to 20% of total product cost at most companies is inventory cost, this is very significant.
    • fewer lost sales from stock-outs
      If your inventory depletes faster than you expect, you can often get more in days with expedited shipping (which is worth it if the product is a high profit margin).
  • quality improvement
    In addition to sharing the same values, a supplier in your local market is bound by the same laws, regulations, and liabilities that you are. Thus, the chances of them producing an inferior quality product are much lower. Note that this also reduces your costs as higher quality means fewer returns, and, most importantly, fewer lawsuits!
  • compliance
    Again, a local supplier is bound by the same laws and regulations that you are. Thus, they will be compliant from the start. This also reduces your cost as compliance monitoring can get very costly.
  • innovation
    Even though some foreign suppliers, desperate for business, may seem over eager to work with you, you have to remember that, in some cultures, you don’t say ‘no’ to the customer and that the supplier may not be as open to open collaboration as a local counterpart who speaks your native language natively as well. Plus, a supplier in a local market is more likely to be going through ups and downs at the same time you go through ups and downs and is, thus, more likely to be on the same wavelength.

So follow Tim’s advice and get out there and promote your services as a more reliable, ethical, environmentally-conscious, compliant, quality, innovative supplier who is ready and willing to work with your customers to find new and innovative ways to reduce costs and increase value across the board in a manner that will allow a consistent and predictable supply.

And for all of you suppliers who are saying “How do we do this?, my answer is to use the tools and services that are already available to you. Create a great web-site and have a search engine optimization firm optimize it for Google searches. Every day, more and more people turn to the web, and Google, to help them discover new sources of supply. Then, identify a marketplace (not a supply network that is limited to buyers who use a certain vendor’s software) where people are going to go to look for suppliers like you. If you’re in manufacturing, I recommend taking a good look at MFG.com. Yes, it is a pay-to-play marketplace (but then again, they’re all pay-to-play marketplaces), but at least they have an in-house team dedicated to helping manufacturers make the most of their opportunity, which includes assistance in getting set-up, finding new opportunities, and responding to RFPs. (This is because they make most of their revenue off of transactions, which don’t happen unless their manufacturers get business.)

The Return of U.S. Manufacturing?

In my recent piece on Is Your Supply Chain Reversible, I noted that the US is now a low cost country source for (Western) Europe and that those manufacturers ready to take advantage of the situation are going to lead the turnaround in US manufacturing. Shortly after, I found an article in Industry Week that wanted to “welcome back US manufacturing” on the basis that high fuel and energy prices along with rising labor costs in traditionally low-wage markets have some manufacturers rethinking how far they are willing to extend their supply chains. This article caught my attention as it pointed out that some mid-size companies are already bringing manufacturing back home, as they are unable to control shipping costs that are spiraling out of control.

The article mentions Desa LLC, a manufacturer of residential heaters based in Bowling Green, KY, as a case in point. Despite the low production costs in China, the high shipping costs, combined with the recent VAT reductions in China, give local manufacturing a lower TCO. Then there’s the relative price increases in some raw materials in China compared to the US, the falling dollar, and across-the-board energy costs. When everything is put together, the perceived advantages of China-based manufacturing for many (large, bulky) products disappear.

Of course, as the article notes, not all manufacturers are going to return to the US, since labor costs are higher than in other countries, but, as the article notes, many are likely to return to the continent and “near-shore” to Mexico (and, if the dollar rebounds, to Canada for complex products and services). But many are considering the US. A recent AMR survey of manufacturing executives found that 21% are planning to increase US-based manufacturing over the next year and Caterpillar Inc., for example, is investing 1 Billion in a multi-year capacity expansion plan for five Illinois plants.

But when you consider that the smart US manufacturers, like CEI who recently invested in an robotic palletizing system that automated a formerly manual stacking procedure, are investing in better technology that makes production more cost efficient, it’s going to make more and more sense for many manufacturers to return home. After all, it’s all about competitiveness, and those companies who invest money into new equipment, processes, and innovation are always going to have an edge. And considering that the US has been the center-point for innovation over the last few decades, there’s no reason that US manufacturers can’t bring jobs back if they put a bit of effort and investment into it.

MFGX.com – Exploding onto the Scene

MFGX.com, the first open global community for manufacturers, which came out of beta three short months ago, is poised to take the manufacturing world by storm. It already has 12 active communities with over 80 discussions, 40 documents, and 30 blog posts — which is quite a lot considering how traditionally silent the manufacturing and procurement communities are with respect to the on-line world.

MFGX.com, which was originally conceived as a companion site to MFG.com, is important because it’s the first offering in the space that’s open to all manufacturers, regardless of the marketplaces they belong to or the products they offer. This allows producers, distributors, and retailers to find the best manufacturer to fill their needs and manufacturers to find the producers, distributors, and retailers that they can have the best relationships with – creating a win-win for everyone.

Furthermore, it’s simple — composed primarily of plain old forums (discussions), wikis (documents), and blogs, it eschews all of the new social networking nonsense that plagues many other sites. Considering that most social networking sites are, at least in the doctor‘s view, a big waste of time, I believe that this is a good thing. The internet is one of the best tools for knowledge sharing that we have, and the best sites are those that promote the sharing of knowledge, not your latest anti-ephiphany. (After all, does it really matter that you think Britney should be boycotting her current fashion line because of sweat-shop utilization? And do you really want the world to know you read BritneyZone daily? [Hat Tip: Google Search] So next time you use Twitter, remember the definition of the word.)

However, the real beauty of the concept, is the fact that it serves as the foundation for Open Source Manufacturing, which, as Jason Busch also points out over on Spend Matters, is quite cool and forward looking. After all, some of the best innovations in IT have come from open source, and some of the best successes in R&D have come from open innovation networks like NineSigma, InnoCentive, and YourEncore, and crowd-sourcing has been used to successfully streamline process. Just think what open source could do for manufacturing. It could improve processes and products. Even more importantly, it could open manufacturing design up so that, if you’re an engineer, inventor, or just a tinkerer, you could build your own products and not have to worry about a manufacturer going out of business if there’s a product you really want to keep using. For example, imagine an open source car that anyone could build parts for and that anyone could maintain. You wouldn’t have to worry about manufacturer bankruptcies, or, better yet, unnecessarily high prices or poor quality. And this could be just the beginning.