Category Archives: Procurement Innovation

aPriori

Last week, in his Spend Management Goes Upstream series, Jason presented the basics of the “aPriori Philosophy”* on Spend Matters [WayBackMachine]. About the same time, I was lucky enough to meet with them in their Concord, MA headquarters when I was in the Boston area.

I must say that I am very impressed with aPriori‘s solution and definitely convinced that their solution is unique. The reality is that if you’re a best-in-class company that has already implemented technology to support the full strategic sourcing cycle, including spend analysis, decision optimization, and compliance (in addition to the old standards of e-RFX and e-Auction), then your only chance for significant cost savings is to attack the design phase – where the majority of your costs are baked in!

This is precisely where the aPriori solution comes into play. If you’re buying direct materials from a contract manufacturer, now you have a solution for understanding precisely what you should be paying based upon precisely computable geometric (physical) cost drivers and related non-geometric (part-related) costs. The reality is that current market value for a part is not always anywhere close to what you should be paying. For example, a sales representative from a new supplier is not incentivized to give you the best deal, he’s incentivized to get the best deal he can for his company. A supplier that’s always made a certain part a certain way might not realize that new technology or materials would allow them to make that part significantly cheaper if they used a different process. In this case, this is primarily due to a lack of insight.

This lack of insight is precisely what aPriori’s tool was designed to address. The application instantly and directly interfaces with your CAD program and interrogates the solid model to construct the geometric cost drivers that aPriori uses to automatically determine all the process routings that can be used to make the part, compute the costs associated with each step based upon standard machine, material, and labor costs, and compute the total cost of each part on a per unit basis by factoring non-geometric cost-drivers such as production volumes, the selected supplier or internal factory selected, and the exact routing and machines used.

This application allows design and manufacturing engineers to understand the cost of a part before they finalize a specification, evaluate different options, and make the best price-performance decision. But this is not the coolest feature. The coolest feature is that the application is based on factories built on mechanistic process models that allow you to configure the application to understand any physical part or factory/supplier you want to analyze and produce an accurate costing model. Once you produce the mechanistic process model, the solution then applies its built in computational geometric algorithms to determine the most cost-effective construction methodology guaranteed to produce the exact part you need.

The aPriori solution is truly a significant advancement in cost-based design technology. As such, not only will I be blogging about it again in the future, but I’ve also invited aPriori to submit a few guest posts detailing some of the advancements in their platform, complementing their forthcoming posts on Spend Matters, and how these advancements will help your organization save a significant amount of money without sacrificing quality or unnecessarily stressing your supplier relations.

Innovation Tips

Recently, Professor Rosabeth Moss Kanter published an article entitled Innovation: The Classic Traps in the Harvard Business Review (subscription or purchase only). A good executive summary can be found on the IACCM site. Since innovation is one of my favorite topics, I’m going to summarize the salient points and expound on their importance.

Existing corporate structures, controls, and incentives work against out-of-the-box thinking.

Innovation springs from creativity, not from stifled mindsets.

The search for new ideas must go broad and deep throughout the organization.
As I’ve indicated in my Purchasing Innovation series over on e-Sourcing Forum [WayBackMachine] and in my Sourcing Innovation series here on Sourcing Innovation, new ideas can come from anywhere, especially from where you least expect. The key is that you open your mind to the possibilities.

Innovators must be kept connected to the mainstream business.

Otherwise, they will be no more effective than their counterparts in the ivory tower. Although all innovation is good, the reality is that you need innovations that you can profit off of on a regular basis to sustain your business and sustain crucial R&D. Moreover, the best research is that which has a visualizable application (even if it will take time to apply).

You should look for small innovations as well as blockbusters.

A consistent stream of small innovations can often be as profitable as a single blockbuster, and when you consider that blockbusters don’t come along everyday …

Make sure you have Processes and Controls.

Although free thinking needs to be encouraged and supported to get the innovation ball rolling, at the appropriate point in time, each idea needs to be evaluated and a go/no go decision made from a business and ROI perspective.

Select the right leadership.

Your leadership needs to inspire your team to new heights, not drive them to the competition. If you don’t know what I mean, then you need to read more Dilbert.

Defeating Uncertainty (in Demand Planning)

As part of my recent innovation week, I posted Measuring Innovation which provided you some metrics that you could use to measure your innovative progress – since you can’t manage what you can’t measure is as true with innovation as it is with any other business activity. But the importance of measurement goes deeper than you may recognize, as pointed out by recent articles in the Supply Chain Management Review and Knowledge @ Wharton.

According to Wharton, supply chain measurement is a mission critical element but many companies lag when it comes to measuring how well they are doing when implementing new supply chain initiatives. Considering that procurement and supply chain departments are under continual pressure to get better results without increased resources, it’s vital that you use metrics that identify how the strategic needs of the company are being met.

Wharton recommends using the “efficient frontier” to gage capability where you plot points along a trade-off curve between multiple the performance metrics and look for a position that protects your interests and those of your customers simultaneously. For you technical folks, you’re finding the optimal point on a multi-objective pareto curve based upon the relative weightings of the metrics you are using.

However, as the SCMR points out, there are many challenges in supply chain measurement that you have to solve to effectively manage your supply chain and find the optimal point on that multi-objective pareto curve. Old data, too many metrics, constantly changing metrics, and endless debate over metric definition are just some of the difficulties you need to overcome.

The key is to know what to measure, decide on some industry standard metrics to measure it, and have a program in place to measure it that focuses on quality and not quantity. This program should be based on best practices and avoid the common pitfalls of excellence addiction (constant improvement is good, but you need to take it one step at a time), missing data (the right stuff isn’t enough), ingrained inertia (resistance to change), and analysis paralysis (don’t overanalyze or fail to act on the results).

The metric definition best practices outlined in the article are great:

  • design different metric portfolios for different goals
  • keep it small (avoid the “mushroom effect”) as each portfolio must be of a manageable size
  • address the basics: balanced, cross functional, and practical (with respect to cost, quality, time, & effectiveness)
  • align execution and strategy
  • understand the interdependencies
  • balance the need for standards versus customization (every chain should measure demand-forecast accuracy, perfect order, total chain costs, and cash-to-cash cycle time)

Finally, remember to set targets, work hard to achieve them, and retain them once you have reached them.

Procurement Outsourcing V: Provade

In the first post in this series on e-Sourcing Forum, I asked the question “Is procurement outsourcing right for you?”. In the second post in this series on e-Sourcing Forum, I provided some pointers on selecting a Procurement Service Provider, or PSP. In the third post on e-Sourcing Forum I provided some hints on getting the most out of your PSP and in my fourth post I tackled the question I poised in my first post.

In this post, I’m going to introduce you to Provade (acquired by Smart ERP Solutions) a leading provider of managed procurement services for the Global 2000. I’m not going to overload you with details of their services at this time, as you can find lots of information on your own on their site, but simply focus on three distinct advantages they can provide you.

First of all, they focus on Technology Enabled Outsourcing. They use eTools that they have custom developed in house to generate significant savings for their customers in a variety of indirect goods and MRO categories, including labour and legal services – tough nuts to crack for your average BPO.

They built their solution offering using a custom developed off shoot of PeopleTools on top of Oracle – for which they maintain valid licenses on behalf of their clients. Therefore, you do not have to worry about their long-term viability or what happens if you decide that you want to migrate control back in house down the road due to organizational restructurings because you could always migrate the technology they are using in-house, and we know Oracle isn’t going anywhere.

They have acquired significant expertise and experience in the managed procurement space and can apply that experience and expertise on your behalf to give you significant savings on the categories you do not have the volume or expertise to manage in house. Moreover, with the expected growth in the industry, and their standing as a major player, as their current customers entrust more of their spend to them and they acquire more customers, their leverage is only going to increase. I know I’m assuming they are going to continue to grow, but after talking to them last month, I feel that they have what it takes and when you combine the explosive growth that is being predicted with the lack of procurement focused business process outsourcers out there, I see no reason why they should not continue to grow. I’ll be talking to them again in the new year and you can be sure I’ll have more to report at a later date.

Measuring Innovation

One of the results of the Boston Consulting Group’s “Innovation 2006” survey and report that determined that 72% of executives consider innovation a top-three strategic priority was that only 52% of the respondents considered their company’s innovation capabilities to be superior to that of their competitors. This is probably correlated with the fact that only half of the respondents said their companies use metrics to assess the performance of their innovation processes. After all, how can you judge what you can’t measure? (Furthermore, Boston Consulting Group found that among companies that do use metrics, most use only a handful.)

This could be because many companies find it difficult to manage the innovation-to-cash process. There are ways to do this, and one methodology, as provided by the report, is the cash curve of an innovation (which depicts the cumulative cash investments and returns for an innovation over time). The information that goes into the curve isn’t perfect, but it does bring out the many implicit choices, assumptions, and decisions that management teams make out in the open and fosters discussion. Furthermore, it forces you to collect and maintain data, which is necessary for the development of metrics.

What metrics should you use? The Boston Consulting Group also produced a companion report, “Measuring Innovation 2006”, that provides some insight. According to the report, the three metrics that the executives considered most valuable were time-to-market, new product sales, and return-on-investment, but these are only good for measuring the end result, not the intermediate artifacts of the process.

Fortunately, the report also provides you with other possibilities that you can use. Breaking innovation down into inputs refined by a process that produces outputs, the report suggests the following metrics.

For Inputs:

  • Financial resources committed
  • People and Utilization
  • The number of ideas generated and expected payback for each
  • Key capabilities

For Processes:

  • Resources extended per individual project and on-average
  • Cycle times for the entire process and specific parts
  • The number of ideas moving from one stage to the next
  • The difference between the initial expected value of an idea and the actual realized value

For Outputs:

  • The number of new products or services launched
  • Incremental gains in revenues and profits
  • Cannibalization of existing product sales by new products
  • The ROI of your innovation activities

In other words, you have options beyond the basics, and you should use some of them. The report indicates that the ideal number of metrics across all three elements of innovation is between 8 and 12, and I would bet that 9 would be a sufficient starting point. As for what metrics you choose, it’s really not that important. What gets measured, gets improved – and more importantly – understood. As time goes on you can adjust the metrics based on your experience if need be, but the sooner you start trying to measure your innovation efforts, the sooner you will see them improving. The right metrics are important in the long run, but in the short term, it’s about getting there – and without effort, you probably won’t get there at all.