Category Archives: Sourcing Innovation

e-Leaders Speak: David Bush of Iasta on “Strategy for Success in e-Sourcing: Sourcing Execution”

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Today’s guest post is from David Bush of Iasta.

As any one who has been around e-Sourcing technology for any amount of time knows, the greatest sourcing and procurement successes are directly tied to properly managing adoption and continued usage by both the sourcing and stakeholder communities. The best software in the world is only marginally effective if only a tiny fraction of spend is under management and being executed through a strategic sourcing process. To be truly successful, companies must bring more spend under management.

In this Sourcing Innovation series which highlights strategies companies can utilize as the global recession slowly releases its grip, I will focus on a critical strategy that consistently drives success. It is not a theoretical concept that requires the use of the latest-and-greatest functionality, but one that works in the real world with tools most companies already have in place.

The critical strategy I refer to is Sourcing Execution, the tactical operation of strategic sourcing performed by a third party for a procurement organization. Most people are familiar with procurement outsourcing from years of experience with very large entities such as IBM or Indian BPO providers handling the P2P process in a remote call center. What a number of organizations are beginning to learn, however, is the same tactic can be done within the sourcing department. Automating transactional driven functions within the sourcing process increases the efficiency and impact of sourcing teams which will, in turn, increase spend under management and savings.

AMR Research has covered this topic very well, specifically in their latest research on “The 2009 Supply Management BPO Landscape: Short-Term Body-Shopping Trumps Business Transformation”. They have built a nice example of this process contained within the Spend Analysis model summarized below.

Offshore Operating Model
As clearly outlined in the example, there are very distinct areas labor can be divided. The outsourcing of tactical data management can increase the effectiveness of the local resources. Another compelling strategy for Sourcing Execution is to identify and outsource the “block and tackling” of the competitive bidding process. Companies can use different methods to achieve this goal:

  1. Tactical Execution:
    Support from the partner is generally remote and process oriented. Internal stakeholders prepare the bid data and deliver it to the partner to be executed in a pre-determined way as designed by the procedure team/steering committee. For example, taking the RFP elements and building the online sourcing project and inviting suppliers to participate. The third party makes no sourcing decisions, but the time line is dramatically compressed, thus allowing the organization to focus on the more strategic objectives of the category.
  2. SME Assisted:
    The next level of “on-demand” support makes Subject Matter Experts (SMEs) available on a short term basis, to offer strategic input during the most critical phases of the sourcing process. These SMEs might be experts in supply markets, risk/financial analysis, e-Sourcing or specific category expertise that is valuable. For example, developing a complete RFI/survey or relevant lotting strategy.
  3. Category Implementation and Compliance:
    A sourcing project is only as good as the implementation rate. If a company identifies 20% savings for a category and implements 5%, the actual delivered savings is zero. Category compliance services provide tactical support for tracking and following the implementation of awards by managing reports that highlight compliance areas that need attention. The service can also distribute repetitive information to suppliers and stakeholders as it relates to new contracts.
  4. Category Management:
    Full blown sourcing advisory services at a category level where a qualified sourcing professional manages the most of the sourcing lifecycle — from spend data collection through award analysis and negotiation. This is the traditional X-step process, depending on which management consulting firm got their first. The SME is an extension of the procurement team for 8-14 weeks on average. This period can be extended if implementation and compliance are required.

A shared service approach to outsourced strategic sourcing delivers numerous benefits. A normal sourcing lifecycle can be reduced to 2-6 weeks from a standard 2-6 months. This allows internal category managers to focus on strategic initiatives, supplier development and core Tier-1 sourcing opportunities. Allowing indirect and “C” Level items to run through collaborative management, increases the amount of spend under management and reduces costs dramatically without adding head count.

Two resources on this topic that are worth exploring in more detail are the previously mentioned AMR Research (specifically Phil Fersht and Mickey North Rizza) and TPI. Bill Huber at TPI is very wise in these topics as he has implemented and researched outsourcing for years.

Simply outsourcing for the labor arbitrage is a short term plan which will not have sustained results. Simultaneously leveraging a technology, process and people strategy enables you to realize sustainable objectives.

 

Thanks, David!

Are Bad Financial Tools Killing Your Innovation?

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Not enough companies are innovating, even though it’s doubly important that they do so given the current economic climate. Now some companies don’t, and probably won’t ever, get the importance of innovation, and as sad as it is, I get that. A few companies do get the importance of innovation, and are still focussed on innovation. And then there are those companies where the leading thinkers get it, but the management says no because it’s too expensive and too risky, despite the low-risk proposals and high ROI presentations that are put forward by brilliant staff.

Needless to say, this has perplexed me because while I know for a fact that there are always going to be those managers who are just too stupid to get it, I have to assume this is not the case at the average company because most boards don’t put up with idiots for too long, especially when business is going down the tubes. So I did some research, and stumbled upon a great article in last year’s Harvard Business Review that might account for some of the reasons management says no when they should be saying “that’s great … do it now“!

In “Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things”, the authors highlight three financial analysis tools whose misguided application will cause a CFO to say no to innovation every time, even when the answer should be an exuberant yes. More specifically, the following financial methods tend to lead the CFO, and management, towards the event horizon of the do-nothing black hole where they get sucked in to the forever stagnant singularity from which they’ll never escape.

  • Fixed and Sunk Costs
    The method of evaluating fixed and sunk costs with respect to future investments confers on unfair advantage to the status quo.
  • Share Price
    The emphasis on earnings per share as the primary driver of the share price to the exclusion of almost everything else diverts resources away from investments whose payoff, no matter how large, lies beyond the immediate horizon.
  • Discounted Cash Flow (DCF) and Net Present Value (NPV)
    The common application of these methods to evaluate investment opportunities causes managers to underestimate the real returns and benefits of investment in innovation.

Of these, the DCF and NPV is probably the deadliest because its often the first calculation done by the CFO, and when your proposal fails this biased sniff-test, your project is stopped cold in its tracks.

So what’s the problem? Why does the DCF, which should be capturing the financial benefits of ROI innovation projects, instead illustrate that they will yield less of a return than the status quo?

The problem, referred to as the DCF trap, is that when most financial managers compare the expected cash flows from an innovation project against the default scenario of doing nothing, they incorrectly assume that the present health of the company will persist indefinitely if the investment is not made. We all know that this is not the case. Pick a vertical … any vertical … the sale of every product declines over time because people always want “new” and “improved”. It’s nothing new. Archaeologists have illustrated that the life-cycle of pretty much every “invention” throughout history followed the battleship curve. This means that, if you do nothing, sales will eventually start to decline.

If, instead of assuming flat line revenues for doing nothing, the financial manager correctly assumed declining revenues starting 6 months to 3 years out (depending on the vertical and product line), they’d quickly see that the loss associated with doing nothing is much greater than the “sunk cost” of a new innovation project, even if the ROI turned out to be less than expected.

Long story short, next time you’re turned down on an innovation request, ask why. When they say it costs too much, or the risk is too high, ask to see the calculations. Review them, find the “trap”, redo them, and try again. You might not succeed (because some managers will never admit their mistake), but if you start educating them, maybe the next project you present will get approved, allowing you to get back on the road to innovation.

Four Rules of Global Sourcing Excellence

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In Introduction to Sourcing Transformation by Houston, Schwarting, Spieker, and Turner, published in Booz & Co’s “Sourcing Reloaded”, the authors put forward four rules of the road in global sourcing that should not be forgotten in your current quest to lower costs:

  • Pick Your Spots
    Start your sourcing transformation by redesigning procurement procedures in simple, concrete ways that can produce measurable and significant value.
  • Create Total Transparency in Purchasing Costs and Trade-Offs
    Make-vs-Buy decisions, supply chain re-design, and the ramifications of sourcing changes should be clearly articulated so the organization understands the reasoning and buys in.
  • Collaborate Fully with Internal and External Stakeholders
    A robust sourcing process depends on participation throughout the product life cycle, from the concept stage in R&D to the final disposal or salvage of the product.
  • Become an Influential Corporate Leader
    Successful CPOs build confidence by leveraging their position in the executive suite.

Whether times are good or bad, the basics don’t change.

Is it Time for the Mass Implementation of Knowledge-Based Sourcing?

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In Win-Win Sourcing by Bill Jackson and Michael Pfitzmann in Booze Allen’s “Sourcing Reloaded”, the authors define knowledge-based sourcing as an approach where manufacturers and suppliers share a long-term commitment to improving each other’s capabilities, starting by working together to eliminate wasted effort and other inefficiencies. They then highlight the Honda Motor Company approach to contract formation. The executives of each company come together in a room, put their concerns on the table, write their proposed actions on a whiteboard, discuss them, and when everything on the whiteboard is agreed upon, the meeting is over. The contracts are typed up, printed, signed, and the contract is executed.

It has many benefits. For example,

  • there is no wasted effort in months of back-and-forth point-counterpoint negotiation
  • openness and trust is established up front
  • action plans are defined day one
  • teams can focus on building value and sharing knowledge

Instead of being at odds, the two sides collaborate openly to lower costs and raise overall performance, with the expectation that this mutual effort will continue over many years and benefit both companies. The focus is on value creation, and not just the lowest price. Considering that the lowest price is rarely the lowest cost when you consider transportation, reliability, quality, and “value” that you can charge a premium for, the approach certainly makes sense. That’s why the knowledge-based sourcing model traditionally outperforms the traditional bid-based model and one of the reasons why Honda and Toyota are not in the same straits as their American counter-parts.

But we all know that there is no silver sourcing bullet or universal sourcing model that will always work. So when and where should you use it? I believe it really comes down to what are you buying and the faith you have in your supplier. Are you buying raw material or finished product? Commodity or Premium Product? Production or Value-Add Design? I also believe that it should be part of a multi-step sourcing process and not just the go to method. A deep relationship is only going to benefit both parties if it is a good match and your supplier is going to be around for the long term.

Basically, I think it’s just another method instead of “sealed-bid” or “e-auction” as part of a multi-round process. If the category you are sourcing could benefit from the approach (i.e. it is of sufficient complexity and there is an opportunity for joint value creation), then I would start with a two-step RFX process. First, I’d do an RFI to find out what suppliers have the potential to meet my needs and then an RFP to find out how, and in what expected price range. Then I’d take the best RFP and stat the knowledge-based sourcing negotiation. If it went well, there’s my supplier. If it didn’t, next supplier on the list. Thoughts?

Innovative Analytics & Training is Unleashing Strategic Sourcing 2.0 …

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But Will It Be Enough?

If you surf on over to the Innovative Analytics and Training website, you can download a white-paper on Strategic Sourcing 2.0. Focussed on automating networks and analysis in a more rigorous fashion, it’s a nice take compared to the standard sourcing methodologies that many big name consultancies have been putting forward, but, especially these days, sourcing is a multi-disciplinary exercise that requires a lot of inputs up front to get it right.

The model put forward covers five core capabilities that the author believes are key to successful global sourcing. Specifically, building on the core dimensions of information, people, technology, and infrastructure, these capabilities are:

  • Source Discovery
    Source discovery is the process of identifying the right partners, vendors, and suppliers. This phase starts with an information gathering phase that identifies the potential partners, vendors, and suppliers and gathers all of the factual and objective information that is available. This phase often involves web searching and crowdsourcing.
  • Source Evaluation
    Once potential sources are identified, a careful evaluation process begins. In this phase, the author recommends accessing a multi-cultural expert network to assist with a rigorous evaluation that considers a potential supplier’s capabilities, economics, resilience risks, responsiveness, strategic alignment, and other advantages or disadvantages to your specific situation.
  • Source Network Management
    Legacy IT systems are architecturally inadequate and unable to provide multi-company visibility, collaboration and flawless transaction execution across an ever-growing network of customers, suppliers, outsourcing providers and employees. State of the art systems, in comparison, support multi-enterprise sourcing networks with sensors that provide all parties near real-time insight into the network’s performance. A multi-enterprise sourcing network, built on an open-architecture delivered on a SaaS platform, provides real-time insight into all aspects of the sourcing network.
  • Sourcing Analytics
    Based on the philosophy that competitive advantage can be sustained in the future by advancing the quality of one’s insight anddecisions – the outcomes of analysis, sourcing analytics is an emerging analytic discipline focused on strategic sourcing that must be a core competency of any modern global sourcing organization, which must also have an eye angled toward optimization. At the very least, this platform must support the computation of the core metrics of perfect order, cycle time, supply chain flexibility, supply chain management cost, and cash-to-cash cycle time.
  • Sourcing Resilience
    A resilient network, at a minimum, includes:

    • acceptable levels of redundancy,
    • acceptable security,
    • insight into business, network, and risk,
    • rapid insight and response protocols for disruptions, and
    • continuity of planning.

It seems to address all of the core requirements for modern sourcing, but, and this is the biggie, does it support a comprehensive framework for risk management. Risk is the fifth dimension after people, information, technology, and infrastructure, and if you aren’t managing risk in a cohesive fashion across the process, it will be all too easy for something to slip through.