Category Archives: Sourcing Innovation

The 2nd Sourcing Innovation Series: Trading on the Spot Market

Last summer, as part of the Sourcing Innovation sponsored cross-blog series on The Future of Sourcing, Jason Busch theorized over on Spend Matters (in Sourcing Innovation Securitizing Direct Materials) that securitizing direct materials and capacity was in sourcing’s future and that suppliers would benefit from the model as well as buyers.

Under the securitized capacity model, suppliers would be able to forward sell capacity and realize cash flow to fund investments in equipment and labor. They would also benefit through an improved understanding of market price for capacity. Buyers would benefit through an ability to balance reserved capacity and spot-buy capacity to handle demand spikes and to do so at true market prices. They could also take a more active role in acquiring the underlying commodities that go into finished parts from suppliers, reduce risk and variability of supply markets pricing, and avoiding escalation / de-escalation clauses entirely. In addition, if they were not happy with the current market price for capacity, they could try a direct negotiation technique, or they might hedge their bets by buying a “call” on future capacity rather than the underlying contract itself. And if they know the supply market well, perhaps they might even become a trading party, buying and selling capacity for profit based on their analysis of the market.

And now we have some proof that Jason might be right. According to a recent study by Haim Mendelson and Tunay Tunca at Stanford’s Graduate School of Business, “strategically using both fixed-price contracts and open market trading, supply chain participants can create greater efficiencies” (Business Wire). Furthermore, both consumers and supply chains as a whole will benefit from these efficiencies.

Given that availability, costs of raw materials, and consumer tastes fluctuate, shorter-term spot trading is appropriate to handle these fluctuations. Furthermore, just as the stock market summarizes many pieces of information about the performance of a company, business-to-business spot markets can provide up-to-date information about the availability of raw materials, the cost of production, and consumer demand for the end product. Because all of this happens much closer to the time that the end product ships to the consumer, supply chain participants can update their plans to take into account real-time information.

However, it’s important not to overuse the open market, as that can have its drawbacks. Haim and Tunay found that the more you trade, the more you drive the price against yourself. For example, a manufacturer may want to buy 10,000 computer chips at $1 per chip, but trying to buy twice that amount may force the manufacturer to pay twice that amount as cheaper suppliers become exhausted. Thus, buying only in the on-the-spot market raises the risk that you’re going to spend more than you would have in a fixed-price contract made six months ago. On the other hand, you have a better idea of actual need, and may end up spending less by not overbuying. Suppliers face similar risks and benefits, and so may also benefit from both early contracts and spot-market trading. Thus, the best balance between long-term contracting and the spot market depends on the liquidity of the spot-market in the industry a company is buying in.

A good spot market creates efficiencies not only in the spot market itself, but also reaching back to the long-term contract stage. Furthermore, suppliers will anticipate when a well-functioning spot market is rising – where information about supply and demand is current – and price will become competitive early on. This makes the supply chain more efficient and increases the total profit potential while also benefiting consumers, as a more efficient supply chain translates into lower retail prices.

A Kick-Ass Direct Sourcing Solution for Manufacturers: Part II

In yesterday’s post, I indicated that I would introduce you to a solution for direct sourcing that was distinct from your standard sourcing suite and which was designed to manage your PLM-based sourcing needs from day one – and that is what I am going to do.

Believe it or not, the solution I’m referring to is the new solution being offered by Co-exprise (rebranded DirectWorks, acquired by Ivalua), a company that has been around since 1995, managed over 175B in customer spend since their inception, and which is probably still best known for its Co-exprise MarketPlace.

For the past few years, Co-exprise has been working hard to create what they hope will be an entirely new type of PLM-based direct sourcing solution for complex manufacturers – be they aerospace, automotive, defense, heavy machinery, high-tech, medical device, or diversified manufacturing – that directly attacks the trials and tribulations faced daily by the sourcing team who have to source assemblies of ever-increasing complexity while being crunched by continually decreasing product life-cycles. And the solution they have devised is un-like any I have ever seen.

In the situation where you have a lot of complexity to deal with, where you are sourcing complex assemblies of thousands of parts, where you have hundreds (or thousands) of design specification documents in dozens (or hundreds) of formats to deal with, and where you need to collaborate in real time with your engineering team and your supplier’s engineering team, it’s the best solution I’ve seen for the type of direct-sourcing problem they are solving.

The solution, which integrates RFx, auctions, project management, collaboration, PIM, PLM integration, dashboards, and tree-based navigation, also includes enhanced security, contextual-awareness, supplier qualification, and enhanced meta-data capabilities. The application understands over 1500 disparate file formats produced by CAD, CAM, and PLM software solutions and can automatically extract relevant meta-data and apply custom compression techniques (based on wavelet theory and fast fourier transforms) that achieve 50% to 99% compression ratios and allow for faster document transmission, which is very secure as the files are encrypted using 512 bit AE2 compression and access can be restricted at a very fine grained level – and to a specific individual or IP if needed.

The solution is project-based, and everything in the system is an object. This might not sound important, but this allows everything to be cloned, which means that any project, or portion thereof, can be copied and used as a template for a future project. Furthermore, collaboration works on any object in the system – a context can be created on any file, item, sub-assembly, assembly, or project – and a focussed discussion, logged and accessible at any time, can take place. These discussions are then integrated with the task management functionality and can be tracked accordingly. The RFx solution is more than adequate, the auction capability allows for real-time bidding at a latency of only 50 ms, and basic contract management capability is being built as you read this.

It doesn’t have spend analysis yet (though they have stated that they are working on a new type of spend analysis solution more appropriate to direct sourcing then your standard spend analysis solution, which intrigues me even though they are not yet ready to release details – especially since I want to know how they plan to one-up BIQ [acquired by Opera Solutions, rebranded ElectrifAI]), there’s no optimization, and no (third-party) e-procurement integration, but as discussed in yesterday’s post, spend analysis is usually a separate project in these types of direct sourcing projects, complex decision optimization is usually not required (or viable where you usually need a strategic relationship), and since everything in the system can be exported, it wouldn’t be hard to do a batch-based XML or CVS linkage to your current e-Procurement or e-Payment system, so it’s weaknesses are not significant for the problem it is addressing.

As I noted yesterday, there are other solutions out there, like the UGS solution, and you should look at any solution that appears to be relevant before making your selection, but, even though you probably haven’t heard of it, if you’re a manufacturer sourcing complex assemblies, I would not leave the new co-exprise solution off of the short-list when doing your evaluations.

I will be continuing discussions with the co-exprise leadership team (who have 200 years of combined experience in manufacturing and supply chain) and should have more to say in the future, but would like to note that they do plan to update their web-site and materials in the near future and this will help to shed some light on the uniqueness of their product. But in the meantime, if you’re a manufacturer in the market for a direct sourcing solution, give them a call or drop them an e-mail and they’ll be more than happy to give you a demo.

A Kick-Ass Direct PLM Sourcing Solution for Manufacturers: Part I

In this post I’m going to lay the foundation required to introduce you to a new direct sourcing solution if you’re a manufacturer – regardless of industry – who manufacturers, or outsources the manufacturing of, complex parts and assemblies. (In other words, if you’re in aerospace, automotive, defense, heavy machinery, high-tech, medical device, or diversified manufacturing, you may want to read these posts carefully.) This isn’t to say that it’s not useful for the sourcing of simple parts or assemblies, or that it can’t be used for indirect materials (with some caveats), just that the true power of this solution is not recognized unless you’re sourcing (at least moderately) complex parts and assemblies.

This is a distinct solution from the standard sourcing suites that is offered by the likes of Emptoris (acquired by IBM, sunset in 2017), Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric), and Procuri (acquired by Ariba, acquired by SAP); the on-line marketplace solutions like Alibaba or the manufacturing focussed MFG.com; and even the PLM focussed solutions of Agentrics (acquired by NeoGrid) and UGS (acquired by Siemens). Not to say that these are not great solutions, the first set are great solutions for indirect materials and simple direct materials; the middle set are often perfect at identifying potential suppliers and, especially in the latter case, for sourcing simple parts or assemblies; and the latter set are really good for PLM management within your company, but in one way or another, all fall short when it comes to complicated manufacturing and the sourcing of complex parts and assemblies, especially when you’re global.

The reason that this is the case is that sourcing an assembly is not like sourcing a straight-forward commodity, raw-material, or service. It’s not just a matter of performing your market intelligence to come up with a should cost model, executing spend analysis to identify the potential savings opportunity, posting an RFI to identify potential suppliers, creating an RFP to qualify suppliers, sending out an RFQ to get initial bids, (potentially) running an auction to determine final bids and the suppliers eligible for an award, and using decision optimization to determine the final award, which is then contracted. Sourcing a complex part or an assembly is much more involved.

When you’re sourcing a complex assembly or part, both you and your suppliers have a lot of complexity to deal with. First of all, you need to know how many basic parts exist in the sub-assemblies and sub-parts, how many instances of those basic parts exist, and what raw materials and manufacturing processes are required to make those parts. Then you need to identify and find all of the specifications and drawings and make those available, in a secure and controlled way, to your potential suppliers in formats that they can understand and work with. Then you need to enable collaboration between your sourcing professionals, design engineers, the potential suppliers’ production engineers, and the potential suppliers’ sales professionals. The potential suppliers’ production engineers will invariably have questions on the design, process, and materials and require clarifications to determine what will be involved to make the part. Then the potential suppliers’ sales professionals will no doubt have questions regarding the precise specifications and quality requirements of the raw materials so that they can provide accurate quotes based upon the feedback they get from their engineering team. (Does the bolt have to be hardness 5, or will hardness 4 suffice?)

Then something will invariably cost more than you expect, or can afford to pay based upon what marketing thinks sales will be able to sell the product for, and your combined sourcing and engineering team will have to collaborate with the combined sourcing and engineering team of the (potential) supplier(s) likely to get the award to come up with a new design or manufacturing process that will meet costs. During this process, a plethora of new documents and versions will be created and need to be tracked in a manner that is instantly accessible by all parties as soon as they are available. Then you’ll actually have to collect the quotes at the basic part level and be able to automatically roll them up into quotes for the sub-assembly and assembly and be able to compare, at each level, across suppliers to determine which supplier gets the assembly, which suppliers get the sub-assemblies, and which suppliers get the basic parts. And if you are sourcing a complex assembly with hundreds, or thousands of parts, this is no easy feat.

Furthermore, this is not something you can easily do with a standard sourcing suite, even if its on-demand and even if it is augmented with an on-demand Product Information Management (PIM) solution such as that offered by Arena (even though this is a great solution for PIM – and works great even for complex parts during a joint design phase), marketplace, or traditional PLM solution.

This is because standard sourcing suites are not designed for the management of design drawings, CAD/CAM models, and PLM and also since very few handle complex bill-of-materials with hundreds or thousands of parts (as they are designed to handle events with small to moderate sized bundles well), marketplaces are not designed for complex sourcing, and traditional PLM is not designed to be collaborative on-demand over the web.

(You might point out the UGS solution, which I wrote about in this post back in March, and it’s a good solution, but when you get down to it, it’s a relatively weak integration between separate suites of products built at different times for different purposes with different toolsets on different platforms compared to a solution built from the ground up to tackle the direct PLM-based sourcing of complex assemblies head on. Considering the number of mergers and integrations the UGS solutions have gone through, it’s impressive that they took the solution as far as they have. Whereas the UGS solution model is good for those companies who already have one or more of the tools that have been integrated and need an easy stepping stone to get to the next level, the from-the-ground-up model is probably a better way to go for those innovative companies that do not have any of the solution sets or are willing to change the way they look at PLM and Sourcing and take a new, integrated, approach.)

Furthermore, when you are dealing with the sourcing of complex assemblies, it’s usually not the raw material costs you’re concerned about, since these are fairly constant around the globe, but the production costs – which usually boils down to the labor. Auctions have little value beyond the most basic components (such as screws, nuts, and bolts) since the only wiggle room the supplier will generally have is their margin. There are not a lot of (complex) constraints, as you don’t have a lot of leeway, so complex decision optimization is usually not required – it’s really just looking for the lowest landed cost, which is easily computed, while making sure any diversity or dual sourcing constraints are met. So, beyond RFx and (at most) simple optimization, for the most part, you don’t need complex sourcing functionality. And where you are concerned about raw material costs, you’ll do a spend analysis project outside of the individual assembly sourcing events to benchmark your expected costs, which will then be fed into each sourcing event. As for contract management, the contract is fairly simple – provide the required assembly in the designated quantity at the designated time – since all the details are in the appendices which consist of the design documents and CAD/CAM models. So, tracking the design documents, the award, and a single attachment that represents the standard terms generally accomplishes the required level of contract management. And the project management that is required is not really sourcing project management but PLM project management – sourcing project management is just a subset that consists of the quoting phase and final award selection.

Thus, if you are a manufacturer – be it aerospace, automotive, defense, heavy machinery, high-tech, medical device, or diversified – there is a good chance that your current solution for sourcing, if you have one, is likely not meeting all of your needs. Furthermore, to meet your more complex needs, you likely need a new type of direct sourcing solution that was designed to manage your PLM needs from day one. In part II, I will introduce this solution to you. Stay tuned.

(P.S. In order to prevent anyone from ruining the surprise, and to insure all related discussion is centralized in one place – in the forthcoming post II, I’ve disabled comments for this post. Thank you for your patience.)

The Shift from Creativity to Value

I enjoyed reading “The Shift from Creativity to Value”, futurethink’s 2007 annual Innovation Tracker study. As implied by the name of this blog, innovation is a passion of mine, even though I reluctantly have to agree with one of the main findings of the report, that innovation remains elusive.

The study had some interesting findings. For starters:

  • Many organizations set out to become innovative without actually defining what innovation means for their business.
  • Leadership needs to be more committed to innovation if they are to inspire their employees to be innovative.
  • People need a climate that enables them to innovate.
  • People are afraid to fail, feel they don’t have the time or flexibility they need, and believe that their leaders are too averse to risk.
  • Lack of Creativity is an oft-sited hurdle to innovation.

And what do these findings mean?

  • As the study says, organizations need to define what innovation means to them. More importantly, they need to define what it means relative to their current product or service offerings. There are many kinds of innovation, ranging from what would be an apparent solution to a fresh eye to a revolutionary new discovery. But as practitioners of TRIZ know, you’re only going to make a revolutionary advance at most 1% of the time and come up with a new concept at most 5% of the time. However, as any good business guru knows, you don’t need a revolutionary new discovery to be the market leader, just sell a better, more efficient, and more cost-effective product than your competitors. Just look at Toyota. They’re still selling, more-or-less, the same product they sold last year – cars – but they are made better, more efficiently, sell for less than some of their competitors, and offer you more value. And they’re doing great. And it doesn’t take a genius to do what they do, just everyday intelligence, a good education, and perseverance.
  • Leaders set the tone of their corporate culture. If they are not committed to innovation, but are instead committed to “tried-and-true” practices, chances are their employees are also going to be committed to “tried-and-true” processes in their efforts to please management.
  • Innovation requires creativity, creativity requires the right mindset, and the right mindset requires the right environment.
  • Innovation is not a smooth and straight freshly paved highway, but a curvy and jagged pot-holed dirt road that is guaranteed to contain a few bumps along the way. Failure to some degree is inevitable – and that’s not a bad thing. As humans, we can often learn more from our mistakes than our successes. As long as we take the time to learn from these failures, and manage the risks by constraining the impact, there is no reason that we cannot eventually succeed, and sometimes do so beyond our expectations. Thus, it’s important that employees know that it’s okay to fail (as long as you do so within well-defined bounds).
  • The corporate culture is key to creativity, and an organization must adopt a forward-thinking culture from the outset.

The study also points out that innovation is about ideas, and, in a business context, addresses a need and generates value. Furthermore, innovative businesses are those that just do it – not those that just talk about it. Some of the most innovative businesses don’t even talk about innovation as it’s so ingrained into their culture that it’s just natural. And that’s the way innovation should be.

Innovation is Relative

A recent CRM Today article, which quoted Gartner, noted that “Emerging Markets are Increasingly Driving Global Innovation”, that developing nations are adopting innovation and technology faster than mature markets, and that China and India are innovating at a faster rate than ever before. But the title misleads one about the truth, which becomes somewhat clearer in the article, that this innovation is relative to their current state of development.

For example, the article notes that in highly constrained environments, which might include poor infrastructure and low affordability, there is an acute need for products that can serve the local market better, rather than products designed for the developed world. For example, mobile phones which require less power and have built-in connectivity, are more suitable for emerging markets than PCs. They are also cheaper than PCs and more adaptable to the emerging market environment. Gartner predicts that mobile phones will outnumber PCs by a factor of 15:1 in developing markets by 2010.

Furthermore, even though China and India have the ambition to lead the IT industry in the global market, as the article notes, India is still lacking in infrastructure and China still has huge cultural barriers to overcome. As I noted in Can China Be Innovative?, a huge obstacle is the nature of China’s educational system, which stresses conformity and does little to foster independent thinking. This is also a country where new product development is equated equal to copying something someone else does, but doing it slightly cheaper and / or using a new color. Furthermore, as I pointed out in Is Low Cost Country Sourcing to China Really Innovative?, even though media reports in 2004 indicated that China produced 600,000 engineers compared to the 70,000 produced by the United States, more than 290,000 of the Chinese degrees were subbaccalaureate and studies by organizations such as the McKinsey Global Institute have indicated that multinationals find that less then 25 percent of the graduates are employable which indicates that the number of employable graduating engineers in China from a multinational perspective is roughly equal to the number of employable graduating engineers in the U.S.

So even though I can understand Gartner’s prediction that by 2015, IT engineered for developing economies will drive 20 percent of disruptive IT innovation worldwide, I will only agree if innovation is taken in a context relative to the local economy. In other words, I think China, India, and other developing nations, with their huge appetite, will increase their rate of innovation, to the point where they may even exceed the rate of North American and European innovation, but that innovation will be relative to where they are today and that, as such, they can not be banked on as sources of innovation for our developed economies. Not to say that they won’t stumble on a few breakthroughs along the way that will really help us out, just that I wouldn’t bank on it.