Category Archives: Sourcing Innovation

Show Me The Money! (Supply Chain Cost Reduction Opportunities)

Show Me The Money!

Sorry to disappoint you, but this isn’t a post about Cuba Gooding Jr., whom all of you action fans will remember as recurring minor character Billy Colton in MacGyver near the end of the series.

Instead, this is a post about how you can Show Me The Money by applying the proper technology at the proper places and proper times in your supply chain to save big, even with rising material costs, inflation, and the global talent war.

The reality is that unless you are best-in-class, and the harsh reality is that, by definition, the vast majority of you are not, your supply chain is hemorrhaging cash. And in all likelihood, lots of cash. Where?, you ask. Everywhere!

Let’s take a simplified PC supply chain for example. Raw materials are mined and shipped to a processing plant where they are refined and shipped to base part manufacturers. These base parts (such as chips, wires, etc.) are then shipped to component manufacturers who produce circuit boards, hard drives, cables, etc. These base components are then shipped to an assembly plant where the PC is assembled. From the assembly plant it is shipped to a central distribution center where it is then shipped to either a regional distribution center, store, or your home, depending on the sophistication of the distribution center.

Furthermore, the specifics of your supply chain depend on who you choose to buy from, who your suppliers choose to buy from, who is chosen to handle your transportation requirements, and who you choose to sell to.

From this example, we derive the following fundamental sources of cost:

  • Labor (inc. raw material collection, processing, & subsequent part and component handling)
  • Parts (inc. design, component raw materials, & built in production operations)
  • Operations (inc. part production, handling, & overhead)
  • Transportation (inc. raw materials, parts, components, & finished product)
  • Buying (who you buy from, where, & when)
  • Selling (who you sell to, where, & when)

However, from a savings viewpoint, not all of these are equally important, since only some of these are really hemorrhaging cash, despite their absolute value on the cash flow statements.

  • Labor is more or less defined by market rates. Moreover, companies that pay more for more productive people often have a higher ROI per person than those that pay less.
  • Selling is marketing, materials, and labor. The first is generally not under your purview, and again the issue is not cost, but results; the second is covered by buying; and the third we just discussed.

This tells us that the fundamental sources of cost, and thus the fundamentally sources of unnecessary costs, ripe for saving, have to do with:

  • Parts
  • Operations
  • Transportation
  • Buying

And those of you reading regularly will know what the answers are.

But back to the point – how do you Show Me The Money? You use these solutions to identify where you are hemorrhaging cash, tackle the issues head on, and stop the leak. And then you point to the big, fat increase on the balance sheet as your doing. And that’s how you Show Me The Money!

It’s also why I keep talking about companies like the following:

  • Apriori, Akoya (acquired by I-Cubed), etc.
  • Informance (merged with QlickiT, acquired by Catalyst IT), Apexon (acquired and merged with Infostretch), etc.
  • CombineNet (acquired by Jaggaer), i2 (acquired by JDA, rebranded Blue Yonder after the acquisition thereof), etc.
  • Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric), Procuri (acquired by Ariba, acquired by SAP), BIQ (acquired by Opera Solutions, rebranded ElectrifAI), etc.

They may be small, they may be new, but they are trying to build a solution that will help you find those savings leaks that you are not likely to find on your own. So keep reading!

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.

Sourcing 2007: Part II

Today, two more great posts and a summary of the main prediction of Aberdeen’s CPO’s Strategic Agenda 2007 hit the blogsphere.

Stay tuned. Tim Minahan’s main post is on its way (yesterday’s was just the prelude to wet your appetite) and I’m sure at least one guest blogger is not going to be able to resist the temptation to chime in!

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.