Category Archives: Sourcing Innovation

The Strategic Sourcing Lifecycle: A Free e-Book for You.

Last fall in our post on how the Trade Extensions Event Was Different, we noted two important things. The first was that the Trade Extensions event was different because, unlike many vendor events, not a single presentation was about their platform — it was all about the customer and the various types of value available to the customer (including a focussed vision, sustainability, and an understanding of how what comes next can generate value). The second was that their message was different. Unlike most vendors which focus on their key capability, their most powerful modules, etc, Trade Extensions only had one thing to say. It’s not optimization. It’s just sourcing.

And SI echoed this point in a series last fall because that’s the truth. It’s just sourcing. And sourcing is not just an RFX, e-Auction, or optimization-backed negotiation. It’s a process. A process that starts with the identification of a need and only ends after the last unit required by the organization has arrived safe and sound and is put to proper use or the last hour of service has been successfully completed.

This process covers the entire product or service lifecycle from the initial planning phase through the traditional sourcing phase (which includes the RFX, e-Auction, Optimization, Negotiation, Contract drafting and award) and the traditional execution phase (which includes performance, relationship, risk, task, and change management) to the analysis phase (which includes a formal review and opportunity assessment before the next opportunity is selected).

This process goes beyond what a typical platform will support, and what a typical vendor will tell you. Especially when the vendor’s platform will not support each and every step that you need to be aware of. But Trade Extensions will tell you (because only educated people can make proper use of a true optimization-backed Sourcing Platform), and to make sure they got it right, they commissioned the doctor to write an e-book that exemplifies the full end-to-end strategic sourcing lifecycle that makes it clear for one and all what it is, what it requires, and what you should keep in mind when looking for a platform to support one or more parts of the cycle. And that e-book has now been made available to anyone who wants it for FREE over on their site. Simply fill out a brief 5-box form and The Strategic Sourcing Lifecycle: A Brief Introduction, a 118 page e-book, can be yours today.

In addition to a detailed definition of each of the four phases (planning, sourcing, execution, and analysis), the e-book also takes you through the evolution of strategic sourcing, Supplier Relationship Management (SRM), the next level of sourcing, complex tenders, and the evolution of strategic sourcing platforms as well as providing you with a detailed sourcing glossary that will define the most common terms and abbreviations. This is essentially a print-book in e-book form as it even includes a full index!

Whereas the most an average vendor will give you is a long white-paper disguised as an e-book, just like the Spend Visibility Guide (still FREE) was the first true e-Book on Spend Visibility and Spend Analysis, this is the first true e-book on the full strategic sourcing lifecycle. Download the The Strategic Sourcing Lifecycle: A Brief Introduction today. It will be worth your time.

Beyond Sourcing Optimization: The Best Bundle is Only the Beginning Part II

As per our last post we recently discussed the criticality of optimization in
It’s Not Optimization, It’s Strategic Sourcing, explained that Even “Simple” Categories Hide Extreme Complexity, and pointed out Why Your First Generation Platform is Not Ready for Modern Sourcing in the hopes that you would understand that you need to be ready for Complex Sourcing.

But Strategic Sourcing Decision Optimization (SSDO) is only one area where optimization can be applied to add organizational value. There are at least half a dozen other areas where optimization can be successfully applied in a progressive organization that is a leader in its industry. As noted in our last post where we briefly discussed inventory optimization, production optimization, and demand optimization — three areas that can hide considerable cost savings when properly analyzed — there are a number of areas in an organization where optimization can identify considerable value. Today we will discuss three more areas.

Service (Level) Optimization

The goal of service level optimization is to find the right balance between customer satisfaction and service cost to maximize profitability while minimizing customer dissatisfaction. While everyone would like a robust high-quality product that lasts until they are done with it, that’s not always feasible. The very nature of many product lines — electronics, automotive, plastic-based CPG is that the products will break down with regular use and/or regular exposure to the elements. Better materials, better manufacturing, and better care will lengthen lifespans, but computing equipment, cars, and plastic boxes don’t last forever. And if the intended lifespan is 3 years, it’s not cost effective to build a product expected to last 13 years. However, the nature of things is that if you build a product expected to last 3 years, some units will breakdown and need to be replaced before the 3 year mark is up (and some will last longer). So what level of warranty do you need to offer, what level of service (in terms of repair / replacement window), how much will it cost, and how much will the market bear. Finding the right base / extended offerings and price points is key to maximizing both consumer demand and customer satisfaction.

Asset Optimization

Big organizations have a lot of assets, often assets they often don’t know that they have. For example, unused compute power in the data centre, unused production time at the factory, and unused equipment in the yard. This last category can be a huge burden to an organization that is paying a lease or amortized monthly payment on a 10-year plan for equipment that is only being used part of the time. (That’s why renting by the job or renting out might be a better solution.) And if an organization is continually renting the same equipment for multiple projects, it might make sense to buy and share the equipment between projects, even if it has to be transported between locations. Asset optimization can save an organization a lot of money and can often, when done properly, considerably increase working capital. This brings us to:

Working Capital Optimization

Optimizing the balance between assets and liabilities, working capital ensures that a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses without creating a crushing debt load or jeopardizing long term profitability. Working capital optimization is tricky as it involves balancing with DPO (days payable outstanding) with DSO (days sales outstanding), early payment discounts (on the inbound and outbound supply chain), supply chain and invoice financing, short and long term investment opportunities, and short-term gains vs. long term cost reductions. It’s not easy, and, like all of the other examples of optimization covered in this brief two-part series, often requires sophisticated optimization.

These are just a few of the examples where optimization can yield significant benefits beyond sourcing and where Sourcing can bring additional savings and value to the enterprise since it will be able to collect a lot of the data and intelligence that is required to build, and solve, the sophisticated models required.

In future posts we will discuss these types of optimization in depth as well as the new breed of providers tackling these types of supply chain optimization. Stay tuned.

Beyond Sourcing Optimization: The Best Bundle is Only the Beginning Part I

We recently discussed the criticality of optimization in
It’s Not Optimization, It’s Strategic Sourcing, explained that Even “Simple” Categories Hide Extreme Complexity, and pointed out Why Your First Generation Platform is Not Ready for Modern Sourcing in the hopes that you would understand that you need to be ready for Complex Sourcing.

But Strategic Sourcing Decision Optimization (SSDO) is only one area where optimization can be applied to add organizational value. There are at least half a dozen other areas where optimization can be successfully applied in a progressive organization that is a leader in its industry. In this post we’ll outline some of the best opportunities, a few of which have been covered before, and in future posts over the next year we will dive deeper as we introduce you to some of the companies exploring the use of optimization in these areas to bring your operations the same level of savings that your SSDO vendors are bringing the Sourcing and Procurement organization.

Inventory Optimization

Inventory optimization can be defined as the act of balancing supply and demand uncertainty to meet a desired services level at a minimum level of investment. But this is easier said then done. Not only do you have to consider the myriad of carrying costs that need to be balanced — warehouse rental costs, labour costs, and depreciation costs — but also take into account the costs associated with stock outs, alternate distribution costs if inventory is improperly distributed, and lead time costs, and try to balance them all.

Production Optimization

Optimizing inventory is a good start when it comes to reducing overhead costs, as inventory carrying costs can be as high as 25% by some estimates. However, production costs can also be unnecessarily high if production is not optimized. Production line down time is costly, and a production line goes down every time it is switched up to produce a new product (or a new variation). Thus, it’s not always best to plan production by order volume, but by total volume for a period, optimizing production runs to maximize throughput (and worker time), minimize downtime, and, most of all, minimize switching times. Especially if order volumes vary and part of the year would otherwise require overtime to meet demand.

Demand Optimization

The counterpart to production optimization is demand optimization. Not only does it cost the organization hard dollars to carry inventory unnecessarily or use poor production plans, but it also costs the organization hard dollars to product unprofitable product lines or cater to unprofitable customers. For each product line there is a production cost, a marketing cost to increase demand, a cost of goods solds (COGS), and an opportunity cost from not producing a potentially more profitable product line. Demand optimization is optimizing what product lines to produce, how much to invest to shape demand, and when to produce those product lines. It optimizes organizational profit by focussing on profitable product lines and marketing activities versus marginally profitable or unprofitable activities.

And these are only a few categories where optimization can increase performance, and profit. In part II, we will tackle three more areas. Stay tuned.

It is NOT Direct or Indirect — It is Strategic and Complexity!

Now that we’ve set the record straight on sourcing, it’s not a suite, it’s just sourcing; and optimization, it’s not optimization, it’s strategic sourcing; it’s time to set the record straight on another rampant misconception perpetuated by vendors who make their living off of the ignorance they perpetuate.

It is not direct or indirect — it is strategy and complexity.

The right way to source a category has absolutely nothing to do with whether it is a direct category for your organization or an indirect category for your business. Nor does it have anything to do with whether or not it is a category regularly sourced by your GPO or whether or not the GPO has it under contract.

First of all, as we elucidated in our most recent paper on “Complex Sourcing: Are You Ready”, even the categories that were traditionally seen as the simplest indirect categories are sometimes actually among the most complex “direct” categories that the organization possesses!

Secondly, what is indirect for your organization is direct for another organization, and a supplier in particular. Calling it indirect only masks the fact that, at some point in the supply chain it is a complex direct category and if your supplier, or GPO, is not approaching it correctly, a significant amount of money is being left on the table.

While there are some that would very much like to forget that before the introduction of e-Negotiation (e-RFx and e-Auctions), a number of “indirect” categories used to cost organizations millions — such as tires in automotive, lights in aviation and printer ink in back offices everywhere — this is not the right thing to do. We have to remember that these organizations never understood how much these “secondary” categories were really costing them and that, sometimes, 100% profit margins were the norm, because they often did not have the ability to go out to market like we do today.

Thirdly, while a product organization might see services as indirect as such a category would be labelled as non-core, and, similarly, while a service (or financial) organization might see a product category as indirect as it too would be labelled non-core, if such service, or product, is essential for the organization to deliver the product, or services, the organization profits on to the end consumer, how can such a service, or product, really be non-core?

For example, if successfully selling that next generation cellphone requires augmenting the supplier’s design team with a new design team that can enhance usability above the competitor’s product without sacrificing a low-price point or quality, that is a critical service and should not be treated as a secondary outsourced indirect category. Similarly, if delivery of your big data analytics services requires a specific high-end laptop configuration that can not be easily met by all providers, and a sub-par configuration would result in delays or service degradations, this is not a category that can be thrown over the wall to a GPO either.

In other words, direct or indirect has no correlation to the complexity of a category or its strategic importance to the business and, thus, should not be used to determine the appropriate sourcing strategy. The right way to initially classify a category is to use a basic measure that that captures its strategic importance and its complexity and any category with a measure that exceeds a certain threshold must be strategically sourced. The rest can be sourced using simple spot-buys or other traditional methods provided that they are not too complex, or too strategic in someone’s view, for these traditional methods.

Where do you start on your Supply Management Journey?

In our last post on the subject matter, we noted that there is no one platform, just one workflow, and the only way to make progress is to define the one workflow, identify a set of overlapping/integrating systems to achieve the one workflow, identify vendors that can provide these systems, and then select those vendors that best meet overall organizational needs and move forward.

But where does one start? This is a very tough question, and very organization dependent.

  • What does the organization have now?
  • Where is the organization in its Next Level Supply Management journey?
  • What is the talent profile — what is its average and collective IQ, EQ, and TQ?
  • What are the organization’s biggest pain points?
  • What are the organization’s top pressures?
  • What is the organization’s budget?
  • What resources does the organization have available to support implementation and change management?
  • What resources and programs do its current, and prospective, vendors have to help?
  • And so on.

It’s tough. Typically, an organization makes the jump when it’s desperate to get savings, and typically, when doing a systems buy, the organization will focus on the system that is advertised to identify the biggest return. In Supply Management, that’s a true strategic sourcing system that supports complex sourcing as only decision optimization and spend analysis technologies have been repeatedly found to identify year-over-year savings in excess of 10%, with everything else being single digits.

But identification is not realization. In an average organization without the proper processes and systems to support contract implementation, as per a classic AMR series on reaching sourcing excellence, an average organization will only capture 60 cents to 70 cents of every dollar of negotiated savings at the end of the day.

If the organization is not set up to capture savings, it has to start simple. Processes. e-Procurement. SRM to get suppliers on board with processes and programs that will allow it to capture data and insure the suppliers deliver the value they promise without constant monitoring by the buyer. If the organization is set up to capture savings, but can’t identify any, it has to look at more complex platforms or options. However, regardless of the answers to the above questions, it should start simple and work it’s way up the technology and process complexity ladder. The key to success will be adoption, and that will mean not overwhelming those that will be required to adopt the new systems and processes if success is to be achieved.