Category Archives: Sourcing Innovation

The Voice of the Customer

As mentioned in yesterday’s post on What Can The Right Supply Chain Transformation Do For You, there are a number of best practices that should be followed when undertaking a supply chain transformation but by far the most important is to listen to the voice of the customer. Since the whole purpose of the supply chain is to serve the company and the whole purpose of the company is to serve the customer, the best supply chain is one that serves the needs of the customer from end to end and enables the company to excel in the products and services it provides.

Even when considering manufacturing, service, and raw material suppliers, the voice of the customer has a hand to play. The voice of the customer has a role to play at each stage of the supply chain mega process. Whether you are Planning, Buying, Making, Moving, Storing, Selling, or handling a Return — the customer’s needs must be considered. The following are just a few of the questions that can be asked at each stage:

Stage Question
Plan What needs does the customer have?
What products or services might meet these needs?
Which of these do we have the competence to offer?
Buy What materials or services do we need to offer the products or services we plan to offer?
What level of quality is the customer expecting?
How robust do the materials or services need to be?
Make What features are most important to the customer?
What level of quality is required?
What materials should be avoided because they might be hazardous?
Move How fast does the customer need the product?
How environmentally concerned is the customer?
Are there any special transportation requirements required to insure the product arrives to the customer as expected?
Store Where should we place the product to get it to the customer when they need it?
What are the storage requirements to maintain quality and integrity?
Sell What price point is the customer expecting?
Where does the customer expect to buy the product?
Return If something goes wrong, how does the customer expect to accomplish a return?
Where does the customer expect to make a return?
How efficient does the customer expect the return to be?

If you answer these questions correctly, then you just might have a customer who says:

  1. I need a solution.
  2. I know where I can get it.
  3. I buy from you.
  4. My order goes “in production”.
  5. My order is then put “in transit”.
  6. I get and use the product.
  7. I get support when I need it.

And that’s a successfully transformed supply chain.

What Can The Right Supply Chain Transformation Do For You?

There’s a two-fold reason one of the top themes for SI this year is Next Generation Sourcing and a reason SI has spent posts (upon posts) discussing CAPS Value Focussed Supply, Tompkins Associates’ Supply Chain Value Creation Framework, BravoSolution’s High Definition Sourcing, Purchasing Practice’s Innovation Framework, The MPower Group’s Next Practices, and, shortly, Greybeard Advisors’ Next Level Supply Management. Not only is your supply chain not likely to survive the prolonged global economic recession and “jobless recovery” without it, but it’s going to mean the difference between survival and smashing success.

As proof, I point you to The Lessons from Dell’s Supply Chain Transformation, a recent videocast and article over on Supply Chain Digest.

While Dell’s investor relations group edited out some of the more detailed metrics that resulted from their recent supply chain transformation, the ones that stayed were extremely compelling.

  • 300% reduction in forecast error
  • 30% freight cost reduction
  • 30% manufacturing cost reduction
  • 37% improvement in product availability
  • 33% improvement in order delivery times

That’s more-or-less a 30% improvement across the board! All you have to do is implement best practices and, most importantly, listen to the voice of the customer at each stage. (And yes, it’s often easier said than done, but those returns are worth the effort.)

Purchasing Practice on Supply Management Transformation: Lead on Innovation

In keeping with one of SI’s major themes for 2011 on Next Generation Sourcing, today we are going to discuss the recent Transform white paper from Purchasing Practice (a strategic procurement advisory company). Entitled The Brave CPO: Leading on Innovation, the white paper defines the CPO’s role in innovaton with respect to business strategy and procurement strategy and discusses how the CPO can leverage external innovation networks.

The white paper starts off by discussing the need to understand the company’s growth strategy, which generally falls into the Market Penetration, Market Development, Product Development, or Product and Market Development buckets, and how Procurement can help. According to the white paper, innovation is increasingly sourced external to the organization, placing the skills and responsibilities of the procurement function right at the heart of its process. This is a very important, but overlooked point. As companies continue to outsource more and more of product design in addition to manufacturing to strategic suppliers, the importance of Procurement and Supply Management to successful innovation increases exponentially. It’s literally the difference between smashing success and abject failure.

Plus, without Procurement’s help, as they are in the best position to understand supplier capabilities, the business won’t be able to answer the critical questions necessary to select the growth strategy. Specifically,

  1. Target customers can only be identified once the organization is sure it can provide the products or services they require.
  2. Products and Services can only be selected once the organization knows that it can offer those products or services at a profit (which can only be known once cost is known).
  3. Product and Service Delivery can only be determined once the efficiencies and costs of the different options (which will often include 3PL or third party support) are determined.

Then the white paper discusses some core innovation drivers, which generally fall under business, market, technology, and environmental categories. These drivers fit nicely with CAPS recommendations for creating tomorrow’s value, as outlined in SI’s post on VFS Level 3. Especialy since a good innovation strategy optimizes costs and resource utilization, improves organizational flexibility, and promotes sustainability in the long term.

After addressing the innovation drivers, the paper moves on to a discussion of the Procurement innovation strategy (and the need to connect it to the organizational growth plan). A good strategy is one that reduces costs through cycle time reduction, exclusive knowledge or intellectual capital, preferential access to scarce resources, increased agility, environmental friendliness, or sourcing innovation, since cost reduction is always a concern of CXOs and increases the chances of organizational support across the board. The strategy is often identified through an analysis of the organization’s competitive priorities to determine which one Procurement can make the greatest contribution to.

Once the Procurement innovation strategy is selected, it’s then up to the CPO to make it happen. This will require proactive leadership as the CPO must convince the C-suite it’s the right way to go and the team that their effort will pay off in the end. In addition, the CPO must define, commit to, and meet targets, metrics, and budgets to gain the respect the Procurement department will need for continued success over the long term. In addition, CPOs must make sure the right organizational, procurement, and individual capabilities are in place for success.

Finally, the white paper discusses the concept of Innovation Centered Procurement, which is Purchasing Practice’s equivalent of CAPS Value Focussed Supply, The MPower Group’s Next Practices, Tompkins’ Associates Supply Chain Value Creation Framework, Bravo Solution’s High Definition Sourcing, and Greybeard Advisors’ Next Level Supply Management. Since it’s not much different from the other frameworks, we won’t discuss it in detail, but will suggest that you definitely add this white paper to your Next Generation Sourcing library. To obtain a copy, send an e-mail to info <at> purchasingpractice <dot> com with the subject heading “Leading on Innovation“. The discussion of high level enablers and leveraging external innovation networks is a must-read for anyone trying to take their supply management organization to the next level.

Open Call for Demos and Thought Leadership

While Sourcing Innovation is always willing to consider unsolicited guest posts on any supply management topic, right now Sourcing Innovation is interested in the following subjects and looking for thought leadership on these important issues that are going to shape supply management in the years ahead.

  1. Next Generation Sourcing
    Whether you call it Value Focussed Supply (CAPS), Next Practices (The MPower Group), the Supply Chain Value Creation Framework (Tompkins Associates), High Definition Sourcing (Bravo Solution), or Next Level Supply Management (Greybeard Advisors), its clear that the practice of supply management must continue to advance if a supply management organization wants to obtain, and maintain, world class status.
  2. Supply Chain Education
    I’m convinced that, right now, Supply Chain Education is Broken and that a new model is needed to fix it. I’m looking for supporting and contradicting views on the issue. We need to establish a dialogue around this fact before its too late because most of your experienced top talent is going to retire and walk out the door in the next five years.
  3. Next Generation Supply Chain Platforms
    Right now, everyone is buzzing over cloud and social network platforms, even though the cloud does not yet offer any apparent advantages over true multi-tenant SaaS and most social networks don’t let you do anything more than waste time poking your friends. We need to figure out what a true next generation platform really is, not what the hype mongers tell us it should be. (Hint: It’s not Twitter.)

*SI has never refused an open demo request, and doesn’t plan to start now, so all requests will be accepted, but it can only guarantee a review and write-up by the end of May to the first seven respondents.

Tompkins Associates and the Next Generation Supply Chain, Part IV

In Monday’s post, we brought your attention to Tompkins Associates’ recent white paper on “Leveraging the Supply Chain for Increased Shareholder Value” which nicely complements CAPS Research and A.T. Kearney’s study on “Value Focussed Supply: Linking Supply to Competitive Business Strategies” and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates’ white paper on “Leveraging the Supply Chain for Increased Shareholder Value” should definitely be on your reading list as you outline your Next Generation Sourcing strategy.

So, today, we are going to discuss the objective of Capital Efficiency.

Capital efficiency is a measure used to determine whether a particular product, service, or operation is profitable, could be profitable with some adjustments, or should be abandoned entirely. The basic measure is computed by dividing the average value of output by the rate of expeniture for a period of time. A good capital efficiency is greater than one.

There are two primary ways for a company to increase capital efficiency. It can reduce working capital or improve the return on its fixed assets.

The most effective way to reduce working capital for many companies is to improve inventory management as significant amounts of working capital are typically tied up in inventory for an average company. The most effective reduction will be realizied when both cycle stock and saety stock is optimized. The white paper on “Leveraging the Supply Chain for Increased Shareholder Value” outlines four techniques that can be used to minimize cycle stock and four techniques that can be used to minimize safety stock.

With respect to improving return on fixed assets, a supply chain has four options. It can focus on the network assets, the building assets, the equipment assets, or the technology assets.

Technology assets need to be upgraded regularly or the cost to maintain the systems will increase as the risk of obsolescence skyrockets. Thus, a return on technology assets can be obtained by upgrading to a new system with addtional value before the technology becomes obsolete and the upgrade prohibitively expensive. (To determine how much the upgrade is going to cost, use the Cost Model Calculations in the SI Enterprise Software Buying Guide.)

Equipment needs to be maintained as no value can be obtained when it is not functional, and if it breaks down to the point of no repair, all value is lost. Thus, value is maintained when equipment is maintained. However, value can only be increased by upgrading to new, more efficient equipment that is easier to maintain, repair, upgrade, and control through modern control systems.

Building assets offer a fairy large opportunity for return on assets. If a building is appropriately designed for a function and has the right height, layout, and column spacing, no space will be lost, operations will be efficient, and, if LEED standards were followed, it will be energy efficient, cheap to maintain, and sustainable. Any building that is not used 100% does not deliver an optimal return. If a building is only partially used, a greater return can be obtained by leasing the unused space, or, if usage is sparse, disposing of the building and acquiring, or leasing, a more appropriate space.

Finally, the network offers the greatest opportunity for a large return on assets as an appropriate network realignment often removes 5% to 15% from total supply chain cost. A well designed network has low transportation costs, high agility, and (geographically dispersed) robustness and can withstand a disruption in part of the network. A good network is optimized, using the techniques outlined in SI’s three-part series on Supply Chain Network Optimization (Part I, Part II, and Part III), and stress-tested against multiple scenarios using a simulation tool.

All-in-all, a company has multiple options for increasing capital efficiency, just as it has multiple options to improve margins and achieve profitable growth. That’s why its important for a company to adopt a value-focussed mindset, implement next generation sourcing and supply chain practices, and chase the value that is just waiting to be extracted from the supply chain. And that’s also why it’s important to add papers like Tompkins Associates’ “Leveraging the Supply Chain for Increased Shareholder Value” to your working library as there aren’t that many resources out there that describe what a supply chain needs to do to get to the next level.