Category Archives: Sourcing Innovation

Information … Information … Information

Yesterday’s post discussed the lack of realistic starting points for an average organization that wants to merge onto the value focussed path and the need for information. Then the post discussed e-RFX applications and how they are not always the answer as most are not configured for collecting more than a moderate amount of data, and the information required to make the right decision might require a large amount of data to be collected.

For example, consider the information required to make the right decision in a global freight bid where the company has over 5,000 lanes across five continents that are currently being serviced, in part, by almost 500 carriers. Not only will there be a need to collect up to 1,000,000 LTL and TL bids to know what the lowest rates are, but there will be a need to collect data on capabilities (refrigerated, freezer, hazardous martial, etc.), capacities, and serviced lanes. And then, once all of the information has been collected, past performance, guaranteed service levels, (commitments to) sustainability (such as biofuels and hybrid vehicles) will have to be considered in addition to costs and on-time-delivery capabilities. And if multiple carriers are almost equal, long term viability, strategic partnerships, and/or commitment to social responsibility might also need to be considered.

All-in-all, this represents a significant amount of data that needs to be collected, analyzed, and distilled into useful information — data that is not even going to be collected if a firm is still using a first-generation e-Sourcing platform. This is because:

  1. Traditional RFX tools, which are now a commodity (as every provider and their dog has one — trust me), are not built to collect that much information.
  2. Most of the RFX tools that can handle that much information, typically by way of Excel import and export, are not designed with supplier usability in mind. No supplier is going to quote 5,000 lanes at multiple LTL and FTL levels if they only service 3,000 and 2,000 can be broken into 20 cross-regional groups where each lane in the group is priced the same by mile.
  3. Of the few tools that allow for generic pricing and (typically) single-dimensional overrides, most won’t designed with the ability to easily design multiple levels of overrides and the OLAP-like navigation that’s really need to quickly zoom in on the relevant data items (which need to be viewed or altered).
  4. And while most of the better RFX tools allow a user to define as many RFIs, RFPs, and RFQs as the user desires, these generally have to be crammed into rigid workflows that may or may not fit the scenario at hand.
  5. Plus, while most of the tools can push data out into an auction or a SIM tool (that is the foundation for SPM and/or SRM), most don’t allow data to be pulled back in, since the first generation e-Sourcing model was a linear RFX -> Auction -> Decision Optimization -> Award -> Contract Management -> SPM flow.

And then, once you get past all that, you still have to analyze the data to distill the information required to make a good award decision. Because even the best strategic sourcing decision optimization on the market will fail if it’s not provided with the right data AND the right constraints (or, depending on your choice of terminology, rules). The right constraints can only derived by a knowledge individual that has the right information at her disposal.

So how do get the right information? You take your sourcing to the next level. So what does this Next Generation Sourcing look like? Stay Tuned.

VFS: Are You Ready?

Last week explored the four levels of Value Focussed Supply (VFS) as put forward in CAPS’ recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

There were a lot of good suggestions in the four levels of value focus put forward by CAPS, but a lack of realistic starting points for an average organization that needs to merge onto the value focussed path. As per the second post on the elimination of value leakage, it’s hard to protect revenue if the key revenue streams are unknown. It’s hard to reduce cost if cost has not been baselined. It’s hard to reduce working capital requirements if they, and the reasons for, aren’t understood. And it’s hard to protect corporate reputation if the risks are unknown. But how do you identify key revenue streams? How do you baseline costs? How do you document working capital requirements? And once costs are baselined, how do you go about reducing them in such a way that working capital and corporate reputation are not negatively affected?

You start with information. Information helps an organization baseline costs. Information tells the organization what its working capital requirements are. Information tells an organization what its corporate risks are. And, most importantly, information tells an organization what options it has for reducing costs that won’t negatively affect working capital and corporate reputation.

So where does this information come from? Data, and an analysis of that data. Where does the data come from? Some of it should come from internal systems, from which it will be amalgamated with a spend analysis system into meaningful reports. But the rest should come from (prospective) suppliers, who have access to data that the organization does not.

But how does an organization get that data? The obvious answer is through an e-RFX application, but it’s not that easy. Why not? It’s one thing if the organization is spot buying silver and there are only three suppliers with a surplus available within the immediate area of the factory that needs it within three days and the only information that needs to be collected is the purity, price per pound, and cost of transportation if the supplier delivers, but it’s another thing completely if the organization is renegotiating it’s global transportation contracts. The first situation is a few dozen bids. The latter could be a few hundred thousand bids. Assuming the organization can identify all of the bids that it desires, how does it get the suppliers to provide that much information? No supplier wants to get a bid sheet that requests multiple LTL rates and TL rates for 5,000 lanes … especially if it only services 2,000 of them. A simple RFX isn’t going to solve the problem. So what is?

Tune in tomorrow because, as Number 2 would say, “we want information … information … information“.

VFS Level 4: Stretch for Added Value

Today’s post completes our exploration of the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

According to CAPS, the final level of VFS, after tomorrow’s value has been created, is to stretch for added value. While SI agrees with the premise and many of the strategies that CAPS outlines for additional value creation, it’s not sure that “stretch for added value” constitutes a level, as an organization should always be looking for added value. After an organization creates tomorrow’s value, what it really needs to be do is work on its future supply chains and design new value into those supply chains from day one.

The reality with supply chains is that all sources of value, like all sources of cost savings, are fleeting. Once you stop the leakage, the savings to be had from that strategy are gone. Once you reduce TCO while improving quality by using an alternate material, current value has been increased and a new strategy will have to be identified to find additional value (as a single alternate material can only be substituted in once). Once you design an alternate component that requires less of a costly raw material and that utilizes more of the cheaper, more resilient raw material, the opportunity to increase value disappears as soon as the component enters production. Thus, once you create tomorrow’s value, you have to start looking beyond tomorrow because it won’t be long until tomorrow becomes today and a new opportunity is needed. This means that the supply chain has to be redesigned and improved on a regular basis — and that’s why the fourth level of VFS should focus on design for value in the next generation supply chain.

But before we digress too far, let’s review what CAPS suggests for an organization that wants to stretch for added value.

  • Gain or Unlock New Sources of Revenue
    by reshaping the supply marketplace, like Bentham did when it bypassed the traditional supply market to develop a new captive source that used alternate sources for steel and fabrication to deliver needed components 50% faster
  • Share Risk and Increase Integration Along The Value Chain
    like Carco did when it integrated with key material suppliers, toolmakers, and first tier suppliers, switched to aluminum alloy tooling for select parts, changed tool designs to accomodate model variations, and improved supply base capabilities across the board
  • Eliminate Unneeded Assets
    like Globalgoods did when it chose to rationalize the supply base to take advantage of relationships with smaller suppliers that it could use to negotiate additional value through equity value rebates (based on the suppliers’ market cap and level of business) as those suppliers profited considerably from business with Globalgoods
  • Create Competitive Barriers
    like Meditrend did when it increased integration of the entire healthcare delivery system to deliver better patient outcomes at lower costs

These are all good suggestions to add value, but many of the strategies either belong at other levels of VFS or need to be integrated in a broader supply chain redesign for an organization to truly maximize it’s return on investment. For example, an adept organization would partially reshape the supply base (through rationalization among existing and alternate suppliers) and plan to eliminate unneeded assets as soon as possible when creating tomorrow’s value and a progressive organization would begin integration early in the VFS as integration of related processes is often a quick way to increase current value. The real stretch is the creation of competitive barriers and the unlocking of new sources of revenue, but this often requires a new supply chain to support the new revenue stream or the competitive barrier the organization wishes to acquire. Most organizations can’t begin producing a new product or service without an appropriate supply chain in place. That’s why SI thinks the next level should be design for value, using the strategies defined by CAPS in conjunction with strategies identified by some of the early proponents of next-generation supply chain design, such as AMR with their DDSN2 (Demand Driven Supply Network) methodologies. A holistic strategy focussed on value-driven supply chain redesign is what a leading organization needs to take their TVM (Total Value Management [eSourcing Forum] [Sourcing Innovation]) philosophy to the next level.

With a few tweaks, the VFS strategies, and the migration up the value curve they represent, put forward by CAPS is one of the best, and most inclusive collection of progressive value strategies that the doctor has seen yet, and a great overview for any organization that would like to create value by design (instead of by accident), but as a step-by-step guidebook, it leaves something to be desired. CAPS recognizes this and also offers up a framework, that will be discussed in a future series, but in order for the framework to be useful, one has to have the right data to support the strategy, which could have extensive data requirements. But how and when does one get this data? This seems to be a weak point of the methodology and a hole that needs to be filled if one is going to employ the methodology to maximum effectiveness. So how do you plug the hole? That’s the subject of next week’s miniseries. Stay tuned!

VFS Level 3: Create Tomorrow’s Value

Today’s post continues our exploration of the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

The next level of VFS, after current value has been maximized, is to create tomorrow’s value to insure that the Supply Management organization continues to deliver value year after year. Again, SI is in full agreement. The Supply Management organization must deliver value year after year, and the best way to do that is to start creating tomorrow’s value today.

So how do you increase current value? According to CAPS, the organization must continue its focus on the four critical components of the balance sheet — revenue, cost, assets, and intangibles — and find ways to take the improvements to the next level. At this level of VFS, this means that a company would:

  • Focus on Obtaining a Strategic Flexibility Advantage
    by leveraging supply base capability for competitive advantage like Comco did to eliminate the need for an entire sub-component
  • Optimize Costs Along the Value Chain and Rationalize Value
    by leveraging supplier knowledge like HiTech did to co-develop a brand new component and bring a product to market a year ahead of the competition, and by improving the value-to-cost ratio via value engineering and analysis
  • Tailor Assets to Markets and Rationalize Assets Along the Value Chain
    by identifying customer needs and creating unique value like Apollo did when it created packaging to unify the adoption of a consistent look-and-feel for a new entertainment product, by eliminating duplicate assets, and by outsourcing or insourcing assets to achieve scale or competitive advantage
  • Support Sustainability and Leverage Intellectual Capital
    to increase the value of the brand for years to come like Healthifood did when it utilized the intellectual capital of the supply base to design equipment for local markets and cut NPI by 25% (while considering full life-cycle costs in new equipment from a sustainability perspective that included water and energy utilization)

SI fully agrees with these recommendations and believes that CAPS is on the right track with these recommendations. The only things it would add are:

  • Strategic Flexibility
    adopt an ongoing focus on component and SKU rationalization — the fewer distinct products there are to manufacture, the easier it is to be flexible with scheduling
  • Optimize Costs
    make utilization of strategic sourcing decision optimization and supply chain optimization solutions part of daily operational life
  • Rationalize Assets
    and rationalize the supply base at the same time — if there are too many suppliers with similar assets that are under-utilized, it might be time to trim a few suppliers or get a few new ones
  • Support Sustainability
    consistently look for new sources of supply that are less harmful to the environment or (more) renewable (than current raw materials)

Now that tomorrow’s value has been created, an organization can focus on moving on to the final level of VFS, which is the subject of the final post of this week.

VFS Level 2: Increase Current Value

Today’s post continues our exploration of the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

The next level of VFS, after (most of the) value leakage has been eliminated, is to increase current value. SI is in full agreement here. This should be one of the primary focal points of every Supply Management Organization as it has to be about more than just cost reduction. According to CAPS, the next level of the value curve is obtained by continuing the focus on the four critical components of the balance sheet — revenue, cost, assets, and intangibles — and finding ways to take improvements to the next level. At this level of VFS, this means that a company would:

  • Enhance Revenue
    by increasing market share and improving pricing, which could involve a focus on local markets to tailor products to local taste
  • Understanding Real Cost and Reducing TCO
    by modelling what the costs are, and should be, and focussing on the costs that are too high and “attacking them broadly”; this could include finding alternate, cheaper, sources of supply
  • Increasing Productivity of Fixed Assets
    to get bang for the buck, which could include involving suppliers early in custom component design to improve manufacturability and lower costs or the rationalization of specifications to improve operational flexibility
  • Enhancing Corporate Reputation and Increasing Customer and Supplier Loyalty
    by targeting customer needs or working with suppliers to help them improve processes and lower costs

Probably the best example the report gave to increase current value was to follow Comco’s lead. Comco put engineers on site to help suppliers improve processes (using lean and quality management techniques), opened up 3rd party manufacturing research centers (to help its suppliers innovate and reduce costs while improving quality and reliability), and created cross-functional workshop that spanned internal and external organizational boundaries. These actions not only increased current value in the near term, but increased the value the organization could expect in the future, which began the organization’s progression to the next level VFS (which will be discussed in tomorrow’s post).

Again, SI agrees with all of these recommendations, but believes a few key points were missed that are critical to an organization pursuing additional value. Specifically:

  • Revenue Enhancement
    often begins by cutting unprofitable product lines. If a product line is inherently unprofitable, no amount of supply chain optimization can fix things. Supply Management has to do an impartial profit analysis of all of the product lines and determine which are, or could be, the most profitable, which lines should be consolidated, and which lines should be dropped completely.
  • TCO Reduction
    starts with should-cost modelling, continues with should-cost modelling on a component level, and attempts to identify common costs that can be reduced across categories through component rationalization or direct sourcing of raw materials on behalf of a supplier
  • Fixed Asset Utilization
    should also include a cost-benefit analysis of current fixed assets and whether or not they should be maintained or sold
  • Reputational Enhancement
    by focussing on common customer concerns, such as sustainability, and finding ways to embrace them in a cost-effective manner

SI feels that an organization cannot maximize current value unless it starts by understanding the areas where the value is and focussing on those areas, even if that means it has to pull out of certain other areas. And once an organization has maximized current value, it is ready to move on to the next step of VFS, which is the subject of the next post.