Category Archives: Sourcing Innovation

VFS Level 1: Eliminate Value Leakage, Part II

As indicated in yesterday’s post, this week will explore 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 Association.

According to CAPS, this starts with the elimination of value leakage, and, for the most part, SI is in full agreement (with the disagreements being around where an organization starts plugging the holes). In CAPS’ view, this starts by focussing on four primary components of the balance sheet — revenue, cost, assets, and intangibles — in an effort to find ways to improve them such that the overall corporate position is improved. At this first level of VFS, this means that a company would:

  • Protect Revenue
    by improving quality and stability of supply
  • Reduce Cost
    by reducing unit cost and managing demand
  • Reduce Working Capital Requirements
    by improving working capital management
  • Protect Corporate Reputation
    by taking steps to prevent the media fiascos that would result if
    tainted food or dangerous products were released into the marketplace

and CAPS goes on to give the following examples of:

  • working with key suppliers,
  • looking at alternate fee arrangements,
  • adding better inventory management strategies or early payment discounts, and
  • improving testing and quality inspection process.

These are all valid, and great ways, of eliminating value leakage, but, at least in SI’s view, there are some basic steps a company needs to take before it starts these processes. In particular, SI feels that a company needs to start by:

  • Identifying Key Revenue Streams
    Before revenue can be protected, it has to be identified. Start with a sales analysis to identify the products that are generating the most revenue and then do a cost analysis to determine which of these are, or could be, the most profitable and then focus on these categories as improvements to key revenue streams will be the most effective.
  • Understanding Current Cost, Demand, and Actual Spend
    Before cost can be reduced, it has to be baselined. Do a spend analysis to determine where money is being spent, what the current demand is, and how much the demand is costing you. This will help you identify which categories need the most effort and which suppliers are really key to your success.
  • Understanding and Optimizing Working Capital
    Before working capital requirements can be reduced, they have to be understood. What is the current level of working capital required? Why? And how long is it being tied up for, on average? If capital is moving quickly, inventory optimization might not buy the organization much in terms of working capital reduction, in which case it will have to focus on early payment discounts or baseline cost reduction. But if significant amounts of working capital are tied up in inventory, that is the only thing the organization should focus on until the product is fixed.
  • Identifying the Risks to Corporate Reputation
    If the primary risks aren’t identified, they can’t be protected against. Depending on the type of product being produced, quality might not be the biggest risk to corporate reputation. So a batch of cleaning solution was accidentally watered down by 10%. Is anyone going to notice? Probably not. But if the chemicals used may pose a danger to the environment, then the company has to focus on finding safer alternatives.

SI feels that an organization cannot effectively stop value leakage until it has a good handle on its current situation and has identified where the greatest leakages are. Otherwise, its efforts will likely find only limited success (as the chance of a category having minimal value leakage is just as great as the chance of a category having high value leakage when a category is chosen at random). And even then, there are a few more basic steps a company might have to take but these will be discussed in subsequent posts.

VFS Level 1: Eliminate Value Leakage, Part I

This week will explore 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 Association.

According to CAPS, you start with the elimination of value leakage. While this is a good place to start in theory, in practice, at least until now, most organizations increased value in supply management purely by accident. They were given a mandate to reduce cost and when they were no longer able to negotiate better prices or optimize incurred costs (logistics, storage, VAT, etc.), they looked for new ways. Not knowing any, they got creative, and sometimes they got lucky and found strategies that not only lowered costs but increased the overall value of supply management to the organization. At this point, the organizations began an effort to find more value, and began their progression up the supply management value curve, which, in the view of CAPS, and the author, starts with the elimination of value leakage (although the author believes one or two critical steps were overlooked in the report).

According to CAPS, value is obtained at each level of the value curve by focussing on four components of the balance sheet — revenue, cost, assets, and intangibles — and finding ways to improve them such that the overall corporate position is improved. At this level of VFS, this means that a company would:

  • Protect Revenue
    by improving quality and stability of supply
  • Reduce Cost
    by reducing unit cost and managing demand
  • Reduce Working Capital Requirements
    by improving working capital management
  • Protect Corporate Reputation
    by taking steps to prevent the media fiascos that would result if
    tainted food or dangerous products were released into the marketplace

Furthermore, such a company might go about these actions by:

  • Working with Key Suppliers
    to implement Lean, Six Sigma, or TQM (Total Quality Management) processes to reduce defects, streamline production, and increase schedule accuracy like Powercon worked with a key supplier to correct dismal delivery performance and increase customer loyalty in the process
  • Looking at Alternate Fee Arrangements
    like Pharmacare did with ancillary legal services which could be contracted on performance-based fee arrangements and other ABM (alternate billing methods) to reduce costs by 20% to 40%
  • Adopting Better Inventory Management Strategies or Early Payment Discounts
    as reduced inventory translates into a reduction of cash locked up in inventory (as well as reduced storage costs) and early payment discounts not only reduces invoice payments, but reduces a supplier’s need for financing (which is often at higher rates), which reduces future costs
  • By Improving Testing and Quality Inspection Practices
    even though this might increase costs slightly up front since having a better brand increases revenue in the long term and the up front cost quickly translates into long-term savings

These are all great strategies, and, for the most part, great starting points for any supply management organization that wants to increase the total value it provides (and do true “Total Value Management” [e-SourcingForum] [Sourcing Innovation]), but a few of them seem to skip the starting points, at least in SI’s viewpoint. This will be the focus of Part II.

VFS: Accident or Planned?

If you haven’t figured it out by now, I’m in the process of dissecting the latest report from CAPS Research on Value Focussed Supply (VFS) with ultra-fine tweezers because it might just turn out to be the most important report of the new decade — if you can get past the fact that they’ve thrown YAMA (Yet Another Meaningless Acronym) our way. Or, it might just be a trivial summary of obvious supply chain improvements from the past few years and have no lasting impact. However, unless we dive in to the details of the 90 page report, we won’t know for sure.

Early in the report, the authors state that the aim of the report is to understand how a holistic value approach differs from traditional competitive sourcing approaches. The hypothesis is that companies that are successful at VFS (which The Mpower Group would term next practices) do two things:

  1. Follow a Value-Focussed Process for Key Categories
    that links to current and future business and technology needs, establishes fact-based value goals for the category, and formulates, implements, and measures strategies designed to achieve the fact-based goals
  2. Invest in Process Enablement
    to conceive, identify, deliver, and sustain value for the near and long term

And while one must agree that any organization that does these two things has a good chance of increasing the value obtained from supply management — as the organization will be looking beyond simple cost reduction to sustainable value creation through supply risk reduction, alternate supply sources, quality improvements, and increased value add to the core product — there is also a chance that, for an average organization, VFS is arrived at by accident. A significant disruption occurs. The team steps up and finds a creative way to solve the problem and restore quality supply in a timely basis, and, in the process, creates additional value as a side-effect because the new process is more efficient or the new materials are more reliable, etc.

Consider the case study for Powercon Co. It had 300 part numbers that could only be obtained from a sole-source supplier that was 40 days late, on average, when a delivery date was missed and that only managed to achieve 50% on-time delivery performance. As the company could not identify any alternate suppliers that would meet all of the company’s needs (affordably), the company had to do something about the problem to improve the supplier’s performance in order to maintain its productivity (and, presumably, profitability) as the late orders brought about a host of problems for the company which did not want to delay its own shipments and face customer service level issues due to a supplier’s problem. In addition, the late orders were also limiting the company’s ability to optimize its manufacturing operations, forcing it to keep excess inventory on hand.

In this situation, even though the company eventually took a formal effort, based on Six Sigma, to improve the situation, VFS was as much an accident as a planned project. The Supply Management team didn’t wasn’t sitting around looking for new ways to add value, they were responding to a dire situation and looking for a way to put out the flames. With the help of an external expert who designed the Six Sigma program, the company improved the supplier’s performance by over 95%, achieving an on-time delivery of 98%, and reaped all the benefits that came from the improvement, but not all of the value was by design.

But sometimes value is by design as well. Consider the case study of F&B that rationalized specifications to reduce SKUs and requirements to those that customers valued and paid more for. This effort had a significant design element up front. But is it really VFS from the get-go? The ultimate goal was cost reduction, and this was a way to achieve the same goal since increase profit per unit is sometimes just as good as reduced costs since it reduces the percentage of revenue spent on raw materials.

What do you think? Is VFS by design or is it by accident?

More to come.

VFS Enablers: Competitive Enablers in a New Wrapper

Generally speaking, I’m not hard on CAPS Research because they tend to produce some of the best research and papers in the space, but I had to take a crack at VFS in yesterday’s post because I don’t think we need another acronym. And while it may look like I’m taking another crack at their recent “Value Focused Supply” publication in this post, I’m trying to point out that the next level of strategic supply management in your organization, regardless of what you call it, isn’t that hard to obtain. It’s just the next rung on the ladder, and only one small addition to the capability repertoire will get an organization there.

According to the white paper, the critical enablers of VFS are:

  • executive engagement
    No initiative will succeed over the long term without executive engagement, which is also a critical enabler of classic competitive supply strategies.
  • value chain goal alignment and measurement
    This is a fundamental requirement of any supply strategy designed to enhance an organization’s overall competitive position — and a core requirement for any enhanced competitive supply strategy, such as DDSN and TVM.
  • supply market understanding
    Without supply market understanding, even a simple e-Auction will fail miserably.
  • collaboration approaches
    The best results always materialize from collaboration.
  • supplier relationships
    Without a good supplier relationship, quality, on-time delivery, and emergency orders are at risk.
  • organization and human resources
    The right people will always be required to pull the strategy off.
  • information/analytic capabilities
    This is essentially the only enabler that’s new, sort-of. While information/analytic capabilities are a requirement of competitive sourcing strategies, as good information is necessary to select the right strategy and analyze the bids, classic competitive sourcing did not require decision optimization, modern (POS-based) forecasting techniques, inventory optimization strategies, or (true) spend analysis.

Thus, any organization that has mastered standard competitive sourcing can easily move on to next generation sourcing strategies simply by adding a new tool or two to their toolkit — complete overhauls not required.

Share This on Linked In

VFS: Will Yet Another Acronym Solve Our Woes?

A recent publication of CAPS Research and A.T. Kearney, Inc. on “Linking Supply to Competitive Business Strategies” introduced us to yet another acronym for modern supply management: Value Focussed Supply (VFS). As per usual, there’s a lot of good advice that accompanies the acronym, but do we need it?

According to CAPS and A.T. Kearney, Value Focused Supply (VFS) strategies will provide the next breakthrough opportunity for companies to create and capture value from their most strategic purchases because they go beyond the typical price/cost focus of competitive sourcing. However, anyone who has been keeping track would know that a number of supply strategies have been developed over the last few years that were not (just) cost/price focussed, including AMR’s DDSN (Demand Driven Supply Network) and TVM (Total Value Management,  (e-Sourcing Forum) an optimization-based approach).  [Also: Sourcing Innovation]

According to the executive summary, leading companies are clearly demonstrating the power of this more comprehensive approach. This isn’t the first time we’ve heard these claims either. The MPower Group has been making the same claims for over a year now with their next practices approach, which they’ve described in a number of posts here on SI, including Strategic Sourcing is Dead and The Sourcing Emperor Has No Clothes. Plus, any organization that extends its focus beyond just cost is bound get better results after a while. And once a suitable strategy and focus is adopted, there will be opportunities to protect and create significant competitive advantages.

While I agree that the widespread use of [traditional] completive sourcing techniques and tools (and e-RFX and e-Auction in particular) has eroded the major advantage that it gave pioneers in the 1990s, we don’t need to resort to new acronyms. The average organization has yet to even try strategic sourcing decision optimization or embrace true spend analysis. Then, as mentioned above, there are next generation supply strategies based on decision optimization, such as TVM. The average organization just needs to keep up with the times.

Furthermore, it’s not necessarily an issue that the savings gap between “leader” and “follower” companies has shrunk in half since 2004. For example, if all of the organizations were employing some form of sourcing strategy, then you would expect the gap to close over time. Furthermore, the recent recession has caused many suppliers to slash prices in efforts to keep afloat. If suppliers slash prices on their own, there’s not much to cut in a competitive sourcing event.

And while companies must find and mine additional value from their supply relationships, current techniques will more than suffice — no new abbreviations required. As long as supply is linked to a competitive business strategy, value can be increased — for both parties.

Share This on Linked In