Category Archives: Supplier Management

The New Supply Chain Manager – Global and Local

Supply Chain Digital recently published an interesting piece on three core trends impacting UK supply chain skills in 2014 where they noted that, even across the Atlantic, globalization is taking a new spin.

According to the article, complex supply networks are now deployed to offset inventory risk, balancing low production costs of far away places with short-lead time replenishment from factories closer to market. This allows for an initial order to be made in the Far East and then supplemented by more local sources if sales demand. This allows the buyer to balance cost vs. lead time / stock out / quality risk and indicates that, like the US, the UK is now focussing more on total cost of ownership and optimizing the total supply chain cost and not just the landed cost (even though the transportation costs from Eastern Europe and parts of Asia are much less for them then the transportation costs their North American counterparts need to bear). It’s a good sign, and SI has always maintained that the right sourcing methodology is best-cost country sourcing, and that often means, when the full life-cycle cost (and risk) is analyzed, home-country sourcing is the way to go.

The need to be local is further emphasized by the evolving purchase patterns of the local consumer. E-commerce is being widely adopted and the Amazon effect is taking hold. Consumers want to shop at home, get the goods delivered to their homes, and if something is broken, return the goods from their homes. This is forcing retailers and distributors to adapt to complex and challenging operating models as they need to not only manage the home-delivery process but the home-return process, often getting products back to the factory from which they came for repair, refurbishment, or recycling (as strict laws in the EU, such as RoHS and WEEE, often prevent outright disposal of anything with electronic components).

Finally, it all comes together in the last trend which revolves around the need for a broader skill-set to manage the broad nature of today’s Supply Management initiatives — initiates that are hugely complex in nature and require Supply Management professionals to know how to manage suppliers, production facilities and freight movements across a multitude of countries and time-zones. It’s not easy, but it can be fun!

Sole Sourcing In Your Supply Chain: Oversight Or …

An indicator of fraud?

As per a number of Sourcing Innovation posts, and a recent post over on Procurement Leaders on “Procurement Fraud: A Shocking Wake-Up Call”, procurement is a ripe area for occupational fraud. Outside of Accounts Payable, Procurement generally controls or influences the most organizational spend.

And not only is “Procurement Related Fraud on the Rise” (Spend Matters UK), but it is taking place at 2 out of every 3 organizations — many of which are even unaware of its presence! Furthermore, every organization affected by fraud is likely losing 2% of its revenues to fraud. Forget overpayments, duplicate payments, and other recovery audit targets that, even when extremely successful, aren’t likely to recover more than 0.5% of your revenue in supplier credits — especially when most of these overpayments can be prevented with good invoice automation. Fraud is the bigger uncontrolled drain on the average organization’s coffers, and the issue that most needs to be attacked.

Fortunately, there are tell-tale signs of fraud, and if you regularly look for, investigate, and take precautions to prevent certain scenarios, the chances of fraud occurring in your organization will be significantly reduced. A number of these signs are succinctly summarized in Mr. Ashcroft’s post on Procurement Fraud: A Shocking Wake-Up Call, referenced above, but it’s the first four that really catch your attention.

  1. Single Source Decisions
  2. Insistence on Sole Contact With Suppliers
  3. Reluctance to Change Suppliers
  4. Refusal to Issue Invitations to Tender

All of these relate to sole-sourcing, which we all know to be a significant supply chain risk as a single disruption can wipe out an entire product line or category. Sole-sourcing should generally only be used when you are producing a new product which involves turning over a lot of proprietary knowledge to the manufacturer, proprietary knowledge upon which your competitiveness is dependent, or when the product requires a new type of technique that only one supplier can currently offer at an affordable price point. Otherwise, for supply assurance and risk mitigation, dual (or tri) supply should be used.

If something is being sole-sourced for which there is no good justification, then the sole-source arrangement should be carefully evaluated as the reason therefore could be fraudulent (or, if not fraudulent, unethical, as the buyer could be choosing that supplier simply because the supplier constantly gives the buyer free tickets to sporting events, free trips to industry conferences, etc.). And if any suggestions to change the supplier meet with unnecessary reluctance or insistence not too, that’s an even bigger indicator that something could be happening under the table.

In other words, when you get right down to it, sole-sourcing is generally not a good decision. When you combine the opportunities it presents for fraud and disruption, the risk is typically too great.

Supplier Innovation Can Bridge Finance and Suppliers, but Reverse Financing is Not Supplier Innovation!

Reverse factoring is definitely a finance innovation, especially when many finance departments still think squeezing the supplier on margin is a good thing, but it’s a buyer(-led) innovation (and one sophisticated buyers should be implementing). Needless to say I was hoping for more creative insights when I checked out this recent piece on Procurement Leaders that purported to be on “Supplier Innovation – A Bridge Between Finance and Suppliers”. Something on how the supplier’s involvement in NPD/NPI, process re-engineering, or product standardization efforts and its effect on finance would have definitely been preferred.

There are a large number of ways true supplier innovation can benefit finance which include, but are not limited to:

  • Production Process Redesign
    The supplier could utilize a solution such as aPriori‘s Enterprise Product Costing Platform with appropriately configured VPEs (Virtual Production Environments) to suggest alternate fabrication methods that could cut the cost of the part in half or more!
  • Material Substitution or Component Redesign
    Design locks in as much of 80% of the cost — maybe the supplier can identify alternate materials or design changes before the first part is produced that can deliver the same quality and reliability but yet reduce cost.
  • Deployment of Modern Punch-Out and Invoicing Solutions
    Nothing is more annoying then trying to integrate a supplier catalog that is still exported in an archaic FoxPro format on a weekly basis to an old-school FTP site into your modern e-Procurement platform or OCR and auto-correct invoices still delivered as fax into your modern invoice automation solution. A supplier that adopts state of the art CRM technology that plugs and plays with your system often does more for finance than anything you can do.
  • SaaS Information Management
    As per a recent Gartner study, a Billion Dollar company spends 1,000 hours every week managing suppliers and their information. This time is primarily spent on data entry and maintenance, contact requests for updated data, compliance monitoring, performance monitoring, accounts payable and invoice verification. At least one-quarter to one-half of this time is spent on supplier information management alone, which is the equivalent of 6 to 8 FTEs (Full Time Employees) for this one billion dollar company. A supplier that kept the information required by their buyers up-to-date in a central repository that could be easily accessed and read into standard Procurement SIM/SRM systems would be doing a big service to their customers and considerably decrease the buyer’s overhead costs, making the buyer’s finance department quite happy.
  • Fine-Grained Bid Information
    The buyer’s cost depends not only on what the supplier produces, but where it produces, what the inbound and outbound shipping costs are, and how much the supplier pays for raw materials. A supplier who provides fine-grained (should) cost data in detailed cost models helps the buyer decide what locations are most cost-effective for it, whether it should be buying raw materials on behalf of the supplier (and use its negotiating power), and who should be financing what for lowest overall supply chain cost.

These are just a few of the ways that suppliers can innovate a bridge between themselves and the buyer’s finance department. There are others. The point is, innovation is not limited to reverse factoring, which should not even be initiated by the supplier!

The Most Important Word In Supplier Relationship Management Is Not What You Think It Is


Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC. Joe co-wrote the book on Managing Indirect Spend: Enhancing Profitability through Strategic Sourcing.

It may be an old story, but it is still an important story in any discussion of Supplier Relationship Management (SRM). According to Business Insider, with about six weeks to go before the launch of the iPhone in 2007, an angry Steve Jobs pulled his senior team into an impromptu meeting on a Monday morning. His plastic-screen’d iPhone prototype was scratched, and he demanded a glass screen be fitted to the iPhone. Specifically, he is quoted as saying “I want a glass screen. And I want it perfect in six weeks“.

If you read the Walter Isaacson biography on Jobs, you can imagine a few other words were in those two sentences. But that is not critical to this story.

Here is the important part. Once Apple and Corning perfected the art of cutting glass so intricately on a massive scale, they had two weeks to get the new glass faces on the phones. Their assembler, Foxconn, woke its employees when the first glass shipments arrived in the middle of the night, and arranged for production to run non-stop.
Not every supplier is going to wake its staff in the middle of the night to cater to your needs, but when you maintain a close relationship with them, and firmly establish the ways in which each party is critical to the other’s success, then the proverbial (and in Apple’s case, actual) doors open. This is the critical takeaway from any talk on Supplier Relationship Management: those in-depth relationships with your suppliers can lead to competitive advantages ranging from moving up in that supplier’s priority list to getting first dibs on their innovative practices and products.

The importance of Supplier Relationship Management is not lost on sourcing professionals and the industry at large, but the most important aspect of SRM seems to have been lost; or if not lost, then effectively drowned out by savvy marketers. A Googling of “Supplier Relationship Management” produces more than eight million results, but the first page is dominated by companies selling SRM software. When I googled, seven of the first page’s organic results, and all of the ad space, are dedicated to software solutions. While “Management” is an important aspect of “Supplier Relationship Management”, and having a clear view of your organization’s entire supplier pool is critical to effectively working with them, the value of SRM comes from the “Relationship” portion. Worded another way, no supplier has ever given a customer exclusive access to a new product because that customer put them in a database!

I should probably stop here to note that SRM software is a great way to manage all of your suppliers, and relatively easy to implement across all of them. Relationship-building, by comparison, is an impractical across-the-board practice returning minimal results for maximized efforts for all suppliers outside those producing critical, hard-to-obtain, or otherwise-important materials for your organization.

That said, “Relationship” is the critical term of SRM when dealing with critical suppliers. Period. Supplier relationship software allows you to track purchases, organize data, and better understanding of your organization’s demand for a supplier’s goods — all of which are tactical, short-term measures. Building relationships, on the other hand, is crucial for your organization’s critical suppliers, as it allows you to talk frankly with them and develop the long-term strategies necessary for mutual success. And it provides critical benefits.

So what are those critical benefits? For starters,

Preferential Access to the Supplier — Much like Apple was able to rouse Foxconn’s employees in the dead of night for glass screens, a thoroughly developed relationship with a supplier can gain your organization preferential access to them. The benefits of a healthy relationship can be leveraged to obtain priority access to product capacity, better pricing, and, depending on the supplier and product or service needed, access to the supplier’s best people.

Supply Chain Stability — With a relationship developed between your organization and a supplier, it is possible to talk frankly about their risks. Weather and disaster vulnerability, political events, logistics concerns — anything that could potentially impact the supply of their products to your organization. Additionally, these discussions allow you to get a better understanding of the supplier’s supply chain and the potential hiccups within it. Most importantly, these discussions provide the foundation for your organization and a critical supplier to jointly develop solutions to potential problems, ensuring that a mutually beneficial solution is reached in the creation of a better understanding between the two organizations.

Input Into Innovation — Another area where Apple capitalizes on its strong supplier relationships is in the joint innovation of new technologies, strategies, or processes. The company routinely puts out the cash to fuel a supplier’s development of an improved or revolutionary product or process in exchange for exclusivity. Recent examples include the company’s lockdown of capacitive touch screens following the iPhone’s launch and their joint development of the highly precise lasers used to perforate the aluminum MacBook frames to allow for hidden status lights. Even if your organization lacks the capital to fund supplier improvements, enhanced relationships can still get your organization input into a supplier’s next product, leading to design changes that can lead to more efficient production, or a lower cost, on your side.

Knowing that a partnership can lead to a reduced total cost of goods through shared responsibility, assistance in the product development process through shared expertise, and long-term stability through the forming of a bond with a customer are key incentives that can persuade reluctant suppliers to come onboard and sweeten the relationship on an ongoing basis.

If your supplier is critical, a deep and mutually beneficial relationship with them is critical too.

Thanks, Joe!

Perks and pitfalls of knowledge diffusion in the supply chain


Today’s guest post is by Professor Ralf W. Seifert & Olov H. D. Isaksson.
Ralf W. Seifert is Professor of Operations Management at IMD and he teaches in the “Leading the Global Supply Chain” (LGSC) program.
Olov Isaksson is a PhD candidate at the Chair of Technology and Operations Management at EPFL, specializing in buyer-supplier relationships. He previously worked at Henkel as a supply chain project manager.

Do you collaborate with, and learn from, your suppliers, or are you serving them the knowledge to compete with you head-on on a silver platter? This question is increasingly relevant in today’s global competitive environment. Firms are routinely leveraging global sourcing to gain cost advantages but competition nowadays occurs between supply chains, rather than businesses. Thus keeping an eye on your supplier’s ambitions is vital.

Case in point, just look at the ongoing patent infringement lawsuits between Apple Inc. and Samsung Electronics Co. Apple turned to Samsung as a supplier for its new iPod and iPhone products back in 2005. At first the two companies jointly developed the components, which gave Samsung an insight into Apple’s technology and operations. Being the only supplier for the processors, Samsung also gained critical knowledge on Apple’s prediction of the market size for the iPhone. In 2010, Samsung launched its own smart phone and has since become Apple’s largest competitor. Today, Apple still remains dependent on Samsung, but it is trying hard to diversify its supplier portfolio.

The above situation exemplifies the negative aspects of knowledge spillovers in the supply chain — i.e. how important knowledge that exceeds the scope of the formal transaction can be diffused between customers and suppliers, and then be used in a rivalrous manner. At the same time, spillovers can also have positive effects and lead to a competitive advantage for the supply chain as a whole.

How does your desire to draw on trading partners for innovation balance with the need to protect strategic knowledge? And, to what extent do you take co-competition from suppliers into account in your supplier assessments? We engaged 34 executives from different high-tech firms and asked them about their opinion. Their consensus: recognizing knowledge spillovers is a critical issue in today’s supply chains. Both suppliers and customers are seen as important sources of information for innovation (see Fig 1).

“We get plenty of valuable information about the market, its players in the value chain and its main drivers from our customers and suppliers. My business relies on it. It is a great input for our R&D portfolio,” said Dr. Ir. Kees Joziasse, Director of Innovation at Corbion Purac.


Figure 1
While most high tech firms protect their innovations through patents, most of the executives stress that knowledge spillovers occur outside formal collaborations — to a large extent via personal interactions between employees of the firms (Figure 2).


Figure 2
Greg Nelson, Sr. Director R&D LED Systems at Philips highlights that employees possessing important knowledge must be conscious of the risks and rewards of knowledge spillovers when interacting outside the firm:

“Knowledge spillovers in the supply chain are a clear attention point. There is a need to create awareness up front with people who have these contacts and to have an explicit policy regarding what can be transferred. Policy restrictions must be balanced with the potential benefits that can be derived from collaboration and not hinder speed in the process. While policies and procedures are not always 100% effective, they do help create awareness in the organization to guard against unintended transfers.”

The Supplier Perspective

While a supplier can learn from its customers, it cannot choose who wants to buy its products/services. Still, Ted Smith, EMEA Sales Director at ON Semiconductor suggests that firms can leverage knowledge spillovers and gain a competitive advantage by carefully choosing collaboration/innovation partners.

“We typically don’t select which customers to do business with, but we do select customers to innovate with. We work with selected alpha-customers, or early adopters, who support supplier innovation in return for a head start in the market.”

The Supply Chain Perspective

Good and enduring partnerships can lead to a competitive advantage for the supply chain as a whole: Mukesh Singh, Senior Regional Manager at BASF explains that “Suppliers easily share their new learning/knowledge if the customer has a strong supplier relationship management program.”

However, it is important to agree upfront how innovative output that is generated in a collaboration should be divided. Dan Negrea, Managing Director AEMtec GmbH and Chief Technology Officer at ECMS exceet, elaborates:

“We strictly consider the background and foreground intellectual property (IP) in our cooperation with partners. The background IP is a source of information “for free.” The foreground IP is normally shared between our company and the customers. Product related IP goes to the customer and process related IP stays with us. In most cases, cutting edge products require the parallel development of a product and a manufacturing process.”

The Customer Perspective

Most executives viewed knowledge spillover as a positive phenomenon. Reflecting on the Apple-Samsung example, others might beg to disagree. Managers do need to protect important knowledge from potential competitors and patents offer only limited protection. Thus, strategic supplier assessments and a detailed supply chain contract are vital to mitigate this risk. If the knowledge in question is critical, in-house production or vertical integration of the supplier might still outweigh short-term gains.

Takeaways

Knowledge spillover readily occurs in your supply chain. Managers need to be aware of the risks of negative leaks, which can have detrimental consequences for the firm. At the same time, knowledge spillover can offer significant benefits for your supply chain if suppliers leverage newly acquired competences to your advantage. These are our recommendations:

  • Explicitly recognize the potential of knowledge spillovers in collaboration and sourcing decisions up-front! What do you need to protect from your competitors? Are there limitations in your supply chain contract? To what extent can your enforce non-use, non-disclosure and non-competition clauses in a global marketplace?
  • People buy from people. Make sure that employees are aware of the risks and benefits of knowledge spillovers! Create an appropriate policy regarding disclosures and interactions outside the firm!
  • Have a clear strategy with regards to each supply chain partner! Do you want a win-win situation or to squeeze a supplier? In collaborations, clearly agree upfront how innovative output shall be divided! If the knowledge is strategically important, in-house production or vertical integration of the supplier might be the safer option.


Thanks Ralf and Olov for this interesting take on Supply Chain collaboration.