Category Archives: Supplier Management

Managing Indirect Spend: An In-Depth Review, Part II.2

Our last post continued our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. Specifically, it discussed the chapter on Market Intelligence, which is critical to the success of any sourcing initiative and one of the most important tools in any sourcing professional’s toolkit. In this post, we review the other non-software tools at a sourcing professional’s disposal that were discussed in Bill and Joe’s tome on Managing Indirect Spend.

The major tools at a sourcing professional’s disposal when conducting market research can generally be classified into the following categories:

  • Traditional Industry Publications
    One of the first stops should be one or more traditional industry publications that publish in-depth case studies that include best practices, savings achieved, and new processes or technologies being employed by suppliers and your competition.
  • Indexes
    Indexes such as the CPI (Consumer Price Index), the ISM Manufacturing Report, the ISM Non-Manufacutring Report, and speciality indexes such as the Pulp and Paper Weekly and American Metal Markets can be extremely valuable. Furthermore, for just about any commodity that can be listed, somewhere in the world is an index tracking it. For example, Mintec has over 15,000 indices in its database.
  • Blogs
    Practitioner, Commodity Specific, and General Supply Management blogs can all be helpful. Of course, we agree with Bill and Joe when they indicate that you should start your search in the latter category with SM and SI.
  • Import Records
    This is a great source of competitive intelligence. You can find out who your competitors are using, what types of products they are importing, and in what volumes. Sites like Panjiva, Import Genius, the Datamyne, and PIERS are great places to start for easy access.
  • Search Engines
    It is surprising just how much information is available through Google, especially if one takes the time to learn advanced search capabilities, like restricting to a domain or a set of document types. There are often a considerable number of presentations in PDF and PPT format on the web which already contain the data you need free for the taking. One just has to find them.
  • Social Networks
    It’s amazing the information that some people will let slip on a social network or how frank they will be in a one to one discussion in a group or forum. Don’t forget to use these tools as well – but be careful what you post – it may be archived for eternity.
  • Research Reports
    While most research reports are sponsored and skewed towards the sponsors, the generic market data as well as the capabilities they describe are always useful, and it’s especially useful to see which vendors didn’t make the tragic quadrant or grave analysis. Sometimes they are just as good for your organization’s needs.
  • Group Purchasing Organizations
    GPOs often have oodles of benchmark data. Your organization might need to join, and use them for some non-critical spend, but a judicious use of their master contracts where other members have more volumes can often result in better rates for the organization with very little effort.
  • Electronic Sourcing Tools
    Some SaaS/Cloud providers will often bake-in aggregate market intelligence into the tools they offer. If the organization is already paying for these tools, use them to their full advantage!

Another tool at the organization’s disposal for a successful sourcing project is a spcialized consultancy or Procurement Services Provider (PSP). A PSP with the tools, consulting experience, and skills in the right categories can jump-start an organization’s indirect sourcing efforts and get significant returns months, if not years, earlier. The key is to find the right one that is incentivized to do the job. As such, the organization should probably look for contingency providers that only get paid when hard dollar savings are realized. Providers that get paid based on man-hour effort often have no incentive to get the organizatio the best deal possible as they are paid regardless and providers that get paid based on estimated savings have no incentive to make sure the savings are actually realized. And while contingency providers that get paid on hard dollar savings may ask for a (significantly) higher percentage, it’s better to pay 30% of realized savings and realize 80% of the estimated savings than to pay 15% and only realize 40% of the estimated savings. In the first case, the organization still nets 56% of the savings in its pockets while, in the second case, it only nets 34% of the savings.

However, be sure to follow the best practices outlined by the authors if engaging a (contingency) PSP, or your organization might not get what it bargained for. Specifically, don’t engage an organization that

  • Baits and Switches
    Insist that if the organization provides a resume, that resource actually works on the project.
  • Overstretches
    Make sure the organization has the resources to complete the project – manpower and financial stability.
  • Asks for Double Payments
    If the consultancy gets a commission for (re)selling a certain product or service, they aren’t out to get you the best deal. Period.
  • Asks for Up-Front Payments on Soft-Dollar Savings Claim
    It’s not a savings until the goods are received, invoiced, and paid at the negotiated price without any extra financial gotchas tagged on.
  • Bakes in Hidden Additional Costs
    Read the Fine Print. If you are responsible for travel, software, hardware, and miscellaneous expense costs, your organization could pay more than it saves.
  • Makes Ridiculous Savings Claims
    If a PSP comes in and promises 30% off the board in a category where the base market index has gone up 20% over the last year, that’s probably not a valid claim (unless your organization has the worst sourcing team imaginable).
  • Lacks Analytical or Technical Skills
    Long-Gone are the days when hardball negotiations or reverse auctions were enough. Creativity and deep analysis are often key to uncovering new savings opportunities.
  • Doesn’t Include Audits in their Proposals
    How else will you insure you get the promised savings? Seriously – if the PSP forgets the audit, you forget them.

Finally, it’s important to note that if the organization uses an electronic sourcing tool, it’s doubly important to remember what not to do or the tool will blow up the event faster than you can read this post. Tools don’t replace the necessary human contact and it is vital that the team does not neglect to:

  • insure the right tool has been selected for the event
  • insure the right suppliers are being invited
  • personally invite suppliers
  • follow up on the RFx/Auctin invitation
  • insure the right specifications are included
  • insure the right training is provided to supplier representatives

There are a lot of tools at a Supply Management organization’s disposal for conducting market intelligence and managing indirect spend, but they have to be used wisely.

At this point SI is going to take a short break, but next month it will continue with Part III of it’s review of Managing Indirect Spend and discuss some examples from the field.

SAMBC? WTH? Can’t They Just Say Only Customer Service Matters?

Or at least a better acronym? This one is a Seriously Impractical Customer Orientation. In fact, SICO is a better acronym — Success Is Customer Oriented! Anyway, we are referring to Service As Measured By the Customer (SAMBC), the metric that is replacing “perfect order” at P&G, as described in this recent SCB article on how The Perfect Order Isn’t So Perfect.

According to P&G, the perfect order metric doesn’t get the job done because it causes your service to become very internally focussed. And as we indicated in yesterday’s post, you can’t just focus inward. First of all, as we indicated yesterday, you will fail your customer if your supplier fails you. Secondly, you will fail your customer if you don’t insure that they get what they need, when they need it — and this is often more than just delivering a product on a specified date. As noted by Deidre White, Associate Director of Customer Service, an undue focus on the perfect order results in the loss of opportunity to create value for our customers and ourselves.

As Dale S. Rogers, Professor of Logistics and Supply Chain Management at Rutgers notes, while the perfect order might offer the advantage of simplicity, it’s ill-equipped to deal with the complexities of most global supply chains today. Furthermore, the trend toward outsourcing has created a network of independent partners, each of whom plays a critical role in getting a shipment to its destination. By limiting its performance assessment to what goes on within its own plant or distribution center, a company like P&G fails to get the big picture. What looks like a smooth-running operation could easily be considered a failure by the end customer.

The lack of joint scoring on the traditional perfect order metric is what causes it to fail. For example, consider the example of a 100-case shipment that is five cases short because of space constraints. A supplier who puts the missing cases on the next shipment considers the order filled. The customer thinks otherwise. And it’s the customer’s opinion that counts. An unhappy customer can result in lost sales down the road.

So how do you implement SAMBC? That’s a good question. According to the article, there’s no one-size-fits-all solution in a SAMBC process as each customer has its unique set of metrics and priorities. The article notes that the suplier must adjust its own to meet them. And that the SAMBC metric is the percentage of measured customers at which we are at or better than expected service targets, where the targets are established by and with each customer. That’s a scorecard. And SAMBC can be implemented the same way — with a “balanced” scorecard that measures the customer goals. Specifically, a scorecard that takes into account the customer measures of success and weights each measure according to the priority placed on it by the customer. It will have many of the same metrics — on time delivery, quality, etc. — as a “perfect order” scorecard, but it will be completed by the customer and each measure will be weighted differently by each customer. That’s likely all there is too it.

How to Be a Customer of Choice?

CPO Agenda recently ran an article on “how to be a customer of choice” that merits some thought. If supply is limited, or a supplier innovation could shift the balance of power in the marketplace, you want to make sure that your organization is first in line to get it. And, since the size of your wallet, while still a hugely important element, may not in isolation be sufficient to guarantee your company receives preferential access to scarce resources, latest innovations or the best people, your organization wants to be a customer of choice. So how do you do that?

Becoming a customer-of-choice may not be as easy as one thinks because Key Account Management (KAM) is much more widely established and practiced than SRM, which means that, in terms of account management, your suppliers have a leg up on you. Plus, you can bet the average sales organization puts a lot more effort and investment into account management than a supply management organization does today.

According to the article, which quotes KAM experts Malcolm McDonald and Diana Woodburn, there are three (3) main elements that companies use to select key accounts (customers of choice):

  • Financial Outcomes
    past, present, and potential future income streams as well as “wallet share” (on the basis it can cost up to five times more to capture a new customer than grow a relationship with the existing one) over the next three years
  • Customer Needs
    and how well the supplier’s visions and objectives are aligned with their needs
  • Customer Attributes
    factors and behaviours that signal to the supplier whether “trusted partner” status is a reality

However, in some cases, key account status, which should be reserved for only a handful of accounts (15-35 is considered optimal by some), does not, by itself, guarantee preferential treatment. In practice, only a third of key accounts, on average, are given access to cost and productivity improvement resources, access to reliable sources of critical materials/services, and breakthrough innovation ideas.

Based on this, the authors proposes the following definition for customer of choice:

a company that, through its practices and behaviours, consistently positions itself to receive preferential access to resources, ideas and innovations from its key suppliers that give it a competitive advantage

And the best way to become one, according to the author, is to see things from the supplier’s perspective. The typical pain points of a supplier are:

  1. Willingness to Engage
    suppliers want a customer open to external ideas and willing to listen to what they say
  2. Information Sharing & Communications
    lack of openness makes a supplier worried about customer commitment and affects allocation of resources
  3. Getting Things Done
    suppliers want a customer that will make decisions and implement them
  4. Approach to Business
    is the supplier treated fair and respectfully by the customer and can it expect to be treated so in the future
  5. Paying the Bills
    customers do not like late payments or unfair payment processes

And these are all good points. In fact, as far as I can tell, all that is missing is the following:

6. Long Term Commitment
All of the above is a good start, but what a supplier really wants from a customer of choice is a long term relationship that is likely to be profitable.

VMO Best Practices or General Organization Best Practices

A recent article over on SIG on “How to Build A World Class Vendor Management Organization” noted that the most important element of success was execution. Execution that involves the:

  • identification and allocation of appropriate resources (people)
  • identification and implementation of enabling technology
  • development of policies in collaboration with key stakeholders
  • documentation of processes and workflows for key programs
  • application of segmentation strategy to align resources
  • pilot strategy and program that supports Business Units and Suppliers
  • testing, refinement, and redesign of processes as required
  • communication, communication, and communication

This is all good, and everything that should be done in the establishment of a Vendor Management Organization, but an organization would do the exact same if it was establishing a Global Procurement Organization. Or if was establishing a Shared Services Organization. Or if was establishing a Consulting Services Organization. No matter what organization is being established, it will not be successful without:

  • people who know what they are doing
  • technology to support them
  • policies to guide them
  • processes to enable them
  • strategies to make the best use of resources available
  • support from affected Business Units (which is won through incremental wins)
  • adaptability to changing circumstances and
  • constant communication

In other words, the article contained good advice, but nothing specific to VMOs.

So what is the real key to a good VMO?

A focus on the vendor. It may take different forms, but the vendor, and its success, should come first as vendor success enables organizational success.

Risk Detection Can Not Be Automated

No matter how many impressive white papers, including this recent one on Uncovering Surprising Supplier Behaviours Creating Organizational Risk by Atlantic Software Technologies, Inc. (an IBM Software Value Plus Business Partner). This white-paper recommends automation of inbound data classification to expedite throughput because automation of this function enables the organization to redeploy up to 40 percent of staff while increasing processing throughput as much as threefold. This is important because one cannot assess the true business value of a supplier relationship unless one understands his or her own personal relationship with the supplier. And, in order to really get a handle on the quality of the relationship, an organization has to
be able to collect and analyze data points from the multiple impact points throughout [its] supply chain, both internally and externally, not just the ones that are easily visible and retrievable.

This is true. And, as the paper points out, if one does not understand the nature and quality of the relationship, one may never know that:

  • a supplier delay, just communicated to one of your employees, will impact multiple customers,
  • new international suppliers are being tapped to avoid single-sourcing risks, which might be causing quality risks, or
  • foreign nationals are handling sensitive information prohibited by export control laws (and this last risk could put an officer of the company behind bars).

But automating the processing and classification of unstructured data is not going to reduce risk. In reality, it’s going to increase risk. In a nutshell, here’s why.

Let’s say that external testing found lead paint on a children’s toy. If you’ve identified “lead paint” as a risk and set up a rule that alerts someone in Quality Control that a review is required, then you might feel you’ve mitigated the risk, as the document will come in, be sent to quality control, see that lead levels are present and well beyond tolerance, and tell Procurement to refuse the shipment. Problem solved. Right? Wrong!

What happens if the test was performed by an individual who speaks English as a second language, who trusts that all misspellings will be handled by Microsoft Word, and who mistypes “lead paint” as “led pant” in the report. Both are legal English words, and if you turn grammar checking off, Microsoft Word will not complain. Is the automated classifier going to catch this? Not likely. While you may remember to program in one or two misspellings, like “led paint”, or an abbreviation, like “ld pnt”, you are not going to come up with every possible misspelling, and you’re not going to want to because, if you include too many, you’ll get a lot of false positives (and misclassifications). If this is a product where tolerance is 0, and the test results are not acted on in time, not only could you be stuck with a multi-million dollar inventory that can’t be sold, but if a product makes it onto shelves, gets bought, and someone gets sick, that’s a lawsuit that could cost more than what it cost to develop and manufacture the first batch of products.

Now, there’s nothing wrong with deploying such technology to scan documents to look for documents of interest that should be reviewed, but it should not be the foundation of any risk management strategy. Good risk management entails identifying relevant risks and having a mechanism for anyone to report when a risk of interest may be materializing. Then someone knowledgeable about the risk reviews the situation and makes the call.