Category Archives: Supplier Management

Supply Chain Disaster Management

Earlier this year, EBN Online ran a good article on “Managing the Variables in a Supply Chain Disaster” that outlined the basic steps a global company can use to get started on planning for a disaster.

It’s obvious, with all of the recent natural disasters, political disasters, and economic disasters, that a supply chain natural disaster is coming your way. It’s just a question of what, when, and how it is going to impact your supply chain. That’s why you need to plan. So where do you start?

According to the author, start by getting all of the departments together — IT, operations, sales, warehousing, administration, and management — to help map out the entire upstream and downstream supply network and determine where the different risk points are and what risks are most likely to materialize. And, as Jim Lawton points out in this Industry Week article on “Country Risk — What You’re Overlooking”, you have to not only focus on your suppliers and the countries they are located in (whch contribute to the political, economic, and commercial risks that are faced by your organization), but your suppliers’ suppliers and the countries they are located in.

Then run a variety of “what if” scenarios to see how the company could recover if supply is interrupted, a warehouse goes up in smoke, a supplier becomes unavailable, freight rates or tarrifs rise substantially, preferred raw materials or components get banned for regulatory reasons, or something else possible, but not predictable, happens. If there is no way to recover, something has to be done now before it’s too late for your supply chain, and maybe your entire organization. For example, if all of the company’s supply for a certain component is from South Korea, and supply from South Korea gets cut off, there would be no recovery. The company either has to find a secondary source of supply from another country, or a way to use a slightly different component to accomplish the same task.

If a moderate increase in freight rates or tarrifs would prevent the company from being able to source a raw material at a price that would allow the company to turn a profit on the finished product, then the company has to identify alternate, cheaper, transportation methods, a way to further save on raw material costs, or a way to increase the value, and thus the selling price, on the finished product. If a raw material gets banned from usage in the product the organization plans on importing into Europe, then the organization has to have a way to produce the component using a different raw material, which could require a different design or manufacturing method, which could add cost as well.

The short of the story is that disaster planning is more than just identifying the upstream supply network and more than just identifying what could go wrong, but also identifying how a recovery could be initiated if necessary.

11 Ways to Improve Your Supply Chain Management

Late last year, Enterprise Apps Today had a great article on 11 Ways to Improve Your Supply Chain Management. A few of these are not repeated, or not listened to, enough, including:

  • Throw Away Your Spreadsheets
    As Sourcing Innovation has reminded you, Spreadsheets, which are riddled with errors and outdated information, Will Cost You Billions! Billion dollar accounting errors have resulted from spreadsheets on more than one occasion!
  • Manage Information, Don’t Use Information Management
    If the system doesn’t facilitate proper collection, identification, and analysis of the information required to make an informed decision, and make such easy to do, it’s not the right system for your supply chain operation.
  • Monitor the Performance of Each Partner in the Supply Chain
    Whether that partner is up stream or downstream. Waiting until a shipment is missed or a customer is late with a payment is too late to begin a problem diagnosis or issue resolution.
  • Remember that the Supply Chain Doesn’t Begin at the Warehouse or End on the Store Shelf
    More important than ensuring products are stocked on the shelves is that those products are [considered] desirable by your customers. If the product ain’t selling, it don’t matter that it’s stocked. It’s all about the end customer, and making sure the product is what they want from the raw materials up, with no child labour or sweatshops in the equation.

Can Cost Management On Its Own Be Strategic?

A recent issue of eSide Supply Management published a piece on “Strategic Cost Management and the Supply Base” that, while full of good advice, might be misleading to an up-and-coming Supply Management practitioner who needs to be set on the right road early on. However, before I can explain, let’s review the key points from the article.

The article started off great when the author noted that:

It might sound obvious, but when faced with a cost improvement challenge from your business, a good place to start is to think about what you’re practically being asked to do. Does the scope of the request apply to an innovative product or service whereby you more likely need to achieve an optimized cost, while simultaneously trading off against other attributes such as performance, delivery channel or customer appeal? Or, is the focus on a current product or service which is no longer deemed competitive or requires maintenance of a current selling price via cost reduction efforts.

The reality is that cost management is not simply keeping prices down. It’s keeping total cost down — where total cost is the total lifecycle cost of the product, which includes acquisition, manufacturing, distribution, sale, warranty, return, and disposal — while keeping total value up — which includes quantitative factors such as low defect rates and high reliability and qualitative factors such as market appeal and differentiation. And the best way to achieve this goal will be different for every product.

And the goal will always be cost, and not price, reduction, because cost reduction is typically sustainable over the long term, while price reduction is often a short-term commercial concession, which is then typically reversed later when the power balance in the buyer/supplier dynamic changes.

However, cost reduction is a more difficult task, especially when the suppliers have power, but there are tools available to help the buyer. The author does a good job of pointing out some of them, including:

  • analytics and benchmarking
    which can provide a buyer with a detailed cost breakdown and a foundation for an accurate cost (of production and distribution) model — which helps the buyer understand how much it should be costing the supplier and what level of profit margin the supplier is trying to get
  • integrated product teams
    whose collective understanding of the product or service from a production, distribution, use, and repair and recovery perspective can shed insight on potential opportunities for cost reduction that a supply manager may not see on his own
  • supplier involvement (from a technical perspective)
    a good supplier is full of innovative ideas to provide your organization with more value (and keep you as a customer) — especially if you bypass sales and go straight to the product engineers or service professionals (as they know where the cost is)

But even though this will help with the multifaceted, complex and often perplexing arena of supplier cost management that supply management professionals have to deal with on a daily basis, it kind of misses the full picture — that cost is only one component of strategic supply management and if supply is strategically managed, cost will fall in line as the buyer will know what costs need to be managed and what costs (of little consequence) can, more-or-less, be ignored.

After all, it’s usually not the initial price that constitutes most of the cost, but the unexpected expedited deliveries, the unexpected high rate of failure and warranty returns, the cost of unhappy customer retention, the losses associated with inventory stock-outs because the supplier couldn’t deliver on time at all (even with expedited deliveries) that constitute most of the unnecessary cost in a category. Control the supply, control the cost.

Thoughts?

Managing Indirect Spend: An In-Depth Review, Part III

In our last post, which ended the review of Part II of Managing Indirect Spend, a new book by William (Bill) Dorn and Joe Payne of Source One that takes you on an excellent adventure through the world of indirect sourcing (that they have been living in for the past two decades, well before Strategic Sourcing and Supply Management became cool), we discussed the non-software tools at a sourcing professional’s disposal, Procurement Services Providers (PSPs), and the (common) mistakes that can kill a sourcing project. This wrapped up our discussion of the capabilities at a sourcing professional’s disposal. Today, we’re going to discuss Part III, Examples from the Field, and focus on some of the results that can be obtained when applying the best practices discussed in the section.

The examples focussed around the gains that can be achieved by collaborating with suppliers, leveraging supplier feedback, and analyzing data — which, as SI outlined in Spend Visibility: An Implementation Guide, we know to be significant even before the application of additional tools and techniques. We’ll start with supplier collaboration.

As Bill and Joe point out, collaborating with your suppliers can produce surprising and profitable results. In fact, collaborating with your entire supply chain (including your suppliers’ suppliers) can often produce sustainable results that equate to large cost savings opportunities. Plus, it encourages partnerships with your suppliers, which may lead to your company being the first in line for new product developments or other supplier benefits.

Consider these examples from the text:

  • specifying printer models and toner requirements, instead of brand name toner cartridges, generally leads to savings north of 50% when suppliers are asked to propose low-cost (non-OEM) solutions
  • the cost of a simple chemical compound was reduced 39% when the buyer worked with the supplier to jointly source expensive regulatory valves at a higher volume
  • the willingness to work with a new supplier that produced a required solvent at an insufficient level of purity (and guarantee them a reasonable amount of business under the right circumstances) if the supplier was willing to refine their manufacturing process to get to the required level of purity convinced the supplier to make the infrastructure investment and saved the customer a considerable amount of money now that a third, lower-cost supplier, had entered the market

In addition to collaborating with suppliers, you can use the information they provide to your advantage. By leveraging the information that your supply chain provides, you can actually achieve deeper discounts in the products or services you are buying, and improve the overall relationship and integration with each of your suppliers. This can lead to results like the following:

  • by working with suppliers to find out what was possible, the buyer was able to approach the incumbent and ask for a new type of telecommunications infrastructure that reduced organizational cost by 35%
  • by working with the supplier to find out when the supplier wanted to make a sale, and the supplier representative, who was quite eager to make a bonus target, the customer was able to get a software product (only available through resellers) at cost with terms of net 30 days, allowing it to delay the purchase to the following quarter (while still allowing the supplier, and the representative, to recognize the sale this quarter)
  • a buyer which needed specialized multi-million dollar computer equipment that could only be supplied by one supplier was able to reduce its costs and get millions of free marketing by allowing the supplier to use its logo in its advertisements (which the supplier promised to spend millions on if the buyer allowed the use of its logo)

Lastly, there are great opportunities to be had through data analysis, including:

  • a detailed line analysis that will often identify a significant number of (secondary) phone lines that are not required that are costing the organization hundreds (or thousands) each
  • the appropriate segregation of MRO spend into the right buckets that will allow suppliers to be more competitive on the categories they are strong in, as this will decrease overall cost significantly
  • the identification of non-compliant spend and the top offenders as a few choice words from the CFO to these individuals (or their superiors) will considerably decrease maverick spend quickly increase realized savings 20% to 30%

There are plenty more examples, but considering that SI essentially co-wrote a book detailing what they are and how to find them in Spend Visibility: An Implementation Guide (free download, no registration required), we’re not going to go into them any further in this post, especially since the important lesson is that you should be leveraging the information provided by the supply chain (for analysis) and then working with your suppliers to implement the best solution(s) you identify.

Stay tuned. After another break, SI will conclude it’s review of Managing Indirect Spend later this month with Part IV: How to Do It.

Series to date:

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.