Category Archives: Supplier Management

Manufacturing Strategies for Controlling Costs

These days, manufacturers are purchasing more and more goods from global suppliers. As a result, manufacturers have to become more sophisticated in their analysis, more accurate in their demand forecasting, and more knowledgeable about the global marketplace and the changes it is undergoing. To this effect, a recent Industry Week article titled “Sources of Strength” attempted to outline the next generation sourcing strategy that manufacturers need to use to remain competitive.

According to the article, the first thing a manufacturer needs to do is insure that it’s processes are appropriate, that it’s goals are aligned with organizational needs, and that it’s people have the necessary skill sets.

The next thing it needs to do, as per the article, is select an e-Sourcing suite. This is not the first step because technology by itself doesn’t do anything unless you understand how to use it and how to organize and take advantage of the data it acts on. What technology does is simplify the process of sustaining benefits because it automates the process and captures decisions and data for future use.

Then, once an organization has streamlined and simplified its sourcing processes, the article indicates that it has to start collaborating with its suppliers. This is because a good relationship provides a manufacturer the opportunity to create flexibility with its suppliers and creates a means to reduce costs at each stage of the supply chain. According to Bob Derocher of Archstone Consulting, this requires selecting providers that will sit down with you and work together on continual process improvement to reduce the total cost of each purchase.

According to Bob, one of the things you see being done between manufacturers and some of their major supply partners is a focus on supply relationship management, creating a collaboration … that way, manufacturers don’t have to just demand a lower price from the supplier. If they can reduce the friction between the two companies and the effort it takes to do business together, the supplier can keep a good margin and give you a good price. Then they’re both better off, which is important because in many ways, their fates are tied together.

Furthermore, as noted by Sanjay Argawal at Deloitte Consulting, when collaboration is done right it addresses one of the biggest challenges companies have today — not having very much visibility beyond their Tier One supply base. When you form a strategic partnership with your supplier, you also get visibility into the supply chain beyond that supplier. And the more visibility you have in the supply chain, the more influence and control you’re able to have to prepare for supply disruptions“. Also, as noted by Bob, the specifications process is not just about the engineering aspects of the components, it’s also about the business relationship between the buyer and the supplier. How will the supplier deliver the product? When do you take financial ownership? How will the supplier know when to ship another batch? If you have a collaborative planning and forecasting process with the supplier, you’ll know all of that up front“.

So, re-engineer and align your processes, obtain a good e-Sourcing suite, collaborate, increase your visibility, look at the total cost – including logistics, and be lean. That’s a pretty good start. Throw in a pinch of six sigma, a pound of scrap and waste management, better energy utilization, and some smart price forecasting to insure that the contract term chosen is the right one, and a manufacturer would be ready to enter the twenty-first century in their sourcing operations.

Foundational Principles of Supplier Performance Management

The Supply Chain Management Review recently ran an interesting article on “Embracing Supplier Performance Management for More Profit, Less Risk”. The article noted that if each business unit is measuring suppliers with a different set of criteria, and not sharing data at the corporate level, how do you know which suppliers are achieving the desired outcomes? With no real visibility, how can you be sure that your most important suppliers won’t suddenly experience quality issues that disrupt deliveries? How do you know if your business practices, and those of your suppliers, are in compliance with the latest government and industry regulations?“, which are all good points. If you don’t have a good supplier performance management program, how can you expect good results?

So what is SPM? According to the article, it is a management program and set of processes that help define, measure, and collaboratively enhance supplier performance and business goals. Although, as the article correctly notes, SPM will never eliminate uncertainty, it will help you understand where the uncertainty is and what the risks are – so that you can take appropriate measures to minimize the uncertainty and the risk.

The article then goes on to define the basic components of a SPM program as:

  • Defining SPM objectives aligned to a spend management strategy
  • Defining a straightforward, repeatable process
  • Establishing a supplier ownership and segmentation strategy
  • Establishing KPIs
  • Defining scorecard and survey templates
  • Gathering performance data
  • Analyzing results and communicating to suppliers
  • Collaborating with suppliers to improve performance

And follows these with it’s 7 foundational principles of SPM:

  1. Know Your End-Game
    And set metrics only for the elements that bring you there.
  2. Face Facts
    Employees must understand that SPM provides a more accurate assessment and that KPIs need to be held steady for at least 12 to 18 months.
  3. Be Firm
    Suppliers must understand the program, goals, and benefits before it is implemented – and you must be willing to follow through with corrective actions when required.
  4. But Work With (not on) Suppliers
    It’s not a student-teacher relationship or boss-subordinate relationship – it’s a collaboration.
  5. Assign SPM Owners
    Someone has to take responsibility.
  6. Drive Ongoing Improvement & Reset Metrics
    The output of the last performance review, and subsequent action plan, should be the input to a supplier’s next review period.
  7. Automate Whenever Possible
    Implement resources that automate surveying and scorecard functions to minimize resource requirements.

This is all great advice – but it misses one very important element: the supplier! Everything that the article outlined was to help the buyer manage the supplier’s performance – there was not a single recommendation to help the supplier manage its own performance! When all is said and done, it’s the supplier that has to perform – not the buyer. Thus, it’s important to provide the supplier with tools and processes that it can use to perform better. In other words, you need to provide them with an enablement solution that allows them, at any time, to see how they’re performing, collaborate with you on improvements (and, when necessary, corrective actions), and manage their own processes and procedures. Only then will all the great advice provided in the SCMR article take you as far is it should.

Sustainability: Rounding the Bend

Eric Hiller gave us a granola definition in his first post on sustainability over on Cost Cents. Eric’s take on the debate is that a business should understand how to cost or value the profit of a sustainability initiative, since businesses have to be sustainable themselves before they can “go green” or “save the planet”. When attempting to evaluate whether a sustainability initiative is a good decision or not, Eric advises you to see how it impacts the cost statement – as it affects the cost statement the same way ANY cost does in terms of material cost, labor cost, direct overhead cost, amortized and capital investment costs, and period / indirect overhead costs. For example, the cost of material = cost of commodity + cost of disposal + cost of secondary effects. For example, if we are evaluating materials for a SUV, then we are interested in fuel economy as a secondary effect. It can be costed as the part mass times the cost per kilogram times the material strength to weight factor (since magnesium has better strength to weight than aluminum which has better strength to weight than steel, for example). In other words, just like analyzing the carbon footprint can tell you whether Britons should import roses from The Netherlands or Kenya, analyzing the cost can tell you whether or not the effort has value.

Over on Buyer Analytics, Dave M took a stab at defining sustainable procurement. Dave points us to the International Council for Local Environmental Initiatives (the ICLEI) for a definition of sustainable procurement. Sustainable procurement aims to integrate environmental considerations into all stages of the purchasing process with the goal of reducing the impact on human health and the environment. Then Dave tells us what he believes the cornerstone of sustainable procurement to be — ethical sourcing. Dave defines ethical sourcing as an organized social approach which promotes selling goods which adhere to standards for international labor, environmentalism, and social policy. He then gives us a few reasons for insisting on ethical sourcing which include the facts that there are 2.7B people in the world who have to exist on less than $2/day and the fact that rights groups estimate there are as many as 60 Million children working in violation of the Child Labor Act. (More reasons can be found in my summary of the John Lewis Partnership “Responsible Sourcing Workbook”.) He also points out that just because you don’t purchase from suppliers in developing countries that this does not mean ethical sourcing doesn’t apply to you – you still need to ask who your suppliers themselves purchase from and trace the chain.

Andy Monin on Vendor Compliance also tackled the sustainability issue in his latest point about the contradictory dual view of the average (North) American. In his post, he points out that we all want to sustain the forests, clean beaches, and good air. However, at the same time, the average (North) American wants to sustain two cars, a morning latte, and the drive-through fast-food life style. He might be a bit greener than he was in the 90’s, carrying reusable sacks to the grocery store, installing compact fluorescent lighting (CFL), and even driving a Pius … err-r-r … Prius … but this is all for naught if he continues to want a bigger house filled with more gadgets. A few CFLs isn’t going to significantly make up for the additional energy consumption of a 15% larger house with more electronics. Andy then tries to address where the true sustainability impact will come from.

According to Andy, achievable sustainability must not degrade quality of life, must create simultaneous ripples that compound the benefits and impact felt around the world, and must have champions (like Eric’s AlGorites) that can embrace the concept based on the inherent incentives and benefits. This means large institutions, like Wal-Mart, will likely be the drivers of the greatest impacts, at least in the short term. However, we must note that Wal-Mart is not really the biggest fish in the pond. It’s just one player in a large retail industry. Furthermore, from an industry perspective, US hospitals alone represent over 1 Trillion dollars (which is nearly 5% of US GDP) and could make a real difference. He then gives four good reasons why hospitals should attempt to be the catalyst of the movement and make the jump: it’s good common sense, it will make them more competitive and attractive, it will improve their ROI, and it is socially responsible. Furthermore, hospitals have to make difficult, ethical decisions every day – who better to lead the sustainability charge and truly do no harm?

the doctor Exposes A Few More Elephants

As the doctor mentioned in his last post, there are a lot of elephants hiding in the sourcing and procurement war room! There are so many, in fact, that the doctor is having problems figuring out how they all fit! However, as the doctor was in-depth scanning and reviewing some vendor web sites (and no, the doctor‘s not going to list names – since he’s sure most of these vendors are still upset with him for the X-emplification series, which is going to be followed by an X-asperation series in the next month or so thanks to some really great questions and suggestions the doctor received in private e-mails), he caught a glimpse of the data enrichment elephant hiding behind the door, spotted the compliance elephant under the boardroom table, and found the performance management elephant hiding in the closet.

The Data Enrichment elephant would have us believe that your data is “enriched” if it’s processed by a spend repository that applies repeatable data cleansing and categorization rules to make sure it is always in a form that can be analyzed by the solution that you have. Although accurate cleansing and categorization is important, and a necessary part of any spend analysis project (whether done by a central data administrator or an analyst on the fly using a real spend analysis tool), it’s not data enrichment. Enrichment, by definition, means that additional data, culled from other third party sources, is added to your data so that you can do analysis above and beyond what you could just with the data in your organization. For example, this could be using Equifax Austin-Tetra to append financial risk and diversity information so that you can determine how much spend is really going to diversity suppliers (versus how much spend you think is going to diversity suppliers) and how many suppliers you are dealing with have a risk of failure in the next 12 months. In other words, what the Data Enrichment elephant is selling you is important, it’s just not enrichment – it’s basically what you should be getting with any tool you buy that promises accurate cleansing and categorization.

The Compliance elephant would have you believe that just because the vendor sells a complete suite that is capable of fully automating your processes and work-flows, storing all information and award decisions in a searchable centralized repository, and managing your contracts with a solution that alerts you whenever a transaction is found off of contract or a contract is coming up for renewal, that you are compliant. the doctor would like to say he’s sorry, but he isn’t, but compliance is much broader than this. Compliance is not just compliance with internal processes, but whether the system is always being used (because automating the processes is irrelevant if the system is not being used), whether it is collecting the data required by your organization to meet the requirements of Sarbanes Oxley and the accounting standards being used, whether or not you are awarding to a company on the denied party list, whether or not the carrier who is bidding is licensed to operate in the countries that you are shipping from or two, whether or not the products you are sourcing comply with regulatory requirements such as REACH, RoHS, and WEEE, and so on. This goes well beyond the offerings of any sourcing or procurement solution on the market. Well beyond. If the vendor is telling you that they enable compliance with respect to SOX, REACH, etc., and being very specific about it – that’s great! Sourcing and procurement solutions can enable compliance. But, considering the breadth of regulations that need to be adhered to in global trade, a sourcing or procurement solution alone, by itself, will not make you compliant. So, in short, this is an elephant that likes to considerably over-promise and under-deliver.

The Performance Management elephant tells you that if you have a sufficiently complete technology platform, than you achieve supplier performance management. One vendor in particular is stating that a combination of project management, collaboration technology, assessment, and monitoring technology is everything you need for supplier performance management. Although this is likely everything you need to monitor and measure your suppliers, and thus a good foundation, there’s a big difference between measuring something and doing something about the result! The nature of performance management is that it can’t be a purely technology solution – because performance comes down to people. Technology is good at tracking tasks and, by way of benchmarks, pointing out where there are inefficiencies or problems – but you need people to identify the root causes and work with suppliers to identify the solutions and insure that they get implemented. Furthermore, for this type of platform to be truly useful, it should have an expert-system module that can be customized to each vertical to help the individual responsible for performance management to diagnose possible errors and resolutions. Without this, then it’s just an open source project management tool combined with an RFX tool for surveys and assessments and a BI tool on an ERP to produce metrics and generate alerts when something falls outside of an acceptable range. In other words, the Performance Management elephant has a really good cause, but is a little confused how to actually go about getting results.

For those of you counting, this brings the total number of elephants we’ve discovered in this room to date to twelve. In addition to the data enrichment, compliance, and performance management elephants, previous posts identified the optimization, e-Procurement/EIPP, and spend analysis elephants; the supplier enablement, contract management, and hidden cost elephants; and the RFX, e-Payment, and technology RFP elephants.

the doctor hopes you enjoyed this post, and the brief return of the blogologues, because this will be the last regular blogologue for a while. There are two reasons for this. The first reason it takes a lot of time to craft and edit a post of meaningful content (versus the first half-formed thought that comes to mind), and given that this blog is generating zero income at the present moment, the doctor, unfortunately, can only afford to dedicate so much time to it. The second reason is that the first cross-blog series of 2008 on Sustainability starts next week, and given the importance of this topic, the doctor does not want to detract from what he hopes will be a very popular, and very prolific, cross-blog series.

Supply Management in the Decade Ahead VII: Developing and Managing Suppliers

Today we continue our coverage of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead” (a detailed report based on research jointly undertaken by the ISM, A.T. Kearney and CAPS Research), and our review of the seven critical supply strategies for succeeding in a dynamic world in particular, with the second critical supply strategy identified by the report – the ability to develop and manage suppliers.

According to the report, in the decade ahead, the development of a competitive worldwide supply base and suppliers that collaboratively help to create value in support of the buying company’s business models will become the norm. Although the doctor is not sure whether or not it will be the norm across all companies, the doctor is sure that it will definitely become the norm across market leaders. Furthermore, as the report notes, the leaders of the pack will enter into an era characterized by companies looking for ways to strategically leverage key supplier/buyer capabilities for innovation and “enlarging the pie” rather than playing the zero-sum game whereby one company’s gain usually comes at the expense of the other. The importance of strategic partners, both buyers and sellers, will increase.

The report outlined thirteen strategies for working with suppliers. The top six were the following:

  • Improve Working Relationships with Strategic Suppliers
  • Allocation of Management Attention and Resources to Suppliers
  • Grow the Volume of Purchases from Strategic Suppliers
  • Require Suppliers to Take a Greater Role in Cost Management
  • Employ Joint Evaluation of the Working Relationship
  • Collaboratively Share Risks, Rewards, and Cost Savings

In the decade ahead, companies will put greater care into strategically structuring their supply base in order to support the business model and category strategies. Effective cross-functional teams will be employed to structure the supply base and help achieve the overall goals of the business. The supply base will be structured using a “bottom-up”approach that will be applied to each category. The collective supply base identified will contain the right number of suppliers for the company.

The report also provides some good questions to ask on a category-by-category basis when attempting to strategically structure the supply base around strategic categories:

  • How many suppliers is right for this category, and what role should each play?
  • What current and future capabilities are required, and where in the world should the supplier(s) be located?
  • Which suppliers do we want and why?
  • Do we want to lead and/or manage supplier networks at the Tier 2 and Tier 3 levels?
  • Which suppliers do we want to cross-collaborate with each other, why, and how can we influence this collaboration?

Suppliers will play a greater role in the innovation process and companies that work in industries where technological change is a driving competitive force will opt to work in an “open innovation” environment that celebrates the power of discovery and dedicates significant resources to working on such efforts. In addition, supplier relationship improvement will be a growing need, as suppliers will be increasingly viewed as a source of innovation, which is a change in the traditional western buyer-seller dynamics.

Furthermore, two different approaches to collaboration – “initiative driven” or “institutionalized” – will be employed as circumstances warrant to enhance future working relationships with strategic suppliers. The initiative-driven approach will establish a leadership team that will drive the company to rationalize the supply base, enhance segmentation, and identify preferred or strategic suppliers, improve performance scorecards, create or further develop capability matrices, modify performance driven sourcing behaviors to identify and reward best performers, and implement a company change program focussed on improving working relationships.

Mature strategic suppliers will be moved from the “initiative driven” state to the “institutionalized” state where the goal of the supplier relationship will be focused on improved value creation along multiple dimensions – including innovation, revenue enhancement, and business continuity – and not just cost reduction.

The report also noted that in contrast to today’s quarterly business reviews, stale supplier training programs, and narrow-focused joint improvement efforts, periodic, cross-functional reviews and meetings with key suppliers will be the way of the future.

In summary, in the decade ahead, the supply management function will have to clearly understand company needs and align with the appropriate suppliers, develop close working relationships with suppliers that are strategically important to unlock value-creating potential, and invest in not only reactive, but proactive supplier development efforts to maximize the value achieved by the supply base.