Category Archives: Supply Chain

Can You Truly Have Structured Risk Conversations without Exact Purchasing?

We’ve been talking a lot about the Busch-Lamoureux Exact Purchasing Pocket-Cube model lately because we’re never going to solve the exponentially proliferating Procurement problems unless we fix the fundamentals. And when it comes to risk management, it’s pointless unless the risks being managed are the ones that really matter relative to their criticality which should be defined not by Risk Management, but by Procurement based on the importance of the categories they impact.

If you look at risk in isolation, you’re going to focus on:

Traditional Risks

  • limited commodities, especially foodstuffs, where bad yields or natural disasters wipe them out, or minerals that come from limited mines
  • transportation shortages, where routes are at capacity and any man-made or natural event that impacts the lane in any way causes a shortage
  • factory limitations, as it’s a custom product that can only be produced by a few existing factories without extensive customization

And you’re going to completely ignore:

  • restricted commodities, where a significant percentage of global production comes from a single region, or country (and when that gets cut off, a glut of supply suddenly becomes a dearth of supply)
  • global transportation chokepoints, and what happens when a lack of rainfall limits the amount of traffic that can pass through the Panama Canal, the Red Sea closes, the Strait of Hormuz is cut off, etc.
  • local transportation chokepoints, such as the ILA controlled east-coast ports in US or the ILWU controlled west-coast ports in the US, and a strike cuts off your routes and back-up routes
  • skilled worker limitations because it’s not just the factory, it’s the work force, and if most of the workforce is > 60 and the educational/mentorship programs that trained the next generation workers were shut down … that factory is gone in a few years

And what you address might not be that important.

If you’re a traditional mechanical manufacturer, you’re only dependent upon rare earths for magnets and lighting, as most rare earths are in electronics. If you’re monitoring anything beyond the rare earths used in the magnets and lights you need to make/source, you’re wasting your time.

If everything being sourced through a taxed transportation network could be sourced from somewhere else through a network with a lot of capacity, at only a slightly higher price point, then you don’t really care about that transportation network.

If you’re dependent on two factories, and you aren’t monitoring the turnover, the influx of new workers, and the output of future workers in the local economy, you will someday, without warning, find yourself needing to find a new factory with a new supplier that will need to customize their production lines, processes, and workforce to your needs … which they may not be able to accomplish in time to keep your supply chain flowing and main product line in stock — which could risk your entire business model.

Meanwhile, you don’t notice the risk above where

  • 60% of the rare earth you depend on for your magnets are coming from different suppliers in China, so when a pandemic strikes and China institutes a no tolerance policy against a virus that can’t be eliminated, your supply goes up in smoke (and you had no warning to secure as much supply as you could while you still could)
  • you weren’t watching for events that could close the Strait of Hormuz (thinking the Red Sea was the end of it) and aren’t watching the Strait of Malaca (which carries almost 25% of global trade … so if the pirates leave Africa …)
  • you will get shocked when the ILWU contract expires on July 1, 2028 and the US West Coast ports shut down as the pay increase that was negotiated in the last round is NOT keeping up with the inflation your current administration is creating;
  • and so on.

And if you attempt to solve your supply chain risk identification by acquiring a multi-tier supply chain visibility and monitoring solution, you’ll get sucked down every risk rabbit hole that is identified based upon every raw material used anywhere in your supply chain and detected impact event.

Unless you are properly categorizing your purchases using Busch-Lamoureux Exact Purchasing, identifying those categories both high-risk and high-impact, and identifying what risks would be devastating to you, you aren’t addressing the right risks and any attempt at a structured conversation will be a waste of time.

And only then will you be able to identify:

  • where the impacts will be felt,
  • which functions need to be involved,
  • who should own the risk,
  • why identified monitoring via subscription data feeds is needed,
  • when a risk-related event is significant and needs to be manually assessed/addressed,
  • what needs to be done if significance is determined, and
  • how response success will be determined.

And then you can use the tips offered up by Greg Schlegel in his We Discuss Risk Regularly post to have truly successful risk management conversations.

Sourcing Excellence IS Optimization!

Sourcing Excellence requires optimization. Not AI. Optimization. We have finally reached a point where nothing else will get you there.

And Sourcing Excellence requires Paul Martyn. You need someone who has built and led programs, evaluated and employed multiple tools, and has the decades of experience to bring the insights you need instantly to the table. With many of the sourcing optimization greats (who founded CombineNet, VerticalNet Tigris, Trade Extensions, etc.) retired or moved on, the number of people left who have over two decades of practical experience are countable on your fingers (just like the number of analysts who have been consistently covering this space for two decades). Paul Martyn is one of the few, true, optimization masters left. So if you want to save your supply chain, reach out to Paul.

If you want to understand why, as well as why sourcing excellence truly requires optimization (as it’s time has finally come), since I know you won’t listen to me, read Paul’s ongoing Sourcing Excellence series, which just saw Part 11 published.

  1. Part 1: (Optimization is Thinking)
  2. Part 2: (Optimization Frames Reality)
  3. Part 3: (Optimization is More than a Capability)
  4. Part 4: (Optimization Changed the Game)
  5. Part 5: (Optimization Must Always Be On)
  6. Part 6: (AI is NOT Yet Fly in Procurement)
  7. Part 7: (Innovation is Just an Input)
  8. Part 8: (Orchestration is the Key)
  9. Part 9: (Value is a Game)
  10. Part 10: (Constraints Dictate)
  11. Part 11: (Constraints Vary)

When a Conflict Starts, It’s Already Too Late For Procurement To Pay Attention!

Supply Chains are not only hurting, they are breaking, and they have been since the US and Israel renewed the conflict with Iran and more-or-less brought the Strait of Hormuz to a close for pretty much every western country that is associated with the US.

A Strait that is critical not only for

  • global energy (as it normally sees 20% to 25% of global oil passing through it daily)

but also for

  • natural gas (up to 25%, at least it will further delay the AI Data Centers)
  • fertilizer (as it saw up to 50% of urea, ammonia, and sulphur supply passing through it daily, with the former a key fertilizer component)
  • methanol (but at least bootleggers will have to use real grain alcohol now) and petrochemicals
  • etc.

In other words, the Strait being close off is not just a logistics nightmare for the shipments you were expecting that needed to pass through the Strait on time, it’s a nightmare across your entire supply chain as all of your suppliers dependent on the oil, natural gas, chemicals, gasses, etc. that normally pass through the Strait daily are also suffering their own nightmares. Delays will compound through the chain for the lucky ones, and the rest will see shipments just stop.

And articles that tell you this is a leadership moment are missing the point.

Where it was critical, you should already have known your exposure, had monitoring in place, and been alerted the day the conflict started that an issue was coming your way.

Where supplier Force Majeure was unacceptable, you should already have had the flexibility in your contract to shift, pause, or end the contract immediately upon supplier failure.

Where supply was critical, you should have been geographically dual-or-tri sourcing with order escalation clauses built into the contracts so you can quickly secure supply when potential shortages are detected.

Where margins are tight or costs can vary widely based upon external events, your cost models should already be taking this into account, should be monitoring for market price changes, and should be updated upon such changes with immediate alerts if prices shift beyond typical market fluctuations.

And strategic and critical suppliers will already be treated as such. They will be given fair margins, access to buyer expertise that will help them with efficiency and negotiating their own raw material contracts, and placed in a financial position where they too can dual or tri-source and explore optionality in their own supply chains.

Because, as Paul Martyn commented on one of the many articles on why the conflict is apparently time to pay attention and step up (even though, as we stated in our opening, it’s already too late):

If you:

  • defer supplier investment –> you pay in disruption
  • squeeze supplier margin –> you pay in resilience loss
  • ignore (supply chain) optionality –> you pay in constrained decisions and lack of supply

The answer, of course, is to be paying attention to any high risk or high impact category from the day you identify it to the day you end the last product line that uses it. And to use the Busch-Lamoureux Exact Purchasing model to properly place your category, determine which cost factors and risks you need to track, how often, when alerts should be triggered, what mitigations can be taken up front, and what actions need to be taken when an issue likely to cause a disruption arises.

How Do We Fix The Procurement, Logistics and Supply Chain Disconnect? (Part 2)

Yesterday we gave you a history lesson on how we got here, from the time it worked back in 1885 to now where it’s completely broken. The reason? You can’t understand how to fix it if you don’t understand why it broke. (The Short Answer: McKinsey and peers who echoed their thought leadership to break down functions, outsource staff, outsource production, outsource logistics, and downsize until there’s almost nothing left in the organization.)

Procurement was never meant to be divorced from Supply Chain or Logistics. It was all supposed to be an integrated function. Buy. Ship. Manage. Repeat. But it’s not, and because no one will give up a fiefdom, and because almost no one has enough cross-disciplinary training to understand the intricacies of most functions, yet alone manage them, it won’t become part of Supply Chain again (or at least not for a long time — at least not before the fall of the modern house of Usher).

So fixing the disconnect is going to be hard. The departments will remain separate. The business language will remain distinct. The goals and KPIs will be local and different. Procurement is going to want lowest cost from a supplier it believes can supply the necessary volume over the lifetime of the (contract) award. Logistics is going to want suppliers that are on lanes served by existing carriers they have contracts with who have excess capacity and from whom they can get a good rate.

Supply Chain is going to want to utilize warehouses, ocean routes, FTZs, and other networks they have in place that they believe are low risk and high performance — they have to assure supply to manufacturing. Each goal would likely select a different supplier — there will be one supplier that is lowest price, one that is lowest shipping, and one that fits in best with the current network with a high supply assurance rate. Furthermore, if you “work” with them and then select the supplier they don’t want, they’ll think you weren’t actually “working” with them.

But, fortunately, you don’t need to work with them to work with them. You just need their priorities and their data.

You can make the best balanced decision for Procurement, Logistics, and Supply Chain if:

1. You understand the competing objectives AND their relative priority

You sit down with logistics and ask them what their most critical criteria are in supplier selection, ask them to rank them, and ask them to relatively weight them. Then you sit down with supply chain and do the same. Then you take your critical (generic) criteria, rank them, and relatively weight them. Then you create an integrated list based on the relative rankings across your three departments, weight based on C-Suite priorities, and get the final, general purpose, rankings blessed by the CFO and COO.

2. You integrate into all of the internal AND external data sources at your disposal

When you go through this exercise, you’ll realize that multiple factors affect landed cost, supplier risk, supply assurance (and supply chain risk), quality, and other key factors. You’ll realize that the only way to evaluate all of this is to pull in key sets of data from the logistics system, supply chain systems, and external data feeds (so that risk analyses are done on complete, up-to-the-minute, data) and integrate them into a decision matrix.

3. You make a decision that satisfies the objectives subject to the data available

And you do this using modern decision optimization that balances all of the objectives relative to the weightings, hard constraints, soft goals, and supplier offerings. As per our prior article, thanks to the introduction of multiple “buy local” acts (US CHIPS, EU IAA, Chinese local content) , The Time for Optimization is Finally Here as it’s the only way you will be able to satisfy all of these requirements with a single multi-vendor buy as you have to match
procurement decisions with supply chain factory requirements as you have to buy for different requirements and produce to those requirements and produce where its most economical to get those goods to the countries they were produced for.

In other words, you fix the disconnect with:

  1. shared priorities,
  2. integrated data,
  3. integrated decision optimization that takes procurement, production, and logistics requirements into account.

And if you don’t fix the disconnect, your organization’s entire existence may soon come into jeopardy.

How Do We Fix The Procurement, Logistics and Supply Chain Disconnect? (Part 1)

First, a history lesson.

Back in the beginning, in 1885, Railroad Barons were building the nation during the Gilded Age, writing the first handbook on purchasing, and managing their logistics and vertically integrated supply chains in house.

But as technology advanced, so did the need for mass production and specialization, and production of components that could be easily, and more economically, produced by a third party started to be done by the third party so the firm could focus on more specialized production in house. But then the Panic of 1893 set in, the Guilded Age began to come to an end, and the Progressive era began.

The Progressive Era, which focused on social and political reforms, also saw continued technological progress as well which occurred as the railroad era gave way to the automotive era (symbolized by the Ford Model T in 1908), the introduction of the first production line, and the need for improved logistics (enabled by Autocar Truck, one of the first motor truck companies) as supply chains slowly lengthened and became more complicated.

These functions were still managed in-house as part of a single function, buying from American companies, even if the materials were coming from halfway around the world (as the American company would buy from the American importer), and everything worked well (unless unions got in the way — but that’s not the subject of this post). Then we saw the New Era, which lasted a little over a decade until the Great Depression happened, which was bad, but it led to the New Deal, which saw more political reforms, and then we got World War II, which, when it ended, led to the post-war economy which ushered in the American Dream for the Consumer and the rise of the management consultancy (and marketing agency) for the Business — where the former had just began two decades earlier.

During this era, we saw the rise of McKinsey that revolutionized corporate structures through the institution of professional management, performance-based pay, and strategic planning. This led to the introduction of downsizing (unnecessary middle management) in the 1960s, the 7S framework in the 1970s (that focussed on aligning strategy, structure, systems, shared values, skills, style, and staff) that introduced the importance of systems, and then the 1980s brought outsourcing of talent and offshoring of unspecialized supply.

This led to the split of logistics from supply chain to manage the transportation from global countries, and the split of Procurement from Supply Chain as that was a back-office function that could be outsourced, and the great divergence began. Once costs started soaring, we saw the introduction of the first dedicated Procurement software in the 1990s, the proliferation of platforms and the rise of Procurement in the 2000s, and the rest, as they say, is history.

Procurement became a completely standalone process, and purchasing became completely separate from supply chain and logistics. During the age of globalization where conflict was low, free trade flowed, and stagflation ruled, everything worked well. But then we got COVID, tariff/trade wars, global instability and increased conflicts, critical strait closures, and supply chains breaking on a daily basis. Decisions made by Procurement months, or years, ago in isolation don’t hold up any more. Neither do processes that assumed sourcing events could take months. Neither do risk mitigation plans that assumed you could just switch to the other supplier in the region (who you gave a volume minority contract to) when the region has been cut off.

The days of Procurement succeeding stand-alone are gone. It must operate in a supply-chain-aware, logistics-aware, and geopolitical aware context. But, for the most part, except for supplier selection in the seven-step-sourcing process of your choice, it doesn’t do any of this. So how do we fix the disconnect?