Category Archives: Supply Chain

Direct Sourcing Should Be Part of Supply Chain Management …

… but it’s not, and the reality is that none of the Supply Chain Management solutions (which are often still in the middle ages of technology) are anywhere close to even considering direct sourcing, so you can guess how close they are to being able to support it.

This means that, in order for us to get to the point where we have a direct sourcing solution that works, integration will be key. Furthermore, the integration must be as native as possible between the direct sourcing and supply chain planning and management solutions, with full, real-time, data exchange in compatible models.

This is because, as pointed out in Part 4 of our direct sourcing series with Bob Ferrari of Supply Chain Matters on how integration is key, without native integration, it’s hard to react and execute effectively when:

  • consumer demand suddenly spikes or flatlines
  • supply lines (or a supplier) suddenly become unavailable
  • costs significantly change over night

Only with direct integration to the supply chain visibility, planning, and execution systems will you:

  • see the spike when it happens, not when it’s too late to even attempt to do anything about it
  • see the delay in a shipment that could indicate a supply chain disruption and see the alternate supply lines or suppliers that could be rapidly be routed to or ordered from
  • see what your alternatives are, what they would cost, and how long it would take to bring them online

… and begin an emergency sourcing process for substitute parts, alternate carriers, or even new suppliers in time to at least prevent part of the forthcoming disruption, and pull all the data in from the relevant systems that you need to start that process.

It’s the only way to create a supply chain aware integrated sourcing strategy, which changes the static old world view of:

  • Identify the core product lines for the next 5 years, create the regional and local supply chain hubs, (blanket) contract the major carriers, and set up the infrastructure
  • Finalize the products for the next 1 to 3 years, do the sourcing events, cut the contracts, define the normal delivery schedules and routes, set up the (auto) reorders, and set the supply chain in motion.
  • Make minor changes based on localized demand variations, localized/temporary disruptions, or unexpected situations, get things back on track, and continue with the production and sourcing plan as normal

This worldview is unable to cope in today’s global economy that is plagued by pandemics, wars, major shipping route interruptions due to severe weather (Panamanian droughts) and rebels/terrorists (Houthis in the Red Sea), border closings and trade wars. While it more-or-less worked fine for the relatively stable global “free” trade of the first two decades of the century (except for when natural disasters occured), it’s clear the model no longer works and needs to be replaced by a better one.

More specifically, an integrated multi-level model that can react and re-run continuously as a result of signal changes to help the organization react and adapt to changes while still keeping long term and mid-term goals in mind with every decision. An ideal model that is spelled out in Part 4 of our direct sourcing series with Bob Ferrari of Supply Chain Matters on how integration is key.

For Proper Direct Sourcing, Different Organizational Thinking is Required

In our last post we noted that standard sourcing solutions don’t work for direct and referred you to our seven part series with Bob Ferrari of Supply Chain Matters at these links:

And we noted the reason was that direct sourcing doesn’t work isolated from supply chain. Fortunately, direct sourcing and supply chain planning can work together, but only if we

Think Different

This is the only way we are going to realize business and operational planning alignment from source to supply. Right now, it takes too much time across the various strategic, tactical, and operational decision making processes in the gathering, assimilation or transcribing of the most up to date line-of business, functional or operational focused data and information into spreadsheets and antiquated tools to support forecasting, sourcing, supply chain, and logistics systems.

This is primarily due to the fact that not only are each of these processes for different timeframes but they are typically conducted using different business processes. Long term strategic planning is typically conducted using IBP methodologies, mid-term tactical planning is typically conducted using S&OP methodologies, and short-term planning is typically conducted using exception planning, materials replenishment planning, logistics re-routing, etc.

Each plan requires information on the connecting layers in order to make a decision. IBP requires knowledge of what S&OP can do and the best historical results from S&OP to come up with the plans most fit for execution. S&OP requires knowledge of the overriding IBP goals as well as the operational systems used for day to day procurement, inventory replenishment and management, logistics and trade management, and production. Since most of these systems don’t talk, it’s a lot of manual data collection, processing, and pushing up and down the levels and the chain.

These processes need to be connected in integrated planning loops that span:

  • Plan, Source and Procure
  • Plan and Analyze
  • Plan and Produce
  • Execute and Fulfill

Moreover, these planning process frameworks need to be enabled by more effective data management, data harmonization, and analytics that enables these loops to constantly be executed and re-executed as needed to ensure each level of planning and each step of the process has the data it needs to suggest the right answer for the human to make the right decision.

Finally, this will only happen if organizational employees think different and adopt new processes, frameworks, data models, and strategies to integrated planning from source to supply. For some insights in to how this might happen, see part three of our joint series on how today’s Organizational Thinking is Wrong.

Standard Sourcing Solutions Don’t Work For Direct

the doctor recently teamed up with the Supply Chain Master Bob Ferrari over on Supply Chain Matters to bring you an initial seven part series on why Standard Sourcing Technology Solutions Don’t Work for Direct, which you can find at these links:

If you read Parts I and Part II in detail, which you most definitely should because we’re only going to summarize a few highlights here, we detail some of the big reasons they don’t work, besides the fact that most were designed for indirect and can’t even do the basics of direct sourcing. The reasons we put forward included:

  • Direct Material Sourcing is Hard
    • substitution (like satisfaction) is not guaranteed
    • substitution is always conditional when available
    • demand is not easily aggregated
    • delivery time guarantees are often significantly more important
  • Sourcing Platforms Don’t Do Direct Well (as most were designed for indirect)
  • Most Sourcing Platforms Don’t Support Bill of Materials
  • Most Sourcing Platforms Don’t Support Optimization

Then we dove into why direct solutions don’t work either:

  • It’s Not Just Landed Cost, It’s Total Cost of Acquisition
  • It’s Not Just Cost, It’s Supply Assurance
  • It’s Not Just Supply Network Assurance, It’s Timing

That’s just the baseline sourcing side of the equation. We still haven’t talked about the supply assurance side:

  • They Aren’t Designed for Multi-Stage NPD/NPI Sourcing and Quality Assessments
  • They Aren’t Designed to Capture Network Performance and Carrier Risk
  • They Aren’t Designed to Capture and Assess External Risks

That last point is key. If you’re not considering the geopolitics of where you are sourcing from and where you are sourcing to, and how those might change in the near future, you could be in for quite a shock, as many of you in the USA found out this year. If you had been paying attention to the election, noted how much a certain Tech Bro donated to a certain campaign, and compared that number to past campaign contributions, you would have known the election, which appeared neck and neck, was being bought and paid for, which party was going to win, and who was going to be President.

If you did your research, analyze everything he said publicly in the decades leading up to his first campaign for political office, look at what he actually did in his first term, and read Project 2025, you would have known something was coming on the trade front, especially where certain countries were concerned. And you would have known that what was coming was not going to be good for your business if you were sourcing from China.

But it’s not just the “to” destination you have to worry about, especially if the only thing increasing is cost. It’s also the “from” destination, which could be cut off entirely by a new regime that imposes sanctions or embargoes, or could undergo a rapid economic decline due to bad government decisions, external third party sanctions and embargoes, or global shifts in trade. A great discussion of this can be found in Koray Köse’s recent LinkedIn post on on Poland’s Economy: Reslient Amid Political Storms and how it faces a test under it’s new President — and how, should it fail that test, supply chain leaders need to be prepared. It’s the perfect example of why supply chain considerations need to be pulled back to sourcing, because there’s no way an average sourcing professional today would consider any of this when evaluating suppliers for a direct sourcing project.

Financial Business Risk Prioritizes Supply Chain Vulnerabilities …

… but it does not identify those vulnerabilities, although it can tell you where to start looking. So while an article in the SCMR last year provided a good overview on how to evaluate, and quantify, supplier risk, the title was misleading when it said they were calculating business risk to identify supply chain vulnerabilities.

The article, which described an approach by the authors to find a way to improve the evaluation of risk impact on a business, culminated in four main findings. The approach, which looked at the total financial impact a supplier failure would have, yielded two findings that we’ve known for over a decade, ever since Resilinc pioneered the approach of assessing the financial risk associated with a supplier failure (based on mapping where all of their parts are used and which of those are single source)

  • procurement spend with a supplier is NOT correlated with the financial risk of a supplier
  • part standardization can increase business risk impact

As well as two insights that are rather new:

  • procurement spend is not correlated with the revenue of the company (the Resilinc model could have shown this, but they did not focus on this or collect those metrics last time SI was made aware of their methodology)
  • true high-risk impact suppliers are a substantially smaller amount of spend than an organization might think; in the authors’ study, they represented only 28% of total spend (whereas most companies will highlight the high spend suppliers as high risk and identify the suppliers that represent almost 3 quarters of spend, or 73% in this study)

The reason for this is that they linked all of the organization’s data sources that contained information related to the BoM for each SKU, the revenue for each SKU, and the suppliers for each BOM. By creating a network of connections between components, products, and suppliers, and identifying single source parts, the link between the criticality of a supplier and the revenue became clear. Consider the supplier who supplies that custom control chip for the fuel injection management, cruise control, or even for the monitoring of the tire pressure. If they were to fail, the absence of a single, $10, custom control chip can bring down a multi-million dollar production line, and close down an entire production plant, as the recent semiconductor shortage did to many plants during COVID. Given that these were being put into $10,000 to $100,000 cars, these suppliers would never have blipped on a spend-based risk assessment. And this is just one example.

But it is an example that demonstrates the blind spots companies have with respect to small and specialized suppliers that aren’t in the top 80% of spend but yet supply sole-sourced and/or custom parts or products. This means that when doing a risk assessment, it’s not just risky suppliers or risky supply chains that need to be assessed, it’s any supplier that supplies something that isn’t easily replaced by another source should something happen to the current supplier. The risk could be low that they will fail, and lower still that you couldn’t quickly modify a design to use an alternative, but you don’t know until you assess. And that assessment must be revenue and criticality based, not spend based. Spending $100M with a steel supplier to acquire the raw material for a frame assembly makes the supplier strategic, but doesn’t make using that supplier super risky when all their competitors offer the same grades of steel. But if you need a custom chip for that car, power transformer, etc., and you currently only have one supplier to supply it, then that supplier, no matter how stable and how low-risk its profile looks, is a risk even if it only gets one hundredth of the spend. And you need to determine if it has any vulnerabilities and, if so, monitor them so you won’t be surprised by a sudden failure.

Why Your Standard Sourcing Solution Doesn’t Work For Direct

Too many of you have been there. You sign that seven figure deal for that end-to-end Source-to-Pay suite, spend another seven figures and 18 months integrating with the ERP, PLM, AP, BI and existing Legal CR solutions, and then try to source your first NPI project natively only to … fail. Why is that?

They just weren’t built for direct.

And it’s not just something you can add in later. If the platform wasn’t designed from the ground up for direct sourcing, there’s zero chance it will ever do a decent job at it. (And, FYI, the majority of the S2P suites the big analyst firms are drooling over in their annual quadrants and waves started out as simple indirect Sourcing or Procurement tools.) People who don’t understand the nature of software don’t get this, but software has to be constructed like a building. You might hear vendors and techies throw around MVC model, which stands for Model-View-Controller, when they talk about how new and well architected their solution is, but that just means it’s built in a maintainable web-friendly way for what, and only what, it was initially designed to do.

It all comes down to the data model and the software architecture of the controller, and neither can be a black box. The data model has to be designed from the ground up to support bill of materials and direct sourcing and procurement data requirements. The controller has to provide the infrastructure to support the complexity of the application that is required. For those who don’t understand software, I like to put it this way. If you pour the foundation for a two story house, and buy wooden beams for all of your structure and supports, you can’t build a 10 story apartment building. You need a foundation for an apartment building and steel and concrete supports. (Even though you can theoretically build a 10-story structure on a two-story foundation if you have the right steel and supports, it won’t be stable. The slightest tremor on the Richter scale [which might not even be detectable by a human] or a strong wind will send it crashing down.) You need both. And just like you can’t replace the foundation under a building or replace the entire support structure in real life, you can’t do the same in code. You have to rebuild, usually from scratch.

So why weren’t they built for direct? Well, there are a number of reasons (besides they wanted to get a product to market fast and/or just weren’t smart enough to build a direct sourcing solution). They include:

  1. direct material sourcing is hard
  2. substitution is not guaranteed
  3. demand aggregation is not straight forward
  4. delivery time guarantees and on-time arrival is significantly more important

To understand these, and learn about the rest of the reasons the majority of sourcing solutions were not built for direct, dive into Standard Sourcing Technology Solutions Don’t Work for Direct – Part One and Standard Sourcing Technology Solutions Don’t Work for Direct – Part 2 over on Supply Chain Matters.