Category Archives: Supply Chain

The Nature of Supply Dynamics Part II: Commodity Based Cost Models Alone Aren’t Enough

You’re partof a progressive Supply Management organization that has strategically sourced the top 10 categories by spend, supplier, geography, and department. The low hanging fruit has been picked, the big fish have been fried, and you’ve even implemented a catalog-based tail spend solution to make sure all spend is at least visible, if not managed or minimally sourced. There are no more obvious avenues for big savings, yet the CFO and CEO are still screaming for savings (despite the fact that you should be focussed on working with Sales to identify low-cost value-adds and NPD to take cost out before those unnecessarily fussy and short-sighted engineers bake it in), so what do you do?

You take a hint from your forward thinking peers, start doing cost break-downs on your more expensive categories and products, and look for raw materials with a high-spend that could potentially be reduced by consolidation on behalf of your suppliers. But are the opportunities real?

Just because your organization spends $20 million on steel doesn’t mean it spends $20 million on steel. It might spend $3 million on carbon steel, $2 million on nickel steel, $4 million on nickel chromium steel, $1 million on chromium steel, $5 million on molybdenum steel, $3 million on tungsten steel, and $2 million on silicon-manganese steel. While that’s $20 million on “steel”, it’s not the same “steel”, and might require half a dozen different suppliers in an area to provide at acceptable quantity and quality levels. Not the leverage an initial spend analysis might suggest.

Moreover, even that $4 million of nickel-chromium steel might not be $4 million of nickel-chromium steel. You could easily be buying four primary grades: 1.25% Nickel, 0.8% Chromium (31xx); 1.25% Nickel, 1.07% Chromium (32xx); 3.5% Nickel, 1.5% Chromium (33xx); and 3.0% Nickel, 0.77% Chromium (34xx) in roughy equal quantities, with a few other grades thrown in. This means your “volume” leverage is at most $1 million per grade of steel. Not a huge volume leverage at the end of the day.

A cost model tells you where your money is going, but not necessarily where your opportunities are. You need to drill into the bill of materials for the product, extract the specs, and see where there is enough standardization for negotiation leverage. And then you need to work with engineering to see where greater standardization can occur so that, as new designs come in and old designs phase out, you have more and more negotiation leverage over time.

And that’s why you need good visibility into your product information, which is not something your average sourcing or procurement system captures. It’s the detailed BoM with material composition specs, fabrication requirements, and so on that really allow an analyst to identify the real raw material (or even energy in deregulated markets) volume leverage savings opportunities, not the phantom opportunities that arise when a superficial spend analysis using systems designed for indirect spend are used.

And you need this information on an ongoing basis. Just because you spent $4M this year on nickel-chromium steel doesn’t mean you’ll spend $4M next year on nickel-chromium steel. Maybe most of the buy was in cancelled product lines and the new product lines have all switched to molybdenum steel, which means that could be where the real opportunity lies — if the grades can be standardized and agreed on by the various engineering teams. With regular updates, trends can be projected and predicted, even if sales or engineering forgets to inform Procurement that a product line was suddenly cancelled at re-sourcing time.

In other words, the nature of supply dynamics is that for both real supply assurance and real supply chain savings you need detailed product information that goes beyond a cost model and even a high level bill of materials, and an ability to work with that data.

The Nature of Supply Dynamics Part I: Unknown When Unmanaged

Despite the constant pressure from the CFO to squeeze every peso out of the supply chain (not penny, that’s not good enough any more, they want to squeeze tenths of a penny now), the primary purpose of Sourcing is not cost reduction — it’s assurance of supply. (And that’s why Sourcing Innovation prefers Supply Management terminology over Procurement and Purchasing, but that’s another post.)

Assurance of supply is no easy feat. Just because you do a sourcing event, identify a supplier, cut a contract, send a purchase order, and arrange a delivery date, it doesn’t mean the product is going to show up. The product might not be manufactured on time due to a a raw material shipment delay on behalf of a tier 2 supplier or a production line breakdown. The shipment might be lost, stolen, or under 3 km of water. Or, the supplier might go bankrupt. Either way, no supply.

But this is a risk that can be fairly well managed through proper supplier qualification, production tracking, shipment tracking, and dual-supply. However, a bigger risk, and one that keeps the CFO (vs. the COO) up at night is the cost control measures you put in place during negotiations to keep supply affordable so the company (knowing that there is always a ceiling to what customers will pay) can maintain profitability.

If you are in an advanced Supply Management organization, one measure you are probably taking is aggregating raw material supply needs across products and categories and buying the raw materials on behalf of the supply base as your volume can often net a better deal than individual suppliers that supply products purchased in lower volume or that use lesser amounts of expensive raw materials (like steel and rare earth metals). This measure can save an organization a lot of money in markets where prices can fluctuate 50% or more in a few months, but only if the suppliers buy off of the contracts you tell them to when they are supposed to.

But how do you insure this? And more importantly, how do you even know what they are doing? Your organization can put in the contract that they have to buy off of any raw material contracts your organization mandates and your organization can ask them to report regularly, but how does your organization really know? The account rep might report 95% compliance and claim only a few “off-contract” purchases due to the need to buy emergency supply as a result of a late shipment, but the reality could be the exact opposite. And you can ask for records, but will you get the right ones?

If you don’t have anyway of keeping tabs on the situation, and managing it to whatever extent it can be managed, it’s completely unknown. It’s the nature of supply dynamics, and why visibility is needed both into, and across the supply chain. So how do you get it? More on that later in a later post. But first, how do you know the analytics is right and the master contracts are appropriate in the first place?

Pool4Tool: Bringing The Direct Procurement Platform — And Message — To the Masses! Part III

In Part I, we began our discussion of the Pool4Tool platform by focussing on its Sourcing capability. Then, in Part II, we discussed their Procurement and SRM capabilities, and specifically, the catalog management capability, procurement requisitions, service management, the SRM portal, and the overall procurement workflow capability. In this third and final installment of our initial 3-part series on Pool4Tool, we are going to discuss the supply chain management capabilities, which is where many of the capabilities not found in traditional source-to-pay (or procure-to-pay) platforms designed with indirect in mind fall short for direct materials management.

The Pool4Tool platform contains a number of unique supply chain management capabilities, including deep ERP integration, document approval, VMI, automated order dispatch and order acknowledgement, Kanban, and quality control.

Let’s start with ERP integration. Pool4Tool supports extremely deep ERP integration and the integration to SAP is so strong, and the interfaces so useable, that it’s actually deeper than Ariba and more useable by its clients for SCM than SAP’s own interfaces in some cases.

It’s EDI integration with third party content is extensive as well. Third party feeds that have already been integrated include, but are not limited to, D&B, Ecovadis, and about a dozen other providers. This data can be viewed side by side with all internal system and supplier data to provide a true 360 degree view of a supplier that extends beyond the enterprise to the market as a whole.

One of the true strengths of the platform is the integrated VMI capability. Not only does the portal allow a supplier to self manage all of their data, see all of their purchase orders, get real-time visibility into their invoice status, and collaborate with the buyer, but it allows the supplier to manage inventory levels on behalf of the buyer. The supplier can keep track of stock levels in real time, manage deliveries to make sure stock levels do not fall below minimums or exceed maximums, and insure the buyer can run their operations smoothly at all times. This can take MRO to a new level and allow both parties to be more efficient.

And, last but not least, the bill of material support and integrated lifecycle costing with integrated budget management extends into supply chain management capabilities as well. The cost of a product is more than just the production cost, or acquisition cost, or sales cost — it’s the cost of distribution, the cost of maintenance, the cost of return, and the cost of raw material reclamation. The lifecycle cost can be many times more than what it costs to make a product, and the POOL4TOOL platform not only contains models to accurately compute that cost, but also to manage the acquisition, distribution, and support against a budget and track the costs across the lifecycle.

In other words, the capabilities of the Pool4Tool platform, while only briefly discussed in this series, go well beyond the average Source to Pay platform designed with indirect in mind and is, thus, a platform that should definitely be evaluated by any sourcing organization that does a lot of direct (material) sourcing.

For more information on why indirect platforms cannot support complex direct sourcing needs, see Sourcing Innovation’s recent white paper on The Direct Procurement Challenge. For more information on complex direct sourcing needs and the importance of efficiency and effectiveness in general, see the doctor‘s recent paper on The Procurement Value Engine, co-authored with the procurement dynamo. And check out the Pool4Tool platform.

For a deeper dive into Pool4Tool and their platform, see the recent 3-part series over on Spend Matters Pro [membership required] that does a very deep analysis of Pool4Tool and their capabilities. (Part I, Part II, and Part III.)

Pool4Tool: Bringing The Direct Procurement Platform — And Message — To the Masses! Part II

In Part I we began our discussion of the Pool4Tool platform, focussed on its Sourcing capability. Specifically, we discussed the RFX and e-Auction capability, the Contract Management capability, and the Catalog capability which can be used to kick-off Sourcing events or procure much needed products and services. Today, we are going to discuss the Pool4Tool platform’s Procurement and SRM capabilities.

It’s important to understand what the Pool4Tool platform does, and how it is different because, as we have been saying (in the Direct Procurement Challenge), indirect platforms cannot support complex direct sourcing needs and the Pool4Tool platform is one of the few platforms that can. (For more information on complex direct sourcing needs, see our recent paper on The Direct Procurement Challenge, sponsored by Pool4Tool, and for more details on the importance of efficiency and effectiveness, see the doctor‘s recent paper on The Procurement Value Engine, co-authored with the procurement dynamo.)

As per our last post, one of the capabilities of the Pool4Tool platform is a powerful catalog management platform that can be used to manage not only multiple supplier catalogs, internal and external through punch-outs, but also multiple requisition types and templates that can be reused as needed across sourcing and procurement projects. These catalogs can be managed by the buyer or by the suppliers themselves, and fully supports UNSPSC. The catalog is fully integrated into the e-Procurement platform and supports approval workflow by employee, cost center, or organizational unit. Requisitions can be approved in full or in part and (partially) approved requisitions can be automatically pushed into the ERP as soon as an approval is made. This can also kick off an automatic purchase order to the relevant suppliers (as requisitions can contain requests for products and services to multiple suppliers) and can do so in their own currencies (as not only does it support multi-currency, but even multi-currency within a single order).

The entire process can be kicked off by a Procurement Requisition from somewhere in the organization that can be made through the platform, be automatically routed to the right buyer, and kick off the right sourcing or (catalog) procurement process. This allows for all requests to be captured and managed in a central fashion. This is more important than you think as this allows all spend to be captured, tracked, analyzed, and brought under management.

In addition, service orders are deeply embedded in the e-Procurement platform and can be kicked off like procurement requisitions and tracked and managed through the entire process outside of the catalog or the standard PREQ if need be. Each type of service order can have its own workflow and approval process, can be tracked, invoiced against, and paid only when services have been rendered.

From an supplier point of view, the Pool4Tool Supplier portal is quite extensive. Suppliers can (self) register and create, and maintain extensive profiles. They can also manage their certifications, qualifications, insurance policies, and other documentation that is required by the buyer. They can access all their RFXs, auctions, communications, orders, invoices, and have a 360 degree view of their activities with the buyer.

Flipping back to the buyer view, the buyer can also use the portal to manage and develop their suppliers using the supplier development and (corrective) action management capabilities of the platform. And, like the buyer, they can get a full 360-degree view of all activities associated with the supplier. Past and present RFX and auctions, contracts, current orders and commitments, innovation initiatives, development activities, issues and corrective action plans, and overall supplier scorecards are all centralized. It’s a central point to get a comprehensive view of supplier capabilities, commitments, engagements, and possibilities.

In Part III, we are going to discuss the SCM capabilities of the Pool4Tool platform.

Pool4Tool: Bringing The Direct Procurement Platform — And Message — To the Masses! Part I

Hopefully you caught the recent webinar on The Direct Procurement Challenge or at least downloaded Sourcing Innovation’s recent paper on The Direct Procurement Challenge and realize that not all platforms are cut out for direct procurement. The majority of Procurement platforms were custom designed for indirect procurement and only handle those categories well.

The core issue is that direct procurement is typically much more complex than indirect procurement and requires capabilities that are not typically found in indirect platforms. As per our recent post on 5 Reasons Why You Need to Take the Direct Procurement Challenge, there are (at least) fifteen (15) capability requirements that a direct sourcing professional requires to efficiently and effectively source direct categories, and none of these are completely satisfied by indirect procurement platforms. To be more precise, nine are only partially satisfied and six are not satisfied at all.

That’s why you need the right platform, with the right capability, and an understanding of what that capability is and how to use it. Pool4Tool has been heavily focussed on educating you on the why (with the aforementioned white-paper, a two-part white-paper on The Procurement Value Engine Part I, and upcoming papers on Value-Based Sourcing and Virtual Procurement Centers of Excellence), and core capabilities to look for, so in these posts we are going to discuss the Pool4Tool platform and some key capabilities it has to support your direct procurement.

Pool4Tool has a very extensive platform with capabilities that not only span the traditional Source to Pay process, but also what we’re going to call the Procure to Produce process, as it can also manage inventory and production processes as part of its PLM capabilities. And all of this, as anyone who read the paper or attended the podcast would infer, allows everything to be done in a very supplier centric manner so that all of the needs — material composition, quality, delivery, etc. — can be evaluated in a balanced fashion against each and every supplier.

Pool4Tool capabilities can be divided into 4 (four) major buckets: Sourcing, Procurement, SRM, and SCM. Today we’re going to tackle the sourcing bucket.

Pool4Tool sourcing capability consists of standard RFX and auction capability, which is found in any e-Sourcing platform, but also includes sophisticated cost breakdown analysis and bill of materials support. A key requirement for any direct platform is bill of materials (BoM) support, and the need for BoM support is a key differentiator between indirect — where you are buying finished products for use or distribution — and direct — where you are buying dozens, if not hundreds, of raw materials and components to complete a product. Furthermore, these cannot be purchased separately or put out in separate lots as they all have to be compatible and meet rigid, interlocking, specifications in order for the product to be properly assembled and meet the quality requirements. In the Pool4Tool product, the Bill of Materials can have as many components as needed, and can be included in the cost breakdown analysis which can also include energy costs, labour, and overhead costs. This analysis can be done by product by supplier and insures that only useable bids are considered.

In addition to RFX and auction capabilities, designed for direct, it also has contract management capability. The contract management module, while not a best of breed enterprise contract management solution with deep authoring support, is just as good as the contract management capability found in the majority of sourcing platforms, and includes the capability to store and index all necessary documents required by the sourcing process, as well as search the (meta) data associated with those contracts. Finally, it also has deep catalog management capability that can store all direct, indirect, and even standard service requirements required by the company that can be used to either (insta-)buy products and services as needed or kick-off sourcing projects by populating requirements in RFX or auctions.

In Part II, we will discuss the e-Procurement and SRM capability of the Pool4Tool platform.