Category Archives: Supply Chain

Is the Emerging Share Economy Going to Disrupt Your Procurement Practices?

My Purchasing Center recently ran a very interesting article from a Senior Consultant of the Hackett Group on “Considerations for Supply Chain and Procurement in the Share Economy” that did a great job of explaining how the Share Economy is disrupting consumer purchasing patterns, and thus demand. However, in SI’s view, it did not do as great a job when it came time to make the case that it would disrupt daily Procurement operations.

In SI’s view, while the share economy may change the approach to certain categories, it’s not going to change fundamental procurement processes, methodologies, or the best practices that a leading Procurement organization brings to the table. We will elaborate on this, but first let’s review the main points of the My Purchasing Center article.

Noting that the share economy is projected to reach 3.5 Billion this year, with no signs of slowing down, the author of the My Purchasing Center article posits that these trends are going to have a significant, innovative, and potentially disruptive impact on Supply Chain and Procurement.

Zeroing on on services like Lyft and Airbnb where legions of people use their own car or living space as an on-demand taxi-service or rental, the author notes that this reduces the demand for additional cars and short-term rental properties. Similarly, services like zip-car, where people can rent on demand, not only reduce the demand for taxis and limos, but for second vehicles altogether, and thus reduce the total demand for vehicles from a manufacturer. This can effect economies of scale, and increase the cost of each vehicle produced if the demand drop is significant.

Then there is the emergence of 3D printing that is now to the point where even non-engineers can assemble a 3D printer, download some software, and produce their own goods at home. When the cost drops, demand for products that can be just as cheaply printed at home may drop but, more importantly, demand for products that can be printed in bulk just as cheaply as needed on the shop floor could wipe out entire categories for a supplier.

And these are valid observations. Demand is going to change, and shift, and it’s going to have an effect on what an organization can and can’t sell and on what a supplier can and can not profitably produce. No argument there.

But, unless it takes us back to a barter economy, it’s not going to have much of an impact on a good Procurement organization. The first thing a good Procurement organization does when it starts a sourcing event for a category is analyze the category in depth to determine the demand for the product or service, the criticality of the product or service, the strategic nature of supply relationships in the delivery of the product or service, etc. to determine what supply strategy is the most relevant, how the sourcing event should be conducted, what technology should be brought to bear, etc. If demand has dropped 50% in a category since it was last sourced and the economies of scale have diminished, then sourcing is going to shift from a lowest TCO approach to a strategic relationship where it can work with the supplier to take cost out of the production or delivery process or, if necessary, innovative a new design that will allow it to use lower cost materials and production / delivery processes. With or without a share economy, the mandate, and function, of Procurement is the same — source each category in the manner which generates the most value to the organization and procure each part or service against the identified strategy.

Do you think SI is missing something? If so, leave a comment.

The Value of Visibility: It’s More Than You Think

When someone mentions supply chain visibility, the first thought that probably jumps into your head is a foundation for resiliency, which it is, as we discussed in our last post on the value of visibility in your supply chain. The potential to prevent a major supply chain disruption that could cost an organization an average of 10% against potential revenue on the affected product lines for two years running and reduce that loss to 2%, or less, is huge. But it’s not the only savings enabled by good supply chain visibility.

In addition to per-event savings associated with disruption avoidance and crisis containment, there are ongoing savings associated with spend under management. Even if your organization employs advanced sourcing methodologies that include spend analysis and decision optimization, the value of multi-tier visibility goes well beyond what traditional advanced sourcing models can deliver.

For example, a 2012 FERMA4 study found that the majority of firms with advanced risk management practices, built on good end-to-end supply chain visibility, had EBITDA growth over 10% and revenue growth over 10%. The EBITDA growth came from lower costs. The lower costs resulted from better sourcing decisions enabled by better multi-tier supply chain visibility and total cost-of-ownership models. That’s a double digit savings! Up until this point, only spend analysis and decision optimization could consistently deliver that level of savings.

The observant among you might be thinking that this study is just one data point and maybe these savings aren’t obtainable by everyone because it’s statistical, but the proof doesn’t end there. In 2011, Haitao Li and Mehdi Amini undertook a comprehensive computational study on a five-tier multi-echelon supply chain for PC assembly that analyzed over 2,000 scenario variations and found that multi-tier visibility drives cost savings of 15% on average. This study, which built in the impacts of potential, and likely, supply chain disruptions at various levels of the supply chain, demonstrated that most optimal awards that only consider the first tier are highly dependent on the input assumptions and extremely susceptible to disruptions, which can increase the cost by up to 60%! Even the tiniest of perturbations was found to increase the total cost by over 5%. But when multiple tiers were considered and awards were made that were disruption resistant, the average cost savings came out to 15%! This is huge! (Especially given that, according to research conducted by IBM referenced in our last post, emergency re-sourcing efforts often increase costs by up to 30% over the optimum solution.)

This means that, even if your organization is lucky enough to be among the 14% that don’t experience a major disruption within the next year, the ROI from better sourcing decisions alone will pay for a supply chain visibility solution many times over. How much will you save? Up to 1.7% of revenue every year. (An average manufacturer will spend 59% of revenue on direct materials and services and 89% of this spend under management. Assuming that at least 1/3rd is sourced annually, and that the savings are only 10%, as per the FERMA4 study, that’s savings opportunity of 0.10 * 0.33 * 0.89 * 0.59 = 0.017 = 1.7%) So, if your organization does 1 B in revenue, it can expect a savings opportunity of up to 17 M a year from disruption-resistant awards to the supply base (which will, by their very nature, minimize the number of small disruptions the organization experiences).

And this is only one aspect of the year-over-year recurring savings that Supply Chain Visibility can bring your organization! For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think (Registration Required), sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.

Do You Know the Value of Visibility In Your Supply Chain?

A recent manufacturing study found that 86% of organizations experienced significant supply chain disruptions in the last 12 months. In addition, a number of studies have proven that the rate of supply chain disruptions are increasing. This means at this point in time, the chances of your organization not experiencing a significant disruption in the next 24 months is 2% and dropping — fast!

It is true that certain disruptions, like those caused by natural disasters, cannot be prevented and others, like supplier failures that result from financial implosions as a result of undetected fraud or the unexpected loss of a major customer, cannot be predicted. But that doesn’t mean that there isn’t value in knowing about them as soon as they occur, because they can be mitigated, or at least minimized, with enough time to take appropriate action.

However, if your first indication of a disruption that happened months ago is when an expected shipment from a tier 1 supplier is 3 days late, it’s too late! If the disruption was the result of a natural disaster that wiped out multiple industrial parks in a region, and those parks produced over half of the world’s supply of the raw material or critical component that your goods require (such as storage drives for custom-built computer systems*), then by the time the shipment doesn’t show up, any excess supply has already been locked up by the competition.

There is a big value to visibility. How big? A recent IBM study, found that the average supply chain disruption is 6 weeks and that as a result of a disruption, sales decrease an average of 7% in the following year. If demand for your product was roughly constant over a year, that’s 1/8th or 12.5% of your sales wiped out overnight, plus additional losses of 7% in the following year as a result of customer defection, because it’s not likely that your customers are going to wait months for a product if your competitor has a similar product at a similar price point. In other words, kiss an average of 10% of your revenue on the affected product lines good-bye for the next two years.

However, if you can prevent the disruption, even if it means acquiring replacement inventory from a higher-cost supplier and using expedited shipping, you can prevent the vast majority of these losses. And even if your organization has to pay a 30% premium to prevent the supply chain disruption, given that the average organization spends 58% of revenue on sourced products and services, this means that the premium would be capped at 17% of affected revenue, or 2% of overall revenue vs the 10% of revenue that would be lost otherwise.

And if the only way to prevent the disruption is with enough advance warning, that says that the value of visibility in this example is 8% of the revenue at risk from a supply chain disruption. This is huge!

However, that’s just a small part of the value that Supply Chain Visibility can bring you. For deeper insight into the value of visibility, download SI’s latest white-paper on “The ROI of Supply Chain Resiliency: It’s More Than You Think” (Registration Required), sponsored by Resilinc. You might be surprised at how much hidden value you can extract from your Supply Management operations.

* As you might recall, the Thailand floods seriously damaged the factories that produced a significant number of the world’s hard drives, as Thailand is the world’s second largest producer of hard drives.

8 Key Design Considerations for Optimizing Your Demand Planning Process: Part I


Today’s guest post is from Josh Peacher, a Senior Consultant in the Operations Practice of Archstone Consulting, A Hackett Group Company.

Demand Planning was once an overlooked element of supply chain management. However, more and more companies are beginning to understand how essential this component is to overall operational well-being. After all, a demand forecast is the genesis of the supply chain process. If poor demand signals are being sent through the system, it becomes extremely difficult to manage raw material and finished goods inventories, execute an efficient manufacturing process, effectively service customers, and ultimately drive an accurate financial forecast. So if your organization hasn’t already taken a long, hard look at improving its demand planning process, it’s time to begin. As a starting point for your journey, let’s take a look at the 8 key design considerations for optimizing your demand planning process. In this first installment, we’ll focus on the 4 most basic design considerations and then move to more advanced principals in the second installment.

1. Start with Statistical Forecasting and Exception Management

  • Statistical forecasting should always drive the original forecast. A simple set of formulas such as exponential smoothing, weighted moving average, and Holt-Winters can deliver more accurate, reliable, and efficient forecasts across the entire sku base than manual forecasts. This can often be a change management challenge for many organizations as demand planners feel a pride of ownership over their forecast and have trouble with relinquishing control to a set of arithmetic functions. This is where exception reporting comes into play.
  • Exception reporting utilizes a set of pre-defined criteria to identify skus that are not ideal candidates for statistical forecasting. Since the strength of statistical forecasting comes from identifying patterns in demand history, highly erratic and/or variable skus are not good candidates and require manual intervention of the forecast. While exception criteria are customizable, common filters include frequent zero demand periods, high variance between last 6 months history and next 6 months forecast, high variance in month-over-month demand history, and frequent shortages. Exception reporting is also an excellent way for demand planners to prioritize their time across the sku set and focus their efforts on the skus that truly require attention.

2. Select the Right Software Tool

In today’s environment of sku proliferation and real time information, it’s become a necessity to utilize a demand planning tool to assist with the demand planning process. Software solutions such as Manugistics, SAP APO, and Logility all have their strengths and weaknesses. Key criteria to evaluate when selecting a solution include:

     
  • Customer service reputation of the provider
  • The tool’s ability to handle forecasting nuances (i.e., 5-4-4 calendar recognition and promotional forecasts)
  • Transparency and reliability of the generated statistical forecast
  • Forecast performance reporting and exception reporting capabilities
  • Flexibility to forecast at multiple levels (e.g., sku, customer, category, business unit)

3. Track the Right Metrics

Demand planning metrics should serve two purposes:

  1. Identify improvement opportunities and
  2. Drive accountability.

The appropriate metrics will vary based on the characteristics of the industry and company in question. However, a few core, agnostic metrics are routinely found in leading organizations. These include:

     
  • WAPE (Weighted Absolute Percent Error) – In my opinion, WAPE is the most balanced and telling measure of forecast error. Some professionals will advocate for MAPE. However, MAPE doesn’t effectively account for volume as the forecast error % for each period is treated equally.
  • BIAS – Bias is similar to forecast error. However, bias provides a measurement of whether your forecast tends to be above or below actual demand thus signaling a forecasting over/under “bias”.
  • Period-over-Period Error Trend – You’ll want to understand whether your demand planning process is improving or digressing. Measuring the forecast accuracy over time will also help to identify meaningful changes occurring in the business.

4. Leverage the Correct Data

Statistical forecasting and exception management will help to get a reasonably accurate forecast. However , to drive forecast error down to best-in-class levels, demand planners must leverage external information.

As the graphic above shows, there is an abundance of information that demand planners could call upon to help them adjust their forecast. The real art of demand planning is knowing which of these data sources to use and when. Over time, your organization will get a sense for which information streams are most relevant and can begin to build a rules-based process around the use of external information.

Thanks, Josh! We look forward to Part II.

While You’re Celebrating Your Thanksgiving in the U.S.

Think about what you can do to make the rest of the world, including the 870 Million people in the world who are chronically under-nourished, thankful as well.

As Procurement Pros, you have a lot of control over the global food supply whether you realize it or not. Money does talk, and with enough pressure, the supply chain will walk to your marching orders. And if those orders are appropriate, maybe we can prevent half of the food being produced going to waste.

According to The Food and Agriculture Organization (FAO) of the United Nations, roughly 1/3rd of the food produced in the world for human consumption every year, approximately 1.3 Billion Tons, gets lost or wasted — due to losses during harvesting, storage, transport, and processing. This loss is almost four times what would be needed to feed all of the chronically under-nourished people in the world, and part of the reason food reserves are at an all time low.

And to make matters worse, the growth, and partial harvesting, storage, transport and / or processing produces 3.3 Billion tons of CO2 emissions and wastes precious water and energy resources. So, not only are people starving when there should be enough food, but we’re wasting limited fresh water and energy in the production of the food that is being wasted.

In developing countries, 40% of this loss is occurring at post-harvest and processing levels due to financial, managerial, and technical constraints in harvesting techniques as well as storage and cooling facilities. Additional infrastructure investments would solve the financial and technical issues, and getting smart people on the ground would solve the managerial issues. If a large grocery chain decided to invest on the ground, and reduce loss from an average of 35% to 10%, it would effectively increase production by almost 40% and lower the cost per unit by almost 30%. (Production levels go from 65% to 90%. 40% of 90% is 36%. 30% of 90% is 27%.) This is not a hard problem to solve. And it wouldn’t take too long before the grocery chain saw ROI.

In developed countries, more than than 40% of losses happen at retail and consumer levels. Faster transport, better storage, and better inventory planning could have a big impact at the retail level. The only thing a Procurement Pro can’t really control is consumer waste.

So think about what changes you can make in your organization to minimize food waste and encourage investments on the ground in the regions, and on the farms, you depend on. And when costs go down, your organization will have something to be thankful for too!