Category Archives: Supply Chain

Is 2010 The Coming of Age for Sourcing and Supply Chain Optimization?

In the beginning, there was the reverse auction. Industry visionaries applied reverse auctions to their sourcing events for commodity and competitive categories (in the mid nineties) and saved a small fortune (which sometimes exceeded 30%, 50%, and even 70% of previous category costs). They were heroes and the world was good.

 

Then, a couple of years later when they circled back to the first categories and held another auction, something unexpected (to them) happened. The total savings shrunk considerably. The average savings, expressed in terms of percentages, dropped from the mid double digits to the (low) single digits. The savings often equalled what they would have expected from a traditional RFX / negotiation process. But the market was a seller’s market and the total event time, and thus the total event cost, was low, so with the right spin, they still looked quite successful. The world was still good.

 

Another couple of years passed, and they circled back to the first categories again. But this time, the market was a buyer’s market again and savings were bound to equal those seen in the initial category reverse auctions, right? Wrong! Instead, something really surprising (to them) happened — instead of saving money, total costs increased — sometimes in the double digits! The world was a dark and scary place. What happened? Could it have been avoided?

In short, as I explained in A Brief History of Optimization (published in By the Buy, the TradeExtensions Newsletter), reverse auctions are not the panacea that many auction platform providers still make them out to be and the identification of real savings through auctions can often be elusive at best. A new technology is needed, and as I have been saying (well, shouting from the rooftops) for years, that technology is optimization.

But, even though the technology is now a mature technology (as strategic sourcing decision optimization turns 10 this year, which makes it middle-aged in Internet years and a senior citizen in dog years), only the true market leaders (which generally account for 10% of the total market) have even tried it, and, in my estimates, less than half of those have truly adopted it on an organization level, even though the analysts have consistently found that strategic sourcing decision optimization consistently saves an average of 12% above and beyond what you’ll get from the best reverse auction.

Simply put, optimization is instant ROI. Guaranteed. In the absolute worst case, your allocation is already perfect and you won’t save any money. But I’ve NEVER seen this happen in practice. Even the most dismal events generally return 3% to 5% savings. Even if we’re only talking a 50M category, that’s still about 2M in savings. And now that you can run an event for (considerably less than) 100K, that’s still at least a 20X ROI!

And it doesn’t take a PhD to use it anymore. Now that most of the platforms offering true strategic sourcing decision optimization have easy to use GUIs, wizard-based constraint definition, and scenario and costing templates built right in — with full Excel integration for data collection, modification, and reporting, optimization is as easy to use as an auction platform. (And in Trade Extensions’ platform, it’s built into the auction.) And while it might still take a couple of days of training to master the advanced features, any of your senior analysts should have no problem picking it up quickly. And once they learn it, they can modify the templates for your organization and train your more junior staff, who will probably only need a couple of events to master most of what they’ll need to do on a daily basis for an average category.

And after reading this recent piece in Industry Week that says “Transformation is Out; Optimization is In” that pointed out that while organizations still want to ‘transform’ how they deliver back-office services, they typically want to move in pragmatic, incremental steps and focus on achieving best-in-class, standardized and optimized delivery models and said that while many organizations remain keen to avoid the costs of new capital and migrating to new suppliers, investment is being made in ensuring existing suppliers and internal processes are delivering optimum value, I’m starting to think that maybe optimization might finally begin to come of age. It appears that the term has finally entered the daily vocabulary of supply management professionals, who should now be more open to at least reviewing optimization solutions. And once they see the savings to be had, and the power that they can have at their fingertips, I can’t help but thinking that the followers are finally going to start to adopt this technology and become leaders in their own right. (The laggards will ignore it for years to come, but that’s okay. Most are still hunkered under their desk waiting for the recession to be over and will eventually go out of business anyway, so let’s not worry about them.)

Share This on Linked In

Are Open-Source Data Interchange Standards for SaaS the Key to Radically Simple Supply Chains?

A couple of years ago, the Harvard Business Review ran an article on “Radically Simple IT” that noted that the fundamental problem with enterprise IT projects, which continue to be a headache for business leaders, is that these systems are constructed using a cathedral approach. Like the great cathedrals erected in Europe in the middle ages, enterprise IT projects are costly, take a great deal of time, and deliver value only when the project is completed. Furthermore, they yield systems that are inflexible and cement companies into functioning the way their businesses worked several years ago, when the project started.

What’s needed are systems that can be improved — rapidly and continuously — well after they’ve gone live. The systems should be built on a “path-based” approach that provides a path for the system to be developed over time. After all, it’s difficult and costly to map out all requirements before a project starts because people often cannot specify everything they’ll need beforehand.

Given the rapid escalation of supply chain systems, designs, regulation, and security requirements, it’s pretty much impossible to map out all of the requirements of a supply chain systems project before it starts. And even if it could be done, they’d just change tomorrow anyway! A new approach is definitely needed for developing and implementing systems that serve the supply chain, and I think we’re reaching the point where they will be born of necessity.

You see, even though there are now a number of big players out there that offer very broad solution suites, these suites are, still, for the most part restricted to sourcing and procurement, logistics and inventory management, or global trade and data exchange. While the footprints of each type of system is rapidly expanding within their respective domains, most systems are still not expanding beyond the comfort domains of the vendors providing the systems.

And to be honest, most vendors with expertise in sourcing and procurement, have little in logistics, inventory, or shop floor operations and most with expertise in logistics, inventory, or shop floor operations have little in global trade regulations and security requirements. The key is going to be the development of modular SaaS platforms that can interoperate using a common data language that is open and not owned by any single vendor. (Single vendor standards just build a single vendor eco-system, or a bigger Ariba Supply Network.) Just like the web was built on true open standards, next generation supply chains need to be as well. The question is, who will lead the effort and when will the major players buy in?

Share This on Linked In

HBR’s Breakthrough Ideas for 2010 are Good for Your Supply Chain, Part III

The Harvard Business Review recently ran a great article on “Breakthrough Ideas for 2010”. While many of the ideas aren’t new (as a few can easily be traced backed decades), for many, their application would be. But more importantly, their application could fix a lot of problems in the world today.

What really struck me was how they all had good supply chain equivalents that could help you revolutionize your supply chain. So, in this post, I’m going to tackle the last three ideas and explain how their supply chain equivalents are ideas you should strongly be considering if you haven’t implemented them already.

  1. Hack Your Way to Innovation.
    Thinking outside the box doesn’t help if what you really need is a sphere. If the current system isn’t working, you need to fix it. If you’re not sure how, then hack at it piece by piece, keeping what works and throwing away what doesn’t, until you get the results you need. After all, this kind of work-around isn’t new–your company has been hacked from the inside for ages. What is new is that the cheat codes are becoming public, and there’s nothing you can do about that. There’s only one successful strategy for a hacked world: If you can’t beat ’em, join ’em. Change the debate within your company to leverage what your hacker employees know.
  2. Apply a Bubble Model to Every Industry You Do Business In.
    As every major market has demonstrated during the last decade, there’s sustainable growth, and then there’s a bubble … and when you start treating a bubble like sustainable growth, you are headed toward a supply chain disaster. Now, while it might not be possible to predict every bubble, and definitely won’t be possible to predict with accuracy precisely when a detected bubble will burst, research coming out of the National Bureau of Economic Research and behavioural finance studies suggest that you can identify bubbles as they form with significant accuracy. Then you can take steps to increase measurement and monitoring and decrease production cycle time to allow you to quickly alter projections and plans as you approach a likely burst point. At the very least, this will prevent you from getting stuck with millions of dollars of inventory. It will also keep morale high as you’ll make more informed staffing decisions and avoid adding headcount you’ll have to lay off later.
  3. Take Business Organization Lessons From Hong Kong.
    Just like too many countries are stuck with rules that slow down inflows of technology, prevent successful urbanization, and stifle personal ambition, too many companies are stuck with processes that slow down inflows of technology, prevent successful adoption of innovative applications, and stifle professional growth.
    As the article points out, you start by launching an anonymous corporate division to act as a Center of Excellence (it could be one-in-the-same with the R&D lab in the beginning). You start with a charter that lists the rules that will prevail in the company to come and allocate space (land), employees, and resources. Assign only staff that want to be part of the COE, accept the charter, and bring with them a vision of the great company to come. They will invest not only their time, but their energy, experience, and education in the location of best-in-class technologies, processes, strategies, and paradigms that will ultimately make your organization a better place.

Share This on Linked In

HBR’s Breakthrough Ideas for 2010 are Good for Your Supply Chain, Part II

The Harvard Business Review recently ran a great article on “Breakthrough Ideas for 2010”. While many of the ideas aren’t new (as a few can easily be traced backed decades), for many, their application would be. But more importantly, their application could fix a lot of problems in the world today.

What really struck me was how they all had good supply chain equivalents that could help you revolutionize your supply chain. So, in this post, I’m going to tackle the next three ideas and explain how their supply chain equivalents are ideas you should strongly be considering if you haven’t implemented them already.

  1. Develop Industry Standards for Supply-Chain Data Exchange.
    Just like agreed upon standards for digitally representing drug assets would spur pharma innovation, common digital standards would spur supply-chain data exchange. After all, wouldn’t it be nice if your ERP talked to your EIPP which in turn talked with your CMS which in turn talked with your Sourcing Suite which in turn integrated with your CRM? And if all of these systems could output data feeds in a standardized format that made multi-feed loads into your data analysis system a breeze and let you focus on the analysis and not the mapping and cleansing which isn’t nearly as important as most of the providers make it out to be?
  2. Develop Your Own PACE program for your suppliers.
    PACE stands for Property Assessed Clean Energy bonds which are being introduced in 15 states across the US as debt instruments, backed by property-liens, that enable businesses to retrofit buildings for energy efficiency.
    A supply chain equivalent, which could take the form of a low interest loan to a supplier in your supply base, would save you money (as your supplier’s overhead costs would go down), make you money (as you could charge interest or insure you are guaranteed preferential treatment if supply is tight), and greatly improve your public image. “We not only enforce strict standards of social responsibility and sustainability in our supply base, but we help our suppliers meet those goals.” Simply put, like smart supply chain finance, it’s win-win-win.
  3. Support a Free Market for Technology Licensing.
    … and while you’re at it, vote to get rid of software and business process patents.
    Allowing an inventor, regardless of whether he’s a professor or a guy in his garage, to license as he sees fit would dramatically speed up the commercialization of new technologies and both the U.S. and the world would benefit from them much more rapidly. Forcing professors to use an antiquated model that forces them to line up in a queue at the local, understaffed licensing centre doesn’t help anyone.
    Furthermore, getting rid of stupid software patents that allow companies to patent what are arguably mathematical constructs, which are supposed to be unpatentable, and stupid business process patents that allow companies to patent the obvious, would not only open up the playing field but allow companies to freely innovate. Think about how much more innovation we’d have if every innovator didn’t have to constantly worry about getting sued by a company that succeeded in patenting an algorithm fundamentally based on 20-year-old public-domain MIT research because the clerk doesn’t know any better. (For many of you, think about how much more innovation you’d have if Ariba and Emptoris took the millions they’ve spent on lawsuits and spent it on New Product Development in an attempt to beat each other at your RFP table.) Nothing stifles innovation more than stodgy lawyers. Follow the EU’s example and you’ll be on the fast track to success.

Share This on Linked In

HBR’s Breakthrough Ideas for 2010 are Good for Your Supply Chain, Part I

The Harvard Business Review recently ran a great article on “Breakthrough Ideas for 2010”. While many of the ideas aren’t new (as a few can easily be traced backed decades), for many, their application would be. But more importantly, their application could fix a lot of problems in the world today.

What really struck me was how they all had good supply chain equivalents that could help you revolutionize your supply chain. So, over the next three posts, I’m going to explain how their supply chain equivalents are ideas you should strongly be considering if you haven’t implemented them already.

  1. Motivate Your Employees With Meaningful Goals, Resources, and Encouragement.
    Recognition does indeed motivate workers and lift their moods. As the authors note, you need to take great care to clarify overall goals, ensure that people’s efforts are properly supported, and refrain from exerting time pressure so intense that minor glitches are perceived as crises rather than learning opportunities. And your benefits will multiply if you cultivate a culture of helpfulness and of learning. Happy, challenged, engaged workers are productive workers.
    In addition, if you’re a manager who knows that the head of Sales from down the hall is Maury the Management Moron who likes to constantly promise first, worry about delivery later, and then bug your people on a regular basis for this piece of information or that report or participation on a last-minute call, you need to put a stop to that behaviour immediately. You need to make it very clear that *ALL* requests go through you, and no one else, and that if you ever, ever, ever catch him bothering one of your hard working sourcing or IT professionals without your approval, you will take him to task, and if he keeps it up, you’ll bring in Mr. Louisville if you have to. Nothing is more disruptive to productivity than when Maury the Management Moron is out of control. Nothing.
  2. Remotely Monitor Your Supply Chain Health.
    Just like remote monitoring of patients using a kiosk or similar device is a health-care breakthrough, remotely monitoring the status of your OEMs and shipments is a breakthrough for your supply chain. A supply chain visibility solution that lets you keep track of where your raw materials and inventory is at all times is truly priceless. It enables you to detect minor deviations before they become major disruptions and fix them. And if something major happens, such as a natural disaster shutting down a factory, a civil disruption cutting off a transportation route, or a political embargo closing borders, you’ll know almost immediately and have time to implement your risk mitigation plan.
  3. Fund an R&D Center.
    I’ve said it before, and I’ll say it again. R&D labs are what made North America great in the latter half of the 20th century. Pretty much every major technological advance that didn’t come from a DoD sponsored initiative came from a private research lab like the ones that used to be (significantly) funded by AT&T, Bell, Xerox, and TI — and which are on the verge of going extinct. (We hardly hear of AT&T labs anymore [just endless commercials about their network], Bell is now Alcatel-Lucent, Xerox Parc is now just Parc, and the original TI Labs have been replaced with the new “Kilby Labs”.) Breakthroughs come when you have time to sit down and think about the bigger picture and experiment, not when you’re trying to meet quarterly targets.
    The R&D lab doesn’t have to be a big one. You could start with one person who’s job is to simply evaluate potential technologies and processes that could improve your supply chain, and then slowly add a couple of people to help with the institutionalization of best practices, staff development (after they attend train-the-trainer workshops), and system maintenance. Then bring in an engineer to work with your supply base to take cost out of the process and a systems architect to help your vendors build better systems that meet your needs. After a few years, the ROI will be simply extraordinary as you transform into a best-in-class world-leading organization.

Share This on Linked In