Archive for July, 2006
July 31st, 2006
David Bush - Iasta
Today we are happy to bring you some very thoughtful comments from Kevin Brooks at Apexon, a leading vendor in this section of supply management. Kevin’s background is originally with Ariba and now heads up marketing for Apexon in San Jose.
Anyone with even a passing interest in supply chain issues will tell you that managing supplier performance is important. As E-Sourcing Forum and others have been pointing out during this week’s series of posts, effective supplier performance management yields bottom-line savings and top-line competitive advantages most companies can’t afford to ignore. Analysts have been saying this for years. Consulting firms have been preaching the benefits of a collaborative supply base since the dawn of time. Software companies continue to promote a variety of SPM and supply management solutions.
So why is good supplier performance management the exception rather than the rule in most manufacturing companies?
I think part of it has to do with the name. “Supplier Performance Management” or “SPM” is too much like SRM. Too techie. Too tactical. Too prone to spark debates about whether you mean, “supply” or “supplier.”
Whatever you choose to call it, SPM is a more nuanced concept with more long-term benefits than straightforward cost cutting. U.S. automakers are learning that lesson the hard way. A recent survey by Planning Perspectives, a Michigan-based research firm examining supplier relations in the auto industry, found that GM’s relations with its suppliers are at an all-time low. The survey also found that Tier 1 auto suppliers throughout the industry are shifting capital and R&D investment, service, and support away from customers who treat them with a single-minded focus on cost, like GM. Other U.S. carmakers with an equally single-minded focus on cost fared poorly as well compared with generally strong showings by the Japanese, who took a more balanced view of supplier performance. As a result, suppliers see value in improving quality for Japanese OEMs, whereas they just maintain quality for those in the U.S.
But let’s suppose a company does come to some agreement about the meaning of SPM, and what it can do for them. That’s when they fall prey to the Three Deadly Myths of SPM.
Myth #1: You’ve got to fix the data first
This is a version of the often-repeated “garbage in, garbage out” mantra. I saw a variation on this myth when I was at Ariba in the early days of e-procurement. Then, the issue was getting data into online catalogs. Over time it became apparent that customers who went “all in” (buying everything through a single system) even with just a small percentage of supplier-enabled catalog content, were getting far more value than those who waited and conducted online commerce solely with suppliers that had been catalog-enabled. The lesson was that more value came from getting as much spend as possible flowing through a single system as quickly as possible. Getting the spend managed in this way actually accelerated the process of cleansing the data.
It is reasonable to assume that you need good data before you can embark upon a data-intensive effort such as SPM. Just don’t let fear of perfect data become the reason for significant delay. Any competent SPM vendor should be able to deal with your data today, and they should also be able to get you value from what you’ve got, regardless of data quality. Besides, as one manufacturing company CPO recently told me, if the data is truly garbage, getting started with SPM is often the fastest way to begin cleaning it up.
Myth #2: Supplier scorecards are the same thing as SPM
The danger of this myth is that it equates reporting with managing, and it keeps companies from seeing SPM as something more than a tactical exercise in monitoring suppliers. Scorecards are an important component of SPM, but they are not the same thing as having a strategy and a process for getting more value out of your supply base. For one thing, they take too long to produce. Most scorecards require significant manual effort and are little more than custom Excel spreadsheets. Quarterly scorecards are the norm because it takes that long to assemble the data in most companies.
There is some indication that this may be changing. AMR Research, for example, sees investment in performance scorecards and dashboards jumping 26% to $5.2 Billion this year. One hopes that this is more than just a shuffling of deck chairs, and that companies use the new and better tools they are buying to graduate from information-gathering and reporting to true proactive management of their supply base.
Myth #3: Once we get our ERP upgraded, we’ll have what we need for SPM
If you assume that ERP will truly deliver most of the required SPM functionality (something that took nearly a decade in e-procurement, and some argue still hasn’t happened), the main danger in this myth is unnecessary delay and increased risk. I’ve read estimates that a $1B manufacturing company experiences 30-50 moderate-to-severe supply disruptions a year, each costing about $100,000 to resolve. Those disruptions aren’t going to wait for the ERP upgrade, so why should the supply teams?
Rather than tackle this myth head-on, which will inevitably end up as an unproductive battle with the IT department, I would suggest that the SPM strategy begin with the ERP vendor itself. Is the supplier able to deliver what the business needs, at the quality level expected, and in a reasonable timeframe? If so, then by all means use them. If not, look for alternatives.
***
I think the up tick in interest in SPM that analysts like Aberdeen and AMR Research are seeing is a hopeful sign, but unless interest translates into action, I suspect that SPM will continue to be the exception defining leading companies rather than the rule defining industry best practices. So what will it take? For starters, companies need to realize that managing supplier performance is about more than just cutting costs. Then, take aim at the three deadly myths of SPM. >From there, the market offers a wide range of solutions to help expedite the journey.
Oh, and somewhere along the way we probably need to come up with a better term.
Kevin Brooks - Apexon
Entry Filed under: General, Interviews, Supplier Performance, Suppliers, e-Sourcing Marketplace
July 30th, 2006
Michael Lamoureux
Friday we introduced you to supplier performance management and yesterday we discussed some of the challenges in developing and implementing a supplier management program. Today we will discuss some best practices and steps to success.
Many of the eight best practices that we discuss below grow out of the C5 (connect, coordinate, check, control, and cultivate) Aberdeen operational supplier management framework, as discussed in Aberdeen Group’s recent Supplier Performance Measurement Benchmark Report.
The first best practice is open communication and data sharing between parties to make sure that everyone is on the same page.
The second best practice is strategic supplier selection (often known as supplier rationalization) for strategic engagements. This generally means concentrating purchases with a small set of suppliers to provide the buyer with greater leverage and fewer suppliers to proactively manage in performance and quality improvement initiatives. This does not mean single sourcing, as that is wrought with risk.
The third best practice is the definition of mutually agreed upon performance targets and mutually agreed upon metrics. Create joint action plans with your suppliers to meet these targets.
The fourth best practice is continual scorecarding to insure that the metrics are continuously up to date. Scorecarding should be done at least monthly, data tracked at a granular level by location, trade lane and product family, and linked to customer facing metrics. Linking primary KPIs across processes helps supply managers understand how their metrics link up with those of their customer facing peers.
The fifth best practice is proactive monitoring of the supply chain on a regular basis. This is usually done by way of business process management (BPM) technology that can alert stakeholders to exceptional conditions, assign accountability, track resolution progress, and automatically update affected systems.
The sixth best practice is the implementation of cross-functional problem resolution consistent with overall business objectives. Considering that there is a huge opportunity cost associated with human productivity losses from resolving supplier performance problems, it is vital that problems are resolved quickly and correctly. Leading companies use pre-programmed rule-management systems to guide them through intelligent resolution strategies. These systems are updated regularly with best practices.
The seventh best practice is the implementation of control points at suppliers to minimize mistakes. Utilize technology to check that items and quantities on supplier’s shipping documents on open order lines reflect those on the most up-to-date purchase order.
The eighth best practice is the use of predictive analytics and KPIs to transform supplier scorecards into forward looking risk management instruments to identify potential problems well before they materialize. Best in class firms scorecard, but leading firms are now using predictive analytics to spot inflection points and KPI correlations that identify potential capacity issues, lead time variability, quality, or supplier financial issues before they show up as a metric on a scorecard.
In Aberdeen’s Supplier Performance Measurement Benchmark Report, they identified Steps to Success for laggards, average performers, and best-in-class enterprises alike. These steps were thought out, generally applicable and on-target so we will repeat them as-is and refer the reader to Aberdeen’s report for additional insights.
Laggard Steps to Success:
- Measure supplier performance constantly, and at least monthly. This is one of our eight best practices and key to continued success.
- Improve visibility into supplier activity and inbound shipments. This will insure that your data is not only up to date but reliable.
- Measure the downstream impact of supply disruptions. This will help you create actionable contingency plans that will minimize the cost of such disruptions when they can not be avoided.
- Create a cross-functional review team. A key to sourcing success in general, it is especially true in supply risk management and supplier performance management.
Industry Norm Steps to Success:
- Transform procurement and material managers into supply base developers. This is the essence of strategic sourcing best practices and improves your supplier performance management efforts across the board.
- Implement supply chain management technology and manage supply disruptions based on business goals. This is another one of our best practices and ensures that downtime and costs associated with a disruption are kept to a minimum.
- Insert control points at suppliers. Yet another one of our best practices, this helps catch potential mistakes that could be costly before they happen and streamlines operations.
- Make scorecarding more granular. Good scorecards are granular scorecards and allow you to quickly zoom in on the root cause of a problem.
Best in Class Next Steps:
- Apply statistical process control techniques. Take your processes up a notch with statistical control theory.
- Adopt business process management technology. A best practice that allows you to catch exceptions as soon as the relevant data enters your system and stop small problems before they blossom into large problems.
- Evolve your scorecard into a forward-looking risk management instrument. A best practice which helps you predict potential supply chain problems and take corrective action before your monitoring systems even notice a blip is the ultimate evolution of supply performance management.
For everyone:
- Ask an expert. As the great Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” The best learn from the best. Look externally for best-in-class providers to help you become best-in-class in supplier performance manaagement.
For more information on supplier performance management, see the Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 29th, 2006
Michael Lamoureux
Yesterday we introduced you to supplier performance management, a methodology for reducing supply risk, driving continuous cost reductions and performance improvements, and accelerating savings. Proactive supplier performance management programs can improve service levels by 10 to 30%, improve invoice accuracy by 10 to 20%, and reduce inventory levels while increasing on-shelf availability. (For more advantages of supplier performance management, check out Aberdeen Group’s recent Supplier Performance Measurement Benchmark Report.)
Today we are going to talk about the road to success, some of the challenges you will face, the requirements you will need to address, and the operational framework that will get you there. Tomorrow we will continue with a discussion of some best practices and steps to success.
Successful supplier performance management is a continuous cycle of supply and capability assessment, performance monitoring, and improvement identification. A good starting point is the Aberdeen C5 operational supplier management framework: connect, coordinate, check, control, and cultivate. (Aberdeen uses monitor and improve, but I prefer check and cultivate.)
The cycle starts with integrating suppliers into an exchange, proceeds to a synchronization of buyer requirements with supplier capabilities, implements scorecards and metrics to measure performance, tracks performance against SLAs, identifies exceptional situations, resolves problems and disruptions according to business objectives, and employs analytics to identify defect patterns and unpredictability to eliminate root causes and identify new opportunities to remove cost from the supply chain.
The cycle defines a number of requirements that must be met before a good performance management methodology can be put in place. Collaboration systems are required to successfully integrate suppliers into your systems and processes, visibility is required to properly align supplier capabilities to your requirements, well-defined metrics need to be defined to asses performance, and monitoring systems that support granular data need to be implemented to automatically detect deviations and exceptional events. Data needs to be timely and reliable in addition to your suppliers.
These requirements are wrought with challenges. Without good data collection and analysis systems, the detection of defect and supplier unpredictability patterns can take weeks or months. Without good collaboration systems, coordinating internal functions is challenging enough without trying to coordinate internal functions and external schedules. Thus, the selection of appropriate technologies is critical.
A synchronized view to the data for all internal and external shareholders is critical. There can be no meaningful discussion about performance improvement if different users are measuring data points against different metrics. However, this is challenging since every company operates differently, follows different processes, and interprets data in different ways. Again, good technology choices will help you in this endeavor.
So, how do you get to a synchronized view with shared scorecards and metrics? Hardwork, dedication, and outside expertise. I firmly believe that this is not an area that you should attempt to master on your own. Bring in consulting experts to get you on your feet quickly and deploy best of breed solutions. Although I’m not going to recommend a specific solution, I will point out three companies in the space, in alphabetical order, that you could start with in your search to meet your technology and consulting needs: Apexon, Nexprise, and SupplyWorks. Just make sure that whomever and whatever you select for supplier performance management integrates well with the e-Sourcing and e-Procurement systems you are using, since SPM tools are another piece of the framework, and not a be-all end-all solution.
For more information on supplier performance management, see the Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 28th, 2006
Michael Lamoureux
Last weekend we discussed supply chain risk and how important it is in today’s efficiency based supply chains where a single disruption can cost a corporation six, seven, or even eight figures and when more than 80% of supply managers reported in a recent Aberdeen study on Supply Risk Management that their companies experienced supply disruptions within the last 24 months. We discussed the need for resilience, flexible processes, and risk management.
One of the major strategies we cited for risk management was the adoption of risk mitigating sourcing strategies aligned with your supply base management strategies. We formally defined supply base management as the process of determining not only what the right number of suppliers are but who the right suppliers are, and indicated that it doesn’t stop there. Good supply base management includes continual proactive supplier development where you work with your suppliers to drive continual performance improvements.
This brings us to this weekend’s topic: supplier performance management. Best-in-class organizations have best-in-class supply bases that continually exhibit best-in-class performance across the supply chain. Since performance improvement is a continual process, and not a one-time deal that happens by chance, it needs to be managed and best-in-class sourcing organizations manage their performance and that of their suppliers.
Supplier Performance Management (SPM) is a business practice that is used to measure, analyze, and manage the performance of an organization’s performance in an effort to cut costs, alleviate risks, and drive continuous improvement. The ultimate intent is to identify potential issues and their root causes so that they can be resolved to everyone’s benefit as early as possible.
Considering that Aberdeen found that companies with formal performance measurement programs were able to improve supplier performance by 27% and that enterprises that shared performance data with suppliers generated 61% greater improvements in supplier performance than enterprises that withheld this data, the benefits of supplier performance management compared to the costs of trying to recover from a preventable disruption are phenomenal.
For more information on supplier performance management, see the Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 27th, 2006
David Bush - Iasta
The well buzzed and documented release of Dave Stephens new venture, Coupa, has gone live. Originally slated for July 4th - “Independence Day” (meant to symbolize freedom from expensive installations of the past) is available at Coupa eProcurement. Dave personally took me through the tool in mid-June and I can attest that it had the best user interface and smooth, intuitive e-proc functionality that I have been exposed to. Coupa also has a social networking structure that breaks the mold for traditional e-Procurement solutions. Lets call it e-Procurement 2.0.
I am very curious to see how Coupa takes off compared to its well known brethren like SugarCRM. I will be watching closely at the code development pace and install base. Of course, I will also make sure to get regular feedback from Dave himself, to post here. As with any start up, there will be mistakes and strategy shifts, but Dave is well equipped to make the adjustments on the fly to make it all work.
Entry Filed under: Functionality, General, Technology, e-Sourcing Marketplace
July 27th, 2006
David Bush - Iasta
According to McKinsey, they want Software as a Service usage to go up. This aligns very well with the recent data that has come out from Aberdeen and AMR. McKinsey states that software costs can be reduced by 30-40% by having external hosting and implementation and usage is greatly increased.
In addition, our own Michael Lamoureux broke down some of the statistics from both reports as well.
- 52% of survey respondents indicated that on-demand systems require less implementation time and effort than traditional installed behind-the-firewall legacy applications with a further 39% indicating installs took about the same amount of time and effort; that’s 91% of respondents agreeing that on-demand is at least as fast to implement as legacy systems, if not faster
- enterprises deploying on-demand solutions improve spend under management by 28% more than enterprises that deploy installed on-site solutions over the course of a year … 28% … considering that the savings potential for each dollar of spend under management is between 5% and 20%, even if the actual savings realized is only 30.3% of planned savings (industry average - best in class do much better), then you are looking at a savings of at least 1.2M for every 1B … 1.2M+ … and considering that decent on-demand suites can be obtained for 250K/year (not counting professional services), you could easily save 1M just by using on-demand! ( If you are best-in class and capture 70% of planned savings and efficient and get 15% on each dollar of spend under management, you save roughly 3M more on every 1B going with an on-demand solution! )
You can download the new Aberdeen study for free here.
Entry Filed under: Analysts/Research, Functionality, General, Technology, e-Sourcing Marketplace
July 26th, 2006
David Bush - Iasta
I thought Michael Lamoureux did an excellent job in the past week with his analysis of supply chain risk. Supply risk is an area I’ve written about for quite some time, and I believe that it is just starting to get the respect it deserves. Thanks to supply risk evangelists like Jim Lawton at Open Ratings, it’s an area that more and more procurement and operations professionals are talking about. But Open Ratings only addresses one component of supply risk management: the proactive monitoring and predicting of supplier operational and financial risk. The truth about supply risk is that it lurks – and needs to be addressed – in the shadows of virtually all external supply-related activity. From sourcing strategy development through to logistics, warehousing, and even aftermarket service and support, supply risk should factor into all procurement and operations decisions companies make.
Given the breadth of supply risk concerns, it’s absolutely worth consulting with experts on the subject to gauge overall exposure and develop action plans to mitigate and manage risk. Protiviti, a risk management consultancy, is a great firm to talk to as a jumping off point, and has developed some outstanding thought leadership on the subject. AMR Research is also building some excellent research and knowledge in the area as well. Ariba is noticeably quiet when it comes to supply risk. This is a shame, because given their expertise when it comes to global sourcing and their direct materials supply management experience gained from FreeMarkets, I have no doubt they could build an exceptional advisory practice — not to mention integrating supply risk capabilities into their solutions — in the area.
- Jason Busch
Many thanks to Jason for adding more thought to the last Weekend Series, you can read more of his daily commentary in his signature link.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 25th, 2006
David Bush - Iasta
Like most of you, I received the latest copy of Inside Supply Management, which is the publication issued by ISM - unfortunately, ISM does not post most articles on line so you will need to read it in print or take my word for it. Anyway, I read an article written by Bryan Ashenbaum which focused on the stumbling blocks that reverse auction technology can produce.
Any article that is written to make better usage of, and promote best practices during the reverse auction process, is a good thing. However, I felt the column took a simplistic look at what can go wrong and how to avoid issues. Reverse auctions are like snowflakes, no two are exactly alike. The author made point of five potential issues which I agree with to varying degrees. In fairness, it is pretty short and he likely only had so many words available which limited the detail. To summarize and add my input:
Point 1: Supply managers must know the markets and have an understanding of where prices are going. Nothing is worse than prices going up or putting your supplier out of business.
ESF: These points are true but to offer a bit more - supply managers should always collect preliminary bids from the suppliers days before the bid! Why let surprises catch you off guard, if prices are up there could be a problem with the spec that needs to be fixed immediately or the market conditions have changed. On the latter, I have seen plenty of auctions that have had a cost increase but be considered a large success.
Point 2: RAs are singularly focused on price and should be focused on simple, non-critical items.
ESF: Not really much to agree with here. RAs work very well on complex and highly strategic items. Also, there are many ways to incorporate more than just price into a sourcing event with the use of e-RFx and sourcing optimization. The real key to running a successful auction has little to do with the item or service, it has to do completely with accurate specifications and a competitive supply base that can be considered equal.
Point 3: Careful prequalification is needed to have suppliers invited into an auction and many non price factors should be hammered out before the event.
ESF: Agree completely.
Point 4: Supplier resistance and relationships are too important to jeopardize in a one dimensional bidding event.
ESF: This is true and it would be foolish to act in a threatening manner towards strategic suppliers. I happen to think this point is a little timid though. Proper communication and qualified suppliers offer valid opportunities to utilize RAs. It is important to realize that even heavily deployed auction initiatives usually do not exceed 25% of spend, so most companies are not over using the technology.
Point 5: Clearly communicate the intentions of the bid, award process and all other pertinent information.
ESF: Agree completely.
Overall, the article gives some good basics about strategy for auctions but paint the picture in a somewhat bleak and foreboding light. There are enough incredibly successful auctions running through Iasta’s software that I tend to believe that the value is worth the effort. It is the job of both the technology provider and supply manager to make sure the process is using best practices and follows the same rigorous attention to detail that should be expected out of any bid - electronic or traditional.
Entry Filed under: General, Reverse Auctions, Suppliers, Supply Management Best Practices
July 24th, 2006
David Bush - Iasta
Today is open mike night here on ESF, if anyone would like to jump in on the Supply Risk discussion from the weekend, please do. After previous excellent commentary from Dave, Sudy and Jason - the bar is set pretty high!
Alternatively, I was very impressed with Jason’s haymaker on Oracle and the smear campaign on spend analysis through the new “blackpaper” - nice! Jason says everything as well as can be said, so please read his post. This is also a nice lead in, as I have plans to really ramp up discussion of Spend Analysis/Visibility on this blog soon. Back to regularly scheduled programming tomorrow.
Entry Filed under: Analysts/Research, General, Spend Analysis
July 23rd, 2006
Michael Lamoureux
Friday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises. Yesterday we discussed the different types of supply chain risk that an organization needs to prepare for, the need for resiliency in its daily operations, and the classic strategies used to prepare for risk. Today we will discuss modern strategies for supply chain risk management and supply network planning.
The good news is that it is possible to design supply chains that are robust enough to profitably continue operations in the face of expected deviations and unexpected disruptions and quickly recover from disasters. The foundation is a strong, stable supply network forged from good supply base management, strong supplier links, and continuous improvement and a corporate culture that embraces change and flexibility.
In fact, the factor that has been found to most clearly distinguish companies that bounce back quickly from a disruption from those that do not is a corporate culture geared towards flexibility. A flexible culture is one where communication is pervasive and continuous. Low-level employees have the power to make decisions and the end goal is continuous improvement. (See the recent article in CPO Agenda entitled Supply Risk Management.)
True resilience comes from attacking supply chain risk from all the angles and having operational, tactical, and strategic plans to deal with it. Operationally, companies need to be able to quickly fill in gaps that result from disruption and reschedule activities so that business processes remain synchronized and deliveries are made within customer delivery windows. Tactically, plans need to have redundancies in terms of human resources, machine resources, logistics and supply organizations to allow for this flexibility. Strategically, companies need reliable partners with intrinsic capabilities in deviation and disruption handling, and the skills and ability to adapt to changing market conditions.
Four strategies for building resilience into your supply chain and mitigating risks are production versatility, concurrent processes, decision postponement, and risk-mitigating sourcing strategies aligned with your supply base management strategies.
Production versatility is the ability to move production between plants, use interchangeable and generic parts (Build to Order), and apply employees to different tasks. The ability to move production between plants minimizes risk of complete supply disruption with respect to a part or product, the use of a small number of commodity parts simplifies operations and concentrates procurement outlays and creates the flexibility to move the business among suppliers, and flexible cross-trained employees will be able to step in and get you back on track when something goes wrong.
Concurrent processes with respect to product development, ramp-up, and production/distribution allow you to reduce time to market, decrease the time required to recover from supply disruptions, and improve overall operating efficiency.
Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain, thereby enabling build to order operations, allows for the diversion of parts and semi-finished material from surplus areas and products to satisfy shortages.
Risk-mitigating sourcing strategies aligned with supply base management initiatives minimize the possibilities of preventable disruption, maximize your response time, and allow you to define contingency plans for immediate execution upon a supply chain disruption. There should be a contingency plan for each priority disruption that includes both a detailed description of the procedure to follow and a definition of roles and responsibilities in the event of the disruption.
Designing a robust supply chain and a resilient supply base is a straight-forward five-step process that starts with defining risks and ends with the definition of mitigation and monitoring activities. Specifically:
- Assess Risk Probabilities and Risk Impacts
- Select the top n high-probability high-impact risks
- Identify Risk Mitigation Strategies
- Implement the strategies
- Monitor the supply chain
Risks can be classified according to how likely they are to occur and how devastating the consequences can be. Contingency plans must exist for every risk that is both likely and known to have a significant impact. Remaining risks should be prioritized and contingency plans outlined for the top 10 or 20, depending on how many make sense from a cost-benefit analysis. All potential risks from an organizational, network, industry, and environmental perspective should be considered.
Once a risk is identified, risk mitigation strategies should be identified and the best ones implemented. This will include a modification of internal processes or defining a contingency plan, depending on the type of risk and its severity. For example, demand fluctuations would probably be dealt with by implementing order visibility systems that monitor consumption and spending levels and analyzing trends for unexpected changes whereas a disaster that took out suppliers and distributors within a region would require a contingency plan that specified the ramp up mechanisms for alternate suppliers and distribution centers in an unaffected region.
The supply chain will need to be monitored on a regular basis to detect deviations and disruptions quickly to insure that contingency plans, when required, are initialized and executed as efficiently as possible. Effective management and monitoring is a core business discipline that defines and enforces standard performance and risk measures and assessments, collaborates with suppliers to detect and mitigate risks, and leverages sourcing technologies and information services to improve risk planning, monitoring and response. It consists of appropriate supply chain and sourcing strategies that balance cost, performance, and risk and strong supply base management focused on continual improvement.
Proper supply base management is the process of determining not only what the right number of suppliers are but who the right suppliers are. It’s the right balance between supply base reduction to reduce administrative overhead and cost and supply base expansion to mitigate single source or dual source risks. It requires a good understanding of supplier capabilities and supply market dynamics. It includes continual supplier development which is not just a reactive process that identifies and fixes problems but a proactive process where you work with suppliers to drive continual performance improvements to make sure your supply base stays best in class. This is generally accomplished by performance incentives, direct involvement, which may take the form of training and education or collaborative projects, and regular supplier monitoring and assessment.
Effective supplier assessments are multi-dimensional and examine overall quality, performance, and service levels. They are linked to strategic goals and are objective and fact based. They are on-going and include supplier feedback and two-way communication. At regular intervals, you monitor the actual and relative performance of each of your suppliers with respect to goals and targets and establish a dialogue. You also establish consequences for failure / lack of improvement and stick to them. They are a fundamental tool of Supplier Performance Management, our topic for next weekend. Whereas the strategies above are your mechanisms for reducing risks, supplier performance management is your mechanism for keeping risks down. To be continued.
For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 22nd, 2006
Michael Lamoureux
Yesterday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises with some recent statistics. Today we are going to discuss the different types of supply chain risk that an organization needs to prepare for, the need for resiliency in its daily operations, and the classic strategies used to prepare for risk.
Risks arise at many levels. They can be internal risks that result from daily operations, network risks within your supply chain or partner interactions, industrial risks common to all companies operating in your industry, or environmental risks beyond anyone’s control. They range in severity from minor deviations in supply and demand through supply chain disruptions that can knock out part of your supply chain to serious disasters that will force a temporary irrecoverable shutdown of (a substantial) part of your supply chain.
We use the definitions of R. Gaonkar & N. Viswanadham of The Logistics Institute (Asia Pacific) at the National University of Singapore, as found in their Indian School of Business Working Paper A Conceptual and Analytical Framework for the Management of Risk in Supply Chains. Specifically, a deviation is when one or more parameters stray from an expected value without any changes to the underlying supply chain structure. A disruption is when the structure of the supply chain is radically transformed through the unavailability of certain facilities, suppliers, or transportation options. A disaster is when a temporary irrecoverable shutdown of the supply chain network occurs due to unforeseen catastrophic system wide disruptions.
Within your organization, you face machine related issues, quality problems, materials and parts shortages, and communicable illnesses among you staff on an almost daily basis that could lead to deviations. Furthermore, unexpected employee strikes and opportunistic behavior by senior management could lead to significant supply chain disruptions in the long term.
From a network perspective, you are subject to the risks associated with increasing customization, outsourcing, and collaboration. A disruption to your supplier or third party logistics carrier is a disruption to you. Their organizational risks and performance problems become your network risks. Furthermore, you risk deviations due to fluctuating transportation capacity constraints, disruptions due to failures in your lines of communications, customs delays, port slowdowns, supplier bankruptcy, and government (over) reactions to crisis situations (such as border closings).
From an industry perspective, the emergence of a new technology or a new business model could cause considerable deviations and disruptions to your business across the spectrum.
From an environmental perspective, you are subject to variations and deviations in expected demand, supply, and lead times that can result from shifts in consumer spending, inflation, and unpredictable economic changes such as foreign exchange fluctuations, governmental policy changes, and free trade zones. You are also subject to disruptions from human perpetrated acts such as sabotage, theft, strikes, and slowdowns and disasters that result from terrorist attacks, large scale natural disasters, and major geopolitical events.
In order to effectively manage these disruptions when they occur and maintain profitability and effective operations, your organization needs to be resilient to predictable and recoverable supply chain risks. Resilience is the inherent ability of an enterprise to return to normal performance levels following a supply chain disruption. Resilience can be achieved through classic redundancy mechanisms or built-in flexibility.
Classic mechanisms for dealing with unforeseen supply chain deviations and disruptions included adding safety margins to lead times, maintaining extra “just in case” inventory, frequent queries of order status, reserving capacity, lining up distribution alternatives, dual sourcing, and order expediting when a disruption occurred.
However, most of these margins come wrought with disadvantages. Adding safety margins to lead times and maintaining extra “just in case” inventory increases costs and decreases an organization’s ability to respond rapidly to demand changes or shifts in consumer preferences. Frequent querying of order status wastes everyone’s time and decreases operational efficiency and reserving capacity decreases the value of, and return on, your investment. Order expediting drives up costs and diverts capacity away from other products. In fact, the only classic mechanisms that make sense are dual sourcing, which is a fundamental strategy of good supply base management, and lining up distribution alternatives, which is a principle of good network design.
Tomorrow we will discuss modern strategies for supply chain risk management and supply network planning.
For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 21st, 2006
Michael Lamoureux
Supply chain risk can formally be defined as the potential loss resulting from a variation in an expected supply chain outcome. It is the mismatch between supply and demand.
Traditionally, supply chain risk was often the result of inadequate spend visibility, lack of deep supplier and market information, poor inventory management, poor supplier collaboration, and inefficient coordination heightened by a lack of infrastructure, skills, resources, research, and technology as well as language and cultural barriers.
Today, matters are much worse. With today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralized distribution, more and faster product launches, low cost country sourcing and supply chain globalization in a highly volatile global market place, companies are at greater risk than ever before. When you consider that 10% of active suppliers represent 80% of spend in many of today’s enterprises, and that many companies lack visibility into their supply chains beyond their tier one suppliers, supply risk management is becoming key to ensuring continued operations in a profitable manner.
After all, the effect of a supply chain disruption goes beyond just late shipments, lost production time, and delayed execution times. It can cause stock outs and lost sales, missed customer expectations, quality and safety concerns, project failure, market exposure, and lost credibility. It can increase costs, reduce your bargaining power, and even influence poor supplier selection as you struggle to correct the imbalance. (It can even devastate your stock price. A recent study in the Journal of Production and Operations Management that analyzed the effect of supply chain disruptions on long-run stock price performance over a three year period found that stock returns of companies experiencing significant supply chain disruptions trailed returns of peers by 33% to 40%.)
The importance of supply chain risk management cannot be ignored. According to Aberdeen’s recent study on Supply Risk Management (October 2005), more than 80% of supply managers at 180 global enterprises reported that their companies experienced supply disruptions within the past 24 months. Supply glitches negatively impacted their companies’ customer relations, earnings, time-to-market cycles, sales, and overall brand perception. Furthermore, it found that more than 75% of companies expect supply risks to increase over the next three years.
However, enterprises that have adopted comprehensive supply risk assessment and management programs, which include leveraging deep supplier and market information, have reduced the frequency of supply risks and outperformed their peers in supply performance and costs.
Tomorrow we will discuss the various types of supply chain risks, which extend well beyond simple supply disruptions, the need for resilience in your daily operations, and the classic strategies for dealing with such risks. Sunday we will conclude with a discussion of some modern methodologies for building resilience into your supply chain, risk management programs, and associated processes.
For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
July 20th, 2006
David Bush - Iasta
Archstone Consulting just released the results of their survey of 50 U.S. and Global Companies in the consumer packaged goods, services, retail, and manufacturing sectors that found that over 90% of companies are currently challenged by Supplier Relationship Management.
According to the press release, their survey shows that while many companies have conducted strategic sourcing and outsourcing to reduce costs, few have mastered Supplier Relationship Management as a critical part of enhancing their supply chain and reducing overall costs. In addition companies lacking key SRM capabilities such as supplier stratification, supplier governance, performance management, and supplier development often have inefficient relationships and are unable to realize the full value of their supply base.”
In addition, the survey found that:
- 58% of respondents report inconsistent, inefficient, and overly
tactical SRM practices
- 58% of respondents report an inability to hold suppliers accountable
- 53% of respondents cite a lack of vision for SRM as a major barrier to
successful implementation of SRM practices
That’s why I’m pleased to inform you that, starting tomorrow, our weekend series will consist of an introduction to Supply Risk Management 101, followed by Supplier Performance Management next weekend, two key components of Supplier Relationship Management.
When you consider that the respondents to Archstone’s survey who had launched SRM initiatives have achieved (or expect to achieve) a 7-11% reduction in cost of delivery and a 9-13% reduction in cost of quality, the benefits of mastering these two areas are significant.
Entry Filed under: Analysts/Research, General, e-Sourcing Marketplace
July 19th, 2006
David Bush - Iasta
IBM is moving its global purchasing headquarters from Westchester County, N.Y, to Shenzen, China, effective August 1, as per a recent announcement in Purchasing Magazine. Furthermore, John Paterson, Vice President and Chief Procurement Officer for IBM, will re-locate from Somers, N.Y. to China and run Big Blue’s Global Procurement Operations from there.
The move is designed to help IBM capitalize on the opportunities in China and the surrounding Asian marketplace and, preferably, help shape them to its advantage. IBM has been sourcing in Asia for 40 years, even before the neighboring “Land of the Rising Sun” was a major global marketplace. With a supply base that relies heavily on Japan, Korea, Taiwan and China, having a strong sourcing presence in Asia, and China in particular, certainly makes sense, especially when you want to source (software development) services and labor in addition to hardware components.
However, one has to wonder about moving the entire operation. After all, many industries in China are still in their infancy. Take, for example, an article entitled “Industry in Infancy” that Purchasing published one week prior to the IBM announcement article which noted that even though IBM buys a lot of production materials in China, there are many critical components, such as semiconductors, that it can not buy in China because the products it needs are just not available. A direct quote from an IBM Procurement Director is that “most electronic components are produced outside of China. Raw wafer and integrated circuit (IC) technology exists in China, but it is substantially behind product that is available from other regions”. Also, “Chinese manufacturers lack the intellectual property (IP) to build high-end semiconductors such as microprocessors, digital signal processors and ASICs” and “it is unlikely that Chinese manufacturers will get access to [this] IP in the next few years”.
In addition, if you read the other article on China published by Purchasing on the same day entitled “DOs and DON’Ts of doing business in China”, the first “don’t” is “don’t be in a rush” but IBM announced the relocation of its global procurement organization less then three months in advance!
Purchasing isn’t the only publisher of articles littered with warnings on the Chinese business environment. A recent Economist article entitled “Watch out, India” had a few scary facts and statistics of its own. Chinese workers tend to lack creativity, tend to speak and write English poorly, and as a whole China is still five to ten years behind India. Furthermore, few engineering and computer graduates are as good as their qualifications may suggest. While they tend to have a solid grasp of theory, few leave university able to apply it to real-life problems. “It is as if they can describe a hacksaw and how it works perfectly, but have no idea how to build a door with it.” Furthermore, they typically need “two years of full-time training just to become a middle-level engineer and four years to get to be a project manager” and, in the end, “only 10-20% of programmers ever get to a really good level and can become an architect.”
Does that mean I think that they might have made the wrong move? Not necessarily. If China lives up to predictions and becomes a global market force in the next decade, similar to Japan’s transformation two decades ago, this bold move for IBM could reap huge rewards in the long term. But if the issues of IP protection, rampant piracy, and market liquidity do not get resolved, you have to wonder how they’ll grow beyond a fledgling LCC provider to the global market, regardless of their size and numbers. In other words, I think the jury is still out.
Entry Filed under: General, Global Supply Issues/Risk, Suppliers, Technology
July 18th, 2006
David Bush - Iasta
Distribution Trends for a Global Economy, a recent article in Supply Chain Manufacturing & Logistics Magazine by Deb Navas, Editor at large, is a good read.
In it, Deb notes that “roles are blurring in the retail, wholesaler, and distributor supply chain arena, and the definition of what the “distributor” now does is not so easily defined. Big Retail operations … primarily use their own distribution networks, though they also use wholesale distributors.”
Historically, retail uses the push distribution model, a sophisticated form of cross docking where specific store distribution for an ocean container is already predetermined. But in today’s JIT/lean world, retail distributors can support a variety of push/pull models with flexible Warehouse Management Systems (WMS) that work in conjunction with transportation management systems, yard management systems, order management systems, labor management systems, RFID, vendor managed inventory, and supplier portals.
Companies that outsource manufacturing and lack a distribution infrastructure can bypass distribution altogether and use services such as UPS’ Trade Direct program to receive and consolidate/deconsolidate their product overseas and ship it direct to stores or customers. This allows some companies to bypass wholesaler’s and their associated margins.
Still, many companies still use traditional wholesaler distributors that serve a valuable niche supplying last-minute product and managing inventory and stock. Even though wholesalers are under increasing pressure to lower prices while holding inventory longer, they have the opportunity to substitute lower cost products from a different source to increase profitability or market share, an opportunity not available to retailers and manufacturers with contract manufacturing agreements.
However, regardless of whether you manage your own distribution or leave it to a third party, there are still significant route distribution issues in today’s supply chain due to the escalating cost of fuel and shortage of reliable drivers, increasing distributor ship overhead significantly. Many distributors have to optimize driver performance and routing just to maintain their current volumes.
In other words, you have a plethora of distribution options, just make sure you consider the relevant issues, such as escalating fuel costs and potential stress on the distribution network due to an increase lack of qualified drivers on the road, before you make a final decision. (For more information on driver shortages, see my recent post on The Truck Stops Here … Or Does It?)
Entry Filed under: General, Suppliers, Technology
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