One of the major challenges in any supply management effort is to maintain support for the effort within an organization. Unfortunately, spend analysis (SA) has long been a weak link in the emotional support structure of spend management initiatives, for two reasons:
Vendor over-promises with respect to data cleansing accuracy lead to disillusionment when (inevitable) errors are found;
The inflexibility of SA data structures and hierarchies leads to disillusionment and abandonment of the SA system as a useful analysis tool.
With respect to (1), I wrote in an earlier post that SA vendors tend to compete on the quality of their data cleansing services, because the rest of the offering tends to be undifferentiable. I remember a 2001 meeting at a New York financial institution, where one of the key opponents of the spend management initiative drilled into the weeds on an SA dataset and found poorly-mapped spend – which he of course immediately brought to the attention of the entire group. I can’t remember exactly what he said, but it was something along the lines of: “If you can’t get THIS right, why should we believe ANYTHING you’ve mapped, or ANY of the conclusions you’ve presented?”
It’s always possible to drill into the weeds and find mistakes. That’s why data cleansing promises are so dangerous. One slip of the finger during a midnight mapping session – one mistake by an automaton (confusing “flour” with a misspelled “flour. bulb,” for example) – and opponents of the initiative are deeply empowered. The worst part of this situation is that errors can’t be corrected quickly in most SA systems, because they are batch-oriented, read-only data warehouses. In the case of our meeting, instead of the vendor saying, “Oh, thanks!” – and, with a few mouse clicks, fixing the mistake and moving on – there the errant spend sat, glaringly obvious to all, for the remainder of the meeting. In fact, it sat there for the next few weeks, until the next monthly “refresh” of the spend cube was performed.
Which leads us to the next guiding principle of Web 2.0 Spend Analysis:
Dataset changes should not have to wait for the “refresh” cycle. Change is a fundamental part of the SA process, and changes need to be made instantly, constantly, and effectively in order for the SA system to remain relevant and useful to key stakeholders.
Imagine the number of data mapping errors that are discovered as customer procurement experts walk through spending data with which they are intimately and deeply familiar. No SA vendor or offshore third-party cleanser (and certainly no automaton) can possibly know what those experts know. Mistakes are inevitable, and changes pile up quickly. By the time the next refresh is published, say by week two of the following month, even more changes have piled up that won’t be reflected in the new dataset. It’s the proverbial dog chasing the fire truck – the dog is committed, and he does his best to catch up, but he’ll ultimately be left behind. The result is deep frustration and an eventual abandonment of the SA system as anything other than a transaction store.
With respect to inflexibility of data structures and hierarchies, the same reasoning applies. Typically no committee decision on a hierarchy structure will survive the first analysis report – stakeholders want to see the hierarchy in some new and special way. “Today let’s group Puerto Rico with the Southeast Region rather than with the Caribbean, and let’s also combine the Northeast, Midwest, and Canada into a new meta-region” – a perfectly reasonable request that unfortunately makes the existing spend dataset organization (and all the power of the OLAP data warehouse) useless. Again, the result is disillusionment: “You mean, you can’t change the hierarchy until next month – and I’ll need to get permission from all the other users of the system first??”
And let’s not even talk about cost center hierarchies – for every dotted line in the management hierarchy, there’s another interpretation for how costs should roll up. It’s imperative that the spend analysis system be agile enough to be altered in real time to any perspective, to support the analysis of the day.
If one buys the conventional wisdom that a Spend Analysis (SA) system is simply a data warehouse/data viewer combination, that doesn’t leave much room for product differentiation. Most data warehouses are essentially the same, and so are most data viewers. This is why SA vendors tend to compete on the quality of their services, not of their software. These services are referred to as “data cleansing,” and sometimes the terms “aggregation” or “enrichment” are used – but basically they boil down to three processes:
Integration of multiple data sources;
Familying and/or grouping of suppliers;
Commodity mapping of spend.
Various approaches to these processes are taken, but most SA vendors use a mix of third-party service providers, some automation where appropriate, and/or internal clerical resources. Much is made in marketing literature of various artificial intelligence techniques, such as the ability to recognize an item description and accurately classify it – but in practice, advanced data cleansing is quite simple to do, requiring only some intelligently-designed tools and some attention to detail.
Sourcing consultants often chuckle about this. Old hands at the consulting business know that applying common-sense 80-20 rules to spend categorization (for example, noting that at many companies 90% of spend occurs with the top 200-300 suppliers) makes the “cleansing” process quite straightforward. Building an actionable spending dataset by hand, as these consultants used to do back in the early 90’s (and still do today, in many cases) is just a matter of rolling up one’s sleeves and hacking at the problem with Access, Excel, and a modicum of intelligence. Billions have been saved using hand-built one-off spend datasets.
I recall a 2001 meeting in which a start-up technology group tried to sell us their “AI” techniques for spend classification. Our sourcing consultants, veterans of McKinsey, A. T. Kearney, and The Mitchell Madison Group, and thought leaders on spend analysis since the late 1980’s, listened politely and showed them the door. So did everyone else in the space at the time. Ultimately, these technologists formed their own SA venture and sold it to a very large company that should have known better.
I also recall a 2002 conversation between two e-sourcing companies, sponsored by a common investor. After a rocky start to the meeting, all the puffery and pretense about “proprietary methods” and “proprietary databases” for spend analysis suddenly dissolved into smiles when both parties to the meeting realized that everyone in the room already knew the “secret sauce” behind commodity mapping: map the GL codes, map the suppliers, then map GL + supplier to catch suppliers who sell more than one commodity. See http://www.busiq.com/MappingSpend.html for a more complete description of this core methodology that’s been in use since 1994.
Which brings us to the next guiding principle of Web 2.0 Spend Analysis:
Data cleansing can and should be done by end users themselves, not by spend analysis vendors; or, if insufficient resources exist to perform the initial cleansing, subsequent data maintenance should be performed by end users.
Business users know their own data and their own vendors best. Armed with appropriate and user-friendly tools, there’s no reason why they shouldn’t be empowered to create, clean, organize, and maintain their own datasets.
As Mike Smith from Hanover Insurance remarked to Debbie Wilson in a Cool Tools article earlier this year, “We know our business much better than any consultant, and that knowledge allows us to write much more granular rules. Here’s an example: everybody knows what IBM does. But does everybody understand how I use IBM?”
The accounting or ERP system is not the only source of useful spending data in the enterprise. There are many other datasets with stories to tell. Here are just a few:
Insurance claims systems
Purchasing card feeds
T&E data
Fleet vehicle records
Cell phone usage records
Invoice-level detail by vendor, by commodity
And that’s just on the cost side – why should analysis systems restrict themselves to spend data? How about:
Sales information
A/R data (should we beat up a vendor who is also our best customer?)
Credit and collections data
Subscriber billing information
Call center analysis
How can all these disparate and rich datasets be brought into one over-arching “spend analysis” dataset? Often they can’t; and that means we need multiple datasets, and the flexibility to create them as needed. Which brings us to the first two guiding principles of Web 2.0 Spend Analysis:
New analysis datasets should be easy and fast to build, by ordinary business users, at no incremental cost;
Spend analysis systems should support multiple datasets simultaneously, enabling multiple users to investigate arbitrary and unrelated topics, also at no incremental cost.
Why at no incremental cost? Because if there’s cost associated with the project, the project won’t get done. The “what if” analysis that could have found a jackpot of savings won’t get done. The cleanup of a messy ancillary dataset will never happen. And so on.
Why do ordinary business users need to be able to build new datasets? Because if they have to ask someone else to do it (IT, or specially-trained internal resources, or the spend analysis vendor), it won’t get done, or it will get done incorrectly. And, if someone else has to do the work, then there is incremental cost, and we’re back to square one — trying to justify an expensive initiative to higher-ups.
Of course, enterprises often grow by acquisition, and may have a number of active accounting systems under the same corporate umbrella. Achieving a coherent view of spending across these disparate systems can lead to impressive savings – not just the incremental savings that result from achieving higher discount levels with vendors, but shifting of spending onto existing contracts that may be far superior at one division than at another. Such disparities are apparent when spend data are consolidated, and the savings are both zero-effort and immediate.
So, of course it is useful to have a overarching view of spend, which may involve millions or tens of millions of transactions. Which brings us to the next guiding principle of Web 2.0 Spend Analysis:
Not only should the spend analysis system be agile enough to support multiple datasets, it must also be powerful enough to support single datasets as large as 50 or 100 million transactions, with acceptable performance.
I’m always amused when I run across new marketing-speak for old ideas, but the “Web 2.0″ meme has some interesting applicability to spend analysis. Web 2.0 refers to the evolution of the Web from a static content-delivery mechanism into a higher-value interactive medium – and spend analysis needs to make the same transition.
But, more on this later. As with any story, we begin at the beginning.
I. Spend Analysis Today
Spend Analysis (SA) starts with the aggregation of error-corrected and enhanced spend data into a useful data display framework. This entails:
Collecting data from multiple accounting systems or other sources (such as pcard systems, PO systems, insurance claims systems, and T&E systems).
Correcting the data through a process of classifying spend by sourceable commodity. Besides direct materials, sourceable commodities might include categories such as contract labor, office supplies, computing equipment, commercial print, and so on.
Loading the data into a useful data display framework. Such frameworks should be based on advanced database systems capable of OLAP (On Line Analytical Processing), as opposed to ordinary relational database systems. Although functional SA systems have been created with relational databases, there are basic technical reasons why they cannot scale to multiple millions of transactions and maintain acceptable response times. Many “home grown” SA systems have failed because the early promise of relational processing and relational reporting bogs down exponentially as datasets expand.
SA systems are not “Business Intelligence” systems. For SA, it’s necessary to re-classify spending data, and to build data dimensions that support purchasing and sourcing, as opposed to the very different data organizations that support corporate accounting. SA systems must also consider data feeds that are separate from and/or additive to the accounting or ERP system. For these two reasons, spend analysis systems don’t tie directly into accounting or ERP systems as BI systems usually do; in fact, such a connection would be a mistake. And, as a corollary, ERP systems are not capable of spend analysis, either.
Simplistically, an SA system might consist of a commercial OLAP system (such as Hyperion’s Essbase, Microsoft’s SQL Server, or SAP’s Business Warehouse) together with expertise sufficient to (1) collect and aggregate data from multiple sources, (2) classify the data into sourceable commodities, and (3) load the data into the OLAP system such that it can be viewed. This simplistic view, in fact, accurately characterizes many of the SA systems currently on the market today.
Unfortunately, the concrete nature of a commercial OLAP system and viewer does not usually extend to the “soft” processes of loading and classifying data. Those processes are typically handled with external manual resources (offshore resources in many cases), augmented by whatever automation can be brought to bear. Typical SA systems have therefore become an amalgam of “product” and “service,” where the SA supplier is retained on a long-term basis to update data and change dimensions and mappings on behalf of the customer. The SA “system” is therefore an odd mix of software and consulting services, with a built-in dependence on the vendor to make changes. Ironically, this means most spend analysis systems are the literal definition of “Software as a Service” – they are mostly Service, not Software.
Equally unfortunately, the typical SA system tends to suffer from Stephen Potter’s “so what” diathesis – i.e., once the data have been loaded into a drillable OLAP viewer, and the obvious low-hanging fruit has been picked, it is not obvious how to use the system to drive long-term and consistent value – for example, to track the progress of initiatives, contracts, and compliance, or to drive generic business models of more significant scope. It’s therefore not uncommon for SA customers to derive steeply diminishing returns from their original SA investment, rather than leveraging that investment to maintain focus and control, and to uncover additional savings.
Recently, I asked my friend, Eric Strovink, to help out with a series devoted to Spend Analysis/Visibility. This week we will be putting out a group posts which will educate and illuminate readers on a nuances of this type of technology. Truth be told, Eric did most of the writing and I am merely a humble editor this week. What was developed, however, is very informative and valuable to read for people that want some of the truths about Spend Analysis and a great foundation level education about it.
Any company that has hopes of successful strategic sourcing must start with accurate and useful visibility into spend. Please feel free to comment to posts on each day that might raise questions or sound familar. I have a feeling Eric will be lurking around the neighborhood…
According to Aberdeen interviews, the reasons for the prominence of optimization in the use of sourcing are:
Price inflation of key commodities such as energy, base metals, resins and other raw materials that suppliers procure. Optimization can help an enterprise understand a supplier’s economics, cost structures and analyze the increase in the amount of data from such details. Assisting suppliers with energy costs and other raw material costs is an example where there is more information and optimization can analyze this data.
After repeated e-auction and eRFQ events, supplier prices have been reduced to where suppliers’ margins and profitability can be damaged. Optimization can take a deeper look at additional information such as delivery options, quality and other attributes.
Having a flexible tool that allows for highly customizable combinations is critical for this type of analysis. More companies that have already embraced basic e-Sourcing technology are going to make the transition to getting deeper into the analytics of sourcing award allocation.
Last month, AMR published an article entitled Who Really Owns Your Software Vendor? Should You Care? where they stated that private equity firms have been spending billions to buy up software companies and combine them into very large portfolios. It is true that acquisitions in software are a very regular occurrence, and that it often has no effect on you as the end customer, but the article, which states that software buyers need to understand who really owns their vendors notes the bad news associated with this recent trend:
The real owners are financial investors with little interest (or knowledge of) the software products or underlying technology.
Private equity firms typically do not want to hold an investment for more than five to seven years in totality.
Employee, product, or customer loyalty is unlikely to influence business strategy.
Debt reduction is a much higher priority than long-term product investments, such as functional rewrites or new architectures.
In other words, if your vendor is owned by a private equity firm, the chances of significant new releases are significantly diminished due to reduced chances of significant R&D investment, your input is less likely to be valued, and long term stability is up in the air, since the private equity firm is likely to dump the company once they’ve realized their expected returns.
By now you’re probably asking how does this affect me? Since most companies in our space are not currently owned by private equity firms. It affects you since most companies in the space were established with venture backing and are thus majority owned by venture capitalists who also want their money back within five to seven years. This means that if your vendor is majority owned by a VC and not picked up by a big company within the space looking to broaden its offering after a few years, it is most likely going to be sold to a private equity consolidator whose only interest is to ride it for all it is financially worth, even if it means driving the company into the ground.
This is one of the hidden values of our company when compared to others. We are 100% privately owned, profitable, and free of itchy trigger fingers eager to get return. We have had plenty of discussions with VC firms and have never been able to justify the changes that would inevitably impact our clients and our management style. If we ever do find a good way to accelerate growth beyond just having a good product, we will do so in a way that allows us to maintain our philosophy of running Iasta with a client driven focus. Our history since 2000 has proven that we can compete and excel against much larger and much deeper pocketbooks.
According to a recent article in Global Logistics & Supply Chain Strategies entitled Riding the Rails Out of the Intermodal Muddle, between now and October monthly container volume will build to nearly two million boxes moving through major U.S. ports. Truck drivers and trailers and chassis will be at a premium, and the rail intermodal system will be pushed beyond 100 percent capacity. This is a staggering statistic. Especially considering:
The number of import containers has grown eightfold in the last 25 years to 400 million twenty-foot equivalents (TEUs) per year.
For the last 25 years, the capacity growth rate of the nation’s entire transportation infrastructure has remained static.
However, what’s even more surprising is that there is little immediate danger of port congestion or choking of the domestic system that has plagued the industry in recent years especially considering John Ficker, president of the National Industrial Transportation League has stated we have reached a point where demand has exceeded the railroad industry’s capacity to haul all of this traffic, hurricane season is upon us, and the ever increasing number of security initiatives. Furthermore, there are serious manpower shortages in the Trucking Industry and the article clearly states that railroads must build capacity and improve service levels to handle this increased traffic.
In other words, you should not take your logistics for granted and assume that even local US based shipments will be on-time and problem free as even the slightest breeze could theoretically knock out part of the house-of-cards infrastructure that North America is essentially running on due to the current situation of capacity maximization and manpower shortages. You should not only plan for minor disruptions, but do what you can to avoid potential problems in the first place. The article provides three recommendations, courtesy of Steve Branscum, group vice president of consumer products marketing for Burlington Northern Santa Fe.
Make better use of West Coast ports. Ocean carriers gravitate to L.A. / Long Beach, but spreading shipments across the ports reduces the chance of congestion.
Be more cognizant of which inland destinations are best served by which port and route freight accordingly. Railroads can then create greater density on certain lanes and improve efficiency.
Use receivers that work 24/7 to avoid frustrating carrier service performance and clogging terminal operations.
Reading SupplyManagement.com, I came across the short article Purchasers support paranoia theory that stated procurement is overly concerned about how it is regarded by others in its organisation and that of the 167 people who responded to the survey, the majority (70 per cent), agreed that procurement is too worried about how it is viewed by those outside the function. I can’t help but wonder why?
After all, financially speaking, no other employee in an organization can have as much of an impact on the bottom line as a purchasing professional. Considering that, in most organizations, a dollar saved is worth at least five dollars in revenue, generally speaking, no other employee is as valuable.
If I were to hypothesize, I’d say it was generally due to one of two reasons:
1. Senior Management doesn’t appear to appreciate purchasing.
In this case, I’d have to agree with Peter Sammons, Director of Buy Research, who said if senior managers cannot see the value of professional value-chain management then they should not hold senior positions. If this truly were the case, I’d advise them to seek other positions, since purchasers are in hot demand.
2. Purchasers don’t see the impact they’re making.
In this case, it’s just a matter of visibility and the fix is easy. Tools that can capture, analyze, and report on the savings obtained. After all, once it becomes clear how good you are doing, the confidence will follow.
According to MFG.com’s statement, “The combined companies bring together buyers and suppliers from around the world in an online environment that leverages the collective intelligence of the community to bring products to market faster, less expensively and more intelligently.” Although it is true that volume and economies of scale will provide benefits to you, the user, I’d like to point out that marketplace buys generally do not qualify as strategic sourcing and that the results you can expect are probably no better than what you’d get through a properly run reverse auction.
Significant, sustained, sourcing results depend on a proper process and proper eSourcing technology to manage that process. That being said, a marketplace that includes an automated supplier discovery engine that matches the attributes of a buyer’s RFQ to “ideal” suppliers using a community rating system that rewards those who are good citizens and exposes those who are not has a lot of value, and the use of such a site in conjunction with an eSourcing project and eSourcing suite that would let you manage the RFX and bidding process internally, so that you could apply decision optimization and total value management to the award decision, could be very beneficial.
I’ll be interested to see how the acquisition and new solution plays out for them over the coming year, especially since many marketplace efforts started during the dot com boom have met with limited success. Mfg.com seems to part of a new breed that is trying and succeeding on this model.
This is the last full weekend of the summer, and, thus, the last summer weekend series on e-Sourcing Forum. This summer we discussed, in detail, 12 topics in process and technology, supply management, and innovation that we hope you can use to help you design better sourcing methodologies. Today we are going to review the innovation topics.
Our ongoing purchasing innovation series talked about generic methodologies that you could use to foster and manage your innovation process, what tomorrow’s organization is likely to look like, and transforming new product development into an innovation-based process.
In addition, I managed to organize a complementary cross-blog forum on The Future of Sourcing, that nicely complements the purchasing innovation series, which I summarized in my Sourcing Innovation Series:
The series was an embodiment of the cross-blog interaction I wanted to see even before I started my own blog, and the primary goal of my blog, which started with the entry Strategic Sourcing Innovation Defined.
In the first part of our Purchasing Innovation Series we talked about some generic methodologies that you could use to foster and manage your innovation process. In addition to basic techniques for continuous and discontinuous innovation (such as six sigma and “thinking outside the box”), we introduced you to TRIZ and the verifier approach.
TRIZ, Teoriya Resheniya Izobretatelskikh Zadatch, or the Theory of Inventive Problem Solving, is a methodology, tool set, knowledge base, and model-based technology for generating innovative ideas and solutions for problem solving. The basic methodology has four steps:
evaluate a specific problem
translate the specific problem into a general (scientific) problem
search for general (scientific) solutions
translate the appropriate solutions into specific solutions
Of course, the real power of TRIZ in a CPO’s eyes is the advanced implementation approach better known as “invention on demand” which can be used to combat lock-in to patent protected suppliers. Invention on demand extends the benefits of TRIZ from component-level mechanical engineering problems to system level problems in general, be they mechanical, electrical, electronic, or even pure software. The goal is not incremental product improvement, but the creation of a completely new product that can replace the predecessor product without giving the incumbent supplier any leverage to claim intellectual ownership.
The verifier approach, which may be best known for its role in cracking the 400-year-old mystery of the Voynich Manuscript, is a seven-step methodology designed to solve problems that remain unsolved after the application of more traditional approaches. In its simplest form, the verifier approach may be applied to a problem using the follow methodology:
amass a knowledge of the discipline through interviews and reading,
determine whether critical expertise has yet to be applied in the field,
look for bias and mistakenly held assumptions in the research,
analyze jargon to uncover differing definitions of key terms,
check for classic mistakes using human-error tools,
follow the errors and gaps as they ripple through underlying assumptions, and
suggest avenues for research that emerge from steps one through six.
The power of the approach is that it can be used to zero in on the analyses most likely to lead to success by taking advantage of the “expertise gaps” that exist in most areas of specialization.
In the second part of our purchasing innovation series, we talked about what tomorrow’s organization, and thus tomorrow’s procurement organization, is likely to look like and the techniques it is likely to employ in its innovation initiatives. We talked about how networked person is replacing organization man and that a world class procurement organization is going to drive corporate transformation into the new millennia and how it will have a dotted line to every area of the business.
We also talked about crowdsourcing which takes advantage of the “new pool of cheap labor: everyday people using their spare cycles to create content, solve problems, [and] even do corporate R & D” to perform tasks, once exclusively the domain of professionals, that are suitable to crowdsourcing. Although it may have started with stock photography, content packaging, challenge driven R&D, and technical repair flows, companies like Eli Lilly, Colgate-Palmolive, Boeing, DuPont, and P&G are now using it to reduce R&D costs while propelling innovation forward. For example, back in 2001, pharmaceutical Eli-Lilly funded a new endeavor by the name of InnoCentive as a way to connect with brainpower outside the company – specifically, people who could develop drugs and speed them to market - and threw open the doors to other firms eager to access the network of ad-hoc experts. These companies post their most ornery (scientific) problems on InnoCentive’s Web site and anyone interested on the network can take a shot at cracking them, for a prize that ranges from $10,000 to $100,000 per solution. To date, more then 30% of the problems on the site have been cracked, which is 30% more problems than would have been solved using a traditional in-house approach (since these companies typically post the problems only after their internal R&D team has taken a shot and failed). And it’s extremely cost-effective - take the quoted Colgate-Palmolive example where they paid an InnoCentive member who found a solution to a fluoride powder injection problem a mere $25,000, a fraction of what it could have cost Colgate-Palmolive to dedicate their R&D team to the problem until it was solved internally.
In the third part of our purchasing innovation series, we talked about design for sourcing and transforming new product development into an innovation-based process where procurement is involved from day 1 since this typically reduces product development cost by 16% to 18% and overall product cost by 15% while increasing revenue by 19%, according to recent Aberdeen studies.
We also pointed out a little software company by the name of BrightIdea.com that provides an innovation management on demand software tool for only $49/month per user to demonstrate that tools exist to help you with your innovation efforts. Other software products include Jenni’s Idea Management Software, Centric Software’s Product Intelligence software, or Imaginatik’s Idea Central Software.
In other words, the future is innovation - through and through. Product innovation. Process Innovation. Technology Innovation. Organization Innovation. Regardless of what it is - it will be innovated.
This is the last full weekend of the summer, and, thus, the last summer weekend series on e-Sourcing Forum. This summer we discussed, in detail, 12 topics in process and technology, management, and innovation that we hope you can use to help you design better sourcing methodologies. Today we are going to review the supply management topics.
This set of posts identified the risks in your supply chain and methods for managing them, methods for tracking and managing your supplier performance, the center-led model which is the ultimate in internal procurement organizational structure, procurement outsourcing for when an external third party purchasing organization can get better results on a set of categories than you, and methods for tracking not only cost reductions but cost avoidance, which can be used to accurately measure your performance.
We defined supply chain risk as the potential loss resulting from a variation in an expected supply chain outcome - the mismatch between supply and demand - and supply risk management as the act of managing supply risk. Supply risk management is important because 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. Furthermore, 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.
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. In order to effectively mitigate risk, prevent deviations, and effectively manage disruptions when they occur and maintain profitability and effective operations, your organization needs to be resilient to predictable and recoverable supply chain risks.
The best way to manage these risks is to adopt a flexible culture, employ proven methodologies (which include the classic strategies of dual sourcing and lining up distribution alternatives and the modern strategies of production versatility, concurrent processes, and decision postponement), and align your risk-mitigating sourcing strategies with your supply base management strategies.
Of course, even a risk management strategy worth its weight in gold cannot compensate for a poorly performing supplier, which is why supplier performance management, the process of measuring, analyzing, and managing the performance of a supplier organization in an effort to cut costs, alleviate risk, and drive continuous improvement, is so important.
After all, when you consider 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.
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, which I abbreviate: connect, coordinate, check, control, 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.
Successful supplier performance management is also built on best practices. In our weekend series, we defined eight best practices that we felt were key to your success:
Collaboration: Open Communication and Data Sharing
Strategic Supplier Selection
Mutually Defined Performance Targets and Metrics
Continual Scorecarding
Proactive Supply Chain Monitoring
Cross-Functional Problem Resolution
Supplier-based Control Points
Predictive Analytics and KPIs
Center Led Procurement is a procurement organization model where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization. The center led model of procurement gives you all of the advantages of more traditional centralized and decentralized procurement organization models with minimal disadvantages.
The center led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. You increase operational efficiencies and decrease overall operational costs while maintaining the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.
A recent study from Aberdeen Group demonstrated that organizations with center led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management.
Our weekend series also covered some of the best practices for your center-of-excellence led procurement organization. These best practices were:
Led by a Chief Purchasing/Supply Chain Officer on the executive team
Cross Functional Teams
Multi-Year Supply Plans
Coordinated Metrics and Improvements
Web-Based Automation and Decision Support Tools
Ongoing Education
Speak to your supplier community with a central voice
As an organization, you will find that your performance on some categories is significantly better than your performance on others. Specifically, you will probably see better results on high volume categories in your areas of expertise. However, with strategic use of procurement outsourcing, it is possible to see the same level of results across the board. In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.
Procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party. You should consider it because it is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably than those who do not. You should consider outsourcing indirect or non-critical spend, the management of processes such as requisitioning and compliance tracking, and other competencies that are not core to your business.
It also has a side benefit of contributing to the happiness of your top performers. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.
Finally, once you have revolutionized your procurement organization under the center-led model, implemented risk management strategies, improved your average supplier performance level, and outsourced non-core competencies for increased savings, you need to quantify the results and aggressively market yourself as the heart of the organization. In order to do this, you need to recognize both hard and soft cost reductions. Although a significant amount of focus is on cost reduction, a great deal of supply management effort is on cost avoidance, and with rapid inflation in many key energy and raw material categories, avoiding significant cost increases when average market costs are skyrocketing are just as important as reducing spend in non-inflationary categories. The quantification of cost reduction may be challenging, but it is doable. You can use standard market indexes to determine the inflation since the last sourcing cycle and any increase over the last sourcing cycle that is less than the rate of inflation is still a success.
This is the last full weekend of the summer, and, thus, the last summer weekend series on eSourcing Forum. This summer we discussed, in detail, twelve topics in process and technology, supply management, and innovation that we hope you can use to aid you in your design of better sourcing methodologies. Today we are going to review the process and technology topics.
Our on-demand posts highlighted the benefits of on-demand software-as-a-service solutions over traditional installed approaches, which include:
Pay As You Go
Instant Deployment
Single Instance
Economies of Scale
Provider handles administration, maintenance, and headaches
Free Upgrades
You, the customer, have the leverage
Anywhere access
Buy what you need, and only what you need
Single Accountable Entity
Regular, Automated Data Backup
Built for Change
Unparalleled Collaborative Capabilities
Integration with office applications
Security
Uptime
Low Total Cost of Ownership (TCO)
Our demand-driven supply posts highlighted the importance of a strong focus on a pull-based customer centric approach to demand and supply chain planning. The goal is to help you identify the best mix of customers, products, channels, geographies, and prices for the dynamic marketplace, as this is key to maximizing your efficiency and profitability. This is because traditional Supply Chain Management deals poorly with rapid change as it relies heavily on up-front forecasts and does not incorporate regular forecast revisions or the demand signals necessary to determine when a shift in demand is needed.
Our optimization posts emphasized the importance of using decision optimization in award determination (as it will save you an average of 12% over and above a price-focused auction), despite the fact that its usage is not yet common in the marketplace, which is likely due to the dearth of vendors offering such technology. In addition, we pointed out that despite its limited acceptance up until now, we believe its time has come due to the convergence of the following factors:
Extensive use of e-Auctions over the last 3-5 years by early adopters.
Optimization Technology has evolved.
Solution Providers are integrating optimization into their platforms.
Solution Providers are recognizing that there needs to be a significant amount of sophistication under the hood.
Our Six-Sigma posts defined Six Sigma - a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology with the ultimate goal of producing at most 3 defects per million trials (in the long run). The goal of Six Sigma is to prevent defects before they happen via process improvements. To do this, Six Sigma uses a toolbox of statistical tools and frameworks to:
identify which defects impact customer requirements,
determine why each defect was caused and uncover the hidden factory, and
improve the process parameters and product designs to reduce defects.
Six Sigma practitioners look for ways to decrease the overall amount of variation in a process, since process variation is often the primary cause of defects. It does this by way of its DMIAC, Design-Measure-Improve-Analyze-Control, methodology which generally executes as follows:
define each process step, inputs, and outputs
map the customer requirements to process inputs and outputs
identify key metrics to measure performance
establish defect root causes for, and relationships between, inputs and outputs
analyze and improve the process to optimize performance metrics
provide controls to ensure sustainability of improvements
Since Six Sigma is a generic methodology, it can be applied across your supply chain, and to your supply management and spend management initiatives. Six Sigma Strategic Sourcing (SSSS) and Value Based Six Sigma (VBSS), which stem from Total Quality Management (TQM) initiatives and focus on Total Value Management (TVM), are two examples of Six Sigma frameworks for sourcing. They are based on best practices, which are nothing more than the everyday sourcing best practices that eSourcing Forum has been describing for the past year, but documented, standardized, and applied regularly and consistently across your sourcing organization.
The real killer sourcing application, however, is not on-demand software-as-a-service, demand-driven supply, optimization, or the six-sigma toolbox, but the integration of all of these processes and technology into one. In other words, a leading procurement organization is one that uses a six-sigma (best-practice) based demand-driven sourcing methodology that uses best-of-breed software and service offerings on-demand to determine optimal awards using market-leading decision optimization. Alone, each of these technologies and processes are great, but together, the whole is truly greater than the sum of the parts.
Aberdeen has a new report being surveyed and prepared right now. The details, per Aberdeen, were sent to me and are here:
The category of Maintenance, Repair and Operating (MRO) items has recently been seen as an opportunity for an enterprise to realize costs savings. Recent Aberdeen Group benchmarks show MRO as a top priority in terms of categories to focus on for cost-savings efforts.
Please take 3 to 5 minutes to complete this Aberdeen survey on MRO supplies that will shape our upcoming MRO Spend Management Benchmark Report.
Previous findings include:
* MRO is in the early stages as a category “to-be-sourced” by 67% of the respondents of a recent Aberdeen survey
* MRO is 26% of the total spend of a company (on average), and can be as high as 63%
* In a 2004 Aberdeen study, the average savings of MRO programs are 6% and can be as high as 25%
All respondents will each receive a COMPLIMENTARY copy of the report upon publication. Participate in the survey by clicking here or follow the link below.
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