Author Archive
April 29th, 2008
Michael Lamoureux
I enjoyed the recent article over on Global Services by the title of Wrecking Ball that noted that implementation of new operating models requires the corporate equivalent of wrecking an old building in order to build anew, yet few corporate managers are trained to swing the wrecking ball carefully, communicate in the most effective way to employees, and prepare for the fallout.
As the author notes, for many corporate change managers, preparing to communicate with employees is the last tick in the box. Too many managers assume that the responsibility can be offloaded to HR or the internal communications department when the reality is that only the managers who understand the scope - the work, employees, internal customers and potential impacts - can effectively swing the wrecking ball and manage the inevitable issues that are going to arise from a major change.
Furthermore, communication preparation should begin at the strategic planning stage, not at the beginning of implementation. This is the best time to prepare the right message - which must be clear, factual, and consistently communicated. Employees need to understand the reasons for change if they are to embrace them. As the article notes, simple oblique statements such as “we need to be competitive” can sound like corporate code for increase executive compensation - and is not going to be very inspirational.
Once the core message is drafted, it’s time to list all the affected stake-holders, determine who realizes the rewards and who pays for the gains, and develop a plan to address their specific concerns. This will require targeted messaging to them on top of the basic message. Be sure to plan for the inevitable backlash, and craft appropriate responses as well.
Once the messaging is worked out, you can work out the roadmap and implementation plan as you know you will be able to start delivering the right messaging to the right stakeholders at the right time. This plan should include performance incentives as productively tends to decline precipitously immediately after a major change is announced. It should also include a plan for dealing with voluntary attrition, as some people will get nervous, fear for their jobs, and seek new employment elsewhere. And, of course, constant communication that addresses all of the concerns as they arise.
Entry Filed under: General, Project Management, Supply Management Best Practices
April 23rd, 2008
Michael Lamoureux
Another good article in the recent edition of CPO Agenda is Collection Action by Nick Martindale. (It should be no surprise that I’d pick up on this one, as I’ve been known to preach the “Collaborate, Collaborate, Collaborate, Collaborate” mantra - see parts I, II, III, IV, and V, for example.)
The article starts off by noting that collaborative buying has yet to recover from the hefty blow that it was delivered in the nineties, after a number of GPOs quickly sprang into existence, and then failed even quicker, and that Group Purchasing Organizations are going to have to overcome some formidable obstacles if they are to grow and succeed.
One of the major problems with the original GPO model, which is still used by many of the GPOs still in the market today, is its myopic focus on cost savings. Organizations join because they think that volume-based buying will allow them to get their office supplies, energy, and contract labor cheaper, but end up saving very little and then develop a bad taste for the GPO model. Furthermore, many suppliers loathe GPOs because they believe that the whole point of a GPO is to compress prices and choose the lowest-priced supplier, and this means that it’s often hard to get your best suppliers to bid on the collective contract.
Just like Procurement needs to focus on total value on each and every buy they make, a GPO also needs to focus on total value on each and every buy they make on behalf of its customers. They need to look at the supplier from all relevant angles - cost, capability, service, and value-add. However, even more importantly, the GPOs need to encourage and enable their members to collaborate and share knowledge and best practices so that their interaction with the GPO does more than just save a few dollars on outsourced categories. With the right GPO, a member company should gain as much value from networking opportunities and shared knowledge as it gains from the cost savings associated with having a third party manage select spend categories.
Entry Filed under: General, Project Management, Supply Management Best Practices, e-Sourcing Marketplace
April 8th, 2008
Michael Lamoureux
The Supply Chain Management Review recently ran an article on Maximizing e-Sourcing through a Center of Excellence where they noted that software alone is not sufficient — organizations must have the knowledge and policies in place to support these tools. The article then says that, because of this, leaders today are establishing Centers of Excellence (CoE) to fully capture the value and savings from e-Sourcing technologies.
As per the article, a Center of Excellence is a small center-led group of sourcing experts who focus on standardizing processes, leveraging technology, capturing best practices, sharing knowledge, and streamlining activities. The model allows the flexibility to tailor purchases at the local level while leveraging corporate spend for strategic categories and commodities. (For a more complete definition of Center Led Procurement, as well as the benefits that normally accompany it, see my three part series: Part I: Introduction , Part II: Center of Excellence, and Part III: Best Practices).
The article also proclaims the benefits that often accompany a CoE and points to an Aberdeen study that found that the savings performance of an organization that has established a CoE is typically 39% better than its competitors. Furthermore, the organization is 32% more likely to have employed advanced sourcing strategies, 54% more proficient in their usage of e-Sourcing technology, and 25% ahead of their competition when it comes to maverick spend.
Considering that other studies from other organizations have reported similar results, there’s no arguing that a well designed and properly executed center of excellence gets results. However, I have to wonder how much is due to the center of excellence and how much is due to the mindset of excellence. It’s not the center that achieves results - but the people. It’s not the technology that the center employs - but the people who use it. It’s not the processes that the center recommends - but the people who
employ them. The mindset to apply best practices, processes, and technologies and be best in class resides in people.
Furthermore, if you have a team that has the mindset, do you really need a physical center? Many organizations like to “centralize” their “center-led” procurement organization in a single location - but considering the global talent crunch, is this really a good idea? First of all, your best talent is probably distributed globally - and many of them probably aren’t going to want to relocate (half-way around the world). Secondly, with the increasingly global nature of business, you need talent distributed globally to help your global teams understand the best practices, processes, and technology and properly apply them. If you think that once a year training sessions in a central location is enough these days, you’re trapped in the past. Thirdly, you can’t always aggregate demand across disparate divisions when each division could be making slightly different goods for different markets with different regulatory requirements. Sometimes demand just has to remain distributed.
Thus, I have to ask whether a Center of Excellence is the answer or if what you really need is a Team of Excellence. Furthermore, do you really need this team centralized in the same office, or can they be distributed out across your global purchasing organizations? It seems to me that if they have a Mindset of Excellence, this is all you need. Furthermore, since you’ll have one or more experts in each of your divisions, it seems to me that not only will you have increased adoption of the mandated processes, technologies, and best practices, but that you’ll get even better performance across the board. Now, it’s true that you’ll need networked persons to pull this off, but hey, it’s the noughts. Get used to it.
Entry Filed under: General, Supply Management Best Practices
April 1st, 2008
Michael Lamoureux
It’s hard to come up with a good definition for supplier enablement. Depending on who you ask, it is either supplier networks, catalog management and / or ((c)XML-based) punchouts, e-Document Management, a Supplier Portal that enables e-Procurement and / or e-Sourcing, or some (often proprietary) combination thereof. The common thread between most of the definitions that one encounters is a greater utilization of technology solutions to streamline procurement and / or sourcing processes by seamlessly connecting the buyer to its suppliers through a common application or platform.
However, none of these definitions really get to what supplier enablement should be. Supplier enablement should be about providing a buyer’s supplier with the solutions that the supplier needs to more efficiently and productively do business with the buyer in such a way that the buyer is also able to conduct business with the supplier more efficiently and productively. It is true that such a solution will need to be based on one or more technology solutions, but the focus needs to be on the business processes required and the capabilities of the supplier, not on the capabilities of the technology supplier. The best technology in the world is useless if the supplier doesn’t have the technical capabilities in-house to make use of it.
Supplier Enablement is relevant as it can significantly increase performance metrics such as spend under management and enterprises that leverage supplier enablement solutions enable their suppliers faster, better, and more efficiently than those that do not. Well executed supplier enablement reduces administrative errors, increases inventory turns, eliminates parallel processes, reduces cycle times, maximizes value, and improves compliance.
To this end, it’s important to understand the four core capabilities that will be required in any end-to-end supplier enablement solution.
- Catalog Management
If the goods and services the intended users of the e-Procurement system need to order on a regular basis are not in the system, this will just result in the system being by-passed and proliferation of the maverick spending that the organization hoped to avoid through the acquisition of the e-Procurement system. Thus, catalog management is quite important.
- Supplier Network
A supplier network, which is becoming a staple offering of many of the larger e-Procurement providers, is a single point of integration that provides a many-to-many connection between buyers and suppliers, allowing them to transact in real time. The major selling points of these networks is pre-enabled suppliers and the ability to find new suppliers almost instantaneously if you are a buyer and the ability to support multiple buyers through the same technology platform and win new opportunities for business if you are a supplier.
- e-Document Management
The most critical, and most often overlooked, component of enablement, regardless if the trading entity is acting in a buyer or a supplier capacity, is that of information and document management. These days, each trading party needs to maintain a host of information on each party it trades with, including incorporation information and status, owners, home country, operating countries, financials, products, services, contacts, CSR status, regulatory compliance, and current contracts as well as a slew of documents including RFx’s, purchase orders, shipping receipts, goods receipts, invoices, payment receipts, product information sheets, and trade documents.
- Supplier Portal
A supplier portal is a web-based interface designed to allow a supplier to easily conduct business with a buyer by providing them with a one-stop-shop access point for receiving and replying to RFX requests, participating in auctions, receiving and returning contracts, providing catalogs, receiving purchasing orders, replying with shipment receipts and invoices, and receiving goods receipts and payments. It also allows the supplier to maintain and update all of their information as required by the buyer and to check order and payment status at any time.
For more insights on #, check out the Supplier Enablement: The Secret to Sourcing Success wiki-paper over on the e-Sourcing Wiki which includes more detail on the core capabilities, an overview of buyer-side and supplier-side challenges that will need to be addressed, and some best practices to help ensure a successful project.
Entry Filed under: General, Supplier Performance, Suppliers, Supply Management Best Practices, Technology
March 12th, 2008
Michael Lamoureux
A generally accepted (and obvious) “best practice” is to procure services via a robust competitive methodology. In general, this is achieved by issuing a comprehensive request for proposal (RFP) to each of the potential vendors for that service. The practice has now become so common that many organizations have developed a standardized template (or templates) and are able to rapidly churn out RFPs to meet the demands of its business unit customers. This semi-automated approach accelerates the overall procurement timeframe and enables the organization to rapidly achieve superior results for the procurement of commodity products and services. Unfortunately, as with any automated process, this approach has also led to a reduction in critical thinking that is applied to each RFP.
Hear, Hear! This is precisely the point I was trying to make in the doctor on Technology RFPs: Don’t Put The Cart Before The Horse!, although I was restricting my attention to technology RFPs at the time. “Filling in the blanks” on a template isn’t sufficient for large and/or complex projects. The RFP needs to be carefully composed if you are to achieve maximum value from it. That’s why it was nice to see the article Beyond the Template over on SourcingMag.com which outlined some best practices for:
- effectively creating a competitive environment
- clearly defining the services being procured
- enabling the objective evaluation of vendor responses
- achieving optimal terms, conditions, and pricing in the competitive environment
The article may be services centric, but it still has great advice.
Creating a Competitive Environment
- Accentuate the positive
Why should the supplier want to engage in a relationship with you?
- Clearly specify what you hope to achieve
What are your goals? What do you require from the supplier?
- Enable the vendors to differentiate themselves
Be sure to allow some open-ended responses. Check-the-box, multiple-choice radio-buttons, and fill-in-the-blank does not leave much room for vendor differentiation.
- Ensure the vendors understand your environment
How do you work? How will the relationship be managed? What do you expect from a supplier?
- Emphasize the importance of the transition period
If you are transitioning away from a current supplier or a current process, be sure to explain how the transition process is going to work and what you expect from the supplier.
Defining the Services
- Know what you want
An RFP should not be used to gather information to help the enterprise decide what it would like to procure — it should be used to gather information about what the organization is going to procure and how it is going to go about the process.
- Define the boundaries
If you are procuring a product, who is managing the transportation? If you are procuring a service, what capabilities will the supplier be providing, what capabilities will you be retaining, and how do you define the break-points?
- Define the measurement criteria
How will the supplier’s performance be measured?
- Put yourself in the vendor’s shoes
Read the RFP from the viewpoint of a supplier. If there is anything that requires clarification, then clarify it. If you’re unsure if it is clear or complete enough, have an uninvolved third party (such as a colleague in another department) review it.
Objectively Evaluating Vendor Responses
- Establish discrete requirements
What do you need at a minimum to consider a supplier? If you are unsure, do a multi-round process where you ask for general proposals on how a supplier will solve a problem, followed by a request for specific proposals once you have selected an approach.
- Weight the requirements according to their relative importance
In order to score the proposals to select a winner, it is important to give more weighting to key factors.
- Define the proposal pricing format
This will allow you to compare proposals apples-to-apples.
Achieving the Best Buy
- Make it clear that RFP responses are contractually binding
Of course, this only applies to the final RFP/RFQ in a multi-round process.
- Use contract-ready requirements in the RFP
This will prevent snags in the negotiation.
- Don’t put off until later what you can do now
Do your best to make sure that the requirements in the RFP address all key considerations. After all, how likely are you to receive favorable terms regarding any items you forgot to address once you enter into a deal and lose the competitive environment?
This is great advice and, if you have the time, the full article is worth the read.
Entry Filed under: Supply Management Best Practices, e-RFx
March 6th, 2008
Michael Lamoureux
First of all, the doctor would like to point out that he’s thrilled with the level of supply chain coverage that Industry Week has had of late. the doctor realizes that it’s a drop in the bucket compared to the focus they put on manufacturing overall, but it’s better than no drop in the bucket at all. Late last year they published an article that asked What are the Critical Skills of Supply Chain Leaders that the doctor had to read, especially since the doctor spends a significant amount of time trying to answer this question when formulating the seven savors and the seven scruples of a sourcing sensei on the e-Sourcing Wiki.
According to the article, supply chain leaders embody five critical skills:
- Hire the Best and Brightest
This syncs well with the third savor - team builder - so the doctor has to agree with this one. Great leaders surround themselves with the best and brightest. Only charlatans insist on hiring those that they can wield their inferior superiority over. Furthermore, the best will also recruit actively during times of recession - since this is when their team can make the greatest impact.
- Metrics Driven
This syncs well with the first scruple - analysis - so this is another winner. They are also focussed on regular benchmarking, so they can set meaningful, realizable, goals.
- Performance-Reward Orientation
This syncs well with the third scruple - team recognition - so this one gets two thumbs up. They reward performance against goals, and especially those who take action that benefit the whole firm and not just themselves.
- Technology Savvy
This is the sixth scruple - technology - so this is right on the money. Great leaders embrace technology advances that can support more sophisticated supply chain management. They know the difference between real analytics capability and static reports and also when, where, and why to apply decision optimization. They also understand that while technology can enable a good supply chain, it can’t fix a broken one and know when to apply process re-engineering.
- Resist the Urge to Surge
Supply chain leaders understand that end-of-quarter sales surges are disruptive and costly and push to avoid these types of practices. They realize that surges depend on a cycle consisting of inventory buildup for a long period of time - which costs dollars, as well as unprofitable use of capacity - which costs more dollars, followed by a deep discount, which resulted in a lot of sales but the need to temporarily increase capacity - which resulted in overtime costs. And unless you’re producing holiday themed items, chances are this demand can be afforded by pricing your products more appropriately. Consider the example given of a diaper manufacturer who thought that a quarterly sales pattern of “low-low-high” was the natural demand pattern. the doctor surmises that the CEO never had children. Infants and toddlers don’t go through 6 diapers a day for two months and then suddenly double to 12 diapers a day for one month and then suddenly drop back to 6 diapers a day for two months on a quarterly cycle. Demand for diapers is relatively consistent. The only reason the pattern was low-low-high was because the retailers knew that the end of the quarter brought deep discounts, and they could save money by ordering an entire quarter’s supply at the end of the previous quarter, since their inventory costs, relative to the manufacturer’s, were minimal when you consider they could distribute the supply to each of their locations for which they paid overhead for regardless of inventory level.
This skill is important, but it’s actually a critical component of the second scruple - strategy. Because if you happened to specialize in holiday decorations, then you have to surge to make money. The trick is not to resist the urge to surge, but know when it makes sense. If the item is seasonal, or it’s a new product launch, you have to sell big and do it fast, and this will require inventory build-up. (Or you could be a Sony and lose hundreds of millions of up-front sales because you didn’t have enough units to satisfy initial demand.) However, if it’s a staple, or non-seasonal commodity, surging is much more likely to be costly than profitable. You need to know the right strategy for every item you’re sourcing for.
In other words, this is a great set of skills, but it doesn’t necessarily cover all of the skills that you need. They missed the following scruples:
- Compliance
- Sustainability
- Innovation
And even though you can delegate compliance to a senior risk management practitioner, the doctor just don’t see how you can be a great sourcing leader unless you have an eye on sustainability and another on innovation at all times.
Entry Filed under: General
February 27th, 2008
Michael Lamoureux
What is Corporate Social Irresponsibility? Simply put, it’s the practice of not being socially responsible as a corporation. What is social responsibility? Although heavily debated, it’s something that 71% of adults in the US believe corporations are not doing, or at least not doing well, according to a recent study by Harris Interactive. Why is it important? If it leads to even a one point change on Fortune Magazine’s “Americas Most Admired Companies”, it can translate into 107M of additional value for your corporation. Furthermore, the portfolios of the most admired companies show cumulative returns of 126% while those of the least admired show cumulative returns of only 80%. Furthermore, a good CSR program can make any company more competitive.
So what is it? Simply speaking, it’s the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of that of the local community and society at large. It’s responsible production, socially responsible labour relations, community involvement, environmental cognizance, and sustainability. It’s about a commitment to do things right.
What is right? That’s up for debate. The specifics will depend on local regulations, industry standards, your shareholders, and your corporate values, but at a high level, you can pretty much count on needing good labour, health and safety, environment, and community conduct codes.
But it’s not just as easy as raising wages, reducing greenhouse emissions, or opening a day care. For example: One company reduces its emissions of greenhouse gases. One increases its spending on recycling. Another provides free child-care facilities for its workers. Another raises the wages of its lowest-paid workers. All of these things cost money: suppose, for the sake of argument, that all four have reduced profit by the same amount. Which company has done most to protect the environment? Which has done most to advance social progress? Overall, how far has each company improved its triple bottom line? Bearing in mind the cost, can you even say that any of them have done so? (The World According to CSR, The Economist, January 2005)
It requires a strategy - and that requires a good process to develop one, a process that is described in the new wiki-paper over on the eSourcing wiki:
Corporate Social Responsibility: A Sustainable Solution. It’s complete with over a dozen in-depth references, so check it out!
Entry Filed under: General, Global Supply Issues/Risk
February 18th, 2008
Michael Lamoureux
Industry week recently ran a good article by Chris Ferrell of Tompkins Associates on Best Practices in Freight Bidding that had a number of good suggesstions. The article offered up the following 12 best practices:
- Obtain commitment from executive management.
This is always a good idea, no matter what project you are undertaking.
- Benchmark current freight costs.
Also, separate out fuel surcharges from basic freight spend.
This is critical. After all, how can you do better if you don’t even know how well you’re doing now?
- Include new transportation providers in the bid process and allow carriers to bid on different markets.
This should be obvious, but I’m afraid it isn’t. If you always have the same carriers bidding on the same lanes, they’re going to figure this out eventually and keep their rates in sync to maximize their profit, which is akin to minimizing your savings.
- Standardize bid formats to ensure apples-to-apples comparisons.
This should be a no-brainer.
- Have a minimum of one year’s worth of clean historical data.
Not sure I understand this one. You should have good projections of what your freight requirements are going to be, by market and lane, for the next year and these should be based off of solid demand projections that use at least a year’s worth of good, clean, data and preferably two or three years!
- Look for opportunities to decrease cost by changing transportation modes.
Never assume your current transportation network and strategy is optimal. For instance, just because ocean looks cheaper, doesn’t mean it is. Consider laptops. Their value depreciates weekly. If you can make them light enough, and pack them tight enough, air freight will be more profitable.
- Use a multi-round bid process.
You should definitely use a multi-round RFX, to qualify potential award recipients, but not necessarily a multi-round bid. Depending on the market conditions, the number of potential carriers, your needs, and how clearly you can specify those needs up front, a well-defined auction that takes into account all costs and factors, appropriately weighted, might be your best bet.
- Encourage carriers to take a more holistic look at your freight.
Good carriers will know their networks and how to optimize them much better than you will know yours. It’s their job. They might be able to come up with alternative bundles, modes, or schedules that could save you a significant amount of money.
- Leverage volume through a relatively small group of core carriers.
This is a basic tenet of sourcing, period. Just make sure that you split demand through a small group, and not a single carrier - because this would introduce a significant risk into your supply chain.
- Bid freight on a regular, predetermined basis.
Like any other bid, it shouldn’t be done ad-hoc. It should be by major sourcing project or at regular intervals.
- Put as much effort into implementation plans as you do the bid.
Remember that negotiated savings are just that - negotiated savings. To realize them, you need to be ready to do what it takes.
- Track carrier performance against commitments and utilize feedback loops.
You should not only track performance, but verify invoices using m-way matching and analyze historical performance using spend analysis to find overpayments and secure the credits or refunds before the contract expires.
Although the doctor is an expert in transportation network modeling, and well versed in freight, there are other bloggers out there who are experts in freight bids and freight auctions, a few of whom run projects on a (very) regular basis. He knows at least a few of them check this blog from time to time. Maybe they’ll chime in with a few tips of their own.
Entry Filed under: Optimization, Reverse Auctions, Supply Management Best Practices
February 13th, 2008
Michael Lamoureux
Free Trade Zones, Foreign Trade Zones, Special Economic Zones, and Sectoral Promotion Programs may all sound like the same entity, but, depending on the country, they can be vastly different. Where global trade is concerned, they can be a great advantage, if understood and used properly, or a relative disadvantage if not well understood.
In the US, a Foreign Trade Zone is an enclosed area, operated as a public utility under the control of US Customs, with facilities for handling, storing, manipulating, manufacturing, and exhibiting goods. Merchandise may be exported, destroyed, or sent into Customs Territory from the zone, in the original package or otherwise. The advantage of the zone is that, although items shipped from the zone are subject to Customs duties if sent into Customs Territory, they are not subject to customs duties if reshipped to foreign points! Furthermore, the usual formal CBP entry procedures and payments of duties are not required on the foreign merchandise until it enters CBP territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Foreign Trade Zones can have a huge impact on your working capital and supply chain financing requirements.
A Chinese Special Economic Zone is a different entity entirely. In the People’s Republic of China, a special economic zone is given special policies and flexibile measures by the central government to allow them to encourage foreign investment. The policies allow them to utilize a special economic management system that contains special tax incentives and greater independence for international trade activities. In a SEZ, there is no tax on foreign investor funded companies during start-up years before making a profit, no tax in tax in the first two profitable years, and only half of the normal tax in the third and fourth years.
In India, a Special Economic Zone, which was modeled after the China Special Economic Zones, is a foreign territory for the purposes of trade operations, duties, and tariffs. The specifics vary from zone to zone, as they do in China, but the zones also borrow some of the concepts that originated in the Foreign-Trade Zones Act of 1934 in the US, making them interesting entities.
Mexico has Sectoral Promotion Programs that establish lower tariffs on the importation of inputs for the use of various products, and the special economic zones of Brazil are different entities still. For more information on free trade agreements, foreign trade zones, and special economic zones, see the Free Trade Primer over on the e-Sourcing Wiki which can be used as a good starting point for your research.
Entry Filed under: General, Global Supply Issues/Risk
February 6th, 2008
Michael Lamoureux
Optimization can not only be used to reduce cost, but it can also be used to reduce risk. In this post I’m going to overview how you can effectively support seven common risk mitigation strategies in a proper strategic sourcing decision optimization solution (including the solution offered by Iasta, if you’re wondering).
Capacity Assurance
You can create exclusion constraints that restrict supply to suppliers with a minimum amount of capacity to insure that the suppliers can handle the award they receive. Furthermore, you can create qualitative constraints that restrict award to suppliers with spare capacity to insure you can cope with unexpected demand surges. Although forecasting significantly more demand than you actually have is bad, especially if you stockpile inventory and don’t dynamically order and pull as needed, forecasting significantly less demand and not being able to meet that demand is much worse - because then your brand takes a big hit in the public market, which is much harder to recover from.
Compliance
These days, there are a dizzying array of regulations that may need to be complied with such as REACH, RoHS, Part 11, ITAR, and SOX (etc., etc., etc.), and failure to comply with any one of these regulations can result in huge fines, delayed or stopped shipments, or confiscation and destruction of inventory. Thus, it’s key that you insure that each product you source meets the regulations that you have to meet. Optimization supports this by allowing you to exclude suppliers that don’t meet any of the requirements, and limit supply to suppliers that only meet the standards of some of the countries you ship product to.
Distribution Alternatives
A strategic sourcing decision optimization solution that supports freight lanes can support multiple carriers, allowing you to select the lowest carrier, and lowest cost shipping lane per carrier, between a supplier warehouse and a buyer distribution center. (If the product doesn’t support multiple shipping lanes per carrier for each warehouse-distribution_center pair, you can always create a second instance of the carrier and associate that with alternate routes. You can then account for total volume discounts offered by the carrier by defining the discounts on all instances of the carrier.)
Dual Sourcing
From a risk mitigation perspective, sole sourcing is a bad idea. A really, really bad idea. With decision optimization, you can use allocation constraints to force an award to at least two carriers, and even specify an approximate award breakdown, such as a 20-30-50% split between the three lowest cost carriers.
Incentives / Performance Based Contracts
Let’s face it, some suppliers will perform much better if they get a bonus for good performance. By using negative discounts, you can determine how much a given award would cost you if the supplier performed exemplary under an incentive structure, and by using penalties, you can determine how much an award would cost if the supplier performed poorly (providing you also factored in an adjustment for the higher cost of processing more returns).
Lead Time Reduction
You can use a qualitative constraint to capture the average amount of delivery time for each carrier on each lane and limit awards to a given distribution center, set of distribution centers, or all distribution centers to product from supplier warehouses that can reach the destination(s) in a maximum (average) timeframe. Thus, if you’re selling a product for which demand can fluctuate significantly, you can make sure you can always restock within a given timeframe as soon as the sales data starts to spike unexpectedly.
Price Hedging
Strategic sourcing decision optimization can help you figure out what contract length might be optimal for a given commodity. For example, if your predictions are that oil is going to keep rising for the next year, with a peak price that’s $20 per barrel above what you’re paying now, and your main supplier thinks that it’s going to top out at a peak price that’s only $10 per barrel more than what you’re paying now, and is willing to give you all the oil you need at only $5 more per barrel than the current market price, you can run scenarios for a 6 month demand window and a 1 year demand window at different price points. Then, you can see that if cost keeps increasing at a rate that is only two thirds of your prediction, it’s probably better to hedge for a full year.
And, of course, proper strategic sourcing decision optimization also gives you:
Total Value Management
Since it allows you to capture all your costs - unit, freight, utilization, and impact costs (by way of adjustments) - as well as any discounts available to you from a supplier for the purchase of certain products in sufficient quantities. This means that you’ll always get the lowest total cost of ownership with respect to your business constraints.
Entry Filed under: Global Supply Issues/Risk, Optimization, Supply Management Best Practices, Technology
January 29th, 2008
Michael Lamoureux
Purchasing B2B had a good article over the summer called Suppliers Like You Because? Discovering All Your Leverage Points by Terence Lillew that had a list of nine discussion points that should be considered in the development of a cost management strategy for a category.
1. Dollar Volume
Dollar volume is generally the primary leverage point. When a regular order over a period of time is locked in, suppliers can budget resources, plan appropriately and rein in their costs. Thus, you can insist that some of that savings is passed on to you.
2. Size
After dollar volume comes organization size. The larger the organization, and the greater the potential for future business, the greater the discount structure that the supplier can offer.
3. Leadership
The organization’s leader sets the tone for business value. If the leader is respected, and has demonstrated long-term effectiveness, the company can leverage itself into a better position.
4. Business Philosophy
A fair and ethical business philosophy that looks for solutions instead of attaching blame and that continually improves and a philosophy that supports creativity will give the organization a competitive edge in all negotiations.
5. Policies and Process
The company’s purchasing department must be responsible for the policies and processes if they are to leverage their position, and they must be sure to make sure the policies and processes are fair and up-to-date.
6. Early Influencer
A company known as an innovator gains a certain amount of prestige that can be leveraged to improve their position in a negotiation because they will be seen as a company you want to do business with.
7. Benchmarking
A leading organization constantly benchmarks its performance against peers and competitors. Suppliers know that a benchmarking company is often a successful company and may be more inclined to do business with such a company.
8. Buy Locally
Organization’s that buy locally have a natural advantage over those that don’t. A supplier wants to service a local buyer.
9. Payment Cycles
In an industry where most buyers are trying to extend payment cycles, any buyer that can reduce payment cycles is in a strong position to negotiate for additional discounts.
These are all great points. Be sure to think each and every one through before finalizing your negotiation strategy and starting an e-RFX or an e-Auction.
Entry Filed under: General, Supply Management Best Practices, e-Sourcing Marketplace
January 22nd, 2008
Michael Lamoureux
A great sourcing department is led by a great sourcing leader - but what does a sourcing leader do that sets her apart from everyone else? Simply put, to earn her place at the top, she astricts. More specifically, great sourcing leaders analyze, strategize, believe in team recognition, innovate, focus on compliance, use technology, and always have an eye out for sustainability. More specifically:
- Analysis
A sourcing leader understands the importance of analysis and carefully analyzes the situation before making important decisions, putting something up for bid, or signing a contract. She has a data-centric approach, based on spend analysis, that she uses to cut through the nonsense and find the real opportunities.
- Strategy
A great sourcing leader recognizes that the truly successful don’t get ahead by flying by the seat of one’s pants. She also recognizes that no one gets ahead by just focussing on day-to-day tactical operations. A great sourcing leader has a strategy. One that is built on a solid foundation, based on detailed and thoughtful analysis.
- Team Recognition
A great sourcing leader is a team builder that believes in regularly recognizing and rewarding her team for her accomplishments. This recognition comes in the form of public praise when they succeed, bonuses when they exceed savings targets, and a salary that’s at least at the high end of market average.
- Innovation
A great sourcing leader is focussed on constant innovation and improvement that enables her, and her organization, to not only adapt to the market, but to lead it where they want it to go. A great sourcing leader is constantly on the lookout for new innovations in technology, business process, and relationship management that she can use to improve the operations of not only her unit, but the enterprise and supply chain as a whole.
- Compliance
A great sourcing leader recognizes that compliance is not just the multi-faceted buzzword of the day, but the key to realizable savings, low risk operations, and positive press.
- Technology
A great sourcing leader is always on the lookout for new technologies that can help her team get a better handle on the supply chain as a whole as well as for new best-of-breed technologies that can improve performance in key activities with the potential to generate significant value or advance the overall organizational strategy.
- Sustainability
A great sourcing leader knows that sustainability is more than just a buzzword, it’s the key to successful business year after year. That’s why she makes sure that each strategy employed is sustainable, that each supplier used is responsible, and that environmental and social responsibility is always considered.
For more information on The Seven Scruples of a Sourcing Sensei, I strongly encourage you to check out the new Sourcing Leadership wiki-paper over on the e-Sourcing Wiki. Besides diving deeper into each of the actions that a sourcing leader does differently, it also discusses The Seven Savors of a Sourcing Sensei, or the seven key fundamental skill sets that set sourcing leaders apart from others.
Entry Filed under: General, Supply Management Best Practices
January 7th, 2008
Michael Lamoureux
Security of goods in transit is not a new issue. Ever since the dawn of ocean freight, well before the dawn of the spice trade, traders have had to worry about piracy. And many hundreds of years before that, those who traded by land had to worry about outlaws, bandits, and raiders. However, ever since the attack on the World Trade Center in New York on September 11, 2001, the need for security has heightened - driven by a slew of new security regulations being introduced by countries around the globe.
Whereas back in the nineties all you had to worry about was the Customs Modernization Act of 1993 if you were dealing with the US or the Modern European Customs Code if you were dealing with the EU, today it’s a different story. In the US you have to deal with the new Automated Commercial Environment (ACE), International Trade Data System (ITDS), the Container Security Initiative (CSI), the Maritime Transportation Security Act (MTSA), and the Customs Trade Partnership Against Terrorism (C-TPAT); in Europe you have the Authorized Economic Operators and the forthcoming Modern European Customs Code; and in Asia you have to deal with the Asia-Pacific Economic Cooperation Secure Trade in the APEC Region (APEC STAR).
Each of these acts has its own little caveats, and failure to comply with any act can result in delays, fines, and confiscated, and subsequently destroyed, shipments. Thus, it’s important to understand what these acts are and what they involve. For an overview, I’d suggest starting with the Customs and Security Primer over on the e-Sourcing Wiki. It has a brief description of what all of these acts are as well as starting points for further research. Furthermore, with your help, it will grow and improve over time.
Entry Filed under: General, Global Supply Issues/Risk
December 17th, 2007
Michael Lamoureux
Supply Chain Finance is the optimization of both the availability and cost of capital within a buyer-centric supply chain. The availability and cost of capital is usually optimized through the aggregation, integration, packaging, and utilization of all of the relevant information generated in the supply chain in conjunction with cost analysis, cost management, and various supply chain finance strategies.
A Supply Chain Finance Solution, in comparison, is a combination of trade financing provided by a financial institution, a third-party vendor, or an enterprise itself, and a technology platform that unites the trading partners and the financing partners electronically and provides visibility into the various supply chain events that can serve as financing triggers.
Supply Chain Finance is a lot more than just factoring, early payment discounting, or inventory shifting. It’s balancing credit, financing options, inventory management, and other supply chain variables to optimize working capital, and much more. Thus, given the complexity of supply chain finance in today’s globalized supply chains, it is important to have some good strategies in order to ensure that you are reaping the benefits that are there to be gained. It’s also equally important to understand that some of the classic strategies are more apt to be strategies for failure than for success. To this end, here are three strategies for success and three strategies for failure to avoid to start you on your supply chain finance journey.
Strategies for Success
- Balance Open Accounts and Letters of Credits
It’s important to understand an organization’s cost of capital versus the supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into the cost of goods sold.
- Improve Forecast Accuracy
One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.
- Lower Your Supplier’s cost
A recent Aberdeen benchmark report found that 39% of suppliers indicated that their top issue is their ability to access financing at acceptable terms. The more it costs a supplier to make a product, the more it will cost a buyer to buy it. Consider using early payment programs, inventory ownership solutions, and / or virtual consignment financing to lower your supplier’s costs, and your own in the process.
Strategies for Failure
- Shifting Inventory to Suppliers
Considering that most suppliers have to wait an unduly long time between their initial cost outlay to make a product and the eventual payment for that product in an environment where many buyers are now demanding payment terms that include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have large storage facilities or inventory management expertise, this drives up their costs from all angles. Their financing charges go through the roof as they have to take out more high-cost short-term financing, often at rates of 20% to 40% per annum (which are especially common in developing economies), their costs of operation go through the roof as they have to either acquire additional assets or pay a third party to manage the inventory, and their opportunity costs rise as they are prevented from ramping up production, due to lack of funds and storage, on New Product Development that could ultimately prove more profitable to them, and to you as the buyer. All of these costs just increase their cost of goods sold, and your price, and your “brilliant idea” to get rid of inventory carrying charges has only served to increase the total cost of ownership of the products you are buying. Nice move, hotshot!
- Increasing Days Payable Outstanding
Most suppliers only have constricted access to short-term financing with a significantly higher cost of capital. This cost-shifting to suppliers might result in better Days-Payable-Outstanding (DPO) statistics to a buyer in the short term, but ultimately results in a less financially stable, and thus higher-risk supply base, and, eventually, an overall higher cost of goods sold to your supplier and you versus your competitors who have mastered sound SCF practices.
- Mistaking Early Payment Discounts and Factoring for Financing Options
Early payment discount programs, regular or automated, do not address the root causes of financial flow inefficiency and can in fact exacerbate the underlying drivers. Instead of shifting inventory to a supplier, you’re essentially shifting costs and this often results in cost increases, rather than cost reductions, across the supply chain.
For more insights on Supply Chain Finance, check out the wiki-paper over on the e-Sourcing Wiki which includes an overview of the benefits to buyers and suppliers, strategies for success, strategies for failure, and tips on both buyer and supplier supply chain finance implementation.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices, e-Sourcing Marketplace
December 11th, 2007
Michael Lamoureux
Ten years ago, the world was a simple place to do business. Make an honest product, follow the import and export regulations (which, relatively speaking, were few and far between), avoid known toxins, and you were all set to go. Today - different story. You have to document, and report on, everything you do, familiarize yourself with various hazardous material safety and bioterror acts, and keep on top of a never ending slew of regulatory compliance acts coming out of the European Union, including the directives on the Restriction of Hazardous Substances (RoHS), Waste Electrical and Electronic Equipment (WEEE), and End of Life Vehicles (ELV).
Probably the most important act in the US is the Sarbanes-Oxley Act (SOX) of 2002, otherwise known as the Public Company Accounting Reform and Investor Protection Act of 2002, which established a new quasi-public agency (the Public Company Accounting Oversight Board, or PCAOB), that was drafted and passed in response to a number of major corporate accounting scandals (including Enron, Tyco International, Peregrine Systems, and WorldCom) in an effort to restore public trust in accounting and reporting practices.
The Sarbanes-Oxley Act contains a number of major provisions that address the disclosure of internal controls at public companies, the certification of financial reports, auditor independence, personal loans to any executive officer or director, insider trading, and required disclosures. Basically, auditors must be independent, independent auditors must “attest” to the disclosure of internal controls, the chief officers must personally certify the financial reports, personal loans to executive officers or directors are banned, and insider trades are prohibited during pension fund blackout periods. Failure to comply with any of the requirements could result in enhanced cival and criminal penalties for violations of securities laws.
In Europe, it’s a different story. Depending on the products you make, it’s either the Restriction of Hazardous Substances Directive (RoHS) that restricts the use of six hazardous materials in the manufacture of various types of electronic and electrical equipment; the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) that broadly covers the production and use of chemical substances; the Waste Electrical and Electronic Equipment Directive (WEEE) that imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers; the end of life vehicles (ELV) that force vehicle producers to have networks of facilities where the last owner of a vehicle may freely deposit such vehicle at the end of its life; or the cosmetics directive that was created to ensure product safety and public health while allowing the free movement of safe products within Europe.
Globally, we have the Kyoto Protocol, various industry codes of conduct, and forthcoming RoHS and WEEE equivalent acts in Asia. It’s a regulatory whirlwind, and it’s not about to stop. That’s why the e-Sourcing Wiki has started a wiki on regulatory compliance. Check it out - and feel free to add to it!
Entry Filed under: General, Global Supply Issues/Risk
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