Posts filed under 'Functionality'
May 8th, 2008
Sean Delaney - Iasta UK
Well I couldn’t resist this…especially since I was once one of these buyers. What is more interesting for me is that having crossed over to the “other side”, the negotiating styles used by the supermarket buyers (Tesco’s etc) certainly sounded very familiar.
When showing these tactics to Duncan Bullivant, the Chief executive of Henderson Risk Group, a seasoned hostage and kidnap negotiator, the article writes “even he was surprised”. Duncan then goes on to say ”not only do I recognise the phrases, I recognise all these tactics in every aspect of business I have done in the last few years.”
The tactics and behaviours during negotiations have evolved over the years from being more physical, to more psychological. For example, not long ago there was the story of one buyer, who used to attend meetings with a water pistol, and fire water, at the supplier, if the supplier didn’t meet his demands. Is this procurements’ equivalent to water boarding?
One strategy is called the “clock face” which involves 41 sequential steps as the buyer seeks to coax the best price out of the supplier. Tactics include threatening to de-list the supplier (which in reality could lead a supplier going out of business), threatening to go over their head to their bosses, play good guy and bad guy, deliberately misunderstanding something, and just when you think you may have made it, the final stage is the partnership stage. This is where suppliers may be deliberately left to feel the odd one out, before bringing them back into the fold.
Tired? Well, I certainly was after reading it! Quite clearly those more sophisticated suppliers will prevail and there is already evidence of this. Furthermore, as the supply base consolidates, and they become equally sophisticated, an impasse will inevitably be reached. With raw material prices rising so rapidly, I think this may be the final tipping point in relations.
However, back to negotiation techniques used, I can’t help feel that there is a serious case for the automation of the negotiating process. How much more sophisticated can one get? I would argue that in the future, it is imperative to keep it simple. Capacity constraints, and the securing of scarce resources, are going to be the key sourcing variables.
Entry Filed under: Global Supply Issues/Risk, Optimization, Reverse Auctions, Sourcing News, Supply Management Best Practices, e-Sourcing Marketplace
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 17th, 2008
Agatha Degasperi - Iasta Europe
I took part in a webcast this week entitled “Bringing Contract Management into the 21st Century – 5 Principles Every Procurement Executive Should Know” sponsored by Procurement Leaders.
It is quite clear that Contract Management is starting to add real value to companies. Problem is, too many are still stuck in old practices that result in a lack of visibility, control and inability to manage compliance. I thought it would be worthwhile to highlight some of the key takeaways from this hour long webcast.
What is CLM:
CLM stands for Contract Lifecycle Management and refers to a technology platform(s) that can manage the full lifecycle of a contract (i.e. All governing activities of how contracts are used) which are:
a) Contract Drafting
b) Contract Negotiation
c) Contract Storing and Repository
d) Contract Compliance and administration
e) Contract Renewal
f) Contract Optimization
What are the advantages of implementing CLM (summary of presentation given by Andrew Bartels of Aberdeen Research)
Phase 1 - Contracts reside within one single repository – making it easier to search, analyze and increase visibility into renewals. Already here, there are major cost savings to be had!
Phase 2 - Ability to generate reports and analyze current data – this helps identify duplicates, inconsistencies, and any other potential risks/issues with ongoing contracts
Phase 3 - Automatic contract creation – this helps only use legal staff for critical tasks and shorten the contract cycle times.
Phase 4 - Contract repository integrated with existing transaction systems – this clearly is the ultimate, long term goal of CLM. Where there’s a real time ability to verify that pricing is compliant & meets agreed service levels every time purchases are made – leading to greater conformity of contracts.
Key considerations for successful implementation
a) Aim for some early wins. In other words, don’t try to take on too much in one go. While the ultimate goal is to get all contracts on the system, it is best to go with a phased approach. To prioritize, the key variables to consider are: contract size and degree of activity (start with the contracts driving transactions as these are the renewals you don’t want to miss!)
b) Have a clear system & tool in place for importing existing contracts: ensure the technology you choose accounts for this and establish a system for importing the contracts. Many companies opt to have temps work on this so buyers aren’t bogged down with low value tasks. Furthermore, this step tends to take much longer than expected, so it is good to prepare the resources!
c) Develop best practices around how contracts will be set-up, structured, the verbiage that will be used and the controls that will be in place to manage the contract templates.
d) Maximize buy-in by involving all regions, relevant business units and stakeholders early on in the process. Particularly those close tot he market who are being directly impacted by the lack of visibility and compliance with contracts. Having some early wins with these groups can help serve as a “pull” for those less willing departments.
e) Consider assessing the potential cultural/attitude obstacles to adopting the tool and tackle this early on.
Some other interesting stats presented were that geographically, US appears in the lead of implementing CLM, but Europe is close behind & gaining ground. While the ultimate goal is to reach this phase 4 of integration with transaction systems, the majority of the companies currently find themselves in phase 1: Document Repository. The good news is that there is already tremendous value & ROI to be had with just implementing the first phase, as the increased visibility given will already create savings by helping to not miss renewals and minimizing other possible savings leakage from a lack of contract compliance.
Entry Filed under: Contract Management, General, Supply Management Best Practices, Technology
April 16th, 2008
Oscar Pacheco - Iasta
The recent article on improving SAP suite of product was a very interesting read, not because of what was written, but because of what was omitted. A group of CPOs whose companies used SAP were having difficulty extracting consolidated spend information from their SAP system in different business units and lobbied SAP to improve the product to more easily obtain this information.
Certainly a valid request that will prove useful to SAP users, but there is a large assumption that had been missed here. The CPOs have assumed all of the data from the various systems is “good” data, meaning no duplicate supplier names, all commodity coding is correct, no strange transactions, data from one business unit means the same thing to all business units, etc. If there is one thing for certain (other than death and taxes) it’s that data is never good and always needs a bit of cleaning.
If, in fact, SAP does improve the system, the CPOs will be viewing and making decisions based on flawed information. This is where spend analytics can help. Spend analysis generally involves pulling the information out of the various systems (SAP, or any other data source), performing analyses on that data to improve the quality (such as consolidating the various data sources, consolidating vendors names, categorization, etc.) and then producing reports.
These reports carry much more value and will represent a clearer picture of reality rather than a clouded view. The cleansed information can be used by a variety of groups for various purposes, but is essential to the procurement organization. It can allow them to track spend by categories, GL Account, business unit, region, supplier, and more, giving them the information they need to make the best decisions.
Entry Filed under: General, Spend Analysis
April 15th, 2008
David Bush - Iasta
I am a little late getting to this report from AMR, which is reserved for members only (although SCDigest did provide a little insight, as did Spend Matters).
High level take aways stated that supply management technology is a key enabler for value chain success, reflected by an anticipated 14.5% increase in spending in 2008. Cost savings and procurement efficiency are two of the primary goals desired by purchasing respondents, and also, it was noted that the spend visibility and contract management were ranked 1 and 2 in the list of Most Strategic Investments.
Another interesting statistic showed that Sourcing tools were the most commonly deployed applications at companies over $1b in revenue, at 67%. That is a very strong show of acceptance of eSourcing. It also showed that an additional 27% of respondents intended to deploy sourcing application, which would total 94%. That seems a little odd to me and possibly I am missing the relationship between those two questions.
One of AMR’s key conclusions drawn was:
Our study identifies a shift away from ERP platforms over the next three years for most supply management segments in favor of best-of-breed and custom applications that are expected to provide the greatest innovation, functionality, and transformational capability in supply management.
This was backed by:
The largest supply management budget segment is internal head count. Tied with the ERP platform as the main supply management application, one definitely questions the use of technology and services to integrate and streamline processes in supply management. With high dollars in these three segments, the opportunity for integration, cycle time reduction, and savings is significant. This is good news for supply management technology vendors, service providers, and business process outsourcing firms.
…
While most of the 15 segments in the United States were sourced using ERP platforms, custom and best-of-breed vendors continued to be deployed and appear to be cutting into ERP market share, specifically in the areas of travel and expense, services procurement, supplier connectivity, SPM, supply visibility, supplier portals, and financial settlement.
Clearly, AMR is very bullish on supply management spending patterns, but also are touting the trend of BoB vendors digging into the ERP meat and potatoes.
Entry Filed under: Analysts/Research, Contract Management, General, Spend Analysis, Technology, e-Sourcing Marketplace
March 13th, 2008
David Bush - Iasta
Even in these very turbulent economic times, we are still seeing a large volume of reverse auctions being executed. However, now is a good time to remember the definition of cost avoidance, as explained on the eSourcingWiki and pulled from CAPS.
Cost avoidance is a cost reduction that results from a spend that is lower then the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken.
This accounts for the situations where spend is higher due to higher demand but overall cost per unit is lower, where up-front investments reduce overall spend in one or more categories over a multi-year initiative, and where a process improvement or product replacement resulted in a lower operating cost or cost per unit compared to what the company would have spent had the company not improved the process or replaced the product.
Or to add to these guidelines, cost avoidance can potentially be measured and impacted when the market conditions are raising unit costs but the introduction of competitive bidding lowers the delta between your former pricing and the new escalated pricing.
Although the concept of an on-line reverse auction is not necessarily within the definition of cost avoidance, I have seen it work many times this year already. A recent example in packaging had suppliers with 20% increases across the board. However, the auction concluded with a 1-2% savings in some lots and no more than a 5% increase in the other lots.
As always, it is critical to enforce best practices and know your market and suppliers. This tactic is not a guaranteed outcome, but should not be summarily discounted either.
Entry Filed under: General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices
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 4th, 2008
David Bush - Iasta
On-demand, whatever. This comes from an article I found on Supply Chain Brain by Jeff Kaplan, titled: Top Ten Reasons Why On-Demand Services Will Soar in 2008.
His reasons in summary:
- Services are Recession Proof
- Everyone’s Going Virtual
- Amazon, IBM and Google Bet on Utility Computing
- Nick Carr Returns
- SaaS Solves SOX
- Managed Services 3.0, Unified Communications Services and Service Automation
- Carriers and Channel Companies Find Success With New Services
- Failure Doesn’t Matter
- IT Discovers Services are the Solution
- Wall Street Buys Into Services
You can read the article for details as he describes them. Three of the ten stuck out a little more than the rest.
First is the #1 point, which states:
“The ability to adopt on-demand services on a pay-as-you-go basis will be a perfect sourcing strategy for businesses seeking greater cost-controls and flexibility.”
This is very self explanatory and the SaaS model has ALWAYS been easy for everybody to “turn on and go”.
Next on point #5, which states:
“A year ago, most publicly traded companies and other large-scale enterprises rejected the idea of SaaS because they thought they needed to take greater responsibility for their own compliance requirements. Now, they view the process controls, auditability and offsite hosting features common in most SaaS applications as a perfect solution for their Sarbanes-Oxley (SOX) needs. As a result, enterprise adoption of SaaS will accelerate.”
That is a huge shift of opinion and could be one of the most important foundations possible for a SaaS model. Maybe corporations are starting to listen to and understand the messaging that has been coming out for years from vendors.
Lastly, point #10:
“Wall Street loves the predictability of subscription services and now that it has a solid set of market ‘comps’ to measure business success in the services market, it will be encouraging more privately held companies to go through the IPO door.”
A couple points here. First, we have no intention of going public, but there appears to be many in SaaS that do plan this route. Also, it might give some indication as to why Ariba bought Procuri. Many have said they were looking for a mid-market story and more SaaS revenue.
Finally, point #9 is interesting but I will never bank any value on making IT departments happy. I think the only time they are truly happy, is when they can mope around the office telling everybody how miserable they are because they are too busy to have fun like everyone else.
Entry Filed under: Functionality, General, Technology
February 19th, 2008
David Bush - Iasta
Industry Week is on a roll as of late. In addition to their recent article on Best Practices in Freight Bidding, that Michael Lamoureux summarized in this post, they just published on article on 10 Strategies to Drive Down Your Transportation Spend that was rather good. In brief, the strategies were:
- Keep your network flexible to take advantage of cheaper and more economical freight lanes.
- Set budgets and measure spend against budget on a regular basis.
- Negotiate constraints for price, capacity, and capability over the long term.
- Implement postponement strategies that allow you to reduce lead time and improve cash flow.
- Monitor and enforce inbound compliance.
- Optimize your transportation planning.
- Consolidate all outbound shipments. If you pay for the truck, use it to its full capacity.
- Improve supply chain visibility. Know where your shipments are when, and why.
- Monitor and audit all invoices and shipments. Only pay what you have agreed to under contract.
- View transportation and trade as one integrated process.
Finally, and I can not stress this enough, use strategic sourcing decision optimization when making your award decision to insure that the award you select will enable you to keep your transportation costs down. Otherwise, you might think you save big on the unit cost only to find out that your transportation costs double.
Entry Filed under: General, Optimization, Supply Management Best Practices
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 14th, 2008
David Bush - Iasta
The Supply Chain Management Review recently ran an article on how to accelerate sourcing cycle times that had some good suggestions on how to keep your sourcing cycle lean and mean.
According to the article, obstacles that prevent the rapid execution of a quality sourcing process typically fall within one of the following four categories:
- insufficient and/or inaccurate data
good sourcing needs good data; be sure to clearly define and articulate what data you will need before the project begins
- poor process definition and knowledge
you should have standard methodologies and processes, and standard templates for each major category to insure that the team doesn’t have to “re-invent the wheel” every project
- insufficient resources
strategic sourcing requires dedicated resources; although one can automate tactical purchasing, the very nature of strategic sourcing is that it requires qualified, intelligent individuals concentrating on the problem
- lack of corporate culture for sourcing
sourcing affects multiple business units; they must be aligned to ensure success
The article then goes on to focus on two areas that can make a difference: spend data and talent.
Good strategic sourcing starts with a detailed spend analysis project that identifies the opportunities and illuminates the data you will need to conduct a successful sourcing project.
But in the end, it comes down to the talent assigned to the project. As the author points out, successful sourcing requires creativity and perseverance, drawing heavily upon:
- teamwork and collaboration
- leadership and communication
- analytics and problem solving
- broad expertise that encompasses project management, legal issues, and technical skills
Virtual teaming with collaborative processes and access to improving analytics and toolsets is creating the means for speed, the framework for results and the platform for sustaining category leadership despite the constant flow of talent … as long as the right e-Sourcing platform is in place to support it!
Entry Filed under: General, Spend Analysis, Supply Management Best Practices
February 7th, 2008
David Bush - Iasta
Last month, Global Services Media ran an article titled Sourcing: From Art to Science that noted that not only do today’s approaches to managing global sourcing rely primarily on antiquated methods for project scoping, but that they also fail to put into place real-time metrics to assess productivity. The article also notes that nearly half of sourcing relationships that rely on distributed global teams sour and fall far short of expectations. Those aren’t good odds.
The author states that he believes that we need to build a more sophisticated infrastructure of tools and methods to manage the complexity of working globally. This is because global teams create levels of complexity in management, metrics, and productivity that come with a price. Furthermore, the author states that he believes that the answer lies in real-time dashboards that provide instant metrics on productivity and immediate visibility into a process collaboration, problem situations, and new opportunities.
Now, while I wholeheartedly agree with the need for better visibility, I have to say, especially after discussions with the doctor who has his own views on dashboards (in short, they’re dangerous and dysfunctional), that I do not agree that dashboards alone will solve the problem. Although they might tell you, assuming they’re built properly, where you’re not performing at estimated peak efficiency (and where there’s room for improvement), they won’t tell you why or what you can do about it. Plus, if the metrics say you’re doing well, you can be lulled into a false sense of security. This would be bad if someone came up with a more efficient way to do a process, which you completely ignored because you thought you were doing well enough.
To me, the answer is more science, and more visibility, but it comes in the form of collaborative project management and deep analysis. This requires an e-Sourcing platform that is fully integrated and configurable, to give each team member the access he or she needs, and that tracks project status and outstanding tasks in a simple manner that allows quick access to current projects and tasks. Furthermore, and this is key, the platform needs deep analytics - in the form of spend analysis and optimization - to allow the sourcing team to uncover issues and model the total costs of a potential award so that the best decision can be made going in. In other words, more science is the answer to your sourcing pains, but real-time metrics in a dummy dashboard is not enough.
Entry Filed under: General, Optimization, Project Management, Spend Analysis, Supply Management Best Practices, Technology
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 31st, 2008
Sean Delaney - Iasta UK
In a previous entry I talked about how the utilisation of Spend Analysis software makes the rational of a vendor reduction programme less relevant. When reading the latest report from The World Economic Forum on the risks for 2008 I am convinced this logic will now start to gain more momentum.
According to the WEF there are 4 major risks to be aware of over the forthcoming decade. What is most disturbing is that all 4 will have an immediate effect on sourcing decisions.
In summary these are:
• Systematic Financial risk – this has already been well documented in recent weeks. The lack of liquidity in markets will have a negative effect on business investment and therefore increase capacity constraints in the global supply chain.
• Food Security – Global food prices are at record highs whilst stocks are at 25 year lows….”population growth, lifestyle changes, use of crops to manufacture bio fuels and climate change – are likely to sharpen over the coming decade”. There is already evidence of this in the UK. During the last 10 years land used for Agricultural purposes has fallen by 8%. In addition land still in use is increasingly being used for the production of Bio fuels. The price of wheat is at all time high. Furthermore during the same period the population has grown by 2m to 60m – this is predicted to grow to 69m by 2027!
As anicdotal evidence of the scale of the shift the other day I was at my son’s children party. When I was talking to one of the Dads he mentioned that an old colleague was, until recently trading currencies and he is now trading livestock in Australia…buying millions and millions of dollars of cattle one day and selling the next. What’s more is he is achieving higher returns than he was when he was trading currencies.
• Supply Chain Vulnerability – “Improvements in technology and global logistics, along with reduced trade barriers, have led to a historic expansion of international and intra-regional trade over the past 20 years”. Although this has widely been seen as a benefit the WEF are saying now our risks are too concentrated in core areas. For example the concentration of raw material ownership in the hands of say State controlled funds or the impact on wage price increases in China.
• Energy – the increasing demand for energy coupled with the requirement to reduce CO2 emissions is going to cause difficulties. I am already seeing the growth in the demand for specialist energy buyers to mitigate organisational risk. However when we see 17% increase in fuel bills universally applied by all suppliers, clear evidence of collusion in the market and what is worse more political influence on the supply it seems that such a move is now punitive.
I would like to add a fifth risk that since none of these risks were mentioned in the same report for 2007 volatility caused by globalisation should be added too!
From this it is quite clear that there is need for global supply chains to be more diverse and as mentioned before this can be achieved with decent (real time as possible) spend analysis. Furthermore this technology should be used to monitor production, commitments and deliveries. Reports should also include commitment further down the supply chain.
The use of sourcing optimisation technology is now essential and especially the use of “what if” scenarios is a must. In fact the speed of change could require optimisation scenarios to be computed more frequently and not just at the point of “award”. This would allow for the inclusion of such things like the effect of climate changes to raw material stocks or the increase in the average wage in China.
It is now obvious that it should be a priority to use both of these technologies. However what has struck me is that combining these technologies together would achieve far more powerful results. I don’t know the exact probabilities by my guess is that the benefits would be exponential and thus reduce the probability of major a catastrophe in a global supply chain.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Optimization, Spend Analysis, Technology
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