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.
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.
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.
Supply and Demand Chain Exec has a fantastic article on eSourcing process integration, which is written by Andy Sealock of Pace Harmon. If you can get past the incredibly unfriendly user obstruction for printing and viewing the article on 7 different pages, you will be able to really get a ton of great information. In fact, I would say that this is the best and most comprehensive content I have read about eSourcing project management.
This comes off my recent post, The Per Event Paradigm, where I tried to dissuade companies from under committing to the eSourcing process. This article validates that principle with many examples of best practices for setting up the proper eSourcing frame work and foundation. I will not steal too much of the thunder from the article, but Andy does say, “a common pitfall is to squander that investment by not executing properly on the associated process integration, and therefore never realize the value projected in the business case used to justify the tool.” Well put.
Some of the key principles that are highlighted include:
Establish Uniform Data Definitions and Provide Training
Build Data Collection Requirements with the End Result in Mind
Data Attributes To Capture for Project Management (including project status levels)
The final page also goes into best practices for eRFx and reverse auctions, which are always good to refresh and understand. One of the comments he makes is:
Companies can better leverage e-sourcing tool auto-scoring capabilities for vendor proposals by structuring as many requirements as possible in the form of binary (yes/no) answers, or requiring the vendor to enter a specific value, or choose from a list of multiple-choice responses. This improves evaluation process efficiency as the assignment of weights to these requirements can be built into the tool ahead of time. The tool will then apply the appropriate weights to vendor proposal responses and auto-score them without manual intervention.
I do agree with this principle, but am not sure the practice can be enforced consistently. It is like telling people that an auction should be awarded to the lowest bidder because all other factors have been normalized. This is true, but very difficult to accomplish in tight time frames and other unknowns.
The article ends brilliantly:
Process integration considerations for a successful e-sourcing tool rollout may seem like a substantial amount of work (and it is), but in reality it is a small investment relative to the payoff received in the form of enhanced efficiency and effectiveness from the sourcing process. With significant dollars and time on the line, it is vital that the enterprise plans ahead and allocates sufficient priority and resources to process integration when making a decision to implement an e-sourcing tool.
This article in supply management is a classic misconception that just by adding together more of the same does not always equal lower unit costs. As highlighted by Michael Lamoureux there are a number of issues that inhibit collaboration like culture, time and timing.
I think the SM article gives us a great opportunity to dissect a particular collaboration project and measure it against the inhibitors outlined by Michael and Tim Cummins
1. The process of collaboration is difficult enough with 2 parties. Each party has different objectives and consequently different contractual requirements. Honda has been used as an example of how collaboration can work successfully however each project tends to imply that only 2 parties were involved. The project being announced by SM has 10 parties!
2. Collecting together requirements often adds delays to projects. Any benefits gained can often be lost in the process, only leading to frustrations of those involved. This directly relates to the time issue however there comes a point were time invested out weighs the benefits.
3. Benefits can be eroded when the contract is finally awarded it may no longer suit all parties. In order to meet their requirements stakeholders are required to buy off line from the contract. This further erodes the integrity of the awarded contract. Future collaboration projects have less importance as they only act as a loose frame work agreement thus further undermining the integrity of the process.
In my opinion not only does culture, time and timing prohibit collaboration but also the IT infrastructure and more specifically the category chosen to collaborate with.
In this particular case it is unclear what IT infrastructure is in place. However without it collating the requirements of each member will be a logistical nightmare and will result in high % of non compliance post award.
For me though the real crux of this project is the category that has been chosen to collaborate with. Claiming a potential 10% saving by simply adding together the road surfacing requirements for 10 authorities is a little ambitious especially when you consider the following.
Let me highlight some of the supplier cost drivers:
• The cost of Asphalt is fixed by the crude oil prices and therefore is index linked. Since Oil is in the process of reaching an all time high it is unlikely that savings would be achieved in this portion of the overall cost.
• The Cost of plant and Machinery is fixed by the cost of money i.e interest rates. If suppliers have bought/leased machinery the costs are fixed and standard returns must be achieved.
• The Cost of labour is subject to minimum wages and experience. Since there is a limited supply of labour, underpinned by a minimum wage there is likely to be little room from negotiating here too.
When suppliers are constrained by such cost drivers coupled together with a more bureaucratic process of winning business you start to get a sense 10% might be a little…err pie in the sky?
Furthermore with so many vested interests the requirements are likely to be watered down to such an extent that the service levels become too vague. Measuring any benefit is going to be impossible.
I am not adverse to collaboration but I think small steps should be taken at first to establish procedures, measure benefits and compliance. After all that’s how Honda started!
The ISM Project Management for Supply Professionals Satellite Seminar Program Handbook, despite being limited mostly to presentation slides and a few article reprints, had a few great slides and a few great tips for supply management project management that are doubly true for e-Sourcing project management. Two slides in particular that I would like to point out and comment on are the Seven “Sins” and the Six “Tried and Trues”.
Seven “Sins”
Arrogance
Don’t assume you know the outcome before you start, that you can do it better without full utilization of the e-Sourcing tool, or that suppliers will not be interested. You need to go in with an open mind to achieve true success. When we see men of a contrary character, we should turn inwards and examine ourselves.
Indecisiveness
The end result of a successful e-Sourcing event is an award. This implies that one has to make a decision - and do it promptly, as e-Sourcing comes with the expectation of efficiency. Not to mention, one needs to make decisions at each stage of the RFx process as to which suppliers will be invited to continue through to the final auction or sealed bid negotiation and which suppliers do not make the cut. To see what is right, and not to do it, is want of courage or of principle.
Disorganization
Just because the tool keeps track of and organizes of RFQs, bids, and supplier information for you, this does not imply that your organization skills can slack. In fact, it implies the opposite. You need to be more organized. Instantaneous delivery allows for instantaneous responses and questions. Shortened cycles mean that you have to be prepared to help suppliers efficiently pass through the stages. If a man takes no thought about what is distant, he will find sorrow near at hand.
Stubbornness
Hand-in-hand with arrogance, stubbornness can kill your project before you start. Don’t resist the tools or cling to the old ways when a new way is faster, better, and more collaborative. Hold faithfulness and sincerity as first principles.
Negativism
Negativity is very unlikely to lead to a successful, positive result. Respect yourself and others will respect you.
Cowardice
Dogs aren’t the only ones that can sense fear. So can people. And not all suppliers will be fair and honest if they think they can walk all over you. Be bold and embrace the brave new e-Sourcing world! To know what is right and not to do it is the worst cowardice.
Untrustworthiness
e-Sourcing requires trust. Lots of it. If your suppliers don’t trust you, they won’t participate, and the project will be over before it even begins. The superior man is modest in his speech, but exceeds in his actions.
Six “Tried and Trues”
Define a clear purpose
What is the goal of the e-Sourcing Project? To secure supply? To reduce costs? A combination of both?
Take the time to gain team buy-in
You need all of the affected stakeholders in your organization as well as your potential suppliers to be comfortable with the project and the process. Take the time to educate them on the benefits and get their support.
Be supremely organized
e-Sourcing is designed to be a very efficient process. When the project starts, you need to be ready and available to take it to a prompt conclusion.
Lean about unfamiliar areas
Inspiration rarely springs forth from the mundane or the familiar. Explore related and unrelated areas to understand the far reaching effects of your project and look for insight into ways to improve the process.
Protect your impartiality
The supplier qualification and award guidelines should be decided before the project begins and to be perceived as fair and trustworthy, you need to do your upmost to adhere to them.
Be collaborative, then decisive
The purpose of a multi-round RFx process is not just to qualify potential suppliers, but to get their input to refine your needs, RFP, and sourcing plans to the best they can be. Collaborate with your suppliers to get the best set of requirements and designs possible before deciding on the final award decision after the sealed-bid negotiation or auction takes place.
According to an article in the Outsourcing Journal back in March titled Suppliers Face a Changed World As First Generation Outsourcing Deals Expire, 43% of annualized outsourced contract value that is up for renewal over the next two years face a medium risk of getting restructured. Traditionally onshored deals will be offshored, mega-deals (that included infrastructure, applications, maintenance, and development work) will be unbundled, and individual transactional business process outsourcing will be merged into larger multi-process deals, for example.
However, as per the Supply Chain Outsourcing article in the current issue of the Frasers/PMAC article, more choices are only making decisions tougher for the buyer. With so many functions being outsourced and so many third party providers to choose from, it’s now harder than ever for a buyer to align structures, requirements, strategies, and capabilities with a prospective third party’s offerings. Although I’ve written a fair amount about procurement outsourcing in my procurement outsourcing series (I, II, III, IV, and V), I liked this article as it concisely addresses the three questions a buyer should be asking, and answering, before she starts down the outsourcing path.
Am I a good candidate for outsourcing?
The only guidelines or clues for answering this question are internal problems, pressures, or shortcomings, such as insufficient planning, alignment, or control; limited visibility; poor process integration; or lack of coordination across multiple supply chain channels.
What function(s) should be outsourced?
The challenge is to know which function(s) would perform more effectively in an outsourced environment and how the outsourcing of one or more functions would benefit the entire supply chain.
What kind of organization should handle outsourcing function(s)?
Outsourcing options used to be limited to third-party logistics providers (3PLs), most of which developed solutions to complement their assets. But another kind of provider has emerged: integrated-services coordinators. These global, ìasset-agnosticî organizations manage clientsí supply chains by synchronizing the services of 3PLs, functional providers, and internal business owners.
At long last, Iasta has finally released our newest version of SmartSource. I generally do not discuss happenings in Iasta-land on E-Sourcing Forum but this is significant from my perspective because we have been so excited about unleashing this monster, and, because it changes the e-Sourcing landscape even more with our expanding breadth across supply management. Although none of our competitors will ever admit it, Iasta is now a player in end to end supply management and we did it with all of our own code. There was no cheating by acquiring technology (although we did partner for some). If you are interested, you can read the full press release here. As a summary, here is what changed:
Iasta has made the release of SmartAnalytics - a spend analysis platform that few can rival. Look for more blogs coming on spend visibility technology and best practices. This is the first new platform we have introduced to complement SmartSource.
Major enhancements to the Executive Dashboard and Management Reporting functionality.
New user enhancements to Decision Optimization, including better data loading capability.
A new, integrated module for Contract Management is available that allows users to close the loop on the sourcing lifecycle.
Over 200 client feature requests.
Iasta has been running well-attended group webinars for weeks now and been getting a very positive response from our user community. If you did not get a chance to view some of the highlights, please let us know and we would be happy to schedule some time to bring your company up to speed. Thanks for all the support and feedback that went into this release. We still have more surprises up our sleeve in 2007 as we will continue to embed huge amounts of functionality into SmartSource without pegging our clients with a seven figure smack-down. Some companies call them “modules”, we call it our product.
So, to highlight this glorious occasion, I have a tribute that I have always found enjoyable and strangely keeps getting funnier while simultaneously more disturbing:
This is the last full weekend of the summer, and, thus, the last summer weekend series on e-Sourcing Forum. This summer we discussed, in detail, 12 topics in process and technology, supply management, and innovation that we hope you can use to help you design better sourcing methodologies. Today we are going to review the innovation topics.
Our ongoing purchasing innovation series talked about generic methodologies that you could use to foster and manage your innovation process, what tomorrow’s organization is likely to look like, and transforming new product development into an innovation-based process.
In addition, I managed to organize a complementary cross-blog forum on The Future of Sourcing, that nicely complements the purchasing innovation series, which I summarized in my Sourcing Innovation Series:
The series was an embodiment of the cross-blog interaction I wanted to see even before I started my own blog, and the primary goal of my blog, which started with the entry Strategic Sourcing Innovation Defined.
In the first part of our Purchasing Innovation Series we talked about some generic methodologies that you could use to foster and manage your innovation process. In addition to basic techniques for continuous and discontinuous innovation (such as six sigma and “thinking outside the box”), we introduced you to TRIZ and the verifier approach.
TRIZ, Teoriya Resheniya Izobretatelskikh Zadatch, or the Theory of Inventive Problem Solving, is a methodology, tool set, knowledge base, and model-based technology for generating innovative ideas and solutions for problem solving. The basic methodology has four steps:
evaluate a specific problem
translate the specific problem into a general (scientific) problem
search for general (scientific) solutions
translate the appropriate solutions into specific solutions
Of course, the real power of TRIZ in a CPO’s eyes is the advanced implementation approach better known as “invention on demand” which can be used to combat lock-in to patent protected suppliers. Invention on demand extends the benefits of TRIZ from component-level mechanical engineering problems to system level problems in general, be they mechanical, electrical, electronic, or even pure software. The goal is not incremental product improvement, but the creation of a completely new product that can replace the predecessor product without giving the incumbent supplier any leverage to claim intellectual ownership.
The verifier approach, which may be best known for its role in cracking the 400-year-old mystery of the Voynich Manuscript, is a seven-step methodology designed to solve problems that remain unsolved after the application of more traditional approaches. In its simplest form, the verifier approach may be applied to a problem using the follow methodology:
amass a knowledge of the discipline through interviews and reading,
determine whether critical expertise has yet to be applied in the field,
look for bias and mistakenly held assumptions in the research,
analyze jargon to uncover differing definitions of key terms,
check for classic mistakes using human-error tools,
follow the errors and gaps as they ripple through underlying assumptions, and
suggest avenues for research that emerge from steps one through six.
The power of the approach is that it can be used to zero in on the analyses most likely to lead to success by taking advantage of the “expertise gaps” that exist in most areas of specialization.
In the second part of our purchasing innovation series, we talked about what tomorrow’s organization, and thus tomorrow’s procurement organization, is likely to look like and the techniques it is likely to employ in its innovation initiatives. We talked about how networked person is replacing organization man and that a world class procurement organization is going to drive corporate transformation into the new millennia and how it will have a dotted line to every area of the business.
We also talked about crowdsourcing which takes advantage of the “new pool of cheap labor: everyday people using their spare cycles to create content, solve problems, [and] even do corporate R & D” to perform tasks, once exclusively the domain of professionals, that are suitable to crowdsourcing. Although it may have started with stock photography, content packaging, challenge driven R&D, and technical repair flows, companies like Eli Lilly, Colgate-Palmolive, Boeing, DuPont, and P&G are now using it to reduce R&D costs while propelling innovation forward. For example, back in 2001, pharmaceutical Eli-Lilly funded a new endeavor by the name of InnoCentive as a way to connect with brainpower outside the company – specifically, people who could develop drugs and speed them to market - and threw open the doors to other firms eager to access the network of ad-hoc experts. These companies post their most ornery (scientific) problems on InnoCentive’s Web site and anyone interested on the network can take a shot at cracking them, for a prize that ranges from $10,000 to $100,000 per solution. To date, more then 30% of the problems on the site have been cracked, which is 30% more problems than would have been solved using a traditional in-house approach (since these companies typically post the problems only after their internal R&D team has taken a shot and failed). And it’s extremely cost-effective - take the quoted Colgate-Palmolive example where they paid an InnoCentive member who found a solution to a fluoride powder injection problem a mere $25,000, a fraction of what it could have cost Colgate-Palmolive to dedicate their R&D team to the problem until it was solved internally.
In the third part of our purchasing innovation series, we talked about design for sourcing and transforming new product development into an innovation-based process where procurement is involved from day 1 since this typically reduces product development cost by 16% to 18% and overall product cost by 15% while increasing revenue by 19%, according to recent Aberdeen studies.
We also pointed out a little software company by the name of BrightIdea.com that provides an innovation management on demand software tool for only $49/month per user to demonstrate that tools exist to help you with your innovation efforts. Other software products include Jenni’s Idea Management Software, Centric Software’s Product Intelligence software, or Imaginatik’s Idea Central Software.
In other words, the future is innovation - through and through. Product innovation. Process Innovation. Technology Innovation. Organization Innovation. Regardless of what it is - it will be innovated.
This is the last full weekend of the summer, and, thus, the last summer weekend series on e-Sourcing Forum. This summer we discussed, in detail, 12 topics in process and technology, management, and innovation that we hope you can use to help you design better sourcing methodologies. Today we are going to review the supply management topics.
This set of posts identified the risks in your supply chain and methods for managing them, methods for tracking and managing your supplier performance, the center-led model which is the ultimate in internal procurement organizational structure, procurement outsourcing for when an external third party purchasing organization can get better results on a set of categories than you, and methods for tracking not only cost reductions but cost avoidance, which can be used to accurately measure your performance.
We defined supply chain risk as the potential loss resulting from a variation in an expected supply chain outcome - the mismatch between supply and demand - and supply risk management as the act of managing supply risk. Supply risk management is important because with today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralized distribution, more and faster product launches, low cost country sourcing and supply chain globalization in a highly volatile global market place, companies are at greater risk than ever before. Furthermore, the effect of a supply chain disruption goes beyond just late shipments, lost production time, and delayed execution times. It can cause stock outs and lost sales, missed customer expectations, quality and safety concerns, project failure, market exposure, and lost credibility. It can increase costs, reduce your bargaining power, and even influence poor supplier selection as you struggle to correct the imbalance.
Enterprises that have adopted comprehensive supply risk assessment and management programs, which include leveraging deep supplier and market information, have reduced the frequency of supply risks and outperformed their peers in supply performance and costs. In order to effectively mitigate risk, prevent deviations, and effectively manage disruptions when they occur and maintain profitability and effective operations, your organization needs to be resilient to predictable and recoverable supply chain risks.
The best way to manage these risks is to adopt a flexible culture, employ proven methodologies (which include the classic strategies of dual sourcing and lining up distribution alternatives and the modern strategies of production versatility, concurrent processes, and decision postponement), and align your risk-mitigating sourcing strategies with your supply base management strategies.
Of course, even a risk management strategy worth its weight in gold cannot compensate for a poorly performing supplier, which is why supplier performance management, the process of measuring, analyzing, and managing the performance of a supplier organization in an effort to cut costs, alleviate risk, and drive continuous improvement, is so important.
After all, when you consider that Aberdeen found that companies with formal performance measurement programs were able to improve supplier performance by 27% and that enterprises that shared performance data with suppliers generated 61% greater improvements in supplier performance than enterprises that withheld this data, the benefits of supplier performance management compared to the costs of trying to recover from a preventable disruption are phenomenal.
Successful supplier performance management is a continuous cycle of supply and capability assessment, performance monitoring, and improvement identification. A good starting point is the Aberdeen C5 operational supplier management framework, which I abbreviate: connect, coordinate, check, control, and cultivate. The cycle starts with integrating suppliers into an exchange, proceeds to a synchronization of buyer requirements with supplier capabilities, implements scorecards and metrics to measure performance, tracks performance against SLAs, identifies exceptional situations, resolves problems and disruptions according to business objectives, and employs analytics to identify defect patterns and unpredictability to eliminate root causes and identify new opportunities to remove cost from the supply chain.
Successful supplier performance management is also built on best practices. In our weekend series, we defined eight best practices that we felt were key to your success:
Collaboration: Open Communication and Data Sharing
Strategic Supplier Selection
Mutually Defined Performance Targets and Metrics
Continual Scorecarding
Proactive Supply Chain Monitoring
Cross-Functional Problem Resolution
Supplier-based Control Points
Predictive Analytics and KPIs
Center Led Procurement is a procurement organization model where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization. The center led model of procurement gives you all of the advantages of more traditional centralized and decentralized procurement organization models with minimal disadvantages.
The center led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. You increase operational efficiencies and decrease overall operational costs while maintaining the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.
A recent study from Aberdeen Group demonstrated that organizations with center led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management.
Our weekend series also covered some of the best practices for your center-of-excellence led procurement organization. These best practices were:
Led by a Chief Purchasing/Supply Chain Officer on the executive team
Cross Functional Teams
Multi-Year Supply Plans
Coordinated Metrics and Improvements
Web-Based Automation and Decision Support Tools
Ongoing Education
Speak to your supplier community with a central voice
As an organization, you will find that your performance on some categories is significantly better than your performance on others. Specifically, you will probably see better results on high volume categories in your areas of expertise. However, with strategic use of procurement outsourcing, it is possible to see the same level of results across the board. In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.
Procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party. You should consider it because it is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably than those who do not. You should consider outsourcing indirect or non-critical spend, the management of processes such as requisitioning and compliance tracking, and other competencies that are not core to your business.
It also has a side benefit of contributing to the happiness of your top performers. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.
Finally, once you have revolutionized your procurement organization under the center-led model, implemented risk management strategies, improved your average supplier performance level, and outsourced non-core competencies for increased savings, you need to quantify the results and aggressively market yourself as the heart of the organization. In order to do this, you need to recognize both hard and soft cost reductions. Although a significant amount of focus is on cost reduction, a great deal of supply management effort is on cost avoidance, and with rapid inflation in many key energy and raw material categories, avoiding significant cost increases when average market costs are skyrocketing are just as important as reducing spend in non-inflationary categories. The quantification of cost reduction may be challenging, but it is doable. You can use standard market indexes to determine the inflation since the last sourcing cycle and any increase over the last sourcing cycle that is less than the rate of inflation is still a success.
This is the last full weekend of the summer, and, thus, the last summer weekend series on eSourcing Forum. This summer we discussed, in detail, twelve topics in process and technology, supply management, and innovation that we hope you can use to aid you in your design of better sourcing methodologies. Today we are going to review the process and technology topics.
Our on-demand posts highlighted the benefits of on-demand software-as-a-service solutions over traditional installed approaches, which include:
Pay As You Go
Instant Deployment
Single Instance
Economies of Scale
Provider handles administration, maintenance, and headaches
Free Upgrades
You, the customer, have the leverage
Anywhere access
Buy what you need, and only what you need
Single Accountable Entity
Regular, Automated Data Backup
Built for Change
Unparalleled Collaborative Capabilities
Integration with office applications
Security
Uptime
Low Total Cost of Ownership (TCO)
Our demand-driven supply posts highlighted the importance of a strong focus on a pull-based customer centric approach to demand and supply chain planning. The goal is to help you identify the best mix of customers, products, channels, geographies, and prices for the dynamic marketplace, as this is key to maximizing your efficiency and profitability. This is because traditional Supply Chain Management deals poorly with rapid change as it relies heavily on up-front forecasts and does not incorporate regular forecast revisions or the demand signals necessary to determine when a shift in demand is needed.
Our optimization posts emphasized the importance of using decision optimization in award determination (as it will save you an average of 12% over and above a price-focused auction), despite the fact that its usage is not yet common in the marketplace, which is likely due to the dearth of vendors offering such technology. In addition, we pointed out that despite its limited acceptance up until now, we believe its time has come due to the convergence of the following factors:
Extensive use of e-Auctions over the last 3-5 years by early adopters.
Optimization Technology has evolved.
Solution Providers are integrating optimization into their platforms.
Solution Providers are recognizing that there needs to be a significant amount of sophistication under the hood.
Our Six-Sigma posts defined Six Sigma - a relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology with the ultimate goal of producing at most 3 defects per million trials (in the long run). The goal of Six Sigma is to prevent defects before they happen via process improvements. To do this, Six Sigma uses a toolbox of statistical tools and frameworks to:
identify which defects impact customer requirements,
determine why each defect was caused and uncover the hidden factory, and
improve the process parameters and product designs to reduce defects.
Six Sigma practitioners look for ways to decrease the overall amount of variation in a process, since process variation is often the primary cause of defects. It does this by way of its DMIAC, Design-Measure-Improve-Analyze-Control, methodology which generally executes as follows:
define each process step, inputs, and outputs
map the customer requirements to process inputs and outputs
identify key metrics to measure performance
establish defect root causes for, and relationships between, inputs and outputs
analyze and improve the process to optimize performance metrics
provide controls to ensure sustainability of improvements
Since Six Sigma is a generic methodology, it can be applied across your supply chain, and to your supply management and spend management initiatives. Six Sigma Strategic Sourcing (SSSS) and Value Based Six Sigma (VBSS), which stem from Total Quality Management (TQM) initiatives and focus on Total Value Management (TVM), are two examples of Six Sigma frameworks for sourcing. They are based on best practices, which are nothing more than the everyday sourcing best practices that eSourcing Forum has been describing for the past year, but documented, standardized, and applied regularly and consistently across your sourcing organization.
The real killer sourcing application, however, is not on-demand software-as-a-service, demand-driven supply, optimization, or the six-sigma toolbox, but the integration of all of these processes and technology into one. In other words, a leading procurement organization is one that uses a six-sigma (best-practice) based demand-driven sourcing methodology that uses best-of-breed software and service offerings on-demand to determine optimal awards using market-leading decision optimization. Alone, each of these technologies and processes are great, but together, the whole is truly greater than the sum of the parts.
On Friday we reviewed our series to date and indicated the importance of purchasing to new product development (NPD) and innovation and yesterday we reviewed some recent research from Aberdeen Group that qualified and quantified the importance of procurement to NPD and innovation and the benefits it produced. We then introduced the concept of “design for sourcing” and indicated its key role in reducing costs, increasing revenue, reducing the innovation cycle, and combating a slew of risks before they become relevant. Today we are going to review purchasing’s evolving role in the organization and the role I see it playing in the future and why.
Simply put, in the future I see every unit in the business having a dotted line to procurement and every non CXO manager having a dotted line to the CPO (or CSCO). And I’m not alone. Jason Busch, co-founder of Azul Partners and blogger extraordinaire of Spend Matters made the same point in a recent presentation entitled The Future of Spend Management.
I firmly believe that any company that continues to keep procurement in the closet will go the way of the dinosaurs. As the global market place heats up, companies will have to push innovation to the max just to survive. But even those companies will have a limited lifespan if they don’t source for success. After all, when their competitors will be producing products at 80% of their cost and reaping revenues 20% higher, it won’t be long before they just can’t compete.
To see how vital procurement will become, let’s review the best practices of the best-in-class companies identified by Aberdeen: dedicated leadership, centralized control, standardized processes to capture and leverage results, employment of technology to facilitate the process, and constant measurement.
Who else besides the CPO is going to be able to lead these innovation processes? Considering that innovation cross-cuts every unit of the business, you need someone who is used to working with every unit of the business on a regular basis. What other division in the business regularly deals with every other business unit? What other senior manager interacts with every other manager on an almost daily business? Only finance and the CFO. But finance is only about controlling and tracking costs, not managing value and leading innovation. And the CFO is there to see that funds get used wisely, not lead new innovation initiatives.
Where else are you going to centralize control? Only a best-in-class procurement organization constantly looks at buys from cost and risk perspectives - only a best-in-class procurement organization understands how to calculate the total value of a purchase. Furthermore, only procurement regularly interacts with partners up and down the supply chain.
What business unit besides engineering needs such a refined focus on standardized processes to succeed? Where has the recent evolution in center led operations been taking place? Procurement. Sourcing best practices rely on standardized processes. Procurement Centers of Excellence have been transforming operations at best in class companies and increasing EPS (Earnings Per Share) across the board.
New integrated, collaborative, workflow-driven e-Sourcing systems have been transforming not only sourcing processes but sourcing teams into efficient networked-person communities that can effectively interoperate locally and globally. Who better to lead the transition to PLM (Product Lifecycle Management) technologies then someone intimately familiar with SLM (Sourcing Lifecycle Management) technologies that are built on the same precepts and processes?
Finally, sourcing professionals are used to measuring everything they do. How else can they quantify success? They don’t produce physical products. They don’t make material sales. They don’t cut the final contracts. Their only achievement is savings, an intangible meaningless concept until quantified and measured.
Furthermore, I believe that the best-in-class companies will be those that embrace new innovation processes, such as TRIZ and the Verifier approach, that require coordinated team efforts across the board. Those teams will need to be led by an interdisciplinary team well-versed in all of the business’ operations. Only one team makes the cut. Procurement.
As companies continue to outsource and go global, even more of a company’s spend will flow through procurement. Procurement will not only become the center of operations in a company, but the difference between a successful profitable company and a company on the brink of bankruptcy. And I am predicting that this future will happen a lot sooner then you think. The best-in-class companies are embracing procurement today in preparation for a market shake-up that could happen any time with the rampant rise in energy and raw material costs and global stock markets that literally rise and fall overnight thanks to rapid advances in e-trading.
And if you haven’t figured it out yet, as suggested by the recent cross-blog Sourcing Innovation Series, The Purchasing Evolution is Here! Vive La Evolution!
For more ideas on how to innovate your purchasing - and your sourcing - see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki.
Not only did these reports qualify the value of innovation to a company, but they quantified the significant financial benefits of introducing procurement into the process at the earliest stages of New Product Design (NPD). Specifically, when procurement is included in NPD in the design stages, product development cost is typically decreased by 16 to 18%, overall product cost is typically decreased 15%, and revenue is typically increased by 19%. Furthermore, quality is improved (through the elimination of late changes due to sourcing considerations), parts reuse is increased (which enhances supply leverage while reducing inventory and complexity), and time to market cycles are improved by 10% to 20%.
When you consider the intensified cost pressures, reduced product lifecycles, increased product complexity, increased rates of commoditization, tougher competition, and the continual reduction in trade barriers in today’s global marketplace, the need for continued innovation is essential to a company’s very survival. However, when done right, successful innovation can be the key differentiator between survival and massive profitability.
With respect to product development targets, Aberdeen has found that the majority of companies (75%) are not able to consistently hit any of the following five key measures:
percentage of products meeting revenue targets
cost targets
launch date targets
quality targets
product development cost targets
Classifying companies into laggards (25%), industry norm (50%), and best-in-class (25%), Aberdeen found that the industry norm was only able to hit revenue targets 40 to 80% of the time, cost targets 40 to 80% of the time, launch dates 20 to 80% of the time, quality targets 50 to 90% of the time, and development cost targets 30 to 80% of the time.
New Product Development is more challenging now then ever before since the majority of products require expertise across disciplines and organizational boundaries. Most products are so complex that it often requires cross-disciplinary teams across your supply base to design, prototype, and bring a product to market. Furthermore, innovation, which is as much as broadening the product development view as it is about managing the product lifecycle, requires input from business units including, but not limited to, design and engineering, marketing and sales, legal, finance, and procurement. The process requires a significant amount of coordination, communication, collaboration, and control.
Managing this innovation is no easy feat, but great results are much more likely if you follow the best practices of best-in-class companies that dedicate leadership, centralize control, standardize processes to capture and leverage results, employ technology to facilitate the process, and measure constantly. (For more details, refer to the Aberdeen Group reports referenced above.) A senior manager should be directly responsible for overseeing the full process of identifying innovation opportunities, engineering them, developing them into products, and bringing them to market. Centralizing control allows for the standardization of processes, consistent distribution of best practices, and consistent management of a central knowledge repository. Standardize processes improve efficiency and allow for the capture of knowledge and results that can be re-used in the future. Appropriate technology can simplify coordination, collaboration, and communication and allow everyone involved to focus on innovation, not automation. Best-in-class companies are four times more likely to have Product Lifecycle Management related technology, integrated data and process automation, and collaboration infrastructures than their peers. Constant measurement allows for constant improvement. Best-in-class companies are three times more likely to measure key performance indicators across projects on a monthly basis.
Furthermore, successful innovation incorporates customer needs, evaluates goals in business terms, implements operational improvements that yield tangible results, chooses product opportunities by value and relies on procurement to ensure that product costs and supply risks are addressed up front.
Successful innovation “designs for sourcing“. If you wait until the prototype phase, after engineers have made material and component choices, chances are that all of your designed-in-costs, which the Defense Advanced Research Projects Agency (DARPA) estimates to be 80% of the product costs, will be locked in. Involving procurement early is the key. Otherwise you risk increased direct material costs, unacceptable risk in supply, unexpected component obsolescence, missed regulatory compliance, the inability to expand products into new geographies, the lack of ability to take advantage of sourcing leverage, increased quality inspection costs, raised manufacturing costs, and missed launch dates.
To design for sourcing, the average company, who still operates in organization man’s world (see Part V), will have to reshape its organizational discipline to one of organizational synergy between networked persons across its business units, and engineering and procurement in particular. Engineers have to be aware of the impact of their decisions on cost and procurement has to be aware of the impact of engineering’s decisions on supply and they both need to work towards selecting the best components for the best products that bring the most value to the company.
For more ideas on how to innovate your purchasing - and your sourcing - see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki.
In our first series of posts, we discussed some approaches that you might use to introduce innovation into purchasing and the organization as a whole. In our second series of posts, we discussed how the organization was changing, the important role purchasing will have to play, and how you can use new outsourcing methodologies such as crowdsourcing to reduce costs and improve productivity.
Before we get into this third, and final set of posts in our first Purchasing Innovation Series, I’d like to mention a little software company by the name of BrightIdea.com that provides an innovation management on demand software tool for only $49/month per user. If you don’t know where to start in your innovation improvement efforts, companies like BrightIdea (which reports clients that include Bosch, Honeywell, and Reliant Energy), can help you dive right in and increase innovation productivity from day one - using the same type of on-demand solution that you already use in your industry leading sourcing efforts. Innovation doesn’t take brilliant product and process managers, just brilliant people enabled by the right processes and tools to guide them. The tools offered by companies like BrightIdea are supported by analytics, archiving, financials, and rewards processes that allow a company to understand and save data created around innovations, compute the bottom-line impact, and recognize those most responsible.
In this series of posts we are going to discuss why innovation is so important and why purchasing has to lead the way. Tomorrow we are going to discuss some recent research from Aberdeen Group that quantifies not only how important innovation is in new product development (NPD), but the significant financial benefits it entails. Sunday we are going to wrap up the first part of this series by detailing how purchasing can lead the way in shaping the new enterprise.
When procurement is included in NPD in the design stages, product development cost is typically decreased by 16 to 18%, overall product cost is typically decreased 15%, and revenue is typically increased by 19%. Furthermore, whereas the majority of companies are not able to consistently hit product development targets with respect to percentage of products meeting revenue targets, cost targets, launch date targets, quality targets, or product development cost targets, the majority of best-in-class companies that have incorporated procurement into the process at the design stages hit these targets over 80% of the time.
For more ideas on how to innovate your purchasing - and your sourcing - see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki.
One of the application areas of Six Sigma, the relentless quest for perfection through the disciplined use of fact-based, data-driven, decision-making methodology, is supply chain, which includes supply management, spend management, and strategic sourcing. A number of firms are peddling six sigma initiatives designed to improve your supply chain operations, including KPMG with their Six Sigma Strategic Sourcing (SSSS), but the best processes are those focused on value, such as Value Based Six Sigma (VBSS). These process stem from TQM (Total Quality Management) initiatives, but since they focus on TVM (Total Value Management), the focus is on the solution of those problems that directly support business goals and have the highest potential impact.
With VBSS, you apply a small-number-of-projects-at-a-time mentality to finish the projects as efficiently as possible to enjoy the benefits as soon as possible. You follow generally accepted Six Sigma Strategic Sourcing best practices, but you select the projects based on a value (cost/benefits) analysis aligned with your business objectives (which should in turn be aligned with your customer requirements).
So what are six-sigma strategic sourcing best practices? Simply put, they are every day sourcing best practices applied regularly and consistently across your sourcing and procurement organizations! There’s nothing special or fancy - the key is to adopt the best process you can get your hands on, automate it, follow it consistently, and improve it on a regular basis. Where do these best processes come from? The e-Sourcing providers that built your current systems and the supply chain and supply risk consultants who helped you design your supply chain. (Including Iasta, your e-Sourcing Forum sponsor.)
Six Sigma merely provides the DMIAC methodology that tells you, in sourcing terms, to define, measure, analyze, design, verify, control, and improve.
Specifically, as per KPMG’s Six Sigma Strategic Sourcing:
Define
business case
business goals and objectives
procurement strategy
resource allocation
Measure
identify key metrics
validate/cleanse data
benchmark against best in class
Analyze
review data
identify gaps
obtain customer / end user feedback
identify opportunities for cost & price reduction
assess technology and organization effectiveness
Design
design process improvements
develop implementation plans
develop new contracts
identify technology upgrades
Verify
pilot recommendations
pilot performance metrics
rework/redesign as required
implement
So is six sigma worth it? Yes. Do you need it? That depends. If you can consistently identify and successfully implement best practices and draw from a large quality and innovation toolbox on a regular basis, then, no, since six sigma is just the consistent application and improvement of these tools and processes until you have, in laymen’s terms, essentially six nines reliability. However, if you don’t know where to start, then a Value Based Six Sigma Strategic Sourcing Program can get you on track and usher in considerable savings at a phenomenal rate compared to other initiatives. It’s certainly worth a look, but I personally do not think that your business depends on it.
