How do I work with the Service Provider? Should I interview the offshore resources? What are SLAs? What can I do to improve quality? These are questions we hear repeatedly from our customers. In response, we’ve developed a series of workshops to address these pressing needs. The content is structured to be delivered in ½ day to 2-day highly-interactive sessions, which allows organizations to truly understand and implement the concepts. We’ve conducted these with a number of large IT organizations on a variety of topics, including:
Managing in an Outsourced Environment (ADM Operational Management) – Organizations struggle with the transition from a staff augmentation model to a managed service model. Internal employees often have new roles and must work with Service Providers using contractual constructs such as defined pricing units and Service Level Agreements. This 1- to 2 -day course provides practical guidance on day-to-day management in an outsourced environment. It breaks down many of the contractual elements into easy-to-understand tools that front-line managers can use to measure and incent Service Provider behavior and to foster a healthy Service Provider relationship that achieves the original sourcing goals. Many of the concepts are based on the book I wrote with Jim Hussey, Managing Global Development Risk, which was no. 1 in the outsourcing category on Amazon.com last year.
Creating an Investment Mindset – IT Governance and Demand Management are two of the hottest topics in the industry but are also two of the hardest strategies to implement within an organization. This 1-day workshop focuses on IT decision rights and a practical approach to IT Demand Management focused on prioritizing projects and aligning them with business needs. The workshop also highlights the advantages of agile development in an offshore delivery model to develop a flexible team that can rapidly respond to changing business needs.
Establishing a Testing Center of Excellence or Managed Test Factory – Focused testing via a COE is quickly becoming one of the best ways to improve software quality. Service Providers are creating a potpourri of offerings to capture a slice of this rapidly growing market. This ½-day course provides an overview of the market with an operational focus on the key concepts and the necessary steps to establishing and managing your own Testing COE or Managed Test Factory.
Dedicated time with industry experts in a ½ day to 2-day workshop is a great way to accelerate your organization’s understanding of emerging sourcing trends and strategies.
If you think of general business process services trends, it is no different from using vendors for several other goods and services to run an enterprise. These may range from mail/courier services and car rentals to facilities management or procurement of raw materials, peripheral equipment, etc… The rationale, at its simplest, is that organizations specializing in a particular area would offer that service to another business that may not consider it to be a core service of its business. As a result, the business world becomes an inter-dependent, complex web of organizations working or partnering with each other to deliver core services as efficiently and competitively as possible.
In our industry, we refer to service providers as those who specialize in delivering business processes or IT functions to banks, manufacturing companies and other sectors. These providers, with their continual evolution and maturity, are increasingly going to offer such services in a manner that diminishes the customer organization’s ability to compete in-house in terms of not only the economics but also the use of contemporary tools and technologies. The question for C-level executives at such a mature stage of competitive outsourced services will not be whether to outsource, but when and how. The exception to this trend will largely be the use of captives for the scope that includes the proprietary services or data that needs to be retained in-house. In my view, the hybrid strategy (use of both captives and third party service providers) will eventually be the most popular one amongst large global enterprises when they have attained a high level of maturity in deployment of a global services delivery model.
It is a no brainer that third party service providers will invest, grow and develop capabilities that can only be compared to other competing providers and not internal groups of customer organizations. A sharp focus on core business services makes all the difference for companies in the development of their distinctive and superior capabilities. In other words, it is hard – if not impossible – to stay ahead of the curve in areas that are not central to the raison detre of an enterprise.
The trend of commercialization, monetization, or transfer of captives over the last 2-3 years to third party providers confirms the thought. That should not be construed as a prediction of the death of captives, but a pointer that captives will have their place under the sun in situations where competitiveness with third party providers is not the reason for their establishment.
In summary, I am bullish in the long term about the growth of services outsourcing, which will not only increase its prevalence across industries and regions, but will also experience growth in step with the growth of the world’s GDP. I welcome the opportunity to hear if you have a differing thought.
The devastating events in Haiti last week have organizations around the world scrambling to help. Standing behind many of those organizations is a unique supply chain software and services organization, Aidmatrix. A non-profit that supports non-profits and relief agencies with the technology and supply chain services needed to get the right aid to where it’s in the most demand.
Aidmatrix is currently working overtime to support the relief efforts in Haiti. AMR Research recently spoke with former Wisconsin Governor Scott McCallum, who is now the company’s CEO and president, about the organization and its work. We offer this case study of Aidmatrix’s work with a call for help. If you’d like to give to the relief efforts in Haiti, Aidmatrix has set up a donation site where organizations are listing specifically what they need (http://www.aidmatrix.org/haiti.htm). You can help fill those needs, whether it’s through cash or if your company has the needed supplies
Trying times like these demonstrate why AMR Research is glad we’re in a position to showcase and share the supply chain best practices that get help where it’s needed.
Add commentMarch 16th, 2009Agatha Degasperi - Iasta Europe
Being a “glass half full” kind of person, I’m always trying to look for a glimmer of light amongst the darkness, and maybe there is some despite the economic crisis?
Well, a little trouble has been brewing in my country of residence, Belgium, this past month between Delhaize (one of the biggest supermarket chains in Belgium) and its supplier Unilever. The Delhaize Group was boycotting over 300 products from Unilever, which they claimed to be too expensive and too varied for their customers. At the core of the conflict was Delhaize’s complaint that Unilever had increased its prices to a point that would make the products 20% to 30% more expensive for their end clients. While Unilever defended their position by saying their products have only increased by 2% to 3% (so less than inflation).
So what has this meant for the consumer and the competitors? Well, both Delhaize and Unilever suffered a noticeable drop in their clientele following this price dispute, according to an independent survey conducted by the advertising firm Brandhome. Consequently, over 30% of Delhaize clients have moved on to other retailers in an effort to find Unilever products, benefiting predominantly the Colruyt group and then Carrefour. For customers still loyal to Delhaize, they have chosen to buy other brands such as Danone and Proctor & Gamble.
Just this past Friday, came news that after weeks of negotiations Unilever and Delhaize have buried the hatchet by agreeing to end the conflict all while managing to not disclose the conditions of their final agreements. So despite things being back to business as usual (so it seems) it still brings somes questions to mind: Isn’t the current economic crisis an ideal opportunity for educating consumers to choose better? Doesn’t it put buyers in a position of power to make better decisions and stand up to bigger suppliers? Doesn’t this help create new opportunities for both the consumers and suppliers down the line? I think the dispute in Belgium was proving to do just that…
Purchasing Magazine is hosting a webinar today (2pm EST) that is a good topic for the other side of the sourcing argument in tough times. You can register for the event by following this link.
I have been hearing many rationales on both sides of this fence. Some companies are hurting badly and want to reclaim ground that was lost in the last couple years. Many of these organizations felt their supply base took advantage of them during that period.
Others are taking a more cautious approach, which will be out lined in this webinar. There should be quality reasons for this approach too. I think, like many discussions of strategy, it depends. There are no rules to follow and each challenge must be assessed individually with the risks properly accounted for. Today’s webinar might help build the criteria chart for the proper supplier development and sourcing strategy.
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.
According to Eyeforprocurement, Emptoris assembled six experts with backgrounds in finance, operations, procurement and technology and tasked them with developing five actions CPOs could take immediately to gain greater control over spending and cut costs without reducing operational effectiveness.
At the summary level, the points were:
Strategy #1 – Get Quick Visibility into Spending
Strategy #2 – Take Steps to Mitigate Inflation
Strategy #3 – Renegotiate and Enforce Compliance to Contracts
Strategy #4 – Mitigate Risks When Pursuing Cost Reductions
Strategy #5 – Do More with Less
You can read the details behind each strategy in the newsletter. These are all solid ideas and certainly ones that have been covered extensively in our repository – eSourcingWiki. When times are good, you can be sloppy and still look smart. However, when it gets a little rough, organizations better have everything battened down with good process, visibility and control.
This post first appeared on ESF on June 12th, 2008
My friends over at Denali Consulting had another newsletter last month. This one discussed the current supply markets and financial crisis. It concludes with:
Supply markets and commodities are reacting similarly to the financial markets, which are expecting this financial turmoil to result in a deepening and protracted recession. This economic downturn will most likely be international in scope and last throughout 2009 and into 2010.
As such, demand for a wide array of goods is expected to fall, along with production volumes. This will most likely lead to a downturn in base commodity prices. So, with the exception of utility infrastructure commodities, most other manufactured products will see an easing of prices over the next 18 months. Utility infrastructure project demand is still strong and will continue to be going forward, albeit at a more elastic rate, and pronounced market easing is not expected until the 2010 to 2011 timeframe.
This consistent with what we are seeing in reverse auctions and multi round bids, right now. Commodity prices are dropping everywhere and buyers are looking for new market prices in areas wherever they can find savings.
Add commentDecember 8th, 2008Omer Abdullah - The Smart Cube
“Stockmarket bubbles often take a genuine improvement in economic or corporate performance, and then vastly overestimate its effect.”
So began a recent article in The Economist, explaining the run-up and subsequent fall in equity prices within emerging market bourses, leaving many investors questioning whether “they had been suckered into giving developing countries the benefit of the doubt”.
Many business practitioners (buyers, supply chain executives and others) may be asking the same question – what with the issues that such markets have seen over the past year (contaminants and quality issues in China, spikes in oil prices beyond anything we have historically seen (albeit somewhat abated), logistics price escalations, wage increases, etc.). Indeed, a number of observers are asking the question as to whether the practice of offshoring and outsourcing to emerging markets still has ‘legs’ or whether we should be rethinking the practice.
While there are no black or white answers to this question (despite the fact that we are in an election year!) and that the right answer will undoubtedly vary from company to company, it is worthwhile debating this question in the context of several market truisms today:
Truism #1: Globalization is the reality – our economic environment has evolved. We no longer operate in parochial entities but rather must interact with counterparts beyond our borders. This is not an altruistic practice but an economic necessity – talent, capability as well as the growing consumer wallet are not geographically constrained. Indeed, for many markets (both B2B and B2C), the real growth markets are no longer in western, developed economies. Compounding this reality is the fact that the concept of the vertically integrated entity is, for the most part, dead. Organizations that operate on the principle that they must do it all themselves are, quite simply, not operating as optimally as they can and should.
Hence, organizations of any size or merit must have a global (or at least international) footprint. This applies from both the marketing and operational perspectives. Furthermore, those that don’t are working hard to establish one. This is not simply because of the economic opportunity presented outside of our home markets but also because of the availability of talent across the world. The US is not alone in breeding the best and brightest talent, and it is critical that progressive organizations tap into these capabilities wherever they are available.
Truism #2: Arbitrage exists and will continue to drive behavior – yes, costs have gone up. Wage inflation has hit the developing markets, as have oil price increases and commodity price jumps. There are categories where the arbitrage value has shrunk on a pure cost basis. For some companies, this may cause a shift in strategy.
However, it is important to build a total cost picture of the effects of the various changes on the arbitrage topic. This total view encompasses not only the actual dollar cost of the purchased product/service, but also the relative productivity provided by the outsourced operation, the differential in product/service quality and the long term channel-to-innovation provided through the outsourced relationship (by allowing each party to focus on what they do best, they are able to develop and grow their offerings to take advantage of the relative innovations within their own markets, and hence benefiting the other party in the relationship). Looked at from this point of view, an coupled with the reality of globalization and price movements in developed markets, arbitrage will remain a key influencer of purchase behavior for the foreseeable future and beyond.
Truism #3: Darwinism is alive and well in Emerging Markets – the arguments to the above, not withstanding, the issues we have seen in emerging markets (including the quality issues) are very real issues and, while never excusing them, are not historically unexpected. Indeed, industry growth has almost always seen periods of intense growth, marked by a surplus of competitors, intense price pressures, and the chase for scale. This invariably leads some companies to adopt ‘shortcuts’ and less rigorous quality processes, and hence we see the types of serious problems that we have witnessed to date.
What we are witnessing now is a public backlash that will force stricter processes and operating changes. This will enforce a culling process that, over time, will sort out the quality players from the “me-toos” – resulting in a more sound and stable industry base for customers to do business with on a commercial basis.
Truism #4: Long term partnerships are more important than lemming -l ike generalizations – much like the financial markets in recent weeks, emotions tend to run rampant in difficult times and responses, certainly at a public level, can be rash. At times like these, what is important in the long run, is to identify partners and relationships and build on those for the long run.
Successful companies are founded and grown, at all levels, on the back of solid relationships; of partnerships whereby both parties make the appropriate long term investments in each other (financial, process, or otherwise). Given that we are dealing in a global environment, such partners will invariably be located in all parts of the globe.
To put into context the rush to the Emerging Markets door that many are suggesting, The Economist article makes a pertinent observation – that despite the actual structural improvements in emerging market companies and economies (suggesting genuine economic improvement for the longer term), “just now, the markets are having none of it. That could present a buying opportunity.”
In considering their response to the recent emerging market pressures, supply chain and sourcing executives would do well to bear that in mind.
Tomkins Associates released some survey results from a recent study they did regarding supplier relationship management with Asia.
With the promise of capitalizing on the low cost labor in Asian counties, businesses have been in an incredible rush to capture the economic benefits. However, companies that do not do their homework are often surprised to find that the business practices they are accustomed to in North America do not work as well in Asia.
In the report, which was authored by Bruce Tomkins, Colin Maxwell, Steven Ganster of Tomkins, highlights of the top 10 lessons learned are summarized.
1. Have a presence in the area and at the sourcing company.
2. Obtain expertise in the complex and varied rules and practices of Asian countries and companies.
3. Pay particular attention to product quality.
4. Be prepared to accommodate extended lead times.
5. Understand the importance of building long-term business relationships with Asian suppliers.
6. Fully understand supply chain capacity and potential constraints that may create barriers for delivery from Asian suppliers.
Most of these are things that can be analyzed upfront through the usage of RFx surveys, although final analysis will certainly need to be qualified and confirmed onsite and off line.
Additionally, many organizations can take advantage of advanced sourcing optimization by addressing each of the supply risks as different constraints in a scenario model. These can all be layered together, or separated by importance. Through the process of collecting information and resulting bids, a sourcing team can determine the best subset of suppliers quickly, before making final judgment and award.
1 commentNovember 12th, 2008Charles Dominick, SPSM - Next Level Purchasing
Today’s headlines are full of natural disasters and financial failures. The risk of a supply chain disruption has never been more real. It’s your responsibility to help predict and prevent supply chain disruptions, so here are a few best practices you can employ to assess supply chain risk when evaluating prospective suppliers.
Make Supplier Risk Assessment Part of Process – You never know where a disruption will occur so all suppliers must undergo some level of risk assessment. Create both short- and long-form risk assessments so the appropriate level of diligence is performed. Geography, political situation, and financial stability are just a few of the factors that must be assessed for each supplier.
Know Your Critical To Operations (CTO) Spend Categories – To be sustainable, you’ll likely have to prioritize your supplier risk assessments. Use your long-form risk assessment for all prospective suppliers of CTO categories and for all suppliers who failed the short-form supplier risk assessment.
Go On A Field Trip – Site audits are critical in supplier selection for CTO spend categories. You simply can’t rely on second hand information when evaluating these suppliers. Go see for yourself.
Understand Your Supplier’s Supply Chain – Does the prospective supplier procure raw materials from the same source as your old supplier? Does he have a risk assessment system for his suppliers? Understanding and examining his supply chain up front can prevent supply disruptions later.
Create An Early Warning System & Contingency Plans – The trick is to identify the factors that can change your supplier’s risk levels and monitor them before they cause a supply chain disruption. Companies like DnB and Equifax offer services to help monitor changes to supplier risk profiles. Remember, the best way to deal with supply risks is to prevent them.
Sometimes, I just like the way the British phrase things, as this sentence which started an article on sustainability in the Financial Times that I read while in London. Here, they were calling out the “Wal-Mart Price” which demands extreme cost cutting in every area possible to meet the demands of the global giant.
In Beijing last week, Lee Scott – CEO of Wal-Mart, spoke at a “sustainability summit” which was highlighting the vast Wal-Mart supply chain and their initiative to use their purchasing power to raise environmental standards throughout China. It is being called the most ambitious private sector effort to reduce waste and pollution in the country, to date.
It looks like Wal-Mart will be enforcing some of these new programs with the use of eSourcing technology, on top of it all.
In the US, the retailer has embraced a series of environmental initiatives over the past three years, including developing solar power systems and promoting more sustainable products such as, low energy light bulbs. This year, it introduced a packaging scorecard that evaluates the efforts of suppliers to reduce waste, which is now being translated in Mandarin.
Environmental groups are lauding the effort with some skeptics thinking this will just be added to the agenda (and cost structure) while they demand YOY cost reductions from suppliers.
At the very least, in emerging countries, the government will not be the ones to take corrective action of companies that cut green corners. It takes the end consumer to enforce change. It looks like Wal-Mart is making these efforts, probably based on the climate of customers which are, in turn, demanding it.
One of the things that is frustrating about commenting on oil markets, is the virtual guarantee that the price will significantly different between writing and publishing an opinion. That is true is this one, too. As I write, the price per barrel has sky dived to $65 and pump prices are below $2.50 in Indiana (inexplicably, one of the most expensive gas areas with Chicago and Milwaukee). However, in reading the thoughts of Matt Simmons about his Peak Oil Theory, it was shocking enough to bring attention.
The concepts that Simmons brings immediate attention to are disturbing at a minimum: $500 barrel prices, supply shortages, and World War III. Clearly, this goes well beyond strategic sourcing…
In a nutshell, he suggests (with an offshore platform full of documentation and statistics to prove it) that we have passed over the peak of the production curve for oil. He believes the Saudis are far overstating their reserves and the days of easy oil recovery, are over. Perhaps most prescient, is his statement that complacency will take over as oil dips in price. A short term lull helps to dull the focus on alternative energy sources such as wind, nuclear, solar and biofuels. Companies that are not disaster planning for their supply chains could be in for some very tough times.
Simmons has been right many times before, so I do not take his commentary lightly, especially with the shell shock of the credit crisis still reverberating loudly in my head. A couple weeks ago, I got an email from a wealth manager at a major investment company which tried to be a Friday silver lining to another crappy week. In it, he gave a quick comment that “at least gas prices are going down”. I never respond to these but couldn’t help it. I sent back an equally brief retort: the economy is in the tank, credit is gone, consumer spending is evaporating, global manufacturing is grinding down and the demand for oil is convulsing. Of course gas is cheaper. I consider the return to $4/gallon gas as a leader indicator of a recovery.
His response: good point.
Frankly, there are a lot issues going on right now that are frightening in ways that I have never seen before. This peak oil theory is no joke and will radically transform the global economy, and personally, I believe it to be true. My future, my boys’ futures, the country’s future and extended quality of life are all in jeopardy, if these issues are not dealt with effectively. I hope this is all is moot in 50 years because smart people made good decisions. Otherwise, watching Saw I-V will seem like a Willy Wonka marathon this Halloween.
I live in Dallas which is a large warehousing and distribution center due to its central location in the US. This area of the country is only a two day drive (or by rail) to anywhere in the US therefore many companies choose it to locate their distribution centers. A recent article in the local paper wrote that Dallas may not be the best place anymore, because of the increased fuel cost a central location may not be the most cost effective manner to reach the entire country. What the new strategy will be has not yet emerged, but the impact to total cost has already been felt.
From a domestic supply perspective this will have an impact on the sourcing practice as we will need to look more carefully at the transportation part of any sourcing project. We need to ask suppliers if they have multiple options for shipping and ask that they provide a breakdown of cost within these options. This will increase the complexity involved in evaluating the cost of these options when making award decisions.
From an international perspective we may have a move away from the usual Low Cost Country Sourcing regions (China, India) to regions closer to home (Brazil, Mexico) or even at home.
I really enjoyed an article that I read from Tomkins Assoc on Supply Chain Brain. The primary focus was to understand the disconnect that appears between buyers and suppliers, especially when it comes to global supply chains. Simple things that we take for granted, like email, are not even close to ensuring adequate communication. More important than the message, is who is accepting that message and their ability to act on it.
Mr Tomkins states, “In the North American business arena, SRM is perceived as a software approach. But when crossing the ocean, that can no longer be the case. There is some technology that is useful for facilitating communication between suppliers and companies, but true SRM is a one-to-one process. SRM is simply not about a company lining up all their suppliers and forcing them through the implementation of software.”
This is very true. Although software companies are very opinionated about the value of their respective SRM software, there is no responsible company that would ever profess that the software replaces the people, it just enhances the process to maximize the results.