Posts filed under 'Supplier Performance'
May 5th, 2008
David Bush - Iasta
One of the nice things about getting out to conferences, is gaging the pulse of what people are looking for, at this time. Not only are you hearing practitioners discuss what their companies are seeking, but you get the same conversation 10-15 times per hour. This year, its score carding / SPM and spend analysis. If a vendor showed up and wanted to build momentum on reverse auctions, the response will be much cooler. Although most of the attendees are very familiar with auctions, and many use or intend to use them, they do not want to talk about them a lot. It seems that they are expected and not worth long discussion. In other words, they have been commoditized.
This is fine, of course. Iasta made the commitment into the full sourcing lifecycle years ago and those decisions are paying off now, as we continue our strategy of innovation in some areas and fast followers, in others.
I think the exhibit hall on Sunday was fairly light on traffic, especially when compared to Las Vegas. However, out of the people I talked to, we generated 6 product demos, to be scheduled, in one session. I can see many of the attendees looking for very specific things with intentions of learning and acting. I will take quality over quantity any day.
This has definitely been a good start to the conference. St Louis has been a good venue, with everything tightly packed. That is, everything but restaurants, which are 9 blocks away. I have never been able to figure out the lay out of down town St Louis. Its a big city, but it is nearly impossible to find where the people are and where things are happening, outside of the one block Laclede landing area. I think there must be hidden spots that the locals do not want outsiders to know about. I bet there are beer pixies there, that keep every ones glasses full with Budweiser.
Entry Filed under: General, Supplier Performance, e-Sourcing Marketplace
April 1st, 2008
Michael Lamoureux
It’s hard to come up with a good definition for supplier enablement. Depending on who you ask, it is either supplier networks, catalog management and / or ((c)XML-based) punchouts, e-Document Management, a Supplier Portal that enables e-Procurement and / or e-Sourcing, or some (often proprietary) combination thereof. The common thread between most of the definitions that one encounters is a greater utilization of technology solutions to streamline procurement and / or sourcing processes by seamlessly connecting the buyer to its suppliers through a common application or platform.
However, none of these definitions really get to what supplier enablement should be. Supplier enablement should be about providing a buyer’s supplier with the solutions that the supplier needs to more efficiently and productively do business with the buyer in such a way that the buyer is also able to conduct business with the supplier more efficiently and productively. It is true that such a solution will need to be based on one or more technology solutions, but the focus needs to be on the business processes required and the capabilities of the supplier, not on the capabilities of the technology supplier. The best technology in the world is useless if the supplier doesn’t have the technical capabilities in-house to make use of it.
Supplier Enablement is relevant as it can significantly increase performance metrics such as spend under management and enterprises that leverage supplier enablement solutions enable their suppliers faster, better, and more efficiently than those that do not. Well executed supplier enablement reduces administrative errors, increases inventory turns, eliminates parallel processes, reduces cycle times, maximizes value, and improves compliance.
To this end, it’s important to understand the four core capabilities that will be required in any end-to-end supplier enablement solution.
- Catalog Management
If the goods and services the intended users of the e-Procurement system need to order on a regular basis are not in the system, this will just result in the system being by-passed and proliferation of the maverick spending that the organization hoped to avoid through the acquisition of the e-Procurement system. Thus, catalog management is quite important.
- Supplier Network
A supplier network, which is becoming a staple offering of many of the larger e-Procurement providers, is a single point of integration that provides a many-to-many connection between buyers and suppliers, allowing them to transact in real time. The major selling points of these networks is pre-enabled suppliers and the ability to find new suppliers almost instantaneously if you are a buyer and the ability to support multiple buyers through the same technology platform and win new opportunities for business if you are a supplier.
- e-Document Management
The most critical, and most often overlooked, component of enablement, regardless if the trading entity is acting in a buyer or a supplier capacity, is that of information and document management. These days, each trading party needs to maintain a host of information on each party it trades with, including incorporation information and status, owners, home country, operating countries, financials, products, services, contacts, CSR status, regulatory compliance, and current contracts as well as a slew of documents including RFx’s, purchase orders, shipping receipts, goods receipts, invoices, payment receipts, product information sheets, and trade documents.
- Supplier Portal
A supplier portal is a web-based interface designed to allow a supplier to easily conduct business with a buyer by providing them with a one-stop-shop access point for receiving and replying to RFX requests, participating in auctions, receiving and returning contracts, providing catalogs, receiving purchasing orders, replying with shipment receipts and invoices, and receiving goods receipts and payments. It also allows the supplier to maintain and update all of their information as required by the buyer and to check order and payment status at any time.
For more insights on #, check out the Supplier Enablement: The Secret to Sourcing Success wiki-paper over on the e-Sourcing Wiki which includes more detail on the core capabilities, an overview of buyer-side and supplier-side challenges that will need to be addressed, and some best practices to help ensure a successful project.
Entry Filed under: General, Supplier Performance, Suppliers, Supply Management Best Practices, Technology
June 20th, 2007
Michael Lamoureux
Aberdeen just released its report on Supplier Enablement, Connecting with Suppliers to Build Lasting Relationships which found that supplier enablement continues to be one of the top three challenges for procurement professionals looking to transform their procurement organizations, gain better visibility into their supplier enablement processes and supplier relationships, and increase spend under management.
According to the study, best-in-class enterprises demonstrate that supplier enablement can positively impact the business when the right technologies and practices are employed. Best-in-class enterprises, which have 78% under management compared to an average of 44% for all other peer enterprises, enable 50% of their suppliers versus the 23% enabled by their peers, are 25% more likely to document and share their best practices, and are almost twice as likely to have full visibility into enablement activities, realize transaction processing costs 47% lower than their peers. Thus, this study confirms which many of us were starting to suspect, that supplier enablement not only makes suppliers feel good, but generates significant bottom line savings for an organization.
Aberdeen defines an enabled supplier relationship as one that includes one or all of the following capabilities:
- automated exchange of documents and communications
- on-line catalog management
- active management of supplier information through a self-service process
Of these activities, the third is the most important. When it comes time to source a category, it takes little effort to click the “send” button to send a document to a supplier, and you do not care about the entire catalog - just the product(s) in question. However, if you do not know who your suppliers are, what they can provide you with, and how to contact them, and the relevant individuals in the organization, you will not be very productive. Moreover, with large companies typically having tens of thousands of suppliers, managing this information is an onerous task - but if you are a large customer, it takes very little effort for a supplier to manage their information for you - especially if they want your business.
So what’s the best way to achieve supplier enablement? If at all possible, select a sourcing suite that has, or is about to have, supplier (self) management capabilities (like your forum sponsor, Iasta, that will be releasing an initial version of Supplier Management with a Supplier Self-Service portal in the fall), or a solution that integrates into the sourcing and/or procurement suites you already use. If this is not possible, I’d recommend going with a specialty provider of supplier information management (SIM) services, like Aravo who specialize in integrating SIM management applications into the sourcing, procurement, and / or ERP tools that you already have.
Then, as Aberdeen so eloquently states, include suppliers in the enablement process - leverage their experience and technologies to ensure collaborative and efficient interactions during enablement and through the lifetime of the relationship.
Finally, as Aberdeen also points out, be sure to standardize processes along the way that leverage leading technologies, like XML (eXtensible Markup Language) and SOA (Services Oriented Architecture), and leading 3rd party services, such as Ariba’s Supplier Network, Austin Tetra’s integration services, or Integration Point’s Global Trade Management software.
Entry Filed under: Analysts/Research, General, Supplier Performance, Suppliers, Supply Management Best Practices
June 11th, 2007
Sean Delaney - Iasta UK
62% of respondents to the recent annual ISM survey said they received bonuses on top of their regular salaries. On average the bonuses received were around 16%.
Personally I like the idea of rewarding individuals based on their performance. However, the largest element of the bonus measure is often based on the organisations performance. The downside to this is that it does not reflect the individuals’ performance and is therefore less motivational.
When attempting to measure the performance of procurement, organisations will resort to such tactics as rebates, which frankly, is a very blunt stick. It does not take into account supplier performance and non price improvements like client web portals etc.
So what is the solution?
I do believe that the time is now right to start to look at rewarding procurement differently. The benefits of eSourcing are easy to measure. Whether you conduct a live event or closed bid the resulting commercial benefits are transparent and auditable.
But what about the implemented savings achieved I hear you say? So often when it comes to implementing the most commercial sourcing strategy the stakeholder will allow some leakage in the award. As we know from a recent Aberdeen survey this leakage is typically around 2%.
As procurement professionals whilst eSourcing takes us part of the way towards accountability, I think new developments in SRM and Spend Analysis software complete the accountability circle. The automation of the complete sourcing process makes it more economical to quickly measure performance post contract award.
The ability not only to measure the negotiated benefit but to also monitor ongoing performance of suppliers now make it possible to reward procurement in a much more motivating fashion.
However, with any measure, it must not be too cumbersome to collate, it must align the individuals’ goals with the goals of the organisation, it must be transparent, and finally individuals must be able to track performance regularly. Here are some ideas for measuring performance (please feel free to suggest some more):
- Implemented savings – this is to ensure stakeholders have buy in.
- OTIF reports
- Customer satisfaction - use online surveys to measure.
- Customer satisfaction – measure complaints.
- Design – e.g. in retail, measure number of top selling designs.
- Quality – number of returns.
- Contract compliance – measure % of spend through the contract.
Through Spend Analysis, and ultimately SRM tools, these measures can be automated and weighted. So, in your next performance review with your boss save everyone’s time and make the following proposal:
- 50% salary standard and guaranteed.
- 15% based on organisational performance.
- 35% based on the implemented deal benefits (based on the criteria listed above).
I would be interested in your feedback on their responses, however, I suspect they may not be ready for such a radical change.
Entry Filed under: Analysts/Research, General, Spend Analysis, Supplier Performance, Supply Management Best Practices
June 7th, 2007
Michael Lamoureux
A recent Research Brief from Aberdeen, Enabling Suppliers, Enabling Savings, notes that supplier enablement is one of the top three challenges for procurement professionals looking to increase spend under management and drive tangible cost savings to the bottom line.
According to the brief, effective supplier enablement includes:
- Supplier recruitment and information management
- Technical integration and support
- Electronic document transmissions (PO, invoice, etc.)
- Supplier catalog management
- Enhancement for other business processes
In addition, they hypothesize the following actions, capabilities, and enablers are required:
- adopt incremental BPO methodology and related services
- cover entire business processes across multiple spend categories
- achieve visibility into enterprise spending
- collaboration across internal and external teams
- supplier self-service tools
This was followed up by another Research Brief, Supplier Networks Drive Supplier Enablement, which noted that supplier networks can increase performance metrics such as spend under management significantly and that enterprises leveraging their supplier networks are enabling their suppliers in a faster, better and more efficient way.
The brief notes that an enterprise must realize the value if they are interested in fully enabling their supplier base. Having one central network to handle POs, invoices, and catalog management allows an enterprise to quickly enable suppliers in their base, communicate in a helpful manner, and manage key business transactions with ease.
What’s interesting to note is that although the focus on supplier enablement is well-founded and their recommendations close to what I’d recommend, the core capabilities they note for supplier networks do not dictate the need for a supplier network, merely the need for a fully functional supplier portal. A well-defined portal will allow a supplier to access cached copies of purchase orders, upload invoices, check payment status, manage their catalogs, and communicate with the buyer. A network may simplify and automate some of these tasks, but a network is not necessarily needed if an organization is merely beginning their journey on the road to supplier enablement.
Also interesting is that there is no mention of the enhanced benefits a supplier network can bring to a buyer beyond those benefits that would be found in an enhanced portal such as supplier search, interactive RFX’s, and enhanced collaboration. But that’s a topic for another post.
Entry Filed under: General, Supplier Performance, e-Sourcing Marketplace
May 3rd, 2007
David Bush - Iasta
As with any business function, measurement in eSourcing is a fundamental key to success, but only if done right. That’s why the article on The 7 Deadly Sins of Performance Measurement and How to Avoid Them in a recent issue of the MIT Sloan Management Review is a must-read for e-Sourcing program managers. As the article points out, operational performance measurement remains an unsolved problem, as there are still a multitude of systems out there and generally no indication as to which one is the right one for your business. Nonetheless, even if the best way, and the best set of metrics to use, is unclear, there are definitely wrong ways to go about the problem.
Avoiding the wrong way starts with avoiding the seven common, but deadly, mistakes pointed out by Michael Hammer in his article. These are:
- Vanity
Don’t just use measures that will inevitably make the organization, its people, and especially its managers, look good. Every organization has weaknesses, and the key to becoming best in class is improving upon them. However, you cannot improve upon a weakness you cannot identify.
- Provincialism
Organizational boundaries and concerns should not dictate performance metrics.
- Narcissism
Organizations often measure from their point of view when they should be measuring from their customer’s point of view.
- Laziness
Many organizations assume they know what is important to measure without giving it adequate thought or effort.
- Pettiness
Measuring only a small component of what is important.
- Inanity
Implementing metrics without giving any thought to the consequences of these metrics on human behavior and, ultimately, on enterprise performance. People in an organization will seek to improve a metric they are told is important, especially if they are compensated for it, even if doing so has counter-productive consequences.
- Frivolity
Not being serious about measurement in the first place.
So what can an organization do to avoid the seven deadly sins? The author offers four key steps.
- Decide what to measure
Select the right things to measure, those aspects of organizational performance that are both controllable and important to achieving success.
- Measure the right way
Use metrics that capture the essence of what needs to be measured in a usable form.
- Use metrics systematically
Embed the metrics in a disciplined process for performance improvement.
- Create a measurement-friendly culture
The organization must encourage the disciplined use of metrics for ongoing performance improvement rather than regarding them as threats to be feared or opponents to be vanquished.
Entry Filed under: General, Supplier Performance, Supply Management Best Practices
April 10th, 2007
David Bush - Iasta
Yesterday, I posted on Supplier Performance best practices. Today, I wanted to establish a list of things that suppliers should be providing, in some combination, to increase the value of their relationships with the buying organization. These items should be addressed in eRFx stage to determine the value add that each supplier brings to the relationship. This list is general and not necessarily comprehensive, but gives good insight into factors that should be considered and discussed with each valued supplier.
- quality reputation
- partnership differentiation capabilities
- established contacts and cross-company knowledge
- competitiveness
- proven business development support, e.g. promotions
- product design creation and development capabilities
- collaborative product design
- product selection/variety
- consumer support/service
- category management services
- supplier conversion support
- supply chain management
- inventory balancing
- order fulfillment rates
- order-to-shipment lead times
- returns management/defect support
- delivery terms
- payment terms
Many of these I found in a very old document that was meant for consulting suppliers on reverse auction strategy (which I cannot find now and was not developed by us). Some may be industry specific but give very good placeholders for the things that both the buyer and supplier should be considering to make a lasting, mutually beneficial partnership.
Entry Filed under: General, Supplier Performance, Supply Management Best Practices, Technology, e-RFx
April 9th, 2007
David Bush - Iasta
According to a recent article in Purchasing, suppliers who stand out are those willing to act as partners and that when you find them you should foster the relationship by communicating with them openly - early and often.
Consider using supplier forums to explain to suppliers what it takes for you to consider them best in class and the criteria you will use to measure them by. Explain your marketing dynamics, what you are doing, where you are going, why quality is critical, and what you see a supplier’s role as. If a supplier does not understand what it takes to be best in class, how can you expect the supplier to reach that level.
In today’s marketplace, where assurance of supply, quality, and regulatory compliance and service is often more important than cost, good supplier performance is critical. But best-in-class is difficult to achieve, and integration is critical.
The article offered three tips for buyers that are useful:
- Know exactly what you need from suppliers beyond the actual components or services they provide
- Communicate regularly on your vision, the needs within your markets, and your expectations form suppliers
- Measure suppliers on their willingness to innovate and to invest in your future as well as their own
And I would offer one more:
- Start the process in your eSourcing event … not after making the award
Entry Filed under: General, Supplier Performance, Suppliers, Supply Management Best Practices
February 20th, 2007
David Bush - Iasta
Yesterday, like many others, I learned from Spend Matters that Apexon had basically shut down operations by releasing most of its team, including executives like Kevin Brooks. Many are familiar with Kevin from positions at supply management companies and from posting guest blogs on sites like E-Sourcing Forum and Spend Matters on topics like supplier performance. It appears that the assets are in the process of being acquired by another company which will roll it up into a larger portfolio.
Kevin is a great person and this is very unfortunate for him personally. It now makes sense why he did not have time to contribute to the guest posts here a month ago as there was quite a bit going on there at the time. I do have all confidence that he will not be on his own for long, however, as he is very talented and intelligent. After that, I thought about the factors that led to this occurrence. I am probably oversimplifying because I do not know everything that happened at Apexon nor do I profess to be an expert on supply risk, performance or quality. That being said…I am left wondering:
Can these types of applications exist independently? The supply management software community has already lost high quality vendors like Apexon and Open Ratings. Not lost in entirety, but lost in autonomy. Both companies where highly lauded as ground breaking and ahead of their time but eventually ground to a halt (remember Mindflow?). However, the execution never met the expectation which leads one to believe that out-thinking the masses increases the possibility of failure to a level of unacceptable risk (for both vendor and customer). It also shows indications that having too tight of focus, or niche, becomes an unstable business model with enterprise applications. There is no question that both companies delivered immense value and very strong value propositions with functionality that is needed by many in procurement and supply chain but were unable to monetize that into a sustainable business.
I believe that points to the fact that a supply management software company must offer a mixture of broadly applicable functionality + useful features + cost effective pricing, even if it does not go into the deepest levels of detailed minutia or special cases scenarios. A software company can get hopelessly mired in these types of development projects. In fact, Iasta once built an advanced type of bidding lot for a $50mm reverse auction event and, to my knowledge, that setting has never been used since - by any customer, and it took us a MONTH to develop! It seems like supplier performance functionality will ultimately be handled by eSourcing or ERP applications or home grown internal data, as Charles Dominick commented. Charles, I believe “cracking the code” of SPM lies in not relying on it exclusively for revenue success.
My next observation comes back to my old soap-box of being a slave to other people’s money. As Iasta has grown, I have seen clear benefits of infusion of capital. Although we have never done this, there are compelling opportunities which would allow us to flip a switch and double or triple our development, operations and sales bandwidth. Alas, it has not happened - by choice. A software company is difficult enough to manage without having influence pushed down into the business decisions which are led by groups that want a certain yield on their investment. Jason mentioned that Apexon was looking for a path to $50 million in revenue within 3 years instead of 5. I repeat $50,000,000!! And, 5 years was too slow? I highly doubt Apexon would have made that number any way, with price compression and feature diversity on a non-stop curve. This industry is littered with companies that over promise and under deliver but not necessarily at their own fault. However, who cares if they made $50 million in revenue, are satisfied customers and stable businesses not enough? No, its not, when people want their money back. There is an inherent danger when numbers are the only metric used for business decisions and evaluation of success.
I apologize for the rambling stream of consciousness but wanted to capture my initial thoughts without edit. Ultimately, this is just a continuation of the expected market consolidation. As stressful as all of this is, I still feel comfortable that we are moving in the right direction and we will not be surprising the market with this type of news, even if we have to “sacrifice” hyper growth for our pedestrian 100% YOY. I can live with that.
Entry Filed under: General, Supplier Performance, e-Sourcing Marketplace
December 4th, 2006
David Bush - Iasta
Tapping Into … Managing Suppliers
Collaborative sourcing and supplier relationship management software may both have a place in your organization, but it’s not the same place. They are two distinct approaches to managing suppliers. In order to reap the benefits of both, mind the gap — know when to keep them apart and how to bring them together.
So starts the recent article Mind the Gap in the November issue of Inside Supply Management which points out that the economic benefits of collaboration are clear, but only if its managed both effectively and selectively. “The wrong approach to collaboration may increase costs instead of cutting them, create confusion instead of clarity and drive suppliers away (even into bankruptcy) instead of bringing them on to the team”.
This can be due to the common mistake of “confusing two very different ways of managing suppliers — one way is through the use of supplier relationship management (SRM) software and the other is through full and open collaboration”.
Although the article does a great job of clarifying the difference between SRM and open collaboration, as well as providing the three requirements for effective collaboration, it does not do a good job of pointing out where each belongs in the sourcing cycle.
Although SRM can start pre-award, full collaboration should not begin until after an award decision has been made and a contract, which protects the proprietary and confidential information of both parties, has been put in place. SRM software, which monitors and tracks a supplier’s product quality, delivery, reliability, continuous improvement, innovation, and other performance metrics, based upon market and supplier data, can be used to scorecard suppliers during the RFX process. Collaboration, however, requires commitment. Confusing the two could impact the efficiency and effectiveness of your sourcing cycle and lead to hostility if you did not select the supplier(s) you were collaborating with before the award was determined since they might assume that they were going to be selected.
Entry Filed under: General, Supplier Performance, Suppliers, Supply Management Best Practices
October 23rd, 2006
David Bush - Iasta
Dr. Lamoureux of Sourcing Innovation recently pointed out the Frasers/PMACNewsLetter to me and this month it has a great article on how to Use labor productivity to drive down purchase costs.
The article points out that suppliers often use wage increases to justify small nudges in prices each year since it seems reasonable, but wages aren’t the real issue, labor costs are. For example, in Canada, labor productivity gains have been keeping costs down and the cost of a “unit of labor” has risen at the low rate of approximately 1.3% per year. Of course labor costs depend on productivity, but considering that this Stats Canada article (the first one that came up in Google) notes that US GDP rose at a rate double Canada in the second quarter of this year and that unit labor costs increased a mere 1.2% in the same quarter, you can see that this article is just as relevant to US buyers since labor costs could be significantly less then wage increases due to increased levels of productivity.
Thus, as the article notes, when negotiating with a supplier, be sure to discuss their productivity. After all, if they are really investing in technologies and processes to improve productivity, then they should not need to raise prices by much more than a mere percentage point to cover wage increases and stay competitive.
Entry Filed under: General, Supplier Performance, Suppliers
September 16th, 2006
Michael Lamoureux
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 summer, we talked about:
- Supply Risk Management
- Supplier Performance Management
- Center Led Procurement
- Procurement Outsourcing
- Cost Reduction and Avoidance
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.
Entry Filed under: General, Project Management, Supplier Performance, Suppliers, e-Sourcing Marketplace
August 23rd, 2006
David Bush - Iasta
I found the recent article in Global Logistics & Supply Chain Strategies of SupplyChainBrain.com entitled Looking Backward: Sony Ericsson Takes on Challenge of Reverse Logistics to be very interesting. The author, Robert J. Bowman, describes how Sony Corporation and Ericsson AB sought a competitive edge in the mobile-phone market by revamping the handling of returns and repairs.
The article described how Sony Ericsson required a fast, reliable and flexible system to manage parts for phones with a lifecycle of around nine months that would also lower its overall cost structure. It used to rely on a single electronics manufacturing service provider to handle productions, repairs, and logistics, but since the provider was subcontracting freight and brokerage and insisted on doing repairs in Mexico, the relationship wasn’t working.
Sony Ericsson decided to separate repair and logistics into two separate contracts, the first going to Bloomington PTS Electronics Corporation and the second to UPS Supply Chain Solutions. It was a challenge as this required building a system that could handle the sheer volume of product that would work through the system in a real time exchange between all parties involved and required them to absorb UPS Supply Chain Solutions’ knowledge, but it paid off. The company was able to reduce costs and double customer satisfaction levels, an impressive feat.
The article demonstrates that supply chain improvements extend beyond sourcing and distribution and that you should always be on the lookout for new ways to improve your operations.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance
July 31st, 2006
David Bush - Iasta
Today we are happy to bring you some very thoughtful comments from Kevin Brooks at Apexon, a leading vendor in this section of supply management. Kevin’s background is originally with Ariba and now heads up marketing for Apexon in San Jose.
Anyone with even a passing interest in supply chain issues will tell you that managing supplier performance is important. As E-Sourcing Forum and others have been pointing out during this week’s series of posts, effective supplier performance management yields bottom-line savings and top-line competitive advantages most companies can’t afford to ignore. Analysts have been saying this for years. Consulting firms have been preaching the benefits of a collaborative supply base since the dawn of time. Software companies continue to promote a variety of SPM and supply management solutions.
So why is good supplier performance management the exception rather than the rule in most manufacturing companies?
I think part of it has to do with the name. “Supplier Performance Management” or “SPM” is too much like SRM. Too techie. Too tactical. Too prone to spark debates about whether you mean, “supply” or “supplier.”
Whatever you choose to call it, SPM is a more nuanced concept with more long-term benefits than straightforward cost cutting. U.S. automakers are learning that lesson the hard way. A recent survey by Planning Perspectives, a Michigan-based research firm examining supplier relations in the auto industry, found that GM’s relations with its suppliers are at an all-time low. The survey also found that Tier 1 auto suppliers throughout the industry are shifting capital and R&D investment, service, and support away from customers who treat them with a single-minded focus on cost, like GM. Other U.S. carmakers with an equally single-minded focus on cost fared poorly as well compared with generally strong showings by the Japanese, who took a more balanced view of supplier performance. As a result, suppliers see value in improving quality for Japanese OEMs, whereas they just maintain quality for those in the U.S.
But let’s suppose a company does come to some agreement about the meaning of SPM, and what it can do for them. That’s when they fall prey to the Three Deadly Myths of SPM.
Myth #1: You’ve got to fix the data first
This is a version of the often-repeated “garbage in, garbage out” mantra. I saw a variation on this myth when I was at Ariba in the early days of e-procurement. Then, the issue was getting data into online catalogs. Over time it became apparent that customers who went “all in” (buying everything through a single system) even with just a small percentage of supplier-enabled catalog content, were getting far more value than those who waited and conducted online commerce solely with suppliers that had been catalog-enabled. The lesson was that more value came from getting as much spend as possible flowing through a single system as quickly as possible. Getting the spend managed in this way actually accelerated the process of cleansing the data.
It is reasonable to assume that you need good data before you can embark upon a data-intensive effort such as SPM. Just don’t let fear of perfect data become the reason for significant delay. Any competent SPM vendor should be able to deal with your data today, and they should also be able to get you value from what you’ve got, regardless of data quality. Besides, as one manufacturing company CPO recently told me, if the data is truly garbage, getting started with SPM is often the fastest way to begin cleaning it up.
Myth #2: Supplier scorecards are the same thing as SPM
The danger of this myth is that it equates reporting with managing, and it keeps companies from seeing SPM as something more than a tactical exercise in monitoring suppliers. Scorecards are an important component of SPM, but they are not the same thing as having a strategy and a process for getting more value out of your supply base. For one thing, they take too long to produce. Most scorecards require significant manual effort and are little more than custom Excel spreadsheets. Quarterly scorecards are the norm because it takes that long to assemble the data in most companies.
There is some indication that this may be changing. AMR Research, for example, sees investment in performance scorecards and dashboards jumping 26% to $5.2 Billion this year. One hopes that this is more than just a shuffling of deck chairs, and that companies use the new and better tools they are buying to graduate from information-gathering and reporting to true proactive management of their supply base.
Myth #3: Once we get our ERP upgraded, we’ll have what we need for SPM
If you assume that ERP will truly deliver most of the required SPM functionality (something that took nearly a decade in e-procurement, and some argue still hasn’t happened), the main danger in this myth is unnecessary delay and increased risk. I’ve read estimates that a $1B manufacturing company experiences 30-50 moderate-to-severe supply disruptions a year, each costing about $100,000 to resolve. Those disruptions aren’t going to wait for the ERP upgrade, so why should the supply teams?
Rather than tackle this myth head-on, which will inevitably end up as an unproductive battle with the IT department, I would suggest that the SPM strategy begin with the ERP vendor itself. Is the supplier able to deliver what the business needs, at the quality level expected, and in a reasonable timeframe? If so, then by all means use them. If not, look for alternatives.
***
I think the up tick in interest in SPM that analysts like Aberdeen and AMR Research are seeing is a hopeful sign, but unless interest translates into action, I suspect that SPM will continue to be the exception defining leading companies rather than the rule defining industry best practices. So what will it take? For starters, companies need to realize that managing supplier performance is about more than just cutting costs. Then, take aim at the three deadly myths of SPM. >From there, the market offers a wide range of solutions to help expedite the journey.
Oh, and somewhere along the way we probably need to come up with a better term.
Kevin Brooks - Apexon
Entry Filed under: General, Interviews, Supplier Performance, Suppliers, e-Sourcing Marketplace
July 30th, 2006
Michael Lamoureux
Friday we introduced you to supplier performance management and yesterday we discussed some of the challenges in developing and implementing a supplier management program. Today we will discuss some best practices and steps to success.
Many of the eight best practices that we discuss below grow out of the C5 (connect, coordinate, check, control, and cultivate) Aberdeen operational supplier management framework, as discussed in Aberdeen Group’s recent Supplier Performance Measurement Benchmark Report.
The first best practice is open communication and data sharing between parties to make sure that everyone is on the same page.
The second best practice is strategic supplier selection (often known as supplier rationalization) for strategic engagements. This generally means concentrating purchases with a small set of suppliers to provide the buyer with greater leverage and fewer suppliers to proactively manage in performance and quality improvement initiatives. This does not mean single sourcing, as that is wrought with risk.
The third best practice is the definition of mutually agreed upon performance targets and mutually agreed upon metrics. Create joint action plans with your suppliers to meet these targets.
The fourth best practice is continual scorecarding to insure that the metrics are continuously up to date. Scorecarding should be done at least monthly, data tracked at a granular level by location, trade lane and product family, and linked to customer facing metrics. Linking primary KPIs across processes helps supply managers understand how their metrics link up with those of their customer facing peers.
The fifth best practice is proactive monitoring of the supply chain on a regular basis. This is usually done by way of business process management (BPM) technology that can alert stakeholders to exceptional conditions, assign accountability, track resolution progress, and automatically update affected systems.
The sixth best practice is the implementation of cross-functional problem resolution consistent with overall business objectives. Considering that there is a huge opportunity cost associated with human productivity losses from resolving supplier performance problems, it is vital that problems are resolved quickly and correctly. Leading companies use pre-programmed rule-management systems to guide them through intelligent resolution strategies. These systems are updated regularly with best practices.
The seventh best practice is the implementation of control points at suppliers to minimize mistakes. Utilize technology to check that items and quantities on supplier’s shipping documents on open order lines reflect those on the most up-to-date purchase order.
The eighth best practice is the use of predictive analytics and KPIs to transform supplier scorecards into forward looking risk management instruments to identify potential problems well before they materialize. Best in class firms scorecard, but leading firms are now using predictive analytics to spot inflection points and KPI correlations that identify potential capacity issues, lead time variability, quality, or supplier financial issues before they show up as a metric on a scorecard.
In Aberdeen’s Supplier Performance Measurement Benchmark Report, they identified Steps to Success for laggards, average performers, and best-in-class enterprises alike. These steps were thought out, generally applicable and on-target so we will repeat them as-is and refer the reader to Aberdeen’s report for additional insights.
Laggard Steps to Success:
- Measure supplier performance constantly, and at least monthly. This is one of our eight best practices and key to continued success.
- Improve visibility into supplier activity and inbound shipments. This will insure that your data is not only up to date but reliable.
- Measure the downstream impact of supply disruptions. This will help you create actionable contingency plans that will minimize the cost of such disruptions when they can not be avoided.
- Create a cross-functional review team. A key to sourcing success in general, it is especially true in supply risk management and supplier performance management.
Industry Norm Steps to Success:
- Transform procurement and material managers into supply base developers. This is the essence of strategic sourcing best practices and improves your supplier performance management efforts across the board.
- Implement supply chain management technology and manage supply disruptions based on business goals. This is another one of our best practices and ensures that downtime and costs associated with a disruption are kept to a minimum.
- Insert control points at suppliers. Yet another one of our best practices, this helps catch potential mistakes that could be costly before they happen and streamlines operations.
- Make scorecarding more granular. Good scorecards are granular scorecards and allow you to quickly zoom in on the root cause of a problem.
Best in Class Next Steps:
- Apply statistical process control techniques. Take your processes up a notch with statistical control theory.
- Adopt business process management technology. A best practice that allows you to catch exceptions as soon as the relevant data enters your system and stop small problems before they blossom into large problems.
- Evolve your scorecard into a forward-looking risk management instrument. A best practice which helps you predict potential supply chain problems and take corrective action before your monitoring systems even notice a blip is the ultimate evolution of supply performance management.
For everyone:
- Ask an expert. As the great Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” The best learn from the best. Look externally for best-in-class providers to help you become best-in-class in supplier performance manaagement.
For more information on supplier performance management, see the Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance, Suppliers
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