Posts Tagged ‘Sourcing’

Strategic Sourcing, what is it all about?

December 17, 2013

Strategic sourcing processes introduced in the mid-nineties have proven to be so robust that even today they remain broadly similar.

This quick overview is not an absolute step-by-step template, because each organisation is unique and each deployment, although broadly similar, will be unique. It is not designed as a one-size-fits-all approach as this will not align your sourcing strategies with what your organisation wants to achieve. One thing that has been learnt from multiple deployments is that successful organisations drive deployment of strategic sourcing in their own way. 

Definitions

stra·te·gic [struh-tee-jik] – adjective

1. Helping to achieve a plan, for example in business or politics;

2. Pertaining to, characterised by, or of the nature of strategy: strategic movements;

3. Of an action, as a military operation or a move in a game, forming an integral part of a stratagem: a strategic move in a game of chess.

sourc·ing [sawr-sing, sohr-] – noun

1. Buying of components of a product or service delivery from a supplier.

Strategic sourcing is an integral part of a wider business strategy to improve profitability and, in turn, shareholder value. It is directly linked and specific to the business, and illustrates opportunities within the supply base to either reduce cost or increase the value of products or services required by the business. Typically, it includes demand management and supplier management. However, increasingly it is becoming important to factor in total cost of ownership (TCO) and sustainability. 

Demand management

Understanding the specification and volume requirements from the business ensures that needs can be appropriately met and that resources are not being wasted. Demand management is not about reducing contract volumes. Rather, it is about ensuring that contract volumes are appropriate for meeting the needs and objectives of the organisation. A core process that will contribute to the strategic sourcing plan is the sales and operations planning process (S&OP).

The S&OP is an integrated business management process through which the business continually achieves alignment and synchronisation between all functions of the organisation. It generally includes:

• an updated sales plan;

• a production or delivery plan;

• inventory holdings;

• customer lead times and commitments;

• a new product development plan;

• a strategic initiative plan;

• a financial plan.

The strategic sourcing team would ultimately be involved in several of these areas, to contribute towards capacity planning and to understand how each feeds into the overall plan and influences demand profiles.

Supplier Management

Understanding the capability, costs and capacity within the supply base ensures that business requirements can be appropriately matched without incurring higher costs. Systematic improvements in supplier management not only improve cost of goods and services but can also improve relationships with suppliers. This can lead to supplier relationship management (SRM) – tools and processes that enable the proactive management of an ongoing business relationship to secure a competitive advantage for your organisation.

To deploy SRM, an organisation needs to decide on a segmentation approach that considers the internal needs of the business, spend, and also accounts for risk to the business. Broadly speaking there are four high-level categories of suppliers.

Transactional suppliers are where little or no relationship or performance management activity is undertaken. Either the suppliers are utilised infrequently or the supplier is of low value to the business. These suppliers can be easily switched for another if required.

Performance-managed suppliers focus on ensuring delivery of the contracted goods and services to the required cost and service levels, rather than on building a collaborative long-term relationship.

Relationship-managed suppliers have some strategic value, so elements of SRM needs to be applied here.

Strategic suppliers are typically either business critical suppliers, or high spend suppliers. Generally the most effort is expended on this category to drive a mutually beneficial collaborative relationship. This is an effective route to improving costs through the Value Add or Value Engineering (VA/VE) process. A close working relationship with strategic suppliers also leads to a greater understanding (and reduction) of the TCO of products or services. 

Total Cost of Ownership

Understanding TCO is becoming increasingly important to procurement. Legislation concerning the environment is affecting the way we do business either through EU directives such as the Waste Electrical and Electronic Equipment (WEEE) Regulations or through corporate social responsibility programmes that drive different behaviours from the business. It is important to factor in not just the acquisition costs but also the cost of doing business with the supply base and any return flows or on-cost from recycling. 

Sustainability

The fourth element of strategic sourcing also provides part of the rationale for driving it within the organisation. Being able to sustain the supply of goods and services while de-risking the supply chain as well as balance the total costs is ultimately the responsibility of procurement.

A coherent approach

Tying all activities together into a coherent plan will transform the business, as only the procurement team can do. Internal ‘silos’ are built as a company grows. Although each silo represents the company’s acquisition of knowledge and improves the ability to deliver value to the customer, they can also create inefficiencies in the business, leading to organisational inertia. This can slow the pace of change and reduce the capability for innovation. Creating a plan balanced across the four areas ensures you will engage with the business and supply base.

When creating a communications plan, consider each of the four areas and how they might affect the stakeholder. Simple, bite-sized statements work well for those in more senior levels of the organisation. However, greater detail will be needed for others, especially where they perceive they might have to change what they do. Build in the wider plan, so each stakeholder can see all issues and organisational levels have been considered.

Develop your plan and highlight the best solutions for each area of the business. Consider using a SWOT analysis (see below) to develop the ideal outcomes.

 

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The butterfly effect on enterprise data within SCM

January 2, 2013

After doing a couple of projects where master data was a critical element but unfortunately nothing was done to correct it, I thought that I would reintroduce the post on the Butterfly effect in Master Data. All to often the master data is completely forgotten in projects and in the end costs money to rectify and could lead the software to fail after go live. So to learn more about the butterfly effect and it’s impact on master data read on!

The term “butterfly effect” refers to the way a minor event – like the movement of a butterfly’s wing – can have a major impact on a complex system – like the weather. The movement of the butterfly wing represents a small change in the initial condition of the system, but it starts a chain of events: moving pollen through the air, which causes a gazelle to sneeze, which triggers a stampede of gazelles, which raises a cloud of dust, which partially blocks the sun, which alters the atmospheric temperature, which ultimately alters the path of a tornado on the other side of the world.

Enterprise data is equally susceptible to the butterfly effect. When poor quality data enters the complex system of enterprise data, even a small error – the transposed letters in a street address or part number – can lead to revenue loss, process inefficiency and failure to comply with industry and government regulations. Organisations depend on the movement and sharing of data throughout the organisation, so the impact of data quality errors are costly and far reaching. Data issues often begin with a tiny mistake in one part of the organisation, but the butterfly effect can produce disastrous results.

An ERP or supply chain system focuses on parts, descriptions and inventory data. Since government agencies don’t control the way supply chain and ERP data is defined, you may not have an idea about how the data should look in an ideal state, but it should provide an accurate depiction of the physical warehouse or just-in-time supply chain system. You need to know what is in stock, when it can be supplied and how much it costs.
Holding just the right amount of inventory is crucial to optimising costs. After all, inventory costs are incurred every hour of every day in areas including warehouse storage, heat and electricity, staffing, product decay and obsolescence. With this in mind, consider the impact of a transposed letter in an ERP system. Someone enters part number XL- 56YJM instead of LX-56YJM. Until the error is discovered and corrected, you may hold duplicate parts in inventory or not be aware of parts carrying the slightly different SKU because of the transposed letter.

You also want to take advantage of volume discounts. If the data is unstructured, making it difficult to understand global buy patterns, the company may miss out when negotiating with the vendor.

Because there is no standard format for ERP data, few of the steps for fixing the data are done for you ahead of time. It is critical to establish a methodology for data profiling in order to understand issues and challenges. Since there are few governing bodies for ERP and supply chain data, the corporation and its partners must often come up with an agreed-upon standard, with input from users of the data to understand context, how it’s used, and the most desired representation.

If you have clean data in your supply chain, you can achieve some tangible benefits. First, the company will have a clear picture about delivery times on orders because of a completely transparent supply chain. Next, you will avoid unnecessary warehouse costs by holding the right amount of inventory in stock. Finally, you will be able to see all the buying patterns and use that information when negotiating supply contracts.

Driving collaboration through Contracts Management

January 2, 2013

The contracting process has always been a major point of discontent between procurement and legal functions within an organisation. The goals of the legal department to achieve control and compliance often clash with procurement’s objectives to build collaborative relationships with suppliers. This has become extremely pronounced now, that procurement feels that it needs to become a strategic value contributor pushing the business performance of the organisation rather than simply focusing on getting the lowest price. A collaborative culture of contract authoring can be built using the right contract management technology, which can bring together the two functions and drive compliance and control while at the same time foster better supplier relationships, which in turn can deliver real savings with minimal risks to the supply chain. This paper takes an in-depth look at the reasons for the collaboration challenges between procurement and legal departments and the technology and process initiatives that can bridge these gaps.

Procurement and Legal at loggerheads

A recent study by IACCM throws up several results that suggest that the relationship between procurement and legal teams are less than cordial in most organisations. Nearly 70% of the study respondents felt that the relationship between the two functions needed to improve. It is not surprising that the primary reason for discontent between the two functions was the contracting process. The biggest fear that most legal departments have is the whether the procurement function can actually ensure that the contracting terms
will be adhered to post contract awarding. This may seem like a paradoxical situation. If the procurement function gets into contracts with suppliers in the first place, why would it not want to adhere to them?

There are several factors that result in maverick or off contract purchases. A majority of these occasions are primarily ad-hoc purchases, where buyers resort to buying from whichever supplier is available quickest and at the most opportune time. More maverick spending means higher total procurement costs and fewer on-time orders which is clearly not a recipe for achieving procurement efficiency. A research by APQC says that organisations with 16% maverick spend spend on an average nearly $17,000 more per procurement FTE as compared to organisations with maverick spend of 1%.. In fact even the on time delivery percentages for such organisations was nearly 6% lower than their peers. It is therefore definitely not surprising that legal teams have their doubts over the correct execution of contracts by the purchasing / procurement department. In the IACCM report referred to above governance of contracts post award and the ability of procurement to effectively manage contracts was cited by nearly 60% of the participants as a critical factor causing high level tension between procurement and legal functions.

Conflicting approaches with a common need for change

Analysing from an organisational perspective Legal and Procurement teams approach the contracting process from two very different angles. Legal teams look at contracts as tools to streamline processes and establish strict controls while procurement looks at it as the first step in establishing cost savings and supplier relationships. With the economy becoming vastly different – with supply chains becoming growingly interconnected and vast- these disparate perspectives of the contracting process have brought their own unique challenges for both the departments. Legal teams now have to handle a much larger number of contracts in multiple languages and with a wide variety of, at times very specific and unique contracting terms and conditions. The increased workload and the looming threat of non-compliance to several contracts makes it imperative for legal teams to manage contracts more efficiently and leverage the right automation to maintain control. Standardising the contract creation process is often made the primary goal.
Procurement, no longer a tactical function, needs to develop long term strategic relationships with suppliers and add more value to the company’s bottom line. This needs contracting to be more flexible to generate additional savings and contribute in value creation. This may include insertion of necessary clauses that help them take advantage of dynamic marketing conditions – say for example escalation and de-escalation clauses for highly volatile commodities. This of course becomes the first bone of contention between the two functions as one aims to standardise while the other needs more flexibility. The pressure between the two teams is to create a contracting process that not only helps procurement generate savings and account for frequent renegotiation but also helps legal enforce compliance in contract execution and get better outcomes out of the contract resulting in sustainable savings.

An often neglected area of discord between the two teams is the time taken to create contracts. Procurement with its need to take advantages of prevalent market conditions and the supplier’s disposition to discounts at the time of negotiation needs the contract creation and execution cycles to be as short as possible. Legal teams on the other hand have a primary responsibility to ensure every contract is free of risk to the organisation and hence may take frustratingly long periods to go through minute details in all clauses within the contract. This may result in procurement missing out on additional savings based on time discounts or market variations. Automated contract authoring technology that provides standard clauses and templates is the the answer to not only reducing the time for contract creation and approval but also ensuring that risk mitigation is easy.

The need of the hour

The need of the hour is for the contracting process to enable collaboration between the procurement and legal functions rather than be a cause for dissent. At a strategic level there is a growing need to redefine the relationship between the two functions. The contracting process needs to ensure

Real and incremental savings

Improved contract outcomes

Better process streamlining and compliance

Mitigation of risks while taking advantage of dynamic market conditions and better
renegotiation

Proactive and collaborative management of change

Powerful analytics that deliver strategic value

Getting the right solution

All this is easier said than done. It is imperative that a process is created within the organisation that makes contract authoring, creation and management simpler. Although getting buy in from employees in the procurement and legal teams is important, the first step to have an effective process in place to invest in the right technology. A contract management solution should be able to foster collaboration by providing clause libraries and standard contract templates that ensure contracts don’t miss out on any mandatory clauses and terms. This will help in reducing the time for legal review as well as ensuring minimum exposure to risk. Although it should provide a sufficient collection of standardised clauses and templates the contract management solution should also have customisable workflows that permit the insertion of clauses that help organisations take advantage of market conditions and supplier discounts. There should always be room for renegotiation especially for volatile commodities. This can be achieved by putting clauses like escalation/de-escalation clauses or conditions on contract renewal based on prevalent commodity market prices that insure the organisation against volatility risks

Technology as an enabler:

An ideal solution to this collaboration conundrum would be a solution that streamlines all the steps of the contract management process

A typical contract management process can be divided into three major stages.

Contract Authoring

The solution should be able to create contracts with pre-defined workflows that not only incorporate feedback from all relevant stakeholders during the contract creation process but also take care of exceptions and approvals. The authoring process can be made easier and more compliant by having a central template repository that contains all pre-defined clauses. Legal teams should have access to this repository to continuously update the latest clauses and ensure that the organisation has no unforeseen risk in getting into the contract. All contracts should be housed in a central repository where they can be tracked and managed. The contracts should also be easily available through simple search processes to ensure easy access to all necessary stakeholders.

Contract Negotiation

Contracts should contain well-defined service level agreements (SLA), which are transparent to suppliers. The contracts should be the basis of all supplier performance measurement and should be the guiding factor to defining the KPIs for all supplier performance management processes. Alerts should be configurable within the contract management system for tracking compliance both for users within the organisation as well as supplier performance to contracted terms. Besides compliance alerts the solutions should also have alerts for contract renewals so that evergreen contracts don’t get renewed repeatedly without the scope of renegotiation-something legal teams always have on their cross hairs. Contracting solutions should be able to match contracts with spending data to help track any maverick spend and in turn provide potential opportunities to save. Analytics should also be provided on supplier performance in term of discounts adhered to and quality.

Contract Sign Off’s

Electronic signatures have to be mandatory for any contract management solution implemented and should be enabled during various stages of the contract creation and approval process.

Reaping the desired results

An effective contract management process if setup as mentioned above can result in the following benefits

Reaping the desired results
An effective contract management process if setup as mentioned above can result in the following benefits

Risk mitigation due to increased visibility into existing contracts

Improved contracting process and reduction in overall cycle time

Adherence to regulatory compliance requirements due to increased tracking of contract compliance

Increased compliance to terms and conditions

Spend compliance ensuring sustained savings. In fact a recent survey of nearly 600 procurement professionals suggested that doubling contract compliance leads to a near 600% increase in savings generated through spend management activities

Better collaboration due to standardised processes and agreed SLA’s between Legal and Procurement as well as procurement and suppliers

In closing an effective contract management solution can help organisations generate sustained savings and build effective supplier relationships. But one of the major benefits of implementing a robust contracting solution-that both stores and authors contracts-is increased collaboration between procurement and legal working to the benefit of both. Procurement is able to drive sustainable savings and meet its goal of being a strategic value contributor to the organisation while legal teams are able to mitigate risks to the organisation and ensure control and compliance.

Planning and Scheduling in the Supply Chain

December 28, 2012

Before relying on an ERP system to manage planning and scheduling activities, all companies should first make sure that the right processes are in place, standardized and uniformly used across the enterprise. Robust processes and policies will allow the company to generate accurate and timely data. Only then will a company be in a position to use an ERP system to improve planning and scheduling activities.

Major companies have invested heavily in ERP implementations and have suffered business disruptions whilst implementations have taken place. Despite good intentions, most companies haven’t come close to realizing the value achieved by those featured in various ERP case studies across the globe. Revenues have not increased by 20%. Operating costs have not fallen by 15%. Finally, on-time deliveries have never reached record highs of 95%.

So what is stopping companies achieving ROI? In my mind it is very clear that companies lack understanding and commitment! Firstly, the understanding that business value is inherently linked to business change, not systems change. From the commitment side it’s all about executing a good plan. However, this is another story! What we are confronted with now is that we have an ERP that is implemented which may or may not have achieved its ROI. Now we have got to get down to the operational level and try and recover what may have been lost or disrupted during the implementation however long ago it was.

The opportunity we are now presented with covers the whole enterprise and should allow the company to gain post implementation value, this area I am referring to is the whole Supply Chain, starting at the front end with Planning and Forecasting all the way through to settlements (including cash flow management). The area that we will concentrate upon here of course is replenishment planning, which by its very nature covers nearly all aspects within Supply Chain Management. This is where a company’s supply meets its demand!

Companies that plan well are more likely to:

·         Anticipate demand and respond nimbly to unforeseen market shifts

·         Have higher customer satisfaction rates

·         Have less cash tied up in obsolescing inventory

It’s where forecasts are converted into purchase and/or production orders. Planning activities influence inventory levels and, by extension, cash flow. The sad truth is that most companies’ ERP systems issue poor planning recommendations – ones that, if acted upon, would lead to a huge mismatch between supply and demand. Because those system-generated recommendations don’t reflect true operating realities; planners, purchasers, materials managers, production managers and others often ignore system-generated planning signals and advice.

Almost always, however, poor planning advice has little to do with the software itself. Software is made up of a bunch of 0s and 1s, and simply generates outputs from formulae and rules. In all likelihood, the formulae and rules were programmed just fine. Rather, poor recommendations are usually the result of inaccurate and untimely base data.

The good news is that any company can significantly improve its planning and scheduling activities. And, if it does, it’ll go a long way to generating that seemingly elusive ERP-related business value. From a high level, there are three key success factor to planning. They are:

·         Accurate Item and Movement Data – The system needs accurate data to simulate a company’s operating reality. Key data requirements include item-level order modifiers), bill of materials and routings.

·         Accurate Inventory Data – If inventory counts and movements are not accurately reflected in the system, the planning engine will either make recommendations that cause the company to 1) prematurely order inventory or 2) deliver items beyond the due date. The former case constrains cash flow and unnecessarily increases the value of a depreciating asset class. The latter case leads to higher rates of customer dissatisfaction and turnover. In our experience, a planning engine will only be capable of issuing meaningful planning recommendations when a company:

o    Has accuracy rates of 95% for its on-hand inventory

o    Maintains accurate demand and supply forecasts

o    Knows its minimum inventory level requirements (safety stock)

·         Timely Recording of Material Movements – The status of purchase orders and production orders varies over time, as materials flow through supply chains and production. To ensure that planning signals and recommendations are meaningful, the company needs to update the system promptly. Businesses can choose to do this a couple of ways – through manual input or in an automated fashion.

Legacy sourcing activities still prevail…..

December 21, 2012

While these objectives may sound logical, many sourcing teams defeat their efforts to identify and select the optimal supplier by reverting to some bad habits. Those bad habits include:

1). Preventing personal dialogue between prospective suppliers and decision makers
2). Sending RFP’s that require an extremely time-consuming first response

Why do sourcing teams have these bad habits in the first place? What are their underlying interests?

First, the prevention of personal dialogue has a few elements to it. One element is that procurement professionals always strive to ensure a “level playing field” equitable treatment and a fair process for all suppliers. Procurement ethics dictate that one supplier should not be given information that is not made available to all other suppliers because, then, it would appear that someone in the buying organization is trying to facilitate a pre-determined “favorite” supplier being selected. Another element is that prevention of personal dialogue is designed to protect the time of executives within the buying organization. These are busy people, naturally, so the tendency is to block anything from being added to their already full plate.

Second, the voluminous response RFP has its rationale as well. Sourcing teams have the desire to minimize the number of steps required to get from Point A – issuing an RFP – to Point B – selecting a supplier. So, the tendency is to want to capture all of the required information in one fell swoop.
While those are noble interests, the execution of processes to support those interests is flawed.

Here is why.

In terms of preventing personal dialogue, sourcing teams are failing to realize how personal dialogue is an enabler of sourcing success, rather than a hindrance to it. A conversation can be held professionally without tarnishing a fair process or creating a perception of an ethical breach. Actually, preventing personal dialogue can be perceived as an ethically-shady practice. While procurement professionals commonly feel that not permitting conversations between suppliers and decision-makers preserves the perception of an ethical sourcing process, the opposite may be true. Suppliers would argue that not permitting such conversations perpetuates the perception of an unethical sourcing process where the successful bidder is pre-determined, other bidders are being “used” solely to drive down that supplier’s price, and the sourcing team is steadfastly trying to hide that.

There is another flawed line of thinking with regard to preventing personal dialogue during the sourcing process. That line of thinking relates to the interest of protecting procurement executives’ time. Simplified, it is a procurement executive’s job to build the strongest supply chain possible for his or her organization. By refusing to talk to qualified prospective suppliers and, thus, discouraging them from participating in sourcing processes a procurement executive is failing to fulfill his or her duty of building the strongest supply chain. Yes, time is scarce and must be managed wisely, but attracting a strong supply base is a wise investment of time.

Finally, while minimizing the number of steps of the sourcing process may have good intentions, efficiency should never trump effectiveness. Let’s compare two scenarios.
In Scenario A, an RFP was sent to five carefully-selected suppliers. That RFP required a 50-page response. Only two suppliers responded and neither of those suppliers had a reputation for being one of the top two suppliers in the industry. The other three suppliers felt that a 50-page response was too much work for a process with an uncertain outcome and declined to respond.
In Scenario B, an RFI was sent to five carefully-selected suppliers. That RFI required a 10-page response. All five suppliers responded. The sourcing team then sent an RFP to the four suppliers who had the most attractive responses to the RFI. That RFP told the suppliers that they were receiving the RFP because they were shortlisted based on their response to the RFI. The RFP required a 40-page response. All four suppliers responded. Because they had been shortlisted, they each believed that they had a legitimate chance of winning the business. This two-step process took an additional week compared to Scenario A. But was it worth it to have more competition, more options, and more highly-qualified suppliers to choose from? Most procurement professionals would argue that it was indeed worth it.

Embarking on the eBusiness Journey.

December 10, 2012

There are companies still today who are reluctant to embark on the eBusiness journey, why is this? It is my belief that eBusiness is perceived as an expensive and frightening experience, also that everybody wants to sell a solution without really educating the company in how it can transform the business, thus making considerable savings in time and money. Technology and Business processes have changed considerably in the last decade, making implementations and change much simpler to undertake.

However, it is important to understand the business environment that you are operating under. With this in mind there are at least seven questions that should be asked in any business prior to embarking on the eBusiness journey. Answering these questions will allow the business to either embark on the journey (or not).

Question 1. Do I understand my Business today?

How is my business conducted? Is it difficult to connect with my Suppliers? Where am I spending money and on what? Do I have Administrative Burdens in the way I conduct business today? What is stopping me from moving forward? Have I got an optimized organizational structure?

Question 2. Am I ready to change the way I do Business?

Has the business got the appetite for change? Do I have change management agents in my Business? Do I have an organization that resists change?

Question 3. Do I have a strategy in place for using eBusiness?

What are my Pain points? Do I want to be a business Shaper or a business Adopter? Does the Business understand eBusiness? Am I involved in any eBusiness forums?

Question 4. What are my competitors doing?

Who has embraced eBusiness and why? Can I benchmark my business with others? What etools do they employ?

Question 5. Do I have to build my own applications?

Do I have an Infrastructure that will enable me to implement eBusiness? Are my systems bespoke? Is ICT considered an overhead in my business?

Question 6. What are my strengths and weaknesses?

Is there time liberation in the Business? Is there systems proliferation? Am I firefighting in my business? Do I empower my employees?

Question 7. Do I have well defined processes in place?

Are my processes visible end to end? Are controls in place but are too rigid? Do I have standards in place? Have I got good content? Are there to many levels of authority?

I strongly believe that every company should ask these questions of itself not only to assist it in overcoming the perceived fears of eBusiness but also to evaluate itself in the business environment today. It may result in no actual change taking place as the practices and processes are fit for purpose in the business environment that the company operates under. However, without analysis who will ever know!

eAuctions, Benefits (Buyer & Seller) and Pitfalls.

October 31, 2012

After spending well over a decade implementing, training, conducting, researching the use of Auctions (electronic), I am still asked what it’s all about and how it can be used in businesses today. There is a wealth of information on the internet and research work that I have participated in which will help procurement departments really understand the use of the auction. In this blog I have brought together some of the more common items for the proper approaches to the eAuction. In terms of the research work I would like to direct the reader to research that I participated in with the Georgia State University, entitled “Buyers’ Perceptions of the Risks of Internet Enabled Reverse Auctions” and can be found at http://aisel.aisnet.org/amcis2011_submissions/352

So here we are in the next section as previously mentioned some of the more common items for the proper approached to eAuctions. I should also point out that there is also a plethora of acronyms for this activity. My preference is to stick with eAuctions, but the activity is also called e Bidding, online bidding. However, the auction is not to be confused with an eTender submission, these are extremely different in their approach. The best way to describe an auction is the ability to collect prices for goods and services in a short space of time, for example within 30 minutes from when the event started to when it closes.

Benefits to Buyers

  • removes the human factor from price negotiation not all buyers are good negotiators, and, by definition, only a handful of buyers can be selected as your best negotiators
  • higher average cost reduction especially when compared to a basic 3-bids-and-a-buy RFx process
  • increased efficiency and price transparency  what used to take months can now be done in a couple of weeks as long as you put in the effort
  • assists in the identification of the “best total cost” supplier  as you can also track “bids” on delivery terms and conditions
  • a foundation for supplier relationship development  not only are they open and fair (done right and ethically), but
    they require a great deal of communication up front and post auction (including to losing suppliers) to get right

Avoiding the Pitfalls

  • select items that exist in a naturally competitive environment if you only have a couple of sources, go for supplier development instead
  • select an item where the contract is ending bidders don’t want to win business for one or two years down the road; but more importantly, make sure you have no (other) contracts in place before advertising an auction
  • if you invite new suppliers, have the ability to switch if you have a long-term contract with an existing supplier, or the costs with switching are too high, you don’t have the right conditions for an auction
  • clear, complete, and well defined specifications since you need to be able to award the business to the winner
  • identification of relevant non-price factors this could disqualify some suppliers and indicate delivery terms that you need to track or have suppliers bid on
  • intend to award the business! not only is it unethical to hold an auction unless you intend to award the business, but if you get a reputation for not following through, you’ll have no suppliers bid next time

Ethics

  • clearly communicate your intentions, the process, and your ultimate goal if you just need to reduce cost, and you’re honest, suppliers will respect that
  • do not use auctions for Benchmarking or price discovery suppliers don’t want to be  used solely as a tool to beat down an incumbent
  • award must be to a supplier in the auction it’s really unethical to award to a supplier who didn’t bid but then struck a deal after the auction closed
  • set realistic starting prices if raw material prices haven’t dropped, asking for a starting price that’s 15% lower is not reasonable
  • allow adequate time to train and support the suppliers especially right before the auction
  • do not allow for after-the-fact negotiations in fact, if a supplier tries to negotiate after the fact, they should immediately be disqualified
  • properly qualify all suppliers pre-auction you must be able to award to all winning suppliers
  • contact ALL participants after the auction ends especially the losing one’s – taking just 5 to 10 minutes to explain why they lost goes a long way – and might help them shape up to provide you better bids and service the next time they are invited to a bid

Supplier Benefits

  • it’s a fair and competitive bidding environment everyone has an equal chance of winning
  • more efficient process they’ll have their answer quickly, and no paper to fuss with
  • increased business opportunities they could have more opportunities than they would otherwise
  • collaborative bidding environment they can ask questions, and get answers
  • even if they lose, they still get good information they can see what the market is bidding, and find out why they
    didn’t win (if you follow the ethics above)
  • open processes require trust even if they lose, they can get the information they need to potentially win your business in the future

Even though most of this should not be new to some of you, it’s a great all-inclusive high-level overview on how to succeed in an e-Auction!

The Butterfly effect within the Supply Chain, Specifically Master Data Management!

October 27, 2012

The term “butterfly effect” refers to the way a minor event – like the movement of a butterfly’s wing – can have a major impact on a complex system – like the weather. The movement of the butterfly wing represents a small change in the initial condition of the system, but it starts a chain of events: moving pollen through the air, which causes a gazelle to sneeze, which triggers a stampede of gazelles, which raises a cloud of dust, which partially blocks the sun, which alters the atmospheric temperature, which ultimately alters the path of a tornado on the other side of the world.

Enterprise data is equally susceptible to the butterfly effect. When poor quality data enters the complex system of enterprise data, even a small error – the transposed letters in a street address or part number – can lead to revenue loss, process inefficiency and failure to comply with industry and government regulations. Organisations depend on the movement and sharing of data throughout the organisation, so the impact of data quality errors are costly and far reaching. Data issues often begin with a tiny mistake in one part of the organisation, but the butterfly effect can produce disastrous results.

The Supply chain system ( whatever that system may be) focuses on parts, descriptions and inventory data. Since government agencies don’t control the way supply chain and ERP data is defined, you may not have an idea about how the data should look in an ideal state, but it should provide an accurate depiction of the physical warehouse or just-in-time supply chain system. You need to know what is in stock, when it can be supplied and how much it costs.
Holding just the right amount of inventory is crucial to optimising costs. After all, inventory costs are incurred every hour of every day in areas including warehouse storage, heat and electricity, staffing, product decay and obsolescence. With this in mind, consider the impact of a transposed letter in an ERP system. A part number gets entered into the system as AB-21602M instead of BA-21602M. Until the error is discovered and corrected, you may be holding duplicate parts withinin inventory or not be aware of parts carrying the slightly different SKU because of the transposed letter.

You also want to take advantage of volume discounts. If the data is unstructured, making it difficult to understand global buy patterns, the company may miss out when negotiating with the vendor (if you can”t describe an item, you can’t buy it).

Because there is no standard format for ERP data, few of the steps for fixing the data are done for you ahead of time. It is critical to establish a methodology for data profiling in order to understand issues and challenges. Since there are few governing bodies for ERP and supply chain data, the enterprise and its partners must often come up with an agreed-upon standard, with input from users of the data to understand context, how it’s used, and the most desired representation. The most simplest standard to use is Noun, Modifier, Characteristic, works well for any industry, example Valve, Butterfly, 10 inch, 600 lb, CS, ASTM XXX etc and always make sure that the manufacturers part number is available, they make it so they should also be able to describe it.

If you have clean data in your supply chain, you can achieve many tangible benefits. First, the company will have a clear picture about delivery times on orders because of a completely transparent supply chain. Next, you will avoid unnecessary warehouse costs by holding the right amount of inventory in stock. Finally, you will be able to see all the buying patterns using spend analysis and use that information when negotiating supply contracts.

Managing contracts and service performance

October 25, 2012

Little or nothing is spoken of Contracts management within the Supply chain management process, but it is an integral part of the SCM process and is a result of strategic sourcing or tendering processes. However, do we understand what’s involved?

What is contract management?

Contract management is the process which ensures that both parties to a contract fully meet their respective obligations as efficiently and effectively as possible, in order to deliver the business and operational objectives required from the contract and in particular to provide value for money. Typically, you will require resources for contract management that are equivalent to 2% of the contract value. It is an integral part of the ‘informed customer’ capability.

Who is involved?

Contract managers (Category Managers) representing both the customer and provider have a key role; there will also be input from the ‘informed customer’, providing the interface between customers and providers. Ideally, the people involved in contract negotiation during the procurement process will take on a contract management role.

Critical success factors

A contract is being managed successfully if the following conditions are met:

  • the arrangements for service delivery continue to be satisfactory to both customer and provider
  • expected business benefits and value for money are being realised
  • the provider is co-operative and responsive
  • the customer knows its obligations under the contract
  • absence of dispute
  • no surprises

Foundations for contract management

During the procurement process, the emphasis is likely to be on why the contract is being established and on whether the provider will be able to deliver in service and technical terms. However, you must think very carefully about how the contract will work once it has been awarded.

Management of contracts, especially where there is a partnership, usually requires some flexibility on both sides and a willingness to adapt the terms of the contract to reflect a rapidly changing world. Problems are bound to arise which could not be foreseen when the contract was awarded.

As the customer, you must have clear business objectives, coupled with a clear understanding of why the contract will contribute to them. There must also be a clear understanding of the provider’s objectives. You must be able to recognise and get agreed at senior management level the need for the service provider to achieve their objectives, including making a reasonable margin, perhaps as part of a risk/reward arrangement.

There must be people with the right interpersonal and management skills to manage these relationships on a peer-to-peer basis and at multiple levels in the organisation. Both sides need managers who can manage upwards in their organisation and persuade their boards to make decisions for the benefit of the joint relationship (even though individual decisions may not look attractive in isolation).

Other issues to consider before contract award
Other areas that need to be thought through before the contract is signed include:

  • what are the processes for managing the contract which will give you the level of control you need?
  • how will you retain sufficient expertise to understand the technical direction in which the provider is taking your organisation? You must be able to understand the answers and enter into dialogue with the provider
  • how would the provider ensure that they could always provide you with sufficient skilled resources, given the problems of national skills shortages and the risk that another customer’s account might take priority?
  • what is the real quality of the provider team? Do they have sufficient standing within their organisation to ensure that they will be able to get the resources you require? Can they influence their own board?
  • is there a likelihood of the provider team changing after award of contract, leading to a lack of continuity?
  • if the provider is a consortium, how will the members handle things and ensure that problems are resolved quickly and constructively? For example, do all members of the consortium share the same quality management system and/or escalation procedures?
  • what does the provider know about your business and how will they get up to speed? Can you ensure that enough time is allowed for the provider’s learning curve in understanding the complexity of your business?

Principles of good communication & Collaboration
You have to be aware of new demands when working together – who takes the lead; who is responsible for what; and who pays for what. Will existing management structures help cooperative working? Depending on your organisational structure (for example, centralised or federal units) you will require different reporting arrangements, but the underlying principles of good communication and mutual understanding of responsibilities remain the same.

There must be a clear understanding of what is expected and effective ways of reporting progress. You must have a formal framework defining responsibilities, reporting arrangements and policies. Without this framework there is a risk that you will lose control; your auditors will also need to be assured that formal arrangements are in place, regardless of whether you operate a ‘hands-on’ or ‘hands-off’ management style.

Performance

You will usually need performance measures to cover all aspects of a service arrangement:

  • cost and value obtained
  • performance and customer satisfaction
  • delivery improvement and added value
  • delivery capability
  • benefits realised
  • relationship strength and responsiveness.

It is important that the performance measures selected (and ideally specified in the contract) offer clear and demonstrable evidence of the success (or otherwise) of the relationship.

Once chosen, the requirements underpinning the performance measures should be the primary focus for contract management. They should provide the framework around which provider information requirements and flows, contract management teams, skills, processes and activities are developed.

You should have an existing baseline against which to track any performance measures which are related to delivery or capability improvement. Much of this baseline will typically be established in the business case for the deal.

Three likely levels of performance assessment are:

  • the bottom level is concerned with ongoing service delivery using conventional Service Level Agreement (SLA) approaches and related measures
  • the middle level comprises the desired results of individual programmes of change or improvement, implementation of projects or developments and infrastructure roll outs carried out during the period of the deal. Measures at this level are likely to be derived from investment appraisal and benefits management techniques and constructed on a case by case basis
  • at the highest level an organisation is concerned with the overall outcome or impact of the deal what do we want to have achieved by the end of the contract period? These measures will be derived from the objectives identified during project scoping and in the preliminary business analysis activity. They will be rooted in your organisation’s long term business strategy.

Do we understand eAuctions?

October 24, 2012

Even today there are many companies that do not fully understand what eAuctions are about also the benefits they can deliver. There is also still supplier’s unwillingness to participate which poses a problem for many buying organizations. The power of eAuctions for buying organizations is compelling: 12% average savings; up to 50% cycle time reduction; visibility & standardization of the procurement process with access to a global supply base. Due to this power, eAuctions will not go away.

Predominately all buying organizations look to obtain the best value for the goods and services they purchase, but for many suppliers they still fear the eAuction as they believe it’s a way to eat into their profits, possibly destroying long term relationships and potentially losing the business to a new offshore company or even destroying an industry completely. Without a shadow of doubt the eAuction has shifted the balance of power in the negotiation process towards the buyer. In fact with through preparation, clear guidelines, proper education and understanding of the eAuction process it can be a win win situation for buyer and seller alike. Auctions have been around for a very long time, the first people to use the auction process were the Romans when they where purchasing slaves, assembling willing parties together in a dynamic market and you will obtain the best deal the market can stand. The eAuction has become an efficient and effective tool to market goods and services, facilitating access to new global markets and industries and providing direct feedback on the competitiveness of a supplier’s product base.

So what’s the difference between a traditional auction and the eAuction? The major difference is that the company in first place does not always get the business; in an antique auction the highest bidder will take the antique whilst in an eAuction the lowest bidder will not always win the business. Why is this? In an eAuction there are non pricing factors to be considered such as quality, reputation, standards and delivery schedules. Many buying organizations use the QTC (Quality, Time and Cost) triangle in their evaluation matrix. These are all important factors that go into the final award decision and it’s important that the supplier understands the evaluation matrix and in many cases work with the buyer in its build. Another important difference between traditional and eAuctions is that eAuctions are not a free-for-all. Only invited suppliers are allowed to participate. The final difference is that in a traditional auction the buyer will be only able to negotiate on a one to one basis with a limited number of suppliers, whereas in an eAuction the number is unlimited this allows suppliers from other parts of the globe to compete for the business.

It is extremely important for the supplier to develop his own strategy before entering the event, for example what is the lowest price that can be bid considering your own supply chain process, also consider any current relationship with the buyer and what effect will the non price factors have in the buyers evaluation matrix on the award decision. In the last decade eAuction solutions have become more sophisticated with input from both buyers and seller as to the way the process should be handled and what should be part of the process. This engagement process is still continuing today as the solutions evolve over time and events (Globally). It is fair to say that eAuctions are here to stay and won’t go away as they have become an integral part of the supply chain process.

An all important factor that was not considered in some of the earlier solutions and events was feedback as to why you may not have won the business this time around. There is continuing debate on this, however, if you don’t win, understand why and identify ways of doing better next time around. Look at your own strategy and your own supply chain for possible weaknesses that prevented you from winning.