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This is part two of a two-part post on risk and value mapping.  In part one, we provided some historical perspective on how procurement has evolved over the past century and how value-based procurement has become increasingly important.  In part two we discuss the mechanics of applying risk and value mapping and how it relates to supplier relationship management.

Risk and Value Mapping

One of the primary tools – and a great place to start in moving your company into greater value-based procurement – is risk and value mapping your purchases.

The first question we need to explore when doing this type of effort is to look at our purchases and ask a series of structured questions:

• How much do we buy of this item, both in terms of quantity and total annual spend?
• What is the unit cost? The total landed cost?
• How critical is this item to the customer experience? How critical is it to the operation of the enterprise?
• How many suppliers are there for this item? How available is it in the marketplace?

We use the answers to these questions to define the nature of our relationship with the vendors of these items.  First, we need to rank each on the ubiquitous 2×2 matrix – this time one that ranks annual expense of the item on the X-Axis, and the risk or impact of the item on the Y-Axis.

As we rank each item we are, in effect, defining how we will address that item, and potentially its supplier, and our organization’s relationship with them.

Those items that represent the lowest risk and values to the organization and are sourced from simple commodity-type markets will retain a transactional focus.  Here our effort will continue to be to reduce cost, both in terms of item total landed cost and transactional cost.  The more the procurement team can reduce the total cost of ownership for these, the better. As a result, Items in this item quadrant will have short-term contracts to allow buyers to switch sourcing options frequently. These suppliers also have minimal involvement with the business in terms of design, item specification or planning.

At the other end of the spectrum, there are those items that have a significant impact on the organization and its products/services.  These are items that may have direct effect on the customer experience or that have few substitutes and limited supply in the market.  They can be items that are unique to, or differentiate, your products or may represent a highly complex market segment.

As you might expect, the supplier relationship with these vendors is considerably different.  These represent goods and services that have a significant, potentially vital, impact on the business.  As a result, we want to create long-term relationships and contracts with these suppliers and include them in design and strategy considerations.  In fact, the more strategic the supplier the more we should treat them like partners rather than vendors. It may even be wise in some cases to co-invest in these.  We want to ensure that they see our organization as a “Keystone Client”, the one they have the strongest symbiotic relationship with, the one that gets service before the rest.

A part of that, of course, is to understand the potential strategic supplier’s relationship with the rest of the market.  Are they also servicing our competitors? Will they properly protect our intellectual property (IP)? Will they continue to see us as their keystone client in the future?

Using Risk and Vallue Mapping

Our next step is to begin to look at the 2×2 matrix, the Risk and Value Map, first in broad terms and then, more specifically, how we should handle the goods and services that lie in each quadrant.

In our first step, we can quickly see that the products fall into three general categories:

1. Low risk items, irrespective of the annual volume, tend to be generic or commodity-type items.  They are simple orders that can be generally acquired from several different suppliers, so long as the form, fit and function remains the same.
2. High Risk/ High Spend items, the upper right quadrant, are items that define our competitive advantage.  These are items that have a significant impact on the customer experience, that are unique applications of IP, or that are singles sourced due to technology or resources.
3. Finally, there are the potential problems, the upper left quadrant.  These are items that are high risk, but we spend too little on to have enough leverage or control with our suppliers to protect our firm in the event of disruption or competition.

Now let’s look at how we should handle the goods and services that fall within each quadrant

Tactical Spend

These purchases are characterized by high transactional cost relative to the item unit price. For example, a box of 100 U Drive Screws, 1/4 In , #4, Stainless Steel costs $9.22 at Grainger Industrial Supply, but let’s say your Procure-to-Pay cycle cost to buy and stock it is $92, then the transactional cost is about 1000% of the purchase price.  Clearly, the focus for items in this category should be on minimizing the transactional cost associated with the item.  To do this, we apply two broad strategies:

1. Streamline Procurement Process
   1. Use eProcurement / eCatalogs
   1. Use Procurement Cards (Pcards)
   1. Use EDI for both the procure and pay cycles
2. Minimize number of transactions
   1. Optimize inventory order policy
   1. Leverage vendor managed inventory (VMI) and consigned inventory

Further, we need to view these products as commodities and therefore minimize time spent communicating with the supplier. After all, these are low volume goods we can get from several suppliers.  For that reason, we want to also keep our vendor contracts for these items as short as possible, allowing the freedom to move quickly and often in order to take advantage of price changes in the market.

Leveraged Spend

The Leveraged Spend Quadrant represents those low unit price items that we buy in such quantity that they account for a large spend in aggregate. For this group, the key components of our procurement strategy should be:

1. Streamline the procurement process
   1. Utilize reverse auctions, allowing the suppliers to compete between themselves for your business
   2. Sealed Bid/First Price auctions.  This is the standard request for quote (RFQ)/request for proposal (RFP) approach
2. Leverage purchasing volume
   1. Consolidate orders across divisions and business units to maximize purchasing volume
   2. Add volume for vendor with Combinatorial Contracts.  These are contracts where you include additional products in the quote process to allow the supplier not only economies of scale but also economies of scope
   3. Utilize Industry Portals and/or group purchasing organizations (GPOs). These allow multiple companies within an industrial vertical to consolidate their orders, again with the goal of getting volume discounts
3. Utilize Spot markets to ensure business continuity. As commodity items, multiple vendors are available. In the event of a shortage from your key supplier(s), don’t hesitate to utilize spot markets to ensure that the needs of the business are met.

In this quadrant our goal is to minimize not just the unit price, but the total landed cost (TLC). And how we do that is, in many ways, like what we do in the Tactical Quadrant:

• Be prepared to change vendors based on TLC
• Continuously be on the lookout for new suppliers
• Keep contracts as short and flexible as possible

Strategic Spend

The Strategic Quadrant represents those high volume/high spend items that give you a competitive advantage and/or have a direct impact on the customer experience. Failure in this area of the supply chain can have a long-lasting impact on the brand or the enterprise, and therefore the associated suppliers and supplier relationships need to be carefully cultivated and maintained. Consequently, the Strategic Quadrant has a very collaborative focus. This may incorporate various elements of supplier partnership including:

• Long-term Contracts
• Partnership Agreements
• Co-development of Products and Innovation
• Potential Co-investment

To further mitigate risk, you should also consider what other clients these suppliers serve.  Do they work for your competitors, too? Also, in this quadrant, it may make sense to consider vertical integration, whether actual or virtual (i.e., contractual).  Vertical integration can help reduce risk of supply chain interruption, protect sensitive intellectual property, and provide additional sources of revenue.

Here are a couple of other key take-aways on strategic spend.  First, DO NOT use eProcurement for strategic items.  The usefulness in eProcurement is in its ability to streamline the purchase of routine, low unit cost items to reduce the transactional cost and minimize time spent interacting with the supplier.  Since strategic items basically represent the antithesis of that model, we want to stay away from eProcurement for these items.  Instead, we want to stay in close contact with these suppliers about their shipments of goods and services.  Remember, this is the collaborative quadrant, so pick up the phone and coordinate with your strategic suppliers.

Second, while collaboration is the key here, don’t get so wrapped up in your suppliers that you lose sight of what is best for your company. Focus on strategic supplier collaboration, but ALWAYS protect the enterprise first. And you do this, in part, by building resilience through cultivating at least one alternate supplier where possible, be on the lookout for substitute parts, and optimize safety stock levels for critical items at a risk-appropriate level.

Critical Spend

The final area, the Critical Quadrant, is what should keep you awake at night. These items are where nightmares come from.

You should have one goal with items that lie in the Critical Quadrant – move them to another quadrant. Any other quadrant.  As quickly as possible. These are goods and services that put your organization at risk and at liability.

How and where do you move them? Each item will need to be evaluated separately, but here are some general options.

Move to the Tactical Quadrant. In order to make these items tactical consider looking for more suppliers, thus making them more commoditized.  This may require changing engineering specifications to allow standardization with other, more common parts. Also, you may find that the item’s function can be performed just as well from the customer’s point of view using a less complex part or parts.

Move to the Leverage Quadrant. To make the transition to a leverage part, may again require reviewing engineering specifications to identify ways to simplify the item, making it more widely available. You may also find that the part is used elsewhere in your enterprise.  By consolidating purchases across your organization, you may be able to identify enough total volume to move the item into a leverage buy. And if not, you may be able to consolidate purchases with other businesses – notably NOT to include any direct or indirect competitors – or through an industry-specific GPO to achieve that volume.

Move to the Strategic Quadrant. If the item is identified directly with your company or brand, or if it has a direct impact on your customer’s experience of your products or services, or if it’s complexity cannot be reduced, you must move this item to the Strategic Quadrant.  In fact, if any of the above criteria hold, these items should be your first priority because they represent the most immediate and significant threat to the organization or brand. These are items at known risk that are vital to your product. Don’t delay.

To move these items, you may want to include them in existing contracts with your strategic suppliers to ensure the part’s availability while strengthening that vendor relationship. Alternately, if the item must stay with the current supplier you may need to partner with that supplier. This can be done in several ways.  The quickest is often to agree to pay more per unit or to enter into a long-term contract with a sole-source vendor to ensure availability and the supplier, in turn, agrees to maintain a stock of the items and/or the materials to continue building the item should a disruption occur. You may also want to explore other ways of partnering with this supplier to form some degree of vertical integration, whether actual or virtual. However you go about it, though, moving items to the Strategic Quadrant is likely to incur additional costs, either through higher unit prices, loss of flexibility in future sourcing, or investment in partnering with the supplier.

Digitization

No matter what quadrant you are dealing with, however, it is important to be utilizing the digital tools in your Procure-to-Pay (P2P) toolbox. Each of these, when properly configured and deployed, can reduce transactional cost while increasing operational speed.

Tools like advanced shipment notices (ASNs), Supplier Self-Service portals, Electronic Invoicing and Electronic Payments cost relatively little to implement, reduce both errors and touch labor, and therefore, tend to be “low hanging fruit” that generate quick return on investment (ROI).

In fact, PYMNTS.com[i] recently noted:

• 94% of successful supply chain digitization projects directly led to an increase in revenue.
• Return on investment (ROI) of supply chain digitization initiatives is a top motivator for corporates, with 77% citing cost savings as their top driver for a project.
• Other motivating factors include increased revenues (56%) and the emergence of new business models (53%).

But when planning your supply chain digitization program, it is important to remember that thorough knowledge and a solid roadmap are essential for an organization to avoid a poorly selected starting point or a failed deployment that can destroy momentum and discourage leadership from further investments.

Conclusion

The importance and function of Procurement have evolved over the past century. In today’s environment, a focus not only on price but even more on value is critical to the enterprise to ensure not only its profitability but its survivability. For these reasons, the ability to identify, map, and address the risk and value of materials is a critical skill for the procurement professional. Along with risk and value mapping skills, the digitization of the P2P process reduces cost, increases revenue and encourages new business models.

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[i] PYMNTS.com, “Corporations Stuck in The Planning Phase of Supply Chain Digitization”, Dec. 12, 2018

Risk and value mapping

This is part one of a two-part post on risk and value mapping.  In part one, we provide some historical perspective on how procurement has evolved over the past century and how value-based procurement has become increasingly important.  In part two we discuss the mechanics of applying risk and value mapping and how it relates to supplier relationship management.

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Risk and value mapping –

Then and Now: A Brief History of Procurement

Today we are going to briefly discuss the idea of risk and value mapping, what it is, how it works in procurement, and how it helps protect your organization. But in order to really get a sense of context, let’s start by looking back at the evolution of procurement in modern business and how its role in the organization has evolved.

If we were to step back in time about 90 years ago and find ourselves in Dearborn, Michigan, we would likely see a scene like this.

This is the Ford Motor Company River Rouge Complex. “The Rouge” as it was called, was huge by any standard. It occupies a massive 1.5 square mile footprint along the banks of the River Rouge. And within the complex lie ore docks, sixteen million square feet of manufacturing floor across 93 buildings, and 100 miles of train tracks with 16 locomotives. There were steel furnaces, coke ovens, rolling mills, glass furnaces, and plate-glass rollers. There was a tire manufacturing plant, a stamping plant, an engine casting plant, a transmission plant, a radiator plant, and a tool and die plant. And, oh by the way, they assembled cars here, too.

But there wasn’t much of a procurement operation here.  Why? Because Ford owned virtually EVERYTHING.  The Rouge was one of the most vertically integrated operations of all time.  Ford owned everything from the raw material production – such as ore mining – through final assembly and sales. There was very little bought from outside. Consequently, the procurement operation added very little value to Ford in those days.

But times change and with them how markets work. While vertical integration provides a company ultimate control over its material suppliers, there are drawbacks. Here are two obvious ones. First, it is expensive.  Second, it induces brittleness in the supply chain.

It takes a lot of time and money to be great in one industry, be it automobile, glass, plastics, or steel manufacturing. This fact is exacerbated by the complexity of today’s products. Compare Henry Ford’s Model T to even the simplest car rolling off today’s production line.  I imagine there are more components in a car’s cruise control than there were in the entire Model T. And this complexity brings with it greater barriers to entry at each level of a company’s supply chain.  

Then there is the lack of flexibility.  If a company owns its source of supply in any given area, it is unlikely to have a substantial relationship with alternative suppliers.  That means, when a disruption occurs within a company-owned supply chain, there is little opportunity for mitigation beyond their stockpile.

Henry Ford even saw this in 1927. The one raw material he did not control was rubber.  That was produced in Southeast Asia and managed exclusively by British agents. So, Ford bought a huge swath of land in the Brazilian Amazon to build his own rubber plantation. The effort, however, was a colossal failure costing Ford a fortune and many workers their lives. Ford, in the end, was forced to return to the British rubber agents.

Over time, most businesses have moved further and further away from the vertical integration model and adopted a much more nimble, flexible and less asset-intensive approach – “We do what we do best and buy the rest.”

And with this change, the locus of cost to the operation moved steadily from wages, salaries and overhead toward goods and services expense. And just as early automation was an attempt to minimize the cost of labor per unit of production, this transition brought with it attention on reducing the cost of materials and services purchased.

This was the birth of Procurement as a critical business function.

And it is a critical function. In their book “The LIVING Supply Chain”[i], Handfield and Linton describe a concept the biologist Sean Carroll termed Serengeti Rule 1. “(S)ome species exert effects on the stability and diversity of their community that are disproportionate to their numbers or biomass. These are termed ‘keystone species’”.  Applying this definition to the departments within an organization, we can certainly say that Procurement is a keystone department.  Let me illustrate.

In the example above we are looking at a hypothetical company with $500M in annual revenue. The Baseline column shows its current fiscal performance. Each column to the right shows what happens when the cost of goods and services procured is reduced in 5% increments.  All other expenses remain the same.  As you can see, each 5% step down in cost results in about 11 ½% increase in Net Income Before Taxes in this example. Clearly, this is a case where a department exerts a disproportionate effect on the performance of the enterprise.

And therefore, we have traditionally pushed Procurement organizations to reduce costs, reduce costs, reduce costs!

But there are a lot of other factors that remain unseen, hidden under the waterline of the “Price Iceberg”. Factors like delivery performance, quality of material handling, production delays, inspection costs, pre- and post-sales service and support, product training, supplier financial health, and a host of other risks and opportunities.

While the impact of price negotiation is immediately apparent on the bottom line, focusing exclusively on price often leaves other potential risks and values on the table, unaddressed. There are many other questions we need to be asking beyond, “What is the total landed cost of this item?”.  Questions like:

• What other assets/capabilities the supplier can offer in addition to the product/service procured?
• Is the supplier better with existing activities (e.g., inventory management; after sales support; product development…)?
• Can the supplier decrease our risk (e.g., reducing bottlenecks/critical parts purchasing; disruption response; exchange rates)?
• Can the supplier provide some other competitive advantage (e.g., differentiating factor; new product variant)?
• Can the supplier help expand the product portfolio to address new customer needs?

With value-based sourcing, you seek not only to leverage price, but to leverage the skills and assets of your suppliers to develop and expand competitive advantage in the marketplace. This means at times you may pay a somewhat greater per unit total landed cost in order to reap a larger value for your organization.

In shifting from a solely price-based focus to a value-based one, we need to take into consideration not only the total cost of ownership (TCO), but the additional value provided by the supplier. But this requires a bit of a shift in viewpoint and the broadening of a couple of skillsets. The procurement group needs to maintain as lean a purchasing process as possible for low-value items while developing a strategic perspective, both with internal customers and suppliers, to understand where supplier assets and skills can be leveraged to the organization’s advantage.

Value-based sourcing also means that cross-industry benchmarks have a different purpose.  Instead of seeking to be as good as the benchmarks, with value-based procurement we seek to be better.  Better and different through using the value the suppliers bring to the table. This is done, in part, by moving the purchasing position in the organization from one of tactical and operational specification and delivery to one of strategically coordinating vendor resources and assets to meet the business’ goals. This requires the procurement professional to expand his or her skills to encompass greater general business and finance competencies.

Finally, value-based procurement lends itself to a center-led format. In this particular model, the central procurement organization coordinates enterprise-wide, strategic procurement in direct coordination with the business unit level purchasing organizations which, in turn, provides tactical and operational support to the individual operating units and stakeholders.

Next week in part two of this series we will look at the mechanics of risk and value mapping as well as how you can use risk and value mapping to guide your supplier relationship management strategy.

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[i] Robert Handfield & Tom Linton, “The LIVING Supply Chain”, Wiley, 2017, pg. 11

Last week I was at the Resilience 2019 Conference in Cambridge, MA, co-sponsored by Biogen™ and Resilinc™. Now I go to a fair number of meetings, conferences, and summits, but this one was indeed impressive.  Yeah, they had great food and drinks, but that’s not what I’m talking about. And, yeah, we got to experience Biogen’s virtual reality “cave” where we could walk through architectural floorplans and inside molecules. Very cool, but again, not what I’m talking about. And we toured Biogen’s Global Security Operations Center (GSOC), a 24/7 command center that monitors incidents and potential threats globally while tracking the safety of employees, facilities, and products. An amazing state-of-the-art facility that made you feel like you were in the supply chain equivalent of NORAD’s Cheyanne Mountain Complex, but still not what made this conference a standout.

What I’m talking about is this summit brought together some of the most experienced and brightest people in the world of supply chain. People like:

• Dr. Yossi Sheffi, Director of the MIT Center for Transportation and Logistics (CTL) and a father of supply chain resilience;
• Bindiya Vakil, a former student of Dr Sheffi and founder/CEO of Resilinc™, the leading provider of supply chain resiliency solutions;
• Lee Spach, Sr. Director of Supply Chain and Product Support, who manages all aspects of Biogen’s supply chain resiliency and threat detection, and still had time to be our gracious host;
• Bill Hurles, Executive Director Supply Chain (Retired) at General Motors™;
• Bill Marrin, Executive Director, World 50, Inc. which consists of private peer communities that enable CEOs and C-level executives at globally respected organizations to discover better ideas, share valuable experiences and build relationships that make a lasting impact.
• M.K. Palmore, Field Chief Security Officer in the Americas for Palo Alto Networks and former Head of Cyber Security Branch for the FBI;
• Tom Linton, Chief Procurement & Supply Chain Officer at Flex, and 2017 recipient of the Lifetime Achievement Award from the Procurement Leaders Organization at the World Procurement Congress;
• Dr. Robert Handfield, the Bank of America University Distinguished Professor of Supply Chain Management at NC State University and, along with Tom Linton, co-author of “The LIVING Supply Chain”,

among many others.

Resilience vs Risk Management

And, as you have likely guessed by the title of this blog, the conference’s focus was resilience in the supply chain. So, a quick aside – if you are not really clear on the difference between risk management and resilience, it’s pretty straightforward.  While the two are closely related and there is indeed some overlap, it really comes down to this, risk management is, according to BusinessDictionary.com, “The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention, risk transfer, or any other strategy (or combination of strategies) in proper management of future events.”[i]

On the other hand, Supply Chain Resilience (SCRes) is a relatively new engineering and scientific field of research. An early definition of SCRes was provided by Christopher & Peck (2004)[ii] who defined resilience as the ability of a system to return to its original state or move to a new, more desirable state after being disturbed. Joe Fiksel of Ohio State University amplified this by saying SCRes is the capacity for complex industrial systems to survive, adapt, and grow in the face of turbulent change[iii].  While these are still common base definitions of SCRes, shortly thereafter, Sheffi[iv] made an interesting shift, asserting that SCRes also carries with it the opportunity of a supply chain to be better positioned than the competition and even gain advantage from disruptions. In other words, SCRes is a strategic tool that can not only ensure the enterprise’s rebound from supply chain disruption but can potentially leverage those disruptions to actually create a competitive advantage!

So, in short, Supply Chain Risk Management (SCRM) is about identifying and avoiding risks, while SCRes is about rebounding from and leveraging disruptions that do occur. And since SCRes operates at the intersection of business and STEM, as we discussed previously, this falls squarely in the domain of the Supply Chain Engineer.

But back to the Conference

As you can imagine, with a cast of world-class academics and practitioners like those listed above, the array of topics and events was exceptional. The Role of the CISO and Cyber Risks in the Supply Chain. Managing Risk with AI and Deep Learning Tools. The Power of Analytics and Data in Manufacturing and Supply. Next Generation Operational Centers. Reshape the Enterprise to be a Risk-Ready Culture. Integrating Resilience into the Business Decision Framework. Converting Risk into Supply Chain Intelligence.

And that’s only about half of the sessions.

Obviously, there was too much information to even summarize in a blog but let me try to give you a taste of a few of the key takeaways, at least from my perspective.

Resilience Tools

The SCRes toolset has two main components, redundancy and flexibility. 

Redundancy takes several forms such as redundant means of production, redundant suppliers, and redundant (excess or buffer) stock.  Each of these provides resiliency with little or no loss of speed.  If my plant is damaged by a typhoon, I bring up a corresponding line on one or more of my other production facilities (a bit more about that later when we discuss plant standardization). If my primary vendor has an interruption of supply, I simply use my buffer stock or shift demand to my alternate supplier. There are a few caveats to keep in mind when it comes to redundancy, though. First, any form of redundancy costs you money, money that you are gambling on a disruption occurring at the expense of investment elsewhere. Second, when it comes to alternate suppliers, what at first appears to be a hedge against disruption isn’t always.  Take this all too common example: We get our Referential Universal Digital Indexer (RUDI) from Spacely Sprockets. As insurance against disruption, we spend the time and money to develop an alternate source, Cogswell Cogs. That should protect us from any interruption of supply, right?

Not entirely.

Turns out that both Spacely and Cogswell share a strategic tier-one supplier who is the sole source for one of RUDI’s components, the Sub-Etha, without which the RUDI cannot be manufactured. So, no matter which supplier you go with, you have an equal danger of interruption when it comes to the Sub-Etha channel.

Flexibility is really interchangeability through standardization. Okay, that’s a little oversimplified, but for a short piece like this it will have to do. Think in terms of the Intel™ production facilities. Each one is completely, totally identical … down to the paint on the walls. Now that is standardization. But consequently, what is produced at any Intel™ production plant can be made at any other. So, if an Intel™ plant is knocked out by an earthquake in California, any other one in the world with open capacity can pick up the lost production.

Then there is product standardization.  Here the example is the HP™ Printer. In the US they come assembled and complete with decals.  But go to Europe and it’s a different story.  There, printers are built and boxed, but there is a hole in the side of the box as it sits in the warehouse.  When the order comes, a series of language appropriate labels and font card are added to the container and the package sealed. This one printer can be in western Europe, or in Greece, or Turkey, or Russia.  The core product is standardized, and destination-specific details are added at the last minute.

Next there is part standardization.  Years ago, I worked for an Aerospace & Defense arm of Raytheon™.  We had dozens, perhaps over a hundred, government contracts going on in that facility.  And each time an engineer designed a metal fab part, he or she reached over, grabbed the nearest Granger catalog, turned to the screw section and chose a screw. Consequently, we had several hundred types of screws in inventory.  Had we had a part standardization program in place back then (I’m certain they do now), that number could likely have been reduced to a few dozen. And standardization = interchangeability = resilience.

To carry this whole concept of interchangeability one step further, people should be pliable (read: cross-trained). No one should be the only person who can do a particular job.  If he or she quits, dies, wins the lotto or even calls in sick, that creates a potentially disruptive bottleneck.  By the same token, everyone should know how to do more than one thing.  In many warehouses, each person may be trained to be a forklift operator, a picker, a sorter, and a receiver. This makes each one pliable, able to step in when there is a shortage in another area. And this eliminates another area of risk.

Forethought

A little preparation can go a long way to avoid disruption and to ease the pain when it does happen.  The first step in that groundwork is to source key materials and services with risk as part of the plan. Three specific ways to do this are:

1. Single vs Multi-sourcing. Common wisdom says to always multi-source where possible in order to minimize risk, but as we have seen, that can just be an illusion.  If you multi-source a key product but those various vendors share critical sub-tier suppliers, you are not really getting the diversification of risk you were looking for.  In cases like this it may be better to partner with one vendor and collaborate on – perhaps even co-invest in – mitigating risk together.
2. Supplier Location. When selecting a supplier consider where the supplier’s production and distribution facilities are located.  Are they subject to geo-political threats such as civil unrest, nationalization, or war? Are those areas prone to natural disasters – earthquakes, floods, or tsunamis? Will your intellectual property be adequately protected from competitors and foreign entities? Will your brand be put at risk by local practices such as child labor or the use of conflict minerals?
3. Supplier Financial Health. A vendor’s current fiscal health is a strong indicator of future performance. Rapid Ratings™ reports that companies with poor fiscal ratings are twice as likely to have very poor quality and 2.6 times as likely to have very poor delivery performance as those who are financially healthy.  A 2019 Gartner™ study identified several causes of disruption.  Of the top causes, 36% – the largest single cause – were directly attributed to poor supplier financial health. Another 34% resulted from inadequate supplier capacity, an indirect result of undercapitalization.

Another critical preparatory step is developing playbooks.  These are detailed, step-by-step guides for what to do in a given crisis. Good playbooks are developed through “desktop war games” where key personnel go to a conference room for a day and simulate their response to a given catastrophe, critiquing, refining, and documenting their responses as they go. Don’t waste a lot of time with scenario planning – was the plant wiped out by a typhoon? A fire? An act of terrorism?  While each situation has unique nuances, the main point is that the plant – the resource – is removed from operation; how do we respond and rebound quickly?

Further, the playbooks should focus on three elements in descending order of priority:

1. Life preservation;
2. Asset preservation; and,
3. Business continuity

They should also contain a prioritized list of roles to call when a crisis occurs, listing not only the primary contact’s information, but also that of a secondary and tertiary contact. In addition to business team members, this list should include contact information for fire, ambulance and other first responders including both local and federal law enforcement.

When it Happens

In the event the day does come and a catastrophe occurs, take a lesson from GM: Create a Crisis Suite.  While this should ideally be on premises at the company facility, like the contact list in the playbook, there should also be a secondary and even tertiary location predefined.  Those roles identified in the playbook should report to the Crisis Suite as quickly as possible. Don’t wait to be called as communication lines are sure to be maxed out if it is a regional crisis. Just go.

And what roles should be included? Naturally, every resource is going to require somewhat different teams, but in general you might want to include local operational management from supply chain, operations/manufacturing, engineering, and facilities. Note, I said operational management, not senior management. In the chaos of crisis it is imperative that everyone “swims in their lane”, and that means letting those people who understand the operations best respond quickly.

Final Thoughts – Resilience Future-proofs the Organization

To wrap things up, it’s important to think about “future-proofing” the enterprise.

Remember, resiliency is driven by speed.  Accurate, real-time data drive speed in human decision making. But it is the accurate part that people stumble over.  “I need to clean up my Master Data.”  Well, I‘m sorry to tell you, no matter how much time you spend on it today, you’re going to need to work on it again tomorrow. And the next day. And the next.

Master Data Maintenance (MDM) is an ongoing process in a living, growing organization. It always will be. So, don’t let that be the reason you aren’t building resilience into your organization. Focus on speed and transparency and the data will correct itself. Transparency is, in fact, the key.  Broadcast the shortcomings in your master data rather than hide them. Use intuitive graphics to display what’s wrong, where, and who owns it. People will be motivated to correct those failures under their purview. Enlightened self-interest is a powerful thing, and none of us want to be seen as the weakest link (and, consequently, the greatest risk) in the organization.

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[i] http://www.businessdictionary.com/definition/risk-management.html

[ii] Christopher M. & Peck H. (2004). Building the Resilient Supply Chain. International Journal of Logistics

Management, Vol. 15 Iss: 2, pp.1 – 14.

[iii] Fiksel, Joseph (2003), “Designing Resilient, Sustainable Systems,” Environmental Science & Technology,

Vol. 37, No. 23, pp. 5330-5339.

[iv] Sheffi J. (2005). Building a resilient supply chain. Harvard Business Review, Vol. 1, No. 8, pp.1-4.

Since what we in supply chain management and supply chain engineering do is develop solutions to meet the needs of our employers, clients, and their industries, it only makes sense to build our approach on established lean operations principles. Lean thinking should be foundational to the tools and approaches we use and develop.  In particular, we need to pay constant attention to the five Lean Principals.

The 5 Lean Principles:

• Define value from the customer’s perspective.
• Identify the Value Stream
• Make Value Flow
• Pull from the Customer Back
• Strive for Perfection

Let’s take a moment and look at each of these from the perspective of the Supply Chain Engineer

Define value

According to James P. Womack and Daniel T. Jones, authors of the book Lean Thinking: Banish Waste and Create Wealth in Your Corporation, understanding value is the critical starting point for lean thinking. But what that value is is not set by us, or by our bosses, or the Executive Committee.  Value is set by the end customer, and only the end customer. Put slightly differently, value is the specific goods and/or services that meets a specific customer need at a specific time and for which the customer is willing to pay. Anything that does not fit into that description, is not value. In lean parlance it is muda – waste!

According to the authors: “Lean thinking therefore must start with a conscious attempt to precisely define value in terms of specific products (or services or other solutions) with specific capabilities offered at specific prices through a dialogue with specific customers. The way to do this is to ignore existing assets and technologies and to rethink firms on a product-line basis with strong, dedicated product teams.”

But value is a constantly evolving concept. Often, the solution for today’s issue changes into tomorrow’s pain point.  Over the years, we have seen several examples of this.  Consider the need of the local business units within a large corporation.  The procurement of their goods and services were at one time the exclusive domain of Corporate Purchasing.  But this meant that the unique requirements of the individual business unit were often overlooked in the name of greater order consolidation and cost reduction.  And then came along the “center-led” procurement organization.  In this model, the local unit would purchase most items through a company-wide purchasing agreement negotiated by Corporate Procurement.  But when certain unique requirements arose or when significant cost savings could be demonstrated, the local purchasing department would arrange blanket orders or local contracts with their vendor of choice.

Now, all in all, this is really a pretty good model.  But like most exception-based practices, the exceptions gradually become the rule. So, over time, you end up with buying agreements from multiple locations resulting in multiple vendor records for the same item being stored in the corporation’s ERP systems. Consequently, employees might not know which vendor is the one that they should use for a given order. In the end, the Center-led approach has, in many instances, led to confusion and waste. And so, in these cases at least, a new value proposition has evolved. Each company will identify and prioritize the elements differently, but generally these companies now need to simplify the ordering process and related master data management while meeting the unique procurement needs of the local business unit and simultaneously minimizing the overall procurement cost to the enterprise.

Lean Thinking requires the supply chain manager and the supply chain engineer discover what their customers believe satisfies their specific needs at a specific time. But they must also recognize that this is a continuous improvement process, and not a “once-and-done” approach since problems and requirements change over time.

Identify the Value Stream

The value stream can be defined as the various activities that are required for the three critical business processes we must go through to deliver a solution to our customers, either internal or external.

These three processes are:

• The problem-solving task.  This includes the design, engineering and production of our solution.
• The information management task. The process of receiving demand, scheduling and planning delivery of the solution.
• The transformation task. Creating and delivering the solution to our customer.

But it is when we look at all three of these together as a system that we define the value stream.  Since this stream crosses departmental (and often company) boundaries, it necessarily requires cross-functional collaboration of stakeholders from all the affected areas. And this is where we almost inevitably find huge amounts of waste or muda.

Muda comes in two forms. Type 1 muda is the action that adds no value in itself, but is unavoidable, such as the physical inspection of items upon receipt at the loading dock. Type 2 muda adds no value and can be avoided without damage, such as a poorly laid out stockroom that requires considerable backtracking and wasted time in filling orders.

Back to our center-led procurement example, if we had identified all the stakeholders, Corporate Procurement, local purchasing, the end-users of the items ordered, the suppliers, both corporate and local, and together we had mapped the entire value stream, looking for problems and waste, would we have eliminated the issues we discussed.  Probably not. Exception-based solutions almost always devolve. But those companies that did take this more holistic approach tend to have more robust and durable center-led organizations

Make Value Flow

So now we have removed all the avoidable (Type 2) muda in the value stream. And now there is another, totally counter-intuitive task before us. We must make the value-added steps work together continuously (no waiting, stopping, or rework). That sound simple, but that’s not really the way our brains are wired.  It seems to us that doing things in batches will be most efficient.  Paint all the blue things, then all the white ones, followed by all the green ones.  But this results in a series of “batch and wait” steps. We are, in effect, creating our own bullwhip effect within our organizations.

Let’s go back in time to the early 20^th century and stop by the River Rouge Plant of the Ford Motor Company.  Here we see a very early example of flow processing versus the traditional batch process.  Ford didn’t make all the doors, then all the fenders then assemble them to make all the chassis. Instead, he set up conveyors that continuously moved the cars down the line – a flow – and each car “grew’ in an exact and repeatable process starting with a bare frame and ending with a complete automobile at the other end.  And it was this flow process that allowed Ford to assemble over 2 million Model T’s around the world.

 The same approach should be taken in Supply Chain Engineering. There are several aspects to consider:

• Eliminate specialized departments.

• Focus on the end-solution itself and what is required to complete a single solution.
• Ignore boundaries between companies, departments, and individual roles with the goal of “removing all impediments to the continuous flow of the specific solution.”
• Redesign processes so operation of the solution can flow continuously.

Pull from the Customer Back

Another feature of lean thinking is the concept of “pull”.  The goal is to deliver only what your clients or customers want and when they want it (Pull).  A common flaw in system design is guessing when and what the customers might want and pushing products out. But within supply chain management in particular, we see where this aspect of lean thinking can result in rigidity and a lack of resilience.

Kanban is an excellent example.  A Kanban system, whether single bin or dual, provides a just in time supply of inventory with the minimum of excess overhead. But the cost of that is a certain inflexibility.  If, for example, there is a sudden variation in either supply or demand, you may find yourself without sufficient inventory. And if there is any significant disruption to the supply chain, you have no buffer to mitigate the situation. For that reason, it is prudent to maintain a certain centralized safety stock of critical items.  But at the customer end, pull still remains the key.  For example: “No one upstream should produce a good or service until the customer downstream asks for it.” It is these real-time signals that indicate to upstream activities when more is needed.

Strive for Perfection

And finally, the improvement of processes never ends. You must always strive to design, develop, make, and deliver a better solution while improving efficiency. Think once more about our center-led scenario. In the cases where this has degenerated into confusion and disarray, was a continuous improvement mindset used? Most likely not, for if it had, the problems would have been identified and addressed long ago.

To continuously improve:

• “Form a vision, select the two or three most important steps to get you there, and defer the other steps until later.”
• Don’t settle for just being better than your competitors or even your current business practices; if you’re not moving forward, you’re moving backward.  You can’t stand still.
• Observe your outcomes. Analyze the results. And constantly look across the entire value stream to discover new opportunities for improvement.

Lean thinking can make your make your organization’s supply chain more effective, more efficient and more nimble.  And it can make you a better supply chain engineer.

In our last post we discussed what is a supply chain engineer. With this post, we start to explore what an SCE does beginning with developing a strategy and roadmap for supply chain digitization

Overview

Digital technologies provide a competitive edge by improving the speed and quality of the supply chain while reducing risk and enhancing innovation. Companies that wait too long to launch their supply chain digitization projects risk being outmaneuvered by more agile competitors. Yet, many companies have been slow to embrace the usage of digital technologies within their supply chains for two main reasons. Many have had a bad first experience implementing digital solutions. For others, the return on investment (ROI) isn’t clear, or the executive team doesn’t understand why the supply chain should be a strategic priority for information technology investments.

But the economic and strategic benefits of digitizing the supply chain are real.[1] For example, International Data Corporation (IDC), a leading market intelligence firm, reports digitally-mature companies will achieve $430 billion in productivity gains over their less connected peers.[2] Along with reinforcing the market need for digitization in the procurement space, research highlights the five most important digital solutions, according to the businesses surveyed:[3]

1. Inventory management systems. Hardware and software systems that record, track, and manage inventory levels through the procurement value chain
2. Cross-domain master data management. The collection, cleaning, and management of data from across a company’s businesses and functions within a “single source of truth” repository
3. Contract life cycle solutions. Solutions standardizing and automating contract initiation, creation, negotiation, and execution
4. Supplier quality management. Software allowing buyers to engage and collaborate with suppliers to manage product quality, delivery, and other aspects of supply
5. Spend analysis. Collecting, cleaning, and analyzing organizations’ expenditure data to drive internal strategy, decision-making, and compliance

Digital supply chain solutions not only create opportunities to improve efficiency but also pave the way for supply chain teams to play a strategic role in accelerating innovation.

These benefits can be divided into two broad categories–identifying and creating value and preventing value leakage–which, in turn, can be broken down into more detailed elements.

Identify and create value

• Collaborative and advanced sourcing
  • Supplier qualification and selection: Supplier x-ray – Tier-N supplier insight monitoring for qualification, selection, risk management, and negotiation
  • eCatalogs and eProcurement tools to facilitate sourcing and reduce transactional costs
  • Supplier collaboration platforms such as eSupplier Connection to foster supplier collaboration and innovation
• Spend Analysis
• Network or market data intelligence

Prevent value leakage

• P2P process workflows: Procure-to-Pay workflow and approval support
• Electronic Invoicing
• Demand Forecasting
• Inventory Optimization
• AP Recovery Audits
• Performance Management
  • Supplier performance scorecards: Automated scorecards and supplier performance management tools
  • Procurement organizational performance scorecards: Automated scorecards and performance management tools for the procurement organization

Getting Started

The abundance of competing technologies has made it difficult for companies to determine where to begin transforming their supply chain. Plus, the stakes are high to deploy a digital solution that adds value from the start, because a failed deployment can dissuade leadership teams from further investments. A disciplined, user-focused approach to transformation is critical to the overall success of the enterprise’s digitization journey. To achieve the best outcomes, procurement executives can begin building a sound strategy by choosing two to four digital tools that have a proven track record in the market. This process should be preceded by crafting the enterprise’s digitization vision, analyzing its current digitization status and maturity, and developing a transformation design and roadmap. From this process, a series of deployment sprints can bring about a successful transformation.

Supply chain executives facing the task of digitizing their procurement function can benefit from the helpful practice of creating a digital procurement roadmap, which will ultimately reduce costs and free capacity for more strategic activities. We recommend a five-step approach to supply chain digitization projects:

1. Gather data. Collect information on digital trends from the company’s leadership, the industry, the market, and procurement executives. What are the company’s digital goals and strategies? What vendors and solutions are other companies in the industry utilizing?
    
2. Create a vision. Focus on three to five years from now. What processes should be digital? What solutions does the company want to implement? Define how procurement will work with business unit leaders and vendors to accelerate innovation and results.
3. Digital maturity analysis. Assess which elements of supply chain digitization are already implemented or have been purchased but not installed (shelfware). What processes have already been developed and deployed to accommodate digitization.
4. Design a roadmap to get there. Supply chain executives should set detailed priorities, including near-term goals, to achieve the organization’s digital vision. They should also prioritize clean data, an agile operating model and a digitally skilled workforce when implementing new solutions.
5. Implement in a series of rapid “sprints.”  Instead of trying to coordinate all the anticipated changes into a single, integrated project—where errors or miscommunication can mean months of rework—make constant, small improvements in quick “sprints” of activity. 

While each organization’s journey will be unique, there is a general progression of tools and applications that, if deployed in broad phases, can result in a “rolling thunder” of momentum toward full digitization.  A recent survey of 243 procurement professionals rated 22 digital solutions.[4] The tools that scored high on customer satisfaction have shown a higher likelihood of successful deployment and can help build momentum for digitizing procurement.

Phase 1: Start with solutions that rank high in user satisfaction.  Successful deployments build momentum for digitized procurement.

• Accounts payable recovery audits
• Collaborative data platform (e.g., eSupplier Connection)
• Supplier quality management
• Electronic invoicing (eSettlements, Transcepta)

The next logical step is choosing tools that rank high in importance for the organization and relatively high in satisfaction. They

 include inventory optimization (IO), supply chain resilience, and cross-domain master data management. These solutions also are likely to be successful and deliver a meaningful ROI, demonstrating the value of digitizing procurement.

Phase 2: Deploy solutions that users rate as most important and high on satisfaction.  These tools are likely to deliver on ROI.

• Procure-to-pay suite
• Performance management system
• Inventory optimization
• Resilience & risk management
• Cross-domain master data management

The third cluster of tools includes those ranked high in importance but lower in satisfaction, largely because they are less mature or highly complex. That group includes contract life-cycle management, demand forecasting, and network or market data intelligence. These solutions are riskier to deploy and manage but still important for an organization–so proceed with caution and do proper due diligence to ensure you’re selecting the right solution.

Phase 3: Proceed with caution on solutions with lower satisfaction ratings and ensure that they are a good match for your needs.

• Demand forecasting
• Spend analysis
• Network or market data intelligence
• Contract life-cycle management

There are genuine benefits to digitizing the supply chain. For example, according to the online business and finance magazine PYMNTS.com[5],

• 94% of successful supply chain digitization projects directly led to an increase in revenue.
• Return on investment (ROI) of supply chain digitization initiatives is a top motivator with 77% citing cost savings as their top driver for a project.
• Other motivating factors include increased revenues (56%) and the emergence of new business models (53%).

However, those who are reluctant to digitize risk being displaced by those who are not. Armed with knowledge and a solid roadmap, an organization can sift through the plethora of options to avoid a poorly selected starting point or a failed deployment that can destroy momentum and discourage leadership from further investments.

For more information, contact Carl@TheSupplyChainEngineer or Sierra-Cedar.com.

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[1] See for example, Paul Myerson, Management and Decision Sciences, Monmouth University, Supply Chains Need to Turn to the Digital Frontside, Industry Week, November 1, 2017

[2] “The Value of Real-Time Visibility and Predictive Intelligence for Supply Chains,” IDC, October 2016

[3] Paul Myerson, Management and Decision Sciences, Monmouth University, Supply Chains Need to Turn to the Digital Frontside, Industry Week, November 1, 2017

[4] Source: Bain Digital Procurement Survey, 2018

[5] PYMNTS.com, “Corporations Stuck In The Planning Phase Of Supply Chain Digitization”, Dec. 12, 2018

Visit us at our new home – VertexSupplyChain.com

Not long ago I introduced myself to a client as my company’s Director of Supply Chain Engineering Services.  He responded, “Supply chain engineering?  Wow, that sounds important.”

There may have been a hint of sarcasm in his voice, or it may have just been my imagination. But either way, he was right.  Supply chain engineering, or SCE, is a new, exciting … and important field.  It is where the applied sciences of engineering and information technology meet the business of supply chain management.

But it is such a new field that its boundaries are not well defined.  For example, if you go to Wikipedia, you will find this: ”(In SCE) strategy, engineering and IT are not regarded separately but equally and integrated in all planning steps. Solutions for supply chain design that follow the SCE approach are therefore considered to be holistically and always influenced by engineering. All measures that follow the SCE process focus the most ideal supply chain construction whilst regarding cost optimization, a correct use of engineering and IT as well as training and integration of employees in production centres and logistical facilities.”[i] I have read that several times now and I am still not quite sure what it says.

And if you pull up the Council of Supply Chain Management Professionals (CSCMP) glossary, you will find a very detailed definition of  supply chain management (SCM): “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.”[ii] 

Let’s make that a bit more succinct. SCM is the combination of business functions such as purchasing, logistics, production, and sales to move goods from raw material to the customer.

What you won’t find is a definition of supply chain engineering there.  Nope.  Not even a passing reference to SCE. And that’s not a slam to either the CSCMP or supply chain engineering. It is simply a testimony to how nascent this area of discipline is. And that’s probably why there is so much confusion around the subject. 

I have witnessed that confusion in the field. I have been places where a former IT guy manipulates item and supplier Master Data Files, so they called him a supply chain engineer.  But he’s not.

I’ve been where the lady who does the bid analysis is called a supply chain engineer. But she’s not.

So, what then is Supply Chain Engineer and how does it differ from a Supply Chain Management professional?  Well, at a very high (and somewhat vague) level, SCE is co-equal blending of business strategy, IT, and engineering. Alan Erera, director for the M.S. in Supply Chain Engineering program at Georgia Tech, offers a more concrete definition; “I view supply chain engineering as the application of the principles of management science, industrial engineering, operations research, and analytics for the design, control, and analysis of supply chain systems or their components.”[iii]

Put slightly differently, supply chain engineering (SCE) is the use of applied mathematics and applied science to analyze and optimize elements of the supply chain to meet specific business requirements.

And there you have it – the difference between SCM and SCE.

SCM says we need to have safety stock to prevent stockout.  SCE mathematically calculates the optimal amount of that safety stock for each item based on user-defined constraints.

SCM defines what the required service level is for meeting customer demand.  SCE analyzes demand and supply history to optimize the inventory policies to ensure those service levels are consistently met without unneeded investment in excess stock.

SCM determines the need to collaborate with upstream suppliers to ensure maximum profitability across the entire supply chain.  SCE identifies the tools and technology required to enable the requisite transparency as well as performs the analysis to optimize the profitability across the supply chain.

SCM recognizes the need to add a new distribution center (DC).  SCE determines the optimal location for that DC in order to minimize total investment and operating cost.

What makes a good SCE? First, like any true engineer, he or she must have a strong background in mathematics.  In the case of SCE, areas of statistical analysis and modeling are especially important. This includes subjects such as:

• Predictive (What could happen?), Descriptive (What has happened?), and Prescriptive (What should we do?) Analytics.

• Deterministic models and optimization techniques including linear programming, network flows, integer programming, and heuristics.

• Probabilistic models including the effects of variability in both supply and demand; forecasting and simulation.

They must also have a comprehensive understanding of the functional processes involved in a supply chain, including:

• Production scheduling; inventory management and warehousing, including stocking strategies, order-picking, sortation, automation; distribution.

• Problems of coordination and collaboration along the supply chain; make-or-buy decisions; pricing and auctions; wholesale and retail channels; supply chain dynamics, including the bullwhip effect. Distinctive supply chain issues in key economies.

• Familiarity with truckload, less than truckload (LTL), and last-mile transportation systems; container shipping, including port operations, steamship scheduling; railroad operations, including intermodal; air cargo. The international freight network and patterns of freight flow. Management and recirculation of trailers/containers, along with related labor issues.

• Planning and executing systems for inventory, warehousing, transportation, import/export, etc. Services-oriented architecture, cloud computing; systems integration; RFID and other technologies for scanning and monitoring.

So, I have to agree with my customer, whether he really meant it or not, Supply Chain Engineering is important.  It can be the difference between profitability and loss. It can determine a competitive edge. And in some cases (think Amazon and Walmart), it can mean market leadership.

And that is what Supply Chain Engineering is.

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[i] https://en.wikipedia.org/wiki/Supply_chain_engineering

[ii] CSCMP Glossary; https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx?hkey=60879588-f65f-4ab5-8c4b-6878815ef921

[iii] https://www.quora.com/What-are-the-core-differences-between-supply-chain-management-supply-chain-engineering-and-industrial-engineering