News U Can Use

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Archive for May, 2010

We Need More Value Based Sourcing Performance Measures

Posted by ron sanderson on May 20, 2010

In an earlier post, I questioned the belief that Strategic Sourcing as currently practiced is truly “strategic” (How Strategic is Your Sourcing?)  It seems that the vast majority of Sourcing efforts are at best no more than high quality procurement practices, such as volume and supplier consolidation.  What’s missing is the more complex value oriented piece that makes a process truly strategic in its focus.

That word “value” has proven to be a difficult concept to pin down.  In retail environments, “value” is most often associated with consumers paying the lowest prices for good products and services.  And although value can be thought of as a sort of ratio of the total package of quality, service, and other factors received from a purchase divided by price paid, the value that should be a driving force behind every Sourcing project is a little different.

I would propose that the starting point to all Strategic Sourcing programs, strategies, and projects is an assessment of the value that is desired by the organization, and how a Sourcing initiative can add to that value.  How does an organization define value?  How is it measured?  What is the impact of increasing the total value?

It continues to amaze Supply Chain consultants how often a client will speak glowingly of the Strategic Sourcing process and how focused it is on real results, and yet there are no real performance measures.  Even when there are formal metrics in place, they are most often the kind that measure operating statistics, such as errors per purchase order, or number of invoices paid against a purchase order.  It’s good to measure purchasing efficiencies, but Strategic Sourcing should be all about contributing value to the organization, not about day-to-day operating efficiencies!

What do we mean by “value,” an often misunderstood word?  To begin, value is not about TCO, or Total Cost of Ownership.  TCO is a useful concept that looks at a broader definition of cost than just price and is a useful way to evaluate the true cost of selecting a new supplier, for example.  Value is also not about basic service, quality and other inherent elements of a supplier’s product or service offering.  When you measure on-time delivery performance, for example, you’re not measuring “value,” but rather a basic level of expected service from a supplier.  Customer satisfaction deals with providing great service, including dealing with errors or problems.

But real value to a customer comes from the way a product or service is able to make the customer more successful! Find a way to make a customer feel that he/she has become more profitable from the relationship with your company, and that customer will say that truly high “value” has been received!  Or use your Supply Chain to help a customer gain more of a competitive advantage, such as when your seamless Supply Chain assures customers of higher than normal assured availability of required goods, so that those customers can offer much faster make-to-order products that require less internal inventory, and you’ll have customers who perceive that they are receiving high value from you!

Another example is to lower risk for a customer.  When a customer in the financial services industry, for example, attempts to provide the greatest possible assurance that consumer data will be securely maintained, risk management is critical.  The OCC (Office of The Comptroller of the Currency) regulates banks in part to protect sensitive consumer data.  An external supplier such as a software vendor may have access to such sensitive data, and if the company has created state-of-the art technology and processes to ensure that such risk is minimized, the customer will see those services as providing high value.

Higher revenue, higher profitability, lower risk, competitive advantage – these are all some of the more strategic ways to provide real value to customers, and the Supply Chain can play a key role in providing this value.  When you perform Strategic Sourcing, have you attempted to evaluate suppliers based on how they can make your company more successful?  Which supplier relationship will lead to the greatest risk mitigation in some critical area of concern?  Can a supplier be a true partner in your major product development programs in order to provide you with an even greater competitive advantage during the critical introduction and sales growth phase?  Is there a supplier that can help you achieve greater revenue growth simply because of a superior Supply Chain capability?  And have you incorporated any real value oriented performance measures into your RFPs or into your supplier measurement process?

If so, drop me a line.  I would be interested to hear about it.


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Newton’s Law….the Apple falls??

Posted by dalipraheja on May 13, 2010

Here is another classical example of a major Supply Chain failure (NOT a Supply Base failure!!!).  The essence of it is that the demand for the iPad was so enormous that Apple has had to delay the launch in many parts of the world.  The reason cited is that Apple did not predict the type of demand that materialized and therefore they ran out of product.

WOW…Apple blows a major product launch???  Why are all the icons falling so fast? This is also a learning moment that we should pause and reflect on as it raises some very interesting comments and questions…n’est ce pas?

  • One more time, it clearly demonstrates that the effectiveness of a Supply Base is clearly dependent on the customer’s(Apple) Supply Chain which in turn is clearly driven by demand planning(or lack thereof).  How many more times do we need to see this in our organizations before we all start acting on this issue?
  • Clearly, the promise of ERP systems and everything that followed them have fallen short(surprised anyone?).  I was there in the early, early days of the maturation of the ERP market (I know I look much younger 🙂 ) and I remember the promises made around end-to-end integrated, seamless planning
  • How come almost ALL planning processes never, ever plan for success?  We all have contingency plans that revolve around failure.  This would mean that the Supply Base and perhaps the Supply Chain was not designed to be flexible enough to handle a successful launch?  Was the Supply Base and/or the Supply Chain perhaps too LEAN??  Was too much cost squeezed out?  Yikes, did I really say that?  Ummm, yes I did and I meant every word of it.
  • From the conspiracy theorists:  Could this be an artificially created shortage to generate more buzz?  Could it be Apple’s way of buying some time to fix some of the problems they’ve been having with the iPad?  I seriously doubt that any of these are true and merely bring them up to dismiss them.
  • This will allow their competitors a little bit of extra time to sow some F.U.D. regarding the iPad and to launch their competing products.  And in this day and age, when product life cycles in consumer computing are shrinking rapidly(Kindle?), months can mean a lifetime.

If an icon like Apple(who has had a fairly good record of successful product launches) can have something like this impact what is clearly a ground breaking technology, it should make you pause and think.

Are we, as Sourcing/Supply Chain professionals, focused on the real value generators for our companies?  Or, are we focused on the short term tactical goals for price and TCO?

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