Discuss, debate and exchange ideas on latest trends and opportunities in the Business Process Outsourcing (BPO) landscape. Deliberate on adding “business value” to clients, vendors, employees and various other stakeholders to enhance customer satisfaction and sustain long term partnerships.

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May 21, 2012

Theory of Constraints

As my first post, I would like to start on a topic which is of immense interest to me. This is the Theory of Constraints (TOC) which was originated by E. M. Goldratt. TOC is in simple terms, the focused or lazy man's style of doing operations.

When I mean lazy, I borrow from the quote, "Whenever there is a hard job to be done I assign it to a lazy man; he is sure to find an easy way of doing it."

It helps us to answer many questions such as the one below.

When 100 people are doing some work process in 1 day, how will we be able to increase the work done to twice the amount in a day?

Now, what is the first thing that comes to mind?

We use the old math problem we solved in 5th standard to say that it will take twice (i.e. 200 people) the amount of people to do the work.

If that were the case always, Infosys or any other company will never be able to achieve the non-linear growth model.

To answer the above question better, let's take another example of 10 people going for lunch. What is the speed of the entire group in reaching the lunch place? If we think it is the average speed of the whole group, it is a common but wrong assumption. It is the speed of the slowest member of the group. (i.e.) Everyone reduces their speed to match the slowest member of the group. In other words, a chain is only as strong as its weakest link.
This weakest link or the slowest member is known as a constraint.

Hence in order to speed up the whole process or to increase the work done in the same amount of time, there is absolutely no use of making everyone to work faster.

Many people in the process do not work simply because they do not have any work! This may be surprising to many managers because they can see a lot of work pending and if one says that there is no work, the manager will simply laugh it off.

To explain this, I have put in a simple process flow. The below figure shows the capabilities (Shown as number of work units performed in some time) of the people (Marked as circles) in a process.

 

ToC1.pngHere, it is seen that the first person can do 10 units of work in the time that the second person can do 5 units of work and so on (15 for third person and 20 for the fourth person)

But when the work starts, the manager sees only the following happening below.

ToC2.png

As seen here, the third and the fourth person inspite of being able to do much more, work only for 5 units of work and (depending on the manager) start idling or act as if they are busy.

Not only that, as the first person is sending 10 units of work to the second person, the work gets piled up in the middle leading to delays and worse, work units getting misplaced.

There are many ways of increasing the speed of the flow of work (No...This does not include firing the person in the middle) such as reducing the load of the person who is the constraint (2nd circle), increasing the number of people doing that one piece of work (thus enhancing the flow of work for the entire line) or even changing the form of work itself.

Hence coming back to the first question on how to increase the amount of work performed by 100 people, often there is no requirement of a proportional increase of personnel. A rearrangement of people can work wonders in increasing the output even to 50 - 100% of the current output.

This is only one part of the vast topic of TOC. More parts on the same topic should come soon.

May 17, 2012

Are Third-Party Product Companies in the F&A Space Dead?

Developing solutions in-house vis-à-vis on-boarding an alliance partner (3rd party product companies in F&A space) to drive differentiation in F&A functions is a very tricky subject. Companies in F&A outsourcing business made different choices. We at Infosys BPO decided to focus on developing solutions in-house except in the case of a few strategic areas where developing solutions will have a long gestation period and there is network effect. In the last one year or so outsourcing companies have started to focus on developing solutions in-house as well.

In order to understand why we decided to focus on in-house solutions it is important to understand why outsourcing companies require additional technology solutions in an already complicated technology landscape.  There are primarily three reasons for additional technology solutions:

  • Functionality gaps in core financial application system - The current application, whether a leading ERP (Enterprise Resources Planning) software or a home-grown application  to manage F&A function, does a fairly good job of managing core transactional processes but struggle to manage exceptions in the process. Moreover enterprise applications are not nimble and flexible enough to meet the changing requirements of today's business environment. For example, it is hard to imagine that even after 30+ years none of the leading ERP's has an inbuilt mechanism to manage non-PO based vendor invoices with appropriate control and audit capability.
  • Complex and non-standardized technology landscape - In the majority of Global 200 enterprises, the technology landscape has become very complex as applications were added during the growth phase to cater to a new business line, geography or additional function. Furthermore, many organizations have taken an inorganic route to growth which has resulted in a disparate and disintegrated technology landscape. While these organization are going through top-down analysis to streamline and simplify their technology landscape they require an application that will make the inherent complexity of technology landscape invisible to end-users.
  • Outsourcing on business processes - By definition outsourcing will lead to processes getting managed remotely and it is imperative that vendors (BPO companies) provide an additional level of visibility, control and audit capability to ensure that the client has full visibility into processes, and risks are managed appropriately.

Many companies (3rd Party Product Companies) identified these gaps and developed products / solutions integrated with leading ERP to manage these functionalities and provide a seamless experience to users. Over time leading ERP vendors have incorporated many of these functionalities into core application reducing the functionalities gaps. In the meantime, 3rd party solution provider also enriched their solutions to make sure they provide better and richer experience to user. The twin development has created a situation where overlap between ERP application and 3rd Party solution have increased significantly thereby making the business case for 3rd party solution weaker. Moreover, many companies are using outsourcing of processes as an opportunity to streamline their processes and technology landscape and looking for solutions that can complement existing technology landscape. The solutions companies would like to invest in should have following characteristics:

  • Flexibility - The solution should be modular and each component should easily get coupled and de-coupled as needed. 
  • Quick implementation - Solution should get implemented along with transition of processes to create seamless experience.
  • Should complement existing technology landscape - The solution should be technology and application agnostic and should be able to work with multiple applications as Fortune 2000 enterprise have already made significant investment in technology applications.
  • Minimal investment - The implementation of solution should require minimal investment.

The 3rd party solution more often than not does not provide the value for investment and adds to the complexity of the technology landscape as well. Moreover, client expects BPO vendors expertize in recommending and implementing right solution which is a very different operating model for 3rd - party product companies as they have been selling directly.

May 14, 2012

Uncommon and breakthrough purchasing savings levers - Series 4 (Lever - SG)

Objective of the series: Hi there. I plan to share some very interesting avenues through an exciting series of at least 5 blogposts (Depending upon the response, I can consider sharing more). In each of the posts, I will share a few highly impactful savings levers that generate very high level of annualized savings across many industry verticals. These levers are still not widely used just because they are hardly covered in the common Sourcing & Procurement literature or practices. Hope you will find them useful, apply them somewhere and come out with flying colors. Wish you good luck and enjoy the read.


SG - What is SG? I am sure this is an obvious first question in every reader's mind. SG's expanded form is Services Guarantee.

SG is a contractual commitment from suppliers to buyers on how would they recover failures in contracted service and compensate buyers. A formal mechanism is specified by suppliers and often validated by buyers during pre-RFI/RFP/award discussions with buyers. But what is the scope of SG? Well, in my 20 years' experience across all the spend categories, I believe that SG is a breakthrough savings lever that is spend category neutral or applicable to all the spend categories (i.e. Direct, Indirect materials and services, MRO, Capital). Firnstahl 1989, Hart 1993 reported that significant cost savings can emerge, even though they were not the initial motivation for the introduction of guarantees. It also reduces supply exposure/risk with TQM equivalent rigor from both suppliers and buyers thereby increasing supply reliability. Having or not having SG defined in RFIs, RFPs and contracts is a sort of barometer test for the purchasing knowledge of buyers and organization capability of suppliers. From the next paragraph onwards, this will become clearer.

Hart (1993) and Wirtz (1998) did some seminal study on SG relevant to hospitality industries (B2C focused study). The difference here is that we are discussing SG in the context of B2B environment. Folks working with Automotive or Tier-1 firms would know JIT/VMI etc. clearly which are replenishment processes. I will stretch their imagination further by adding that these are one of the capabilities of suppliers to fulfill the service guarantee and ensure that service from them (to provide parts on time with self-certified quality) is impeccable. The suppliers need this greatly too while on the face of it, it may feel that why some supplier should commit into things like assured service guarantee. Simple. All suppliers want that their customers (buyers in case of B2B) are satisfied, retained for year on year business, be able to find and drive process improvement opportunities and therefore improve their financial/stakeholder performance.  The other reality is that suppliers often perform their best only when buyers demand/drive more and more (all the purchasers know this well). So I would say it is more contingent on buyer to demand and include SG in all the spend category contracts and Purchase Orders (irrespective of large or tail spend items/services). Hart (1993) found that many companies actually re-engineer their processes from top to bottom in order to bring quality up to the requirements of their guarantees.

So here is how buyers should sell/convince suppliers on agreeing to include this clause in the contracts/POs:  SG programs provide buyers and suppliers with proactively defined processes and mechanisms to monitor data on poor performance, track errors and thereby help both organizations to identify and remove fail-points. The customer/buyer firms, in the long run, might be willing to pay a premium for suppliers' service as the perceived/expected value of service will increase for them. Improved performance will also help suppliers reduce the process cost and cost of losing customers or rework. The employees of suppliers' firms also benefit by having the satisfaction of providing error-free service and possess high morale.

As an example, refer UPS service guarantee and extent of compensation at http://www.ups.com/media/en/terms_service_amr.pdf. Similar clauses/sections can be considered by buyers to introduce in RFIs/RFPs/Contracts/POs etc.

However, services guarantees have the downsides of misuse too (e.g. putting barricades to apartment gate so that pizza delivery fails for 30 minutes delivery guarantee and a free pizza is obtained). The adequate and just drafting of these is much beyond having SLAs, KPIs, supplier performance scorecards. Consider taking help of procurement outsourcing service providers to design commodity and supply market specific RGs as well as get them accepted from suppliers.

Found this post useful and refreshing? Want me to write the 5th and the last in the series? Want to extend the series? Send me your views. Thank you all.

May 8, 2012

Strategic Sourcing Through Keiretsu Suppliers of Toyota

Objective: Hi everyone. By virtue of my coming from Toyota, with which I was associated for a major part of my career, I like to share a few interesting perspectives on Toyota's Keirestsu suppliers. I was fortunate enough to manage key Keiretsu suppliers of Toyota, who continue to contribute significantly to Toyota's progress worldwide. These suppliers are a significant piece in Toyota's strategic sourcing principles. The objective of this blog is to take you through the Keiretsu concept, how would a Toyota sourcing manager manage these suppliers and how would one leverage relationship with these suppliers to obtain long term savings and supply reliability (a TQM philosophy for Purchasing - variability reduction in everything is the prime focus).

Since I have directly managed some key Japanese suppliers such as Denso, Sumitomo, Yazaki, Toyota Boshoku (earlier Araco), Panasonic, Sony, Toyota Tsusho and Alpine and indirectly (Japanese technical support for non-Japanese suppliers) managed a few such as Shin Kobe (for Exide batteries) and Toyota Gosei, I would like also to share a few personal experiences, without reference to numbers, actual strategies and the specific supplier details. I would like to share this as one of the initial ones that I like to blog further as a series, if I get good responses. A few of the above suppliers (not all)  have a Keiretsu relationship with Toyota.

Introduction to Keiretsu and its meaning: Toyota has controlling stakes or cross holdings with the key suppliers in its supply base - this is to enable Toyota control some important supply parameters like cost, quality and delivery and also TTM (Time to Market). This closely knit supply base form what is known as the "Keiretsu". This is one of the many ways in which Toyota manages the uncertainty with respect to the supply conditions.

Toyota realized that suppliers played a bigger role in the OEM's success than the OEM's own efforts and developed ways and techniques to reduce the risks and uncertainties in the environment. One of the ways was to not treat suppliers "as suppliers" but as partners. This is one single biggest factor that contributes to what is generally accepted as the "Toyota Way in supplier management".  Toyota recognizes that about 70% of the vehicle cost can be controlled by an effective supplier base and inbound logistics.

Why Keiretsu? As a sourcing strategy, Keiretsu is used to: (1) reduce / control supply risks, (2) enhance supplier capability / competitiveness and (3) achieve market growth.

(1)    Mainly a risk reduction strategy - supplier financial risk, quality risk and risk of supply chain disruptions. Keiretsu suppliers have strong financial indices and the best inventory practices. Toyota sourcing teams have a constant tab on the financial ratios of these suppliers. Quality of parts is determined through concurrent engineering (with detailed deployment of PFMEA, QFD and other concepts) involving teams from sourcing, product development, marketing, quality and production teams. Building quality robustness is important because TPS needs Kanban and Kanban has lesser tolerance on part disruptions, thus closely weaving the supply chain closely into the product development system itself. Most of these suppliers follow VMI, Kanban, cross docking and Jumbiki (in which JIT is taken to the extreme with parts being picked up from the supplier every 15 minutes !! Like to explain this in more detail in the blogs to come)

(2)    Supplier Competitiveness - this signifies overall competitiveness especially cost, quality and delivery as also product innovation. The key component of this piece is cost. Unit price from these suppliers to Toyota is generally perceived to be higher than the competition. Then, how is it possible to bring in cost competitiveness? The answer is this: Toyota provides the overall specification of the components to these suppliers through a request for designing and developing a part / component with a specific cost target (shall explain in detail about cost targets in one more blog). The cost includes the TCO of the part. The costs from the concurrent engineering phase, the supply chain costs (in implementing TPS) and field performance are taken into the part cost. Hence the cost of the parts that get assembled onto a vehicle are perceptibly costlier on the face of it since it is a TCO cost but significantly lower the overall cost of ownership!! As an examples a Denso starter / Alternator is a galactic wonder - can run over two lifetimes of the vehicle (I wish I could explain here the technology behind a square cross section wire, a Teflon coated bearing or a unique torque curve)

(3)    Achieve market growth - here is what a long term supplier relationship can do, more significantly than achieving volume discounts and consolidation. Most of these suppliers are firsts in achieving something remarkable for the OEM. The first halogen free wiring harness in APAC or the first AC to release hydronium ions for a rejuvenated feeling in the car (the New Camry). This not only helps in reducing the TTM but also helps in a strong product positioning and customer recall.

Only handpicked Toyota buyers manage Keiretsu suppliers since these suppliers are generally exacting from the standpoints of the buyer's knowledge on TPS, sourcing and Toyota's yearly Hoshin (I shall explain more in detail about Toyota's Hoshin Kanri and sourcing principles in one of the upcoming blogs). The spend is generally very high due to the value of the parts and there are a lot of simultaneous initiatives running such as VA/VE (for a car release 3~4 years later), productivity improvements, SARBOX, SOC (substances of environmental concern), best cost parts for BRIC countries and so on. One of the basic learnings for anybody in the KM / IT / ITES / ICT industry is the visual control systems that these manufacturing bellwether companies handle - used for project management, stakeholder management, product development and simply for PDCA. And I realize that visual control itself is a blog that I can share sometime !!

One of the possible disadvantages of partnerships with suppliers (Keiretsu) as opposed to what is followed by other OEMs is that the suppliers make many of these parts as blackbox parts so as to provide competitive advantage to Toyota!! Nevertheless, very important components of a car in terms of value and criticality are developed with Keiretsu companies. Some critical parts are the ECU (Engine Control Unit), Seating System (government regulations are strong here), Air Conditioner etc. In most other semi / less critical parts, the supplier has to make the drawing as per Toyota requirement and submit for approval. On the other hand, a company like Toyota Tsusho is a trading company with some of the most amazing best practices in handing inventory and logistics.

I have a few more related topics to speak about on Toyota's supply chain and would like your comments to flow in so that it can be more interactive - an opportunity to share views further on this. If you have any doubts or would like to discuss / share further, I invite you to write to me. Would be great to exchange these perspectives. Thank you.

May 4, 2012

Procurement Value - A Penny Saved

Benjamin Franklin said, "A penny saved is a penny earned". True indeed, but the common problem faced by CPOs has always been - How to define a "saved penny" or "Procurement Value" as few call it.

Traditionally, getting the price reduction from suppliers was the only objective of the procurement organizations. Hence measuring Procurement Value was only based on material cost reduction. The most basic method is to use the difference between the current price and last year's price and multiply it with quantity received. Simple as it may sound, things get complicated in case of non-repeated buy items or items which are not comparable to items bought last year. In such situations, the saving is calculated by taking the price from initial rounds of quotation as base price v/s the final negotiated price. This is where things get trickier and various "games" are played among the suppliers, end users, buyers and financial controllers. Even though companies have well defined policies and methods to determine a baseline price/budget cost or take the lowest initial bid and compare these with the final negotiated price to arrive at a saving calculation, this calculated dollar figure is a very narrow metric to measure the overall Procurement Value. There is a lot of value which doesn't get measured and is often subjective in nature. Over a period of time, the role of procurement function has evolved to control this subjective procurement value. Buyers are not only just issuing purchase orders but also playing the role of planner / inventory controller to ensure security of supply. Apart from running RFQ events, Sourcing Managers are using their commodity expertise and market knowledge to reduce Total Cost of Ownership (TCO) and Procurement General Managers are becoming a trusted business partner and change agent for business units.

The procurement value is now reflected in both the effectiveness and the efficiency of acquiring goods and services. Economic value added (EVA) is a good measure of procurement value which gets linked to revenue earned or gross/net margins of the firm. Procurement led patents creation also gets included in such EVA/procurement value. While the saved penny is important, the process of saving and defining it in the right manner is equally vital.

So, have you saved your Penny today? Please share your views.

May 2, 2012

Return on Investment as a Decision Criteria

In most sourcing decisions, the attempt  is to equalize  competing vendors on all the other criteria like specifications, quality, delivery, commercial terms and then apply price as the decisive criteria. However, one criterion that has been used sparingly is Return on Investment.

While comparing quotations from vendors, while negotiating as well as in trying to finalize a vendor, typically organizations have used the unit or total price as decision criteria. In most sourcing decisions, the attempt  is to equalize  competing vendors on all the other criteria like specifications, quality, delivery, commercial terms and then apply price as the decisive criteria. In various instances especially where there is an ongoing cost that the material or service being purchased requires in the form of maintenance etc., the concept of total cost of ownership has also been applied as a decision criteria.

However, one criterion that has been used sparingly is Return on Investment. Any buying decision can be viewed as an investment for an organization especially in the case of services like training, outsourcing services which are usually linked to some business metric that the organization wants to improve. In such cases, using the traditional basis of total or unit price may actually be counterproductive since the lower cost service provider may not be the able to influence the business metric to the expected levels. In several cases, the purchasers may not be aware of the methodology of computing return on investment and also they may not have all the inputs required to do so, (especially the intangibles).

In these types of services there are several factors that are seemingly intangible like experience, expertise, superior technology, innovation and investments being provided by the service provider. These are extremely important but more often than not, get left out of the decision criteria primarily because the purchasers are unable to quantify them. So how do we go about quantifying the intangible aspects of services provided? ... That's food for further thought...

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