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.

Here, 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.

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.

• 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.

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.

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.

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.

RM - What is RM? I am sure this is an obvious first question in every reader's mind. RM's expanded form is RETURNS MANAGEMENT/REVERSE LOGISTICS. In other simple words, it is about goods and services that are not accepted by buyer post in-warding them into stores/acknowledging work done by services providers. The reasons for this could be multiple. For example, a material/service gets rejected by buyer and returned to supplier for replacement or repair or rework. As per contract, the product might be returned to supplier at the end of life or end of use. Such scenarios occur in each and every industry. Familiar & common commodities that are prone for returns are -- and I'm sure that every reader here would relate to these -- containers, pallets, packaging materials, used clothes, outdated spares, above shelf life items/equipment and vehicles etc. But is this area really uncommon and can it provide breakthrough purchasing savings? Let me investigate that for you. Keep in mind that we are discussing returns management in B2B context and not B2C.

Let's start with a couple of benchmarks and high points that I have collated for you. Sabri and Gupta report in their famous book Purchase Order Management that on an average, 20% of all goods procured are returned for any firm! Obviously in-warding and resending and re-inwarding cycles can have inventory levels inflate/deflate. This is ditto for the firm's profits and demand management sides. Imagine the complexity of a returns management procurement cycle if the suppliers to manage are also international (any one from Automotive firms reading this?)! IPQC reported in 2008 that associated costs of returns can run as much as 10-20% of operational costs of a supply function and that even 1% savings in that could be a huge $ benefit/profit - straight to the bottom line.

So what are the action items/solutions? First of all conduct a root cause analysis to determine the patterns and underlying causal factors due to which returns are created. Then, plan for corrective actions on all fronts - make the processes at supplier's end and the inbound packaging, transportation predictable to six sigma levels. At a category strategy and spend data management level, ensure that each commodity (material or service) in item or service master table is tagged as returnable or non-returnable. The process and technology with procurement should also have traceability and connectivity with AP systems to link PO and Invoice with return and its reason so that debit memo creation can be simultaneous. Items being returned for replacements should also be factored into the procurement and AP applications. Gupta and Sabri recommend that firms should automate processing of the returns upon receipt (including inspection and disposition), speed up the process to reduce risk of obsolescence, and track reverse logistics and net asset recovery to improve effectiveness. If services received are rejected or found to be deficient, the returns management becomes virtual process but should remain same for treatment like products/materials as explained just before. The reconciliation of service return/complaint can be accounted for as a simple apology or monetary compensation - as the contract specifies.

What can you do to have a robust returns management solution? Invite an expert firm to design BIC returns management process, integrated with procurement applications, ERPs and other applications. Choose the firm who can not only recommend (consult) but implement the proposed solution for you and demonstrate benefit. Include them also in returns management spend management plan of yours - for recoveries, repair or replacements!

Found this post useful and refreshing? Want me to write the rest of the 2 posts at least? Then send me your views on this one please. The series has gone well so far in response. Thank you all.

So aim for the moon because even if you miss you might land up in the stars. But for aiming at the moon, one needs to get one's eyes off the ground. A sourcing department most of their time gets so involved in the daily operational nitty-gritties that focusing on strategic aspects appears to be a far-flung dream. Another factor is that it may just not have the skills, time, attention and intellectual wherewithal to become strategic. Outsourcing is one of the ways by which many organizations have ensured a transformational shift in in-house focus from transactional to strategic activities in the sourcing domain and often at much lower costs along with breakthrough benefits. Are you one among them? If not, do you have plans to aim and hit the goal post this way? Let's continue the conversation.

However, this auction feature continues to be sub-optimally utilized by sourcing professionals  even while it offers certain additional savings levers for buyers for those commodities, where it is the toughest to get sourcing savings. The reason for sub-optimal usage of this auction format is primarily that sourcing managers themselves need to know fully about choosing the right auction format (e.g. classic reverse auction or reverse auction with lead bid disclosure or reverse auction which is rank based only or Dutch Auction). That is quite a science and art in itself. However, through this post, I want to highlight how to choose Dutch Auctions and how it provides breakthrough savings levers (the second portion of the theme).

At times a buyer is faced with obtaining savings when the number of approved suppliers with whom to conduct an auction or negotiate prices are very few.  At other times, the price differential between suppliers who submitted quotes is very high with no visibility on cost break-down (mostly due to the nature of commodity). In these cases a reverse auction format does not work and Dutch auction is the suggested way out. A few years ago, I helped an automotive client in getting additional savings for a turnkey project (materials plus design plus installation services for setting up a warehouse). Only two suppliers were approved and qualified and their prices varied greatly with no break up and also both the prices were far higher than the budgeted price. Both were not willing to provide the break up too (suppliers for many niche commodities knowing very well that there are only very few other suppliers in the market and that the buyer has limited say, exploit this situation well). So we set up something called a floor price (~30% lower than budget and 60% lower than lowest RFQ round quote). A price called as ceiling price was also decided which was the maximum price we were willing to pay. The entire project was offered through Ariba Sourcing Pro as one lot for sale. The Dutch Auction started (after suppliers were trained) from floor price set and the price used to increase by 5% after every 5 minutes. At the third increase, one of the supplier (being under pressure that other supplier might accept the price offered before they did), accepted the price offered. Obviously, huge savings were obtained. Unlike reverse auctions where suppliers quote the prices and lowers them, in Dutch Auctions, buyer offers suppliers prices options and any supplier who accepts any price point, wins the deal.

This format can also be applied very well to sell a share of business equivalent lot quantities (e.g. 60% of annual volumes) for direct materials (e.g. automotive components and raw materials). So DA is a very effective auction format for all spend categories - Indirect, Direct, Capital, MRO etc. though there do exist some challenges which should be kept in mind while planning, so that auction results are favorable. Take an experts' help if in doubt.

Found this post useful and want me to write the rest of the 3 posts? Then send me your comments please. The first post in the series got some great comments. Thank you all.

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

GSP -

What is GSP? I am sure this is the first question that would come to every reader's mind. GSP's expanded form is Generalized System of Preference. It is a system under which EU countries comprising of France, Germany, Belgium, Luxembourg, Netherlands, Italy, UK, Ireland, Denmark and Greece have adopted (driven by GATT and then WTO). Under GSP, manufacturers and semi-manufacturers from developing countries (including India and China) will be entitled to a concessional rate of import duty in these EU countries. Why? Due to something termed in global trade as "Preferential treatment to select WTO members". Such treatments/concessions are the outcome of usual inter-governmental negotiations that take place at WTO meetings (ministerial levels) for e.g. the Doha round.

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

GSP -

What is GSP? I am sure this is the first question that would come to every reader's mind. GSP's expanded form is Generalized System of Preference. It is a system under which EU countries comprising of France, Germany, Belgium, Luxembourg, Netherlands, Italy, UK, Ireland, Denmark and Greece have adopted (driven by GATT and then WTO). Under GSP, manufacturers and semi-manufacturers from developing countries (including India and China) will be entitled to a concessional rate of import duty in these EU countries. Why? Due to something termed in global trade as "Preferential treatment to select WTO members". Such treatments/concessions are the outcome of usual inter-governmental negotiations that take place at WTO meetings (ministerial levels) for e.g. the Doha round.
 
Thus, a global buyer in these EU countries importing from such developing countries has an added savings opportunity to reduce TCO even after all the usual sourcing levers have been applied. Automotive or mining companies can take tremendous advantage under this while formulating category/sourcing strategy  while evaluating BCCS (best cost country sourcing) options on a TCO (consider TCO with NPV) model. Even a Bank or Insurance company in EU can benefit. Things like getting insurance policy documents printed (a major spend for Insurance firms) can be easily imported say from India into EU at one tenth of the local landed costs even after reducing all importing expenses and accounting for additional benefits under GSP! There are various other commodities across sectors/industry sectors that can leverage GSP with BCCS.

How does it work? That would be the second question which each of you would be thinking by now. Simple. The certificate of origin issued by the designated Govt. offices of exporting countries (e.g. Export Inspection Council of India) is sufficient as evidence that goods being imported are from preferred countries. However, the importer has to specify in the PO as well as the exporter has to apply for a certificate of origin categorized as Preferential. The importer/buyer just needs to follow local import laws and procedures to apply for the concessional duty while filing Bill of Entry based on the strength of this preferential certificate of origin.

Found this useful? Want me to write the rest of 4 more posts? Then send me your feedback quickly!

As Purchasing professionals we often come across situations where a user has completed his technical evaluation, has performed product demos, has selected the supplier, has had multiple discussions with him, has "negotiated" delivery timelines and has communicated to him that he stands selected. "However, our Purchase guy will negotiate commercials with you", the user has communicated to the supplier. What are the chances that the supplier would offer fair market price to the Buyer, let alone best commercial terms! None.

Users often misunderstand the concept of commercial negotiation. They believe that it is an act performed in one hour, across the table, where the Purchasing Buyer will use his negotiation "tactics" to reduce the prices. However, this is as far from truth as can be. The negotiation meeting is just a culmination of immense ground work and preparation. Commercial Negotiation is all about analysis and research to arrive at a fair price point and then the "act" of negotiation is just an exercise to make the two minds meet. Preparation for negotiation would involve using one or more levers to make a price assessment. This could involve having a commercial comparative in place, a detailed costing exercise, market index evaluation, historical price movements, previous price references etc. clubbed with market analysis, supplier analysis, geo-political situation assessment and other such tools which enable a scientific approach to the process, based on facts and figures. So, while the final act of negotiation may be regarded as an art by some, but the entire preparation that goes behind that art, is all science.

While many organizations mandate that all buying should happen through Procurement, sometimes it ends up becoming a stamping exercise, where the Buyer spends the final 30 minutes with the pre-selected supplier in negotiations and walks away with some discount. Everybody seems happy. But the fact is that the mandate is followed in just words and not spirit, and the organization loses a lot in the bargain. For the Purchasing Buyer too, there is no learning and no satisfaction of adding much of value to the process. For the negotiation process to be effective, involvement of Purchase should be early on in any sourcing exercise and all communications to suppliers, whether technical or commercial, should ideally be routed only through Purchase. Purchase should consciously distance itself from any deals where it was involved at the last minute, more as a stamping body and just to complete the process of "involving" Purchase. Purchase will never get any credit for all such contracts; whereas if anything goes wrong, it stands to be questioned not only by internal stakeholders but also by auditors.

So, while the art of negotiation may be important across the table, it's the entire strategy and science that makes the art effective; without which, the negotiation is nothing but bargaining aimlessly.

Please share your views on the above. I would be eager to know what you feel and what's the experience / beliefs in general.

You will, most probably ask one more question now - "What do you think should be done to get this cadence back?" A plethora of answers will come and most likely in these categories : "Framework and approaches for this category-commodities need to be introduced; Right category managers need to be recruited or capacities augmented; It should be specified clearly that who owns PS spend and supplier management - the stakeholders or purchasing etc."

I am sure that "you" here means someone who is reading this post, could be from a firm that is facing lack of cadence in PS or a procurement consultant and service provider who may have helped a number of firms to provide a solution here. Whosoever you are, you need to know some broad guidelines and that is what I am happy to share through this post.

Unlike standard materials (Direct, Std. MRO, Capital) and usual services (courier, logistics etc.), the degree of complexity of specifications, suppliers buying power and close access to stakeholders are two causal factors that limit the influence/value addition PS category managers can bring in here. When they still want to influence this category under such circumstances, "noise" in the system is created due to resistance from stakeholders-suppliers combine in many forms e.g. "procurement doesn't understand my universe but supplier does so they should leave it to us to directly manage this spend; procurement is good enough to buy standard items/services but not PS; procurement always wants to get lowest prices which is not the case here and value addition is the focus". So one of the best practices could be to clearly identify and list those PS commodities that are best left to stakeholders given their complexity, and if procurement does not have functional experts who have experience similar to comparable stakeholder(s) - within the department (including extended procurement organization of outsourcing partner). The residual PS commodities can be taken as the ones which procurement should influence and with consent of stakeholders.

This simple yet effective approach can bring in the missing cadence and ensure an organization accepted approach to bring PS spend under management to realistic levels. The key here is to identify such have and have-not list of PS commodities for which a one-time project with a capable procurement consultant cum outsourcing firm can be executed.

So what do you think? Look forward to get responses and continue the discussion threads.