The Infosys global supply chain management blog enables leaner supply chains through process and IT related interventions. Discuss the latest trends and solutions across the supply chain management landscape.

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March 31, 2009

Supplier Consolidation Vs Sourcing

In a Sourcing team meeting at a client I recently worked for, a senior Sourcing Manager lamented that instead of “Sourcing” they were merely consolidating suppliers. A pretty insightful statement! And it is true for many organizations where the central focus of “Sourcing” is just to achieve greater volume leverage during negotiations, and using that leverage to get a better purchase-price from a subset of incumbent suppliers. This pure ‘purchase-price reduction by supplier consolidation’ approach does have its merits, but is this what sourcing is all about?

The best-in-class Sourcing organizations do not think so. For them, Sourcing starts way early, with an analysis of spend by categories, and the creation of a sound organizational sourcing strategy which also places emphasis on factors like cycle times, standardization, compliance etc., rather than just purchase price. This is followed by prioritization of sourcing categories, supplier prospecting, and an RFx process that adheres to the sourcing strategy. The result being that such organizations are able to identify and establish a long-term, high-benefit relationship with suppliers which helps achieve lowest total cost, and gives best results on product development, quality and services. The pure purchase-price saving on goods and services is just one of the many benefits.
 
The client that I quoted earlier, is already on its way to become a “sourcing organization”. Using simple IT tools, they now have a clearer understanding of their spend categories. This has led to a better prioritization of categories for sourcing. An emphasis on long-term supplier relationships has opened up opportunities for collaboration in new product development while inclusion of non-cost parameters in RFx scoring has ensured that quality and compliance are not compromised upon. And yes … the pure purchase-price savings are getting better too.

March 30, 2009

Supply Risk – Increasing importance in a weak economy

In my last post on this blog I had talked about Supply Chain being a strategic lever in a declining economy. I had indicated that one of the key areas for companies to focus was in managing Supply Risk in a robust manner to accommodate shrinking capacities and supply failures.  I think that Supply Risk is a fairly complex variable which is not always looked at unless an enterprise faces “supply failure”. In this posting I wanted to try and disaggregate Supply Risk to a degree and provide a framework to think about it.

Let’s consider the example of the automotive industry in the United States. A significant fall in demand due to the economic recession has led to unprecedented reduction in demand from all the major automotive manufacturers. The Automotive value chain supported a substantial supply chain [$ trillion/ X% of US GDP]. These suppliers predominantly supplied GM, Ford and Daimler Chrysler; but also supplied in a small measure to ancillary industries. There are multiple instances where companies that depended in some measure on this vast network of suppliers are now subject to significantly greater supply risk.  Say a GE Wind buys heavy duty, high precision bearings from the same supplier that supplies crankshaft bearings to GM for for automotive engines – understanding these risks is key to managing Supply Risk effectively.
Value Chain Risk
1. Capacity for a product of strategic importance [Volume or Value]
a. Available capacity in market versus demand
b. %age Capacity committed to buyer
c. Exposure to other industries
2. Strength of supplier fundamentals
a. Sustainability of supplier’s economic model
b. Relative position in peer group
c. Investment in product development and growth

Supply Chain Risk
1. Commodity type supplied by the supplier [Strategic/ Leverage/ Routine/ Bottleneck etc]
2. Relative supply performance
3. Strength of relationship
4. Exit barriers [for buyer]
a. Product Development and Design IP ownership
b. Specialized tooling [since high cost, depreciated tooling is valuable]

Country Risk
1. Currency Risk [driven by local economy]
2. Political Risk [buying from Africa for example]

The critical question most companies are asking – and there are more and more everyday in this economy – How do we understand what our Supply risk is? How do we manage it down or mitigate it? I would propose that any discussion of this Risk in particular has to be in context of impact on Buyer [your client or employer] in the event of a possible failure of supply, either voluntarily by supplier or through supplier going bankrupt.  

Establishing Context for a Supply Risk Evaluation

Having established the context, I would propose that this risk has to be evaluated in context of the entire supplier base, commodity strategy and lastly at the level of an individual supplier. All three steps are essential [to some degree] to successfully understand and mitigate risk.
Step 1: Supplier Base Assessment
This essentially is a high level assessment of the entire supplier base. Assessing risk across a buyer’s supplier base is important as it quickly identifies primary drivers of risk and allows buyer to focus on mitigating the highest risk elements first.

Step 3: Commodity Strategy
Evaluating Risk in context of commodity should be a critical component of establishing a winning commodity sourcing strategy. The key questions answered here are:
1. How much of buyer spend [e.g. high pressure oil seals for a Hydraulics Manufacturer – a critical item] is focused on a single supplier?
2. How much of the lead supplier’s capacity is committed to buyer?
3. What alternative sources of material does buyer have?
Strategies for “Strategic products” versus “Routine” or “Leverage” products are very different.

Step 2: Supplier Performance
Supplier performance is a key input into the evaluation of risk from a performance failure standpoint. These are fairly well understood and part of most supplier performance management systems

Mitigation strategies
Do not be the company that discovers they have unaccounted for risk in the supply chain when a strategic supplier you place a purchase order is no longer in business! Mitigation strategies range from having a supplier performance balance score card closely monitored through a real time dashboard [Tactical] to a fully functionality Supplier Accreditation program [Strategic].
While the tactical approach addresses the immediate risks, it does not provided adequate insight into the future. Additionally, the performance score card is fairly transactional in nature. Most suppliers will not share information that they are at financial risk voluntarily. They may continue to perform well till the last day of operations completely blind-siding the Buyer. Agreed that this is an extreme scenario but it is plausible without a more complete approach to Supply Risk.
The supplier accreditation program is in some ways the “Cadillac” of Supply Risk mitigation strategies. A well constructed program would take into account both Performance/ Commodity strategy as well as assess fit from a future strategy standpoint [position in Value Chain/ brand recognition etc]. It will identify and enforce a true partnership across multiple forums. The deeper information exchange and engagement would enable the buyer to identify potential risks early and address them proactively – replacing those suppliers that continue to pose significant risk.
Have you assessed supply risk for your organization lately? Do you have a Supplier Accreditation program in place to mitigate supply risk? I look forward to your comments on this blog…

 

March 23, 2009

Intellectual Property Infringement – One of the Top Supply Chain Risk

A very interesting article titled  Managing the Biggest Supply Chain Risk of All: Constant Change by Noha Tohamy of AMR Research rightly points out – that the biggest supply chain risk of all time is constant change.

The article also mentions that although being a manufacturing hub of the world, China contributes to the most risk to global supply chains, 9 out of top 15 risks. The top of the list is Intellectual property infringement followed by quality failure risk and security breach issues.
Intellectual property infringement is indeed the top rated risk by high-tech and discrete manufacturing companies. In December, during my speaking session at joint workshop on “Supply Risk Management” organized by SMI (Supply Management Institute, Germany) and IIM-B (Indian Institute of Management – Bangalore), this point was overwhelmingly brought out by some of the participants. Intellectual Property Infringement, in essence, is the unauthorized use or distribution of protected copyright, trademark, patent or trade secrets misappropriation. Failure to take action against counterfeits products would pose not only the risk of damage to organization’s brand value and public confidence, but also the risk of purchasing counterfeit products that do not meet the quality expectations of customers who mistake them for genuine products. Various counterfeit products are being discovered all over the world and examples of skillful counterfeiting are on the rise. Litigation costs in for a lawsuit often exceeds $1mn and this emerging exposure can have serious consequences on companies. Some of the popular measures to mitigate this risks are listed below. 

1.    IP Risk Management Audits wherever coverage is available.
2.    Direct visits to government organizations in places where counterfeit goods have been discovered in order to exchange opinions about methods of countering counterfeit products.
3.    Take advantage of the “well-known trademark” recognition to continue with countermeasures with the aim of achieving a fundamental solution to the problem of counterfeit products.
4.    Buy insurance policy protecting infringement of Intellectual Properties. Although, this is offered by a very select group of insurers and comes with many “fine prints”.

None of the measures are full proof. This risk needs to be assessed, measured and monitored all the time. During recession time, consumer buying behavior is dramatically changed. Cheaper product options coming to market using infringed IP pause a serious risk of threatening original product sales. It’s important for organizations to put emphasis on IP infringement in their supplier risk management program during recession.

Supplier Bankruptcy – A Real Risk during Recession

Recession is here. Slower demand, shrunk liquidity and increasing pressure on cost is here. Auto industry has suffered from severe decrease in the demand which has resulted into steep production cuts. Suppliers get paid 45 to 60 days after delivering parts, and this may cause a wave of failures in March and April, when the nearly total shutdown in U.S. auto production at the start of the year starts to hit their balance sheets hard. To other industries also, recession presents increased credit risk and a very real risk of supplier insolvency. In my opinion, supplier bankruptcy causes two different kind of risks.

The first and obvious risk due to supplier bankrupcy is Supply Chain Disruption. Based on the size and  dependency on the supplier, this risk has a potential of minor disruption to complete shut down. Having identified alternative suppliers for key components is one of the best way to mitigate this risk. Yet, getting new suppliers in the supply chain is not an easy tasks. It may take few months.

Another option is to involve a  bank/financer at a very early stage in the transaction. Companies can send the POs to the supplier simulataneously passing the information to the bank. Based on the account liquidity and supplier’s credit history, banks can qualify whether the supplier is fit enough to serve the future demand or not, thus, reducing the risk of disruption should the supplier go bankrupt. At the same time, information from the extended supply chain is leveraged by banks to offer trade finance to suppliers at various stages within the supply chain. This process mirrors the 'just-in-time' approach used by large corporates to optimize inventory holdings. The liquidity risk is substantially reduced given the visibility of information throughout the transaction. Regular reports from Banks / Credit Rating Agencies about your suppliers’ credit health are certainly worth during recession.

The second type of risk arises from supplier filing for Bankruptcy Protection. Under the US Bankruptcy Code, supplier may be allowed to delay the decision on the contract till the end of the case – which could last for weeks or months. It also prohibits company from terminating the contract and requires continuous receipt of goods/services and paying the supplier. Even if the Supplier Contract allows you to terminate it at anytime and without cause, or terminate it if supplier becomes insolvent, the clause is uneforceable under Bankruptcy Protection Code. 

How to mitigate such severe financial and legal risk? Regularly obtaining financial information of the supplier certainly helps. Ensure that you retain ownership and control of software, equipment, data, deliverables and work in progress and supplier owned items that are critical to your business. Insulate yourself from any legal claims from supplier’s subcontractors. Ensure that the supplier is prohibited from delegating his responsibility without your approval.

Tough times calls for tough measures! Understanding interwoven relationship of financial supply chain & product supply chain and controlling the risk emerging out of it should be the priority of organizations during recession. 

March 16, 2009

Warehouses of the future - What it takes to reach there? Part I

I was wondering how would the warehouse of the future look like? Say even 10 to 15 years from now. Well not all of them would have transformed by then, but some of them might have definitely. Maybe, some of them have already had, or are in the process of doing so.

So what is the transformation we are talking about? And how would it affect the way we operate these warehouses? Well, we are looking at how warehousing will be transformed into a highly automated environment. There would be no labour required in the first place, in fact they will be no space for humans to walk (except for service engineers). There will be rails and tracks all around on which automated pick Robots would move to pick and putaway pallets and cases around the warehouse. These robots would move on horizontal and vertical tracks and can reach every location within each zone where they operate. There will be sensors all over the warehouse to guide robots, round the clock.

Now to have such a warehouse to turn into reality (there are quite a few out there), we need to understand what building blocks to be put in place first. First, we need to design the warehouse in such a way that maximum space is occupied, for e.g. these robots will move in rails vertically and horizontally, we do not have to waste space between aisles as there would be no Forklift trucks to be used. Secondly, the size of the carton/box should be of standard sizes, within the maximum limits that each robot can lift and place cartons from one location to another.

There will be extensive use of conveyor systems both for inbound and outbound operations. Zone Picking would be the preferred method to adopt since a set of robots can be positioned to work within a confined zone, rather than having them scaling the entire warehouse to carry out putaway and picking operations. Each zone will be linked to a lane that would join the main conveyor moving goods in/out of the warehouse. These will be of two types, the inbound and the outbound conveyor. So what kind of WMS system would run such a warehouse? Well, that would be the nervous system of the warehouse. It will be like any other WMS, except that it will not print a pick ticket, send instructions to a RF gun or print a work order. No human dependency to report back to the system. Instead, it will send instructions to a large PLC or multiple PLCs to operate all the automated robots and conveyors in the warehouse. We will touch upon these aspects in next part of this blog. 

 

March 13, 2009

Is IT really a primary driver for making your supply chain ‘World-class’?

There have been numerous articles or reports written on building a ‘world-class’ or a ‘best-in-class’ supply chain that you would have surely read. Few of them definitely outclass others in terms of the focus and clarity they provide to the supply chain enthusiasts and practitioners. One such report that I would like to bring to your notice is recently published by McKinsey & Company called “The Race for Supply Chain Advantage” – an outcome of an intensive research done, with large multinational companies participating from multiple industry segments. The report provides the six key practices that would drive supply chain performance, and make companies world-class with outstanding results in some of the most critical parameters such as customer service, cost and inventory. I wouldn’t like to comment anything on the practices listed but I do feel worth mentioning an interesting finding in this report and that’s about the better performance of companies with fewer formal IT systems as compared to the ones that have invested heavily into technology.

As per the report, “IT investment is often not as useful as managers expect”. I find it contradictory to the popular belief that IT investment is not just an essential requirement but a necessary one too. What is your opinion on this?

I personally agree to the finding based on my industry and consulting experience. I have seen supply chain organizations that are fairly mature in operations and there are still these key business users who continue to use simple spreadsheets for most of their effective decision making. The business needs IT to just support the decision making and therefore, “IT as a strategic investment” may not be highlighted as amongst the primary drivers of improving supply chain performance. There are so many instances that we come across as supply chain practitioners where the decision is taken without any data and it’s purely based on experience and instinct. IT can’t capture all that and that’s one of the reasons why IT can’t be a strategic driver. Having said that, I also believe that as businesses grow and become more complex in nature, IT definitely plays a very important role in just ‘facilitating decision making’ and in reducing the level of anxiety and ambiguity in managing business.

With these thoughts shared, I would like to know your opinion on this subject matter. I would welcome your experiences on this and it will be really great to know the reasons and viewpoints in case you differ with my opinion…

March 9, 2009

Is there confusion with SAP SRM suite positioning after acquisition of Frictionless commerce (now rebranded SAP E-Sourcing)? – Part 2

In my last blog, I discussed on the confusion with the Frictionless acquisition by SAP, now I would like to share the difficulties that I see to convince customer to have both these applications operational in the landscape.
Why is it difficult to convince customers to have both these applications operational in the same landscape?
-          Frictionless commerce (now SAP E-Sourcing) has overlapping functionalities with SAP SRM which happens to be its core SRM solution
-          Customers already using SAP SRM, would need a strong business case to convince CPO desk for SAP E-Sourcing licenses
-          Integrate the applications, as they don’t talk to each other still.
-          What is the ROI for such an integration
-          Is there a customer base that will really look forward to integrate these 2 applications  
There is another application, xCLM (Composite application for Contract Lifecycle Management) which SAP is very successful in selling.
This application has the category management and the contract management functionalities of Frictionless commerce. The sourcing functionality has been removed.
Now the confusion with customers grew bigger. Customers were simply unable to understand the classification.
Was there a need to strip the same application and make it available to customers to get more licenses?
I think, potentially there’s more to this than just stripping and rebranding.
I think there was a strong realization from SAP on the positioning perspective. Let’s understand the underlying logic.
Category Management and Contract Authoring and collaboration, were one of the major gaps with SAP SRM, if we plug this gap by making a bolt on application available, it would strengthen the business case for adoption of an SAP on SAP solution than going with “Best of Breed”.
In addition to that, customers can still continue to use the sourcing processes with SAP SRM and plug-in xCLM to handle category mgmt and contract management to overcome the overlapping functionality syndrome.
So I leave the discussion open
…with Frictionless commerce coming in, are most of these gaps for SAP SRM suite offering eliminated or is there a stronger recommendation from the rest of the world?

Is there confusion with SAP SRM suite positioning after acquisition of Frictionless commerce (now rebranded SAP E-Sourcing)? – Part 1

The last 7-8 months have been the most demanding phase for SAP to position the SAP SRM suite offering.
As a consultant, I am still trying to understand why this acquisition? Am trying to logically place these questions to arrive at an answer
Whats the confusion?
SAP SRM (version 5.0 and lower) was always ranked low in comparison to what “best of breed” offers for Sourcing and Contract management functionalities.
However, to overcome this, they acquired Frictionless commerce (now rebranded SAP E-Sourcing) to bridge this gap. They had a strategy to sell it as an On-demand solution only they have been successful in selling the on-demand solution. But they realized the need to make the on-premise solution available for customers who where skeptical in parting with data, but however the On-premise solution brought with it major confusion, leaving the suite offering with heavy questions, reasons stated below.
SAP has also provided integration with SAP ERP for customers who already have an SAP ERP shop and are looking forward for a sourcing application to sit on top of the ERP application. The definition of such customers would be those who haven’t yet implemented SAP SRM or some one who might have opted to use Best of Breed to do the sourcing bit and flush results back into the ERP to feed operational procurement instead of investing in SAP SRM licenses.
With the release of SAP SRM 7.0, SAP had announced that the gap has been bridged, however, not all the extended functionalities that came as a part of Frictionless acquisition have been made available, reasons could be many.
Some known gaps with SAP SRM, version 5.0 (limited to Strategic sourcing process only)
-          Contracts in SAP SRM are limited to Operational contracts; Contract Authoring process is a limitation, limited collaboration features b/w Buy-Sell side.
-          Complex Sourcing processes for RFx and Auctions cannot be handled via SAP SRM in comparison to what the “best of breed” offer.
-          Category Management with SAP SRM can be addressed with implementing cProjects and is not functionality with in the tool.
-          Forward / Dutch Auctions capability isn’t available.
In my next blog, I will talk about “why is it difficult to convince customers to have both these applications operational in the same landscape?”
…also what is xCLM and the confusion that came with it and the benefits it pumped in.

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