On February 9-10, 2017, we had a highly interactive masterclass on Advanced Strategic Supply Chain Management. In attendance were 16 participants representing the following companies: ANZ, Terumo, Samsung, Allegion, Signode APAC, TATA Advanced Materials, Genpact, Future Lifestyle, Videojet, Fresenius-Kabi, Omya and Net Magic Solutions.
The instructor – Patrick S. Woods opened up the course with a brief description of his background which spans approximately 30 years in Supply Chain Management (SCM) – both as a practitioner and as a trainer working with approximately 300 companies from all over the world. Each of the participants then introduced themselves including their name, company as well as their position in the company. In addition to the Best-In-Class (BIC) practices presented in this course – the different industries represented from manufacturing, services, distribution and consulting as well as various positions from SCM to finance to HR to IT allowed for beneficial networking, not only in the scheduled exercises but during breaks for coffee, lunch and before and after the sessions.
We started with audience participation where the attendees identified the objectives that they would like to cover (which for the most part – matched our prepared course objectives) as well as challenges that they face on the job. Key challenges related to: risk, how to ensure other departments in their company work with each other and understanding key supplier relationships.
The first major topic covered was: Six Sigma in Procurement.
This topic generated a robust discussion and it was noted that although Six Sigma was created in a manufacturing environment (first Motorola, then General Electric), it can be applied to any industry including services and distribution since it’s major focus is on eliminating any type of defects by utilizing statistical tools.
Some of the participants asked for a practical approach to how to start a Six Sigma program in their company, and it was explained that the first step is to form a series of cross-functional teams and then identify the top five problem areas that they want to address as well as utilizing key tools as covered in this class.
It was recommended that the most practical treatment of this concept is: “Six Sigma for Dummies” book and to order this for their staff via: Amazon.com.
The second major topic covered was: Applying Total Cost Modeling.
Again, this topic generated a robust discussion and the students were asked to draw three columns on a sheet of paper to put the key costs in perspective in terms of 1. Cost Types (Elements), 2. Cost Behaviors and 3. Cost Decisions. The three-four cost types are Labor, Material and Overhead. These three make up the body of COGS – Cost of Goods Sold and the difference between the COGS and the price should be the supplier’s profit. It was presented that a fourth pseudo-category is SG&A – Sales, General and Administrative. The difference between overhead and SGA is that overhead is 100% created by the entity and SGA as amortized back to the entity.
A practical example presented was opening up a McDonald’s restaurant in Mumbai and that the servers would be the labor, the food products would be the material and the salary of the manager would be the overhead. But, if McDonalds embarked on an advertising campaign – then a portion of the advertising costs would be allocated back to their restaurant (thus, SG&A).
The key elements of TCO – Total Cost of Ownership were reviewed including the costs to get ready to make the buy (Pre-Acquisition), making the buy (Main-Acquisition) and after the product or service has been provided (Post-Acquisition). The participants were then directed to a website: (www.capsresearch.org) which is a collaborative effort between ISM-Institute of Supply Management and ASU – Arizona State University. Here they will find detailed studies in SCM including a very detailed study on Total Cost Modeling that was prepared back in 1998.
The final part of this topic was a practical application of cost decisions – the third category – which reflected Relevant and Irrelevant costs. For example, if the participant were to consider leveraging additional spend inot a key supplier (existing or new) then they could first ask – at what percentage full capacity is the supplier operating at.
If the supplier indicated that at $100M they would be a full capacity and their last year’s sales was at $50M then the supplier would be at 50% full capacity and could absorb another $50M in business without making major investments in overhead and therefore – these costs would be irrelevant to the leverage decision and should not be included in the pricing or should be given back through a rebate. Based on the robust discussion in Day 1, we were only able to get a start on the third key topic.
The third major topic covered was: Strategic Sourcing Strategies.
Here the participants engaged in a key exercise – the development of a Supply Strategy. First it was explained that this involved a vertical and a horizontal axis where on the vertical – the risk factor with the supplier was applied – high risk at the top – such as a Sole Source Supplier and low risk at the bottom – such as Perfect Competition. On the horizontal was applied the value of the item or service procured. To the far right was a high value (A type procurement) and to the far left was a low value (C type procurement). From this they could draw four quadrants (rectangles). In the top right – they would apply a partnership/alliance strategy, in the top left they would look tosubstitute or reengineer, in the bottom right they would engage in competitive biddingand lastly, in the bottom left, they would outsource.