On June 21-22, 2016, we had a highly interactive masterclass on Advanced Strategic Supply Chain Management. In attendance were 25 participants representing the following companies: Max Life Insurance, Kohler, Piramal Enterprises, Larsen and Toubro, Aramex, HelpAge, Dr Reddy’s Labs, Net Magic, Tata Consultancy, Flextronics, Ansaldo STS, BNY Mellon, Ratnamani Metals, Robinson’s Global, Tata Coffee, Quess and Adani.
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 is 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 on 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 at 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 to substitute or re-engineer, in the bottom right they would engage in competitive bidding and lastly, in the bottom left, they would outsource.
Based on this discussion, the participants formed groups and developed their own commodity strategies that they could apply at their respective companies and they made presentations to the group.
This was a continuation of Strategic Sourcing and we began by looking at International/Global Sourcing. Note: when asked how many procure from suppliers outside of India – the majority raised their hands so this was an applicable topic to the majority of the group.
We then focused on key elements of a contract and the ability to contrast from simply “boilerplate language” reactive if there is a contract violation to proactive language driving cost savings and key performance expectations.
As we moved into laws and regulations it was noted that in India – legislation may pass that will impact how they do global sourcing.
We then moved into the official start of Day 2 with a discussion on the Lean concept which very closely matches up with Six Sigma.
The fourth major topic covered was: Lean Supply Management.
It was noted that JIT – Just-In-Time was a concept that was popularized by Toyota initially in the 1950s and then put into practice in the 1970’s and 1980’s. Although JIT has some benefit, it was noted that it was primarily a “local focus”. This was not so-much geographical but meant that if for example, the inventory management department reduced or zeroed out the inventory levels – they were congratulated even if this created a negative effect on sales and operations (in most cases – this resulted!).
Then as we moved into the 1990’s and on into the 21st Century, JIT was replaced by Lean which was a more “global focus” in that unless the entire company was optimized, then no department was optimized! At this point it was highly requested by the participants and noted in Day 1 as a specific objective – that we look at the practical application of Value Stream Mapping. At this point we emphasized that whereas, every Supply Chain is a Value Chain – not every Value Chain is a Supply Chain!
The fifth major topic covered was: Category Management.
This is a fairly new concept in SCM but based on a poll of hands, most in the class had either heard of this term and a few were applying it in their company. At this point – we reviewed a major case study that defined and addressed the applicability of this BIC concept. Then a focus was made on spend analysis (“wrapping your arms” around how many suppliers you do business with and how much you spend with them) as well as risk in the Supply Chain – with the goal to perform optimal risk management (to eliminate or reduce the risk and when the bad event happens – to mitigate the risk).
The sixth major topic covered was: SRM-Supplier Relationship Management.
This is the opposite of CRM – Customer Relationship Management which follows the Pareto Principle that 20% of the number of suppliers provide 80% of the total products and/or services to the firm.
It was noted that if a Google Search of SRM were initiated, about 99% of what would come up would be related to software programs. Although software is a great aid, this portion of the masterclass focused on the practical application of SRM.
As presented, the major premise of SRM is Supplier Rationalization, also known as Supplier Optimization. This primarily focuses on two areas – to determine the number of suppliers (dual source vs. sole source) and the mix – the type of relationship. Focusing on the later, it was presented that suppliers can be grouped into key categories – from a Basic Alliance to a Strategic Alliance.
We then reviewed a special type of SCM mapping called: SCOR – Supply Chain Operations Reference Modeling. The next point was to review key technology tools including software for spend analysis as noted above as well as automated supplier performance score cards and Reverse Auctions. The final point here was to execute a successful Exit strategy when you have to move away from a supplier but yet want to make the exit orderly and optimised.
The seventh major topic covered was: Greening the Supply Chain.
The overriding factor here is “Sustainability” in fact in all our SCM efforts, we are considering the environment and how we present the planet to our future descendants. Key areas covered were IS0-14000 and a continuing discussion on ethics.
The eighth major topic covered was: The 21st Century Talent Pool.
It was noted here that skillful employees is the lifeblood of the organization and we went back to CAPS as mentioned above to look at key skill sets and expectations of the workforce both now and in the future.
It was noted here that two of main certifications/credentials in SCM are the CPIM – Certified Production and Inventory Management and CPSM – Certified Professional in Supply Management.* The CPIM covers the entire field of SCM and involves five modules and exams. The CPSM focuses on SM and involves three modules and exams.
*Note: in a follow-up email – the participants will be given an opportunity to participate in either of these certifications to prepare for the examinations at no charge as a special offering since they attended this masterclass.