After a lightning brigade tour of some of London’s most popular tourist traps (the London Eye, the London Tower, Harrods, various pubs), I had the honor of kicking off the second-annual Supply Management 2.0 Forum series at the swank Millennium Gloucester hotel.

The stars of the show included an encore performance of ITT Industries’ e-sourcing program (more on that later) and a behind-the-scenes peek at Barclays supply management transformation initiative.

Nearly halfway through a three-year effort to standardize and improve its supply management operations globally, Barclays views lowering its supply cost base as one of the keystone’s in its effort to become a Top 5 Global Bank. (Of course, if successful, the financial giant’s recent bid to acquire rival ABN Amro could accelerate achievement of this goal.) Barclays supply management plans include standardizing global sourcing operations; developing and aligning global and regional category strategies; and cutting £100 million from its 2007 supply bill.

These goals are daunting enough under normal circumstances. Barclays’ appetite for merger and acquisition makes supply transformation a moving target. Previous M&A activity has left Barclays’ supply management organization with nine different businesses, multiple ERP systems (as well as multiple configurations of an ERP systems from the same vendor) and six different supply management organizations, each with different sourcing and supplier management approaches.

Craig Dowling, Barclays Head of Global Sourcing Operations, told a packed audience of the U.K.’s supply managers that such heterogeneous processes and systems “have increased the difficulty of intituting effective spend controls and have often resulted in [spend and supply] data inconsistencies” between the bank’s multitude of back-office systems.

Realizing that continued M&A activity — such as the pending ABN Amro deal — will only add more complexity to this environment, Barclays has embarked on embarked on a transformation initiative that aims to standardize global sourcing and supply management processes and controls and consolidating the supply management organizations across all businesses. Barclays will also deliver a “closed-loop” procurement capability. How it will do this is the most intriguing (some might say controversial) element of Barclays’ supply management transformation plan.

In an effort to is to “minimize impact on legacy technology infrastructure,” Barclays has segmented tactical transactional activities (i.e., procure-to-pay) from strategic sourcing and supplier management activities — both from an operational and systems perspective. (Such operational and systems segmentation is a growing trend, which I will address in future posts.) Since Barclays’ individual businesses use an array of back-office financial and purchasing systems — and future M&A will only add more — Barclays will avoid disrupting transactional operations by allowing each business to continue to utilize their existing systems.

To automate and support its strategic supply management operations, Barclays has selected a supply management solution that supports sourcing, contract, and supplier management activities on a common platform that is delivered in a true software as a service (SaaS) mode. Dowling said his company recognized that it is the information from the transaction that is critical for effective supply management — not executing the requistion or PO itself. “Platform independence separates us from other enterprise platforms and allows us the flexibility to pursue our supply management and growth goals simultaneously.”

Critical to Barclays’ plan is the role-based dashboard and advanced, Web-service-based integration capabilities provided by its supply management solution vendor. The bank is also using innovation Integration as a Service (IaaS) offering from its supply management solution, which provides pre-defined adapters to all major ERP and business systems from a fully hosted, subscription-based Web service. Barclays will use this service-based integration model to capture transactional information from all its disparate financial and purchasing systems and to deliver critical supplier and contract information to these systems in return.

We harmonize the [purchasing transactional data] through a common sourcing workbench that enables visibility into all supplier, category, and sourcing project information. It also provides global storage for all key sourcing documents, including contracts.

Barclays has begun its global roll out of its strategic supply management platform in the U.K. because, according to Dowling, “the U.K. organization has the most mature sourcing and supplier management skills.” However, the bank will extend this platform to the 500 person global supply management organization, including those in the U.S. and Asia-Pacific by year end.

By segmenting tactical purchasing and strategic supply management operations and systems, Barclays can continue to pursue its aggressive supply management cost and improvement goals without disrupting corporate M&A growth plans.

Due to the positive response we received from Jeffrey Wincel’s post, The Illusion of Six-Sigma, we have invited him back as a guest blogger. In this post, Jeffrey, principal at LSC Consulting Group, tackles the issue of evaluating cost drivers within a company’s supply chain.

In the supply chain consulting world I normally encounter two primary types of clients. The first are those companies who haven’t really been able to engage supply chain as a serious player in their organizational effort to deliver profits; and the second are those who know and have played the “big game” in SCM and are now ready to take the next step to become even better. Each has its own unique characteristics and are often equally challenging to work with, yet both usually have a common problem – how to really evaluate and understand the cost drivers within their supply chain.

In the manufacturing sector, procured materials and services make up 50-70+ percent of the total cost of goods sold (COGS), and therefore have the single largest effect on profitability. Because of this, it is essential that the cost drivers of the procured products and service be fully understood – this means more than purchase price. Effective procurement initiatives are doing more than running to the low cost regions of the world and making purchasing decisions by “3 quotes and a cloud of dust.” They understand the material, labor, SG&A, overhead, engineer content, etc. that make up the cost drivers leading to price. The ability to effectively improve the cost structure in a sustainable way is knowing and managing these elements.

Unfortunately, most suppliers view the sharing of cost data as an effort to manage their profits, having nothing to do with controlling costs. They most often claim that their costs are proprietary or that their management is unwilling to disclose the information. Suddenly the buy/sell relationship is engaged in a struggle. Suppliers believe that the customers look only at price in making their procurement decisions; the buyers believer that their suppliers must be hiding something if they don’t want to disclose price, so they actually do resort to buying only on price. In this environment there is no way that there can ever exist a customer-supplier collaboration or partnership.

On the question of whether to “share or not to share,” my answer (from both sides of the table) is to share. Of course there have to be ground rules in this process, such as NDAs, concurrence on cost drivers, commitment to evaluate cost versus profit margins, and how to equitably share in the benefits derived from cost improvement initiatives. In response to Tim Minahan’s recent post regarding global competition, Michael Lamoureux wrote: “the answer is not low-cost country sourcing or right country sourcing, but home country sourcing. Whomever can do that competitively will be the long term winner!” I agree with Michael, but the only way in which we can make home sourcing competitive is to actively and aggressively manage the cost elements which make up price while allowing the opportunity for both buyer and seller to remain profitable.

It’s no secret to the readers of this blog that I’m a proponent of learning from the example of leading companies and adopting best practices whenever possible. So thought I’d add a quick post to pass along an opportunity to participate in a new survey from ARC Advisory Group. The survey is designed to explore manufacturers’ use and management of online purchasing catalogs for the procurement of MRO materials. It will examine the range of practices for managing catalog content and for integrating with suppliers and other internal systems. In exchange for your participation, you’ll receive a complimentary copy of the results and a peek at related best practices. A classic win-win.

For asset-intensive manufacturers, MRO is a major expense. The use of online catalogs can result in reduced procurement costs, increased productivity and even improved visibility and compliance. Take the survey and find out where your organization falls in the spectrum of performance. You never know what tip you might find in the results.

You can take the survey here.

Gentlemen’s Quarterly (GQ) recently rated Stockholm as the city with the most beautiful women in the world. (I’ll be sure to let you know.) What the fashion magazine overlooked was that the Nordic region also boasts some of the most advanced supply management organizations on the planet.

On Wednesday, April 25th, the Supply Management 2.0 Forum will stop in Stockholm to showcase some of the practices and techniques Nordic companies are using to improve their sourcing, contract, and supplier management performance. Both the mainstage and the audience at this event are jam packed. (In fact, we just moved the Stockholm Forum to a larger venue due to the high volume of registrants.)

The Stockholm Forum will feature three of the most advanced supply management organizations in the Nordics:

• UPM-Kymmene, one of the world’s leading forestry products companies, will share the secrets behind its supply management transformation. UPM will also reveal how it is using environmentally and socially responsible supply practices to secure long-term supply and lower supply costs.
• Norwegian Defence will showcase how it is using advanced sourcing techniques to ensure supply and hold down costs for its military operations and research initiatives.
• Perlos, a global design and manufacturing partner for the telecom and electronics industries, will share how it is leveraging strategic sourcing success to contribute to its corporate profitability improvement program.

If the standout presentations from Compass Group and Visa at last year’s forum are any indication, this year’s Stockholm event promises to be a huge learning experience. For example, Compass Group’s e-Sourcing lead offered this helpful check list to determine what spend is ripe for auctioning:

1. Can you define clear specification for the category?
2. Is there a competitive supplier pool?
3. Is the spending or unit volume significant enough to be of interest to suppliers?
4. Are you prepared to change suppliers based upon the auction results?

“If you can honestly answer ‘Yes’ to each of these questions, the category can be auctioned,” according to Compass.

The high number of registrants suggests that this year’s Stockholm Forum will also be an excellent opportunity for Nordic-region supply managers to network with your peers.

Don’t miss out. Register here today. I hope to see you there.

Today, I’d like to welcome a guest blogger to Supply Excellence. Jeffrey Wincel is a Principal at LSC Consulting Group. Jeffrey founded LSC Consulting Group in 2001. He has over 20 years of senior level and executive management experience in developing and deploying strategic supply chain initiatives. His company focuses on integrating lean production methodologies with total supply chain management.

I thought for my first posting, I’d write about a topic that is sure to aggravate many Supply Excellence blog readers; that being the illusion of six-sigma. Since the late 1990’s any discussion about corporate process and productivity improvement has included the almost religious zeal of six sigma programs. Jack Welch was able to transform his image through six sigma, going from “Neutron Jack” (the slash and burn corporate take over king) to the genius of GE. Careers and fortunes have been built on the six sigma bandwagon. But for all its fanfare and support, six sigma is an illusion of sustained improvement. In its latest incarnation, there is now “lean six sigma.” But before I totally lose you, let me take a step back at what six sigma was, and what it has become.

When six sigma was first introduced (by Motorola and HP), its purpose was to develop product designs capable of producing 6σ quality level within existing manufacturing technologies. The idea was to design for quality (3.4 ppm), not hope to inspect it out after manufacturing. Its focus was on part specification, production capability, and the relationship between the two. Then in the 1990s in an effort to legitimize the brutal approach Welch was practicing at GE, he adopted the six sigma methodology and transformed it into what it has become today. Six sigma became an event-defined cost reduction initiative, no different that the PICOS process GM tried in the late 80s and early 90s. Outside of the event-defined expectation of the individual six sigma activity, there was no view of sustainability or integration with daily operating disciplines. To give it an air of legitimacy and to tie it to the integrated improvements that Japanese manufacturers were exhibiting, the green belt, black belt, master black belt concept was created. However, the only potential link to Japanese style manufacturing disciplines would be isolated kaizen events.

Ultimately this lack of integration has become more evident to the many companies who utilize this tool. The “Lean Six Sigma” movement is a response to this concern. But it is a response which is really not needed, as traditional lean manufacturing techniques and processes already include the disciplines contained in six sigma. Lean manufacturing includes not only the production disciplines of standardized work, rapid changeover, total productive maintenance (TPM), etc.; but also enterprise wide management reporting (Hoshin planning), and continuous improvement (kaizen). Unlike six sigma, where a few months of training can make you a black belt or master black belt, lean approaches depend on the adoption of an integrative lean philosophy as a basis for business, with expertise developing with time and experience. Although many elements of a lean system can be quickly implemented and drive improvement, mastery of it often comes over many years. A lean master truly is a master of the sustained systems and improvements that are evidenced in the world’s leading companies.

The philosophical basis of lean as part of the identity of a company, exemplified by its long-term and sustained improvements, is what distinguishes it from six sigma. My professional career has included working for companies which employed the “gimmick” programs such as PICOS, 6σ, and even independent kaizen events. However, it was only those companies who embraced lean that showed continual and sustained improvement. It was for this reason, that I too embraced lean as part of my supply chain efforts. “Lean Supply Chain Management” derives its meaning from the disciplines of lean. Conversely, if six sigma were a robust practice on its own, why would there need to be “Lean Six Sigma?”

Supply Excellence’s first-year anniversary is fast approaching. That means it’s time to gear up for the Supply Management 2.0 Forum series that started it all.

Back by popular demand, the Forum series will feature case-study presentations from some of the world’s leading supply management organizations. (Check out the Supply Excellence summaries of the best practices shared at last year’s Forums here.) The Forums also offer a unique opportunity for supply management professionals from a variety of industries to network and share practical strategies to speed and sustain supply management performance improvements.

The first stop on the Forum tour is in London on Tuesday, April 24th. I’m happy to say that attendees at this session will hear first-hand how ITT Industries is using advanced sourcing techniques, such as optimization and flexible bidding, to control costs in increasingly inflationary and tightening supply markets. Attendees will also get a sneak peek at the supply management transformation initiative underway at global financial powerhouse Barclay’s.

If last year’s performance is any indication, this will prove to be a highly informative event and and excellent opportunity for networking with your U.K. supply management peers. Last year, ITT’s e-Sourcing and Strategic Purchasing Manager Jessica Dunlop got rave reviews for her candid tips on how to leverage reverse auctions — and what pitfalls to avoid. Here’s just a sampling of her recommendations:

• Lotting makes all the difference: “We realized we don’t have to bundle all our business into a single auction to get the best price,” said Dunlop. “The vendors will identify what meets their capabilities and provide the best price.” It is important to note that, regardless of the lot structure, ITT does not typically require vendors to bid on all items.
• Four is the magic number: In its first reverse auction for machined parts, ITT included only three vendors. Dunlop said this number didn’t provide sufficient competition to encourage aggressive bidding.
• Better trained suppliers, make more competitive offers: Dunlop also said that, early on, many suppliers were confused about the auction approach, bidding aggressively to be the lowest price, even though ITT had said it would award the business on multiple factors to get the lowest total cost. ”One vendor bid away all his margin, which is not a sustainable or preferable business for him or us,” said Dunlop. ITT has since placed a strong emphasis on educating suppliers on the selection criteria and award strategy to ensure competitive (and sustainable) bids.
• Clearly define the rules of engagement — before the auction begins: In one auction, a winning supplier later tried to place conditions on its offered pricing after the event closed. To guard against such post-event bartering, ITT now uses prerequiste gateways and knockout questions to ensure that suppliers agree to all conditions prior to the auction and to avoid any surprises or disputes after award. 
• Beware of sour grapes: After its second auction, ITT noticed that one supplier that was well out of the running kept placing bids to trigger extension periods and force other more qualified and competitive vendors to continue to bid down their price. ITT eventually closed out the auction and later revoked this disgruntled vendor’s auction privlidges. Dunlop advises constant monitoring of auction events to discourage such antics.
• Spending time with losers, can create great winners: ITT discovered telling vendors why they did not win the business can provide much-needed motivation (and insight) for self improvement. “We’ve had vendors go out and buy new machinery or do joint-ventures in Asia and come back much more competitive and win our business,” said Dunlop.
• Involve Asian vendors, whenever possible: ITT has also tracked a correlation between bidding activity and the participation of Asian suppliers, particularly those from China. “Involving Asian vendors in an auction can help force local vendors to be more aggressive competitive.”

Don’t miss out on this year’s Supply Management 2.0 Form in London. The event is near maximum capacity, but there are a few seats left. Register here. I hope to see you there.

Last week’s post showcased hard-hitting advice from industry veterans from Denali Consulting and Constellation Brands on the pitfalls of supplier performance management. One challenge left off that list: how to build a compelling business case for investing in a supplier performance management program and supporting technologies.

In the Jumpstarting a Supplier Management Program web seminar, Denali President Dawn Tiura bluntly stated: “A program is useless if you cannot show quantifiable bottom-line impact.”

When pressed for how to quantify the impact of an effective supplier performance management program, Dawn didn’t blink: “The business case is real simple. Supplier performance management provides me with uninterrupted supply. It enables me to establish sustainable supplier relationships. And, our research and working with our customers shows, that it can drive 3% to 6% total supply chain cost reductions through continuous improvements.”

In today’s volatile and inflationary market, a business case built on supply stability and reduced supply chain costs should be quite compelling indeed. If this message doesn’t resonate with your CEO or CFO, you should consider working for another company.

Get more advice on how to launch a successful supplier management program, by downloading the complete web seminar here.

Last week, I shared the latest projections from Thinking Cap Solutions which uncovered opportunities to negotiate double-digit discounts on your zinc, copper, and aluminum contracts. And that’s just the tip of the “ICEberg.”

Thinking Cap’s latest Industry Cost Escalation report — the ICE-Alert — identifies 183 industries “where average prices can decline without sending margins any lower than average margin levels held over the past five years.” Suppliers in nearly one-third of those industries could cut average price tags by 5% or more.

Translation: It’s time to renegotiate.

The below chart provides a glimpse into the top 20 commodity sectors where suppliers have the most room to offer discounts. It also offers advice on what type of pricing discount you could negotiate without unrealistically squeezing supplier profit margins.

For complete insight into commodity market supply and pricing trends, order a full copy of the report at www.ice-alert.com or by contacting ICE-Alert Editor Elizabeth Baatz at ebatz@ice-alert.com.

While a new $20 billion free-trade pact between the U.S. and South Korea got all the press last week, the Bush Administration this week announced plans to levy new duties on imports from China.

The uncharacteristically protectionist move comes just as sourcing from China has reached an all-time high. U.S. trade deficit with China hit a record $233 billion last year. Supply managers elsewhere are not immune from the China-import backlash effect. The European Union has also begun to boost duties on certain goods from China.

The new duties, which are in response to anger over China’s export subsidies, also come as an increasing number of manufacturers are reporting rising supply costs. The added tariffs could eat away at the much ballyhooed “China price,” the 20% to 50% discount that initially prompted supply managers to source from the region.

However, the sky isn’t falling just yet. In the U.S., the new duties will initially apply to imports of coated paper from China. In the EU they apply to certain clothing items. But free-traders fear that the move will set a precedent for steel companies, textile producers, and other manufacturers to apply for the same protection. (In fact, the American Iron and Steel Institute (AISI) and Steel Manufacturers Association (SMA) are already calling for the Administration to extend the same protections to steel products.) And several bills in Congress would requrie the Commerce Department to apply countervailing duties to non-market economies, such as China and Vietnam.

Supply managers should keep a close watch on the major manufacturing associations – including the AISI, SMA, the National Textile Association – and U.S. Commerce Department actions to predict if and when duties may be applied to your own Chinese imports as well as those of your suppliers. Also pay attention to China-U.S. trade talks in Washington next month.

A flood of recent studies indicate that the road to supplier performance management is paved with good intentions. The latest Aberdeen Group benchmark found that, while most businesses have prioritized investments in supplpier performance management programs and systems, few have effectively executed on this plan.

In last week’s webinar on Jumpstarting a Supplier Performance Management Program, Denali Consulting Founder and President Dawn Tiura reaffirmed the disconnect between corporate intentions and execution in this area. In a study Fortune 100 supply chain groups, Denali found that, after two years, 70% of companies reported losing up to 100% of the savings they initially negotiated with suppliers. “Companies have to begin to realize that, if you don’t follow up with supplier performance, you can’t claim that savings.”

What’s the problem? Tiura and fellow webinar panelist, Chris Herbst, Supply Chain Program Manager for Constellation Brands, pointed to the following hurdles to effective supplier management — and how to overcome them:

• Most companies try to manage the performance of the suppliers they have, rather than selecting suppliers that meet their performance goals. Tiura says successful supplier performance management starts with the sourcing process: “Set your performance goals. Then choose your suppliers.” Tiura says defining performance goals before engaging suppliers helps secure the right suppliers to meet your company’s needs. It also ensures alignment with internal stakeholders early in the process, increasing their support and participation in the performance management program. Tiura adds that the sourcing process often offers a wealth of ideas for process and infrastructure improvements that can be used as goals to continually enhance supplier performance and relationships.
• Many companies try to measure and manage too much. “You can’t have an effective supplier development program for all suppliers,” says Tiura. She recommends prioritizing development for those suppliers with which you have high spend volumes or those that have a strategic impact to your business. “You need to choose the right suppliers to manage and develop strategically and use automated tools to measure performance of others.”
• Companies fail to align supplier performance measures with the goals of the business. Says Tiura: “You need to start by examining your corporate goals and the business unit’s long-term strategic plans. Then ask, ‘How do my supplier performance measures help meet these goals?’” Constellation attributes its supplier performance management program success to this technique. Says Herbst: “Corporate supply chain provided the template [for a supplier scorecard] as a starting point. We then sought feedback from our [seven] operating companies, allowing for category and regional customization of the scorecard.” Specifically, Constellation uses some common global measures in the areas of cost, innovation, quality, and service. The supply chain group works with the businesses to add measures that support unique attributes of specific spend categories or regional jurisdictions.

Don’t just listen to my recollections. Download a free replay of the entire webinar to hear first hand from Denali and Constellation Brands on how to launch and sustain a successful supplier performance management initiative.