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Supply Chain "Wiring"
There are three levers to pull when tackling sourcing (price, usage and wiring) – each of which yields powerful results in their own right and each of which needs to be tackled before a sourcing department can feel comfortable that they have the particular spend item ‘in order’.
Wiring is in essence the culture and control mechanisms that are in place in the organisation. Good wiring supports good business practices, bad wiring allows sloppy practices and considerable savings opportunities untapped for the organisation.
Elements of supply chain wiring are covered in the Supply Chain Wiring Diagnostics of some organisations and PIP can also carry these out for you. They review whether your contactors are tightly controlled, your inventories and stores are in control and well managed, whether the organisation purchases on catalogue or whether systems are being bypassed with items procured off catalogue or people are engaging contractors before purchase requisitions are in place.
If you are scoring poorly on these types of audit questions, some of the items below may be of interest in helping you and your organisation rectify that situation.
Savings and benefits from Supply chain Wiring are generated through:
- Organisation structure for the procurement department - with the right balance of central and decentralised resources, strategic sourcing, procurement and warehouse management resources
- Role clarity for your people - the right single-point accountabilities, KPIs, targets, and the right people filling those roles with the right skills
- Reporting and reviews - for coaching and performance management of your people. Done well this will drive performance and results.
- Vendor Management
- Stores and inventory management - making sure we have the right amount of stock in the right places and ensuring that production doesn’t stop
- Compliance to procedures and use of preferred suppliers
- ‘Spending Money as if it’s your Own’ - making sure that controls and checks are in place to ensure that money is not wasted and we utilise the best possible deals.
1. Supply chain Organisation - Central vs site
In many multi-site organisations we have found that duplications and gaps exist in supply chain processes and supplier management resulting in additional costs and inefficiencies. More often than not each site negotiates its own contracts with different suppliers and does not leverage the purchasing power of the whole organisation. This also results in increased transaction costs because of duplication.
As an example, at a large coal mine in South Africa we found that each of the 5 mine sites have different standards for safety inspections and licensing for its coal haulage vehicles. Each site had negotiated different haulage contracts and when contractors needed to move from site to site they needed to spend several days obtaining new vehicle and driver permits because no site recognised the other sites’ permits. Needless to say this increased costs and reduced operational performance.
Here the first step was to involve each site in defining an organisation wide standard for vehicle safety and equipment and to define an organisation wide driver induction and skills assessment. Secondly, the total coal haulage task was defined on an organisation wide basis and was being put out to tender.
The supply chain function needs to have clear delineation of accountability between what is done by central supply chain and what is done by site at multi-site organisations. It is important to note when considering this question that consolidation of spend is not the same as centralisation of accountability and does not imply that the spend item has to be managed in the centre. That is location and consolidation are not one and the same thing.
We work with you to design the structure based on assessments of the tradeoffs involved for the following factors:
- supply chain skills in place or available centrally and on sites
- effectiveness of supply chain systems to support multi-site operations
- extent of overlap of goods and services and suppliers used by each site
- ability of suppliers to manage multi-site customer requirements
- strength and depth of relationships with suppliers
- degree of local input / management required at each site
Once the structure is defined and agreed we work with you to plan and execute the implementation.
With good systems, good staff and good supplier relationships it is possible to have a strong centre with devolved site staff to aid responsiveness without sacrificing control.
2. Role clarity and reviews - so your people know when they have had a good week
It would come as no surprise to readers familiar with our philosophies that we consider it important for the supply chain team to have clear individual KPIs and accountabilities, a knowledge of what they can do personally to improve their KPIs and how they can tell if they have had a good week or a bad week. Our experience is that such role clarity is essential if you are to build a high performing business. We can help you to determine the KPIs, install the measurement and scorecards to give such clarity to your people.
We then train you and your people how to hold positive reviews against these KPIs and actions each week in order to drive performance and create a proactive coaching loop for each layer of the business.
3. Action tracker - to drive your improvement pipeline
A further tool we use is called the ‘Action Tracker’. This tool keeps track of all the improvement initiatives and actions that are in process within the supply chain organisation. It is the link between the plans and targets set for the function and the detailed actions that are required to make those plans happen.
The action tracker is updated with all the information about each initiative – who is responsible, what resources are required, who will provide them, milestones and the KPIs to track to ensure that savings and benefits are actually being delivered.
The action tracker provides key information for the weekly RARs conducted throughout the supply chain function.
4. Proactive contract and vendor management
Contracts require proactive management to ensure that the benefits are being captured. Too often we work with clients whose contractors are pushing the envelope too hard in terms of the costs they are charging the client relative to the work they are doing. Our reviews consistently uncover over-billing, sloppy performance from suppliers, time billed when their people are not even on site, overhead margins charged that are not allowed in the contract.
We engage with your to fix this system end to end. From developing simple one-page explanations of the contract for users and what they should check and actively manage - through to setting up simple, structured reviews of vendors on a regular basis (covering results against both parties’ KPIs, actions (done/not done) from both parties). In addition, we train people from both the supply department and the end users how to actively manage suppliers in order to drive good performance from the supplier.
To ensure the GM review focused on the important issues, we used a template that included costs, targets, idea values and contract details etc.
5. Stores & Inventory
Organisations have significant amounts of capital tied up in inventory but unless there is enough critical inventory on hand, the opportunity costs from out of stock items stopping production can be huge.
- PIP assisted a remote mine site to rationalise its inventory holdings while ensuring that production was not put at risk. Working with the production managers, each inventory item was classified depending on its criticality
For each item an individual inventory plan was developed which took into account criticality, normal and peak usage, the length of the delivery supply chain and the ability to store inventory on site or elsewhere. Using this information the minimum stock holding level and the reorder quantity were agreed with the relevant operational managers.
For example, as a result of the review a key reagent was downgraded from Criticality A to Criticality B because a workaround was identified. This meant that stock on hand could be cut in half as shown on the chart below. This revised average stock level was achieved within 2 months.
Though it may not be regarded as the prime focus of most supply chain functions, good housekeeping in the warehouse has a large impact on reducing damage to stock, people, equipment and the environment. Good housekeeping also plays a part in preventing stock outs / lost production and reducing the number of urgent orders placed to cover “missing” stock.
At a remote zinc mine we assisted the supply chain function to improve their housekeeping through this 5 step process:
- Identifying the areas of highest impact of improvement in housekeeping – safety, financial and working climate
- Developing improvement ideas with clear scopes, evaluations, plans - then prioritising the initiatives
- Obtaining approval from the appropriate operational managers
- Implementing the physical, behavioural and procedural changes. The SPIN technique was used for the behavioural aspects
- Sustaining the change with training and regular audits and reporting of benefits
Two major projects completed were the layout and management of the receivables area and a focus on ensuring that all existing and new items were correctly stored in the appropriate location (reducing ‘homeless’ items).
The results were a much improved impression of the stores for visitors, end-users, management and supply chain personnel. The reputation of the stores area was enhanced by the progress made. Quantifiable reductions in loses and damage to stock and equipment were estimated to be approximately $70,000 per annum and the tidier layout significantly reduced the risk of safety, health and environmental incidents. The reduction in ‘homeless’ warehouse items is shown on the following chart.
Vendor Managed Inventory (VMI)
Vendor management of inventory can often bring very substantial benefits, if managed correctly. Firstly, there are the obvious savings:
- Reduction in cost of inventory – if you buy an item from a vendor today, and keep it in stock, the cost of carrying the item is the fully marked up cost to you. However, if the vendor carries the item, the cost to carry is often only the vendor cost. In effect you will still pay for the item to be held, but the time at which the additional cost of the vendor’s profit margin becomes part of the carrying cost is delayed
- Reduced risk of obsolescence – vendors are better equipped to know when something new, with lower cost or better performance may be coming out
- Less risk of damage in storage – vendors are better equipped to manage storage conditions e.g., temperature or humidity
- The vendor can better manage a pool of items – the vendor is usually supplying many organisations and they will have the flexibility to carry a lower total number of items than would be the case for the combination of buyers, while still being able to provide the same guarantee of availability.
However, what is often the largest benefit is also often overlooked - that of price decreases over time. The exhibit shows the price curve for a product over a three year time frame. Because with vendor stocks you pay for them when they are used (rather than purchased), this delay in time can result in a significant reduction in cost to you for products where price tends to reduce over time (technology and fashion items whose value tends to decrease over time).
We work with you to identify items that may benefit from a VMI approach by identifying high value inventory items ,analysing the supplier marketplace to determine their stock holding economics and distribution patterns and then if benefits are available conducting the negotiations with the supplier to implement the changes to VMI.
6. Cost culture, controls and Compliance to procedures
Spending Money as if it’s your Own...
At the core of PIP’s ability to deliver rapid, sustainable results, is our SPIN Cycle methodology – a powerful approach to drive rapid behavioural change. This methodology is powerful for driving improvements in Discretionary Spend, Contractor Spend, Corporate Cards, Domestic Travel and Contract Management - the SPIN Cycle methodology enables change to be captured ‘in the line’ and typically starts to deliver quantifiable results within a month of implementation. Some examples of results from using this methodology to improve compliance to supply chain procedures are shown below.
Depicted in the diagram above, the methodology recognises the difficulties and resistance which often accompany change, and creates alignment to key performance indicators (KPIs) and goals at each layer in the organisation by cascading realistic targets (driven off the value driver tree). Next, employees are trained on how they influence results and then shown how targets will be measured and reviewed. Reviews then sustain the focus and problem solving around the KPI performance and capture ideas for ongoing improvements to these KPIs.
Reducing unnecessary discretionary spend
Text spend - getting consumables purchased ON catalogue and controlling usage
Contractor spend - typically 15-30 percent reduction in usage
Corporate credit cards - reducing non-compliant, discretionary expenditure
Assessment of the state of your supply chain ‘wiring’
In order to plan for the future and to execute against these plans effectively, the management of the supply chain function needs to have a clear and objective view of the capability of the function and of the level of skills and abilities of their staff. An assessment is made of the following areas:
- Supply chain Strategy & Organisation
- Supplier Management
- Supply chain Process
- External Collaboration
The assessment provides a view on the maturity level of the function – is the area in an immature stage, at an average implementation level or is it at world-class performance levels?
At a large government department, this assessment of the supply chain function was used to determine the growth path for the function. It led to a solid understanding of what the next stages of training and development should be. For example, it was totally ineffective to be trying to deliver world class partnering with vendors when the supply chain organisation struggled to negotiate and manage single year contracts for its major suppliers.
The results and analysis of the assessment were used to set realistic targets for process changes, savings and staff development and training. The trajectory for improvement and grow was clear and a plan developed to acquire the necessary skills and resources to implement the plan was agreed and funded.
These are some of the many examples of ways that applying change management disciplines to compliance and supply chain functions can augment the more traditional price and usage levers available to a sourcing group. Our experience is that these supply chain wiring levers deliver substantial financial value as well as tightening the disciplines and compliance across sites. As well as all the cash, not surprisingly, working on these levers will help you do well on your supply chain systems audits as well.
Should you require any more information on our work in Supply Chain Wiring, please contact us on firstname.lastname@example.org.
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