Copyright © 2009, Supply Chain Education, Inc. Understanding and Implementing Five Global Best...

Copyright © 2009, Supply Chain Education, Inc.

Understanding and Implementing Five Global Best Practices In Supply Management

Presented to ISM-Dallas, August 12, 2010

Understanding and Implementing Five Global Best Practices In Supply Management

Presented to ISM-Dallas, August 12, 2010


“The job of procurement isn’t as easy as it sounds.” It mostly involves preventing peoplefrom getting stuff they need to do their jobs. Most dinosaurs worked in procurement beforethey went into hiding. Many of them starved to

death while waiting for a purchase order foredible vegetation. Others evolved into birdsprimarily in the penguin family. Those who

survived carried on the tradition.”- Dilbert

“The job of procurement isn’t as easy as it sounds.” It mostly involves preventing peoplefrom getting stuff they need to do their jobs. Most dinosaurs worked in procurement beforethey went into hiding. Many of them starved to

death while waiting for a purchase order foredible vegetation. Others evolved into birdsprimarily in the penguin family. Those who

survived carried on the tradition.”- Dilbert

What is a Purchasing and Supply Manager?


A supply management professional is an individual who provides leadership by aligning resources to define and satisfy diverse internal and external customer needs through acquisition and ongoing management of materials and services. - ISM

A supply management professional is an individual who provides leadership by aligning resources to define and satisfy diverse internal and external customer needs through acquisition and ongoing management of materials and services. - ISM

What is a Supply Management Professional?


InvestmentRecovery

SupplySupplyManagementManagement

Focus Focus AreasAreas



Distribution

InventoryControl

Logistics

ManufacturingSupervision

MaterialsManagement

Packaging

Product/ServiceDevelopment

Purchasing/Procurement

Quality

Receiving

StrategicSourcing

Transportation/Traffic

Warehousing

Five Global Best Practices In Supply Management


P1: Six Sigma in Procurement

P2: Understanding Total Cost Modeling

P3: Optimizing Inventory Investment

P4: Greening the Supply Chain

P5: The 21st Century Talent Pool

•

The Five Practices The Five Practices



What is the average savings that companies target when pursuing a Six Sigma program?

A) 25%

B) 50%

C) 70%

D) 90%

Question #1 – Six Sigma


What is the average savings that companies target when pursuing a Six Sigma program?

A) 25%

B) 50%

C) 70%

D) 90%

Question #1 – Six Sigma


If an item should cost no more than $3.00 with a reasonable profit mark-up, what is this concept called?

A) Target Cost

B) Approximated Cost

C) Should Cost

D) Shouldn’t Cost

Question #2 – Total Cost Modeling


If an item should cost no more than $3.00 with a reasonable profit mark-up, what is this concept called?

A) Target Cost

B) Approximated Cost

C) Should Cost

D) Shouldn’t Cost

Question #2 – Total Cost Modeling


What is the cost range to carry (hold) inventory on the shelve for one year?

A) 10-25%

B) 20-40%

C) 30-50%

D) 50-70%

Question #3 – Inventory Investment


What is the cost range to carry (hold) inventory on the shelve for one year?

A) 10-25%

B) 20-40%

C) 30-50%

D) 50-70%

Question #3 – Inventory Investment


What is the overall term that is currently used for Greening the Supply Chain?

A) Sustainability

B) Investment Recovery

C) Social Responsibility

D) It’s not green; it’s blue

Question #4 – Green Supply Chain


What is the overall term that is currently used for Greening the Supply Chain?

A) Sustainability

B) Investment Recovery

C) Social Responsibility

D) It’s not green; it’s blue

Question #4 – Green Supply Chain


Of the skill sets below, which one is the main one thatcompanies look for when hiring Supply Managers?

A) Negotiation

B) Information Technology

C) Strategic Sourcing

D) Engineering

Question #5 – Talent Pool


Of the skill sets below, which one is the main one thatcompanies look for when hiring Supply Managers?

A) Negotiation

B) Information Technology

C) Strategic Sourcing

D) Engineering

Question #5 – Talent Pool


What is Six Sigma?

68% 95% 99%


A methodology that eliminates defects, anything that leads to dissatisfaction of the customer and improves business & manufacturing processes, leading to a successful outcome. – Aveta Business Solutions


Success Stories

Dupont

Bank of America

Honeywell

Motorola

GE

$7-10 B Profit – 5 yrs.

$2.4B savings - 4 yrs.

$100M savings - 3 yrs.





How Good is GoodHow Good is Good

20,000 pieces of lost mail/hour

5,000 incorrect surgeries/week

2 short runway landings/day

200,000 drug prescription errors/year

No electricity for 7 hours/month

99% Good

7 pieces of lost mail/hour

1.7 incorrect surgeries/week

1 short runway landing/5 years

68 drug prescription errors/year

1 hour without electricity/34 years

6 Sigma (99.99966%)



x = inputsf = function

(transformation)

Y = Desired Result

Y = f(x) + E

The Six Sigma Formula

E= error



Supplier VARIATION is:

the concept that advocates that no two factors are identical. Variation is also a change in dimension, characteristic, function or data.



The Six Sigma Players

1. Sponsor- launches

& sustains

2. Deployment Leader- aligns goals with plans

3. Champions- manage each of the teams, (i.e. procurement )

4. Core Team- carries out the projects, (can include the supplier)



ExecutiveLeadership

Implements projects w/value $150K or greater

Who are the Belts?Who are the Belts?Champion

MasterBelts

BlackBelts

GreenBelts

YellowBelts

Project Team Members

Implements projects w/value $35K or greater

Everyone else



What are someIdeal customer-

supplier – Six Sigma projects?



DMAICD – Define – which projects should I work

on at this time?

M – Measure – what is my variation?

A – Analyze – what are the different

types of data?

I – Improve – what tools can I use?

C – Control – how do I lock in the gains?


What is Continuous Improvement?

A never ending effort to expose and eliminate root causes of problems,

small-step improvement as opposed to big-step improvement. KAIZEN is

the Japanese term.

A never ending effort to expose and eliminate root causes of problems,

small-step improvement as opposed to big-step improvement. KAIZEN is

the Japanese term.



Incorrectlyinsertedslots inmetal

brackets

Man

Doesn’t knowwhere to insert

Not paying attention

Materials

Inconsistent quality

Inconsistent sizes

Machine

Worn tools Acquired from different vendors

Methods

Overheats

No slotting standards

No alignment guides

Measurement

Template

Ruler

Cause & Effect – Fishbone Diagram


The Set of 10’s – Best Practices

1. Set Stretch Goals

2. Target Tangible Results

3. Determine Outcomes

4. Think Before You Act

5. Put Faith in Your Data

6. Minimize Variation

7. Align Projects w/ Key Goals

8. Celebrate Success

9. Involve The Owner

10. Unleash Everyone’s Potential


The Set of 10’s – Common Pitfalls

1. Not Allowing Enough Time

2. Who’s The Leader?

3. Taking Too Big A Bite

4. Focusing On Isolated Areas

5. But We’re Different!

6. Overtraining

7. Blindly Believing - Measurement Sys.

8. Remind Me Again – CLs or SLs?

9. Exaggerated Opportunity Counts

10. Not Leveraging Technology


The Set of 10’s – Good Resources

1. Colleagues

2. Six Sigma Corporations

3. Professional Societies

4. Conferences

5. Publications

6. Web Portals

7. Periodicals

8. Technology Suppliers

9. Consultants

10. Six Sigma Trainers


Total CostModeling



What is TCO – TOTAL COST of OWNERSHIP?

“Total Cost of Ownership is a structured approach for determining the total costs

associated with the acquisition andsubsequent use of an item from a given

supplier. TCO is a comprehensiveapproach that goes beyond price to

consider a number of other costs.”



PRE-

ACQUISITION

AC

QU

ISIT

ION

POST -

ACQUISITION

TCO COST

CATEGORIES



DescriptionCategory

Costs attributable

to product design tradeoffsDesign

Cost Driver FrameworkExamples

• Material specifications

• Product-line complexity

Facility Costs related to the size of

the facility, equipment, and

process technology

Costs associated with

the location of the facility

relative to customer

Costs that differentiate

a well-run facility

from a poor one

Geography

Operations

• Facility scale

• Degree of Vertical Integ.

• Use of automation

• Location and wages

• Transportation costs

• Labor productivity

• Facility utilization

• Reject rates


Cost Types

Standard -

Predetermined costs to purchase or mfg. an item.

Direct -

Those costs that can be directly tied to a mfg. product

Indirect -

All costs other than Direct costs

Relevant -

Costs that change based on making a decision

Opportunity -

The benefit(s) you forgo by making a decision



A cost modeling technique in which price is projected by estimating the dollar value of each cost component based on objective cost data. The estimate is the analyst's view of what the item "should cost" versus what the supplier

may ask the customer to pay once the product or service has been defined. This analysis

provides a comparison point for bids or proposals and encourages the buyer and seller to identify, discuss and remove avoidable cost,

and to eliminate waste. (ISM Dictionary)

A cost modeling technique in which price is projected by estimating the dollar value of each cost component based on objective cost data. The estimate is the analyst's view of what the item "should cost" versus what the supplier

may ask the customer to pay once the product or service has been defined. This analysis

provides a comparison point for bids or proposals and encourages the buyer and seller to identify, discuss and remove avoidable cost,

and to eliminate waste. (ISM Dictionary)

What is Should Cost Analysis? What is Should Cost Analysis?



Used in supply management to identify the allowable price for a supplier's product or service which starts with the selling price of the buyer's end product or service for its end product or service in the marketplace and subtracting out the required profit. The amount remaining is the total that it can cost the organization to make that product or to perform that service, including materials.

This cost is allocated among purchases and internals costs, with the result being the target cost for each item. Purchasing then works with suppliers to ensure that their prices come in at or below the target cost. Further analysis and negotiation then seeks to remove costs from both the buyer's and the seller's operations to reduce the price to the acceptable target level. (ISM Dictionary)

Used in supply management to identify the allowable price for a supplier's product or service which starts with the selling price of the buyer's end product or service for its end product or service in the marketplace and subtracting out the required profit. The amount remaining is the total that it can cost the organization to make that product or to perform that service, including materials.

This cost is allocated among purchases and internals costs, with the result being the target cost for each item. Purchasing then works with suppliers to ensure that their prices come in at or below the target cost. Further analysis and negotiation then seeks to remove costs from both the buyer's and the seller's operations to reduce the price to the acceptable target level. (ISM Dictionary)

What is Target Costing? What is Target Costing?


Three Approaches to Target CostingThree Approaches to Target Costing

Price Based Targeting

Cost –Based Targeting

Value-Based Targeting


Overhead Allocation FormulasOverhead Allocation Formulas

Labor Intensive Product Total budgeted overhead

Total budgeted direct labor cost

Total budgeted overhead

Total budgeted machining cost

Machine Intensive Product

Total Company General & Administrative

Total Company Sales

Services Provider



Optimizing Inventory Investment



Inventory Objectives

Provide Excellent Customer Service

Maximize OperatingEfficiency

Minimize Inventory Investment



Do these objectives

ever conflict?



What are Carrying Costs?

These are the total costs to hold inventory on the shelf and include:

Capital – Opportunity Storage – Capacity Risk – Damage, Insurance,

Obsolescence, Pilferage



What are Stock-Out Costs?

These are the total costs associated demand during the lead-time exceeding the current inventory level and are the most difficult to quantify based on the three disintegrating levels of customer service. Do you know what the three levels are?



The

Approach To Auditing Inventory



Other KeyApproaches

SMI

SOI

CPFR



Greening the Supply Chain Greening the Supply Chain



The capacity to maintain a process or state. In anecological context, the ability of an ecosystem to maintainecological processes, functions and productivity into thefuture. In a social context, meeting the needs of thepresent, without compromising the ability of futuregenerations to meet their own needs.

- Wikipedia

The capacity to maintain a process or state. In anecological context, the ability of an ecosystem to maintainecological processes, functions and productivity into thefuture. In a social context, meeting the needs of thepresent, without compromising the ability of futuregenerations to meet their own needs.

- Wikipedia

What is Sustainability?



SourceIn

-Tra

nsit

Destination

CHAIN of

Creation



CASE STUDY EXERCISE “What’s a Policy?”

You have recently accepted the position of Supply Chain Director for a company named after its 115 yr. old founder,Wei R. Lacking (WRL Industries). WRL is a foundry that produces motor cycle parts from hot molten metals. Aftera week on the job, you discovered major violations and itis obvious that WRL is truly lacking in clear-cut policies. Three examples come to mind:1) WRL’s purchasing staff make business award decisions based on the size of the gratuities. The most flagrant violator is your Senior Buyer, Sir Lunch a Lot.

2) The foundry workers do not wear protective clothing and shoes when pouring the hot metals.

CASE STUDY EXERCISE “What’s a Policy?”

You have recently accepted the position of Supply Chain Director for a company named after its 115 yr. old founder,Wei R. Lacking (WRL Industries). WRL is a foundry that produces motor cycle parts from hot molten metals. Aftera week on the job, you discovered major violations and itis obvious that WRL is truly lacking in clear-cut policies. Three examples come to mind:1) WRL’s purchasing staff make business award decisions based on the size of the gratuities. The most flagrant violator is your Senior Buyer, Sir Lunch a Lot.

2) The foundry workers do not wear protective clothing and shoes when pouring the hot metals.


CASE STUDY EXERCISE (Cont’d) “What’s a Policy?”

3) The hazardous by-product from the metals is placed ina local dumpster behind the neighborhood grocery store,(WRL management views this as a cost savings from notutilizing a hauling company).

To develop a clear-cut policies & procedures manual that will address your three concerns of ethics, safety and the environment, what six areas should this document focus on?

CASE STUDY EXERCISE (Cont’d) “What’s a Policy?”

3) The hazardous by-product from the metals is placed ina local dumpster behind the neighborhood grocery store,(WRL management views this as a cost savings from notutilizing a hauling company).

To develop a clear-cut policies & procedures manual that will address your three concerns of ethics, safety and the environment, what six areas should this document focus on?


CASE STUDY EXERCISE – (SOLUTION) “What’s a Policy?”

1. A code of ethics with provisions relating to the supply management professional, such a specific guidelines on gratuities, conflicts, reciprocity, human rights, safety, environmental management and compliance with the law.

2. Document retention and control policies.

3. Environmental management systems, based on ISO 14001.

4. Organizational structure and reporting lines.

5. Purchasing process and authority, including types of transactions that require special approval.

6. Commitment of community philosophy, including waste prevention and management.

CASE STUDY EXERCISE – (SOLUTION) “What’s a Policy?”

1. A code of ethics with provisions relating to the supply management professional, such a specific guidelines on gratuities, conflicts, reciprocity, human rights, safety, environmental management and compliance with the law.

2. Document retention and control policies.

3. Environmental management systems, based on ISO 14001.

4. Organizational structure and reporting lines.

5. Purchasing process and authority, including types of transactions that require special approval.

6. Commitment of community philosophy, including waste prevention and management.


CASE STUDY EXERCISE “They Now Know What a Policy Is.”

Back to Wei R. Lacking (WRL) Industries. Your policies onethics and safety are working out well, other than Sir Luncha Lot taking a Director of Sales position with your largestcatering supplier. Although dumping behind the grocerystore has ceased, you want WRL’s environmental practiceto be more than reactive; proactive. To do this, you firmlybelieve that first, you must have an environmental value statement and second, you must audit your supply chain.

1. What factors should this statement include?

2. Who/whom should be audited and how should the audit be conducted?

CASE STUDY EXERCISE “They Now Know What a Policy Is.”

Back to Wei R. Lacking (WRL) Industries. Your policies onethics and safety are working out well, other than Sir Luncha Lot taking a Director of Sales position with your largestcatering supplier. Although dumping behind the grocerystore has ceased, you want WRL’s environmental practiceto be more than reactive; proactive. To do this, you firmlybelieve that first, you must have an environmental value statement and second, you must audit your supply chain.

1. What factors should this statement include?

2. Who/whom should be audited and how should the audit be conducted?


CASE STUDY EXERCISE – (SOLUTION) “They Now Know What a Policy Is.”

1. Environmental Value Statement –

A. Compliance with all laws and regulations B. Prevention of harm to the environment C. Emphasis on recycled products/renewable resources D. Commitment to meeting goals and objectives E. Metrics

2. Audit –

A. Self-audit - what are our practices and our we following them B. Internal – within WRL but outside of the department audited C. Supply Chain – Key suppliers to WRL; are they following WRL policies and procedures (communicate that this audit will be objective and that the results/findings will be acted upon).

CASE STUDY EXERCISE – (SOLUTION) “They Now Know What a Policy Is.”

1. Environmental Value Statement –

A. Compliance with all laws and regulations B. Prevention of harm to the environment C. Emphasis on recycled products/renewable resources D. Commitment to meeting goals and objectives E. Metrics

2. Audit –

A. Self-audit - what are our practices and our we following them B. Internal – within WRL but outside of the department audited C. Supply Chain – Key suppliers to WRL; are they following WRL policies and procedures (communicate that this audit will be objective and that the results/findings will be acted upon).


Minimizing Obsolescence,

Surplus, & Scrap



The Proactive Approach – ISO 14000 Series

• 14000 developed in 1996

• Int’l specification for EMS

• Voluntary plans to minimize harmful affect to the environ.

• Updated with 14001 and 14004

• Annual Evaluation of Compliance

• Renewable Resources



The 21st Century Talent Pool



What’s the dilemma?What’s the dilemma?



Negotiation

Top NineTop NineCurrent SkillsCurrent SkillsBased on CAPSBased on CAPS

Top NineTop NineCurrent SkillsCurrent SkillsBased on CAPSBased on CAPS

MakingDecisions

InterpersonalCommunication

CommonSense

Ethics

Influence &Persuasion

ProblemSolving

ConflictResolution

StrategicSourcing



Negotiation

Top NineTop NineFuture SkillsFuture SkillsBased on CAPSBased on CAPS

Top NineTop NineFuture SkillsFuture SkillsBased on CAPSBased on CAPS

MakingDecisions

InterpersonalCommunication

Cross-FunctionalTeaming

Ethics

Influence &Persuasion

ProblemSolving Leadership

StrategicSourcing



Career Development & Needs Assessment

Career Development & Needs Assessment

• Globalization• Internal Customers• Supplier Integration• Outsourcing• Supply Chain• Total Cost• e-Sourcing

Key Trends Key Skills

• Team Building• Strategic Planning• Communication• Technical• Financial• Relationship Mgmt.• Legal & Contracting

KnowledgeAreas

• Supplier Analysis• Total Cost Analysis• Competitive Mkt. Anal.• SRM• Commodity Expertise• SCM• Price/Cost Analysis



InvestmentRecovery





Distribution

InventoryControl

Logistics

ManufacturingSupervision

MaterialsManagement

Packaging

Product/ServiceDevelopment

Purchasing/Procurement

Quality

Receiving

StrategicSourcing

Transportation/Traffic

Warehousing



Any Final

Questions?



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