Understanding and Implementing Five Global
Best Practices In Supply Management
Presented to ISM-Dallas, August 12, 2010
Copyright © 2009, Supply Chain Education, Inc.
What is a
Purchasing
and
Supply Manager?
“The job of procurement isn’t as easy as it
sounds.” It mostly involves preventing people
from getting stuff they need to do their jobs.
Most dinosaurs worked in procurement before
they went into hiding. Many of them starved to
death while waiting for a purchase order for
edible vegetation. Others evolved into birds
primarily in the penguin family. Those who
survived carried on the tradition.”
- Dilbert
Copyright © 2009, Supply Chain Education, Inc.
What is a
Supply Management Professional?
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
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Five Global Best Practices In Supply Management
Supply
Management
Investment
Recovery
Focus
Areas
Logistics
Packaging
Receiving
Product/Service
Development
Strategic
Sourcing
Distribution
Inventory
Control
Manufacturing
Supervision
Materials
Management
Purchasing/
Procurement
Quality
Transportation/
Traffic
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Warehousing
Five Global Best Practices In Supply Management
The Five Practices
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
Copyright © 2009, Supply Chain Education, Inc.
Question #1 – Six Sigma
What is the average savings that companies target
when pursuing a Six Sigma program?
A)
B)
C)
D)
25%
50%
70%
90%
Copyright © 2009, Supply Chain Education, Inc.
Question #1 – Six Sigma
What is the average savings that companies target
when pursuing a Six Sigma program?
A)
B)
C)
D)
25%
50%
70%
90%
Copyright © 2009, Supply Chain Education, Inc.
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)
B)
C)
D)
Target Cost
Approximated Cost
Should Cost
Shouldn’t Cost
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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)
B)
C)
D)
Target Cost
Approximated Cost
Should Cost
Shouldn’t Cost
Copyright © 2009, Supply Chain Education, Inc.
Question #3 – Inventory Investment
What is the cost range to carry (hold) inventory on
the shelve for one year?
A)
B)
C)
D)
10-25%
20-40%
30-50%
50-70%
Copyright © 2009, Supply Chain Education, Inc.
Question #3 – Inventory Investment
What is the cost range to carry (hold) inventory on
the shelve for one year?
A)
B)
C)
D)
10-25%
20-40%
30-50%
50-70%
Copyright © 2009, Supply Chain Education, Inc.
Question #4 – Green Supply Chain
What is the overall term that is currently used for
Greening the Supply Chain?
A)
B)
C)
D)
Sustainability
Investment Recovery
Social Responsibility
It’s not green; it’s blue
Copyright © 2009, Supply Chain Education, Inc.
Question #4 – Green Supply Chain
What is the overall term that is currently used for
Greening the Supply Chain?
A)
B)
C)
D)
Sustainability
Investment Recovery
Social Responsibility
It’s not green; it’s blue
Copyright © 2009, Supply Chain Education, Inc.
Question #5 – Talent Pool
Of the skill sets below, which one is the main one that
companies look for when hiring Supply Managers?
A)
B)
C)
D)
Negotiation
Information Technology
Strategic Sourcing
Engineering
Copyright © 2009, Supply Chain Education, Inc.
Question #5 – Talent Pool
Of the skill sets below, which one is the main one that
companies look for when hiring Supply Managers?
A)
B)
C)
D)
Negotiation
Information Technology
Strategic Sourcing
Engineering
Copyright © 2009, Supply Chain Education, Inc.
What is Six Sigma?
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
68%
95%
99%
Copyright © 2009, Supply Chain Education, Inc.
Five Global Best Practices In Supply Management
GE
$7-10 B Profit – 5 yrs.
Dupont
Success
Stories
$2.4B savings - 4 yrs.
Bank of America
$100M savings - 3 yrs.
Honeywell
Motorola
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$2.0B savings - 5 yrs.
$2.2B savings - 4 yrs.
Five Global Best Practices In Supply Management
How Good is Good
99% Good
6 Sigma (99.99966%)
20,000 pieces of lost mail/hour
7 pieces of lost mail/hour
5,000 incorrect surgeries/week
1.7 incorrect surgeries/week
2 short runway landings/day
1 short runway landing/5 years
200,000 drug prescription errors/year
68 drug prescription errors/year
No electricity for 7 hours/month
1 hour without electricity/34 years
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Five Global Best Practices In Supply Management
The Six Sigma Formula
Y = Desired
Result
Y = f(x) + E
E= error
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x = inputs
f = function
(transformation)
Five Global Best Practices In Supply Management
Supplier VARIATION is:
the concept that advocates that no two
factors are identical. Variation is also a
change in dimension, characteristic,
function or data.
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Five Global Best Practices In Supply Management
1. Sponsor- launches
& sustains
2. Deployment
Leader- aligns
goals with plans
3. Championsmanage each of
the teams, (i.e.
procurement )
The Six Sigma Players
4. Core Team- carries
out the projects,
(can include the
supplier)
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Five Global Best Practices In Supply Management
Executive
Leadership
Who are the Belts?
Champion
Master
Belts
Implements projects w/
value $150K or greater
Black
Belts
Implements projects w/
value $35K or greater
Green
Belts
Everyone else
Yellow
Belts
Project Team Members
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Five Global Best Practices In Supply Management
What are some
Ideal customersupplier – Six
Sigma projects?
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DMAIC
D – 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?
Copyright © 2009, Supply Chain Education, Inc.
Five Global Best Practices In Supply Management
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.
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Cause & Effect – Fishbone Diagram
Man
Doesn’t know
where to insert
Materials
Inconsistent quality
Not paying attention
Template
Ruler
Inconsistent sizes
No slotting standards
No alignment guides
Worn tools
Acquired from
different vendors
Overheats
Measurement
Methods
Machine
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Incorrectly
inserted
slots in
metal
brackets
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
The Set of 10’s – Best Practices
Set Stretch Goals
Target Tangible Results
Determine Outcomes
Think Before You Act
Put Faith in Your Data
Minimize Variation
Align Projects w/ Key Goals
Celebrate Success
Involve The Owner
Unleash Everyone’s Potential
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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
Copyright © 2009, Supply Chain Education, Inc.
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
Copyright © 2009, Supply Chain Education, Inc.
Five Global Best Practices In Supply Management
Total Cost
Modeling
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Five Global Best Practices In Supply Management
What is TCO
– TOTAL COST of OWNERSHIP?
“Total Cost of Ownership is a structured
approach for determining the total costs
associated with the acquisition and
subsequent use of an item from a given
supplier. TCO is a comprehensive
approach that goes beyond price to
consider a number of other costs.”
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Five Global Best Practices In Supply Management
TCO
COST
CATEGORIES
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Cost Driver Framework
Category
Design
Description
Costs attributable
• Material specifications
to product design tradeoffs
• Product-line complexity
Costs related to the size of
Facility
Examples
the facility, equipment, and
process technology
• Facility scale
• Degree of Vertical Integ.
• Use of automation
Costs associated with
Geography
the location of the facility
relative to customer
Operations
• Location and wages
• Transportation costs
Costs that differentiate
• Labor productivity
a well-run facility
• Facility utilization
from a poor one
• Reject rates
Copyright © 2009, Supply Chain Education, Inc.
Five Global Best Practices In Supply Management
Standard -
Cost Types
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 Copyright © 2009, Supply Chain Education, Inc.
The benefit(s) you
forgo by making a
decision
Five Global Best Practices In Supply Management
What is Should Cost Analysis?
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)
Copyright © 2009, Supply Chain Education, Inc.
What is Target Costing?
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)
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Three Approaches to Target Costing
Price Based Targeting
Cost –Based Targeting
Value-Based Targeting
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Five Global Best Practices In Supply Management
Overhead Allocation Formulas
Labor Intensive Product
Total budgeted overhead
Total budgeted direct labor cost
Machine Intensive Product
Total budgeted overhead
Total budgeted machining cost
Services Provider
Total Company General & Administrative
Total Company Sales
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Five Global Best Practices In Supply Management
Optimizing Inventory Investment
Copyright © 2009, Supply Chain Education, Inc.
Five Global Best Practices In Supply Management
Provide Excellent
Customer Service
Inventory
Objectives
Maximize Operating
Efficiency
Minimize Inventory
Investment
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Five Global Best Practices In Supply Management
Do these
objectives
ever conflict?
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Five Global Best Practices In Supply Management
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
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Five Global Best Practices In Supply Management
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?
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Five Global Best Practices In Supply Management
The
Approach To
Auditing Inventory
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Five Global Best Practices In Supply Management
SMI
Other Key
Approaches
SOI
CPFR
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Five Global Best Practices In Supply Management
Greening the Supply Chain
Copyright © 2009, Supply Chain Education, Inc.
Five Global Best Practices In Supply Management
What is Sustainability?
The capacity to maintain a process or state. In an
ecological context, the ability of an ecosystem to maintain
ecological processes, functions and productivity into the
future. In a social context, meeting the needs of the
present, without compromising the ability of future
generations to meet their own needs.
- Wikipedia
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Five Global Best Practices In Supply Management
CHAIN
of
Creation
Copyright © 2009, Supply Chain Education, Inc.
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. After
a week on the job, you discovered major violations and it
is 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.
Copyright © 2009, Supply Chain Education, Inc.
CASE STUDY EXERCISE (Cont’d)
“What’s a Policy?”
3) The hazardous by-product from the metals is placed in
a local dumpster behind the neighborhood grocery store,
(WRL management views this as a cost savings from not
utilizing 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?
Copyright © 2009, Supply Chain Education, Inc.
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.
Copyright © 2009, Supply Chain Education, Inc.
CASE STUDY EXERCISE
“They Now Know What a Policy Is.”
Back to Wei R. Lacking (WRL) Industries. Your policies on
ethics and safety are working out well, other than Sir Lunch
a Lot taking a Director of Sales position with your largest
catering supplier. Although dumping behind the grocery
store has ceased, you want WRL’s environmental practice
to be more than reactive; proactive. To do this, you firmly
believe 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?
Copyright © 2009, Supply Chain Education, Inc.
CASE STUDY EXERCISE – (SOLUTION)
“They Now Know What a Policy Is.”
1. Environmental Value Statement –
A.
B.
C.
D.
E.
2.
Compliance with all laws and regulations
Prevention of harm to the environment
Emphasis on recycled products/renewable resources
Commitment to meeting goals and objectives
Metrics
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).
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Five Global Best Practices In Supply Management
Minimizing
Obsolescence,
Surplus, & Scrap
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Five Global Best Practices In Supply Management
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
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Five Global Best Practices In Supply Management
The 21st Century Talent Pool
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Five Global Best Practices In Supply Management
What’s the dilemma?
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Five Global Best Practices In Supply Management
Negotiation
Top Nine
Current Skills
Based on CAPS
Making
Decisions
Interpersonal
Communication
Common
Sense
Ethics
Influence &
Persuasion
Problem
Solving
Conflict
Resolution
Strategic
Sourcing
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Five Global Best Practices In Supply Management
Negotiation
Top Nine
Future Skills
Based on CAPS
CrossFunctional
Teaming
Problem
Solving
Making
Decisions
Interpersonal
Communication
Ethics
Influence &
Persuasion
Leadership
Strategic
Sourcing
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Five Global Best Practices In Supply Management
Career Development &
Needs Assessment
Key Trends
Key Skills
• Globalization
• Internal Customers
• Supplier Integration
• Outsourcing
• Supply Chain
• Total Cost
• e-Sourcing
• Team Building
• Strategic Planning
• Communication
• Technical
• Financial
• Relationship Mgmt.
• Legal & Contracting
Copyright © 2009, Supply Chain Education, Inc.
Knowledge
Areas
• Supplier Analysis
• Total Cost Analysis
• Competitive Mkt. Anal.
• SRM
• Commodity Expertise
• SCM
• Price/Cost Analysis
Five Global Best Practices In Supply Management
Supply
Management
Investment
Recovery
Focus
Areas
Logistics
Packaging
Receiving
Product/Service
Development
Strategic
Sourcing
Distribution
Inventory
Control
Manufacturing
Supervision
Materials
Management
Purchasing/
Procurement
Quality
Transportation/
Traffic
Copyright © 2009, Supply Chain Education, Inc.
Warehousing
Five Global Best Practices In Supply Management
Any Final
Questions?
Copyright
Supply Chain
Chain Education,
Education, Inc.
Inc.
Copyright ©
© 2009,
2009, Supply