Outsourcing, Sourcing Strategy, Core Competency, & Supply Chain 101. $100K+ by 30: simecurkovic.com

Students:
There is a claim that every organization needs to focus all of its scarce, limited, and valuable resources (manpower, machines, money, management, and material – the 5Ms) on being the best at one specific thing (your core competency). The idea is that if you try to be a huge diversified conglomerate that tries to be the best at everything, then you will eventually suck at everything because you will have to spread your resources out too thinly across too many areas. General Motors used to be a diversified industrial conglomerate that made train engines, airplane engine, cars, trucks, ovens, refrigerators, generators, etc. How about just focus on cars and trucks?

If you do something better, faster, and cheaper than anyone else in the world (your core competency), then wouldn't everyone come to you for it? Why wouldn't you outsource to someone that can do it better, faster, and cheaper than you? But, isn’t developing a core competency putting all of your eggs in one basket? Answer – no. Look at 3M. What is 3M’s core competency? Answer – Adhesives/glues/sticky stuff. They make the best sticky stuff in the world. What customers, products, and/or industries use sticky stuff? All of them do. 3M has a core competency and is actually diversified and recessionary proof because of it. Every company in every industry for every product needs glue.

How about another example like Honda. What is Honda’s core competency? Answer - Powertrain (engines and transmissions that last forever). So what products use Honda powertrain? Answer – anything and everything that needs a powertrain – leaf blowers, snowmobiles, jet skies, 3 and four wheeler, cars, trucks, generators, motorcycles, chainsaws, etc. That is diversified and recessionary proof by definition.

Companies right now are outsourcing entire functional areas to other companies that have core competencies in these functional areas. For example, companies are outsourcing logistics/transportation/distribution management to 3PLs and 4PLS because these 3PLs and 4PLS can do it better, faster, and cheaper (it is their core competency). Are companies outsourcing purchasing/procurement/sourcing? Yes – to BPOs (Business Process Outsourcing firms), especially for indirect (e.g., MRO, printers, toilet paper, travel, advertising, etc.) and perhaps even direct one day. Are companies outsourcing manufacturing/product/operations? Yes – to manufacturing subcontractors like Jabil Circuit. Jabil can build circuit boards for several different industries such as aerospace, automotive, computer hardware, etc. These companies that outsource to Jabil do not have the economies of scale that Jabil gets by doing it for everyone. Futhermore, in some industries like high tech (Texas Instruments, Hewlitt Packard, Honeywell, Intel, Apple, etc.), their product life cycles are so short that they cannot afford to make the capital investment that Jabil can and does for circuit boards. Companies like Nike, Mattell Toys, Dell, etc., do not actually even build anything themselves and they outsource everything to manufacturing subcontractors (some of which might be sweatshops in South East Asia – but hopefully these shops are SA 8000, ISO 9000, and ISO 14000 certified which proves they take labor laws, quality, and the environment somewhat seriously).

The cool thing about your majors is that lots of companies are outsourcing purchasing, operations, and logistics management. That means there are companies out there with core competencies in a component of your major. So, who are they going to give preferential treatment towards for hiring? Probably students like you that are majoring in their core competency. Think about it, wouldn't there be fewer jobs for you if companies did everything themselves and they did not outsource SCM functional areas like purchasing, operations, and logistics. You could make the argument that if they did this stuff themselves, they could still hire you, but they were not doing that in the 1970s and 1980s. They hired general business majors or just put people without college degrees into SCM jobs. That might explain why they started to kind of underperform in these areas. Couldn’t we say the same about healthcare today or in the very recent past? There were a lot of people in healthcare making supply chain and spend decisions that had no formal education or training in SCM. There are college students now majoring in the other specialized majors such as Sales, Food Marketing, HRM, etc. That is a great thing because that is a core competency for several companies in several industries and they hire those students.

[JMc-ggvv]

Better. Faster. Cheaper. That’s been a guide for me the past 10 years.

[simecurkovic]

Here is a little explanation about commodities.

We discussed how companies are outsourcing commodities to increase value. Value is lowering costs and improving performance (e.g., quality, service, and flexibility). A commodity is defined as being something for which several qualified suppliers exist. Typically, buying organizations will use several rounds of the competitive bidding process to pick a low cost supplier. Buying organizations will send out RFQs to get bids from suppliers. RFQ stands for a Request for Quotation. In other words, please give us a quote for this business.
However, the data seems to indicate several iterations of the competitive bidding process does not get you the lowest price. Why? Suppliers pad their quotes from beginning to end because they know you will play this game. Data indicates that the most effective way to get the lowest bid is to tell suppliers that they will only have once chance to bid/quote on the business. If they really believe that, then they will deliver their best quote the first time around (because it is the only time). However, very few companies actually make bidding a one shot deal. Most companies are too greedy and are not convinced that the one time only cycle works.
Another problem with competitive bidding is that you are just trying to get suppliers to low ball each other and that means you are just messing with their profit margins. If you have a current supplier that charges $1.00 per part, and it costs them $.90 to make it, they have about a 10% margin. If you have them rebid and rebid and rebid on the business, and then they agree to $.93 per part, you are indeed paying less per part, but you have reduced the supplier’s margin down to nothing. Heaven forbid that you as a buying organization just sit down with your supplier and help them reduce their direct costs (e.g., labor and material). Most of their costs are coming from labor and material which means there are probably some really big cost savings ideas there. What if you could cut their direct costs by 30% and then you tell them you can still keep your 10% margin? That supplier would say thank you so much because their margins do not change, they are just more cost competitive and probably end up getting more business because of it (and you now pay around $.70 per part).
One final note. We talked about how some companies are going beyond just outsourcing commodities to also outsourcing core/strategic parts. It can be done effectively. Chrysler has mastered it. They use things like co-location, long-term contracts, and legally they establish joint ownership of all design and mfg capabilities developed. However, with core stuff there might only be 1, 2, or 3 suppliers to choose from. Also, if it is core, chances are you need to go with one supplier because using more than one might be too complicated and sensitive. For example, Chrysler outsources interior seating systems to one supplier (JCI). JCI does not want to do business with Chrysler if they also use their competitor (Lear). Ford will use Lear though and not JCI. I am embellishing here a little to make a point.
Companies do not use competitive bidding when they outsource core parts. Why? One, how do you use competitive bidding if there are only 1 or 2 suppliers to choose from? You cannot. Have you heard about the government awarding multi billion dollar contracts to suppliers like Halliburton with no bids? People often ask why don’t they use competitive bidding to get the same price. Maybe it is because they do not hire ISM students. Some people think it is because our former Vice President (Dick Cheney) used to be the CEO of Halliburton and he has lots of stock in the company. A $2 billion contract from the government makes him $ 2 million dollars richer. Or, is it because Halliburton is the only supplier that can give the government everything they need and want? You decide. It is probably a little bit of both.
Also, usually, with core parts, price is not the most important thing. They of course care about price. But how much do you know about price with something as complicated as a core part like seating systems? It is not a commodity like a widget. They will usually establish cost target goals and reward the supplier if they exceed those goals. Usually, it is about performance (e.g., quality, service, and flexibility). That is why they usually use negotiation to find a supplier for core parts. Junior buyers (like yourself) will use competitive bidding for commodities. Senior buyers (you 5 years from now) will negotiate the terms and conditions of a contract with suppliers for strategic parts.
I hope this clarifies our future discussion. Thanks. Sime

[simecurkovic]

Students:

ESI = early supplier involvement and CE = concurrent engineering, and they mean the same thing. Before companies go into production with new products, they have to design those products, it is called the new product development process (NPD). Companies expect suppliers to do a lot of the design work for the parts that will go into their new products. ESI and CE is bringing suppliers on board during the new product development process so suppliers and companies can work on design issues from the beginning and together. That way, when they go into production, there are fewer issues. ESI and CE gives companies a chance to do things better, faster, and cheaper. Companies are under competitive pressure to get through the new product development process in record time so that they can get their products into the market sooner than later. The ability to do this is called Time Based Competition (TBC). ESI and CE is driving TBC (along with technology and standardization). In the past, companies (OEMs) would do all the design work and just dump off blue prints to suppliers right before the product went into production. Now, the OEMs expect their suppliers to do the design work and integrate these suppliers in the NPD process from the beginning. Every decision and investment dollar has to translate into helping companies do it better, faster, and cheaper. If it does not, it is non-value added (get rid of it). ESI and CE requires a lot of work and investment, but data shows that it pays for itself very quickly. In other words, it is very value-added.
The data actually shows that companies which get products into the market first, not only sell more stuff and make more money, but their margins are also better. Why would their margins actually be better if they spent all that time and effort ($$$$) to be first to market?
Thank you. Sime

[simecurkovic]

INCENTIVES FOR LONG TERM ALLIANCES
• LONG-TERM SUPPLIER ALLIANCES:
1. Open-Book Negotiations means sharing all detailed costs, contingencies, cushions, profit margins,
assumptions
2. Neither party should attempt to gain windfall profits, because fairness is best for long term
commitments
3. As an INCENTIVE, you can commit a percentage-range of your supply needs from a supplier, if in
return they commit to continue to serve you if the market changes from buyers to sellers
4. Your Alliance Partner must be able to convince you they are staying current with state-of-the-art
cost improvements, product innovation, and industry competitiveness
5. One way to do that is commit 80% of a need to a base of two or three suppliers, with those
being able to increase a given percentage in emergencies, then regularly bid the remaining 20%
6. Suppliers can be integrated into your Manufacturing Processes at various Tier-Levels,
subcontracting their suppliers: think of the autos, their seats from Bosch, and Bosch’s wiring from
Square-D, and other examples

INCENTIVES & PENALTIES
LONG-TERM SUPPLIER ALLIANCES CONTINUED:
1. ALIGNMENT OF INTERESTS is number one task to keep in mind: the supplier,
your company, and your customers
2. Penalties, if included, shouldn’t be equal to incentives otherwise seem punitive; if
incentives are constructed properly, penalties won’t be necessary
3. Lecturer aligned interests of O&M (work on existing facilities) and capital project
(new facilities) contractors at start-up utility ITC Holdings, paying for workers and
management incentives for safety, on-time start up, and no unplanned outages:
A. Combined (12) job classes into (3), and paying those three the highest
B. In return for wage increase, workers pay started when they showed up at job
sites instead of locker rooms
C. Wages paid weekly, in cash, would be increased by 5% if no safety violations
were incurred
D. Wages paid weekly, in cash, would be increased by 2% if no unplanned
outages were incurred
E. Wages at end of job, in cash, would be increased by 5% completed on-time

INCENTIVES IN LONG-TERM RELATIONSHIPS
• LONG-TERM SUPPLIER ALLIANCES CONTINUED, EXAMPLE: FAIRNESS;
1. When open-book started with one of ITC’s construction contractors, after online
reverse auction, a supplier said they’d accept an (8%) profit margin on all work they
performed for ITC
2. Market was typically receiving (10%-12%) margins
3. Market for union lineman was very tight in 2003 due to baby-boomer retirements, a
sellers’ market when new round utility projects were being bid across the country
4. ITC insisted the supplier accept an (11%) profit margin, to insure they would continue
as a successful business, and especially so they would always commit (our #1 NEED) to
construct a percentage of our projects, no matter what their other customers asked
5. Contractor saw that as honest, fair deal, and remains in place at ITC, 17 years later
6. Same was accomplished with transformer and then circuit breaker equipment
manufacturers, who committed to production line space for ITC’s upcoming
transformer needs every year

[simecurkovic]

How do companies outsource strategically?

Some companies (both large and small) are going beyond just outsourcing commodities to also outsourcing core/strategic parts. It makes sense for smaller firms with scarce resources to outsource commodities. A commodity by definition is something that several suppliers exist for and as a result of competition, someone else can do it better, faster, and cheaper. However, data also shows that outsourcing core parts can be done effectively if companies take a strategic approach and avoid short-term considerations. For example, some companies use techniques such as co-location and long-term contracts. Smaller companies in particular should establish joint ownership of all design and manufacturing capabilities developed during the outsourcing partnership. There was a time in industry when the school of thought was that every company needed a core competency and should focus all of its scarce resources on developing that competency. Having a core competency implied you could do something better, faster, and cheaper than anyone else and everyone came to you for it. However, it appears that strategic outsourcing can in itself be developed into a core competency, especially for smaller companies that have fewer resources to begin with.
With core parts there might only be 1, 2, or 3 suppliers to choose from. After all, a few or no suppliers to choose from is what defines a core part. Also, if it is core, chances are you need to go with one supplier because using more than one might be too complicated and sensitive. Suppliers with only one or two competitors are reluctant to work with customers that also work with their competition. Companies, especially smaller ones, should resist the temptation of using competitive bidding when they outsource core parts. Why? One, how do you use competitive bidding if there are only 1 or 2 suppliers to choose from? You cannot. Have you heard about the government awarding multi billion dollar contracts to suppliers with no bids? People often ask why don’t they use competitive bidding to get the best price. It is often because there is only one supplier that can give the government everything they need and want.
Also, with core parts, price is usually not the most important evaluation criterion. Everyone of course cares about price. But how much does a smaller firm know about price with something as complicated as a core part? It is not a commodity like a widget. The buying organization should establish cost target goals and reward the supplier if they exceed those goals. Usually, strategic outsourcing of core parts is about performance (e.g., quality, service, and flexibility). Smaller firms should use negotiation to find a supplier for core parts. Smaller firms should use inexperienced junior buyers for competitive bidding of commodities. However, smaller firms need to tap into the experience and skills sets of senior buyers that can negotiate the terms and conditions of a contract with suppliers for strategic parts.
Commodities and core parts can both be outsourced, but the techniques used for outsourcing requires careful evaluation, especially for a smaller company. Larger companies might have the resources to regroup if they ineffectively outsource something strategic, but smaller companies might be more at risk because of a lack of resources to play catch up. For example, decades ago, IBM wanted to outsource the operating system and microprocessor for its personal computers and it was all about driving down costs. IBM failed to recognize that these two components of a PC were strategic and that perhaps cost was not the major driver. IBM quickly outsourced these parts to Microsoft and Intel. These two suppliers proceeded to widen their margins in the PC market as companies like IBM failed to establish joint ownership of design capabilities. IBM was large enough to regroup from these outsourcing decisions, but most smaller firms do not have this luxury.
In conclusion, smaller with limited resources. One way to get there is through strategic sourcing and that includes commodities. For example, do not assume that you are getting the best price and cannot do better because it is a commodity. You might outsource steel pipes to a distributor and only pay $1.00 per piece because that distributor buys steel pipes from the mill in bulk. It would otherwise cost you $1.20 if you bought directly from the steel mill. That is strategic sourcing, but it never stops. Raw material costs for all types of mills have been escalating at very rapid rates and these mills refuse to sell products at a loss and go out of business. They are better managed today and have surcharges for cost increases that are out of their control such as raw materials. If the steel mill has a 15% surcharge that is passed on to the distributor and the distributor marks up that 15%, then your new cost will exceed $1.15. Strategic sourcing would have addressed this issue with the distributor upfront and required that you will only pay an increased amount above the $1.00 that is exactly the rate of the surcharge. In other words, you will pay the 15% surcharge, but you will no let the distributor mark up the 15%. You could also shop around for mills that are more efficient and have a smaller surcharge or use a different distributor. Even commodities can be managed strategically and it might be required for smaller companies as they look for ways to widen margins with fewer resources.
Thank you. Sime

[simecurkovic]

LONG TERM RELATIONSHIPS WITH SUPPLIERS
SUPPLIER RELATIONSHIP MANAGEMENT (SRM); ALLIANCES NEED ONGOING
MAINTENANCE:
1. Warehousing,
2. Just-in-Time Inventory Management,
3. Incoming Logistics (transportation),
4. Replenishment,
5. Product or Service comparison to market
6. Product or Service keeping in step with state-of-the-art products and
services, and other innovation
7. If needed, try a new supplier occasionally to test the market, temporarily changing
incumbent supply base percentage of total requirements

[simecurkovic]

Students:

Let's say you have a supplier and you are starting to get the vibe that you are overpaying. What can you do? You could ask them for a cost break down. However, if a CURRENT supplier does not want to break out costs for you (the buyer), then the contract should allow for competition once a reasonable period of time has elapsed for the supplier to recover their fixed costs. Most Buyer-Supplier contracts actually let a buyer cancel a contract for almost any competitive reason (i.e., they think they are overpaying).
SCM Factoids:

A cost breakdown should be requested with each RFQ (request for quote). RFQ is a fancy way of saying: I am a buyer and I am requesting that you (the supplier) bid (quote) for this business. RFQ can either stand for Request for Quote (quote me the buyer on this business - tell me how much it would cost me) or it can stand for Request for Quotation (I want a quotation/bid from you the supplier on this potential business with me the buyer). Get it? This should be requested using the following statement:
“The buyer will only consider quotations accompanied by a cost breakdown”.
Suppliers may not want to furnish this information, however, it can be required by the RFQ (the supplier has to make a choice). If the quote is for a commodity and there are tons of suppliers to choose from, then the supplier is probably going to give a cost breakdown. However, why would a supplier do this if it is a highly engineered part and the buyer has few suppliers to choose from. In this case, the supplier could professionally give the buyer the middle finger and say here is my price and that is all that I am telling you.
Warning:

Merely reducing the supply base to reduce the supply base does not make sense. Management goals, like “reduce the number of suppliers by 30% this year” usually have the wrong effect (and lots of companies do this). Each acquisition should be evaluated separately. If welding wire is available from three suppliers and no price breaks can be gained by buying all welding wire from one source, then maintaining three suppliers gives the firm more assurance of continuous supply while the cost of buying from three suppliers is not significant greater. Does this make sense to you?

Academic researchers (educated idiots like me) say:
One approach is to award 70/30 split contracts. The supplier with 70% of the business can provide needed services, while the supplier with 30% of the business provides safety of supply and also puts pressure on the large supplier.
Reality: Single sourcing. Most companies are using single sources of supply to get bigger price discounts via higher volumes (economies of scale). Also - Some firms like to become a big portion of their suppliers' business so that they can apply pressure on the supplier. American companies are infamous for this. Why? Because they are greedy. Thank goodness for that because they are paying top dollar for ISM graduates.

[simecurkovic]

Our students are going into a job market inundated with outdated processes. Manual and labor-intensive operations will force them to spend hours every week doing repetitive tasks that could be automated for much greater efficiency and accuracy, allowing them to focus on more fulfilling work. The majority of their time will be spent gathering data, while much less will be spent analyzing and providing insights to support strategic decision-making.

For example, during these inflationary times, it is time for business faculty to start teaching the lost art of Price Analysis and Strategic Cost Management (in very different ways). I have asked a lot of business managers how they “prepare” to negotiate price increase requests from their suppliers. In particular, I was curious about how and where they get their data from (i.e., Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Commodity Exchange (COMEX), London Metals Exchange (LME), New York Mercantile Exchange (NYMEX), etc.). Many said their suppliers provide that information. I am not convinced that using data from your suppliers is a form of “Preparation” for the negotiation process.

Surprised by price increases? As much as 70% of current contracts have price increase provisions! In the WMU supply chain management program we teach our students to track commodity forward price curves. We now look at raw material market data from multiple sources, visualize and analyze historical pricing scenarios, and simulate planned purchases and what-if scenarios against forward price curves.

How do we better prepare our business students to be job ready day one? Procurement organizations need processes and “tools” to mitigate and negotiate on these price increase requests in a strategic, data-driven manner (and academics need to do a better job of teaching it). Traditionally, we have worked very hard to help our students develop very sophisticated data analytics skill sets to manage these very large and complicated forms of information.

Employers place a premium on these business analytics skill sets and would include:

Advanced Excel (power query & pivot) & macros;
2. Data visualization (Tableau, Power BI & python w/ seaborn & matplotlib);
3. Data mining/RapidMiner, machine learning & data science;
4. Python & Jupyter notebook (data analytics & statistical libraries such as pandas, numpy);
5. Relational data models (Excel data model);
6. Graphic & statistical libraries (Seaborn, Matplotlib, Pandas, & Plotly).
See our Business Analytics minor at:



We will soon have some white papers from our WMU SCM program based on the following price analysis & strategic cost management research. Some of our alumni are already testing and / or implementing these cloud-based services that allows procurement organizations, finance, and all other organizations that are exposed to raw material pricing changes, to stay on top of market pricing from multiple sources and proactively assess its impact on future raw material purchases.

These technologies are also now serving as the basis for addressing price indexing implementations (formulas, alerts, etc.). It can all be done automatically and updated daily, saving hours from manually updating spreadsheets. These tools are quick and easy to use to prepare for price negotiations with suppliers, and often returns its investment (which is minimal to begin with) rapidly. These technologies also allow organizations to replace multiple spreadsheets and email threads with one tool that tracks pricing, facilitates collaborative decisions, revisiting past decisions and what led to them, and capturing organizational knowledge.

I have asked many of my former students what are the most prevalent technologies used in your supply chain and business role. The two most common answers are Excel spreadsheets and email. It is 2023 now and we need to move further along. You could make a strong case that using antiquated business tools was a major source of supply chain disruptions the last few years.

My former students keep telling me they are the “Excel Spreadsheet” generation. Excel works and they have very advanced spreadsheet skills. They also tell me that it gives them a competitive advantage in the workplace (i.e., people depend on their monthly report outs per se and very important people read them). The older managers have very weak Excel skills and even the younger graduates coming in have to play catch up to the people that are in their 30s and 40s (that have very advanced Excel skills). My former students also feel very comfortable with Excel. Many of these spreadsheets are their own creation and they find it empowering. In general, it works, it works well, it gets the job done, they feel comfortable with this version of technology while most others do not feel comfortable with it, the technology itself is cheap, and it gives them job security. Some said it took years to build up these spreadsheets, and now they are up and running. However, as I teach my current students, there are alternatives rooted in technology that will allow you to do things better, faster, and cheaper.

Final Thought

In talking with a colleague, we both agreed that many hiring managers do not have a full understanding of the Artificial Intelligence (AI) skill sets associated with our graduating students. Our business students told us many times that their hiring managers valued only the traditional Excel capabilities (i.e., lookup functions, pivot tables, etc. – however, that is NOT AI). Managers also greatly overlook the opportunities from other analytical solutions (skill sets that our students have). This makes it a bit difficult to sell the analytical techniques taught in classes that go beyond our Advances Excel and Predictive Analytics courses. For example, our data mining class is essentially a machine learning class for business, which is the core of AI. The course is designed to solve the problems that Excel falls short on.

Hopefully we do a better job of training our students to “sell” the AI skills and managers become more open to embracing the benefits (which might require a culture change). Embracing and trying new technologies requires leadership that is willing to try new things. Otherwise, we keep using spreadsheets and email to manage very large and complicated data sets.

[simecurkovic]

As a buyer, you have every legal right to say you want a “cost breakdown” of the price they gave you. Let’s say you have a supplier and you are starting to get the vibe that you are overpaying. What can you do? You could ask them for a cost break down.

Material on Supplier Cost Breakdowns and How To Negotiate Price Increases:

When you ask a current or potential supplier to submit an RFQ (Request for Quotation), you are asking them to bid on some business. You are basically saying to a supplier – I have some business for you, and I am requesting that you give me a quote on that business. As a buyer, you have every legal right to say you want a “cost breakdown” of the price they gave you. For example, if the supplier says it will cost you $10/pound for iron castings, then you can say where did you come up with the $10. You can also say you will not consider any quotes unless they give you a cost breakdown. Now, the supplier also has every legal right to say they do not want to give you that information. In fact, if you are the only major supplier that can do something for that buyer and it involves a lot of engineering, technology, and proprietary stuff, why would you give them a cost breakdown. That is why RFQs and competitive bidding does not work too well when you need stuff that is highly engineered and you do not have a lot of suppliers to choose from. RFQs and competitive bidding works great though when you have lots of suppliers to choose from and they compete like crazy against each other. Under these circumstances, suppliers are glad to give you a cost breakdown because they have tight margins and they do not mind telling you they are not making much money on the potential business. However, if I am the only major supplier that can do something for you and I will make $.80 if I sell something to you for $1, then I would rather keep that to myself if I can get away with it. But remember, a commodity by definition is anything for which several qualified suppliers exist and they all compete at the same high level of performance on quality, service, flexibility, and usually the deciding factor is price.

Here is an example…

Let’s say you want a cost breakdown from one of your iron casting suppliers. Hmmmm. Let’s say I (the buyer) was paying...
For rest of lecture, see:

#supplychain #supplychainmanagement #careeradvice

[simecurkovic]

Students:

Typically, buying organizations will use several rounds of the competitive bidding process to pick a low cost supplier. Buying organizations will send out RFQs to get bids from suppliers. RFQ stands for a Request for Quotation. In other words, please give us a quote for this business. Unfortunately, several iterations of the competitive bidding process can be very resource intensive, especially for smaller companies. Larger companies have been able to somewhat reduce these costs by using information based technology (e.g., electronic reverse auctioning).

Either way, the data seems to indicate that several iterations of the competitive bidding process does not get the lowest price. Why? Suppliers pad their quotes from beginning to end because they know the game. Data indicates that the most effective way to get the lowest bid is to tell suppliers that they will only have once chance to bid/quote on the business. If they really believe that, then they will deliver their best quote the first time around (because it is the only time). However, very few companies actually make bidding a one shot deal. Most companies are too greedy and are not convinced that the one time only cycle works.
Another problem with competitive bidding is that you are just trying to get suppliers to low ball each other and that means you are just hacking away at their profit margins. If you have a current supplier that charges $1.00 per part, and it costs them $.90 to make it, they have about a 10% margin. If you have them rebid and rebid and rebid on the business, and then they agree to $.93 per part, you are indeed paying less per part, but you have reduced the supplier’s margin down to nothing. Smaller companies with larger industrial customers have often been victimized by such approaches.
So, why would a smaller company use the same ineffective tactics on its own suppliers? In a perfect world, buying organizations would sit down with suppliers and help them reduce their direct costs (e.g., labor and material). Most of a supplier’s costs are probably already coming from direct labor and material which means there are probably some significant cost savings to be had. What if you could help a supplier cut their direct costs by 30% and then you tell them they can still keep the 10% margin? That supplier would say thank you because their margins do not change. They are just more cost competitive and probably end up getting more business because of it (and you now pay around $.70 per part).

Also, there is nothing stopping a smaller supplier from asking its larger customer for assistance in reducing its direct costs. A larger customer probably has the resources and skill sets to offer just this type of assistance. It would also demonstrate the cost improvement intentions that customers often seek in suppliers. A recommendation for smaller companies is to take a strategic approach to their sourcing decisions, even for commodities. That often requires a careful analysis of how its customers manage them and perhaps not necessarily using the same tactics with its own suppliers. Smaller companies can look to the ineffective tactics of their customers to better manage their own supply chains. Perhaps the customer will then ask the supplier for help.
Thank you. Sime

[simecurkovic]

•COMPETITIVE BIDDING
• Is not the best solution in all situations
• Depending on your Hierarchy of needs, BIDDING IS THE SIMPLEST SC TOOL,
but not always best
• Think about your heart surgery: cheapest or most successful 30 year lives after
• Not a bad start, but there is much more to gain by alliances
• Before simple bidding, your internal team (Manufacturing O&M, Engineering,
Supply Chain) should lay out an objective evaluation criteria, with weightings if
necessary

REQUESTS FOR PROPOSALS or QUOTES (RFPs & RFQs), INTERESTS (RFIs) &
REQUESTS FOR SOLUTIONS (RFSs):
• Consider your supplier base a RESOURCE, which you need to manage and from
which SC extracts value
• Your company doesn’t always have all the answers to your problems or challenges
• You can request proposals for: interest in helping problem-solve, solutions to those
problems, ballpark costs, or quotes for definite costs
• After internal agreement on your HIERARCHY OF NEEDS, ask suppliers how
they’d be able to help achieve those with their varieties of goods and services
• Requires trust and honesty in both directions
• Evaluations internally should be agreed upon by your management before any bids
or requests, and should be objective as possible

ONLINE REVERSE AUCTIONS:
• Not always the best for optimal long-term results, but it’s a start
• Remember the analogy of doing this for your heart surgeon
• Using a third-party platform, ask suppliers to participate in real-time bidding to get
you their lowest price for goods or services
• Can be used to initiate knowledge of your supplier base if you are in start-up
mode
• But you SHOULD LET SUPPLIERS KNOW THIS ISN’T THE END OF YOUR
PROCESS
• Should lead to open-book, mutual gains bargaining

ASKING SUPPLIERS WHAT THEY REALLY WANT
MUTUAL GAINS BARGAINING (USUALLY USED IN LONG-TERM ALLIANCES):
• HONESTY is required at the start, both parties listing what they need from
each other, each parties HIERARCHY OF NEEDS
• Face the needs from the same side of the table BRAINSTORMING HOW TO
ACHIEVE NEEDS OF EACH
• BRAINSTORMING MEANS INNOVATE, NOT JUST TYPICAL SOLUTIONS
• No winner and NO looser, rather fairness, and not unreasonable margins
(profits) for both
• Suppliers can’t be long term partners if the deal isn’t fair from the start
• Open-Book negotiations from both sides is required, REQUIRES TOP
MANAGEMENT TO BUY-IN
• Results should be mutual commitments in some way

[simecurkovic]

Reads…
How should companies use competitive bidding?
Assume a supplier estimates the following costs on an RFQ

ROI and Your Core Competency (i.e., SCM?)

To stay competitive, companies are forced to outsource commodities and focus on their core competency

The primary elements for sourcing a supply partner

What does it mean to be hollow? Sourcing Strategy matters!

The most reprinted article in the Harvard Business Review: The “Core Competence” Article

You have every legal right to say you want a “cost breakdown”

Procurement 101: Explanation on Commodities

How do companies outsource strategically?



Hundreds of SCM Blogs…

[simecurkovic]

Lastly, the SCM field has a lot of work left to do...please save the
day...corporate greed has rushed us into greater risks and sloppiness...
Supply chain study reveals inadequate processes

Nearly a third of all supply chain processes are inadequate, according
to research from Crimson & Co.

This insight was generated by analyzing data from scprime, an
improvement approach designed to generate step-change improvement of the
supply chain in line with a business’s strategy. Since 2010, over 1, 000
scprime assessments have been completed in 20 countries across a range
of sectors, making this one of the largest and most comprehensive
independent studies in supply chains.

The analysis showed that 71 percent of processes in most organizations
are executed effectively, achieving a ‘competent’ or higher rating. This
means that a third of all processes are carried out inadequately,
representing a significant risk to the reliability of operations and
allowing competitors to operate more effectively and with greater
responsiveness.

Only five percent of processes achieved ‘mastery’, i.e. proven best
practice performance, with the highest proportion scored as only
‘competent’. This presents an opportunity to those businesses that
understand the competitive advantage that a supply chain can generate;
by focusing on the right areas, a business can steal a march on its
competitors.

Other notable trends identified include that Europe and North America
appear to lag behind the rest of the world when it comes to process
maturity, with fewer companies reaching the basic competency level - 32
percent of companies’ processes in Europe and North America were
inadequate vs. only 22 percent overall. This is a surprising result
which may reflect the tendency of processes to get worse over time. It
may also be a result of the move of manufacturing out of the old
markets, removing good process discipline from those markets.

Crimson & Co’s Helen Chiswell said: “It’s clear that businesses are
struggling to evolve their supply chain processes to match business
needs. This results from a 'business-as-usual' mindset where companies
prefer to maintain the status quo instead of understanding the drivers
of competitive advantage and adapting accordingly. This is a real risk
to organizational performance.

“Every company needs to configure its processes to support priorities,
allowing the supply chain to deliver against business objectives. The
supply chain is increasingly recognized as a key enabler of competitive
advantage but understanding requirements is a major challenge.

“Process improvement tools, such as scprime, provide a framework for
this. Supply chain assessments identify the areas which need to be
improved to maximize performance. A key stage in this is recognizing the
supply chain as a whole rather than simply an aggregation of
functions.”

Final thought from Sime: Everything is a process and every process is a
problem to be solved. What's the problem? How do I do it better,
faster, and cheaper. I will teach you how to problem solve in my MGMT
3810 class with a real world project.

[simecurkovic]

WHAT IS THE LARGEST AMOUNT OF BUSINESS THAT A SUPPLIER SHOULD HAVE WITH A BUYING ORGANIZATION (AS A % OF THE SUPPLIER’S TOTAL BUSINESS). PLEASE EXPLAIN YOUR ANSWER.

Around 25% because you as a customer (buyer) do not want to put your supplier in a situation where their entire future is dependent on doing business with you.

For example, let’s say you have a supplier and 99% of their business is with you. What if your sales really drop? Will that supplier go out of business? What if you have this kind of leverage over your supplier, will you get ruthless and start to take advantage of them in an unethical manner because you can? One way to avoid these pitfalls is to try and not be the vast majority of business to your suppliers.

However, in reality, companies try to do exactly that (be a huge part of their supplier’s business). Why? So, they can get as much of a price discount as possible and because it does give the buyer more leverage in the relationship (and don’t we all want more leverage?). So, what is recommended (25%) is not reality (especially for large OEMs/buying organizations like GM, Deere, Whirlpool, Toyota, Apple, etc.). They love to be over half of a supplier’s business, but how you treat your suppliers in those situations can vary by company and is influenced by their culture. For example, GM might be more inclined to nickel and dime their suppliers during downturns than Toyota might.

[simecurkovic]

The U.S. supply chain accounts for 37% of all domestic jobs, according to the Harvard Business Review. From me: it is actually higher if you loosely define SCM since every product and/or service comes from & has a supply chain. Note, this is all pre-covid data (so add more to the dollar signs)…Source:

Logistician, $74, 750
Logistics analyst, $58, 713
Supply chain planner, $64, 844
Purchasing agent, $69, 600

Purchasing manager, $121, 110
Logistics manager, $114, 670
Distribution manager, $94, 775
Operations manager, $100, 780

Business and supply chain competencies make up 80% of the fastest-growing skills in this industry; basic technical skills make up the remaining 20%.

Top two:
Microsoft Office and productivity tools
Advanced Microsoft Excel

Technical skills

Among the top and fastest-growing technical skills are:

Data science
Supply chain knowledge
Supply chain management
Project management

Many of our SCM students get a Business Analytics minor, what does that mean? See:
1. Advanced Excel (power query & pivot) & macros;
2. Data visualization (Tableau, Power BI & python w/ seaborn & matplotlib);
3. Data mining/RapidMiner, machine learning & data science;
4. Python & Jupyter notebook (data analytics & statistical libraries such as pandas, numpy);
5. Relational data models (Excel data model);
6. Graphic & statistical libraries (Seaborn, Matplotlib, Pandas, & Plotly).

From me: AI will have a great impact on SCM. However, one thing often not mentioned is the attitude of hiring managers, as many do not have a full understanding of the AI skill sets of graduating students. Our SCM students told us many times that their hiring managers valued only the traditional Excel capabilities (lookup functions, pivot tables, etc. – that is NOT AI), & they greatly overlooked the opportunities from other analytical solutions (skill sets that our students have). This makes it a bit difficult to sell the analytical techniques taught in classes that go BEYOND our CIS 2640 (Excel on steroids) - Applied Analytics Foundations.

For example, our data mining class is essentially a machine learning class for business, which is the core of AI. The course is designed to solve the problems that Excel falls short on. Hopefully we do a better job of training our students to “sell” the AI skills & managers (SCM Leaders) become more open to embracing the benefits (which might require a culture change).

#supplychain #dataanalytics #datascience #python #artificialintelligence #ai

[simecurkovic]

Surprised by raw material price increases? At the WMU ISM supply chain management program we teach our students to track commodity forward price curves. Here's a quick video of Net Alpha's cloud based materialx Decision Support service that is being made available to our students in class as they prepare to become future SCM managers.

Some of our alumni have experienced this new service and love it. It looks at raw material market data from multiple sources, visualizes & analyzes historical pricing scenarios, & simulates planned purchases & what-if scenarios against forward price curves. Our grads will be ready.

Hey Supply Chain Management professionals, here's a one min video showing how easy it is to track changes in forward price curves of commodities and seeing how they may impact your future purchasing decisions. All done automatically and updated daily. Customers that have subscribed to our new materialx Decision Support service love it.



Birmingham, MI - Net Alpha Financial Systems, LLC, the technology company developing solutions that are transforming the way manufacturers, producers, distributors, and brokers transact in raw materials, today announced materialx® Decision Support, a new cloud-based subscription service that enables supply chain management organizations to make better raw material purchase decisions.

materialx Decision Support is designed to make pricing data for raw materials more accessible and usable to procurement and other supply chain management professionals. The service combines access to a rich set of market data sources with powerful analytical tools, data visualization, collaboration tools, simulation, and tracking capabilities, enabling more informed and collaborative decision-making than previously possible. With materialx Decision Support, companies can unlock new levels of organizational transparency to the impact of raw material pricing on their purchasing plans, easily involve all stakeholders in purchase decisions, deeply understand the potential economic outcomes of those decisions, and continuously improve decision-making processes by analyzing the impact of past decisions utilizing the data that was available at the time such decisions were made.

"We've listened to dozens of procurement teams of various sizes in different industries that time and time again communicated similar challenges, especially following the last two years of the COVID-19 pandemic, " said Eyal Mizrahi, CEO and Co-Founder of Net Alpha Financial Systems. "Procurement teams are often asked when they knew about a substantial price change for a critical raw material, how they reacted to it, and how the change was communicated internally. We built materialx Decision Support to enable answering such questions. Procurement teams that have seen our solution have recognized immediately how it can transform their current processes which usually involve partial data, many spreadsheets, and email threads. The new service can also allow them to capture and harness organizational knowledge in a way that wasn't previously possible."


About Net Alpha Financial Systems and materialx

Net Alpha has developed a suite of software tools that help buyers and sellers of raw materials realize digital transformation with minimal investment. The company's materialx platform provides a suite of cloud-based services that transform how raw materials with variable and negotiated prices are evaluated, transacted, and settled. The services include materialx Decision Support for procurement and supply chain management organizations that wish to maximize the strategic value of raw material pricing data and collaborative decisions, as well as materialx Sales Engine, a transactional platform designed for raw material producers, distributors, and brokers that look to grow revenues by deploying a competitive online presence. The materialx platform-as-a-service is a low cost, rapidly deployable alternative to developing and managing expensive in-house systems. The platform was purpose-built to meet the information and transaction needs of buyers and sellers of raw materials through advanced evaluation and analysis, collaboration, negotiation, execution, and tracking tools. For more information, or to arrange a demonstration of a materialx solution, please visit www.n-alpha.com

[simecurkovic]

The WMU Supply Chain Program has been talking to many of our alumni and doing research in the field of commodity pricing and how such pricing is used in internal business processes. Here are some findings: Working with commodity pricing data doesn't have to be a drag.

See the below presentation with some recommendations and insights for professionals in the space.

For a copy of our initial results on...Managing inflationary price risks in supplier-buyer contracts through indexing: Operational challenges and solutions -

I look forward to any other suggestions and comments.

Join the WMU Supply Chain Program to gain the edge in your SCM career.

Managing inflationary price risks in supplier-buyer contracts through indexing: Operational challenges and solutions…Work smart and be effective. How? To work smartly and effectively, leverage technology to streamline business processes and automate repetitive tasks.

Use cloud-based tools for storage, collaboration, and processing, which offer seamless integration and remote access, maintaining productivity from any location. Begin by identifying key indices and data points for your price indexing contract, then set up automated tools to manage this process. AI language models can also automate the reading of proprietary data. Various tools can automate data collection, perform calculations based on schedules, add time stamps, and share results with stakeholders. These tools often include data visualization, simplifying complex data into actionable insights. By adopting such automation strategies, you enhance efficiency and can focus on strategic tasks. For example, the N-Alpha’s MaterialX platform used in WMU’s Supply Chain Management program connects to multiple data sources and automates formula calculations and updates, eliminating the need for spreadsheets to calculate the “quarterly price per part.”


Almost 1/2 of U.S. employees do not feel confident in their negotiation skills:

Also: Toyota, Honda and GM Best Automakers to Work With, Suppliers Say:

Notice: “Cost recovery mechanisms should not be judged in isolation. Inflation-driven cost increases & adjustments need to be addressed in a timely manner that is consistent, tested, & institutionalized & supported by OEM & supplier cost reduction efforts.”


I have asked a lot of SCM managers how they “prepare” to negotiate price increase requests from their suppliers. In particular, I was curious about how and where they get their data from (i.e., CME, COMEX, etc.). Many said their suppliers provide that information. I am not convinced that using data from your suppliers is a form of “Preparation” for negotiation.

What are buyers to do? Procurement orgs need processes & “tools” to mitigate & negotiate on these requests in a strategic, data-driven manner (& we/I need to do a better job of teaching it).

[simecurkovic]

Research: In Supplier Negotiations, Lying Is Contagious. Summary-
__

Of 8 countries examined, workers in the U.S. are the most anxious negotiators. My theory: lack of formal training & we throw them into these roles too soon.


The Bad Actors of OEM Procurement.

As a buyer, you have every legal right to say you want a “cost breakdown” of the price they gave you. Let’s say you have a supplier and you are starting to get the vibe that you are overpaying. What can you do? You could ask them for a cost break down.

Reads…
How should orgs use competitive bidding?

Assume a supplier estimates the following costs on an RFQ

ROI & Your Core Competency (i.e., SCM?)

To stay competitive, companies are forced to outsource commodities & focus on core competency

The primary elements for sourcing a partner

What does it mean to be hollow? Sourcing Strategy matters!

The most reprinted article in HBR: The “Core Competence”

You have every legal right to say you want a “cost breakdown”

Procurement 101: Explanation on Commodities

How do companies outsource strategically?




#supplychain #negotiation #procurement

[simecurkovic]

Students:
There is a claim that every organization needs to focus all of its scarce, limited, and valuable resources (manpower, machines, money, management, and material – the 5Ms) on being the best at one specific thing (your core competency). The idea is that if you try to be a huge diversified conglomerate that tries to be the best at everything, then you will eventually suck at everything because you will have to spread your resources out too thinly across too many areas. General Motors used to be a diversified industrial conglomerate that made train engines, airplane engine, cars, trucks, ovens, refrigerators, generators, etc. How about just focus on cars and trucks?
If you do something better, faster, and cheaper than anyone else in the world (your core competency), then wouldn't everyone come to you for it? Why wouldn't you outsource to someone that can do it better, faster, and cheaper than you? But, isn’t developing a core competency putting all of your eggs in one basket? Answer – no. Look at 3M. What is 3M’s core competency? Answer – Adhesives/glues/sticky stuff. They make the best sticky stuff in the world. What customers, products, and/or industries use sticky stuff? All of them do. 3M has a core competency and is actually diversified and recessionary proof because of it. Every company in every industry for every product needs glue.
How about another example like Honda. What is Honda’s core competency? Answer - Powertrain (engines and transmissions that last forever). So what products use Honda powertrain? Answer – anything and everything that needs a powertrain – leaf blowers, snowmobiles, jet skies, 3 and four wheeler, cars, trucks, generators, motorcycles, chainsaws, etc. That is diversified and recessionary proof by definition.
Companies right now are outsourcing entire functional areas to other companies that have core competencies in these functional areas. For example, companies are outsourcing management to 3PLs and 4PLS because these 3PLs and 4PLS can do it better, faster, and cheaper (it is their core competency). Are companies outsourcing Yes – to BPOs (Business Process Outsourcing firms), especially for indirect (e.g., MRO, printers, toilet paper, travel, advertising, etc.) and perhaps even direct one day. Are companies outsourcing Yes – to manufacturing subcontractors like Jabil Circuit. Jabil can build circuit boards for several different industries such as aerospace, automotive, computer hardware, etc. These companies that outsource to Jabil do not have the economies of scale that Jabil gets by doing it for everyone. Futhermore, in some industries like high tech (Texas Instruments, Hewlitt Packard, Honeywell, Intel, Apple, etc.), their product life cycles are so short that they cannot afford to make the capital investment that Jabil can and does for circuit boards. Companies like Nike, Mattell Toys, Dell, etc., do not actually even build anything themselves and they outsource everything to manufacturing subcontractors (some of which might be sweatshops in South East Asia – but hopefully these shops are SA 8000, ISO 9000, and ISO 14000 certified which proves they take labor laws, quality, and the environment somewhat seriously).
The cool thing about your majors is that lots of companies are outsourcing purchasing, operations, and logistics management. That means there are companies out there with core competencies in a component of your major. So, who are they going to give preferential treatment towards for hiring? Probably students like you that are majoring in their core competency. Think about it, wouldn't there be fewer jobs for you if companies did everything themselves and they did not outsource SCM functional areas like purchasing, operations, and logistics. You could make the argument that if they did this stuff themselves, they could still hire you, but they were not doing that in the 1970s and 1980s. They hired general business majors or just put people without college degrees into SCM jobs. That might explain why they started to kind of underperform in these areas. Couldn’t we say the same about healthcare today or in the very recent past? There were a lot of people in healthcare making supply chain and spend decisions that had no formal education or training in SCM. There are college students now majoring in the other specialized majors such as Sales, Food Marketing, HRM, etc. That is a great thing because that is a core competency for several companies in several industries and they hire those students.
Final thought -
But what about these manufacturing companies that are outsourcing everything, who will they hire? Probably you. I think SCM is a core competency for manufacturing firms that outsource everything. Think about it. They all outsource everything to the same suppliers. Who wins in that situation? The company that manages their suppliers the best – SCM. An aggressive outsourcing strategy that not only includes outsourcing your direct material needs, but also entire functional areas (like purchasing, operations, and logistics management) is very risky territory. It is territory that requires strong skills sets and a core competency in your major – supply chain management.

[simecurkovic]

FYI: more of my old school teaching material. My overhead transparencies from the 90s are NOT available upon request (they are lost). Yes, most of this is still VERY relevant today. Even “AI” agrees. See last 3 pages for list of chat prompts that could facilitate research on supplier selection.

Feel free to use as you wish…teaching material on the complex, yet essential topic of "Supplier Selection".

Why? Comprehensive research on supplier selection in procurement is critical. It helps make informed decisions that align with organizational strategies, ensures high-quality and cost-effective sourcing, and minimizes supply chain RISKS. Note, post-covid, we learned that a VERY large amount of industrial material procurement was being single-sourced, often unknowingly (seriously), posing significant disruptions and underlining the importance of SCM risk mitigation strategies (i.e., SUPPLIER SELECTION).

Great reads for supply chain students (and managers)…

This is a great read if you need an auto industry SCM 101 tutorial: Modeling Total Delivered Cost in the Automotive Industry…















Break-even calculation:

Note, this was largely designed for consumption by 20 year olds (which means we all stand to benefit from a rehash).

hashtag#supplychain hashtag#outsourcing hashtag#makeorbuy hashtag#procurement hashtag#riskmanagement