10 FUNDAMENTAL STRATEGIES

AND BEST PRACTICES

FOR SCM ORGANIZATIONS

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WHAT IS THIS MAN FAMOUS FOR???

Theory of Relativity
E=mc2

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 BUT HIS BEST WORK MAY
BE HIS
DEFINITION OF INSANITY:

“DOING THE SAME TASKS OVER

AND OVER AGAIN AND
EXPECTING DIFFERENT
RESULTS.”
- ALBERT EINSTEIN

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 So what does Albert Einstein have to do with

Building a Best in Class Supply Chain Organization??

 Maybe Albert Einstein has hit on something:

Do it differently from the way you are use to

doing things if you want different results.

 Supply Chain Organizations today, want to be:

 Effective
 Relevant
 Viewed as VALUED
 Part of the Management Team

 To accomplish this, we must have Strategies & Best

Practices in place to “Execute” our plans.

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 WHAT DOES “BEST PRACTICE” MEAN?

Best Practice is defined as:

“A management idea which asserts that there is a :

technique, method, process, activity, incentive or

reward

that is more effective at delivering a particular DESIRED

OUTCOME than any other

technique, method, process, activity, incentive or

reward”
 So lets examine 10 Fundamental Strategies and Best Practices to consider
embracing to “ Achieve Supply Chain Excellence”

1. Establish a governing council 6. Manage TCO (total cost of

ownership)
2. Align the supply chain
organization 7. Manage compliance and Risk
3. Recruit supply chain 8. Optimize Company owned
professionals
inventory
4. Set the Strategic Sourcing
strategy 9. Gather information on a timely
basis
5. Establish key supplier alliances
10. Establish processes and
controls

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1. Establish a Govern Council
• This is listed first for a reason. Absolutely mandatory
• Make up of the Council: Influential Business Unit leaders, C level suite, and
representation from supply chain management.
• What does the council do?
1. Drives strategy. Gives direction to and helps align supply chain strategy
to be consistent with company strategy
2. Helps in removing barriers within the organization
3. Influences internal decision makers. Fosters internal buy-in from the
business units
4. Ensures that the supply chain organization is involved in the early stages
of planning and forecasting.

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 2. Align the Supply Chain Organization

• SCM must be properly organized in order to execute the plan

• Decide: centralized or de-centralized? Answer depends and varies by
company.
 No prescribed answer on how to organize
 Common theme is Centralized Consensus with Decentralized execution.
• In a perfect world, the supply chain organization will have the functions of
 Sourcing
 Materials Management
 Logistics
 Contract Management

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 TYPICAL SCM ORGANIZATIONAL DESIGN
Supply Chain
Supply Chain Leader Council

PROCUREMENT LOGISTICS SCM ADMIN

•Strategies
•Warehousing
•Efficiencies
•Inventory
Strategic Sourcing •Process Review
Tactical •Transportation
•Demand &
•Environmental Forecasting
•KAP-Vendors •Release orders-KAP’s •Disposal
•$ Volume Driven •Spot Orders
•Q A •Non-Repetitive Orders
•Spend Areas-Future

Contract Management

SCM=Supply Chain Management KAP=Key Alliance Partners

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3. Recruit Supply Chain Professionals

• Recruit SCM professionals with the right mentality

 More focus on strategic thinking
 Less focus on measuring transactional activity

• Different skill sets needed today vs. historical

 Interpersonal communication
 Strategic Thinking
 Value Oriented
 Relationship management skills

• SCM Leaders are looking for two distinct skill sets

 Technical Skills (analytical, subject matter expertise)
 Project management Skills. Those who can:
1. Understand the customers changing needs
2. Continually address the changing needs

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 WIN-WIN RELATIONSHIPS are important – how to achieve them

HAVE THE “RIGHT MENTALITY”

HIGH
LOSE / WIN WIN / WIN

CONSIDERATION •I am a loser - step on me •Believe in Mutual Benefit

•I am a peacemaker •Long term relationship
•Win/Lose people love! •Cooperative - Not combative
As Supply Chain
Professionals,
We are evolving
LOSE / LOSE WIN / LOSE to here
• Where bad relationships go
• MY WAY OR HIGHWAY
• Where 2 Win/lose people go to
• Sacrifices Long Term
• Adversarial conflict relationships
• War!! • Squelches Creativity
LOW

LOW HIGH
COURAGE
The 7 Habits of Highly Effective People-Steven Covey
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4. Set the Strategic Sourcing Strategy
• What is Strategic Sourcing?? Collaborative and Organized approach to spend categories with
objective of selecting suppliers best suited to provide maximum value.

• Strategic Sourcing implements cross functional and geographic teams for unified decision
making process with Supply Chain Organization guidance and leadership. This must become a
standard practice

• Strategic Sourcing is the Cornerstone of Supply Chain Management

• Benefits are:
 Improved buy-in from the internal business units
 Increased internal business unit satisfaction
 Assures availability of goods and services (particularly in tight markets)
 Increased responsiveness to customers changing needs.
 Promotes teamwork
 Streamlined Processes
 Quality will be improved
 Lower overall total cost and increased value

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5. Establish Key Supplier Alliances

• Key Supplier selection is product of Sourcing Team

• This best practice that needs to have more focus.
• Supplier Management: the forgotten or ignored step in Strategic
Sourcing Process
• Terminology: Alliance Management vs. Supplier Relationship
Management
 SRM suggest “one way” communication
 Alliance Management more appropriate term: “Two Way
Communication
• 4 Objectives of an Alliance Management Team:
1. Provides a mechanism to ensure relationship stays healthy
2. Creates the needed platform for problem resolution
3. Forum for developing continuous improvement goals for future
4. Ensure that Performance Measurement objectives are achieved

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 Exercise: Name some commodities & services in each category.
How Do You View Them?????

Strategic,
impacts ALLIANCE MGT
core Our focus is
business Routine SRM most likely here

Non-strategic,
easily Routine SRM Routine SRM
replaceable

Easy to manage, High maintenance,

simplistic emotional, complex
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6. Manage Total Cost of Ownership
THIS IS ABOUT:
Instill Total Cost of Ownership / Total System Cost Mindset
 Move away from looking at just lowest price
 More focus on best value
 Move towards process improvement as a measurable
internal goal
 Evaluation of all factors that make up the cost of goods
and services

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Total Cost of Ownership = A + (O+T+M+W+E) Less S
A = Acquisition Cost (25-40%)
O = Operating Costs
T = Training Costs
M = Maintenance Costs
60-75%
W = Warehousing Costs
E = Environmental Costs
S = Salvage Value

Source: The Executive Guide to Supply Chain Management, David Riggs/Sharon Robbins
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Total Cost Approach

Perceived
Purchase
Opportunity
Cost

Demand Drivers Actual

Quality Costs
Opportunity
Environmental Issues
Maintenance Expense Freight

Specifications Standardization
Procurement Practices
Inventory Practices
Warehousing Costs
Warranty Terms
Operational Practices
Disposal/Salvage Practices

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 Total System Cost

Buyer Cost Total System Cost Savings

Interaction Cost Buyer Cost

Interaction Cost
Profit
Strategic
Profit Focus
Traditional
Focus
Supplier Cost (price only)
Supplier Cost

Traditional Strategic
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7. Manage Compliance and Risk
• Contract Management is a focal point for best of class companies

• Sarbanes Oxley (SOX) demands controls and to mitigate risks

• Aberdeen Survey to Leaders of SCM Organizations:

– Question: “How do you manage your company’s
contracts?”
– Answer: “We can’t even find them much less manage
them”
• Effective Contract management:
– Ensures contract compliance (using the agreements)
– Mitigates risks by standardizing terms and conditions
– Provides more spend visibility for future negotiations
– Provides platform for viewing maverick spend

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 Top SIX Contract Management Strategies
(Aberdeen Group Research)

1. Standardize Contract Procedures Companywide

2. Establish Central Repository that is Web Based
3. Integrate with Financial ERP System
4. Track Compliance more Frequently
5. Improve Ability to Analyze Contract
Performance
6. Improve Automation (due dates, expiration
dates, etc)

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8. Optimize Company Owned Inventory
• Inventory is money. Ask any CFO or Controller!!
• Inventory holding cost: 20-48%
• Establish Vendor Managed Inventories (VMI’s)
as one Solution
• Current Market (mostly sellers vs. buyers
market) will challenge VMI programs
– Meet expected lead times
– Logistics issues particularly if sourced offshore

• Need exist to Implement improved and effective

demand planning and forecasting methodology
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9. Gather Information on a Timely Basis
Gather Timely Information from the ERP System
a. One of the largest barriers is inability to retrieve precise spend data
b. Consider deployment of “Data Cleansing Software”
c. Address multiple ERP system inadequacies and provide solution
d. Best of class companies Navigate these Challenges and Find a Way
within their information system to retrieve meaningful data:
1. Goal = Information available to users
2. Information used to target opportunities of spend or process
improvement
3. Information used to monitor compliance and controls

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10. Establish Processes and Controls
 Simplify Processes and Controls-Then Select Correct
Technologies to Complement
1. First order of business is to establish your processes
2. When this is completed, select the technology to
compliment your processes

 Struggling Organizations often implement technology then

develop processes to meet the needs of technology.

 Make Policies and Procedures simple and easy to understand

 Controls should be adequate to deter fraud or ensure that

improper decisions are not being made and doing so without
adding unnecessary process steps

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 SUMMARY

 To expect different results, we may need updated roadmap

 No two companies operate the same way – But all have guiding
principles for success

 Best Practices are a benchmark and guide for SCM

Effectiveness and Improvement

 Company leadership expects SCM Organizations to be more

Transformational vs. Tactically focused

 Good News: Company leadership is expecting more from our

Supply Chain Management profession

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Conclusion

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