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Supply Chain Management

Responding to COVID-19: Navigating Supply Chain Disruptions with MeRLIN

COVID-19 turned out to be a black swan event that is disrupting the global economy and supply chains unlike any crisis in the last few decades. Empty supermarket shelves and consumers desperate for supplies have become a common sight worldwide. It has put business leaders around the world under immense pressure to maintain their business operations and fulfill customer demands amidst the crisis.

Government regulations and factory shutdowns could be blamed for many of the challenges. However, the real issue was that the entities, from suppliers to manufacturers to retailers didn’t have sufficient flexibility and mitigation options built into the supply chain to respond to the situation effectively and in a timely manner. Some organizations resorted to “panic buying” just as the consumers did and ended up with severe cash flow challenges due to both unplanned buffer stock as well as the spike in material costs.

The crisis has proved it beyond doubt, to many organizations that they are still not prepared for such unprecedented situations and have made them realize the vulnerabilities of their existing supply chain models. While procurement leaders have concentrated their initial efforts on managing supply disruptions from their tier 1 and tier 2 suppliers by rebalancing short term sourcing decisions with regards to their supply network constraints, now they need to look for agile plans to build greater responsiveness and future proof resilience into their supply chains at all tiers.

But, figuring out the best plan is not easy for sourcing professionals with a lot on their plate amid the crisis – determining the demand shifts, looking into inventory position, and evaluating the supplier options and financial implications. The steady-state models on which most existing planning systems are based on are no more sufficient to ride through this tide. You need access to real-time information to make the right decisions. Some of the major challenges that procurement professionals face in building supply chains that can adapt to disruptions can be summarised as:

● Lack of visibility of the entire supply chain
● Lack of data to gain insights and take decisions
● Supplier risk management
● Effective communication and collaboration
● Ability to respond rapidly and proactively

Leveraging technology becomes essential to cut through most of this chaos.

Fortunately, today new Strategic Sourcing solutions are available that can dramatically improve the visibility across the supply chain and equip organizations with cutting-edge tools that equip them to respond quickly to such global shocks. The traditional linear supply chain models need to transform to digital supply networks to break organizational silos and become connected to their complete supply network. Advanced technologies today, like IoT, AI, Cognitive Computing, and Big Data can work together to give substantial visibility into inventory, demand, capacity, supply, and finances across the ecosystem to give meaningful insights. Effective planning with this data and insights can act as your key to managing the crisis now and also result in building a stronger foundation vital to your future growth as things normalize and economies rebound.

A procurement solution like MeRLIN allows organizations to absorb supply chain shocks more seamlessly by addressing the major challenges. It enables end-to-end visibility of the entire supply chain as well as provides more transparency through enhanced collaboration across the partner ecosystem allowing suppliers and buyers to work in harmony to fulfill demands.

MeRLIN’s supplier relationship management tool allows you to mitigate supply chain risks by monitoring your suppliers through real-time analysis based on various risk categories like operational, financial, and regulatory, and legal compliance as well as take advantage of global sourcing using MeRLIN’s data aggregation. MeRLIN also has many more advanced features like the AI and fuzzy logic search that enables organizations to identify their spend leakages and optimize the procurement function.

MeRLIN has been used very effectively by a large automotive supplier based out of North America during this crisis. They were able to identify risks across the supply chain by spotting their plants impacted or suppliers who were put to risk due to the lockdowns in place and moving their loads to alternate supplier options available. They were also able to improve their cash flow management by looking at their payment terms across their 12,000+ suppliers, identifying where they were unfavorable, and fine-tuning them to optimize their cash flow. And the highlight is, they were able to do all these in a short span of a few days and respond to the crisis proactively. Without an intelligent procurement solution, it would have easily taken at least a few months for gathering this information to make any decision.

Contact us to know more about MeRLIN and leverage the power of AI, Advanced Analytics, and automation to get more visibility to your entire supply chain network to enhance its flexibility and resilience to any disruptions.

Categories
Supply Chain Management

COVID-19 Should Change How We Think About Supply Chain Risk Costs

Eight years ago, I published a post on HBR, that summarized extensive research I had undertaken to understand how risk creates cost in any supply chain. My work was different from most other supply chain risk research in that I was concerned with how risk creates actual, every-day cost in supply chains and not hypothetical cost, e.g., that of a temporary disruption such as a weather-related event. In other words, I wanted to look at risk more from the point of view of an active stock trader, managing the risk of every transaction, and less as an insurance underwriter, worried about a low-probability event.

In the HBR post, I summarized my cost of risk theory thus:

Risk in the supply chain is not a potential cost — it is an actual cost, very real and borne by every product and service company, whether they understand it or not.
Let’s start by defining what we mean by risk, which is simply the possibility of more than one outcome (of unequal values) to a given future state. The possibility of more than one future outcome can very easily generate a cost in the present. How so? Because the fact that value is not guaranteed in the future lessens value in the present. This reduction in value is present and represents a cost today, not tomorrow. This is a concept fundamental to finance but that, for some reason, has not migrated into supply chain risk management.
Furthermore, that cost can take two forms: economic and financial. The former refers to costs that are visible and recorded within the company (e.g., higher capital costs, business continuity insurance, dual-tooling in manufacturing) and the latter refers to costs that are not always visible or recorded but exist nonetheless (opportunity costs of not entering a risky market, concentration risk in the supply base, reduced valuations, etc.).

SCM risk analysis process


If one accepts that risk is a cost, then risk management is simply the reduction of the cost of risk. These supply chain-related risk costs are present every day that managers come to work. And yet almost no discussion of supply chain risk management deals with the reduction of these present costs in a systematic, quantitative way.

Another way of saying the above is that every product has one price but two costs: the cost of the thing and the cost of the risk inherent in its production/delivery. Moreover, those costs are present each day that the supply chain operates and exist whether or not the supply chain is ever disrupted. They are inherent to the design and its operation, and this should be a subject of continuous quantification and management. This last point is the one many supply chain students, and even some professionals, find hard to understand and accept. Trained to think about supply chain risk from the insurer perspective, it’s hard for many to understand that the moment any risk is introduced to a supply chain a cost is also introduced that is a direct function of the underlying uncertainty. As in buying a house, the moment a buyer is made aware that there may be a contaminant in the land on which the house sits the value of the house is diminished. That same phenomenon exists in supply chains of every type.

CoR in Supply Chain

Once this point is made, I take my SCRM students through an analysis of the typical drivers of CoR in most product supply chains, since together they make up the total CoR of the operation:

As I mentioned earlier, many major CoR drivers exist in the economic form before they exist in financial form. The point relevant to any analysis of COVID-19’s impact on supply chains is that (a) economic costs can convert into financial costs and that (b) this conversion has four features that can be observed and verified time and again.

  • Feature 1: All major risk cost conversions are generally predictable, i.e., no major shift of a risk cost driver from economic to financial has occurred without warning. I liken the conversion precursors to ticks on a seismograph before a major earthquake; if you pay close enough attention, no major conversion should ever be a surprise.
  • Feature 2: The moment of conversion is specifically unpredictable, but it is usually sooner than most models predict. Once the seismograph ticks become steady, a conversion is inevitable. We may not be able to say exactly when it will happen, but we can estimate it better and better as the intervals of the precursors decrease and their magnitude increases. Generally speaking, risk models tend to overestimate the time left before conversion, because the models are typically based on hypothetical conversion scenarios and not readings of the actual precursors in the field.
  • Feature 3: The cost of conversion is always higher than predicted. Whatever you think the conversion will cost, it’s probably wrong and most likely by a wide margin of error. Take your worst-case scenario and make it much worse to approximate what probably will happen when the conversion finally arrives.
  • Feature 4: All conversions are permanent, i.e., no major driver of supply chain CoR has ever moved back from the financial column to economic column. Once a CoR driver “flips”, it stays flipped. Counterfeiting, terrorism, climate change — all made the conversion in past decades and all remain financial CoR drivers to this day.

As with other CoR conversions such as the recession of 2007, 9/11 and climate change, the COVID-19 conversion of pandemic risk from economic to financial follows the same four features:

supply chain challenges
  1. The idea that sooner or later pandemic risk would convert should has been there for anyone who was looking, as this sample of a great visualization from the Visual Capitalist suggests:
  2. We could not predict COVID-19 would strike in 2020, but a look at the SARS-Ebola clustering was an indicator that the moment of conversion was probably getting closer.
  3. The cost of the COVID-19 will far exceed what most supply chain managers had in any of their worst-case SCRM models.
  4. Not one scientist within whom I have spoken believes that COVID-19 is a “once in a century” event. On the contrary, they believe that we are now in a world where such events will be a regular occurrence. However, much like financial crises, we will always be fighting the last outbreak, and it’s highly likely that among the manageable epidemics we will continue to see catastrophic pandemics like the one we are living through today.

The point of this post is that every supply chain operator should understand that a fundamental cost of risk driver conversion is taking place during the COVD-19 outbreak and not just a months-long disruption. It will be necessary to revise all CoR models from this day forward to take into account the fact that pandemic risk is no longer an invisible economic CoR factor but a very real financial CoR driver that must be calculated factored into any supply chain design and managed actively. Moreover, I use the term “supply chain” in the broadest sense of the term, since this conversion applies to all social and business supply chains, from food to health care to education. That’s not a happy thought, but it is the reality supply chain strategists and managers must confront once the crisis passes and they look toward the future.

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Strategic Sourcing

Bring Strategy into Sourcing – What is Strategic Sourcing, Its Process and Benefits

Home » Archives for October 3, 2020

As businesses today are navigating through a disruptive and turbulent economic climate, they need to strive to adapt themselves to achieve a robust and sustainable supply chain. It is likely that companies can navigate through most of the unpredictable conditions to a great extent if they can intelligently acquire goods and services, irrespective of the state of the market. Hence, Supply Chain Management professionals should seek out creative and innovative ways that reduce costs and achieve a faster time to market and at the same time assure and improve the quality of the final product.

If you take a look at traditional procurement practices, it can be seen that the focus was primarily on supplier pricing. But in today’s dynamic business scenario, sourcing needs to evolve into a more proactive process with the cost being only one of the components. There should be a focus on other corporate needs as well, such as assurance of supply, service, quality, innovation, and regulatory compliance, none of which can be sacrificed for a lower price.

This demands organisations to see sourcing as a more strategic activity rather than as a tactical activity. Sourcing teams should emphasize the total value or the total cost of ownership and optimize the entire sourcing process. This ensures the purchase of appropriate goods or services from suppliers that meet quality and delivery requirements at the best price.

What is Strategic Sourcing?

Strategic Sourcing is a holistic approach to supply chain management that continuously improves and re-evaluates the procurement activities of an organization to find the best value by gathering information and being more proactive. While traditional procurement was a short-term activity that focused on initial supplier pricings only, strategic sourcing allows businesses to make their procurement activity less shortsighted and more systematic. It helps develop an adaptable system that contributes to the overall value of the business in the long term.

Strategic Sourcing uses a comprehensive methodology that includes ongoing market & supplier analysis using intensive data analytics and explores various viable avenues in pursuit of cost reduction and overall improvement of quality and sustainability in the supply chain.

Strategic Sourcing – The Process and Steps Involved

Now that we have seen what strategic sourcing is, let’s take a look at the steps involved in strategic sourcing so that you get a clearer picture of what it is all about. Strategic sourcing indeed can have many variations, but it can be commonly broken into the following seven steps

Steps involved in strategic sourcing process

1.Identification and Categorization of Spend Profiles: The strategic sourcing process starts by identifying the spend areas across the business areas in the organisation. It involves analysing the product categories, their spending patterns, the processes and departments, and so on.

2. Develop a sourcing strategy based on business goals: The second step involves identifying the requirements of the business units and defining goals, objectives and corresponding timelines to meet the goals. Based on this, build a strategy on how each requirement of the spend area will be approached.

3. Analyse the supplier market.

The next step in strategic sourcing is to execute an in-depth analysis of the supplier market to evaluate relevant supplier profiles including analysis of the market share of suppliers, their industrial performance, risks and opportunities surrounding the supplier market, etc.

4.Request for Supplier Information

Once the market research is done, request for supplier information to get them registered based on qualification criteria. This information needs to be reviewed periodically to ensure accuracy as well as consistent supplier performance.

5.Initiate Procurement and Identify Selection Criteria

Initiate the procurement process in the form of RFI/RFP/RFQs and receive online responses from the suppliers. At this step, it is important that you communicate your exact requirements, end goals and performance expectations so that the suppliers have a clear understanding of what your organization needs.

The information from suppliers will give you data insights, including the pricing structures, delivery, logistics and warranty provisions, product specifications, etc. based on which you can identify selection criteria for supplier selection.

6.Selection of Suppliers and Execution of the Contracting Process

Based on your selection criteria, choose the suppliers that can offer you the highest value and start with the contracting processes to on-board the selected suppliers. You can have weights from various criteria such as quality, delivery schedules, logistics etc. in addition to price to arrive at the final sourcing decision.

7. Measure and track the performance of suppliers.

The strategic sourcing process does not end with selecting the suppliers, but it extends further by tracking periodically the supplier performance and identifying areas of improvement.  This is important to help organisations understand supplier risks and design strategies to mitigate any risks to the supply chain.

8.Implement Supplier Relationship Management (SRM)

Strategic sourcing stresses on making the relationship between the organization and suppliers a closed loop rather than a one-way process. Implementing supplier relationship management can lead to a synergized long-term collaboration and can further improve supplier performance.

9.Advanced Analytics

Strategic sourcing involves continuous improvement based on a deep study of past trends. Spend, Cost, Project Performance, Supplier Performance etc. need to be analysed and reviewed regularly to identify risks, issues in the supply chain as well as potential areas of optimization and improvement.

Benefits of Strategic Sourcing

Strategic Sourcing is a vital component for today’s businesses, with real-world impact on all facets of the business allowing organizations to align their purchasing teams to business goals and the overall value proposition. There are many reasons why making the transition to strategic sourcing is a smart move:

Benefits of strategic sourcing

1. Impact on cost – Indeed, the most obvious benefit of strategic sourcing is the improvement in the organization’s bottom line. By selecting suppliers that will provide the highest value at the right pricing, strategic sourcing enables organizations to reduce overall costs, price their goods competitively and increase profit.

2. Risk Management – Strategic Sourcing allows organizations to mitigate risks in their supply chain as it considers elements beyond cost. It facilitates increased understanding of supplier markets, supplier’s sustainability, flexibility, and innovation that can all help identify potential risk factors.

3. Build strong relationships with suppliers – With increased communications between businesses and suppliers, strategic sourcing helps businesses build a healthy and sustaining relationship with their suppliers. It leads to mutually beneficial partnerships with suppliers and can result in faster lead times, more reliable fulfilment with flexibility for negotiation, and higher quality materials.

4. Supply Chain stability – Strategic Sourcing ensures that the present and future sourcing needs of an organisation are laid out well ahead of time and owing to the stable supplier partnerships, organisations can enjoy supply chain stability and avoid having to end up in a situation where they do not get what they need.

5. Continuous Improvement – Strategic sourcing is a continuous cycle of activities rather than a one-time activity where the executives get opportunities to learn more every time and improve on the findings to bring more value to the company.

Getting Started with Strategic Sourcing

As competition increases and margins get tighter, the shift towards strategic sourcing is becoming inevitable for organizations that are looking for savings and competitive advantage. Additionally, in an uncertain business environment, managing fluctuations in demand, risks and disruptions to the supply chain proactively are extremely critical. Many organizations try to manage strategic sourcing with basic spreadsheets and Microsoft office tools. But these are inefficient most of the time and turn out to be inadequate in leveraging the real benefits of strategic sourcing. In order to remain competitive and relevant in today’s chaotic markets, it is necessary to utilize the latest technologies and tools.

Digitization of sourcing activities has been following a slow ramp-up compared to other enterprise activities like finance, sales, etc mainly because most of the procurement objectives were less well covered by transactional IT systems. But, in recent years there has been a gradual development of specialized application suites and software focused on procurement activities including strategic sourcing. Emerging technologies like Artificial Intelligence, Robotic Process Automation (RPA), machine learning algorithms, advanced analytics, and big data bring in enormous automation potential not only in transactional activities, such as order and invoice processing but also in sourcing’s strategic elements, such as spend analytics, vendor selection and management. By leveraging the power of automation technology for strategic sourcing, businesses can optimize their sourcing activities to improve their bottom line significantly. A McKinsey report suggests automating Source To Pay activities can reduce spend by up to 3.5%.

Thus, the automation of strategic sourcing translates to more savings at lesser efforts. Strategic Sourcing software can help businesses streamline and automate their sourcing functions by standardizing sourcing requirements and providing a platform for collecting information about suppliers, products, markets, and business needs.

RheinBrücke’s MeRLIN is a strategic sourcing solution for direct and indirect procurement that allows for greater levels of automation of your sourcing activities and simplifies the complexities surrounding strategic sourcing by leveraging real-time data and advanced analytics tools.

Contact us to know more about MeRLIN and transform your sourcing function to a value-driven strategy that can give you a competitive edge.

Categories
Supply Chain Management

How To Avoid Disruptions In your Supply Chain?

How to Avoid Disruptions in your Supply Chain?

Supply Chain disruption is probably one of the biggest fears shared by nearly all manufacturing supply chain planning professionals. Even the most established supply chains may be destabilized due to a myriad of reasons like the recent outbreak of the pandemic Covid-19, natural disasters like earthquakes or floods, shifts in government regulations, economic fluctuations, or even inaccurate demand forecasting. In this blog, we will discuss about how organizations can be prepared to face supply chain disruptions.

In fact, there can be no single way to prevent supply chain disruption. It is all about how you tackle an unforeseen disruption by not being caught by surprise and minimizing its effect so that you can maintain business continuity. For this, your supply chain operations should move towards a more comprehensive and proactive model employing strategic sourcing and other supply chain best-practices that can effectively mitigate risks.

So, how do you go about mitigating supply chain disruptions? By increasing your buffer stock at any time? Not really! It might be effective in preventing any shortages, but stockpiling is a costly affair and can only bog down your operations and impact cash flow in the long run. Then, how can you maintain a lean supply chain and at the same time secure it against unexpected disruptions without costly fortifications?

The trick is in finding ways to be smarter and more proactive, rather than being defensive and reactive, and be prepared. Here are a few ways to keep yourself prepared for any disruptions that may arise in your supply chain.

Steps to Avoid Supply Chain Disruptions 

 

1. Improve supply chain visibility – It’s nearly impossible to respond effectively to an unexpected breakdown without a complete understanding of every element of your supply chain. An integrated IT infrastructure that promotes connectivity and collaboration that enables you to monitor supply chain activity in real-time can make a lot of difference in identifying potential disruptions early on.

2. Transform your procurement process into a value-driven strategy – Conduct timely reviews and adopt an agile procurement operations model, factoring category specific strategic priorities across components such as cost quality, delivery, supplier innovation, etc. Ensure that the process includes a review of location-specific factors such as geo-political, climatic etc that influence supply chain risks associated with each supplier. Strategic Sourcing can help strengthen your sourcing capabilities and supplier collaboration during challenging circumstances.

3. Diversify supplier networks – Having a diversified supplier network allows you to utilize back up suppliers and activate alternate sources of supply during disruptions and become more resilient. When you rely exclusively on suppliers from a single country, you become more dependent on them and you get affected in case of any regional problems. Whereas if you diversify your supply base, you can benefit from the non-interdependent sources of supply. The key is to verify that the suppliers Supplier is again not from the at-risk country.

4. Create open channels of communication – There are a lot of things that you would do during a crisis. Keeping all stakeholders on the same page on what is to be done, or what is being done is one of the most important things. Open channels of communication with suppliers, employees and key customers will ensure everyone is aware of the change of plans, what’s going on, how it impacts them and what they can do to help.

5. Leverage automation – Leveraging digital technologies and automation enabling a smart supply chain can allow you to mitigate reliance on intensive labor to perform your daily operations.

Automation of supply chain activities like strategic sourcing & e-procurement can allow you to respond quickly to supply chain disruptions. Automation tools with analytical capabilities can provide data-driven insights that enable better decision making and help mitigate risks.

6. Invest in digital technologies that can provide greater intelligence – Thanks to the technological advancements in the modern era, we have a range of technologies like Artificial Intelligence, IoT devices for demand sensing and goods movement tracking and advanced analytics algorithms for forecasting, which can be used to foresee supply chain risks and act to avoid disruptions.

IoT capabilities help foster a digital ecosystem of connected systems providing relevant and updated data. Risk evaluation tools that make use of machine learning and analytics to find patterns that indicate risks or opportunities enable businesses to extract insights from data and finetune their future plans. Tools that can even rapidly model alternate supply and transportation scenarios are available.

All these technologies essentially allow you to quickly react to disruptions increasing your supply chain resilience.

7. Expect disruptions and be prepared for the worst with robust contingency plans – Even the best-laid supply chain management systems may collapse at times and things can go off the rails. With something on the scale of the Covid-19 pandemic that spread across the world, even if a manufacturer had diversified suppliers across China, South Korea, and Europe, it would be of no help with all these nations affected badly. So always be prepared for the worst.

There can be numerous what-if scenarios for which you can have contingency plans. Some of the what-if scenarios may seem very unlikely to occur. But it’s still good to have a contingency plan in place.

Enterprises need to map out their supply chain networks from end consumers to tier-N suppliers and for each of their supply chain nodes, warehouse, factory or transportation mode, establish a methodology to measure buisness risks associated with them. Creating alternate plans like alternate suppliers, transporting routes, different shipping or inventory options, etc. can help overcome an unexpected crisis.

The above steps can ensure that organizations can minimize events of supply chain disruptions and build a more resilient supply chain. Organizations that proactively prioritize risk management before, during and after adverse incidents, are always positioned better to secure their bottom-line faster and be on track quickly.

Moving from a traditional linear supply chain model to digital supply networks can enable businesses to break down the functional silos and become more connected to their complete supply network enabling end to end visibility, collaboration, and agility. Hence, leverage digital technologies and automation to anticipate and meet your future supply chain challenges. RheinBrücke’s MeRLIN is a Strategic Sourcing Solution that allows sourcing process automation along with Supplier Relationship Management and planning functions using advanced analytics to help mitigate risks in your supply chain and handle disruptions proactivelyt

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Procurement Analytics

Setting up a high-performance scalable real-time data processing engine

Home » Archives for October 3, 2020

What is the context?

We wanted to develop an auction module for our flagship product MeRLIN. An e-Auction by nature is time-bound, where participants from across the globe login and submit their bids. During this period, the system is expected to provide competitive information on the participant’s bids against other participants’. Some auctions are very competitive and run for a very brief period. Hence it is pivotal that such competitive information is provided real-time.

What is the Problem Statement?

MeRLIN is architected on Microsoft stack with SQL Server being the backend. While typical transactions are stored in SQL Server, attempting to store such large and live transactions in SQL Server will place huge load and potentially impact the performance of other transactions during this period.

Moreover, the requirement to perform real-time calculations on the bid competition and bring them live to participants and administrators can not be done in SQL Server and typical HTTP request-response pair.

What are the options?

While SQL Server is ruled out for computation and data storage, any other technology that involves disk I/O will not be optimal, however efficient it is. On cloud platforms such as Azure, where disk I/O is costed, such large I/O operations will push the infrastructure cost too. Hence, for computation purposes, an in-memory system is an optimal solution. We looked at both Memcached and Redis.

For notifications of computational results, we needed a push mechanism. When we looked at browser push notifications, we realised that they had security flaws and handling them to make changes to web application data will be very challenging. We looked at both HTTP notifications and the ubiquitous SignalR.

How did we compare and what did we choose?

While we have several push notification techniques such as Pushers, Socket.io etc., our natural choice for .NET based application. Considering the relative advantages and ease of use, we decided to proceed with Redis and SignalR.

How did we Integrate them with our stack?

The next task was to integrate them with our existing stack. Also, Redis and SignaR combination is used only during the period of the auction. Once the auction is complete, the application should retrieve data from SQL Server.

What were the challenges and how did we solve them?

  • What happens if the in-memory Redis server goes down during the auction period?

We decided to dump the Redis data into SQL Server periodically so that at least we can resume the auction from the point of the storage.

  • What happens if the web socket used by SignalR gets closed?

We implemented a self reconnection mechanism so that a broken connection does not permanently break a participant’s notification.

  • How do we show live charts for the price changes to Auction owner?

We have been heavily using High Charts for all our visualisations and hence High Charts live was our natural choice.

What we achieved?

We ended up creating an in-memory calculation along with SignalR based notification during the period of the auction and then a regular SQL Server-based storage after the period of the auction. Here is a detailed sequence diagram of the final implementation.

Here is how Auction can be monitored live by the Administrators.

Kudos to the team:

The development team of Froze KhanKarthick PugalengthiRaju R and Gowtham Venkatesh of our MeRLIN team under the able guidance of Raja Chandramohan navigated through various technical challenges and POCs to crack the code of real-time auctions.

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Procurement and Sourcing

Top 3 Sourcing Focus Areas to look for in 2020

As we welcome an exciting yet challenging 2020, the impact and significance of Supply Chain Optimization in the success of organizations become more evident and prominent

However, increased Globalization of Supply chain and associated geopolitics, quality, security and compliance issues continue to pose overwhelming challenges to Supply Chain professionals across the world. Not only are SCM professionals expected to overcome such challenges through innovative and proactive business processes, they are also counted upon to remain agile to quickly respond to unforeseen issues that may arise in any part of the Supply Chain.

2019 witnessed several key geopolitical events that threatened to disrupt the Supply Chain several categories between major world powers. Fearing backlash from supporters, world leaders tightened borders and businesses had to take shelter under their mitigation plans for sustenance.

While we expect this protectionist trend to continue in foreseeable future, Supply Chain professionals may as well prepare their processes, skills and systems to adapt to them.

We, at RheinBrücke, believe Supply Chain professionals can tighten and enhance their focus on the following 3 broad key areas to continue to be at the forefront of business innovation:

Top 3 sourcing focus areas

Deeper Automation

Supply chain professionals need bandwidth to plan to be proactive and react to unexpected events. It means they cannot be bogged down by the regimen of routine paper-pushing activities. The feeling of getting drowned in Spreadsheets is all too common in the stressful world of a sourcing professional. Systems and processes should automate many, if not most, of the decisions, with no or minimal manual intervention or supervision. Analytics plays a key role in such automation.

Some key business processes where automation can further be improved are:

Supplier evaluation:

Systems can consolidate data from different touchpoints such as Purchase Orders, GRNs, Inspection results, APs and prepare the first draft of Supplier evaluation for Buyers to validate while making sourcing decisions. Systems can also suggest potential Suppliers for a given item based on various factors such as quality, cost, capacity, timeliness etc.

 Cost estimation:

Cost estimation of custom parts is typically carried out by designated Cost estimators. Analytics has a great potential to look at historical data of commodities, tying them with market intelligence and coming up with estimated “should cost” of items.

What-If scenarios:

Coming very handy at the time of assessment of potential risks, Systems can simulate scenarios such as supply chain disruptions, exchange rate fluctuations etc. and suggest alternatives.

Seamless Collaboration

Weaker links killing the chain is no more prevalent in Supply Chain than anywhere else in the industry. In order to be agile, it is pivotal that every stakeholder, including the Suppliers, are brought on to the same platform for effective collaboration.

Who, When and Why?

Suppliers during New Product Design:

Involving potential Suppliers during NPD brings forth the potential to assess manufacturability/serviceability and complications in making the item. This has several advantages such as:

  • Leveraging Suppliers’ thought leadership to add value to the process by asking the right questions and provide appropriate suggestions.
  • Significant reduction in lead times.
  • Significant improvement in delivery quality.
  • Exploring the opportunity for cost reduction at the Supplier side earlier in the lifecycle.

Logistics in Supply chain planning & decision making:

Sourcing is no longer about the point of production and consumption, but about the complete link between the two. Engaging Logistics experts during sourcing decisions can provide an opportunity to optimize the link for better and faster sourcing impact.

Engineering in Sourcing decision making:

Typically Engineering and Procurement teams work in silos. However, Engineering can look at suggestions from Sourcing on the availability of alternate or similar parts that may result in expediting product development and exploiting volume discounts.

Sourcing Intelligence

Existing Supply chain systems and processes are designed to look at traditional sources of data within the organization and provide actionable insights to stakeholders. Predictive models have also made inroads.

The next logical step in improving the intelligence of the processes is to connect with data external to the enterprises and provide a holistic view of the supply ecosystem and context.

Potential sources of external data:

  • Data from Commodity Exchanges – To look at historical data of raw materials and use them in part price predictions
  • Regional / Country wise labour cost inflation – To predict labour price variations and their impact on part prices
  •  Supplier financial performance data – To get insights into Suppliers’ growth in the industry vs Supplier’s Share of Business and look at possible de-risking initiatives.
  •  Logistics costs – Impact of logistics on overall procurement costs can be significant. External inputs on evolving logistics modes and their costs can help Sourcing teams do effective What-if analysis to arrive at optimal total costs.

RheinBrücke’s MeRLIN steps into the forefront of making every stakeholder of Supply chain move forward together.

Categories
Strategic Sourcing

How can your organisation identify strategic cost drivers?

Modern day sourcing requires the procurement department to fully understand the cost drivers and be able to leverage appropriate sourcing tools to reflect savings in budget.
Strategic sourcing strives to optimize an organisations supply base while reducing Total Cost of Ownership. However, calculating the Total Cost of Ownership for a particular product or commodity goes beyond the purchase price.

There are other cost elements that buyers need to focus on to achieve a competitive purchase price. Costs including warehousing costs, inventory carrying costs and operating costs, just to name a few, should be taken into consideration. Procurement professionals should analyse spend data to make strategic business decisions about acquiring commodities more effectively and utilizing resources more efficiently.

By breaking down the ‘spend’ of supporting activities into distinct processes, buyers can identify where supply chain efficiencies and costs can benefit the business.
Cost can be broken into 2 categories, namely, Cost elements and Cost drivers.

It’s all about the costs

Cost elements are those elements of strategic sourcing that measures the reduction in cost per unit such as supply chain savings, reduced lifecycle cost and pricing improvements. Volume rebates, payment term discounts are pricing improvements that all traditional procurement departments would look into as part of their strategy to lower cost per unit. However, procurement need to now go beyond classical annual price rebates in direct spend and start addressing demand-related levers. This is where cost drivers play a strategic role.

Let’s take a simple example. A manufacturer realises that a Supplier in location A is supplying only 10% of the actual requirement of a product due to low overall demand in that area and also because the plant is old and cannot cater to more. The sourcing group realising that the existing location had poor utilization rates, were able to reassess alternatives with a Supplier in a nearby location.

Moving to a Supplier in location B increased the logistics costs. However, the new Supplier is now able to accommodate the supply from a single plant at location B and supplies 100% of the commodity achieving economies of scale. The strategic sourcing team was able to reduce cost of procurement by around 15% due to better volume commitments and the Supplier is optimizing facilities and site service costs including cleaning, security, building and equipment maintenance. Additionally, having fewer suppliers reduces the administrative, finance and quality overheads of the organisation as well, leading to further savings. .

Strategic cost drivers

Essentially strategic cost drivers help the sourcing department investigate changes in consumption/ volume and improving operating efficiency. An efficient demand management strategy can help companies reduce consumption, encourage substitution and even change the product mix to realise savings. To reduce procurement and non-procurement related operating expenses an organisation can find a solution to standardise the procurement process, rationalise the supplier base, PO processing, receipt/ warehousing, accounts payable and other operating expenses.

Leveraging Technology

Procurement technology or sourcing tools such as e-procurement that are designed to automate transactions from purchasing to payment (e.g. issuing purchase orders, automatic approval routing, delivery status) and e-sourcing tools developed to facilitate the sourcing process (such as e-RFI, reverse auction, e-auction, supplier selection and real-time negotiations) will continue to advance and make their way into core applications, including Enterprise Resource Planning (ERP) to assist organisations in realising strategic cost drivers.

Advanced solutions facilitate strategic sourcing which helps organisations analyse total cost and highlights the types and magnitude of savings opportunities outside of traditional negotiations around price, delivery and payment terms. Data Analytics and What-If analysis help in understanding the impact of inventory costs, how changes in product specifications drive costs, true life-cycle costs (including warranty, repairs, and disposal), transactional costs and others. A strategic sourcing solution can increase the value beyond the traditional approach and identify sources of savings when suppliers are unable or unwilling to provide price concessions.

Click here if you want to know more about RheinBrücke’s Strategic Sourcing Solution- MeRLIN

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Spend Analysis

What is Spend Analysis and how can a Procurement and Spend Analytics Software Benefit your Business?

Home » Archives for October 3, 2020

Now that we have introduced Strategic Sourcing and Industry 4.0 in our previous blogs, let’s dive right into the very foundation of Strategic Sourcing and how it helps create value through the purchasing process.

Most companies are already involved with some form of Strategic Sourcing initiative. However, Strategic Sourcing can go beyond cutting costs and have a profound impact on a company’s financials. The key component of this is the ability to control the spend of a business.

Most often, spend goes unquestioned as long as it’s within budget. That’s where organisations go wrong. Focusing on budget should not be the benchmark to analyse company spend. However the main aim should be to understand if spend is essential or non-essential.

With most procurement departments, spend is usually habitual. Which means that buyers will purchase from certain sellers because it is the same seller they have always bought from. But what if there was a way to understand if it’s cheaper to buy from the same seller but perhaps from a different plant or at the same price from a different supplier at a different location which ensures faster delivery times?

What is Spend Analysis? 

In simple terms spend analysis is understanding what we are buying from whom and where, and at what terms.

According to an article by CPO Rising (a website focused on procurement and supply management), “Spend analysis is a foundational business process that can help procurement teams determine the next, best steps in the sourcing process including how to prioritize sourcing resources and where the largest savings opportunities exist. It is the process by which spend data is collected from multiple sources/systems (usually multiple) like AP/accounting, ERP, eProcurement, etc. and aggregated, integrated, analysed, and distilled into usable information that can drive insightful outputs.”

Sound simple enough? Well it may seem easy enough but what’s surprising to know is that spend visibility is a concern for most procurement organisations.

Importance of Spend Analysis 

Studies show that, procurement organizations manage, on average, just over 60% of total enterprise spend, leaving nearly 40% of all spend beyond their influence and control. That’s definitely an area of concern.

Having a robust procurement and spend analytics solution in place has become a prerequisite for running a professional sourcing organization. Let’s look at some of the benefits of investing in a good strategic sourcing solution that has strong Spend Analysis capabilities:

Benefits of Using a Spend Management Solution for Procurement and Spend Analytics 

Spend Visibility:

The obvious is Spend visibility. Attaining spend visibility can be time consuming and resource intensive; however, when complete, it opens vast opportunities for cost savings. Organisations will be able to identify those procurement categories where excess money is being directed. This means that you’re paying in excess to the value derived from it resulting in poor ROI.

Apart from identifying the best deals and prices offered by your suppliers, spend visibility also helps in planning and maintaining optimum levels of inventory. This helps in placing orders at the right time. For example, you can ensure low prices in periods of little or no demand as opposed to a peak period where suppliers overcharge due to excess demand.

Spend Forecasting:

The ability to forecast spend is an important benefit of spend analysis. There are multiple teams in the organization who can use the spend data to forecast future spending. For example, finance and planning can use the spend data to understand recurring vendor spend along with long-term contracts to forecast next few years expenditure.

Similarly, the same information can be used by sourcing teams to work with department owners to help them forecast the spend for their key vendors and categories.

According to a report by the Aberdeen group, the top two factors that have raised the urgency for robust and automated spend analysis are the need to forecast savings from sourcing initiatives and the need to prioritize the top spend categories to focus on.

Supplier Performance Management:

Organisations can gain insights into the performance of their suppliers to encourage proactive supplier development. Spend analysis allows organisations to list out non-performing suppliers and in turn help boost contract compliance by monitoring pricing on a continuous basis.

Scorecards help evaluate suppliers and vendors by capturing metrics that evaluate their performance. Gathering a comprehensive spend analysis gives more information on the amount of money an organization spends on purchasing materials and services, and on which suppliers it spends the most. This information is useful on contract negotiations and can be used to maximize the money the organization spends on procurement. When successfully implemented, organizations are able to collaborate with fewer suppliers to attain greater value and establish a more efficient and leaner procurement process.

Spend analytics benefits the buyer and supplier. When negotiating contracts, both parties focus on the strategic goals of both companies and prevent being bogged down in the fight for small cash wins.

Manage risk and maverick spending: 

In a more dramatic description, maverick spending is when employees ‘go rogue’ and purchase goods or services out of contract or from non-preferred suppliers that do not benefit the company. This impacts profits, contract fulfilment and compliance.

Identifying the maverick spend is essential. This means the organization must ensure spend visibility so as to identify the unmanaged costs. This requires a detailed spend analysis to spot gaps in the spend information. Accountability helps pin-pointing a mistake to a particular source or person, thereby making it easier for organisations to identify the root cause of an issue, ascertain the spend and its source.

Spend Analysis benefits

A spend analysis is often the first step in aligning a firm’s sourcing strategy with its competitive strategy. When done correctly, it allows the organization to identify opportunities to leverage buying power, reduce costs, improve operational performance and provide better management and oversight of suppliers, while improving relationships with internal and external stakeholders.

According to Aberdeen Research, inadequate spend management capabilities are costing businesses $260 billion in missed opportunities annually. Implementing a comprehensive spend management framework has become imperative to fully realize the impact of strategic sourcing.

MeRLIN’s spend management solution gives a unified view of your spend. The powerful procurement and spend analytics features of MeRLIN allows users to monitor spend patterns and perform real-time spend analytics across regions, categories, suppliers, etc. The intuitive dashboards and drill down reports allows procurement teams to identify spend leakages and savings opportunities, and thus reduce procurement costs and maximize savings. 

Click here if you want to know more about RheinBrücke’s Strategic Sourcing Solution- MeRLIN

 

Categories
Procurement and Sourcing

Procurement 4.0: leveraging procurement capabilities as a strategic weapon

Industry 4.0 is commonly referred to as the fourth industrial revolution. A revolution defined by new trends in automation and data exchange in manufacturing technologies. But what makes this revolution different is the radical change brought about by the use of cyber-physical systems to monitor, analyze, and automate businesses.

So where does Procurement fit in? Procurement 4.0 leverages certain aspects of Industry 4.0, namely, Big Data, System integration, Cloud computing, and Cybersecurity. Unsurprisingly, data analytics forms a key part of Procurement 4.0. Thus far, Data analysis has been focused upon learning lessons from the past. That said, innovative procurement data utilization will be the way forward as it perceives the future through predictive analytics.

According to McKinsey, disruptive technologies increase the value of digital information along the product life cycle. So how does this impact procurement?

The procurement division, as the primary owner of the supplier interface, can increase its distinctive value proposition within the company by seizing new opportunities. By automating how data is collected, not only will companies change what they buy as they incorporate Industry 4.0, but importantly, they will also change the ways in which they buy using data analytics. The recently emerged Procurement 4.0 adopts innovative ways to digitalize the supply chains and unlocks new growth opportunities.

Lean Procurement 4.0

Procurement 4.0 walks away from just being an approach to streamline and automate procure-to-pay (P2P) activities and instead brings a lean management perspective to procurement. Procurement responsibilities now extend to market research, vendor evaluation, and integration. In manufacturing, lean techniques help reduce inventory wastage. Similarly, with procurement, it is easier to integrate suppliers onto a platform that standardizes assessment and selection and enables a streamlined purchasing structure. This enables greater reliability and flexibility and more agile procurement and production processes. The Chartered Institute of Procurement and Supply describes Lean procurement as a supplier having one point of contact across a buying organization, one contract and offers one price for all locations.

According to Fraunhofer IML, Procurement 4.0 imposes new requirements on purchasing. Smart contracts, Predictive analytics, and Big Data will change the face of purchasing. Operational purchasing will be automated and procurement in itself will receive a promotion towards monitoring, controlling, and steering.

Similarly, PwC’s Procurement 4.0 Value proposition utilizes big data tools and techniques to connect with suppliers and improve the planning, sourcing, supplier collaboration, and risk management process. This automates the supply chain by lowering costs and ensuring faster delivery.

Not surprisingly, Procurement 4.0 encompasses all the above descriptions.

Collaborative Innovation

What not to do.

Collaborative innovation between suppliers, customers, and competitors is a defining element for Procurement 4.0. To establish a strong competitive position in this complex new ecosystem, procurement should be able to define commercial relationships, rules of engagement, and bring the right partners to the table.

Unilever’s ‘Partner to Win’ program is a good example of an innovative supplier collaboration program. Creating an efficient Supplier list of its top 200 suppliers, Unilever defined the ‘Partner to Win’ program around 5 key pillars, innovation, sustainability, service, value, and capacity. Instead of it being an on one relationship with suppliers, Unilever created a platform for Suppliers to work together to establish a sense of transparency on defined roles, product specifications, quantity, quality, etc.

The second change was to bring in Lean principles which allowed Unilever to remove cost as the value decider and instead focus on creating long term value. Unilever worked alongside suppliers to help them improve in areas where the company can buy better, and understand what the business can do to help them with manufacturing. Unilever was able to reduce wastage within its procurement department and managed to establish a mutually profitable and sustainable relationship with its suppliers.

Key Enabler for Procurement 4.0

Digital procurement processes like digital requests for quotations, supplier financial analysis, procurement risk analysis, e-signatures and verification, and digital procurement network collaboration will help organizations move towards Procurement 4.0. However, investing in new digital tools is not the final solution. The tools provide the data required to make strategic decisions. But the problem will be in finding the solution within the data.

As mentioned in the beginning, Data analytics is probably the most important enabler for Procurement 4.0. This will help procurement unlock the real value of large amounts of structured and unstructured data and improve enterprise-wide performance. Companies will gain a competitive advantage because predictive information will provide alerts as to where and when to expect the next failure or success.

Analytics will provide internal data sources, such as spend data, contract data, and data related to supplier relationship management, together with external data sources, such as supplier databases, and provide information anytime and anywhere about supplier markets.

Digitalization will further increase globalization and Procurement 4.0 will require procurement to be located in the most competitive supply markets. Procurement will now go beyond reducing costs and improving efficiencies and focus on building value and profits. The introduction of Procurement 4.0 will include new value propositions, new business requirements, and integrating data across the value chains. There is now a need to use intelligent data when introducing digital processes and tools.

A product like MeRLIN embraces the key aspects of Procurement 4.0. The solution seamlessly ensures system integration which is probably the biggest game-changer for procurement as inefficient handling of large amounts of data has haunted the industry for many years and tighter integration across enterprise systems assists decision making, scenario analysis, and predictions and ensures faster & more accurate data exchange assisted by significantly increased automation.

The solution also integrates sourcing & procurement automation with supplier relationship management and planning functions augmented by advanced analytics, hosted either on-premise or cloud, and can be delivered through Web and Mobile platforms.

The role of procurement going forward will include the management of a “value network”, which is defined as sets of connections between organizations and individuals who act in a manner beneficial to the entire group. The concept of value networks will result in an increased push towards the purchases of services. Simply, the focus of the organization is not only to purchase at the least cost. Rather it is to benefit from the functions of purchasing whilst endeavoring to achieve the best value possible.

One must point out that research on Procurement 4.0 is still in its infancy.  Researches endeavor to explore the concept further so as to completely ascertain the influence of Industry 4.0 on Procurement and fill in the grey area between Procurement 4.0 and eProcurement. Even if technology plays a central role in the transformation of procurement, organizations should only consider it as an enabler or a means and not as an end.  This will also require a change of perspective, mindset, and culture in the procurement community.