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The key attributes that should be adopted or addressed in supply chain are addressed in this article. It  offers a systematic sequence when developing a scorecard of effectiveness in building a best of class supply chain organization.


1. Establish a governing council

As our first listed best practice, the establishment of a
Supply Chain Governing Council is absolutely critical for the success of the company’s supply chain effectiveness. Who should be on this council?? Well, certainly the supply chain organization leadership but more importantly it should consist of members of the executive group, key internal business unit leaders, and other influential company leaders.

2. Align and staff the supply chain organization

Once the supply chain council has set a strategy, the supply chain organization must be prepared to execute. One significant challenge has been how to organize the function to realize the full potential and benefit of being an effective organization. Certainly, organizational structures will take on different looks from company to company. For some companies, it is well served to embed a proficient supply management professional in the internal business unit, and for others the most effective way is to provide a more centralized approach. And a “hybrid” approach of these two would also merit consideration. But a leading strategy of progressive companies is in centralizing strategy to gain consensus, with decentralized execution to improve service.

Regardless, the emerging trend in supply management organizational effectiveness is to roll up under the supply chain leader the functions of Sourcing, Materials Management, Logistics, Forecasting/Demand planning, and Contract Management. The following organizational chart is not listed to suggest this chart is correct for all companies, but more so to give a pictorial
view of what today’s modern organization may look like.


3. Technology

Best of class supply management organizations are recognizing the importance of technology. The reality is that technology is NOT just a supply chain thing—it is how company’s today are conducting their business. One can implement and update ERP systems. Best of class companies put in place the strategy and working mechanisms to get the very most out of their technology. As we continue to migrate to a global economy, the need for connectivity has never been greater.

Data is another area that technology can greatly assist the supply management function. Unfortunately, most organizations have difficulty retrieving the type of data (i.e. spend data) needed to make sound strategy and business decisions. Once again, best of class means

4. Set the strategic sourcing strategy.

Strategic sourcing is a cornerstone of supply management. A successful collaborative strategic sourcing initiative not only ensures availability of supplies, but will result in the obtainment of overall lower total cost. Also, it will streamline the processes  and increase the responsiveness to customers’ changing needs.

Strategic sourcing is not just a purchasing department initiative. It requires input from all functional areas such as finance and accounting, engineering, operations, maintenance, safety/health/ & environmental, quality assurance, and internal business unit team members that will contribute to the initiative’s success. That’s the essence of the collaborative side and the success of achieving true buy-in is to involve internal clients in the decision making process. In most circles today, this final step has traditionally is known as “supplier relationship management.”

6. Manage total cost of ownership.

Strategic sourcing shifts the company’s and team’s focus from just looking at the purchase price, to understanding the dynamics of the total cost of owning or consuming a product or service. For significant spend areas, procurement teams are abandoning the outmoded practice of receiving multiple bids and selecting a supplier simply on price.

Instead, they consider many other factors that impact the total cost of ownership. In fact, acquisition costs accounts for only 25% to 40% of total cost for most products and services. The balance (and majority) of total cost is comprised of operating costs, training costs, maintenance costs, warehousing costs, environmental costs, quality costs, transportation costs, and consideration for the salvage value. Identifying total cost requires cooperation and input from both the buyer and seller organizations.

7. Establish processes and controls

In our high tech world, we see an inherent fallacy of companies who first select technologies to make them more efficient and then structuring the processes around the chosen technology. In reality, the focus should be on “what technology is going to help me become more efficient.”

The answer will come when you first review the processes under consideration, determining the needs and then select the technology that best satisfies those process needs. Don’t select and install the technology first and then structure the process around the technology.

Technology should be considered as the tool to help increase efficiency, not the focal point of what is to done.

And it’s not only the processes and technologies that must be in sync, but we also need to review the supply management policies and procedures as well. Most, as we know, are often culture driven, and do not accurately reflect today’s environment. Review them constantly, and bring them up-to-date keeping them realistic and easy-to-understand and follow.

8. Manage compliance and risk.

In actuality, supply chain leaders and their teams do negotiate significant potential savings during the sourcing process. However, the reality is that in most cases companies never do fully realize the full extent of these savings. The reasons are varied, but include a lack of communication of contract terms within the organizations and a failure to monitor contract compliance. All too often the fully executed contract is filed away in some drawer and forgotten.

Reducing maverick buying and optimizing the value of new and existing contracts is a fundamental tenet of supply management organizations. More and more companies today are moving the contract management responsibility to the supply chain organization rather than having it in legal, finance, or operations as organizations have come to realize the importance of contract management.

A driving force of this movement to the supply chain organization is the need to ensure that one collects the contracts .  Also, they should be  maintained in a central repository.

Furthermore, the migration of the contract management function allows the supply chain leader to more effectively leverage spend.  Particularly in the areas of services, where there is a greater opportunity for cost reduction and risk mitigation. And speaking of risk, sourcing decisions are demanding that a one should integrate risk mitigation methodology into the decision tree progress.

9. Reduce company-owned inventory.

With key suppliers in place and delivering against their contracts, supply chain organizations should strive to constantly review their inventory levels. Also, they should keep them at an optimized level. More so today than in the past, the CFO has put Inventory on the radar scree.  Also, the financial team is constantly looking for new ways to improve the bottom line and reduce working capital.

Supply chain teams often begin by defining the “real” cost of holding that inventory. This cost is often higher than the generally assumed 20% to 25%. In fact, ISM has compiled documentation to indicate that inventory holding cost could be up to 40% or higher of the cost of the item.

Best of class companies today are placing more emphasis on demand planning and forecasting.  It is just one additional means of ensuring that optimizing inventories . Poor planning and forecasting is a direct cause of inventories that are out of balance with the business needs.

10. Green Initiatives and social responsibility.

Greening the supply chain is about reducing the carbon footprint of the supply chain. Social responsibility is a “framework” of measurable corporate policies and procedures.  They result in behavior designed to benefit the workplace, the individual, the organization, and the community.

Social responsibility is playing an increasingly significant role in the supply management organization. It affects the  decision process and risk, for both the buyer and the seller.

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