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Applying the powers of observation to supplier visits -mmg news letter october 2013
1. October 2013
A Message From the MMG Chair
Terry R. Volpel, CPSM, C.P.M., SCMP
Inside this issue:
Napoleon and Alexander —
Modern Supply Chain Lessons
From Military History
3
Applying the Powers of Observation to Supplier Visits
3
Upcoming Events . . .
Seminar:
4
Services Contracting, Principles
of Price & Cost Analysis
Board of Directors
Chair
Terry R. Volpel, CPSM, C.P.M.,
SCMP, LSSBB
The next few years are going to be very
interesting for those of us who manage materials travelling through our supply
chains. Internal threats and external
threats are constantly rising and falling,
Risk assessments are often outdated
and lagging. The Speed of Business is
ever increasing and we need to develop faster methods of identifying risks
and fast tracking mitigation strategies.
Make or buy? Off shoring or in shoring or
near shoring? Supplier Management? Contract
Management?
All of these decisions can have long term
consequences for those who just follow the
trends. In order to be successful we need to be
pro-active, not re-active. We need to get in
front of the curve; to spot trouble; to develop
leading indicators that give us time to act.
Materials Management is more than “just in
time” or even “just in case” planning. What
sets us apart is the mindset that what was val-
id yesterday may not be appropriate today.
The more agile we can make our business, the
faster we can respond to changes in
the business environment.
The ISM Materials Management
Group brings thought leadership to the
table. At ISM’s 98th Annual International Supply Management Conference in
Dallas, May 2013, no less than six
workshops were sponsored by the Materials Management Group. We are active in
research conducted through institutions such as
Michigan State University.
The Board is made up of Practitioners, Consultants and Academics, each bringing some
special outlook or viewpoint but most importantly, the flexibility to understand that
there are many paths one can take to success.
It is only when we get trapped in a paradigm
that we lose sight of this basic truth. Paradigms lock us into a box where we can ignore
the reality of what is going on around us.
Vice Chair
Mary Walker, CPSM, CPSD,
C.P.M., A.P.P.
Secretary/Treasurer
Sheila D. Petcavage, C.P.M.
Chair Emeritus
Karl Harward, MBA
Director/Coordinator
Sponsoring Programs
(ISM Conference)
Fred Lutz, C.P.M., CIRM
Membership Chair
Raymond F. Hopkins, C.P.M.
Director
Cheryl Phillips-Thill, MBA
Technology Advisor
Robert A. Bonnell, C.P.M.
Advisor
M. Bixby Cooper. Ph.D.
Advisor
Steven Melnyk, Ph.D., MBA
We’re on the web!
www.ismmmg.org
The Basics of Forecasting ― The Art and Science of Planning for the Future
Kathleen D. Allen, CPSM
The world of business today is characterized by its fast pace, driven forward at an
ever-increasing rate by technology and the
constantly changing landscape of our global
economy. It seems to be almost impossible to
predict what's going to happen next. The
motto of our business world today could
be...expect the unexpected. Or perhaps...anything is possible.
This poses an interesting dilemma for today's supply chain professionals, especially
those involved in production management.
Future planning is essential to the effective
management of resources. Essential in planning for raw materials and components purchases. Essential in planning for lead-times.
Essential to estimate demand, plan for labor
needs and production capacity. Essential in
the effective management of inventory. In
other words, essential to the success of your
business.
So the challenge is how to best plan for
the future. How to predict the unpredictable.
How to make financially
sound decisions based on the
unknown. The answer to this
challenge lies in the creation
of forecasting models tailored to meet your business'
production management
needs.
The selection of a forecasting model to
best meet your production management
needs may seem like an overwhelming topic.
There are many models available for forecasting, ranging from the simple moving average model to models so complex they
need to be handled by specialized software
programs. The first step, however, is to gain
a good overall understanding of the principles of forecasting.
2. Page 2
The Basics of Forecasting ― The Art and Science of Planning for the Future (continued)
Let's start by defining forecasting.
Forecasting is the art and the science of
predicting future events. The art, why?
Because no one can really predict the
future and realistically, a lot of forecasting is intuition or "following your gut.”
The science, why? Fortunately there are
mathematical modeling methods commonly used in forecasting for a variety
of situations. Because it is an art, you
should never rely 100 percent on forecasting. Because it is a science, you
should know and accurately apply as
many relevant forecasting techniques as
possible.
In the world of forecasting, this juxtaposition between the art and the science
of attempting to predict the future is
defined by the terms, qualitative forecasting versus quantitative forecasting.
Qualitative forecasting refers to an approach dictated by human judgment.
Quantitative forecasting refers to a statistical approach. The art and the science. Or perhaps we may like to think of
it as man versus machine. The human
brain versus the computer.
Another important juxtaposition in
forecasting models is whether to look at
things from the top down or from the
bottom up. Tops-down forecasting takes
the big picture and breaks it down into
pieces. Bottoms-up forecasting takes the
pieces (for example data on a SKU level
or data by region) and puts it together
to form the big picture. In forecasting
terms, these tops-down or bottoms-up
approaches are also referred to as aggregate forecasting versus disaggregate
forecasting. Aggregate is the pieces
together as a whole, disaggregate is the
whole broken down into all the pieces.
Or we could frame this same concept
from another angle by using the ideas of
macro (big picture) versus micro (down to
the details).
These two concepts, simplified as man
versus machine and macro versus micro,
are high level juxtapositions that will
apply to all forecasting models. Now,
let's review some basic concepts involved
in creating a forecasting model. There
are lots of factors involved in forecasting, but I like to think that these can all
be boiled down to four essential concepts. Combination, smoothing, time and
trend.
COMBINATION. The key to refining
the accuracy of forecasts is to use a combination of forecasting methods. This is
an essential concept in building a forecasting model. Of course, the term
"accurate forecasting" is actually an
oxymoron since no one can 100% predict the future, but building an effective
forecasting model will certainly help to
produce more accurate forecasting results.
SMOOTHING. The second essential
concept to remember that goes hand-inhand with combination is smoothing. Yes,
smoothing! Picture a line graph with a
jagged line. Or since we are using a
combination of forecasting methods, let's
picture three jagged lines representing
three forecasting methods. Now let's
picture a line that is combining those
three lines, with the jagged edges
smoothed out. That's the key to refining
the accuracy of forecasting.
Accuracy in forecasting is improved by
using a combination of methods and
smoothing the results. Simple, but true.
This is the very basis of building a forecasting model that will be effective to
manage your business' production needs.
Next, we need to take a look at timelines and horizons through the concepts
of time and trend.
TIME. The next important concept to
remember in forecasting is time. The past
is often our best indication of the future.
As a general rule, the longer time period
you can reference, the better. If you
observed your company's production
needs based on demand for just a couple of months, you probably wouldn't be
able to get a very good picture of the
long term demand needs. However, if
you were to observe your company's
production needs based on demand for
a year, ten years or even longer, you'd
probably have a much better idea of
the production cycle over time. Generally speaking the longer period of time
you are observing, the better your picture of the situation will be.
When forecasting, it's necessary to
break time into chunks so it's easier to
manage and in forecasting terms these
segments of time are referred to as periods. These periods can be segmented
by days, quarterly, annually or whatever works best for your business and forecasting model. The term observation in
forecasting refers to the number of periods being used in a forecasting model.
So now we've broken up our concept of
time into periods (or segments of time)
and observations (or number of periods
in our forecasting model).
TREND. As mentioned before, the ability to increase the accuracy of forecasting by observing a longer period of time
is only true generally speaking. There is
another hugely important factor that we
need to introduce now to balance out the
time concept and that is TREND. In today's fast-paced, high-tech world, information becomes obsolete almost as
quickly as we can take it in. Would we
want to use information from a period of
ten years backwards to determine how
many paperback books or magazines to
produce for the upcoming year? Heck
no! Because now a huge portion of the
population will download the material
they are interested in reading directly
on to an electronic device.
Forecasting needs to balance time with
trend. The converse of this situation also
holds true. Would we want to continue to
produce the same amount of some fashion fad item in the future? No, that would
be silly too, since trends peak and fall
quickly in our fast-paced world. A good
forecasting model should balance time
with trend and use a combination of
methods to achieve a smoothing effect.
So now that we have a good understanding of the basic framework of forecasting, let's run through the steps needed to determine the best forecasting
model to manage your business' production. Since your company's production
needs will be constantly changing to
adapt to the direction and pace of the
market, reanalyzing your forecasting
models will be an on-going process.
Therefore, as a supply chain professional, it is essential that you understand
these steps and can recognize when it's
time for your business to adapt.
STEP 1: Select and build the mathematical models best suited for your company's production needs. Forecasting
models can, and often do, utilize lots of
complex formulas and heavy duty number crunching. Depending on the size
and complexity of your business' production needs, the formulas to best suit your
company's situation could be determined
by an internal planning and forecasting
staff or an outside consultant specializing
in forecasting services. Regardless of
whether your company uses inside or
outside consultants to build forecasting
models, it is important for supply chain
professionals to understand the principles of how models are selected and
built. The concepts of COMBINATION
and SMOOTHING are essential here.
STEP 2: Determine the periods and
observations best suited to build your
forecasting model. Or, in other words,
how to best break up the chunks of TIME
3. Page 3
The Basics of Forecasting ― The Art and Science of Planning for the Future (continued)
your model will work with. Start by gathering as much historical data as possible
on your company's production output. Do
this from both a tops-down perspective
and a bottoms-up approach. This is also
a great time and place to gather data
on the competition and benchmark this
against your company's history.
STEP 3: Apply relevant TREND concepts to your forecasting model. These
would include both seasonal trends, if
they pertain to your business, and market trends. Seasonal trends will show as
peaks and valleys over time. A longer
period of time is required to see the
patterns of seasonal trends. Seasonal
trends are a good example of data that
is generally best approached from a
quantitative standpoint. Market trends
may be observed by looking into the
past but are most effective when considered from the standpoint of the present
to the future. Market trends are a good
example of data that is generally best
approached from a qualitative standpoint.
In today's business world, supply chain
professionals must take on roles of increasing complexity in order to effec-
Napoleon and Alexander Modern Supply Chain Lessons From Military History
Kathleen D. Allen, CPSM
A favorite topic of mine is the lessons
our modern culture can learn from history.
In the field of supply management and
logistics, these lessons often come from
the military. In looking to the future of
supply management, we can benefit from
the knowledge and strategic skills of
great historical military commanders. I’ll
mention two military figures from history
that are my personal favorites as inspirations in strategic applications of supply
management principles.
The first inspiration comes from the
small, rocky and infertile land of Macedonia, a land of people who had few
natural resources at their disposal. It’s a
story that happened over 2000 years
ago of two men who, within just two generations, built one of the greatest military
forces known in history. Alexander the
Great and his predecessor/father, Philip
of Macedonia, created a Macedonian
military force that was able to take down
the army of Darius, King of the Persian
Empire, who had at his control one of the
largest and most sophisticated militaries
of the time. Macedonian troops focused
their skills, employed structural teamwork
in combat and reduced the supplies they
required down to the bare minimum. Each
soldier carried only the supplies needed
to support his role in combat and cover
his basic personal needs. The soldiers
carried their own weaponry, a helmet
that doubled a soup bowl, a block of salt
and a bar of soap. Unlike other great
military models of the time, there were no
separate supply transports that could be
cut off from the troops by enemy forces.
For this reason, Alexander and his troops
were able to move quickly and travel far
from their home base. They eventually
came to stand against the army of the
Persian Empire, at that time one of the
most well equipped militaries in the
world, with chariots, sophisticated weaponry and many troops at their disposal. At the decisive Battle of Gaugamela,
the Macedonians delivered their final
defeat to the Persian Empire with an
army estimated to be half the size of
the Persian forces.
My other favorite military figure, an
inspiration in the field of supply management, is Napoleon Bonaparte. Napoleon rose to power to fill a void left
by the aftermath of the bloody social
uprising, the French Revolution. Napoleon’s supply chain strategy was quite
different than Alexander’s in that it revolved around the intelligent management of supplies and supply chain
routes. The streets of the city of Paris to
this day reflect the concept of supply
management routes planned out from a
centralized core. Roads were paved to
allow for vehicles to maximize efficiency
of moving troops and supplies. Steps
were also taken to preserve food supplies so they could be transported longer distances. Napoleon offered a cash
reward for someone to create a reliable
method of preserving food that could be
transported to his troops without degradation. A French cook rose to the challenge by preserving nutritious foods like
soup in a process similar to the process
for bottling wine. Thus Napoleon was
able to extend his supply lines further
from a centralized base without his supplies losing integrity.
There are many things the modern
field of supply chain and logistics can
learn by looking at military strategies
throughout history. Even though our
world today is becoming more fastpaced and complex every day, there
are basic principles that never change.
A look back is a look forward and a
lesson learned for the future.
tively control the flow of information and
materials needed to accurately manage
production. Forecasting is an essential
tool for the management of resources,
from labor and raw materials to the
finished goods, delivered on-time and
within margin goals. Your company's
ability to gauge the most probable upcoming production needs, both short and
long term, through forecasting and stake
out a strategic position based on this
information are crucial to determining
both the present and future success of
your business.
Applying the Powers
of Observation to
Supplier Visits
Thomas L. Tanel, C.P.M., CTL, CCA, CISCM
President, CATTAN Services Group, Inc.
At the recent ISM’s 98th Annual International Supply Management Conference in Grapevine, Texas, I conducted a
presentation entitled, Power of Observation: What Purchasers Can Learn
from Darwin. This
presentation focused
on the benefits of
enhanced observation
skills. That is to use the
“power of observation.” Charles Darwin,
a British scientist, who
laid the foundations
of the theory of evolution and transformed the way we think about the natural world, spent much of his career
observing.
So what I will do is apply some of the
lessons made in that presentation, from
Darwin, to an activity that many purchasers engage in; namely, a Supplier
Site Visit. As many of you already
know, site visit itineraries should be
planned in advance to include a tour
and formal/informal discussions. The site
visit activities will vary based on your
objectives and the specific challenges
faced by the supplier organization that
you are visiting.
To make a site visit an effective and
valuable exercise, it is imperative that
you have a clear agenda about what
you want to accomplish: time for observation, formal and informal interviews,
and an after-action report. Otherwise,
you risk being treated to the standard
promotional ”lip service presentation
and eyewash tour.”
(continued on page 4)
4. Page 4
Applying the Powers of Observation to Supplier Visits (continued)
Direct Observation
During your tour, observe facility layout, material and process flow, systems
and procedures. At the same time, try to
get a sense of the big picture about how
the plant, warehouse or service center
operates. Seeing is not observing, University of Pittsburgh researchers point
out. As practiced by scientists, observation is a rigorous activity that integrates
what the scientists are seeing with what
they already know and what they think
might be true. Therefore, maybe we
should learn what to observe:
by various observers. Use these checklists
to guide your observation and document
information for follow-up and for sharing
in discussions and reports. Additionally,
check for compliance with accepted industry standards, ISO guidelines and
good practice guidelines.
Take notes as inconspicuously as possible. The best time for recording notes is
during observation. However, since this is
not always feasible, recording observations should take place as soon as possible after observation. Plan time for this
in your site visit schedule.
Asking Questions
Regard anything out of ordinary
patterns as possibly a risk or intentional distraction. Did you notice any
recurring patterns or routines? How
often did they occur? Who was involved?
Focus on incongruent people, equipment, processes, methods, material
flow, etc. What do they look like or
how do they appear? How are they
acting? How many of them are there?
Look beyond what you are shown or
told. Everything you see that is out of
place, ask yourself why it is there
and how it got there, and what it tells
you about the bigger picture.
The main advantage of direct observation is that an organization, event,
facility, or process can be studied in its
natural setting, thereby providing a richer understanding of the situation. Another advantage is that it may reveal conditions, problems, or patterns the supplier may be unaware of or unable to describe adequately. On the negative side,
direct observation is susceptible to observer bias: people may behave differently when they know they are being
observed. The Heisenberg Uncertainty
Principle or Observer Effect are interchangeable terms referring to changes
that the act of observation will make on
the phenomenon being observed. A simple example: a forklift operator will
lower his speed of movement when he
knows that an outside visitor is in his
work area.
I recommend the use of observation
checklists which help standardize the
observation process and ensure that all
important items are covered. Checklists
also facilitate better aggregation of
data gathered from various functions or
Use your powers of observation as a
means of strengthening another important ability: the art of asking questions. Observations are ‘raw materials’
for questions. In some situations, observing what does not happen may be as
important as observing what happens.
Tony Robbins, the American life coach
and self-help author states, “Successful
people ask better questions, and as a
result, they get better answers.”
Meet with management executives,
supervisors, workers, and other staff to
get their perspective on how the site
operates. Do not use rigid questionnaires, which inhibit free discussion.
However, you must have an idea of what
questions to ask in advance of your visit.
Always try to establish rapport and
start with factual questions. Questions
requiring opinions and judgments should
then follow. In general, begin with the
present and then move to questions
about the past or future. Try to phrase
questions carefully to elicit detailed information and avoid questions that can
be answered by a simple yes or no. For
example, questions such as “Please tell
me about the Customer Number One
Satisfaction program?” are better than
“Do you know about the Customer Number One Satisfaction program?”
Use open-ended questions which are
designed to encourage a full, meaningful
answer utilizing the person's own
knowledge and/or feelings. It is the opposite of a closed-ended question, which
encourages a short or single-word answer. Open-ended questions typically
begin with words such as "Why" and
"How," or phrases such as "Tell me
about...." Close ended questions that call
for yes/no or multiple choice answers
are the mark of an amateur.
Also encourage interviewees to detail
the basis for their conclusions and recommendations through the use of probing.
For example, an informant’s comment,
such as “The inbound logistics program
has really changed things around here,”
can be probed for more details, such as
“What changes have you noticed?” Who
seems to have benefited most?” “Can
you give me some specific examples?”
After the Site Visit
Before leaving, discuss the visit with
the supplier/potential supplier. Have
yourself (or your team) draft and send a
formal supplier site visit analysis after
the visit that includes all positives and
negatives.
You should prepare a report after
conducting a supplier site visit. The report should include the purpose of the
visit, what you did, with whom you met,
issues or challenges to be addressed,
items for follow-up, and recommend
appropriate changes needed to support
your organization’s objectives.
This report will serve as a reference
and should be reviewed before the next
subsequent visit to enable tracking of
progress made towards addressing issues identified as problematic.
In conclusion, observation is by no
means restricted to a supplier site visit; it
has practical application in business. A
sharp businessperson can size up a situation accurately and quickly. A trained
engineer can scan a factory floor and
notice key aspects of the workflow. An
alert sales representative can enter
someone's office and tell how best to
approach the person after a quick
glance at the desk. The American industrialist, Eugene C. Grace wrote: "If I
were to prescribe one process in the
training of people which is fundamental
to success in any direction, it would be
thoroughgoing training in the habit of
accurate observation." An effective businessperson sees what others overlook,
whether in a production line, an administrative routine, or a product specification.
5. Upcoming Event
Principles of Price & Cost Analysis and
Services Contracting
Sponsored by
ISM―Utah and the ISM Materials Management Group
Friday, November 8, 2013
7:30 a.m. - 4:30 p.m.
Speaker: Mike Taylor, C.P.M.
Learn from a knowledgeable procurement expert on price & cost analysis, and services contracting.
A great way to earn 7 continuing education hours and learn from one of the industry’s best!
Location:
Radisson Hotel SLC Downtown
215 W. South Temple Street
Salt Lake City, UT 84101
801/531-7500
www.radisson.com/salt-lake-city-hotel-ut-84101/utsaltlk
Fee:
US$329 for ISM members / US$429 for non-members (a great value for an all day seminar)
Early Bird
Discount:
Members and Non-members — Receive a US$30 discount if registration and payment are
received by October 8, 2013.
Added Value!
Registrants who are not members of ISM will receive six (6) months of membership
with ISM―Utah as part of their registration fee.
Credit:
Receive a certificate and 7 credit hours towards C.P.M./CPSM®/CPSD™ certification/recertification.
Registration:
Register online now or complete the registration form on the next page.
Parking:
Parking is free. However, attendees are encouraged to take public transportation if possible.
Meals:
Continental Breakfast and plated lunch is included with registration. For special dietary
needs, contact Jerilyn Midthun (Jerilyn.Midthun@slcgov.com) or Karl Harward
(Karl.Harward@slcgov.com) prior to October 8, 2013.
Can’t Attend?
Manual Package US$295 for ISM Members/US$395 for Non-ISM members
(Please note: Attendance at the event is required for continuing education credit.)
Who Should Attend?
All Public and Private Sector Purchasing Managers, Directors, Buyers, Procurement Specialists, Services and Commodity Buyers
This workshop is designed for buyers and procurement staff in both private and public sectors who want to improve their skills at
determining if a proposed price is fair and reasonable. You’ll learn the role that cost and price analysis plays in proposal evaluation, and how to perform that analysis. Cost elements will be discussed, along with the differences between direct and indirect costs
AND how those differences may affect a seller’s proposed purchase price. You also will look at some examples that use these principles to develop competitive pricing ranges and negotiation objectives.
Note: This workshop is not intended to be a “by-the-reg” reading of FARs or DARs. It will touch on many of the general principles and requirements of
FAR parts 31 and 32. This is not a government procurement class; however, knowing, in general, what the regulations say about cost principles, allowable costs and cost accounting can benefit buyers in any organization.
6. Registration Form
Principles of Price & Cost Analysis and
Services Contracting
Sponsored by
ISM―Utah and the ISM Materials Management Group
Radisson Hotel SLC Downtown
Friday, November 8, 2013
7:30 a.m. - 4:30 p.m.
_____ I am registering for the seminar
_____ I would like to purchase the manual package
__________________ □ CPSM □ CPSD □ C.P.M. □ A.P.P.
Name:
Job Title:
______________________
Company/Organization:
________________________________________________
Mailing Address:
City:
_________________________________________
_____________________________
Phone: ____________
___
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Zip/Postal Code: ____________
Email: __________________________________________
Fee:
US$329 for ISM members
US$429 for non-members (market code: MBSH14— apply to non-member registrations only)
Added Value!
Registrants who are not members of ISM will receive six (6) months of membership with ISM―Utah
as part of their registration fee.
Early Bird
Discount:
Members and Non-members — Receive a US$50 discount if registration and payment are
received by October 8, 2013.
Can’t Attend?
Manual Package US$295 for ISM Members/US$395 for ISM Non-members
(Please note: Attendance at the event is required for continuing education credit.)
Method of Payment: (U.S. Funds Only)
Check enclosed for US$___________________
Check Number: ___________(Make check payable to: ISM-MMG)
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Mail to: ISM MMG Event, 2055 E. Centennial Circle, Tempe, AZ 85284 — Attn: Cere Netters
Fax to: 480/752-7890, Attn: Cere Netters
ISM Contact: Cere Netters at cnetters@ism.ws or phone at 800/888-6276 or 480/752-6276, ext. 3069.