© Spend Matters. All rights reserved.

1
2
Putting the “Supply” in Supply Networks
3 Part 1: Welcome to Supply Management 2.0 in the Digital Supply Chain
4
5 By Pierre Mitchell, Chief Research Officer, Spend Matters
6
7 The Opportunity
8
9 For manufacturers, the CEO agenda is about innovation and global growth. Companies that innovate and
0 compete on customization to markets and customers will increase revenue and market share. For the CFO,
1 this profitable growth agenda must also be predictable – and efficient. The head of supply chain must then
2 align with these strategic priorities for reducing cost and risk, while supporting growth and customer
3 satisfaction. From here, the mandate cascades even more keenly to the chief procurement officer (CPO) and
4 direct procurement leaders who focus more intensely on input cost reduction and supply continuity. This was
5 reflected in a study that Spend Matters conducted last year with the Institute for Supply Management (Figure
6 1). Although there are some expected gaps in terms of procurement being more cost-focused and the
7 broader supply chain management (SCM) function having more “balance” in its supply network priorities,
8 procurement organizations have become more broadly focused on value beyond cost.
9
0 Figure 1: Top 10 Objectives – Direct Procurement vs. Overall Supply Chain
1
Percentage$of$Firms$ci>ng$Issue$as$a$Pressing$Objec>ves$within$next$18$months$

Cost$Reduc>on$ 74%$
57%$

Con>nuity$of$Supply$ 53%$
48%$

Revenue$/$Growth$Support$ 32%$
44%$

Risk$Reduc>on$ 37%$
35%$

Strategic$Partner$Collabora>on$ 44%$
30%$

Customer/Stakeholder$Sa>sfac>on$ 34%$
29%$

Innova>on$ 21%$
29%$
16%$ Direct'Procurement''
Flexibility$/$Resiliency$ 28%$

Working$Capital$Improvement$ 24%$
28%$ Overall'Supply'Chain''
Improvement$of$ROI/ROIC/EVA/etc.$ 17%$
22%$

Complexity$Reduc>on$ 19%$
21%$

Visibility$ 21%$
20%$
Source: “Direct Procurement Excellence Study”, Institute for Supply Management and Spend Matters, 2013

2
3

1
 © Spend Matters. All rights reserved.

4 The global supply chain trend toward “glocalization” and omni-channel consumer support and the shift from
5 products to services are together creating a set of mass customization requirements to orchestrate a supply
6 network far beyond what firms are capable of today. Single-tier forecast sharing, simple supplier portals, and
7 batch electronic data interchange (EDI) won’t cut it anymore. Now, factor in the rapidly increasing volumes of
8 “big data” being generated by devices and external data feeds across the supply chain. You can now become
9 a supply network orchestrator – an information “prosumer” (i.e., a producer and consumer) – who can use
0 the information not just for supply chain visibility, but also for prediction, scenario planning, and near real-
1 time extended network design.
2
3 But then, reality beckons. You just can’t get there if you’re stuck in reactive execution mode and in the land
4 of enterprise resource planning (ERP), spreadsheets, EDI, and duct tape. If you want your physical multi-tier
5 supply network to create competitive advantage, you must have an accompanying multi-tier information
6 network that directly mirrors the physical network – a “digital supply chain.”
7
8 Rather than introduce a new term such as “supply information network,” we will adopt the emerging
9 “business networks” nomenclature and apply it here to the supply chain. (We use the terms “supply chain”
0 and “supply network” interchangeably.) Supply chain business networks are cloud-based information
1 services (e.g., application services, connectivity services, content services) that are more than just rebranded
2 private marketplaces for document exchange in single-tier, source-to-pay processes. They are cloud-based
3 platforms (an overused term, but apt here) that truly mirror the multi-tier physical supply network to enable
4 complex collaboration and orchestration that support “profitable promises” to external customers. These
5 supply chain business networks provide the “system of engagement” for the supply chain actors and activities
6 (and their complex associations with each other) in the trading network rather than just the individual
7 enterprise application “systems of record” for the accounts (financial data), articles (master data for products
8 and components), and assets (resources such as people and physical assets) within the virtual four walls –
9 the environment which ERP was developed for and manages. The data may be persisted locally, but the
0 multi-tier collaboration and associated business rules are in the cloud.
1
2 This multi-tier aspect is not optional. Factory-centric supply chains and their enabling intra-enterprise
3 software are the ways of the past. Brand owners now rely on outsourced manufacturing and distribution
4 partners who form a trading network. To manage these far-flung webs of suppliers, and suppliers’ suppliers,
5 brand owners are cautiously moving to the cloud for their mission-critical value chains. This requires
6 business networks that are not only secure and private, but also flexible in terms of process adaptability and
7 technical deployment (e.g., hybrid cloud deployments that blend public and private cloud models) so as to
8 preserve existing IT investments and make use of new external capabilities.
9
0 Unfortunately, creating a virtualized and resilient n-tier supply network is a pipe dream if IT departments and
1 procurement groups are not collaborating internally with each other. They must think bigger and deeper.
2 They must also collaborate with the broader supply chain organization as part of a multidisciplinary team.
3 And they must create both “business architecture” and IT architecture to integrate a diverse ecosystem of
4 supply chain participants effectively: original design manufacturers (ODMs), contract manufacturers (CMs),
5 business process outsourcing (BPO) partners, managed service providers (MSPs), third-party logistics
6 providers (3PLs), cloud computing providers (e.g., SaaS, PaaS, IaaS), information networks, and more.
7
8 The bottom line: Historically siloed departments, processes, metrics, EDI, supporting ERP systems – and a lot
9 of spreadsheets – have created a brittle, shortsighted supply network that simply can’t be orchestrated
0 efficiently and effectively to meet demand. In this environment, the best demand sensing and shaping
1 capabilities will only get you so far. Whatever maximum forecast accuracy level you can reach, you’ll only be
2 as effective as the extent to which you can:
3
4 • Propagate the demand signals quickly upstream (variability, too – not just point values) through the
5 internal and external supply tiers
6 • Collaborate with internal and external partners to assess current/potential capacity and capabilities
7 relative to the variable demand signal
8 • “Place your bets” commercially and jointly to reduce cost and risk – making promises and
9 commitments with increasing specificity as planning time frames approach the moment of execution

2
 © Spend Matters. All rights reserved.

0 • Failsafe the execution not only through visibility (of current state and predicted state), but also
1 through a collaborative response to the following:
2 o Change the plan (and associated contracts). Supply conditions and trends should be
3 analyzed in other work streams (e.g., supply risk management, category/commodity
4 management) to help optimize the network based on supply and demand conditions
5 o Improve the planning system. This can involve changing the point of postponement,
6 adjusting replenishment policies and parameters, and tuning business rules.
7
8 As supply networks become more complex, componentized, outsourced and global (as well as faster, riskier
9 and more regulated), the capability of managing supply (i.e., “supply management”) is promoted from a
0 siloed set of tactical functional roles to an integrated strategic one. While most of us play roles in the supply
1 side of the house, the goal is to be demand-driven. The demand-driven supply network (DDSN), by definition,
2 is a network of supply. So, if you want to “orchestrate” it, you and your external network partners need to
3 collaborate fluidly in a multi-tier and multilevel fashion that orchestrates both process silos and information
4 silos. For lack of a better term, we call this Supply Management 2.0. It basically expands the vision from a
5 traditional procurement-led sourcing process, typically managed via ERP and/or stand-alone procurement
6 applications, to a cross-functional and cross-enterprise “platform” for orchestration of all critical supply
7 resources in the supply network – materials, capacity, logistics, capital and more – across the supply tiers.
8
9 The New Supply Management: Supply Management 2.0
0
1 “Supply management” has typically referred to the procurement department and the broader set of supply-
2 side processes that the function performs. However, many procurement departments, especially those in
3 non-manufacturing firms, refer to their procurement processes as “spend management.” Now, “spend” and
4 “supply” are two sides of the same coin: Spend is what you pay – and supply is what you get. “Spend
5 management” therefore tends to be biased toward managing indirect spend – non-payroll G&A expenditures
6 (and some CapEx) – while managing “supply” tends to be more direct procurement-focused. More
7 specifically:
8
9 • Indirect procurement is typically focused on squeezing value from expenses and budgets to
0 provision resources and capabilities such as people (services), operating supplies, utilities, outcome-
1 based projects and data/information. It is a loosely coupled set of processes and systems to analyze
2 spending, find suppliers, negotiate and set up contracts/purchase orders (POs) for onetime use or
3 for recurring use via self-service requisitions, catalogs and other means. In essence, the value is due
4 largely to a “strategic sourcing factory” of sourcing projects rather than enabling real factories and
5 the rest of the supply chain.
6 • Direct procurement is more about increasing the “profit pie,” primarily by improving the
7 performance of supply inputs that are pegged to plans and profitable products to meet end customer
8 demand in an integrated supply network. It’s not simply about reducing material costs and total cost
9 of ownership. Value is also created by using direct suppliers to increase innovation and growth or by
0 aligning volatile commodity purchase pricing and supplier contracts to customer pricing/contracts in
1 order to protect margins. See Figure 1 for this more balanced scorecard of supply that is driving
2 current initiatives.
3
4 Direct procurement is also more complex than indirect procurement in terms of both process orchestration
5 and systems requirements. Take the example of a well-known consumer packaged goods firm that can
6 translate purchase price forecasts of volatile commodities through a reverse bill of materials (BoM) explosion
7 to link to pro forma customer/SKU profitability and fine-tune product mix, specifications, substitutions, and
8 pricing to preserve and improve margins. Process-wise, this involves tying supply planning and procurement
9 at the hip to an integrated sales and operations planning (S&OP) process. System-wise, this scenario requires
0 an integration of total cost models, commodity forecasts, time-phased demand and supply plans, finished
1 goods, customers, revenues, and, ultimately, profits.
2
3 From a solution provider standpoint, many companies are using the term “business network” as an
4 information network supporting the processes, planning and analytics of a network of business partners. If
5 you are in the business of manufacturing, your trading network manages direct materials and requires some

3
 © Spend Matters. All rights reserved.

6 form of a “supply chain business network.” Good luck trying to do the above scenario with an indirect
7 procurement process approach and technology application! It should be apparent that indirect spend
8 management applications and related e-marketplaces-turned-supplier networks, even if called “business
9 networks,” aren’t yet close to supporting this type of integrated supply management scenario (and there are
0 dozens of others) with just requests for quotation (RFQs), contract repositories, single-tier POs and invoices.
1 In direct procurement, you are not orchestrating, but rather orchestrating the trading network itself.
2
3 Direct procurement, for its part, is also more than just BoM-based component sourcing and buyer-planners
4 who firm up, sequence and release planned POs to suppliers. Direct procurement organizations are
5 increasingly taking a broader and more proactive role in improving performance for the multi-tier inbound
6 supply chain. In a previous Spend Matters research study, done in conjunction with the Institute for Supply
7 Management, we assessed the degree to which direct procurement organizations were leading the broader
8 supply management processes and transformation. The results were mixed (see Figure 2).
9
0 Figure 2: Direct Procurement Groups Have Limited “Quality of Influence” on the Broader Supply Chain
1
Procurement'Responsibility/Influence'Model'(%'of'respondents)'
Accountable#Owner# Leading#/#Transforming#Across#Matrix# ParFcipaFng#/#Enabling#

Supplier'management'/'"SRM"'(measure,'monitor,' 47%# 34%# 14%#

Sourcing'(strategy'&'execu-on;'mul-F-er;'BuyFSell;'SB' 53%# 21%# 18%#
Commodity'risk'management' 40%# 29%# 13%#
Supplier'rampFup'/'onboarding' 38%# 30%# 20%#
Supply'risk'management'(IP,'natural'hazard,'supplier' 32%# 29%# 18%#
PO'planning,'alloca-ng,'and'monitoring'(including'mul-F 38%# 17%# 22%#
Strategic'3rd'party'procurement'(e.g.,'CMs,'ODMs,'3PLs,' 27%# 18%# 23%# Minority#of#
Procurement#
Supplier'discovery'and'early'supplier'involvement'in'NPDI' 17%# 25%# 29%# organizaFons#
Extending'GRC/sustainability'requirements'to'supply'base' 15%# 25%# 26%# own#or#lead#
these#processes#
Inventory'posi-oning'(who'stores'how'much'raw'materials' 25%# 13%# 30%#
Supply'planning'via'S&OP' 19%# 17%# 36%#
3rd'Party'innova-on'(crowdsourcing,'IP'licensing,'JVs,'preF 5%# 14%# 26%#
Tax'advantaged'supply'chain'design' 5%#8%# 24%#
Design'/'specifica-on'crea-on'(including'make'vs.'buy)' 2%#
8%# 40%#
Source: “Direct Procurement Excellence Study”, Institute for Supply Management and Spend Matters, 2013
2
3
4 The majority of direct procurement groups own or lead the processes for sourcing, supplier management,
5 P2P, and supplier/commodity risk management. However, they are in the minority for strategic third-party
6 management, innovation and design-for-supply, sustainability, network design activities (e.g., inventory
7 positioning, tax-efficiency considerations), and traditional supply planning. In the previous study, we dove
8 into emerging practices and actual case studies to show how others have “connected the dots” in these
9 areas. For this report, however, we will provide a new supply management framework and then highlight a
0 few key capability areas regarding processes and systems that support the core supply planning processes.
1 We will use a collaborative planning and execution framework to highlight how firms are evolving from
2 sensing, responding, and resolving to learning and optimization.

4
 © Spend Matters. All rights reserved.

3
4 A New Way to Keep “SCORe” With Supply at the Core
5
6 It’s time to flip the traditional paradigm of supply management in the supply chain being merely about direct
7 materials sourcing as a serial step in a linear source-make-deliver process. Supply (even just external supply)
8 is inherently embedded into all processes in various life cycles (business, customer, product, component,
9 asset, planning period and supplier). So for supply professionals, let’s put it at the core. If we expand and re-
0 jigger the Supply Chain Council’s SCOR ModelTM and replace “Source” with “Supply” (verb) and put it at the
1 center (i.e., “supply management” as a process central to managing a network of supply), some of the supply
2 connections that exist throughout the supply chain life cycle become clear (see Figure 3).
3
4 Figure 3: A Process Model for Supply Networks Should Have “Supply” at the Core
5

A"ract'&'
Sell'
•  Supply Network •  Customer
Design
•  Product Portfolio
Quoting
•  Promotions Design'
Strategize' Management
•  Sustainable Supply
•  Customer
Pricing
(Products'&'
•  Supply Risk •  Supplier-led Resources)'
growth

•  Spares & Services
Sourcing
•  BPO management
•  Contingent Labor
Management
•  Design-for-Supply
•  Make vs. Buy
•  Asset Capacity Planning
Supply' •  Product Sourcing
•  CapEx Sourcing
(verb) ! •  Energy Sourcing

Posi8on'&'
Serve' •  Multi-tier
positioning Store'
•  SMI/VMI
•  Transportation
Sourcing •  Component
•  Multi-tier Order Sourcing
Management •  Contract Mfg.
•  3PL Management (Buy-Sell)
•  Supplier Lean/6σ

Deliver' Make'
6
7
8 Source: Spend Matters, 2014
9
0 It is still a simple model relative to the scale of the problem that scope-wise involves visibility horizontally
1 (“dirt-to-dirt”) and vertically from business strategy down to execution. Still, a few clarifying notes about the
2 model are needed:
3
4 • The process is life cycle-oriented and reflects the fact that supply chains frequently change through
5 the life cycle of products and of consumer/customer demand cycles (e.g., fashion season,
6 model/year, facility life cycle, promotion period, warranty period).
7 • It includes product supply, but also supply of all other services/resources needed in the supply chain
8 (e.g., tooling, vehicles, facilities, contingent labor).
9 • Performance management is a key part of planning (“planning and performance management,” for
0 example, is a well-known concept). The idea here is integrated “balanced scorecards of supply.” We
1 call this “supply performance management” and it is a way to align strategy and key performance
2 indicators (KPIs) from the supply network level down to individual product line supply chains, supply
5
 © Spend Matters. All rights reserved.

3 segments (of which category/commodity is one type), and suppliers, and for execution, down to a
4 supplier/part/location level. (See Spend Matters for more on this topic.)
5 • Risk/compliance is embedded in this balanced scorecard of supply. Supply risk protects supply
6 performance outcomes such as delivery, quality, price, and regulatory compliance, and it’s
7 embedded within different levels of processes and aligned to “natural risk owners.” The big focus on
8 supply chain visibility, prediction, and agility/resilience is essential to providing the antidote to supply
9 risk.
0 • There are multiple planning domains that must be improved individually to support multi-tier
1 requirements (e.g., supply network design optimization models extending into the external supply
2 tiers) and integrated collectively. For example, the strategic sourcing of transportation services should
3 integrate seamlessly into downstream systems for transportation planning and execution, P2P,
4 freight payments, and more, but also back into network design and costing tools for ongoing
5 network analysis and redesign.
6
7 However, the core supply process here deals with collaborative supply planning and execution, which can be
8 thought of as “traditional supply planning and P2P on steroids.” The concept is depicted below in Figure 4.
9
0 Figure 4: Collaborative Supply Planning and Execution
1
Co l
lab
ora
PLAN% Pla @ve%Su
nni
Profitably%to% ng' pply%
Shaped% Multi-tier network
Demand% requirements Co l
lab
ora
Exe @ve%S
cu- upp
Multi-tier supply Promise%/% on' ly%
costs, capacity,
constraints, Commit% Constrained, committed,
capabilities, the%Supply% contracted supply plan
contracts.

Exceptions, mitigations,
rule/policy updates
Transactions, controls,
Failsafe%the% events, predictive
Execu@on% alerts, responses,
disputes, resolutions

2
3 Source: Spend Matters, 2014
4
5 This figure may seem oversimplified, but that’s the point. The idea is to use a multi-tier network model to
6 allow a multi-tier supply network “optimization” that reaches deep back into the internal/external supply tiers,
7 assesses the “5 Cs” (cost, capacity, constraints, capabilities, and contracts), and then comes back with a
8 promise and commitment of supply that can be monitored in execution. Procurement must come to the S&OP
9 table with detailed supply network information to enable the enterprise to commit with confidence.
0
1 Note, the term “optimization” above has quotes because we’re not talking about the home run “ultimate
2 solve” right out of the gate. Rather, lower-level planning and execution processes start with visibility of
3 demand between process participants who can then collaborate to secure supply, reshape demand, and lock
4 down a plan for execution. Subsequent realities on the ground inform rapid changes back upstream to
5 affected contracts and customer commitments so that all parties can dynamically plan anew to better
6 respond and resolve. If done right, this collaborative feedback also can be used to make the system “smarter”
7 to lessen the frequency of future problems (e.g., a simple example is the dynamic resizing of raw material
8 buffer stock based on supplier lead time variability). Mathematical solvers are useful in the various domains,
9 but the key here is a common network model and a common process.

6
 © Spend Matters. All rights reserved.

0
1 Going back to the “supply planning on steroids” metaphor, the supply planning process is still fundamentally
2 about supply-demand matching stemming from an integrated S&OP process. But we’re not just talking about
3 a simple single-tier requirements explosion and capacity planning exercise. It’s also about dealing with the
4 complexities of a multi-tier global outsourced supply network with issues such as “buy-sell” models, vendor-
5 managed inventory (VMI), multi-tier order fulfillment, contract penalties, life cycle issues (e.g., stock run
6 outs), global trade/compliance rules, point-of-postponement changes, and dual/best shoring. Mastering such
7 capabilities in an integrated fashion are some of the new frontiers for determining top performance in the
8 supply chain.
9
0 In previous Spend Matters research, we found that top performers, measured across a balanced spectrum of
1 self-reported KPIs in the areas listed below (rated from highest to lowest against industry peers) had
2 significantly higher capabilities in 11 different direct procurement competencies:
3
4 • Supplier quality
5 • Delivery (e.g., supplier perfect order, supplier fill rate)
6 • Days Payable Outstanding (DPO)
7 • Cost competitiveness (input costs)
8 • Flexibility/resilience
9 • Supply risk management (e.g., low-risk probability, profit-at-risk)
0 • Days of supply (raw material only)
1 • Supplier innovation (e.g., percentage of ideas or products from suppliers)
2 • Internal efficiency/automation
3
4 The second part of this research report examines some of the technology requirements required to support
5 these areas and hone in on the multi-tier problem. Companies have created all sorts of incremental bolt-ons,
6 custom systems and spreadsheets to deal with these unique requirements. Unfortunately, over time, the
7 proverbial Rube Goldberg machine gets built. It’s sort of like the old game Mouse TrapTM, where you hope
8 your various assembled pieces all work together … but then they don’t, and you’re always missing a piece
9 which inevitably brings the whole thing to a standstill. You then want to dump the whole thing in the
0 garbage. In the supply chain technology area, it just may be about time to do that. But you spent a lot on
1 those pieces, so in the next installment of this series, we’ll look at some successful strategies and approaches
2 to augment them.