Become STANDARD and reach EXTRAORDINARY supply management performance

This is an excerpt of the original article. It was written for the September-October 2019 edition of Supply Chain Management Review. The full article is available to current subscribers.

September-October 2019

It’s that time of year again, when we feature the Top 25 supply chains from Gartner. What I enjoy most about this research is the window it provides into where supply chains are going next: After all, while some lead, the rest of us follow.

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In the realm of supply management, too many procurement leaders fail to challenge their internal Line-of-Business (LOB) customers to simplify and standardize the selection of products and services that they require. As a result, organizations may source/bid identical items in a spend category time after time without substantively improving category performance.

In this article, we'll discuss the operational efficiencies your supply chain can gain from standardization in category management that can help companies—and even governmental agencies—to become extraordinary. And then we'll expand the discussion to demonstrate six ways that supply management organizations can exploit the standardization of procured products and services to capture cost reductions and improve supply chain performance. By becoming standard, your procurement organization—and your supply chain—can deliver extraordinary performance.

Operational benefits of standardization

During the last decades, one U.S. domestic airline has often outperformed its many rivals: Southwest Airlines. In fact, for the 25th consecutive year, Southwest was named to Fortune's 2019 list of World's Most Admired Companies. What makes Southwest so good? Among other smart practices, Southwest Airlines is credited with significant benefits resulting from standardizing its aircraft fleet. The airline operates just one type of aircraft, the Boeing 737.

Indeed, industry experts regularly note that fleet standardization is core to Southwest Airlines' success. And, so does the airline. Several years ago, Chris Wahlenmaier, Southwest's then vice president of ground operations, commented on how standardization facilitates all manners of cost-saving efficiencies: “We only need to train our mechanics on one type of airplane. We only need extra parts inventory for that one type of airplane. If we have to swap a plane out at the last minute for maintenance, the fleet is totally interchangeable—all our on-board crews and ground crews are already familiar with it. And there are no challenges in how and where we can park our planes on the ground because they're all the same shape and size.”

Southwest Airlines is not the only organization to realize the benefits of this approach to its operations. Standardization is a hallmark of most successful organizations that lead their industry sectors. Consider the highly standardized product offerings of Apple and its long practice of rolling out a limited selection of mobile phones, notebooks and desktop computers while allowing a dedicated aftermarket to fill and expand the accessory options for the loyal constituency of the Apple world.

Or consider successful retailers like Starbucks, Subway, McDonalds or Tim Hortons, whose stores are mirror images of each other, with standard colors, corporate branding, signage, a common layout look and feel, equipment, uniforms, supplies and ingredients. The idea is that a manager or associate who has worked at one of the retailers' facilities could walk in the door at another facility almost anywhere in the world and understand the operations—as could anyone maintaining the equipment or supplying a restaurant.

For procurement teams, standardization creates benefits that allow greater sourcing efficiency and leveraging opportunity. Consider the following:

• greater strategic spend influence with fewer suppliers;
• ability to leverage and consolidate freight and logistics;
• escalation of negotiations within the category vertical hierarchy (procuring from manufacturers rather than resellers or distributors);
• simplified employee and technical training for fewer supported vehicle/equipment models;
• reduced spare parts required in inventories; and
• ability to negotiate lifetime Total Cost of Ownership (TCO) programs.

If the glove fits

Several years ago, my organization was helping a Canadian electric utility company reduce its procurement expenditures. When we analyzed the inventory holdings in more than 30 warehouses located around a very large province, we noticed that the company was buying 46 different styles of protective gloves, each resulting in five different SKUs due to small, medium, large and extra large sizing. It turned out that over the years, different company divisions had expanded the list based upon the preferences of its employees.

Now admittedly, different types of gloves are needed in a multi-faceted electrical utility. The employees who support hydro-power plants on rivers may need one type of gloves while those working in liquid natural gas facilities need others. Similarly, the technicians who do forestry right of way and who string power lines need others. And the workers in a nuclear power plant have their own specialized needs. But 46 types of gloves was a ludicrous degree of non-standardization. We brought the list to the vice president of supply chain, who was stunned by the lack of standardization. She requested the list and said it would be e-mailed out to all of the heads of maintenance and inventory who would be told to consolidate the list.

I suggested a different approach to the vice president. We brought the heads of maintenance and inventory operations together for a nice breakfast at a local hotel. The conference room's walls were decorated with a sample of each pair of gloves, along with the name of the manufacturer, the distributor and the utility's purchase cost. We had barely given out team assignments before creative conversations began to take place. Engineers were pointing to three different pairs of gloves and saying things such as: “These all look and feel nearly the same, but this pair is $3.50 (CDN) less than that one and $2.75 less than that one. Why don't we just standardize on the lowest cost one?” Now, the technical name for this is a Kaizen event, but the truth was that a nice breakfast was the real trick.

What was the result? The client organization moved away from a non-standardized product selection involving 46 styles of gloves in five different sizes—that's 150+ different variations of glove pairs—produced by four manufacturers and purchased through three different distributors. After the standardization process, the utility firm's future state scope was only 11 different styles of gloves, produced by two manufacturers and acquired through one contracted distributor. This enabled the utility to drive out approximately 30% of its overall cost by leveraging its spend, and to secure special pricing at a manufacturer level, reduce distributor markups, reduce inventory SKUs and reduce inventory turns and re-orders.

Note that if we had just gone back to the market and re-bid the old scope of gloves, very little of significance would have occurred. As Albert Einstein is reported to have once observed: “The definition of insanity is doing the same thing over and over again while expecting a different result.” But in this case, standardization made the difference in positioning the supply chain team to make significant improvements.

What if your organization has standards?

The procurement team at Southwest has benefitted from decades-long consistency following the initial standardization of aircraft by senior management. But not every management team is so fortunate; many, if not most, have inherited non-standardized fleets and operating environments. This is especially true of organizations that have grown through mergers and acquisitions. There, the procurement team is often trying to support a non-standardized infrastructure embedded with variant versions of equipment, vehicles, hardware, software and all the associated permutations of critical spares, preventative and remedial maintenance parts, to name a few. Too often, this is the situation we find when first engaging with a new organization.

For example, I spoke with a chief procurement officer the other day whose firm produces complex medical diagnostic equipment for hospitals around the world. The firm prides itself on tailoring highly-engineered equipment for its clients. One of its most expensive multi-million dollar products has many options offered by the sales organization to hospital administrators, resulting in over 4,000 possible permutations. The variability in the final products has created a very difficult procurement challenge for this firm's team, something they hope to simplify through standardization in the future. In situations like these, we offer six tips for beginning a standardization journey.

1. Use standard marketplace offerings to the greatest extent possible for the products and services you acquire. The more you vary from industry standards, the higher will be your costs.
2. Look at related downstream costs. For example, a typical piece of electro-mechanical production or office equipment costs 20% of its original purchase price to operate and maintain each year when you include operator compensation, energy, consumable supplies and maintenance. That means that it costs as much to operate equipment over five years as the original purchase or lease cost. Failure to address all the elements of the total cost of operation at the beginning of the selection process will result in the inability to control those costs later on.
3. Lifetime ownership analysis. Apply total cost of ownership (TCO) or total value of ownership (TVO) analysis when determining and sourcing new standards. The former of these considers all costs associated with the acquisition, use and disposition of a product or service. The latter also incorporates the revenue aspects of a standardization decision. For example, if one manufacturer's model of materials handling equipment costs $250,000 while a competitor's brand costs $275,000 (10% more), the decision seems fairly simple. But what if the latter brand can process 30% more volume, thus facilitating a commensurate increase in revenue and higher output per operator labor unit? A true analysis cannot be made without considering the additional revenue impact from the standardization decision.
4. Make descriptions uniform. Especially if you have internal inventory listings or utilize supplier catalog details in your eProcurement tool, inconsistent naming conventions will complicate procurement activities and make standardization very difficult. Years ago, a major cruise ship company had separate inventory warehouses that supported different ships in its fleet. Each inventory had been built by separate teams, and thus identical items in six separate warehouses might have six variant descriptions and part numbers, for example, “large white T-shirt with blue company logo,” “white T-shirt, large, blue logo,” or “blue and white T-shirt.” Based on our recommendation, the firm utilized a catalog cleansing technology service to revise all of its part descriptions. These tools utilize Boolean search engine technologies, similar to what Google might do, to rewrite every product description in inventory listings at all locations. Standardization of the descriptions was done in less than a week and allowed the procurement team to better source and manage a much less complex listing of product items.
5. Consider alternative products. The lifetime cost of ownership for vehicles and equipment can often be greatly reduced by carefully selecting standards that utilize market standard replacement parts, consumable supplies and accessories. I recently helped a large city plan the purchase of several fire engines, including multiple hook and ladder and pumper engines. The city had been standardized on a particular brand of fire engine for three decades, but as we analyzed the lifetime cost data we brought some interesting findings to the team's attention. It turned out that the vehicle manufacturer cleverly packaged replacement parts in their own cartons with labels. But deeper research showed that many of the parts were re-labeled standard parts from chassis and the drivetrain manufacturer Freightliner and engine manufacturer Cummins. Getting the procurement team involved, we found that the fire engine manufacturer was charging as much as a 40% markup on these components. So we did two things: First, the procurement and fleet team aggressively identified preventive and remedial parts that could be cross-referenced to the base manufacturer's original parts and procured directly at a great savings; and second, as part of the contract negotiation for the purchase of the new fire engines, I drafted a clause that provided price protection on any replacement parts procured from the fire engine company in the future, capping the city's price for parts at 10% over the manufacturer's own cost. The best part about this clause was that the price cap applied to all purchases of replacement parts for the operational lifetime of all the manufacturer's fire engines, whenever purchased. These two steps retroactively made a great difference in the city's fleet operating costs because it has 300 of the manufacturer's vehicles in its fleet.
6. Build standards into requirements for engineered CapX projects. When companies and governmental agencies do major expansion projects, it's common to have an engineering or architectural contractor run major projects. These might include facility construction, factory expansion, the re-vamping of a production line or plant turnaround projects. Too often, the people who will support the completed infrastructure or solution aren't involved in the initial design and selection of components. It is much better to involve procurement and maintenance employees in the project so that standards for equipment and vehicles can be built into the initial requirements documentation and designs and the larger organization is positioned for commonality with other fleet elements and locations. That way, they don't end up supporting different versions or configurations of production line equipment, vehicles, computer hardware, HVAC equipment, elevators, point of sale hardware, conveyor and racking systems and forklifts. Advance involvement can ensure that consistency is maintained across the entire organization.

Get standard

Standardization is not just a methodology used to reduced cost, but a pillar of many top-performing organizations. Standardization also results in the improvement of process efficiency and quality. Quality management methodologies such as ISO 9001 (issued by the International Organization of Standardization [ISO]), Six Sigma and LEAN all incorporate standardization of work processes into their methodology as critical elements. The Toyota Production System, from which LEAN originated, relies heavily on standardized work processes, yet according to some experts standardization is one of the least applied LEAN methodologies. It's a logical conclusion that work processes cannot be uniformly standardized unless a inconsistent variety of equipment, vehicles, supplies and tools are being utilized across an enterprise.

On the procurement and operations side, standardization of procured products and services is integral to outstanding results in cost reductions, inventory consolidation and operating efficiency. Try becoming standard in order to achieve extraordinary.

A surprising number of procurement leaders fail to understand significant benefits that result from “standardizing” the products and services for which they are responsible. But,there are at least six ways that supply management organizations can exploit standardization to capture cost reductions and improve supply chain performance.

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