Data Is Queen: Knowing How to Use It Is King Kevin J. Williams, C.P.M., Manager – Global Technology Solutions/Six Sigma Green Belt American Express Corporate Services 877/296-5784; kevin.j.williams@aexp.com 90th Annual International Supply Management Conference, May 2005 Abstract.This paper supports a workshop to be held at the 90th Annual ISM International Purchasing Conference to be held in San Antonio, TX from May 8 through 11, 2005. A large number of data resources have been developed to provide key decision makers with the information needed to advance their businesses. However, despite efforts like ERP systems, e-Sourcing tools and even Procurement Cards, the information has created more confusion than results. This session will establish different uses for information. Such categories may include areas such as audits for compliance, risk mitigation, supplier negotiations, process improvement and performance tracking. From there, the available sources of data and specific useful metrics will be provided. Finally, the best ways to assemble and communicate the information will be provided. Uses for Information. There are many ways information has been compiled by Supply Management professionals in order to evaluate, adjust and improve their enterprises ability to improve the bottom line. Some have succeeded in these efforts, while others have struggled to make a difference. The bottom line is that unless information gathered causes someone to change their behavior, the information will not provide the maximum amount of value possible. In order to adjust behavior, information is typically used within one of these categories: Compliance – In general, this category is about verifying compliance with an enterprise’s expense policies. Data in this category is generally expected to be delivered in an unedited format, and also allows for easy identification of items which require further investigation. Risk Mitigation – This category assesses two critical areas to Supply Management, Security of Supply and Security of Funds. Security of Supply determines how stable your supply base is, and whether or not you need to ensure backup sources are available. Security of Funds determines how much of your money is at risk, and what trends may be present which increase or decrease risk. Supplier Negotiations – This category includes data which assists the Supply Manager in negotiating improved rates, terms and conditions with their supply base. Process Improvement – This category provides data which reflects processes which may be inefficient and in need of change. Performance Tracking – This category gives the information needed to determine whether or not Supply Management (individually or as a function) is meeting the needs of the enterprise.
In this presentation, we will look at each of these categories, determining what information may be needed, potential sources to locate it and ways to format and publish the results for effectiveness. Reverse Engineering Data. In his best seller “The Seven Habits of Highly Effective People”, Steven Covey identified habit # 2 as “Begin with the End in Mind”. This habit really should be the focus of any data collection effort. When determining the “best reports” to use, Supply Managers should be envisioning what type of information they will need to change the current state. The following are some questions which your data should be able to answer for each category: Compliance - What does the current expense management policy dictate? How do spending patterns compare with expected business patterns? Risk Mitigation – What is your supplier’s current financial condition? How do their suppliers view their current condition? Supplier Negotiations – What is your current mix of suppliers by commodity? How is your spend trending vs. the pattern for the commodity overall? Process Improvement – What is the best your current process could be? How do you measure up against the best? Performance Tracking – What are your customer’s expectations? How are you currently performing against that standard? Based on the answers to these questions, you can improve your results in each of these areas. Once you know the questions you need answered, you can now investigate the ways to gather and study the data. Sources and Metrics. When identifying information available to you, there are three main components you need to understand. These include data sources, attributes and metrics. Sources – Data sources exist in many areas. The key is locating the right source for the type of analysis you are performing. The following are some sources of data based on the analysis category involved: Compliance – For this category, you need comparative data. Start by gathering policy and procedure documentation, such as a Supply Management Policies and Procedures Manual or your Travel Policy. For comparative data, identify sources from your Financial, Procurement and Travel systems which gather data related to your policies. In addition, work with your Expense Management providers (EDI, Commercial Credit/Charge Cards, e-Procurement, etc.) to determine data availability from their solutions. Risk Mitigation – For this category, you need benchmark information on financial performance. Use applications commonly available via the Internet such as finance.yahoo.com, hoovers.com and DCMA’s Risk Assessment and Management Process located at http://guidebook.dcma.mil/5/guidebook_process.htm to provide your baseline. Determine
whether or not your enterprise has contracted with services such as Dun and Bradstreet, creditriskmonitor.com, TRW or others for evaluating your customer’s financial status. Obtain access to the same solution for the Supply Management function so your area can capitalize on services already being provided with little to no incremental cost. Supplier Negotiations – For this category, strategic commodity data is required. Internally, existing no cost sources include not only your Supply Management system, but also more importantly your Accounts Payable system. Since AP captures all spend data (including maverick spend and payments not coordinated through procurement), this data can be viewed as a more “total picture” of your opportunities for improvement. Externally, your Expense Management providers (as defined above) should work with you to establish reporting which will assist you in determining your best commodity targets and how to establish your opportunity. Process Improvement – For this category, the best approaches use a structured methodology. If your enterprise has adopted core concepts such as Lean, Six Sigma or ISO these tools should be applied against your existing Supply Management practices. Even in the absence of formalized programs, basic elements such as Process Maps, Fishbone Diagrams and Project Plans should be used to identify opportunities for Process Improvement. Performance Tracking – For this category, you again need comparative data. To determine successful performance, you need to be able to compare customer expectations with actual performance. To begin, gather your customer requirements through the use of a tool such as a Quality Function Deployment (also known as a House of Quality). This tool allows you to display your customer’s requirements, and then to identify the relationship between your measurements and the requirements you are trying to fulfill. Once you have established your data sources, you need to document the two main components of data analysis. These include Attributes and Metrics. Attributes are categories of data. In essence, they address the question “how do I want my results totaled by?”. Examples of Attributes by category include: Compliance – Totals by Business Unit, Department or Individual. Totals by Region (Europe vs. North America for example) or by Country. Totals by Commodity Category. Totals by Supplier. Totals by General Ledger account. Totals by Preferred vs. Non-Preferred Suppliers. Risk Mitigation – Totals vs. Industry Standard. Totals vs. Top 3 Competitors. Totals vs. prior year, quarter or month. Supplier Negotiations – Totals by Commodity Category. Totals vs. prior year, quarter or month. Totals by product or service provided. Process Improvement – Totals by Business Unit, Department or Individual. Totals by Region (Europe vs. North America for example) or by Country. Totals by Commodity Category. Totals by Supplier. Totals by General Ledger account.
Performance Tracking – Totals by Customer Category. Totals by Specific Customer. Totals by Supply Manager. Metrics are the actual data you are reviewing. They address the question “What results am I going to analyze?”. Examples of Metrics by category include: Compliance – Percent of Spend within Policy. Net Billed in Commodity Category. Number of Transactions in Commodity Category. Risk Mitigation – Price to Earnings Ratio. Stock performance (increase or decrease). Total Sales. 1, 3 and 5 year growth pattern. Number of Employees. SG&A Expense. Net Profit Margin. Supplier Negotiations – Net Billed. Number or Transactions. Average Spend per Transaction. Process Improvement – Days of Cycle Time. Hours of Labor. Minutes of System Usage. Percent of Time Reworked. Performance Tracking – Days of Cycle Time. Number of Errors. % of Budget. Formatting Data. Once you have gathered your information, you need to next establish ways to format the information in a way appropriate for the audience. Start by aligning the data results with the question you were trying to answer in the “Reverse Engineering” phase. Once you have determined the “story” that the data tells, you can compile your results and lay them out so you can communicate your recommended course of action. Because so much effort is invested in gathering information, the first tendency is to include everything you’ve gathered in your results. You need to ensure that you don’t give in to this urge. Your audience does not want to perform the same analysis you have just completed. They simply want to know what your results were and how they can trust your information. Start by developing an outline using your final recommendation at the top level. Drill down from there, identifying the top three to five pieces of information that led you to the final recommendation. Conclude the outline with the next action steps that will be required to achieve the final recommendation. For example, after reviewing Compliance data, you determine that you need to better align and promote your agreements in the Limousine/Black Car Service category. The reason is that in the Metro New York area, your preferred supplier is only receiving 27% of the total spend in the category. In addition, total usage is spread across nearly two dozen suppliers so that no one provider has enough market share to encourage further discounting of rates. Finally, the Cost Center that uses Limousine services the most has spent 65% in this category with one supplier, yet that supplier is not your preferred supplier. Based on this analysis, your recommendations are to talk with the Cost Center manager with the highest usage to determine their reasons for using the provider they use. Based on the information you gather, you will refine your customer requirements and determine which
suppliers can meet those requirements. You will next negotiate with your final “short list” to exchange increased market share for lower pricing. Finally, you will develop as communication plan to ensure that employees will take full advantage of the new rate structure by using only preferred suppliers. Publishing Results. Now that you have organized your information, you need to establish a communication plan which will ensure that your recommendation is adopted. As I stated at the beginning of this document, the bottom line is that unless information gathered causes someone to change their behavior, the information will not provide the maximum amount of value possible. In order to change behavior, you need to communicate the results of your analysis in a compelling way to those that will directly impact the current process. Your communication plan should identify three key components: 1. Who are the key players in this process? 2. What is the direct benefit to the key players? 3. What are the best ways to get the key players to change behavior? In the Limousine example, your communication plan needs to target the employees in the Cost Center that uses the service the most. In shifting most if not all of their business to one supplier, those employees will gain improved service from the preferred supplier. These might include things like cars that will wait longer upon pickup for no additional wait charge, their preferred newspaper waiting for them in the car or free in-car cellular calls. In addition, the lower rates will help their Cost Center’s budget stretch further allowing them to use the service at any appropriate time without fear of scrutiny over usage of the budget line. You determine that the best way to adjust behavior is to create a small Traveler Support laminated card that travelers can insert in their wallet or purse. The card would include key travel numbers (such as the travel agency, key airlines, your Expense Management provider, etc.), and would have the preferred Limousine provider for your top 5 cities listed to make it easier for them to comply. This card would be distributed with an internal “splash” publication that would highlight the traveler benefits noted above. Data from your analysis could be used to reinforce key points as needed. Conclusion and Summary. Ultimately, you will need to use your original Attributes and Metrics to determine whether or not your desired change is occurring. Be sure to set up a regular monitoring schedule (monthly is generally best) which will allow you to track your results. If your recommendation has not resulted in the desired impact, you will then need to reassess your data to determine other factors which might be impacting your results. If you develop a picture of what questions you need answered, identify the best sources of data for that need, format your results effectively and publish your results, the end result will be a significantly positive impact on your bottom line!