Published on March 7, 2014
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 Internal threats and external threats are constantly rising and falling, Risk assessments are often outdated and lagging.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.
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
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)
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.
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.
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: ____________ ___ State: __________ 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) Credit Card Type: □ Visa □ Amex □ MasterCard □ Discover □ Diners Club Credit Card Number: ______________________Amount to be charged: US$___________ CVN #: _______ Expiration Date: ______/______ (month/year) Name of Cardholder: ____________________________ Cardholder Signature: ______________________________ 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 email@example.com or phone at 800/888-6276 or 480/752-6276, ext. 3069.
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