Supply Chain Cost Management
The AIM & DRIVE Process for Achieving Extraordinary Results
Author: Jimmy Anklesaria
Pub Date: October 2007
Print Edition: $39.95
Print ISBN: 9780814438459
Page Count: 256
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The Eight-Step Process: An Overview
Let's take a brief look at the overall AIM & DRIVE process, step by step (Figure 2-3).
Step 1. Agreeing on the Need to Manage Costs through the Supply Chain
Let's not waste precious time developing a strategy if it's only going to gather dust on a bookshelf. Before going further you've got to ask yourself: "Am I interested in managing costs through the supply chain, thereby becoming more competitive, along with my suppliers and customers"? If the answer is "yes" you are ready to proceed with the rest of the steps. The first step involves selecting your project, putting together a cross-functional team that includes your key supplier/s as well as internal and external stakeholders, and determining the goals of the team from different perspectives. You've got to start identifying like-minded companies in the supply chain as soon as possible. And you've got to start leading the supply chain in the AIM & DRIVE process right away. At least before other competing supply chains get their act together.
Step 2. Identifying Critical Costs in the Supply Chain
A cost that is not understood is a cost that is hard to manage. The second step involves understanding the supply chain cash flow. Money enters the supply chain only once and it's the job of the cost management team to determine how cash flows through your company and your supply base. While many companies prefer not to discuss cost breakdowns with their customers, this step is a true test of a collaborative relationship. No one expects a full disclosure or "open kimono." However, unless one understands where costs are incurred in a supply chain, it becomes increasingly difficult to determine which costs are critical and therefore require more detailed analysis.
Step 3. Measuring Secondary and Tertiary Costs
Once costs are identified through the supply chain, the next stage is to apply a measurement process to each major cost or subcost. This is by far the most difficult part of cost management, yet a very critical one. Remember, a cost that is not measured is not managed. The question is: what is the best method to measure costs? Since traditional and, to some extent, even modern cost accounting systems have failed to help the users of those systems to "manage costs," we'll use a commonsense approach called Formula Based Costing that I invented only because I was so frustrated with the existing cost accounting systems. This will be explained in greater detail in Chapter 5.
The objective of Formula Based Costing is to generate a list of cost drivers through the use of algebraic equations. A cost driver is a measure of an activity that causes a cost. A driver represents a "causal relationship" between an activity and a certain cost. This means that a change in a given activity should result in a change in the cost that is driven by that activity.
Step 4. Defining Key Cost Drivers and Developing Strategic Options
The most difficult part of measuring costs is to extract a list of cost drivers. Once this is accomplished in Step 3 of the process, the next step is to select one or more drivers as key cost drivers. Selecting a driver as a key cost driver can be done by a cross-functional team, either by observation or by using a matrix described in greater detail in Chapter 6. Attention is then focused on developing a list of strategic options for the selected drivers. Strategic options tell us what makes the value of a cost driver change. This is, in effect, your databank of ideas.
Step 5. Reducing, Changing, or Eliminating Activities That Cause Costs
Costs do not disappear with the wave of a magical wand. Having defined the key cost drivers in Step 4, you need to take the list of strategic options and create strategy statements. Each strategy statement is then put through a rigorous risk-benefit analysis from different perspectives in order to identify potential strategies. Strategies are plans that are practical and implementable. They do not have to be complex or sophisticated in order to be effective. A useful strategy would be to reduce, change, or eliminate one or more of the drivers. The discussion should center on the implications of a change in a given activity. If costs are to go down, certain activities have to be eliminated or reduced. Otherwise, these costs will merely be moved to another account head or redistributed by the creative accountants of the world.
Step 6. Implementing an Action Plan
Developing an implementation plan is as critical to the cost management process as identifying a strategy and writing a strategy statement. While strategies are ideas, implementation plans are a means of converting those ideas into action. This stage involves listing the actions required for each strategy statement. The action plan consists of determining who will do what, how, and by when. Yes, even executives in industry need to be "organized" in order to successfully achieve the benefits of cost management. Why? Because it's so easy to abandon a project at this stage and go on to fight other fires.
Implementation plans, obviously, aim at successfully implementing a given strategy. It is the height of optimism to expect that all strategies will be implemented without a hitch. Murphy's Law (what can go wrong will go wrong) tends to apply from time to time and put a spoke in your wheel. It makes sense, therefore, to add another dimension to your implementation plan. This requires the creation of contingency plans: alternative strategies you will implement if your goals cannot be achieved by the proposed strategy.
Step 7. Verifying the Plan with Cost Monitors
All too often, good strategies do not realize their true potential. You may wonder why not. Perhaps a better idea came along. Not likely. In my experience, plans that fail do so because no one bothered to verify and monitor the process. The purpose of verifying the plan with cost monitors is to make sure that actions are not measured based on mere completion of an item on an action list, but by measuring the impact of change on the value of a given cost driver.
Step 8. Eternally Improving and Leveraging the Process
Cost management is a journey, not a destination. And the journey, like that of Total Quality Management, never ends. If the process of cost management, spelled out in the seven preceding steps, works successfully on a set of critical costs or subcosts, then it's time to start again on other costs, cost drivers, or strategic options. There's no time to stop and smell the roses. Remember that there's no patent on improvement. If you are successful, your competitors will be on your heels, putting the same strategies into practice. So, there's no time to lose; keep the wheels of cost management moving faster than those of your competitors.
Preparing for an AIM & DRIVE Exercise
It is vitally important that adequate preparation be made before conducting an AIM & DRIVE Cost Challenge. I call it a Cost Challenge because the process is designed to go beyond negotiations in order to take cost out of the supply chain. Too many times teams have gone through the process, appreciated its value and the methodology but regretted that they chose the wrong project, brought the wrong supplier, failed to get the right stakeholders from their own company, or did not come prepared with the right information. In order to make sure that this does not happen to you and your team you need to:
Obtain buy-in from top management. Top management commitment and support to the AIM & DRIVE process is critical for the success of the initiative. In Chapter 10 we will address the level of participation that is required from various executives. Not only must there be a strong message from the company's leadership but personal presence as well. It is all about "walking the talk." Employees and suppliers are burned out with the number of "fads of the month" that they are expected to follow. A Supply Chain leader who expects to play a central role in executing the AIM & DRIVE process should make it a point to have a meeting with the CEO, CFO, and other executives, show them the advantages of a collaborative way to take cost out of their product or service, and indicate to them the level of support required to make this a success. He or she should also do the public relations round with the heads of Research and Development, Marketing, Operations, Engineering, and other key functional departments. After all, the success of AIM & DRIVE is driven in large part by who attends the strategy-building session and you want to make sure that there is cross-functional representation on the team.
Select key categories and top suppliers for each category. The question that seems to crop up time and again is, which categories are best suited for an AIM & DRIVE exercise? There is not a single category that I have seen that cannot use the process in some form or the other. Just when I think I've seen it all, something comes up that pleasantly surprises me. For example, once at Deere and Company I got a team of health practitioners working with Deere to reduce the cost of health care in general and cardiac cases in particular. What a wonderful session that was. Having doctors, surgeons, and administrators giving us ideas on how to reduce the rate of incidents and the importance of preventive medicine was a lesson for all of us analytical folks. Companies that have successfully implemented AIM & DRIVE have done so because they first determined which categories to start with; they put a few successes under their belts and then rolled out the other categories. For each major category or subcategory it becomes necessary to choose the right supplier to attend the strategy-building session. Supplier selection can be made based on the volume of business with particular suppliers or on the level of the relationship. Some large suppliers are reluctant to share cost information or cost savings ideas with most customers. A smaller supplier, on the other hand, may be hungry for the business and willing to do what it takes to get it. In many cases I have noticed that smaller companies tend to send people to the AIM & DRIVE session that are decision makers and very knowledgeable about the operations of the company. Many times it is the owner or founder who is part of the team. Larger companies will tend to load their team with global account managers, regional account managers, customer relationship managers, and sales folks who, with due respect, may not be ideal for coming up with breakthrough solutions. If the objective is to harness the inherent knowledge of the extended enterprise, it makes sense to invite more than one supplier for each major category or subcategory. Some companies may select two key suppliers per category; while I have seen others select as many as a dozen. IBM invited fourteen key suppliers for air, ocean, and ground transportation to attend an AIM & DRIVE workshop in Guadalajara, Mexico. At first, I was a bit taken aback to see competitors in the same room. But they understood that, as preferred suppliers to IBM, they had to work together to help IBM streamline its logistics processes—and AIM & DRIVE was the process we would use to make this happen. The response was phenomenal and I have yet to see so many companies providing such a wonderful list of valuable ideas in front of their competitors. They all realized that they were working for the same customer. So, selecting the right supplier and having them send the right people are a must if you are to successfully implement an AIM & DRIVE strategy. And, yes, those right people must have the right attitude too.
Brief customer/supplier team leaders. Having selected the categories and suppliers for an AIM & DRIVE exercise, it is necessary to brief the leaders of each of these categories and supplier representative. Gene Richter always made sure that the leadership of IBM's key suppliers was invited to a half-day meeting along with the leaders of the Commodity Councils that were required to build their respective cost management strategies. He would address the meeting with a clear signal to all invited suppliers that IBM was looking to them for help in providing the best solution to its customers. Cost was mentioned as an important differentiator along with technology, quality, delivery, service levels, and so on. I would then give them a quick overview of the process, expectations, and time lines. We ran a case study so that both IBM-ers and suppliers got a hands-on experience of the process and could relate to it when they determined which topic to choose and who to bring along to the AIM & DRIVE session. Today, few companies are willing to fund such meetings so we resort to teleconferences where suppliers and team leaders are briefed about the expectations and given an overview of AIM & DRIVE.
Determine resource requirements. A company must go into the AIM & DRIVE process with its eyes open and a full understanding of the resources required to make it happen. If you want to do it correctly you need to come up with the budget for a team to get together and have the right people present. The supplier has to agree on this as well. There is no point scheduling a face-to-face meeting between a buyer and salesperson when both companies want to save on travel costs. If that's the issue, it is better to do the whole exercise over a teleconference with the right people in attendance. As technology improves, teleconferencing is becoming more and more popular. I still maintain that there is nothing better than a face-to-face meeting, especially for the first session. However, I understand the demands on people's time and the budget constraints they face. A major electronics manufacturer asked me whether I would help roll out AIM & DRIVE across the global categories within a two-year time frame. Suppliers and category teams were spread across the globe but mainly in the United States and Asia. In the same breath I was told that the company had a freeze on travel so they could not send engineers to the meetings if it involved travel. We tried one in China without the key engineers who were in the United States. It was a disaster. Realizing the importance of having the right people present, I offered to fund the travel budget of three or four key people, provided the team would be given 2 percent of the savings from their strategy to fund the rest of the program (and reimburse me, of course). They took me up on my offer and in the very first Cost Challenge with a supplier of batteries, the team realized savings of $9.7 million within four months. The Vice President of Supply Chain managed to convince the CFO that 2 percent of that amount should be reinvested in the team and the rest of the program. This fueled the engine and in less than two years the company had documented savings of over a billion dollars. No one ever questioned the budget for travel for AIM & DRIVE programs again. Again, it takes the commitment of monetary and human resources to successfully implement AIM & DRIVE. Think seriously about this commitment before you launch on the journey.
Educate participants in the AIM & DRIVE process. With executive buy-in, key categories and suppliers selected and briefed, and the resources committed, it is time to educate the team members in the AIM & DRIVE process. I've seen this done a couple of ways. One would be the approach followed by TI, IBM, Kodak, DuPont, Deere, Mercury Marine, Hewlett-Packard, Agilent, Philips, and others. These companies held two-day events where between four and eight supplier teams were invited to participate. For about two thirds of the first day I went through the AIM & DRIVE process and templates, gave a lot of examples, and had everyone do a case study to get used to the templates. Then the teams went to their respective breakout rooms to begin applying the process to their project. At the end of the second day we would bring the teams back together for a presentation to the executives and the rest of the class. Sometimes if teams felt uncomfortable sharing their strategies with competing suppliers present, we had the individual presentations in the breakout room or the competing supplier was asked to step outside during the general session.
Nordstrom, Motorola, Nokia, Chevron, Anglo American, and a few others held a one-day training session followed by a gap of a few weeks and then held one-on-one Cost Challenges with the suppliers that attended those training sessions. This obviously took more time and resources—but the level of detail was substantially higher.
With this book, there should not be a problem of educating the teams. By the time you have read the whole book you should be ready to actively participate in a Cost Challenge using the AIM & DRIVE process. The next eight chapters will take you through the process, step by step. Let's roll up our sleeves and get into the AIM & DRIVE process of collaboration to take cost out of your supply chain.
Checklist for Preparing for an AIM & DRIVE Exercise
Chart out where you are on the journey from leveraging volume
to leveraging ideas.
Determine whether you are ready for an AIM & DRIVE exercise.
Make a buy-in presentation to top management.
Select key categories and top suppliers for each.
Send invitations to stakeholders and key suppliers.
Brief customer/supplier team leaders on the AIM & DRIVE process.
Determine resource requirements (both monetary and human).
Schedule strategy sessions.
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