Welcome to What the Duck?! A podcast with real experts talking about direct spend challenges and experiences, and now here’s your host, SourceDay’s very own manufacturing Maven, Sarah Scudder. Thank you for joining me for What the Duck?! Another Supply Chain Podcast brought to you by SourceDay. I’m your host, Sarah Scudder, and this is the podcast for people working in the direct materials part of supply chain. I’m @SarahScudder on LinkedIn and @SScudder on Twitter. If you are new to the show, make sure to follow this podcast so you don’t miss any of our direct materials supply chain content. Today, I’m going to be joined by Anna McGovern, and we’re going to discuss how to do value stream mapping with your suppliers. If you work for a manufacturer and are struggling to maximize value and minimize waste, then this episode is for you.

Anna has been in supply chain for over 30 years and has spent over half her career managing direct spend in consumer package goods, beauty, food, and beverage industries. She’s been responsible for rigid and flexible packaging, chemicals, and ingredients, and I have known Anna personally for at least three years, and we actually got to meet in person at the end of last year at the Procurement Foundry conference in Vegas, which was an absolute highlight of my year. So welcome to the show, Anna. It’s great to be here with you, Sarah. Always a pleasure. 

So you have a new addition to the fam. I’m following all of the photos and adventures on Facebook. Tell me about Sesame.

Sesame is our new rescue. We got him the day after Christmas. He was rescued from Texas, one of the kill shelters. So his mama was the one who was rescued. She gave birth to a litter of eight male puppies, and from what I understand, he was picked on by his brothers, and he kind of just gravitated to us. His name was given to him by the shelter. They were all named after seeds. He’s tanned, so he was called Sesame, and the family voted to keep the name. And he’s a little terrorist. He’s ruling our lives right now in that puppy stage, but we love him. My parents got a golden retriever-only family. That’s the only type of dog they’ve ever had, and they got a puppy a couple of years ago. And I warned them. I said, “It’s like having another child,” and they were exhausted. I want to say for the first six months, sleep-deprived. So I can relate, yeah.

So you also have a passion for sports. Why the Yankees?

I live in Connecticut, but we’re in the part of Connecticut, Fairfield County, which is much closer to New York. So, in fact, I lived in Connecticut for years and commuted to Manhattan on the train and worked, but the Ain’t. So it’s either you like the Mets or the Yankees. Connecticut is one of those states that’s split. You can have husband against wife, brother against brother, and so on. So we’re Yankees fans. A lot of people are Red Sox fans and Mets fans here, but I grew up with a Yankee cap on my head, so that’s why I love the Yankees so much. And my boys, I’ve got two baseball kids, and we’re all rather passionate about baseball but New York Sports in general. So not a divided family. You guys are all Yankees fans.

Yeah, my husband is from Iowa, and he grew up spending a great deal of time in the DC area, so he was a Baltimore Orioles fan. We’ve properly converted him, though.

So, one of the things that I admire most about you is you’ve had a very big demanding career, but you also have an incredible family, and I don’t have children, but I admire people who do have children and work. How did you raise such gosh darn amazing kids? There’s always a debate. I ask myself that all the time. Is it nurture or is it nature? I suppose my husband and I had something to do with it regardless, but honestly, I think they were just God ordained. We’re just caretakers. I can’t understand where they got their brainpower because they are very smart. My oldest son is now at the Johnson Space Center in Houston doing a NASA internship. My younger son is choosing between Lockheed Martin Missiles Control in Orlando and Argonne National Laboratory in Chicago, so both very smart boys. My husband had a lot to do with it, and it’s teamwork, really. So yeah, we’re very blessed. I enjoy following the college adventures, and I always like to see parents transition into the empty nester phase. Not everybody handles it as well as you have. Yeah, it’s not easy, but we’re adjusting.

So how did you land in supply chain accidentally? I wish I could say it was planned, but it was the best thing I’ve ever done. I was a psychology and a philosophy minor in my undergrad, and somewhere along the line, it dawned on me that I’m gonna have to go to school forever in order to make above the poverty line in the way of compensation. So I started to take marketing classes, and then when I graduated from undergrad, I took a customer service role in an industrial manufacturing company that was making thermoformed plastics and other high-performance plastics. And I took a job in customer service, and then from there, I moved into manufacturing and started doing material planning and scheduling. And that was sort of the start of my supply chain career. And then a few years later, I got recruited into Unilever, where I spent the next 23 years of my career. And so I fell into it and I loved it. And what I loved about it, especially once I got into consumer packaged goods, is I could see the fruits of my labor. I could go to the supermarket and I could see that laundry bottle or that personal wash bottle or that tub of ice cream that I worked on. In fact, funny story, I was at a club store once, and I had Magnum ice cream in the basket that I had shopped for, and the guy who checks the receipt says, “Wow, that’s like my favorite ice cream.” And I said, “Thank you, thank you very much.” And he goes, “It’s not like you made it.” And I was like, “As a matter of fact, I’m the one who brought this to market.” And I explained the story because I worked on ice cream for like three years. Best job in the world was doing ice cream innovation from a supply chain standpoint. But that’s what I love about the supply chain. I never looked back since. So there is an awesome homemade ice cream company in Austin called Amy’s Ice Cream. It’s been here for years, and they have several locations, and it’s like the go-to ice cream place in town. So yeah, there’s one actually right next to our office. So I’m a big fan.

So this was not planned at all, but our podcast guest from last week was Rachel Hassall, and you were her second, I think, boss at Unilever. Yes, yes, she was one of the highest potential people I’ve ever managed. I knew she was going to go great places. This is when I was managing procurement globally for personal care. She had come to us from packaging development. She started in R&D and found her way to procurement and you’ll find that happens a lot because of that that close-knit connection about materials. And we’re talking value stream mapping today and this is the theme R&D working with procurement – hand in glove and then that third part of the triangle is the supplier, that triumvirate, procurement R&D. And supply base is what creates the magic. That’s where the magic happens. Right there. Those three working on design for value and Rachel could see that she was in packaging development and then she could see that and made the transition to procurement. Yeah I mentioned your name and she was, “oh my goodness, she was an amazing boss. She was nice.” And I said,” she’s coming on the show next week actually.” So perfect planning for me back to back guests.

So you were at Unilever for about 22 years, and then you left and ran procurement for an organization called Arcade Beauty. Yeah, so what would you say? And then you transitioned into a non-profit. So kind of a very interesting big company because systems and processes into more of a smaller organization than into non-profit world. What would you say over the course of those three roles that you held, what was your most important takeaway as it comes to direct materials procurement?

Every career highlight that I’ve ever had, whether I’ve been on the supply chain side or the procurement side, has included working with suppliers to deliver great value. So when you think about direct spend, it’s a that is the largest part of the cost of goods no matter what industry you’re in. Right, direct materials are going to be more than half your cost of goods because when we’re in discrete manufacturing or when we’re in product manufacturing of ever any kind, we’re bringing in materials, we’re adding value to them through the conversion process, and then we’re shipping them out and selling them. So that’s an extremely important piece of the puzzle. And when you think of Black Swan events like pandemic, okay, and when you think of supply disruptions like Ukraine war, what is that magical formula for supply chain resiliency? It’s always about Supply continuity, right? And it can’t work unless your supply base is part of that equation, right? And that is part of the overall Network because when you start talking everybody throws around, you know, the supply chain. What does that really mean? The supply chain is your customers, it’s your distribution facilities, it’s the manufacturing piece of the chain, it’s tier one, tier two, tier three suppliers, okay? Just to give you an example, if I am a consumer goods, if I make laundry bottles, right? And let’s say ice cream, or ice cream. Okay, but let’s stick with laundry for a minute because that’s okay, we can talk.

Let’s talk mayonnaise because this is pertinent. This is pertinent to what’s going on today. If I’m a manufacturer of mayonnaise, what is the key ingredient in mayonnaise? It’s eggs, okay? What’s happening today? Has anyone been to the supermarket and tried to buy a dozen eggs? Price has doubled. Why? Because there is an outbreak of avian flu and as a result, millions of hens have been euthanized. So eggs are in short supply. So how do you secure eggs, right? If you don’t have those close strategic relationships with suppliers so that you get your material direct materials, right? It’s a key ingredient, it’s a fundamental ingredient, right? I was going to use a laundry example to say I buy laundry bottles and suddenly if there’s a refinery that catches fire in Houston or in Galveston, Texas, and the refinery goes down, that is about three or four steps outside of the supply chain that is going to directly impact me, right? Because bottles are converted from resin and resin is made from oil, right? From crude oil, and that refinery going down just had a direct impact on my supply chain and my ability to procure plastic bottles.

This is why value stream mapping is so critical. Because what you’re doing is so many companies just their forecast to their supply base, is let’s cut a purchase order right? And that’s the forecast. This is the first time a supplier will see it here’s my purchase order and, by the way, can you ship me products next week? And no because my lead time is six weeks, right? And then the PO changes happen and you got the man the manual emailing back and forth of changing the POs and this is where a company like SourceDay comes in to create value, right?

How do you minimize that PO disruption but it really is about working proactively from a direct spend standpoint? Understanding where you spend your money. Understanding that value chain, right? So you’ve got to map it out, if I… it’s like I make Magnum ice cream, I make Breyer’s ice cream. Let’s say you know that ice cream is made up of a cardboard tub, right? It’s made up of a cardboard tub. It’s made up of eggs and vanilla and sugar and milk. All of these commodity ingredients. So if I trace, if I break it down to its individual components, including the printed ink that’s on that carton, if I break it down to all of the components, what you’ll find sometimes, if you don’t have a proper understanding of the value chain, a single ingredient that’s meaningless could shut you down. So, what you need to do is you need to break this. So you take your finished product, you break down the individual components, and then you have to map them all the way through tier 2. At least tier 2 supply base so that you understand where is the product made. What is the sourcing map look like. So, I make it so I make Breyer’s ice cream in the middle of Missouri let’s say and then my suppliers are in this geography.

If this plant goes down, like if my nearby Missouri St. Louis Factory supplier goes down, where else can I get that same ingredient or that same packaging material? It’s also made in Indiana, let’s say. So you map it out, and along the way, you identify the risk, you identify the waste, you put in the safety valve to say if plant A goes down for whatever reason, I can source from plant B. Avian flu in the U.S. means I have to go to suppliers in Europe for eggs, right? You look at that, you map that out, you put in your alternate materials, alternate specs, you put that direction in. But then at the same time, you realize you’re tracing the flow of information because that is where most of the waste is. Think of a four-man relay race, like a four by 100 relay race in track and field. What is the most critical part of that race? It’s the handing over the baton. You’ve got one guy sticking his hand out, the guy behind him is trying to properly place that baton in his hand. You can’t let go unless you feel that there’s a direct connection, and now he’s firmly got the baton, you can let go, release him to run the race. That is where you lose most of the seconds in the race. So you’re identifying the waste in the stream, and it’s usually those handovers where most of the waste happens. And that is where you have the opportunity for continuous improvement. So it’s internal and external, and this is how you work on continuous process improvement with your supply base. That’s why it’s so important to do it together with them, because you’re understanding how we give them information and where they can improve and where you can improve, so that it’s creating win-win opportunities for both you and the supplier on the material spend, the direct material spend.

So a lot of our listeners work for small and mid-sized manufacturers, yeah, and what you said could seem overwhelming and like a lot of work to do value stream mapping from start to finish for every touch point, every key point in the supply chain. So do it, ask the question, so how do I prioritize and figure out where to start if I want, if let’s say I don’t have a value stream mapping process in place and I want to get started and I have a small team with very limited resources, right? So you’re not going to do this for every piece of the business forever, that’s the key thing I wanted to call out and highlight. I’m going to do this for your top spend, most critical, most strategic items, right? The things that run your business, the things that impact your revenue the most, right? And you’re going to crawl before you walk, and you’re going to walk before you run.

So, you start with, let’s call it, a top 10 list. Right? Top 10 direct materials that you know you would basically be shut down if you didn’t have. If you start with just that, I will bet dollars to donuts that your top 10 materials, no matter what size business you’re in, whether you’re a $15 million dollar assembly shop making testing equipment, or you’re a $4 billion dollar chemicals company, the process theory is the same. The execution is a little bit different because you have to start with the resources that you have, but in every case, if you look at your top 10 materials list, chances are you’re going to cover anywhere from 60 to 80 percent of your spend. Yeah, one important thing to note is when you stay at the top ten, it doesn’t necessarily mean it’s your biggest spend. You could have a supplier where your spend is not significant, but it is an absolutely critical part, and if you don’t have it, it would shut down your production line. So, I think it’s important to not only look at how much you spend with a supplier when you’re developing that ranking. So, it brings up a good point because what you want, if you’re specifying materials at the start of the chain, you don’t want to be sourcing products. This is why it’s such a critical important relationship with R&D because R&D will specify, and they’ll do a Google Search and say, ‘Let me, I work in North Carolina, and I found this part in Wisconsin, I’m just going to source it from Wisconsin.’ Meanwhile, there’s a guy in Charlotte around the corner that can give you the same specification at a much lower price because it’s not designed to go to the moon, it’s around to be a bicycle ride around the corner. This is why it’s so important. But, yes, to your point, it doesn’t have to be spend, it has to be your top 10 list of risk mitigating opportunities. Exactly, but most of the time, I would say nine out of ten times, it’s going to be spent, right? It’s going to be spend-oriented, and it’s much more rare that it’s going to be not in your top 10 spend, but it is a risky item. But it’s a good call-out. Okay, so we have our top ten, that’s what we’re going to focus on and prioritize because we don’t have the bandwidth or resources to do everything. That’s probably not even if you did, probably not the best use of your team’s time. How do you actually work with suppliers throughout the process? Because when you and I were prepping for the interview, I think one of the most important things that you said to me multiple times was that it’s important to do value stream mapping with your suppliers. Yeah, so the most important thing is you’ve got to have relationships with your suppliers. It can’t be, ‘I’ve got a transactional relationship. I’ve got a demand on the floor. I’m going to have a PO clerk cut a purchase order and hand it over to the supplier.’ So, you need to look, again, you’re valuing your top most important materials from a direct standpoint, a direct spend standpoint, whether it’s spend or this is the most critical item in my product, whatever it is. So, where am I going to source these from? It’s extremely important to realize that if I live in a neighborhood, I better go along with the neighbors on either side of me. It’s no different, right?

It’s no different. I am relying on my neighbor to watch my house when I go away, so in this particular case, my most important materials have to come from a supplier that I know well, that I’m going to develop a relationship with. And then, once that relationship and trust is established, you know you’re not going to do that as soon as you start doing business. That’s not how you know the value stream is going to work. It’s about starting, developing a baseline, and then saying, “how am I going to improve? Okay, I’ve got a baseline. Next year, I want to improve by X. So, Mister supplier, let’s sit down and work together and figure out how we can come up with mutually beneficial solutions.” This is why you sit together for half a day in a board room, start drawing on the whiteboard, map it out, identify those opportunities where there is waste. And I will tell you that seven out of 10 times, the cause of waste is actually the customer and not the supplier. It’s the customer that has to do something different in order to create the value, right? And so, what you want to do, the reason this is so important, is because it is critical to be a customer of choice. You can’t have the attitude that “I’m the customer, you’re the supplier, you will bend to my will” because customers or suppliers have a lot more leverage, and they’re perfectly in a position to fire customers, right? So, you want to behave like a customer of choice because that is a win-win opportunity to create value on both sides of the equation. If I give you information in a timely manner, I as the supplier can plan accordingly. I’m going to generate efficiency. Efficiency leads to savings, and that savings can be passed on to the customer. And therefore, that’s how you create value in the value chain. So, this is the criticality of doing it together. Again, you’re not doing this for everything, you’re doing it for your top materials, and only you as a business can determine what is driving the value in your supply chain.

So, the other thing you talked about when we were prepping for today was something called should-cost modeling. So, I would like to have you explain to our audience what that means and how that fits into this process. And it’s interesting timing, we’re rolling out a company-wide supply chain training program at SourceDay, and as part of the program, we’re going to be having our employees take LinkedIn Learning courses. And one of the courses that I’m taking right now, I just finished a video on should-cost modeling. So, I’ll be curious to hear how you describe it and where it fits into the value mapping process, right? The old way we used to procure, right, is, “I want to source this Yeti mug, and this Yeti mug, I can go to three different suppliers for it, okay?” So, full mug, I’m going to go to supplier A, supplier B, supplier C, right? And then, I’m going to pick the best price. That is the old way of thinking. Instead of, “what is this mug made of?” It’s made up of a plastic clear lid that’s made of hard plastic. It’s made of metal. There is some spray matting on it. There’s some ink printing on it, okay?

So what I want to do is I want to take this mug and break it down into its various components, right? So its various components, and I’m going to put that in a spreadsheet. So this mug is going to have the price of a lid, and then there is like a little slidy thing on here. All of those components are the materials, okay? The materials that make up this entire mug. Now, there are also added costs, right? So added costs: you know there’s the conversion process. So your supplier has materials, they bring in those materials, they create value by converting those materials, what eventually is your mug. So what is that conversion cost? Okay, then what are the other added services? So conversion, by the way, is a universal term for taking direct materials, adding value, and the value is labor. There’s your fixed cost running the factory where you’re making these mugs. There could be, because this is a shiny metallic ink, if I had like a dull ink that would be, there’s an upcharge potentially. So what about the packaging? Packaging is the other bit, right? Assuming I was just using this because this is not wrap, but then you break it into, okay, so there’s the primary pack, right? There’s the primary product, and then there’s the secondary packaging, the packaging that it’s in. There’s the tertiary, so if this comes in a carton that you’re going to gift, and then there’s tertiary packaging, which is the brown corrugated box that it’s going to ship in. You outline all of those things, and then based on this, you look at your labor. So I manufacture, let’s say, in the middle of Tennessee. I manufacture in Chattanooga, Tennessee. What are the labor rates there? What are the electricity rates there? What are those fixed costs? You get a model. You try to value the cost of the materials based on what you know your costs are. So you’re really breaking down the components, and you’re working with your suppliers to say, “Okay, here are all the costs that you, Mr. supplier, I think are paying, and you have to make a margin.” Why else are you in business? There is a margin that you have to have that is a piece of it. So you’re breaking it down, and then you’re saying, “Okay, this should cost twenty dollars. I’m making it up. This should cost twenty dollars. Mr. supplier is quoting me thirty dollars. Why? Right? Why? What else is in here that you’re trying to cover? Are you just trying to pad the margin because a fair margin in this market maybe 25? I’m willing to pay you a fair margin.” And I’ve actually had conversations with suppliers where I thought their margin was too low, and I actually accused them.

I said, “You are charging me too low a price because if you’re trying to buy the business, that’s not good for me because it’s not sustainable. You’re going to be out of business. Yeah, and then they opened up the books. Right? They opened up the books. I can assure you of making a healthy margin, and they showed me that they were so efficient they could make a healthy margin and still pass the lowest cost to me. But hopefully that answers it. Do you need more clarity on what should cost modeling is? You’re breaking down the components of what it is that you’re buying, and you’re trying to get market intelligence. Now, a lot of the smaller companies struggle with this exercise because they don’t have the resources, yeah? So they’ll probably get third parties to help them with this. But it’s understanding what a product should cost and breaking down if the margin is fair that your supplier is quoting you. And if not, why not? And I would argue the key to this is the relationship you have with your supplier. If your supplier is not feeling like you’re a trusted partner, they’re not going to be comfortable opening their books and sharing such transparent company information. So you have to have those key relationships established to be able to do such an exercise. Exactly. It’s not an easy thing to stomach, and it’s a mindset shift. It’s a strategic shift that has to happen. So as it relates to should-cost modeling in value stream mapping, what do you think are the biggest risks to a manufacturer’s supply chain this year, meaning in 2023? In 2023, what’s the biggest risk in terms of direct material and continuity of supply, yeah? Yeah, so it’s visibility, right? It’s absolute visibility. I’ll just give you an example. I was working with a client that had such a complicated bill of material structure. The later levels of the material explosion table were not being captured in the systems they were using. So if they could go like three levels deep, and then they’ve got to procure materials in level four and five, it wasn’t visible. So they were not properly creating a forecast or a bill of material explosion that could translate into a material plan whereby they could get continuity of supply.

So the biggest thing I’m noticing in 2023, there are two big issues that are clear. Inflation is subsiding, but talent is a major gap. So everything you’re talking about requires a certain skill set, and it requires upskilling to be able to think in this way. And so there is a huge gap between the existing talent and the standard that now has to operate. So talent is a big challenge. The other challenge is supply chain visibility, not having the tools to create the visibility in real-time. Okay, so how do you create real-time visibility? And so you need those tech stack solutions to be able to create that visibility in real-time in order to react because supply chain disruptions will continue. Okay, that’s a fact. Plans are useless. Okay, supply chain planning is useless. Like when you say, “I’ve got a supply chain plan,” it means nothing. Being able to react to the changes in the demand and the supply picture and asking those right questions but having the tools to enable me to make decisions in real-time is the biggest challenge for ’23 and beyond. So at SourceDay, we hired an AC product officer last year, and supply chain visibility is probably the thing he talks about the most and how important it is to know where everything is at and every step of your supply chain in real-time. If three weeks from now, what good is it? You need to know right now so you can pivot and adjust and act quickly. So I think companies are, especially manufacturers, are realizing this because they’ve had so many disruptions and their plans have been shut down and now it’s the it’s looking at what technology or solutions make sense to implement that can help with this because you can’t do it just with people exactly it’s a triangular relationship mindset, skill set, tool set.

Thank you for discussing how to do value stream mapping with your suppliers today, Anna. So, you have now left the corporate world and started your own consulting practice. Where would you like to send people and maybe answer the question for us, what problem are you solving for your clients? Because you may have some services that some of our listeners may be interested in. My practice focuses on the end-to-end supply chain, a lot of procurement models that I’m putting in place, but because of the post-pandemic view of how do we prevent this from happening again, most of the work that I’m doing is in planning and planning transformation, and then how do we integrate that plan into the supply base. It’s that integrated flow of information where I’m working on right now the most. If people want to look me up, please feel free to reach out to me on LinkedIn, Anna McGovern, and through my website, pondviewconsulting.com. I’ll be happy to talk to you about any of this, value stream mapping, planning, procurement. It would be my pleasure. If you missed anything, you can check out our show notes. You can find us by typing in “What the Duck?! Another Supply Chain Podcast” in Google. To have optimal results, make sure to add the “Another Supply Chain Podcast” at the end of your search to ensure you don’t miss a single episode. Make sure to follow this podcast and subscribe to us on YouTube. I’m @SarahScudder on LinkedIn and @Sscudder on Twitter. This brings us to the end of yet another episode of “What the Duck?! Another Supply Chain Podcast.” I’m your host, Sarah Scudder, and we’ll be back next week.