Monthly Archives: May 2007

People Matter Most (and high-performing CPOs know it)

Given my temperament to tout the talent gap that is now increasing daily, I was happy to see the recent article from the European Leaders Network that stated People Do Matter Most, Really. The article, which referenced a recently completed research study, revealed, again to my content, that the best performing CPOs are concentrating their efforts on their people, capabilities, mindsets, and aspirations.

The study from McKinsey & Company and the Supply Management Institute found that high performing firms had high performing purchasing departments and that what matters is the people in the purchasing department, how talented they are, how motivated they are, and how they interact with the wider organization. They found that purchasing departments that excel in these aspects of their activities achieve savings two and a half times higher than those that don’t. Furthermore, their positive influence branches out beyond the historical territory of PSM to include areas such as revenue, innovation opportunity generation, and the leadership of commercial change in the company. In more detail, high performing firms demonstrated annual purchasing savings of 3.5%, a 1.4% annual reduction in COGS, and an average EBITDA of 17.7%. Compare this to low performing firms that only achieved a savings of 0.6%, a 0.5% increase in COGS, an an average EBITDA margin of only 12.7%.

Most of the difference between high performers and low performers was encapsulated by three soft elements:

  • Talent and Capabilities of the PSM professionals
  • Mindsets and Aspirations of the PSM department
  • The degree to which the PSM function was aligned with, and able to contribute to, overall purchasing strategy

Furthermore, high performers were five times more likely to employ purchasing managers with analytical expertise and general management backgrounds and six times more likely to hire managers who have experience in another functional area.

Thus, the best way to achieve results is to hire talented and capable individuals with drive and aspiration who have broad experience from a functional and managerial perspective, align them to the overall business strategy, empower them and let them do their job.

Best Cost Country Sourcing

BrainNet recently released a mini white-paper on Best Cost Country Sourcing The Evolution of Low Cost Country Sourcing that had an interesting take on Low Cost Country Sourcing. According to the author, cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for. Personally, as I succinctly stated in a comment over on Supply Excellence, I believe the answer is Home Cost Country Sourcing. Finding a way to to get the best value from a total value management perspective (where total cost of ownership is taken into account alongside quality value metrics such as on-time delivery, reliability, etc.) while sourcing from suppliers in your own country. But I digress.

I particularly agree with the seventh and ninth paragraphs (the third paragraph on the second page and the second paragraph on the third page):

Decision makers often decide too easily that new markets such as India and China are going to be the ultimate attractive sales markets and that a local production plant is the best approach to capture the labor cost advantage there quickly. buying power is still limited in these regions but will definitely increase over time, so it is a “no brainer” that everyone can agree to quickly. The CPO is happy too because every product produced and sold is declared as low cost country volume. In other words, nothing has changed fundamentally in the organization but the so-called shifted purchasing volume has increased. Curiously, even the raw material and components may be sourced from high cost countries and assembled abroad. The right terminology for this approach would be “High Cost Country Sourcing” instead of “Low Cost Country Sourcing”.

It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.

In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.

Increase Competitiveness using Supply Chain Finance

In the April issue of Business Finance Magazine, Beth Enslow of Aberdeen Group penned a great article on How to Create a More Competitive End-to-End Supply Chain using Supply Chain Finance.

According to the article, by merging physical supply-chain information with financial supply-chain data and flexible funding methods, companies are able to not only automate payables and receivables but also to inject much-needed liquidity at various stages of the supply chain.

This gives the buyer the ability to:

  • Optimize Working Capital

    through inventory reduction and A/P and A/R improvements

  • Reduce Product Unit Costs

    through arbitrage opportunities due to a higher cost of capital for many suppliers

  • Extra Days Payable Outstanding

    often by over 50 days which can improve cash flow by hundreds of millions of dollars or decrease unit costs by five to ten percent

This is enabled by better visibility into order and shipment status and historical performance which allows financial transactions between a supplier and buyer to be assessed, securitized, and sold at a lower credit premium which often allows for an end-to-end reduction in the cost of goods sold. Furthermore, enhanced visibility will give buyers the option to finance at multiple points in the supply chain, including raw material production, intermediate production, point of shipment, customs clearance, and arrival at the vendor-managed inventory hub.

The article also described characteristics of best-in class companies in supply chain finance. These companies are:

  • more than three times as likely to use EIPP (electronic payment and presentment) systems as laggard companies
  • three times more likely to use an online payment platform with automated-discounting and invoice-reconciliation capabilities
  • twice as likely to extend payment terms and take part in an early payment discount program
  • more actively involved in using supply-chain financing techniques

In other words, leading companies take advantage of appropriate e-Sourcing and e-Procurement technology to maximize their potential.

Collaborate, Collaborate, Collaborate, Collaborate – Part IV

I know I’m taking the risk of sounding like a broken record (or for those of you too young to remember such a contraption, the effect produced can be mimicked by putting a mini audio clip on infinite loop), but the fact that articles continue to surface on the topic, and the fact that there appears to be a need for these article, leads one to believe that the message still needs to be spread. To this end, here is the fourth installment. (Need to catch up? Here are the links to C4 I, C4 II, and C4 III.)

So how can one foster collaboration? A recent issue of Computer Business tells us that IT Makes Collaboration Easy. This is important because a collaborative approach changes how people relate to each other and people to tend to resist change. Therefore, a collaborative culture cannot be forced on staff, and must be delivered in a way that allows them to become converts after experiencing the benefits for themselves.

The article points out that IT-based tools, if implemented effectively, allow collaboration to be built into everyday business processes, and carried out with the minimum of effort. These collaboration tools must deliver simple user experiences no matter how complex the implementation and underlying processes are.

The importance of collaboration, and of technology that supports that collaboration, is echoed in Looking Ahead: Faster, Brighter Technology by John Kerr, Contributing Editor of Supply Chain Management Review. In the article, he notes that Collaboration is Now the Rule and that new technology developments, such as SOA, will continue to accelerate collaboration among supply chain participants. These tools will help extend collaboration further out to functions that have only recently become part of supply chain management thinking, such as new product development and supply chain finance.

Finally, we find yet another perspective on the importance of technology in a recent European Leaders Network article that illustrates How I.T. shows the way upward. The article points out that communication is the key and technology is the key to global communications, essential in today’s global marketplace.

However, we can use more than technology to improve collaboration. A recent issue of Supply & Demand Chain Executive brings us an article by Nilesh Anand that gives us one direction for collaborative performance enhancement. In Collaborative Performance Enhancement = Successful Supply Chain Management, we are reminded that a supply chain is only as strong as its weakest link and told that the key to collaborative performance enhancement is collaborative benchmarking.

According to the article, a collaborative benchmarking effort starts by choosing effective performance indicators. Efforts are then made to measure them effectively. These indicators are identified by researching best practices and peer organizations that are doing above average. Make sure to cover delivery performance, flexibility and responsiveness, logistics cost, and asset management.

Collaborative benchmarking is important because it requires understanding between all participating members who are more likely to collectively take the whole supply chain into account, and not just one or two segments.

Once you have measurements, focus on identifying and implementing the appropriate best practices to improve them. Set goals for improvements and strive for continuous improvement – collaborating each step of the way.

So in conclusion, you can start to foster collaboration by way of the application of the right technology, the right measurement process, and in the identification and implementation of new and improved best practices and methodologies where everyone works together. Of course there’s more that you can do, but this is a great start!

Critical Supply Strategies for Succeeding in a Dynamic World

As close followers of SpendMatters, where I tend to comment regularly (after all, it is the only other Spend/Supply Management blog that you have to read daily), will have observed, on average, I’m not overly impressed with what comes out of ISM more often than not. However, the recent article Succeeding in a Dynamic World, which was jointly compiled by the ISM, CAPS Research, and A.T. Kearney, was quite good. (After all, both A.T. Kearney and CAPS in particular are known for putting out great work.)

One of the most interesting sections of the 10-page report (which is worth reading) was section three on critical supply strategies. In a world where it seems that risk and cost is increasing daily, good supply chain strategies are more important than ever. Even though none of these strategies are new, which should be obvious as they have been discussed on the blogs, including this one, countless times, it is nice to see them collected all in one place AND endorsed by the ISM which, whether or not it deserves to be, is the largest and most influential supply and spend management association in the United States.

The seven critical supply strategies presented in the article were:

  • Category Strategy Development

    Consolidate your supply base for each category into a small number of preferred suppliers that can be efficiently managed while mitigating risk. The strategy for each category should focus on the overall value chain over a three-to-five year time frame.

  • Supplier Development and Management

    Effective supplier development and management should deliver a competitive advantage in cost, quality, delivery/responsiveness, technology, and innovation achieved.

  • Multiple Supply Networks

    The tail of the supply chain needs to be tailored to each developing market and this will require domestic partners to help execute fulfillment and delivery. In addition, good risk mitigation requires flexibility and diversity in your supply chain and supporting networks.

  • Internal & External Collaboration

    In order to extract the significant gains that collaboration can bring, companies will need to enable best-practice multi-lateral collaboration between supply partners, achieve integrated product development, and employ “customer of choice” positioning.

  • Talent Attraction & Retention

    A supply chain is not an abstract network driven by processes and machines, but a real network driven by people. Good supply chains run on good people. Supply Chain Success will be impossible without the right talent, which is becoming rarer every day thanks to the global talent war. Any organization that does not have a good process in place to identify necessary skills, evaluate organizational gaps, and identify, recruit, develop, and maintain talent is doomed to become a second class citizen in the emerging international marketplace.

  • Enablement of the Supply Management Organization

    Although center-led organizations will continue to dominate for the next decade, as global operations become more complex, hybrid center-led models will begin to emerge to maximize value based upon the right mix of responsiveness and centralized control. Successful organizations will need to adopt and utilize appropriate supply chain technologies that integrate functional management and track appropriate metrics.

  • Enabling Technology

    Technology is key in the supply chain organization of the future. The right technology will enable enterprise-wide supply management, external supply chain visibility, and internal and external collaboration.

Although this obviously is not a complete list, as it makes no mention of the emerging importance of Global Trade Management, Supply Chain Finance, or Right-Cost Country Sourcing, just to name a few disciplines, it is still a great starting point and areas that any successful supply chain operation will need to have fully figured out to succeed.