Monthly Archives: August 2009

The CPO Agenda’s Procurement Checklist for Staying Center Stage

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Now that Procurement has received board attention as the greatest potential for cost savings in the organization, CPOs need to start planning on how they are going to keep that attention once the recession ends and the spending monkeys try to steal the spotlight again. Thinking (way, way) ahead, the CPO Agenda recently put together a good checklist for staying center stage that summarizes some of the key strategies that CPOs will need to pursue to help the board see Procurement as a driver of growth, innovation, and long-term cost reduction and not just a one-trick cost-saving pony.

  1. A Vision for Growth
    • Value Chain
      As the central point of the organization, Procurement is in a prime position to define organizational needs, asses the capabilities of internal resources, and define organizational core competencies. What other business unit touches not only every other business unit, but all of your partners as well?
    • Solution Procurement
      Procurement can source solutions that leapfrog current best-in-class and create a paradigm shift in customer value.
    • Innovation
      As the glue that binds modern organizations together, Procurement can play a critical role in the innovation process by bringing partners and ideas together.
  2. Customer Relationship Management
    As the one business unit that has every other business unit as a customer, Procurement is in a prime position to help the company better meet its customer expectations.
  3. Supplier Relationship Management
    Procurement is already managing supplier relationships on a daily basis … it just has to help the organization understand that it needs to be the central point and the channel by which supplier capabilities are secured to support the company’s growth agenda.
  4. Supply Chain Optimization
    Without an efficient supply chain, companies cannot support the chosen customer needs. In order to achieve its plans, all aspects of a company’s supply chain MUST be optimized. Procurement is in the best position to do that.
  5. M&A Due Diligence
    The ultimate success of a merger or acquisition depends on whether or not the combined organization will be able to deliver more savings and more value … Procurement is in the best position to help make that call.

Give Your Manufacturing a Lift

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Pneumatic lift-assistance devices can not only prevent back injuries, which account for one of every five workplace injuries or illnesses and cost businesses over 12 Billion annually, but they can increase productivity by 40%.

A recent article in Industry Week explained how there is no more back breaking work at 3M since it installed tailor-made pneumatic lift-assistance devices that were tailor made for lifting various pressure-sensitive rolls of consumer labels that can weigh up to 250 lbs. The installation, which eliminated lift-related injuries in the associated plant processes, noted that not only is productivity up 40%, but there is no problem with operator fatigue or repetitive motion injury … and an alert employee is a productive employee.

Furthermore, when you consider that a single injury can cost an employee 65,000 or more, it’s hard to argue against installing lift equipment that also increase productivity. So go for it … and give your manufacturing a lift (and then ask for cost reductions since you know you manufacturing will gain 40% productivity as a result).

It’s Good to Have an Entire State on My Side

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Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

Back on August 1 of this year, I posted an article that included these paragraphs:

Here’s the tactic for the day.

Run a grammar check on your contract using Microsoft Word with “check readability statistics” turned on. Look for a “reading ease” score of 40 or higher and a grade level requirement of 11th grade or less. Remember, the document probably won’t be in the supplier’s language. Once you achieve that, then print the document in an attractive format. Pay attention to typography and white space. Make it easy to read.

If your lawyer struggles with this, get him or her a copy of the SEC’s A Plain English Handbook . It has lots of guidelines and tips. Another good source is Plain English for Lawyers, which you can find on Amazon.

You probably read that advice here first.

It was good to get reinforcement from the State of Rhode Island. On August 19th, The NY Times published an op-ed article titled Plain English is the Best Policy. The article said that Rhode Island is going to require health insurance policies to be written at the eight grade level. Apparently that’s the average adult reading level in Rhode Island. The State will determine a contract’s education level with the same Flesh-Kincaid score that I recommended. It’s probably built in to your word processing software.

Here’s a “before and after” from the article:

Before:
In the event a third party, including your employer/agent, is or may be responsible for causing an illness or injury for which we provided any benefit or made any payment to you, we shall succeed to your right of recovery against such responsible party. This is our right of subrogation. If you do not seek damages for your illness or injury, you must permit us to initiate recovery on your behalf (including the right to bring suit in your name).

That paragraph required 13.5 years of US education and got a reading ease score of 45.

After:
Your injury or illness may have been caused by someone else. If so, we can collect from that person any claims we pay on your behalf. For example, if we pay for your hospital stay, we can collect the amount we paid for your hospital stay from the person who hurt you. We can also collect payment from that person even if he or she agreed to pay you directly or has been ordered by a court to pay you. If the person who caused your injury has already paid you, we can collect from you the amount he or she has already paid to you. This is called subrogation. In addition, if you do not try to collect money from the person who caused your injury, you agree to let us do so in your name.

This material requires 7.9 years of education and the reading ease score is 75.

My advice had to do with writing an international purchasing contract. Perhaps I set my standards too high. I thought 11 years was an appropriate level.Here’s a more pertinent example I use in my training programs

Before:
Supplier will not make any changes to the Products or to processes supporting Products which have been certified by Buyer, without Buyer’s prior written consent, such consent not to be withheld unreasonably. In the event of such changes, at Buyer’s discretion Supplier will either: (i) replace all such Products with Products approved by Buyer and reimburse Buyer for all actual and reasonable expenses incurred that are associated with such Products replacement (including expenses associated with problem diagnosis, testing, and replacement of Products in normal inventory, finished goods inventory, distributors inventories, and with customers); or (ii) credit or refund Buyer the Price of the Products. In the event of upgrades to the Products, Supplier will offer Buyer such upgrades as soon as commercially available.

That’s 12th-grade material. Reading ease is an abysmal 15.

I rewrote this in conjunction with a client’s attorney who was very nervous about my rewriting her work. I shortened the sentences, eliminated passive verbs, added more bullets and numbering and removed the distracting mid-sentence capitalization of common words.

After:
Unless buyer consents in writing, supplier will not:

  1. Make any changes to products, or
  2. Make any changes to supporting processes that buyer has certified.

Buyer will not withhold such consent unreasonably.

If supplier makes such a change without buyer’s consent, buyer may chose one of the following two options.

  1. Supplier will replace all such products with products that the buyer approves. Supplier will also reimburse buyer for all actual and reasonable expenses that buyer incurs in replacing the products. Expenses include expenses associated with problem diagnosis, testing and replacement. Buyer may require replacement of products that are in normal inventory, finished goods inventory, distributor inventory, and with customers. OR
  2. Supplier will credit or refund buyer the price of the products.

If supplier upgrades products, supplier will offer buyer such upgrades as soon as commercially available.

This requires 10.3 years of education and got a reading ease score of 43.7.

Enjoy working with your attorneys.

Dick Locke, Global Procurement Group.

Overhead Cost Cuts Don’t Provide Long Term Savings

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I was very pleased to see this recent article in Purchasing that noted that cost reduction efforts require more focus than sacrifice because all too often I see companies blindly focussing on fixed cost reduction, which, in fact, just costs them more in the long run.

You see, when you cut travel, you cut the ability for your people to make, and maintain, relationships. When you cut entertainment, which is typically a very small budget to begin with, you increase stress, which decreases productivity. When you streamline operations, things start to slip through the cracks. Then when you cut workforce, you cut capability, key processes get skipped entirely, critical sourcing events just don’t happen, and you keep sourcing off of expensive ever-green contracts and spot-buying at high prices. When you cut training, your staff’s skills get even more outdated and your cost reduction efforts miss the mark. And when you cut compensation, your best employees feel unappreciated and trampled on, stop giving 100%, and start looking for their next job.

As the article says, you have much better opportunities, including:

  • transaction processing
  • supplier management
  • health care benefits
  • IT assets (hardware and software)
  • logistics

Assessing Risk

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

I live in South Florida, and for one half of each year we worry about hurricanes. Actually, we start worrying about one month before our six-month hurricane season begins on June 1st; hurricane season officially ends just after Thanksgiving on November 30th.

(At least with hurricanes we’ve got some warning which we’re very grateful for; earthquakes and twisters provide little advance notice, if at all.)

I use life in a hurricane zone when discussing risk analysis.

Let’s take a look at a risk analysis for hurricane season in South Florida based on some risk characteristics:

  • Occurrence: Hurricane season is guaranteed to happen once per year (frequency), though the likelihood of a hurricane strike is unknown.
  • Control: We can’t control the weather, but we can control other things that create risk.
  • Severity: We cannot mitigate the strength of a hurricane but we may be able to reduce the impact it has to our lives and businesses through various preparations.
  • Interruption: Can we continue through a hurricane strike or will we be forced to recover after a period of downtime?

Once the characteristics of a risk are determined, risks can be plotted on a chart or given a numerical ranking, allowing us to determine which risks should be addressed in an order of priority. This analysis can also be used to determine the cost of the risk versus the value of addressing it.

The exercise of performing a risk analysis has the benefit of uncovering risks to your organization that you may have previously not considered. The Risk Assessment is part of the COSO framework used for Sarbanes-Oxley compliance, so for public companies this is a requirement.

The failure to identify risks is a risk in-and-of itself. I would submit that knowing about a risk and knowing that something could be done about it is pretty much just as bad as not bothering to identify risks in the first place.

Norman Katz, Katzscan