Monthly Archives: March 2010

How To Slow Your Supply Chain Transformation to a Crawl

In my last post, we discussed how transformation is necessary for high procurement performance and gave you some advice on how to get started. But transformation is not easy, and there are many pitfalls you can encounter along the way. In this post, we’ll addres some of those.

As a supply chain leader, you are probably in the midst of a process to redesign your supply chain to be more fault tolerant, more secure, and more safe to avoid the fiascos that your brethren (Huntington Meat Packing, Mattel, Toyota) have recently faced in the media. If you want the transformation to go smoothly, and be effective, you better avoid these “six mistakes that can derail your company’s attempts to change” its supply chain, as described in a recent HBR article on Accelerating Corporate Transformations. (Subscription Required)

  1. Cautious Management Culture
    There’s a time and a place for incremental improvement. That time and place is not during a supply chain transformation project. During times of “incremental improvement”, executives tend to be too preoccupied with daily operations and too busy to get involved in redesigning the entire business. During a transformation, the entire management team needs to be charged, focussed on the goal, and involved in making it happen as a team.
  2. Business-as-Usual Management Process
    A transformation can’t be pigeon-holed into established systems and processes and meeting times. It has to be its own system, it’s own process, and its own, all-hands-on-deck, meeting — run alongside the existing systems, processes, and meetings until you’re ready for a transition. People may feel that they don’t have quite enough time, but that’s normal, and often good. Put a little pressure on and stick to the schedule, otherwise a three-month initial phase can quickly become a six-month, nine-month, or longer phase as people keep delaying it because they’re too busy with current processes, systems, and meetings, which aren’t working and need to be replaced as soon as possible.
  3. Initiative Gridlock
    Sometimes you have to kill an old initiative for a new one to fly. As the article points out, executive leaders may lack the insight and courage to discard efforts that have come up short and, to avoid admitting failure, pile new initiatives on top of the ones that are struggling — and the result is gridlock. Success is best achieved when action agendas are restricted to only three or four companywide initiatives, each targeted to two or three carefully selected areas of focus and tied to clear outcome metrics. That way workers aren’t overloaded and can focus on achieving clear, non-conflicting, goals.
  4. Recalcitrant Executives
    Many executives … choose to avoid conflict and hope that the “clarity” and “efficacy” of their grand plan will quickly win people over. Problem is, what’s clear to them isn’t always clear to their counterparts or their direct reports. And if you don’t take the time to win over a “deep denier”, resentment, and a need to undermine your efforts, can build and eventually bring your project to a dead stop. You have to be willing to confront, debate, and fight-for your project. You might not be able to change everyone’s views, but if you can convince them you’re serious and that your initiative is well researched and thought out, and earn their respect, you greatly improve the chances that the dissenters don’t stand in your way.
  5. Disengaged Employees
    Employees, who do most of the actual work, are the key to your transformation. It’s critically important to involve them in the transformation process as early as possible. This should include sessions that inform them of the upcoming transformation before it starts as well as training and Q&A sessions as early as possible in project launch. Roll-out to the entire organization should be as rapid as possible.
  6. Loss of Focus During Execution
    If you don’t continually champion the transformation initiative as the day-to-day grind again takes centre stage, you might find that old habits gradually sneak back in, that leaders switch back to command-and-control mode, or that attention is turned to other “important” activities. As a leader, you have to follow the project through to the end to ensure success.

Basically, as the article points out, transformation launches must be bold and rapid to succeed. Even if the project can’t be done in less than a year or two, it still needs to get into gear quickly, and hit its early milestones as soon as possible, so that the team can see the early indicators of the improvements that will come their way. This will get their full support early on. And as the byline points out, to be successful, don’t lose your nerve!

I highly recommend you check out the full article. It has some great advice on avoiding each of these speed brakes that can bring your transformation to a grinding halt.

Share This on Linked In

A Quick Introduction to Finance, Part I

A recent article over on CPO Agenda on “Skills for the Future” that summarized the findings from a recent workshop that debated the skills the future would require identified better finance skills as keys to future purchasing success. Since the article simply rambled off a list of terms with no definition, I decided I’d define the basics for you.

Working Capital: is a financial metric which represents the operating liquidity available to a business. It’s calculated as current assets minus current liabilities. Positive working capital is required to ensure that a firm is able to continue its operations. Furthermore, it must have enough cash on hand to satisfy operational expenses and maturing debt.

Current Assets: include inventory, holdings, and accounts receivable.

Current Liabilities: accounts payable, debts, and (due) operational expenses.

A key part of working capital management is:

Cash Management: which aims to ensure that the business always has enough cash-on-hand to meet day-to-day expenses.

For example, let’s say that monthly payroll is 200,000, monthly leases are 50,000, and 100,000 in payables are due within the next 30 days. This says that the business needs 350,000 to meet its expenses this month. This also says that, unless payables are received, if the business only has 400,000 in the bank, then it only has 50,000 available for new investments or initiative. As a result, even if you wanted to buy 100,000 in raw materials to negate the need for your supplier to get financing and reduce total supply chain costs, you couldn’t do so. On the other hand, if the business had 500,000 in the bank, you could, but you wouldn’t necessarily want to unless it was the best use of the business’ cash.

Part of Working Capital Management is making the right decisions when it comes to managing cash. This includes making the right borrowing decisions as well as the right investing decisions. If financing your supplier reduced your total cost of ownership of 300,000 worth of goods by 1%, but a short term loan could generate 6% interest, the short term loan would be the better decision. This is because it would generate 0.06 * 100K or 6K worth of interest as opposed to the 0.01 * 300K or 3K worth of savings. On the other hand, if the financing reduced the total cost of ownership of the goods by 3% and the best interest rate was only 4%, financing the supplier’s raw material buy would be the right choice because 9K worth of savings beats 4K worth of interest any day. This is the type of financial planning that Supply Management professionals need to understand to make the right recommendations, and decisions, for the business as a whole.

Share This on Linked In

Efficient Sourcing In Marketing, Part I

Three years ago CIPS and the IPA came out with their report on “Magic and Logic”: Re-defining sustainable business practices for agencies, marketing, and procurement in their attempt to change the game and get the sacred cow marketing budget under control. It was an insightful report, as I noted in my two-part series on Magic & Logic (Part I and Part II), and a great first attempt at carving up the sacred cow.

Then, two years ago, Efficio entered the game with their paper on “The Creative Challenge: Driving Efficiencies in Marketing Procurement”. This report, which covered some of the key challenges involved initiating collaboration between marketing and collaboration, as well as some of the typical savings levers that can be used to negotiate savings anywhere from 3% to 50%, provided an 8-step approach to driving efficiencies in Marketing Procurement. As per my posts on The Creative Challenge (Part I and Part II), it was a good starting process and a great second attempt at serving that sacred cow on a platter.

Since them, I’ve been waiting for another paper that will complete the trilogy and, hopefully, provide us with the ultimate approach to Marketing Procurement. And while it certainly isn’t the ultimate approach, Booz & Co.’s recent attempt, “Efficient Sourcing In Marketing” is a good end to the trilogy. As noted in the introduction, the following, all-too-common, scenario speaks volumes about the sourcing side of marketing at large companies.

The large retail bank’s approach to buying marketing-related services and materials was typical. On direct marketing efforts, decentralized business units worked with advertising agencies of their choice — agencies usually chosen on the basis of demonstrated capabilities, their understanding of the nuances of the individual businesses, and the personal relationships they had built over time. The relative cost was hard to compare, as each of the bank’s business units negotiated its own agreements with its marketing partners. Pricing was usually project-based, with no standardization from one business unit to another, even when it involved universally used items, such as envelopes, mailing inserts, and postcards, or when units shared the same vendors. By ignoring costs, which can represent a quarter of many companies’ total purchasing outlay, the company is leaving huge sums of money on the table — as much as 40% to 50% in some cases. This can easily mean tens of millions of dollars of savings at many large companies in the CPG, Pharmaceutical, or Automotive sectors that rely heavy on marketing. These savings can be reinvested in more successful campaigns, truly allowing marketing to do more with less when efficient strategic sourcing comes to the table, provided both departments collaborate to an unprecedented degree.

This will require adherence to a six-step process, that I’ll address in Part II, but the good news is that the payoff can materialize quickly. Often, merely creating more visibility into a supplier’s relationshipsacross a firm and discussing the level of business with the supplier can elicit more favourable pricing. Furthermore, the appropriate identification of savings target for different types of services can lead to rapid savings. The report gives an example of a CPG company that targeted 8% savings on creative services, 16% savings for less complicated services (that could be done in-house or by lower-cost resources), and a 18% savings through the adopt of a preferred set of enterprise-wide vendors. Overall, the company reduced cost by 42%, saving 10 Million on what was a 25 Million spend!

Share This on Linked In

Sourcing Innovation Welcomes EC Sourcing Group as New Lead Sponsor

Sourcing Innovation is pleased to welcome EC Sourcing Group, a leading provider of Sourcing, Vendor Management, and Document Management solutions for the Mid-Market. Established back in 2001, EC Sourcing Group has spent the last nine years quietly building out a very respectable sourcing and spend management suite as they amassed a large, global, customer base (of almost 100 customers, a number they are on track to pass before 2010 is up). Formed by strategic sourcing professionals with decades of experience running projects in the CPG and Retail space, EC Sourcing Group is also able to offer strategic sourcing services where they bring their wealth of sourcing experience to bear.

As per my post earlier this month on how EC Sourcing Makes Sourcing Easy and Affordable, EC Sourcing Group offers a full e-Negotiation suite with RFX, Auctions, Project Management, Document and Contract Management, and a brand new Corrective Action Reporting Module, which is pretty snazzy. Plus, they are in the process of internationalizing and simplifying the platform that is already used by a number of multi-national clients. The platform currently supports (four) 4 European languages, will support at least six (6) by the end of 2nd quarter, and will also support at least two (2) Asian languages by the end of the year, including Mandarin. To make their SaaS offering even easier to use, they’re currently adding a new quick-access layer to the existing UI that will allow more advanced users to do basic tasks even quicker and easier than before. Finally, as the founders come from a strategic sourcing background (as sourcing managers in retail and CPG), EC Sourcing Group also offers sourcing and spend analysis services, and maintains a network of consulting partners who they can refer to you if you encounter a scenario that requires specialist sourcing expertise.

In my last post, I walked you though the basic e-Negotiation platform. Today, I’m going to describe their new Corrective Action Module that can be used by all affected parties to track, report on, and resolve issues that can arise in the delivery of goods and services. The importance of being able to identify, track, report on, and correct issues quickly, which is often overlooked by sourcing groups who have not yet graduated to best-in-class status, cannot be underestimated. Savings identified during the sourcing process are only potential until they are realized — they are not realized until they are captured. These savings are not captured until the supplier delivers at the service level committed to and the buying organization pays at the price committed to. And while an EIPP/P2P system that makes sure invoices are paid at contracted rates and that maverick spending (that erode rebates) is stopped dead in it’s track is a good start, as it can be configured to make sure you don’t overpay, if the supplier continually delivers bad shipments, these “savings” will soon be eaten up by the cost of dealing with repeat problems.

With EC’s solution, anyone can report an incident as soon as it’s discovered and start the tracking and resolution process right away — the buyer, the receiver at the warehouse, the engineer who discovers the components are all faulty, etc. And once the incident is created, it’s added to the repository where it gets compared against alerts, repeat occurrence triggers, and running reports. The right person will be immediately notified when a priority shipment is botched, if the supplier has been late 3 times in the last 3 months, or if the number of incidents this year has entered the double digits — or if anything else of interest happens. The alerts, triggers, and reports are all 100% user customizable and can be defined by supplier, location, reason (customizeable 3-level reason codes), product or service, item number, time-frame, key-words, status, and other custom fields defined on your custom corrective action report templates.

The template-based solution allows each organization to create it’s own corrective action report templates appropriate to the goods and services it is buying and streamlined for creation by the individuals who will be receiving and working with the products and services. To report an incident, all an end-user has to do is log-in, select the template, fill out the appropriate fields, and submit it. Then, depending on organizational rules, it goes to an administrator/buyer (who is alerted that it is ready) for review, who then releases it to the supplier; or it goes straight to the supplier, who is given a fixed amount of time to respond. If the supplier doesn’t respond on time, the supplier is reminded and people higher up the organizational hierarchy are alerted.

It also has all the standard features you’d expect in terms of template creation, incident status tracking, user-defined report generation, and export to Excel and PDF, as well as an audit feature that lets you find out who did what and when. That way, if a template, or data is changed, and something doesn’t seem right, you can examine the history, and take corrective action if you need to. It’s a great way to kick-off your Supplier Performance Management program.

So please join me in welcoming EC Sourcing Group. It’s forward-thinking companies like them that keep this blog, and the education it gives you, going!

Share This on Linked In

Transformation is Necessary for High Procurement Performance

Last week, where I walked you through The Hackett Group’s 18 value streams that can take you from a naive apprentice to expert sourcerer, I noted that your procurement needed to be transformational. I also provided you with some examples of transformational value streams that included process re-engineering, financial hedging, and supplier collaboration. But I didn’t address how you shift from a strategic mindset to a truly transformational one.

The key is to think about reinventing your procurement organization. That requires going beyond simple strategic sourcing where you are sourcing current needs using the best tools, processes, and information available to thinking about your long term needs beyond the current project (and contract) and coming up with a strategy to make any savings you secure sustainable over the long term. For example, you might focus on securing a long term contract with a supplier who could become a strategic partner, or with a third party manufacturer committed to upgrading it’s production equipment and processes to deliver year-over-year cost reductions, or with a design firm who works with you to continually re-engineer designs to be more cost effective to produce.

As this recent article in Industry Week about how “to achieve high performance” points out, transformation is the process by which companies, business units, or locations make a step-change improvement in their operating performance. It’s more than just an incremental improvement. It’s a new way of operating. It’s not just shifting from cost savings (tactical) to cost reduction (strategic), but to cost avoidance (transformational). It’s going beyond a focus on lowest TCO to a focus on highest value. For example, maybe you could save 10% if you could increase your order from 75K units to 100K units, but when all is said and done, the company is measured on profit. Maybe it’s better to create a slightly higher quality version of the product, only order 50K, pay a little more, but sell them at a higher profit margin. Whereas a strategic sourcerer would try to negotiate the 10% discount on the possibility of 100K of demand as a stretch goal, the transformational sourcerer would accept a slightly higher price-point for 50K, slightly improved, units to maximize total company profit in the long term.

So where do you start? As per the Industry Week Article, you start by recognizing the gaps between your performance and that of best in class companies. If you don’t understand how much better you could be doing, you’ll probably never acquire the drive to be truly transformational. As a result, you’ll leave significant value on the table without even realizing it.

Then you set stretch goals that seem unattainable but are, in actuality, just a little beyond reach. Given that over 80% of all activity in most business processes is a waste — adding no customer value whatsoever — there’s a lot of room for improvement. And since no one says you have to get there all at once, shoot for 50% improvement. If you get 20%+ every year, you’ll be pretty close to your goal after a few years.

Finally, you get a strong organizational leader on your side. As with every other effort, the support of a strong C-suite leader is the key to success. At some point, someone is going to need to make a tough call because you’re going to have to radically change how things are done and there is going to be a lot of resistance at first. But that’s good, because that probably means you’re on the right track.

Stay there, and you might just find out what transformational procurement really is!

Share This on Linked In