Daily Archives: August 10, 2010

Supply Chain Leaders Internalize Risks Before They Come To Pass

A recent article in the Harvard Business Review on leadership in the age of transparency noted that whereas, in ages past, companies could ignore “externalities” and still prosper, today’s leaders are finding that, in order to truly prosper, they have to internalize the “externalities” and successfully manage them long before they creep into realm of regulation or law.

(In economics, an exernality [or transaction spillover] is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. As a result, in a competitive market, prices do not reflect the full costs or benefits of producing or consuming a product or service, producers and consumers may either not bear all of the costs or not reap all of the benefits of the economic activity, and too much or too little of the good will be produced or consumed in terms of overall costs and benefits to society . The examples give by the article are the tobacco industry, that profited by burying research it did in the seventies that proved smoking was an addiction and not a choice for most people, and the use of trans-fats, which are only now being outlawed in restaurants despite the facts that it has been well known for a while that they have no health benefits and provide a danger to some people.)

Supply chain leaders take a similar approach to supply chain management. Whereas good business leaders look beyond the market of today to the market of tomorrow where regulation, activism, or other forces could threaten their business and find ways to internalize those threats and eliminate them before they occur, supply chain leaders are always on the lookout for issues that could cause a major supply chain disruption. Leaders have noticed the increase in natural disasters in recent years that are posing supply chain threats and developed alternate routes and contingency plans. Leaders keep on top of the results of additive and chemical testing and find ways to remove dangerous chemicals and additives from their products long before regulations prevent their use. Leaders are on top of supply and demand swings and proactively lock up supply before it becomes a problem. Leaders look ahead and internalize what’s important.

Share This on Linked In

Strategic Sourcing is Dead!!

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower GroupĀ (TMG) and a contributor to the News U Can Use TMG blog.

And if it’s not, it should be. In our last post, we talked about one of the major challenges in a transformation journey for Sourcing/Supply Chain organizations — namely, the vowels A, E, I, O, and U (which stood for Adoption, Execution, Implementation, Optimization, and Utilization). In this post we’re going to address the second, equally important, challenge. Strategic Sourcing has not delivered the promised results years ago, and it isn’t delivering the right results today. Why not?

First, some assumptions. We can safely assume that the goal of every transformation is Exceptional Business Results (EBR). Furthermore, based on an analysis of recent market events, which contain a very high rate of bankruptcies and warnings, we will also assume that most supply chain organizations are not achieving Exceptional Business Results. Our own research over the years appears to affirm this assumption. It is safe to say that the vowels are not the only major challenge organizations face today.

Basically, we believe that the Strategic Sourcing process is fundamentally flawed. And while our research has shown that that fixing the vowels will drive better performance and results, we will never achieve maximum EBR executing a flawed process. In fact, we go one step further and surmise that the flaws sometimes lead to destruction of overall, or system wide, value (which ultimately drives Exceptional Business Results). At some point in the maturation of every organization, if we are going to maximize Exceptional Business Results, in addition to tackling the vowels, we must address the process itself. We do not expect everyone to agree with us, and we hope that there will be some spirited exchanges to flush out where the problems lie and what can be done. We strongly encourage our colleagues in the professional services community to challenge their thinking, and especially their clients’ thinking, on this topic. We are all responsible for the situation we are now in. It’s up to us to change it!

We started by challenging our own beliefs and modifying our own core processes — and we were surprised by the results. And while it could be the case that our research to-date may not apply to the larger population, we have been testing our “next practices” approach on clients for the past year. This group includes a number of very large and complex multi-national organizations who thought that they were already achieving EBR, and found that when they tried our new approach they were able to achieve EBR that were significantly beyond what they were already seeing with their best practices methodologies. Now, every other organization we have spoken to has jumped on the argument and embraced it almost viscerally. (After all, shouldn’t the goal of every supply chain organization be to achieve EBR for the year that are better than last year?)

Our belief that the core processes need to be transformed to truly achieve EBR is striking a chord. At a recent workshop with a Fortune 25 client, where we had the senior executives from the supply chain organization and their internal customers, the reaction was ecstatic. It literally reminds me of the old days back in the early nineties when we talked about change management as the absolute single most critical issue for supply chain organizations. (How time flies when you’re having fun!) The reaction then felt very much like the reaction now. In addition to the very positive responses we’ve been receiving from industry, we have also found some academic research that supports our argument (including some by Prof. Michael Jensen of the Harvard Business School, but we’ll address that in a later post). We even went back and talked to some of the very early proponents of Strategic Sourcing from A.T. Kearney (whose benchmarking roundtables we participated in), who strongly nodded their heads in support of our argument.

If we go back to the beginning, it started with cost … and to this day, it is still about cost. While we have moved from unit cost to landed cost to total cost of ownership, it’s still cost focused. And while cost cannot be ignored, we firmly believe that a process rooted in cost can never be a strategic process. Cost as a strategy, for the majority of organizations, is not, and has never been, a core strategy. Long term growth has not been achieved from a foundation of cost cutting. Cost cutting is not viewed favorably by the rest of the supply chain, which then explains the absolutely horrendous change management issues that we have all faced. And while we are not trying to add to the discussion generated by recent headlines outlining the major hiccups for some of the world’s largest and most admired corporations (like Toyota, Apple, BP etc.), a significant portion of the conversation around those hiccups has been focused on them squeezing costs out of either the supply chain (the entire system) or just the supply base (and no, they are not the same … I assume we all agree on that). Furthermore, cost reduction is not very high on the goal sheet of any of our major internal stakeholders.

Since the focus on cost ignores almost all of the other elements of the entire system that contribute to EBR, it may actually be sub-optimizing the entire system. While we do recognize that we have moved from the traditional three-bids-and-a-buy to using TCO and risk and supplier management and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards, and benchmarking quartiles, the reality is we are still trying to roll a large boulder up the devil’s staircase with this myopic focus on cost. We can say this with certainty as we have all been there, done that as industry executives and at the MPower Group and have not seen much in the way of change in the last 15 years. We need to move from cost, which is not a strategy, to value delivery, which is.

When we focus on cost, we lose the argument with the entire supply chain system before we even start the conversation because the system sees the goal of cutting costs as a threat to the rest of the elements that are contributing value towards EBR. Furthermore, in most cases when we’re sourcing, we don’t even know what those elements are! If we don’t know them, we can forget about knowing what their impact is on the EBR.

Let’s use an example to illustrate our point … a simple hamburger. While deploying the current best practices, I am sure that we will all be able to provide the best lead times and quality and cost with the least amount of risk, and so on. But how will we identify the impact of the hamburger on the quality of work life for the corporation and therefore its ability to attract and retain the best talent? And if attracting and retaining the best talent is a competitive advantage, especially if that talent does not end up with the competitor, then how will we ever include that impact on the entire system? Will our current best practices ever uncover that value contributor to EBR? (The cost of acquiring and retaining talent is nothing to be sneezed at either. If you’re snickering right now, think about how an offshore drilling platform feeds their people, or Google’s famous cuisine) Should we be purchasing Kobe beef for the hamburger because the value that the hamburger contributes to the entire system is far greater than the 5% that we might have saved on our TCO models? Capturing this value is what will get us closer to EBR. Our stakeholders know that; the head of HR knows this issue intimately. But wouldn’t you agree that most sourcing strategies around hamburgers would NOT include talent management as one of its major decision variables? Voila … we have met the resistance because our stakeholders know that we are approaching it from a cost management perspective and that we are ignoring their many other performance metrics. Unless we figure out a way to approach the decision starting with their value perspective, we will not succeed and we will continue to roll a large boulder up the devil’s staircase.

Another way to look at this is that unless we start expanding our pool of stakeholders to start considering our stakeholders’ stakeholders’ stakeholders needs, and start with those needs, we will never uncover these value contributors. They are real, they are tangible, they are measurable, they are observable, and, in most cases, they are ignored! Consider Prof. Jensen’s basic argument which states that in trying to maximize things like Balanced Scorecards (TCO, risk etc.), we can destroy value because it leaves managers with no way of making the tradeoffs. Thus, a balanced scorecard is in fact counterproductive as a performance evaluation system, even though the process of creating the scorecard is critical because it helps “managers understand both the company’s strategy and the drivers of value in their business”. While we may not necessarily agree with everything that Prof. Jensen claims, the similarity between our arguments are pretty clear. Approaches like TCO and Balanced Scorecards do end up actually destroying value and leading us away from the EBR they claimed they would deliver.

There are a series of articles coming out from us at The Mpower Group that will continue to lay out the next practices that we have proposed to our clients. We will explore why we think the strategic sourcing process needs to be fundamentally altered. While we do not expect everyone to agree with us (and we are sure that there will be some spirited exchange), as we pointed out, we have been and are talking to a number of very large and complex organizations, as well as some not quite as large, and every organization that we spoke too has literally jumped on the argument and embraced it. In addition, we conducted a fairly comprehensive comparison with the the doctor’s favored approach TVM (Total Value Management) and Demand Driven Value Networks proposed by AMR and Gartner. These conceptual frameworks appear to go the furthest in extending current thinking. In our upcoming posts, we will discuss where our approach is very similar to TVM and DDVN but we’ll also point out where our thinkings diverge.

We will tie in the concepts of AEIOU that we discussed in our first post. We will also tie in some very powerful academic research that supports most of what we are saying. There is a significant amount of value in our respective organizations and we suspect most of our organizations are frustrated because they cannot seem to capture this value. It’s time to change the axis, to fundamentally alter the way we make these decisions. So whether you agree or disagree, please join us in the discussion. Keep watching and sharing your thoughts with us!

Strategic Sourcing is Dead!!

Thanks, Dalip!

Share This on Linked In