Monthly Archives: August 2010

The Sourcing Emperor Has No Clothes!

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

As we pointed out in our last post (where we killed off the old sourcing process), Strategic Sourcing has always been fundamentally flawed. It clearly did not deliver the promised results years ago and it isn’t delivering the right results today. Furthermore, I would argue that the results that Strategic Sourcing is delivering may not be totally accurate because the unintended consequences that the function creates (more on this later) may actually destroy value. The current process is penny wise and pound foolish. That’s never a strategy for long term success. What we need is a new way of looking at this function. We need a set of next practices to elevate us beyond what current best practices recommend.

Now, there are many “defenders of the faith” who have argued, quite vehemently, that the TRUE process is not flawed; it was just never executed right. Semantics. What’s interesting is that not a single one of them has argued with our fundamental premise, that Strategic Sourcing has failed to deliver promised results and that it may have actually destroyed value along the way. I guess there’s no point in trying to change their minds as long as they agree, and they wholeheartedly do, that the traditional Strategic Sourcing process must be changed. Are you at least intrigued? Enough to at least join in the debate, regardless of which side you take?

As we alluded to in our last post, sourcing has always been focused on cost. And while cost cannot be ignored, a process that is rooted in cost cutting simply cannot be considered a strategic process for any sourcing organization. Cost has never been a long term strategy for most corporations. I’ll put it another way. Long term growth was never achieved on the foundation of cost cutting. And while we are not trying to use scare tactics 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 blunders is focused on how squeezing costs out of either the supply chain (the entire system) or just the supply base (and there is a difference) was at the root of the problems.

Cost cutting is not viewed strategically (or favorably) by the rest of the Supply Chain either. If you think otherwise, then tell me, have you asked them? This might help explain the absolutely horrendous change management issues that we have all faced as practitioners. Cost reduction is not very high on the goal sheet of any of our major internal stakeholders, other than the CFO. And if it is, it’s either there temporarily or was imposed by someone else. What your stakeholders and their stakeholders will say is that they want Exceptional Business Results (EBR) that drive long term competitive advantage. Since the focus on cost or Total Cost of Ownership (TCO) ignores many of the other elements that contribute to EBR, it may actually be sub-optimizing the entire system. While I do understand that we have moved from the traditional three-bids-and-a-buy to using TCO calculations, risk analysis, supplier management, decision optimizing, and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards and benchmarking quartiles, it’s still not enough! Since the initial goal of the process is cutting costs, it will always be like rolling a large boulder up the devil’s staircase. We lose the argument with the entire system before we even start the conversation because they see the goal of cutting costs as a threat to the rest of those elements in their system that are contributing value towards EBR. In most cases, they are right. Most of the time, Sourcing doesn’t even know what those elements are — forget about knowing what their impact is on the EBR. This also explains why Strategic Sourcing has never been fully integrated into the Supply Chain and why many still continue to think of those two functions as separate from each other.

In addition, the argument that we proposed almost ten (10) years ago, that the sourcing process cannot be strategic and competitive differentiator if everyone else is also doing it, still holds. Think about it. We are all using basically the same process, going to the same supply base and trying to extract the same leverage using the same techniques. What we have just described is a “commoditized” process. Beating down the same suppliers that all your competitors are beating down for the same 3-5% savings just isn’t strategic. Call it something else, but it isn’t strategic!

We can continue to differentiate ourselves on the basis of improving this “commoditized” process using best practices OR we can fundamentally alter the game by using a set of next practices. We can either compete against others or we can move our organizations to competition free zones. We can either benchmark ourselves against others who are all in the “commodity” world or we can re-define the measurement system so there is no benchmark for a while. We can either move up and down the traditional TCO curve or create and relocate to a totally different value curve. We can either defend our position in existing markets or create new markets. How great would it be to get the best terms for a contract without ever needing to negotiate? That’s what I’m proposing.

There are intended consequences and unintended consequences to all Strategic Sourcing decisions. Some of these consequences have a positive impact on the overall value while others have a negative impact. Some of these are known consequences while many are unknown consequences. Since the Strategic Sourcing process is based on TCO, it often only takes into account some of the variables needed to create Exceptional Business Results. As it stands, the Strategic Sourcing process is constrained from ever incorporating all of the variables mentioned above (intended consequences, unintended consequences, positive and negative, etc.). The result, many times, is a decision that clearly optimizes at the TCO level but sub-optimizes at the system level. (Exceptional Business Results Sourcing optimizes at a systems level). Tweaking the current process with best practices will certainly give you some benefits but it will clearly not lead to any type of sustainable transformation or EBR. For that you need next practices. And over the last year, we’ve created a suite of services to help our clients capture increasing value through each step-change of the Strategic Transformation. That is the summation of our argument.

While some organizations have clearly made very good progress in elevating the role and strategic importance of the sourcing / supply chain function, I think it is safe to say that we are nowhere close to being where we all thought we were going to be by now. Wouldn’t you agree? We will also be discussing this and similar topics on our own blog, News U Can Use. Come by and weigh in on the discussion!

Thanks, Dalip!

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Is there a T in BPM?

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

I don’t get it. I have been involved in numerous business process improvement projects over the past 20 years. I have been in numerous meetings about “business process management”. I’ve read white papers and looked at discussion groups. In way too many cases, very early in the conversation, a business process discussion gets down and dirty into integration processes, XML and other related technologies. At a certain point in time, a technology discussion becomes necessary and important, but not early in a BPM initiative. Here is my vote — don’t get techie in a business process discussion. The point is to review, understand and diagram your business process.

Here are some quick guidelines I have pieced together over the years for various business process improvement initiatives:

Engage in a discussion. With respect to Global 2000 executives in particular: discuss your business process internally before you engage an outside vendor, be it a consulting or technology company. If you want to use a technology, use a white board and markers. After a thorough understanding of the process, only then should modern technology be used, and even then the first piece of modern technology employed should only be used to capture the process flow. In other words, you start with something like PowerPoint or Visio. If the organization is large and/or distributed, you might also leverage social networking and collaborative tools, such as wikis, to engage a larger team and obtain input into what your business process actually looks like. Social networking is a great tool to garner input and gain consensus on what a business process looks like, since the challenges of including a large, extended and distributed team is greatly simplified.

Don’t get myopic. Many business processes are cross-functional and extend beyond the walls of your own enterprise. Don’t let those boundaries affect the improvement initiative. Many times, a business process is only as good as its inputs (garbage-in/garbage out). Make sure you understand your inputs/outputs, and in some cases, it is not wrong to extend beyond your own scope of control to better understand and diagram the process. This can be a delicate process, so it may not be for everyone, but if you can engage externally and collaboratively, your results can improve.

Use common phrases and definitions. One way to get team members to understand and define the process better is not to use internal acronyms. Try using industry terms and/or terms you would use to explain a concept at a party. If this is a customer-facing business process, explain it in terms of benefits to your customers. A supplier-facing initiative, benefits to suppliers. By struggling to obtain new phrases/definitions, you will gain insight and, more importantly, challenge the establishment (“now that I say it that way, why do we do it that way?”) — a great 1st step in developing the improvement plan.

To summarize, engage your team, both a core team and an extended team, in defining your process, get it on paper (or electronic form) and have everyone agree that this is at least close. I have seen organizations who engage technology vendors about a business process realize that they did not truly understand the business process. It can get very amusing to watch executives learn about their own business and get insight from putting the business process on the table (hey — how about that for the “t” — the table).

Want to get creative? One business improvement initiative I was involved in actually fined members of the team for using technology acronyms and even internal names. We fined them $1.00 each. I donated $2.00 myself and the pot got as high as $14.00 — that got us an appetizer at dinner that evening!

Thanks, Sudy.

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A Hitchhiker’s Guide to e-Procurement: Catalogs & Contracts, Part II

Mostly Harmless, Part XX

Previous Post

The last post defined catalogs and contracts and discussed reasons why they will need to be revisited and revised on a regular basis. As promised, this post will address the associated challenges of catalog and contract maintenance, some associated best practices, and the benefits that could be expected from an appropriate e-Procurement solution.

Common Challenges

  • Unused Item/Contract Identification

    Catalogs are continuously updated and procurement constantly negotiates and renegotiates contracts. However, how many of the items are ever bought and what percentage of the contracts are used for more than a short time?

  • New Item Identification

    What items were bought this month/quarter that were never bought before? Which are not associated with a contract or an approved catalog?

  • Similar Item Identification

    For those items which are not on contract, were there similar items on contract that would have sufficed? If not, were there at least similar items in approved catalogs that would have worked?

Best Practices

  • Automatically Flag Items Not on Contract and Force Supervisory Review

    The best way to reduce maverick spend is to prevent it from happening in the first place. Forcing a supervisor to review all purchases not on contract (above a certain dollar limit or for products / categories there are contracts for) can put a significant dent in contract spend.

  • Automatically Flag Items Not in the Catalog and Force Procurement Review

    Not everything will be on contract, but there’s no reason that the majority of goods and services that the organization needs to buy on a regular basis can not be in the catalog. Unless the item is brand new, it should be in the catalog if it is needed. Forcing Procurement review will minimize the purchase of off-catalog items where price, and associated spending levels, are unmonitored and where pricing could spiral out of control.

  • Automatically Identify Items in Contracts and Catalogs that Have Not Been Purchased in the Last Month, Quarter, Year

    New items need to be tracked and monitored as any new items bought in quantity on a regular basis are prime candidates for future contracts.

Potential Benefits

  • Improved Contract Compliance / Reduced Maverick Spend

    The automatic flagging of off-contract and off-catalog purchases for manual review and approval can greatly increase contract compliance while simultaneously reducing maverick spend.

  • Easy Identification of Additional Savings Opportunities

    The automatic identification and tracking off off-contract items and associated volumes can identify some of the best opportunities for future savings opportunities.

Once the catalogs and contracts are up to date, it is time to begin the cycle anew. The next post will move on to how to cost a solution.

Next Post: Costing a Solution

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Where is Your Company on the Transformation Curve?

A recent article over on strategy+business on why it makes sense to adjust did a great job of outlining why business transformation needs to be a continuous process. Now that operating in a more volatile, less predictable environment has become a way of life, companies must be ready to repeatedly transform themselves. If the company can not respond to new challenges with a broad-based, enduring plan , it may soon be left in the dust by its competitors.

But most companies can’t do this, because they don’t have an adequately proactive road map for transformation. Instead, they attempt change on the fly, reacting to business disruption with equally explosive responses that may not be useful six months down the road or even sooner. On the transformation curve, they are stuck at the bottom in the reactive stage, when they need to be at the top of the curve in the sense-and-adjust stage.

A company that is reactive employs minimal seat-of-the-pants transformation strategies with little cross-company coordination or follow-up. Such strategies are not only limited, but unsustainable.

A company that moves up the curve becomes programmatic and takes more comprehensive approaches when major changes are required and the company has sufficient lead time. These approaches include thought-out widespread change initiatives across the lines of business that are most affected. Such programs — that include tactics, milestones, and executive assignments — can be quite effective in dealing with contained threats, such as new competitors or new rival products, but fall apart when the threats are not contained and well understood in advance.

But a company that reaches the top of the curve is able to sense-and-adjust. This continuous long-term strategy allows a company to constantly and consistently smooth out volatility in areas of business subject to swift and dramatic change. This is important in turbulent times.

And very important if a company is to have a successful supply chain, which not only has to deal with a tumultuous and unpredictable market, but also has to deal with risks of every colour and flavour, which pop into existence when and where they are least expected. Does your company sense and adjust? Is your supply chain ready?

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What’s the Right Planning Horizon for Your Supply Chain?

The recent report on Supply Chain Strategy in the Board Room by the Cranfield School of Management and Solving Efeso had some interesting and surprising statistics on the frequency of supply chain strategy review and the supply chain planning horizon. Namely, while the frequency of review was all over the place and ranged from less than a year at some companies to over 3 years at others, with an average of approximately 1.25 years for the electronics industry and 2.70 years for the heavy machinery industry, with the exception of APAC, the average planning horizon was between 3 and 4 years, and with the exception of the automative industry (which had an average planning horizon of 5 years), the average planning horizon was almost exactly 4 years across all of the other industries. That’s right, the average planning horizon for construction, heavy industry, electronics, consumer goods, chemicals, textiles, pharma, retail & distribution, and food & beverage was 4 years.

If empirical evidence is to be taken as truth, than this would suggest that 4 years is the right planning horizon for your supply chain. But is it? While the organization does need flexibility and the ability to change direction quickly if the market shifts, does that mean the entire supply chain needs to be reinvented every 4 years?

Product life-cycles are shorter than they used to be, but will the organization be producing completely different products in only 4 years? Or simply bigger, better, badder versions of the current product. At an industry level, most product categories have lifespans of decades … or longer. The basics offerings in any electronics category don’t change that often. CRT TVs lasted decades. Cell phones were primarily analog for about a decade. Than they were primarily digital for another before the modern smartphone came along, which will probably not change much (except with respect to the feature/function/performance classifications) for another decade. The technology for packaging food and making clothes changes very little from decade to decade. Even if the products themselves change rapidly, the production technologies change slowly and the dominant suppliers tend to retain dominance for years and relevance for over a decade, if not two. If a supply chain is properly designed, there’s no reason to think that the fundamentals will have to change every few years.

Furthermore, isn’t a long term strategic planning supposed to look forward five to ten years into the future? Maybe 4 is the new 5, but deeper thought would seem to suggest that this is a very-shortsighted view that will prevent the company from ever realizing all of the efficiencies and economies of scale that are available. This insight from one of the more forwarding thinking interviewees (who’s viewpoint was shared by about 10% of the respondents, who could be considered the leaders) sums it up best:

The review is continuous but the planning horizon is 7 years because the results couldn’t be reached in a shorter period.

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