Monthly Archives: November 2010

What’s the Right Number of Approvals?

In a recent piece by ChainLink Research on “how a legal department can add value”, the author noted how gaining efficiencies is not only about technology, but about process. Referencing Cisco’s big push to get to “one-approver per function”, the article noted that it’s important to ask what is the real ROI of having additional approvers and what is the related impact on revenue and customer satisfaction. It’s important to ask how much time the extra approvals take and what the time-value of money is for holding up orders for that many extra days. And what is the cost to the organization if approver number 17, who is the least affected by the purchase, decides to reject the order 7 days into the process when the product is needed on day 10?

While it’s probably impossible to build some hard and fast rules that will always apply, it is important to set some ground rules as to when another approval is needed, and when an approval can be skipped or automated. For example, does every order over $10,000 need to be signed by three approvers? What if the order is for four new servers at a cost of $20,000 and the purchase has already been approved in principle in the budget (for an amount up to $25,000)? Should not the CTO’s approval alone be sufficient once the product has been selected (provided proper procurement policies have been followed)?

At most there should be one approver per function, and the approval of functions that are minimally impacted should probably not be required at all if at least one of the approvers is a senior manager or the purchase is not high dollar and at least one of the approvers has deep product and/or service knowledge. And any approvals that can be automated should be. For example, a $500 spend on office supplies for approved products from an approved supplier should probably not require three manual approvals.

Any thoughts as to what the right number of approvers is?

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An Integrated View Is Needed, But Integrated Dashboards Are Deadly

A recent piece from ChainLink Research on going “from complexity to clarity” suggests a “management dashboard” that allows a manager to see the status of the end-to-end supply chain and the potential implication of a decision with respect to its impact on key metrics is the key to getting a grip on your complex supply chain.

It sounds great in theory, but it’s very dangerous in practice. Why? In addition to all the reasons I’ve already given you on why dashboards are dangerous and dysfunctional (in this post and this post), when you start chaining dashboards from different systems, you introduce the following additional risks:

  1. inconsistent views
    Different systems may calculate metrics in different ways. For example, the WMS (Warehouse Management System) may present an on-time delivery rate of 90% while the SIM (Supplier Information Management) System has an on time delivery rate of 85%. Which is right? What if they’re both right? For example, the WMS may calculate on-time as percentage of shipments that arrive on the designated day using arrival time while the SIM calculates the on-time as the percentage of shipments that arrive complete on the designated day.
  2. propagated errors
    What if the dashboards propagate erroneous metrics that are used in calculations to produce even more erroneous metrics? For example, what if the WMS incorrectly calculates on-time using date and not delivery time, and doesn’t capture the reality that everything after 11:00 am is late (as the truck can’t be unloaded during the normal shift if it doesn’t arrive by 11:00 am)? An inflated metric is then passed to the IMS (Inventory Management System) which uses this metric in its perfect on-time metric, which calculates this metric using parts that pass visual inspection but not quality testing. An inflated metric is then passed to the SIM system which might calculate perfect orders using orders that pass initial component testing, but ignore failures or returns within the full integrated QC (Quality Control) testing process.
  3. overconfidence
    The more information you have, the less likely you are to notice missing information. For example, if you have a dashboard that tells you your highest spend categories, current sourcing projects, upcoming payables, on-time orders, missing orders, expiring contracts, current and past-due project tasks, etc. you might not notice that your logistics costs are going through the roof.

In other words, integrated dashboards don’t necessarily improve visibility, but they do increase risk!

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If There Is One Constant in Global Business …

… it’s buyer-beware. And one can’t help but heed the truth when you read this recent article over on Forbes on India’s Restaurant Secrets. Quickly getting to the point, the article notes that:

“Today’s Special” can mean three things:

  • the restaurant is trying to get rid of old food,
  • the chef is experimenting with new food, or
  • there is a genuinely good ingredient that’s come in and the chef wants people to enjoy it.

There’s very little difference between this situation and the situation you are faced with when a supplier puts up a large stock of inventory for auction at low, low prices. Either:

  • the supplier is trying to get rid of obsolete inventory,
  • the supplier is trying to push a new, struggling, product line, (which will likely be discontinued in the near future) or
  • the supplier was so proud of a particular product that it got a little too enthusiastic in a production run and/or just wants to get the product out there (expecting that word of mouth will lead to many profitable sales in the future).

You Are Invited to the Wake For Strategic Sourcing


Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) (former leader of the Strategic Initiatives Group for Bank One and former Principal of DEC) and a contributor to the News U Can Use TMG blog.

You are invited to the wake … the tab is on us!! This will be the last of our posts on the Death of Strategic Sourcing. It has become clear to us that most of our community is generally in agreement that we need fundamental change.

For those that still need a bit more convincing, you can look at an interview (Next Practices Innovators Award – Executives Who Elevate Our Function) with Lamar Chesney, CPO of SunTrust Bank and the keynote speaker at the 2010 Aberdeen CPO (Chief Procurement Officer) Summit, whom I first met at Tim Cummins’ IACCM conference earlier this year. Tim was kind enough to provide me with a stage and Lamar and I ended up having a follow-up conversation over some drinks (ummm, I think it was called Scotch!!). If a very senior and highly respected current practitioner is generally in agreement, then I think it’s time to move on. If you need further proof, there is a very interesting report by Kevin O’Marah (“Supply Chain Almost at the Table in 2010” at blog.seeburger.com) at Gartner that clearly points out that even after 25 years, we’re still not there. While the initial numbers look very good, it becomes clear when you dig inside the numbers that the picture is not quite as rosy as we think. “But before we get too excited about this trend, it’s worth asking whether or not the business really knows what supply chain is all about. Only 29% used the label ‘supply chain’ to describe this leader. Nine percent called it ‘procurement’. Another 9% chose the label ‘operations’, while yet another 7% said ‘logistics’. Forty-three percent of respondents were unable to find the functional title for their highest-ranking supply chain executive among these terms“. Bazinga!! Or, as Paul Harvey used to say, “and now you know … the rest of the story“. Basically what Kevin points out is that even though we may have made some progress, we are clearly not there yet.

What is interesting are the views that Supply Chain organizations have about their role. According to Gartner,


“The most encouraging facts revealed in this research have to do with the expanding view supply chain has of its own role. … In terms of priorities, although the No. 1 overall stated goal is still cost oriented (56% chose ‘reduce operational costs’ as one of their top-five priorities), the No. 2 is ‘improve customer satisfaction.’ And even though they’re lower on the list, competitive imperatives such as product innovation, or ‘getting new products to market faster,’ (28%) and risk management (24%) rated significant awareness”.

Two points I would like to make here. First, please note that cost continues to define us, but even more importantly, the second point is that this is supply chain’s view of its own role and I would humbly submit that at the end of the day, it matters not what we think of ourselves but rather what our stakeholders think of us. And I would further submit that if asked, most of our stakeholders would view us through the cost prism and not much else. And here is the money quote from Kevin: “Supply chain has a lot to do with whether or not a company wins its competitive battles, and it’s trying to get the rest of the business to see this. It’s time we get our story straight“.

If you need further proof, take a look at the recent cover story in CPO agenda that screams out “When do we get to SRM?”. Here are some of the statements that strike a chord with me:

  • “… For all of the potential benefits, many organisations have struggled to make it further along the road to supplier relationship management than the contract monitoring stage ..”.
  • “SRM activity is about value creation, not cost reduction ..”.
  • “The best suppliers are going to be in demand ..”.
  • “Those organisations that take the SRM approach with a supplier are more likely to be seen as a preferred customer … the benefits of SRM show it is about more than process and procedure. It also requires the right behaviours, skills, resourcing, and organisational backing to ensure it delivers to its maximum potential”.
  • “The skills required for SRM are different from procurement’s traditional strengths, which underlines the importance of the people question — not only in development terms but in deciding whether it is procurement that should carry SRM responsibilities ..”.

 

That last quote should be very disturbing for us in the community because essentially the point being made is that procurement organizations are so mired in the traditional mindset of cost reduction that they don’t have the right competencies, and this is leaving value on the table. OK, so far that seems to be in line with what I said in Old MacDonald Was Right — It Is About E-I-E-I-O!), in The Sourcing Emperor Has No Clothes! and in Strategic Sourcing is Dead!!! (The Debate Rages On!). CPO Agenda even goes a step further in stating that perhaps Procurement is not even capable of handling such an important responsibility and perhaps it belongs somewhere else. Hmmmmm, I hope they are ready with their chain link armor to absorb the arrows headed their way because at least we were saying that we are more than capable of leading the charge on value.

Here’s what Jeff Dobbs, Global Head of Diversified Industrials for KPMG, had to say: “almost four in ten now acknowledge that driving down costs has damaged relationships with their suppliers“. “Those businesses that continue to follow the traditional low cost or bust models in supply chain management are at risk of losing a foothold in the market. … the expected marketplace winners are entering into strategic relationships with suppliers that not only deliver product, but provide innovation as well …”

Clearly, KPMG is also pointing out that this cost focus has actually destroyed value along the way. In fact, if you read the entire article, they point to this as additional risk being introduced by the sourcing organization.

Before wrapping up this conversation, I would be remiss in not pointing out the other part of the argument. Even if you think that you are a truly strategic organization that is adding significant value, we would postulate that there is still too much of a focus on the consonants (tools, process, technology, etc.) and not nearly as much as needed on the vowels (Adoption, Execution, Implementation, etc.). Even someone who has been called one of the greatest communicators ever (Obama) is now acknowledging that he paid way too much attention to the legislation and policy (consonants) and not nearly enough to the politics and selling of the change (the vowels). Whether you agree with him or not politically, he is clearly pointing out the imbalance between the two and how it has hurt him dramatically.

I would also point to the series of posts by the doctor recently, where he has been analyzing this whole notion of “strategic” and especially the last one on the one commandment of value. I like the simplicity of that. It’s easy to absorb and talk about. I would hope that we can all agree that the definition of value requires a fundamental shift in the way we think and conduct business and that value goes way beyond what most of us have defined and measure today. If all it means is nibbling around the edges and focusing on more spend analytics and risk frameworks, then I’m afraid that the doctor and I will agree to disagree.

To those that think this debate is “nonsense”, “the most laughable statement”, “nothing more than market pitches”, “a long winded rant”, “an outlandish attempt to call attention to the idea” … we wish you all the luck and success in the world. To the rest of the community, many thanks for the support and encouragement, let’s continue our conversations and focus them now on solutions. We have already partnered with IACCM to conduct a research project on some aspects of this issue and will continue to look for others who wish to engage in constructive confrontation. But for those critics that still refuse to concede, we are in the process of documenting a case study where this process was implemented at a Fortune 10 company with incredible results.

Thanks, Dalip.

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There’s No Such Thing As Low-Cost Country Outsourcing

The Business Continuity Institute (BCI) recently released the main results of its study across 35 countries that found that 70% of organizations recorded at least one supply chain disruption in 2010. While this is not news, as the statistic has been this high for a few years now, what is news, as highlighted in a “Procurement Leaders summary” is that where businesses have shifted production to low cost countries they are significantly more likely to experience supply chain disruptions, with 83% experiencing disruption. In other words, your chances of a disruption are greater than 4 in 5 if you use low-cost countries! With an average disruption cost exceeding $700,000 ten percent of the time and an average impact on stock price of 9% (source: PWC), there’s nothing low-cost about low-cost country outsourcing once you factor in the losses from the inevitable disruptions!

Then, when you add the fact that 1 in 5 disruptions result in (serious) damage to your brand, you need to ask yourself why so many of you still believe in this fairy-tale. It’s equivalent to looking for the pot of gold at the end of the rainbow. You’re not going to find it.

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