Monthly Archives: April 2011

Purchasing Practice on Supply Management Transformation: Lead on Innovation

In keeping with one of SI’s major themes for 2011 on Next Generation Sourcing, today we are going to discuss the recent Transform white paper from Purchasing Practice (a strategic procurement advisory company). Entitled The Brave CPO: Leading on Innovation, the white paper defines the CPO’s role in innovaton with respect to business strategy and procurement strategy and discusses how the CPO can leverage external innovation networks.

The white paper starts off by discussing the need to understand the company’s growth strategy, which generally falls into the Market Penetration, Market Development, Product Development, or Product and Market Development buckets, and how Procurement can help. According to the white paper, innovation is increasingly sourced external to the organization, placing the skills and responsibilities of the procurement function right at the heart of its process. This is a very important, but overlooked point. As companies continue to outsource more and more of product design in addition to manufacturing to strategic suppliers, the importance of Procurement and Supply Management to successful innovation increases exponentially. It’s literally the difference between smashing success and abject failure.

Plus, without Procurement’s help, as they are in the best position to understand supplier capabilities, the business won’t be able to answer the critical questions necessary to select the growth strategy. Specifically,

  1. Target customers can only be identified once the organization is sure it can provide the products or services they require.
  2. Products and Services can only be selected once the organization knows that it can offer those products or services at a profit (which can only be known once cost is known).
  3. Product and Service Delivery can only be determined once the efficiencies and costs of the different options (which will often include 3PL or third party support) are determined.

Then the white paper discusses some core innovation drivers, which generally fall under business, market, technology, and environmental categories. These drivers fit nicely with CAPS recommendations for creating tomorrow’s value, as outlined in SI’s post on VFS Level 3. Especialy since a good innovation strategy optimizes costs and resource utilization, improves organizational flexibility, and promotes sustainability in the long term.

After addressing the innovation drivers, the paper moves on to a discussion of the Procurement innovation strategy (and the need to connect it to the organizational growth plan). A good strategy is one that reduces costs through cycle time reduction, exclusive knowledge or intellectual capital, preferential access to scarce resources, increased agility, environmental friendliness, or sourcing innovation, since cost reduction is always a concern of CXOs and increases the chances of organizational support across the board. The strategy is often identified through an analysis of the organization’s competitive priorities to determine which one Procurement can make the greatest contribution to.

Once the Procurement innovation strategy is selected, it’s then up to the CPO to make it happen. This will require proactive leadership as the CPO must convince the C-suite it’s the right way to go and the team that their effort will pay off in the end. In addition, the CPO must define, commit to, and meet targets, metrics, and budgets to gain the respect the Procurement department will need for continued success over the long term. In addition, CPOs must make sure the right organizational, procurement, and individual capabilities are in place for success.

Finally, the white paper discusses the concept of Innovation Centered Procurement, which is Purchasing Practice’s equivalent of CAPS Value Focussed Supply, The MPower Group’s Next Practices, Tompkins’ Associates Supply Chain Value Creation Framework, Bravo Solution’s High Definition Sourcing, and Greybeard Advisors’ Next Level Supply Management. Since it’s not much different from the other frameworks, we won’t discuss it in detail, but will suggest that you definitely add this white paper to your Next Generation Sourcing library. To obtain a copy, send an e-mail to info <at> purchasingpractice <dot> com with the subject heading “Leading on Innovation“. The discussion of high level enablers and leveraging external innovation networks is a must-read for anyone trying to take their supply management organization to the next level.

It’s Easy To Move Beyond Spreadsheets and Improve Operational Decisions

All you have to do is survive the uprising that results when you ban spreadsheets from the organization.

Industry Week recently published a very nicely thought out and written piece from SAP on “how to move beyond spreadsheets to improve operational decisions” using business intelligence that sounds wonderful in theory but doesn’t work in practice. Why not? Because the first thing a user does when they get a new system is dump the data to a spreadsheet they can play with because

  1. they are used to the spreadsheet environment and
  2. the vast majority of BI tools don’t have the capabilities the average analyst needs to do the analysis she needs to do because they all work off one version of the data that cannot be altered in any way.

Thus, an average BI system only worsens the problem as users create and share more and more spreadsheets in an effort to get around the limitations of yet another system with yet another version of the truth. There are only two ways to move beyond spreadsheets. They are:

  1. Ban Spreadsheets
    and force your users to work within the limitations of the BI tool or
  2. Adopt a Real Analysis Tool that Supports a Spreadsheet Interface
    and allows your users to continue to use the interface they are comfortable with in a productive, value-creating, manner

Spreadsheets are not going to go away just because you’ve introduced yet another system. It’s delusional to think otherwise. Your only choices are to ban them or embrace them in a manner that is actually helpful.

What Do You Want?

One thing is for certain, the CPO Agenda knows how to get your attention these days. As soon as I saw the headline for their recent executive debate on “what comes first, quick bucks or big changes”, all I could say is “well, that depends on what you want“. Are you just in it to make a buck, or are you in it to make a career. A career requires long term viability, and that requires the willingness to make big changes when big changes are necessary. Continue to do it right, and the market, with its money, will come.

But I guess the answer is not that easy when management is divided, or you want to keep your job (though I personally don’t see why you would want to keep a job at a company with no vision of the future, as it won’t likely survive this economy without one, but I have to respect a healthy fear of the current job market, or lack thereof). To this end, you could take the advice of Laurence Laroche of Saint-Gobain Packaging — quick wins are a means to gain this credibility [with purchasing] and then transform the function, and do a few quick wins to get respect and then start the long-term transformation.

The real question is whether you can pursue quick wins and long term transformation at the same time. As Xavier Cassignol of FCI points out, it is difficult to do both at the same time, especially when purchasing needs to be constantly in tune with the broader challenges facing the organisation. Especially when product lifecycles are shrinking along with average management tenure. For better or worse, a manager is not likely to survive four years if she doesn’t show increasing returns in each of the first three years, which is difficult when real transformation efforts often take two years in a multi-national.

But you still need to constantly improve. We’re in a perform or perish culture, and it’s not always easy to keep up, so getting ahead of the game can be a real challenge. And you can’t ignore your long term supplier relationships, even if another supplier tries to woo you with lower costs, because quality, reliability, and fit is important too — so you have to continually improve in supplier relationship management too.

And, as Mohamed Marfouk of LVMH notes, if you do continuous improvement right, each step is going to happen faster and faster, because you are building on success, you are building credibility. As you build success in marketing then R&D will want to be your customers and so on. You must carry out your own marketing internally so that other people know what you did and that it worked. This will drive more customers, which, in turn, means you get greater resources and you deliver more. It is continuous. Especially if you start with getting the right team, as I pointed out in step 1 to building a world class supply management organization.

Want to Cut Cost? Focus on Quality!

I’m glad I read all the way to the bottom of a recent article in CPO Agenda on “cutting it fine”, even though I became a little discouraged about half-way through, because the response from Willem F van Oppen, owner of Provoque Consulting in The Netherlands, succinctly summarized the problem with continuously focussing on the non-strategic activity of cost cutting.

As long as companies only play to shareholder value and its myopic dynamics, procurement will not be able to successfully drive a strategic agenda of value sourcing.

There’s a limit as to how much cost can be cut. That’s why, by the third reverse auction on a category, costs actually go up. At some point, all of the margin is squeezed out of a supplier and the costs are not going to go down without a sacrifice in quality or service unless value is improved. This might take the form of increased quality (since a product that lasted longer or sold at a higher price would, relatively speaking, cost less) or better service (since service has a cost too) or it could take the form of raw material substitution or production process upgrades (since reduced production time would lower production costs). Either way, value is being added.

As Rod Wood pointed out, a key role of the Procurement function is cost management. Cost cutting is a knee-jerk reaction to a problem that often introduces more problems than it solves (when quality, service, and/or on-time delivery decreases) whereas cost management is done according to a strategic plan that balances quality, risk, security of supply, product development, and logistics. The odds of the success of the former aren’t much better than a roulette table while the odds of success of the latter are about equal to the house winning.

What Your Supply Chain Can Learn from Starbucks

A great post over on the HBR blogs on “Why I Appreciate Starbucks” summarized some of the fundamental differences about Starbucks when compared to other multi-national corporations. These differences are part of its success story and contain best practices that can be used to improve your supply chain.

The author identifies the following fundamental differences between Starbucks and your average corporation as follows:

  • it sees itself as part of a larger community,
  • it tries to balance profit with social responsibility,
  • it creates a “third place” between home and office where people can connect comfortably,
  • it trains its employees to brew the perfect espresso in order to insure the quality of its signature product is not sacrificed,
  • it doesn’t let major disruptions delay important actions and events that need to be done,
  • it understands that employees feel far more committed to companies whose values and mission they find inspiring, and
  • it understands that customers and clients increasingly prefer to support companies whose values are consistent with their own.

These lessons can be easily translated into supply chain organization success.

  • The supply management organization must see itself as part of a larger company.
    In a successful business, all of the individual units cooperate and act as one larger business unit.
  • The supply management organization must balance cost reduction with social responsibility.
    The media and consumer backlash that can result if the organization cuts cost by buying from third world factories that employ child labor, for example, can cost way more than the amount the organization will save.
  • The supply management organization must create an atmosphere of collaboration
    and provide a comfortable meeting area where cross-functional teams can meet and work together towards success.
  • The supply management organization must train its employees to source the perfect bill of materials,
    where cost, quality, reliability, and all other important factors to the business unit that needs the product or service are appropriately balanced and the end result is overall better than what the organization would have negotiated on its own.
  • The supply management organization must be able to work through major disruptions quickly and without significant impact to overall commitments to its end customers.
    The supply management organization should regularly be gathering market intelligence and updating its contingency plans and be ready to get the job done no matter what, even if it means a lot of extra elbow grease now and then.
  • The supply management organization must hire an A-Team that believes in the mission and values of the organization.
    A team that is not committed will never achieve the level of success as a team that is.
  • The supply management organization must put the needs of the organizational units they serve between their own.
    The needs of the many outweigh the needs of the few, or the one.

Follow this advice and your supply management organization is on its way to becoming world class.