In part I.i, we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. We’re doing this because, even if you have read it, it doesn’t hurt to read it again and brush up on the foundations before starting your Next Level Supply Management journey.
The authors outline a seven-step process to get from where the organization is to where it needs to be that starts with goals and ends with transformation. And it goes something like this:
1. The Right Goals
The right goals are SMART: specific, measurable, attainable, relevant, and time-sensitive and they must focus on real cost savings and value generation, not the cost per purchase order processed or the cost per FTE (which are tactical and send the wrong message — especially in the latter case as Hackett data demonstrates that world-class Procurement organizations tend to have the highest costs per FTE).
Targets should be mid-term, and not immediate, as true value comes from transformation, not one-time savings from a reverse auction because the supply-demand dynamics temporarily shifted in your favor. The authors recommend three-to-five year cost reduction targets that are mutually owned by Procurement, Manufacturing, Engineering, R&D, IT, and/or Finance as true transformation requires significant, up-front, investment in capital, brainpower, and personal commitment. However, considering that some organizations have seen 50:1 ROIs, the up-front preparation and investment will be worth it. In addition, the organization should start with three-to-five initiatives at first, and then add more only when the first set are under control. And it should avoid following in the footsteps of Jack Welch or Ignacio Lopez de Arriortua whose hard-nosed approach to cost reduction ultimately backfired in the end.
2. Process Integration
Competition is no longer company-to-company but supply chain -to- supply chain. As a result, a loosely coordinated group of companies focussed on the optimization of their individual objectives can not possibly compete with a supply chain operating as a team. A successful supply chain integrates each element of supply, design, production and distribution end-to-end. All of the stakeholders, both internal and external to the company, need to be involved in design and delivery. This is why its so important to have partnerships with strategic suppliers focussed on mutual benefit, and not arms-length hostile arrangements that result from a focus on hardball negotiations and perpetual price reductions on the supply side.
Within the company, the C-Suite, Sales & Marketting, R&D, Operations Management, Product Support, Finance, and Supply Management organizations must all be aligned and represented on the cross-functional team that manages each category. Each will have different primary goals, but the goals will be aligned with the written strategic sourcing plan, which will be aligned with the corporate strategy and objectives. And the right suppliers must be involved. As per a Wharton study quoted by the authors, one recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting 30 Billion annually. If that’s not a good enough reason to integrate, I don’t know what is.
3. The Right Leader
The CPO must be able to lead well and work with the team. A lone wolf will not be able to handle the challenges of today’s purchasing organizations, which constantly change. The leader must be able to attract top talent and should possess a reasonable subset of the following skills:
- cross-functional experience
- credibility with Finance, IT, and Operations
- experience interacting with the C-Suite
- strategic thinking
- ability to make tough decisions
- results orientation
The last thing you want is a CPO who tells everyone that they have to spend four years as an entry-level tactical buyer before they can move up the ranks, unless, of course, you want your entire team to quit.
4. The Right (Corporate) Structure
Purchasing should lead from the center. Most best in class Procurement organizations, including most of the winners of Purchasing Magazine’s Medal of Professional Excellence, have been centralized or center-led organizations. (From 1984 to 2004, only two were decentralized.) A 2004 study from CAPS found that 83% of Procurement organizations were centralized or center led (hybrid). In a decentralized organization, it’s much harder to leverage volume, best practices, or market and supplier insight which will exist in pockets through the organization. Although the best structure will be dependent upon the organizational structure and the support from the top, at the very least the Procurement organization should be center-led and influence the decentralized units wherever it can make an impact.
5. Innovation & Technology
Best-in-Class Procurement organizations are willing to innovate and employ best-in-class technology to improve their sourcing and procurement initiatives. While the level of innovation that can be achieved at the current time will be dependent upon where an organization is on its journey, just about any organization can take advantage of new technology to improve its automation of tactical processes (through P2P), increase its insight into organizational spend (through Spend Analysis), and streamline it’s negotiation and award processes (through e-Negotiation and Decision Optimization) and start saving today. Leaders will also embrace Product LifeCycle Management (PLM) solutions.
6. Show Them the Money
Leading Procurement organizations know that the first question on every C-level Executive’s mind is Show Me the Money and are prepared to show a real savings report that answers the following questions:
- Are the savings real?
- Are they net of inflation?
- How were they calculated?
- What’s the baseline?
- Who (in finance) verified the calculation?
- Where are the savings on my bottom line?
In addition, they’ll have calculations ready that demonstrate their impact on the P&L, which will capture:
- volume fluctuations
- marketplace factors
in order to demonstrate total profit-and-loss-impact.
Even though a good Procurement organization
- improves working capital
- improves “monetization” of underutilized corporate assets
- reduces risk and pricing volatility
- increases organizational compliance with contracts
- improves the overall effectiveness and efficiency of the supply chain in meeting key operational needs
until Procurement has established itself as a critical enabler of corporate success, all Procurement will hear from the C-Suite is Show Me the Money.
This is the end-state, the foundations of a world-class supply management organization that applies leadership, best practices, innovation, and technology to generate year-over-year savings and value for the organization. However, this transformation will only be achieved if:
- a shared need that everyone understands and believes in is defined
- an exciting vision of change is presented
- clear communication is made on a regular basis
- obstacles are eliminated (by the CEO if need be)
- executive actions are consistent with the vision
- changes are reinforced
- leadership has skin-in-the-game and stays the course
It can be a long journey to a best-in-class supply management organization, but it will be well worth the effort. For more information, and examples, on how to set goals, integrate processes, pick the right leader, define the right corporate structure, innovate and apply technology, show them the money, and achieve total Procurement organization transformation, review Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line while you wait for Robert A. Rudzki and Robert J. Trent’s follow-up on Next Level Supply Management Excellence.