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. Then in Part I.ii we reviewed the seven-step process that an organization could follow to get from where it is to where it needs to be. This post will discuss two of the three detailed case studies presented in the book that illustrate why an organization wants to transform itself into a best in class organization.
In 2003/2004, when Colgate-Palmolive’s stock dropped 25% on an earnings warning (per share) that was 10 cents less than what the analysts expected and when Unilever’s net income was only half that of some of its peers, Proctor & Gamble’s (P&G) stock price had double its 2000 value and cumulative sales over the past three years had increased 30%. P&G was the quiet giant that could, and did.
How did P&G succeed in a market when so many of its peers where struggling? A major component was an important, but low key, story of supply chain creativity that not only lowered costs but dramatically increased access to external technology.
P&G built a Global Product Supply organization in the late 1980s that included purchasing, manufacturing, engineering, and logistics and organized its purchases on a global basis in 1992 — before its giant business units were organized globally. Purchasing staff members were embedded in the global business units to insure a close alignment with corporate goals. Supply Management was a corporate priority because it impacted 55% of the company’s revenue stream and up to 70% of product costs in some business units. A 5% improvement in costs translated to a 20% improvement in process.
P&G cautiously implemented electronic technology solutions in the dot-com era and today is a leader in optimization and innovation. It built 20 communities of practice internally to make sure technology ideas were shared internally. It launched the Connect-and-Develop program to boost access to innovation from outside sources. P&G scientists and commercial professionals work as equals on product development teams. And it has a tool called Navigator that allows it to view and manage all of its interactions. (Think of it as a drill-down dashboard on steroids.)
P&G was an early adopter of e-auction and strategic sourcing decision optimization and saved over 300 Million with expressive bidding and optimization back in 2003-2004. And, due to its advanced supply management capability, P&G estimated that its acquisition of Gillette would generate 14B to 16B in incremental shareholder value, with 10B to 11B, or 63% to 79%, coming from cost structure improvements alone.
The next case study that we will review is that of United Technologies Corp. (UTC) In 1994, the new CEO saw the need for improved perfomance in UTC. A believer in the power of cost-driven enterprises, the new CEO hired a new VP of Supply Management in 1996 to define the future of purchasing at UTC.
In the beginning, the new VP was focussed on cost reduction. He appointed a director of worldwide sourcing, embraced internet auctions, and outsourced tactical functions of general procurement. From 1996 through 2001, UTC sourced more than 2.5B of goods and services through FreeMarkets and achieved savings in excess of 18% on this spend alone.
UTC was the first customer of IBMs new procurement services offering that included strategic sourcing consulting, purchasing services, and IT systems support. Experienced IBM buyers became consultants on UTC supply teams and helped them build data warehouses, identify suppliers, study markets, and develop processes for continual improvement. Then IBM installed an automated purchasing system, req-to-check, that allowed requisitioners to order approved goods (such as desktop computers) on their own, subject to approval rules based on level of authority. Purchased orders went through the system and were automatically dispatched to suppliers who issued electronic invoices upon shipment. The new system was capable of generating detailed spending reports by group and requisitioner and helped UTC stop maverick buying in its tracks. Soon inventory levels were reduced as users found faith in the process. Not only did compliance create savings, but the speed of transactions improved cycle time.
After delivering significant savings in the first five years of its focus on supply management, in 2001 UTC embarked on phase 2 of its supply management transformation which takes a more strategic approach to cost reduction and value creation. Whereas phase 1 focussed on automation, phase 2 focussed on rethinking the business rules and processes to find greater savings. The goal of phase 2, called UT500, is to orchestrate cross-functional groups to cut inventory, standardize, and save money through a combination of big and small ideas, including lean. The program reached its 500M savings goal in just two years, one year ahead of schedule and in 2004 was on track to save 1B in just four years. In other words, your organization has 1 Billion reasons to embark on a supply management transformation, all of which will make your CFO, CEO, and shareholders very happy.
For deeper insights into how P&G and UTC achieved their supply management transformation and, collectively, saved billions of dollars, as well as how Chrysler succeeded while GM failed, I strongly urge you to (re)read the brilliant case studies in Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management. It’s worth a review while we wait for 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.