Daily Archives: June 15, 2011

Ariba Vision 2020: Today’s Blues

The following six predictions from Vision 2020 – The Future of Procurement, which would have been good if made before 2005 for 2010, are outdated and clearly come from Procurement professionals in organizations that are still in the laggard category as they define situtations that should either now be, or be in the process of becoming, standard modus operandi for a leading Supply Management organization.

04. Communities collaborate

Not only have we had virtual communities since 1996 when Geocities (which launched as BHI in 1995) hit the scene, but we have had collaborating communities in the enterprise for over 10 years now. Even Innocentive has been around since 2001! And while it’s true that communities haven’t been around nearly as long in Supply Chain, with the help of Ariba (and the Ariba Exchange), Kinaxis (and the Supply Chain Expert Community), RollStream (and its social supply chain solution that was recently acquired by GXS), communities are now normal operating procedure in leading Supply Managment organizations.

17. Talent competition heats up

The Talent Competition is already at the boiling point. Now that the economy is recovering, the last of the baby boomers are about to recover in droves at a time when there aren’t enough Supply Management professionals to begin with (as there are no programs out there that mint new Supply Management professionals for your organization to hire, as per SI’s post on the derth of Supply Chain Education). In fact, by 2014, the problem will be so bad that it will be #1 on every CPO list. And any organization that is struggling that does not address the problem now will not be around by 2020 to deal with it.

19. Enter the extended enterprise

For many global multi-nationals and leading Supply Management organizations that have outsourced, offshored, and rightshored over the last few years, the extended enterprise is already here and part of daily operational life. And this holds true for a number of product and service companies in the Global 3000.

22. Bye products, hello solutions

The crunch of the last few years resulted in many suppliers adopting a solution focus as they attempted to retain what little business their was. They went beyond simply providing a product to providing a solution around that product, including repair and warranty services, training services, and, in some cases, even consulting services. They embraced not only VMI (Vendor Managed Inventory) but VMS (Vendor Managed Services) in an effort to make themselves indispensible to their clients.

28. Contracts motivate

Well designed contracts that offer the right incentives and allocate the risks appropriately already motivate top tier suppliers to perform better to get a larger slice of the pie. If a contract offers a supplier a 10% reward for a 3% increase in service level, then, as long as it doesn’t increase the supplier’s costs by 10% to achieve a 3% increase in service level, it happens. It might take a while, but motivated suppliers get the job done when monetary rewards are involved.

29. Firms wake up to supply risk

The recent volcanic eruptions of Eyjafjallajökull and Puyehue that have grounded flights across the better part of a continent, the recent tsunami that devastated Japan and resulted in nuclear disasters in addition to long term supply disruptions, and the recent increase in droughts, fires, and hurricanes (thanks to global warming) that have resulted in decreased crop levels and huge spikes in basic food commodity costs have already woken up any supply management professional that is still breathing to supply risk and the need to address it. And even though most firms may not yet have the answers, they know they need them.

The next post will address Tomorrow’s Shoes.

Contracts Capture Value (Key NPX Take Away 3)

This post continues our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management. On monday, we started with a discussion of value and how the views of Supply Management are not always aligned with that of the internal customer and stakeholders. Yesterday, we discussed how to align those views and get to value. This post will discuss how an appropriately drafted contract will capture soft, and hard, value in the eyese of all parties and how such value can be communicated.

In many organizations, contracts are viewed as roadblocks. However, as Brad Peterson from Mayer Brown points out, this is a viewpoint that Supply Management needs to overcome because good contract terms create value by improving business outcomes. Supply Management needs to learn how to communicate this value because many companies don’t often recognize the value of contract terms in decsion making. Having a quick out clause with little or no penalty in the case of a major disruptive event that will prevent the supplier from insuring a continuity of supply can often save the organization millions of dollars. For example, if war breaks out in the country that your supplier’s production facilities are located in and roadblocks are put up, you will need to shift orders quickly in order to be sure of supply continuity. Not having the right to do this will put the organization at serious risk.

Well designed contracts create value and reduce risk as they will

  • bind suppliers to commitments to provide specified products & services at firm prices (and eliminate price risks for the contract term)
  • give the buyer options to flex, change, or terminate under conditions that the buyer knows would require flexing, changing, or termination to insure organizational profitability
  • provide the supplier with incentives to perform in ways that increase value or reduce risk
  • specify how alignment will be achieved (through governance and IP rights that will prevent problems later)
  • define when, where, and how the products and services will be provided and address logistics concerns in advance

But, most importantly, failing to recognize the value of good contract terms is wht leads to poor business outcomes in most organizations as

  • projected savings get eaten up by change orders
  • service levels stay green even though the customer is red (and stuck in an unhappy relationship for a long time)
  • the promised innovation never materializes
  • the contract turns out to be unexpectedly costly to govern
  • the supplier makes unilateral changes that don’t violate the poor contract terms

That’s why Supply Management has to work on communicating the value of good contracts (that include key clauses that are identified well before negotiations begin) which address the customer’s value points, the key risks, and the overall business strategy. Specifically, Supply Management needs to point out that, with a good contract,

  • suppliers work to keep their promises
  • suppliers do whatever they can to get their incentives
  • options allow the organization to steer to better outcomes
  • alignment allows both parties to work together efficiently
  • removal of uncertainties saves soft and hard dollars

And the value of each benefit can be estimated using expected value, actuarial calculations, economic calculations, and/or monte carlo simulation even when a fixed price is not included. So focus on better terms, and realize better outcomes.