Monthly Archives: June 2011

Supply Management: Secret Agent of Business Impovement (Key NPX Take Away 5)

 

James Bond Theme Song

 

In our final post for the week on 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, we finally get to what matters most: A Next Level / Practice / Generation Supply Management Organization that identifies, secures, and executes on value is the Secret Agent of Business Improvement and every Supply Management Professional is an organizational 00 with a license to kill [waste].

Of all of the messages delivered at the NPX, this message from Alastair Donald, the Chief Procurement Officer of Global Procurement Services of ConocoPhillips Company (which currently holds the #4 slot on the Fortune 500) is probably the most important. Supply Management is the secret agent of business success, and ConoccoPhillips continued prominance in the top 10 of Fortune 500 over the last five years years (#6 in 2010, #4 in 2009, #5 in 2008, #5 in 2007, and #6 in 2006) is largely due to significant improvements in Supply Management over the last four years, which went from delivering, on average, a low single digit annual cost reduction from 2002 to 2006 to a low double digit cost reduction from 2007 to 2010. (While SI cannot release exact numbers, the improvement is very impressive.)

So how does Supply Management deliver such significant improvements to the business? First of all, it gets its house in order and ensures that the following ten functions are adequately staffed by its secret agents:

  • Strategic Sourcing
  • Contract Management
  • Category Management
  • Materials Management
  • Supplier Relationship Management
  • Talent Management
  • Procure-to-Pay
  • Governance & Compliance
  • Sustainable Sourcing
  • Market Intelligence

Then it addresses the threats to national security (and organizational stability):

  1. tactical focus
  2. wrong skill sets (engineers are not enough)
  3. ineffective contracts
  4. too much money spent on PO processing
  5. weak governance
  6. lack of value creation

by way of

  1. strategic execution
    which focusses on correct time allocation, the right organizational design, and integrated processes and tools
  2. skill enhancement
    which focusses on identifying cross-functional high potentials, recent college graduates who can be future secret agents, identification and absorption of external expertise, and an end-to-end talent management process
  3. contact excellence
    which focusses on getting the majority of contracts (including all high value or high risk) on company paper, getting templates in place to expedite the process, and ongoing risk assessment
  4. lower PO costs
    by way of a single global ERP instance, appropriate P2P support systems, and low-cost tactical processing centers
  5. globalization
    managed with a center-led philosophy and key stakeholder councils
  6. true value creation
    by way of a value-driven sustainable strategic sourcing process, dedicated SWAT teams, commercial astuteness, robust models driven by high-powered analysts, financial validation, and fact-based decision making

Secret agents will be needed to pull all this off because only secret agents will be able to deal with all of the challenges that will arise, including:

  • artificial constraints
  • strategy changes
  • short term focus by the peer group organizations
  • talent abduction
  • availability of SMEs
  • change management
  • sleeper agents

but when Supply Management has a seat at the grown-ups table, is on investor relations radar, is being pulled in by other organizational units on a regular basis, has its budget increased (while every other organizational unit sees a decrease), and is no longer seen as the leper colony or roach motel, it will be worth it. Because once every dollar taken out by Supply Management hits the bottom line, Supply Management will truly be the secret agent of business improvement.

Ariba Vision 2020: Tomorrow’s Shoes (Part I)

This is the first of two posts that address the fourteen predictions that were dead on in Ariba’s “Vision 2020 – The Future of Procurement” report. Any Supply Management organization that recognizes the truth of these predictions is well on its way to formulating a plan to be a leading Supply Management organization in the decade ahead.

01. Everything is automated

This prediction is dead-on. Next Generation Supply Management shops are investing heavily in technology to automate all non-strategic and low-value supply management activities, leaving the sourcing professionals to focus on strategic and high-value categories where they can extract the most value for the organization.

07. Spend management shrinks

I’ve said it before, and I will say it again: Spend Matters Not. It’s not how much you spend, how you store it, how you cube it, or how you report on it — what ultimately matters is how much you get from it, profit from it, and derive value from it. Next Generation Supply Management organizations are focussed on improving business outcomes, not cutting costs until quality and stability of supply suffer. Spend Management will shrink as true Supply Management focussed on value takes its place.

09. Service providers excel

Given the increasing cost of outsourcing complex and strategic functions to emerging economies where labour rates are rising exponentially, in order to maintain cost competitiveness and deliver value, the service providers will provide service that constantly improves in efficiency and execution.

13. Let’s get financial

Since overall financial success will still be the ultimate measure of value generation in public enterprises, Supply Management will revolve around the financial supply chain and will be heavily involved in optimizing cash flows, working capital, and financing programs from NPD through return and disposal.

14. SM pros get sophisticated

Supply Management professionals will definitely be much more sophisticated in 2020 than they are today. As the secret agents that essentially drive all aspects of the business, their business savvy, analytical capabilities, relationship skills, and overall execution abilities will be, for the most part, a level above where they are today.

15. Supply pros expand expertise

This is the obvious result of a supply managmeent professional getting more sophisticated. It should not have been included as a separate prediction because it’s impossible to get more sophisticated in Supply Management without expanding depth of expertise in key areas.

16. Strategy scope widens

One does not get to the next level by maintaining a narrow focus, so it should also be obvious that the scope of strategy addressed by an average Supply Management organization is going to expand as well. The strategy will be more closely aligned with the needs of the organization’s end customers and be more cognizant of the needs of the current, and future, customer base. Supply Management will be increasingly called upon not only to analyze merger and acquisition possibilities, but to lead the initiative as success will depend upon succesfull integration of the end-to-end supply chains. And it will be involved in all NPD from day one to help identify customer needs and supplier capabilities before any decisions are made.

The next post will address the other seven predictions that were dead-on.

It’s Not Technology, People, or Process — It’s Execution (Key NPX Take Away 4)

As you probably guessed from the title, 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. Now that we have defined value, defined how we get to value, and how we capture value in contracts, the next thing we have to discuss is how important it is to get to execution as quickly and efficiently as possible.

The reality is that it doesn’t matter how good a process is, how modern the supporting technology is, or how good and well managed the people are if the organization doesn’t execute. The foundations are not enough. A Supply Management organization needs to execute on those foundations to get to value. As Dalip Raheja of
The Mpower Group likes to say, it’s not about the consonants (the foundations), it’s about the vowels (the execution on the foundations) beause Old MacDonald Was Right.

A Supply Management organization that doesn’t execute on the foundations never gets beyond best practices and traditional TCO. This will get an organization good results, but it won’t get the organization to world class status in these tight economic times. An organization needs to Adopt the plan, Execute on the plan, Implement the required changes, Optimize its operations on an ongoing basis, and appropriately Utilize the skillsets and technology it has available to get to the next level. One has to remember that simply having the best practices, processes, and technology isn’t enough. Even though it will make an organization a Toyota, it won’t necessarily make the organization sustainable in the long term. Only an organization with sustainable sourcing strategies can get to the next level.

An organization focussed on getting to the next level will go beyond the metrics and KPIs used to measure suppliers but focus on how the relationships will be established and holistically managed to extract maximum value for both parties. The contract is only the beginning of the relationship. Similar principles apply to relationships within the organization. The Supply Management organization goes beyond being a tactical service provider (who gets the contract and secures the supply) to a strategic consultant (who advises on what types of products and services are truly required in the first place and what suppliers should be approached in any event).

It’s only when the Supply Management organization starts focussing on the needs of the organization as a whole that it can truly achieve value. Unlike cost, which is at the component (product or service) level, value is at the system level and only materializes when the entire system is balanced. A truly valuable supply contract doesn’t sacrifice quality for cost, risk mitigation for expediency, or comfort for potential (but not yet realized) innovation. Just like cost can’t be reduced by selecting a lower cost supplier that will result in higher logistics costs, value can’t be created by looking at any single component as it’s holistic, and it results from proper execution of the vowels. As Dalip likes to say, it’s E-I-E-I-O.

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.