Monthly Archives: July 2011

Cost Reduction Strategies to Avoid

Cost reduction as a strategy is dangerous. First of all, a company that is too focused on cost might lose sight of value, which is what Supply Management is all about. Secondly, a company that is myopically focussed on immediate cost reduction is likely to make one or more of the following mistakes and actually increase costs in the long term.

Direct cost focus

This sounds like a great idea, since it’s where many organizations in manufacturing and CPG have the bulk of their spend, but the reality is that these are the categories that get analyzed year after year after year, while indirect categories fall by the way side. And the reality is that it’s much better to save 10% on 40 M then it is to save another 2% on a 100 M category. It’s twice the savings.

Landed cost focus

While it’s true that you can (theoretically) “book” a savings if a hardball negotiation gets you the same widget for $1, including transportation, that the organization used to pay $1.10 for, this is not really a savings if the widget is of lower quality and has a higher failure rate. If 15% break-down during the warranty window, when only 5% used to break-down, this has not only increased the average unit cost from 1.16 to 1.18 (in terms of functioning units), but tripled your warranty costs. If replacement costs turn out to be twice the product cost then, instead of paying an average of 1.20 per unit from a TCO perspective, the organization is now paying 1.30 per unit (from a TCO perspective) when the total cost of the lower quality product is calculated.

Year-over-year price reductions in multi-year contracts

This is my favourite example of cost reduction ridiculousness. Sometimes, anxious to meet the ridiculous mandate of 5% year-over-year cost reductions for the next three years, Supply Management organizations will try to negotiate three year contracts with year-over-year price reductions of 5% built in. And often they’ll exceed, and cost the organization approximately 15% more then if they just negotiated the best deal they could. Why? The supplier is going to have to make a profit each year it is in business. Since it’s likely not going to change the production methodology, the raw materials, or the labor that goes into making the product for the lifetime of the contract, the supplier knows that the price in year 3 has to be enough to be profitable. So the price it quotes in year 2 will be 5% more and the price in year 1 will be 5% more again in an attempt to insure it is still profitable in year 3. As a result, the organization ends up paying significantly more in the first two years than they could have paid by just negotiating the best, flat, deal possible. The right way to get year-over-year savings is to tackle different categories each year, not try to negotiate silly year-over-year savings in a single category.

Is Your Organization Serving the Right Market?

If your Supply Management organization is part of a global multi-national, chances are that it is buying from China and selling to the U.S. And, for a few of you (in heavy machinery, luxury goods, etc.), chances are that your Supply Management organization is producing Made in the USA goods and selling these to China. But should it be?

Ignoring the fact that rising costs in transportation and production (due to raw materials and the inevitable rise in labor wages) coupled with the decline of the US dollar often make sourcing close to home (in Mexico) or at home cheaper than off-shoring, especially when quality and risk-related costs are taken into account, the organization might be missing out on a much bigger opportunity — selling in China. As per this recent article in the Harvard Business Review that chronicled What the West Doesn’t Get About China, China is the world’s largest consumer of automobiles, motorcycles, mobile phones, luxury goods, and shoes and the world’s second largest consumer of home appliances, consumer electronics, jewelry, and the internet. Thus, if you are in the automotive, electronic, appliance, apparel, or jewelry industries, maybe the organization should be producing in China for China.

China, which is the world’s second largest economy, has over 1.3 Billion people and an emerging middle class flocking to urban areas. The Asian Development bank classifies over 60% of China as middle class. That’s almost twice the population of North America! And half of them have internet access, with most of them having broadband access in their densely populated urban centers. In fact, China now has about 90 cities with a middle-class population of 250K or more. The US and Canada combined have less than 70 such cities. And the projections expect this number to quadruple over the next 10 years. Plus, annual growth in some markets is as high as 60%.

In other words, if the organization is producing in China, then it should probably be producing for the local market (as well).

If This is Your Advertisement for a Sourcing Manager, You Have a Talent Management Problem.

You can’t manage talent unless you have talent. In order to have talent, you have to attract talent. In order to attract talent, you need to have an interesting job and an exciting career path for them. And, unless you already know of some really good candidates that you think you can attract, because you have talent who has worked with these people before and is actively recruiting them for you, your only hope to attract the attention of talent is through a public job advertisement. And I can tell you right now that you’re not going to attract anyone if your job advertisement isn’t good.

For example, if you send out something like the following, which is along the lines of something that recently hit my inbox, don’t expect much. (A few details have been changed to protect the guilty.)

Here’s a superb opportunity for an experienced sourcing manager within the hardware and software domains looking to join a top tier investment bank. This is a permanent position based out of New York City that will pay a base salary of 150K plus a competitive bonus and benefits package.

In this role you will manage Hardware and Shared Infrastructure Software sourcing initiatives, support the post contract supplier management of critical suppliers, and liaise with the legal department to ensure favourable commercial terms. In addition you will constantly interact with senior management to relay critical information about vendor relations and contracts.

In order to be considered for this position, you must have worked as a hardware and software sourcing manager on a global scale within the financial services industry for several years.

This is an excellent opportunity for a qualified candidate who has had strategic sourcing experience looking to manage a high visibility, multi-million dollar project for a leading investment bank.

Now, many HR people are probably saying “what’s wrong with this?”. The answer, just about everything. There’s so much wrong that I don’t even know where to start, and I already wrote a long reply to the sender about how, in my opinion, their chances of finding a top candidate with this was pretty slim. But let’s take it from the top.

Top Tier Investment Bank
If the bank is so good, why are they hiding that they are looking for a talented candidate. Good brands attract good talent.

Based out of New York … will pay (a) competitive …
How competitive? An investment bank in new york is likely in the financial district where nearby 2-bedroom apartments go for 2,500 a month. (In comparison, in the North Dallas area, you can get a 2,000 sq. ft home for 1,000 a month.) New York has one of the highest tax burdens. In fact, it’s about 40% cheaper to live in Dallas than New York. So, 90K in North Dallas is almost as good as 150K in New York. A salary range should not be mentioned unless it’s better than average for the region and, if you’re looking nationally, attractive to top talent in other cities with similar talent. (And given that top talent in Dallas, Texas will probably be making 120K, it might actually be a pay cut for them in terms of their net cash position.)

manage Hardware and Shared Infrastructure Software sourcing initiatives, support the post contract supplier management of critical suppliers, and liaise with the legal department to ensure favourable commercial terms
In other words, what you would do in any sourcing job that managed the IT category. What is different or unique?

you must have worked as a hardware and software sourcing manager … within the financial services industry
So, unless you’ve worked for a bank, you haven’t done squat? Let’s ignore the fact that many multi-national retail companies need systems that are actually more complex as they have to manage a myriad of tax issues across multiple countries and states, manage global logistics, and allow for TCO calculations on products and services with a global footprint. And let’s ignore the fact that sometimes the best talent is someone from outside the industry who brings fresh insights on how to do things more efficiently and effectively. Like Alan Mulally who turned around Ford almost single-handedly with essentially the same team as his predecessor.

a multi-million dollar project
Well, duh. First of all, most financial institutions support a number of on-line, real-time systems that require banks of servers in geographically dispersed data centres. A 13U rack of high-density, low-power blades can easily cost 250K to 500K. So it’s obviously in the millions. It only gets interesting in the tens of millions or more.

high visibility … project
So, there might actually be something exciting to attract a candidate and you don’t at least drop a hint?

All I can say is if you write this swill, don’t be surprised if your applicant pool is full of swine. The vast majority of candidates who are going to apply to this are going to be out of work or not content with their current work, and probably a little desperate. Given that top talent saves an organization money, if a sourcing manager is out of work, there’s a good chance there’s a reason for that. Similarly, if a candidate is not happy, there’s typically a reason for that too. And these days, it’s because they’re overworked. But let’s not kid ourselves. Chances are that, given most corporate situations and the economy, they’re going to be overworked in your job too. And if they can’t stand the heat … (Now, sometimes they’re just unlucky and got axed in an across-the-board cut and sometimes they really do have a bad boss, but it’s not the norm, and most of the candidates that do apply will likely not be right for your organization.)