Monthly Archives: July 2011

Value Add is Taking Precedence Over Cost Cutting — This is a Good Sign

The Summer issue of the CPO Agenda summarized their most recent six month survey in “growth curve” which found that a broader focus on value adding instead of cost cutting alone is emerging, highlighting once again that businesses are gearing for growth. This is a good sign. As SI has been repeating again and again over the last few months — a Supply Management organization will not advance to the next level unless it adopts, first and foremost, a focus on value and advances beyond operational excellence to a state of strategic business enablement.

There is still a pressure to reduce and control costs, as 2/3rds of organizations are reporting an intensified pressure to reduce costs, but this is down 25% from six months ago, which means the leaders (who never compromise more than the top 20% of organizations) have shifted their sights back to value. Plus, only 1/4 of the organizations are reporting delayed investment decisions for new technology or expert consulting, down from 1/2 a mere six months ago. Plus, 41% of organizations said they are preparing for growth and recovery and 2/3rds of organizations have either undergone a transformation program in the past 12 months or are planning one with the number one goal to achieve greater alignment with the business. Good news indeed. Let’s hope that these organizations follow through!

Dealing with Price Volatility in the Turbulent Global Marketplace

In the Hackett Group’s recent insight on “Taming the Inflation Dragon”, we find out that the average company is facing a 9% drop in corporate profits this year due to rising prices and other inflationary pressures and that this translates into a 150 Million hit to the bottom line for a typical Global 1000 company with 27.8 Billion in revenue. Ouch!

Obviously, the company is counting on the supply management organization to control costs despite the rampant price increases in a market where commodity inflation has not only increased by 30% overall but where price volatility has increased nearly 60% since before the recession. Not an easy challenge, especially since speculation in commodity markets is having a major impact on 43% of companies and a moderate impact on 17% more. And with the majority of suppliers passing on increased cost, every company is feeling the squeeze. So what can a supply management organization do to improve the situation?

Use rigorous input price/cost forecasting processes
that integrate data from a large number of sources (public indices, private indices, third party market intelligence, etc.) and internal purchase price history. The processes should include years of historical data in the analysis and apply multiple forecasting models to arrive at most likely prices given current trends and models that traditionally work well under similar levels of price volatility.

Augment input cost forecasting with scenario-based business planning processes
that integrate input price/cost forecasts into a pro-forma profitability plan. The scenarios should consider the extreme cases where demand explodes or demand plummets so that the organization can also develop supply risk management contingency plans and estimate their associated costs so that the overall price/cost models are reasonable and capable of being rapidly adjusted if needed.

Employ advanced demand forecasting models
that create good demand forecast ranges to lock down supplier capacity and pricing. Given that one in four companies experiences significant price volatility by having to pull against limited supply, the last thing a supply management wants to do is have to spot buy in a tight market.

Centers of Excellence that use deep predictive analytics
to not only identify input costs that are likely to increase significantly or undergo increased volatility, but to develop detailed should cost models to support negotiations against undue supplier increases, to reduce supply needs of cost-inflated items by changing specifications or identifying alternate materials, and to identify non-price items that can be traded to off-set price increases (such as better payment terms, new business, or supply management support from your supply management organization). Analytics is a key technology for cost reduction and avoidance across the board.

Clear direction and strategy
for hedging and decision making. This needs to start with a cross-functional consensus on what the business objectives are. Is it to “beat the market”, even if it comes at the cost of establishing complex hedging processes? Is it to “smooth” supplier pricing? Or is it to “smooth” margins by the simultaneous optimization of sell-sie and buy-side commercial strategies. Supply Management and Finance must be aligned.

Five Misconceptions That Increase the Likelihood of FCPA Violations

Not too long ago, Supply & Demand Chain ran a great article on “10 misconceptions that increase the likelihood of FCPA violations” that every supply management organization involved in international business should review. The following five misconceptions in particular are dangerous to your average organization.

  • We are a private company so we don’t have to be concerned with the FCPA
    Government enforcement agencies will go after any company that they believe may have committed a FCPA violation. Given that a company can be criminally fined up to 2 Million per violation, it’s a safe bet that every whiff of a FCPA violation will be investigated.
  • Our employees know our position on ethics because our policies spell it out.
    Just because the organization has an employee manual, this doesn’t mean that the majority of the employees have read it. Or that they remember the policy. Or that they believe it has to be followed.
  • As long as employees and agents have certified that they have not paid bribes, we have done enough.
    A cursory certification will not hold up as a defensible position when a company needs to explain to regulators the actions taken to prevent bribery payments.
  • Our global whistleblower hotline is effective because no violations have been reported to date.
    Fewer than 3% of misconduct reports occur through a whistleblower hotline.
  • Since we don’t have a controlling interest in our overseas business partnership, we have no need or authority to extend our compliance program and policies.
    As the article notes, a company must protect themselves by ensuring that joint venture partners are conducting business in accordance with FCPA and local corruption laws, regardless of ongoing control.

Don’t get caught in violation of the “Foreign Corrupt Practices Act”. Make sure compliance and mitigation efforts are in place at all times.

Six Key Lessons for Sustainable Supply Management

A recent article over on the CPO Agenda on “Platforms for Growth” that discussed the challenges for Supply Management involved in procuring goods and services for decommissioning oil rigs had some great lessons for Supply Management professionals involved in projects in new or emerging areas of spend. While cost control is important, it’s even more important that Supply Management prevent their organization from becoming the subject of media headlines — as this is never a good thing. Plus, early approaches to category strategy can set a pattern within an organization and even drive market structures across the industry that, once established, become difficult to change. Thus, it’s important to get spending in new categories right.

Think Strategy
Supply Management needs to be a part of all of the strategic decisions of the organization as true commercial advantage can only be obtained if Supply Management is involved early enough in projects to influence raw material and service requirements. Not only does the design stage lock in up to 80% of the cost, but it can lock in up to 100% of the market risk. If the design locks in a raw material in tight supply as necessary, such as tantalum, instead of a more available material, such as aluminum (for capacitors), and unrest along the African coast suddenly makes 15% of the global supply unavailable, the organization will be in for a major price shock.

Influence the Plan
Not only does Supply Management need to be involved in all strategic decisions, but it has to come to the table with a good understanding of potential scenarios and a plan in mind. If, by working with marketing and external market research agencies, it understands that sales will be maximized at a certain price point, it can ensure that the selected design can be profitably produced for that price point.

Go for Global Category Scale
Even if the product must be customized for different regions, Supply Management should still attempt to aggregate global demand and award it to a small number of suppliers who are capable of producing variants for the global market to take advantage of economies of scale.

Build the Desired Marketplace
If the product or service being designed is (relatively) new, then Supply Management might be buying from an immature market. In this situation, the organization has the ability to influence market development, which occurs quickly once demand exceeds a critical mass. If Supply Management implements a category strategy that meets the objective of the organization, and it is the first major player in the market, the market will likely mould itself to that need. If the market strategy is low-cost, then the suppliers will focus on no-frill production and delivery. If the market strategy is the full service experience, suppliers will focus on creating end-to-end value added services. If the focus is on being the epitome of cool, then suppliers will focus on creating the most stylish and sleek product they can, with a price tag to match.

Do Your Homework
Market intelligence is the lifeblood of effective category management and the best way to influence the strategy, plan, and marketplace. Even if the organization does not agree with the proposed category strategy, it’s much harder to refute facts than opinions. Plus, it’s much harder for a supplier to exploit the organization in negotiations if Supply Management goes in armed with full knowledge about the current market state.

Examine New Buying (Structure) Options
Don’t limit your options to the current organizational buying strategy. Consider in-house, industry buying groups, vertical integration and even the creation of a Global Business Services organization. New markets sometimes offer new opportunities for doing things different. Take advantage of this.

Will Procurement Heads Also Be Responsible for Facilities and CSR?

A recent article over on the CPO Agenda on how the CPO is “an agent for change” pointed out that, at many organizations, the CPO is getting a broader realm of responsibility as she has to be well versed in change management to succeed at her job. In particular, many CPOs are now being tasked with logistics, risk, revenue, demand management, IT, sales support, property, CSR (Corporate Social Responsibility), and/or FM (Facilities Management) — with CSR and facilities becoming increasingly common.

The article highlighted three individuals in particular who were also responsibile for property and/or Procurement — Kath Harmeston, CPO of Royal Mail; Steve Jones, Director of Procurement and Property at Biffa Waste Services; and Patrick Dunne, Director of Procurement and Property at Alliance Boots — and how their role is not only cross-functional, but logical. Property and Facilities Management require great Procurement skills to keep costs down and value up, and combining the functions results in synergies that reduces internal management costs across the board. Plus, CPOs who are responsible for multiple functions get a much broader view of the business and the experience they gain gathers them a lot of respect in the C-Suite. As Kath Harmeston noted:

I was accepted as a budget-holder, a stakeholder and CPO at the same time. I was seen as quite a different animal — one that could see both sides, played a fair game and stood for accountability, traceability, auditability and transparency.

Similarly, CSR fits well with Procurement. Both Siemens and Clarks, where Barbara Kux is the head of Supply Chain Management and Chief Sustainability Officer and Matt Turner is the CPO and CSR officer, respectively, have combined the functions. It makes logical sense since Procurement directly dictates how sustainable the company is with what it buys and determines how sustainable the company’s suppliers are.

Reading the article, it appears only logical that, as more
companies figure out that the head of Procurement is the perfect candidate to lead these functions, more and more CPOs are going to be tasked with property, facilities, and sustainability as time goes on. What do you think?