Monthly Archives: August 2011

Talent is Critical to Your Supply Management Organization

For those of you paying attention, you’ll notice that I recently did a four part series on Talent Management and, more specifically, a common Talent Management problem shared by many enterprises. Starting with a post that said If This is Your Advertisement for a Sourcing Manager, You Have a Talent Management Problem, which discussed one of the worst advertisements I have ever seen for a Supply Management professional, the series then moved on to explain that If You Want to Attract Talent, [You Need To] Start with a Good Advertisement, discussed What a Good Job Advertisement Might Look Like, and finished up with a post that addressed Now What [That] Your Job Advertisement Actually Attracted a Good Candidate. I did this because talent is critical to your Supply Management function. Without the right talent, you might as well fold up the operation and outsource it all to a third party because you won’t get anywhere unless you have the cream of the crop.

And we’ve known this for a while. Back in 2007, Procurement Leaders published a piece on how “People Do Matter Most, Really” that referenced a joint study undertaken by McKinsey & Company and the Supply Management Institute that found that high performing firms had high performing purchasing departments and that what matters is the people in the purchasing department, how talented they are, how motivated they are, and how they interact with the wider organization.

Specifically, the study found that purchasing departments that excel in these aspects of their activities achieve savings two and a half times higher than those that don’t. Furthermore, their positive influence branches out beyond the historical territory of PSM to include areas such as revenue, innovation opportunity generation, and the leadership of commercial change in the company. In more detail, high performing firms demonstrated annual purchasing savings of 3.5%, a 1.4% annual reduction in COGS, and an average EBITDA of 17.7%. Compare this to low performing firms that only achieved a savings of 0.6%, a 0.5% increase in COGS, an an average EBITDA margin of only 12.7%. And now that every dollar might mean the difference between survival and corporate death, an organization just can’t afford to not be high performing.

The reality is that, despite what some vendors and consultancies might have you believe, first rate platforms and processes are not enough. You have to have the people with the brains and the skills to use them. Back room paper pushers won’t cut it anymore. So do you research and attract some real talent. The bottom line will thank you.

Organizational Data is Organizational Data — NOT Department Data

While reading “Cuts from the Center”, which records a recent CPO Agenda Executive debate held during this past winter, I couldn’t help but notice Nikki Bell’s comment on how she gets frustrated when we make excuses about how we can’t have the right data, or about people protecting data. I have to agree. This is what kills Supply Management initiatives that could save the organization Millions (and in some cases, Billions) of dollars.

And it’s ridiculous. Everyone in the organization needs to know that organizational data IS organizational data and that anyone who has access to organizational data has access to ALL organizational data. And Senior Executives, starting with the CEO, have to mandate this. No exceptions. If information is sensitive, then it should be “scrubbed”, “sanitized”, or “anonymized”, and the data then made available for analysis and mining. Without complete data, you cannot do a proper spend analysis project, and without a proper spend analysis, you will not find the true savings opportunities. And if you want to recover overpayments and avoid unnecessary spending, you need to do a proper spend analysis and uncover the true savings opportunities.

Your data is your data. So mandate it’s use. Remember, if you want performance, you have to make it so.

Questions from the Land of the Obvious: Is China’s Rise Sustainable?

Not only do we have Headlines from the Land of D’oh, but we also have Questions from the Land of the Obvious. This one, in my K@W archives from earlier this year, that asks “Is China’s Rise Sustainable” is an obvious example.

Of Course it’s sustainable. Let’s start with some simple facts:

  • over 1.3 Billion People
    that’s almost 1/5th of the planet’s population
  • over 3 Trillion in Currency Reserves
    compare that to the US debt of almost 15 Trillion
  • annual GDP of 6 Trillion
    it’s the 2nd largest GDP and could surpass the US GDP in the 2020s at the current growth rate, and even if it doesn’t, it will come damn close
  • over 160 Cities with 1M+ people
    and this number is expected to exceed 300 before the decade is over as China urbanizes (and surpasses 50% urbanization); North America has around 20 such cities.
  • China is moving from low value assembly to high value add
    Foxconn produces some of the most advanced electronics in the world
  • Significant R&D funding
    By 2010, Innofund alone had invested almost 9 Billion RMB
  • Significant Infrastructure Advancements
    The 12th Five Year Guideline has significant infrastructure investments. The high-speed railway will exceed 45,000 km (which could cross Canada 6 times!), the highway network will exceed 83,000 km, new airports will be built (including one in Beijing), and 36 Million affordable apartments for low income people will be built (which could house the entire population of Canada*)
  • while we spend, they save
    They have money to spend when the time is right to buy.
  • they are Renewable Energy leaders
    They know their rate of fossil fuel consumption is not sustainable and aim to double their rate of renewable energy electricity over the next five years while building 400 nuclear power plants by 2035.
  • the party is Patient
    They realize that long term change takes a long time and that focus on quarterly objectives is STUPID! They know a long term plan is not 3 years, it is 10 years or more!
  • their civilization is truly ancient
    Their written history extends back over 2,600 years, beginning in the Shang Dynasty, and early texts recount oral histories of the Xia Dynasty that go back over 3,000 years. And, with the wisdom of age, they remember the lessons learned over the years. They were the superpower of the world for most of the last two centuries. If they hadn’t closed their borders early last century, and missed out on the Industrial Revolution, they would never have fallen. But they have learned from their error, and are investing heavily in the information revolution and the knowledge economy. Unless something drastic happens, it’s only a matter of time before they not only catch up, but regain their #1 place.

In other words, this was a headline from the land of the obvious. It’s not a matter of if the rise is sustainable, it’s a matter of how fast China is going to rise.

* which is fortunate, because, at the rate they are buying up property in our coastal cities, us Canadians may have to move there

Remember the Dangers of Centralized Buying

In an effort to combat the inflation across the board, I’m hearing a number of consulting firms emphasize the need to leverage your spend across the board, which is good advice. However, I’m worried about how some firms might be interpreting this advice. I’m getting signs that some firms, not yet as advanced in Supply Management as they need to be, are interpreting this as a need to “centralize”. While this has been the common historical response when a firm needs to obtain spend leverage and Supply Management for the categories in question are decentralized, it’s usually the wrong one. What needs to happen is the firm needs to move from decentralized buying straight to center-led buying and skip the centralization step and the growing pains that will result.

When you centralize, you lose:

  • local opportunities
    while a national temp labor agency can offer you better rates across the board, sometimes a local agency that is 10% more is actually 40% cheaper because you don’t have any travel expenses for local resources
  • local knowledge
    and sometimes a local buyer has a better understanding of the ups and down of commodity or service pricing in a region than a buyer on the other side of the globe and knows that she can spot buy a better price 80% of the time
  • (some) control over supplier performance
    as a centralized buy will typically be with one or two international suppliers who will not only have a lot more weight and leverage, but distributed production; in comparison, if buys are more local, they are typically with smaller suppliers where the buyer has the dominant position in the relationship and more control over quality and the production schedule

In addition, when you centralize, you can pave the way for organizational conflict as a result of:

  • the divergence of subunit goals
  • conflicts of preference between the central units and remote units
  • the lack of subunit inclusion
  • higher costs of certain purchases on the corporate contract as compared with local costs from a local supplier

However, a center-led purchasing organization will work with each subunit to insure that the best buy is made every time. Sometimes that will be through amalgamation of volume to obtain leverage through a larger contract with an international supplier (where costs are high) and sometimes it will be through the provision of best practices to each unit, which will secure the best rates in their region. You only get leverage where it exists to be found.

One Hundred Years Ago Today

The Patent Frenzy began when Francis Holton filed the millionth patent in the United States Patent Office for a tubeless vehicle tire. From 1790 (when the first patent was filed on July 31) to 1911, only one million patents were filed. In the last hundred years, almost fourteen million patents were filed, with over four million in the last ten years alone. Crazy! No wonder the software patent pirates [still] plunder away!

I wish they would follow Napolean Bonaparte’s example and retreat to the South Atlantic to live in Exile. Saint Helena still exists and I certainly won’t stop them from recreating the voyage Napolean embarked on 196 years ago today!