Daily Archives: November 18, 2013

The Measurable Value of Supply Management Maturity

Simply put:

  1. a ROIC (Return On Invested Capital) of 12.8% vs 8.5% for laggards
  2. an Operating Margin of 14.6% vs 8.4% for laggards

according to BravoSolution (Source), who, as a Best-of-Breed global e-Sourcing software and services provider that has been delivering software and services to global clients for over a decade, has been measuring the maturity of client organizations from the time they start their e-Sourcing journey (with BravoSolution) to the time that they master the e-Sourcing process that BravoSolution supports and the platforms they provide.

This 50% performance improvement in ROIC and 75% performance improvement in Operating Margin should not be too surprising given that all of the analysts firms have been telling us for years that leading Supply Management organizations far outpace laggard Supply Management organizations when it comes to financial success. What should be surprising is that the vast majority of companies still have trouble advancing Supply Management out of the laggard category even though many of the secrets of success have been known for many years.

Especially since the the first step is to align the Supply Management organization with the business (goals). This shouldn’t be hard, but for many companies it is. Why?

Let’s start by considering the reasons for misalignment

  • 5% is due to different drivers
  • 30% is due to (different) data
  • 65% is due to differing definitions

The big problem is still communication. In most organizations, Procurement doesn’t speak the same language as the rest of the business, and Finance in particular. Remember, HR still thinks sourcing refers to the recruiting function, Engineering thinks procurement is calling up the preferred supplier and asking them to ship the required parts for the prototype, and Finance defines savings as the difference between last year’s spend and this year’s spend, not how much savings have been identified or how much cost has been avoided. In order for Supply Management to mature as an organization, it not only has to align with the business goals, but it has to speak the business language.

So how can Supply Management achieve alignment and, at the same time, advance as a function and achieve the financial success that will make it the favourite child of the organization?

The EPAM Loop.
Evaluate. Plan. Act. Measure.

In the 1950’s W. Edwards Denning proposed that business processes should be analyzed and measured to identify sources of variations that cause products to deviate from customer requirements. Specifically, he recommended that business processes be placed in the context of a continuous PDCA (Plan. Do. Check. Act.) feedback loop so that managers can identify and change parts of the process that need improvement. And it was a leap forward in business philosophy at the time (and could even be considered the foundation for the DMAIC (Define. Measure. Analyze. Improve. Control) cycle that is the foundation for Six Sigma. Given that sourcing processes are only improved if they are continuously monitored, it’s obvious that a similar process is needed.

So why can’t we just use the classic PDCA cycle? Simply put, we have no way of knowing whether or not a plan is likely to be beneficial, or even executable by the organization, without an understanding of what the current level of organizational maturity is. That’s why the first thing that needs to be done is an evaluation of where the organization is against a maturity framework, built on the study of Supply Management transformations over the last two decades. When an evaluation is done against a well-defined framework, that is associated with best practices that have been successfully used by leading organizations to advance up the maturity curve, the organization can come up with a plan appropriate to its current level of capability. This not only maximizes the organization’s chance of project success but helps it accelerate up the curve faster than organizations that take their best guess, which amounts to nothing more than trial and error.

Once an organization has a proper transition plan in place, it’s talent should be able to quickly execute on that plan and see some success in the short term. Then, when the project has finished, or in the case of a multi-year project, reached key milestones, the team can measure the results versus the expected results (based on case studies and surveys of organizations who undertook similar projects at a similar maturity level), and determine if they are on-track, ahead, or behind. If the team is behind where they can expect to be, they return to the Evaluation stage, determine the reason for the shortfall, modify the process, and try again. When the team has reached the desired level of success, and advanced up the maturity framework, it begins the EPAM cycle again and comes up with process and technology transitions designed to get it to the next level of maturity.

BravoSolution, which has been working on improving their assessment and change management process for years, has found that the process works so well that they have cemented their global sourcing service offerings on the process, which they are calling BravoAlign. Regardless of what it’s called, the method works, and can work for your organization too.