Daily Archives: November 27, 2013

Can Six Drucker Questions Simplify a Complex Supply Chain? Part II

A recent post on the HBR Blog Network on Six Drucker Questions that Simplify a Complex Age poses us with a interesting inquiry — can they simplify a complex supply chain? After all, these are questions out of Drucker’s writing handpicked by Rick Wartzman (Executive Director of the Drucker Institute at Claremont Graduate University), not out of Drucker’s mouth (as Drucker died 8 years ago), and given the recent turmoil in the economy, Drucker might choose different questions to lead us back to the road to recovery (and he might not).

Getting straight to the point, as an existential discussion on what Drucker may or may not ask today doesn’t help us much in the real-world of real-time supply chains, we will skip the philosophical debate and jump right into a discussion of the last three questions, continuing in the same vein as yesterday’s post.

  1. What Are Our Ideas to Try to Do New Things, Develop New Products, Design New Ways of Reaching the Market?
      SI agrees that this would be near the top of Drucker’s list as innovation is becoming more imperative for an organization to survive every year. It’s often the difference between success and bankruptcy, even for a Fortune 500, as today’s fickle consumer can often change the course of a global corporation in just a few years.
      This question is especially imperative for Supply Management that needs to get involved as early as possible in the NPD cycle to not only help identify lower cost suppliers or materials, but the most lucrative markets that will enable to organization to take advantage of economies of scale. Furthermore, supply management technology is considerably ahead of where it was a decade ago, even though most Supply Management organizations are still running on the same ERP they were running on a decade ago, and Supply Management needs to ask not only how it can catch up, but get ahead of the curve and become best-in-class sooner rather than later. Even the most laggard of the Global 3000 can become best in class in as little as five years with the right vision, plan, and change management methodology — but without the right vision, plan and change management methodology, that same organization is likely to be even further behind in five years (if it is still solvent).
  2. Who In This Organization Depends on Us for What Information?
      SI agrees that Drucker would definitely ask this question in a detailed assessment of corporate performance, but SI believes it would be in the context of who in the organization should depend on us for what information. Everyone has a role to play, but in your average organization, not everyone is playing the right role, or even understands what the roles should be!
      For example, Finance typically depends on Procurement for visibility into cash commitments, but does not depend on Procurement for Working Capital Management (WCM) guidance. Finance should be depending on Procurement for WCM guidance as only Procurement has the visibility into the supplier’s cost, financial viability, and expected cost of capital given their financial stability and local market conditions. Thus, if cashflow is limited and AP can’t take advantage of all of the early payment discounts / dynamic discounts at its disposal, only Procurement is in the position to truly determine which discounts are best for the organization in the long-term. For example, sometimes it’s better to take a lower discount if it means paying a supplier that would otherwise have to borrow at 20% per annum, as this could allow the supplier to reduce its operational costs and pass those savings back to the supplier through lower prices at contract renewal time. In comparison, paying a supplier with a cost of capital of 6% per annum early is not going to help that supplier much, which means that the one-time discount is all the value the organization gets.
  3. What Would Happen If This Specific Task Were Not Done At All?
      SI agrees that this is another inquiry Drucker would ask when doing an operational review, but doubts that it would be top of the list. SI believes that the first question would be along the lines of what would happen if we did not supply this product or service, from a market perspective and from an organizational perspective, and then when that understanding is gained, and a commitment to the product or service is confirmed, the individual tasks that are currently involved in the production and/or delivery would be questioned.
      Of course, from a Supply Management perspective, the first question is pretty easy. Either other units would absorb the minimal necessary functions, and probably do them poorly, or the company would return to the age of end-to-end siloed production where it did everything from mining the raw material to delivering the final product to the store shelves.
      The question posed by Rick is the critical question and needs to be asked of each project and task undertaken by Supply Management. If the answer is “not much”, the task or project is not value-add and probably should be dropped in favor of a task that is (more) value-add. For example, let’s take a buyer who notices that an evergreen contract for widgets, which has been in effect for five years, is coming due, which states the organization gets a 10% wholesale discount off of list price. Let’s also say that the average price increase has been about 3% per year, even though market indexes have only been going up about 2%. At a first glance, there might be a savings opportunity of 5% through re-negotiation or re-sourcing, but let’s also say that demand for the widgets has fallen 50% over the past five years, and that the total annual spend is only 2 Million of the 500 Million of Spend Under Management (SUM). Let’s also say that the organization only has the resources to tackle about 30% of the spend categories each year. In this case, if the buyer were to ignore this 0.02% savings opportunity on SUM and instead focus on sprockets, which has tripled in demand since the last contract was cut and which represents a 20 Million category where current prices are estimated to be at 3% above best price, she might be able to obtain a 0.12% savings on SUM instead. In other words, if the task of sourcing the widgets was not done at all, the organization would be better off (by a factor of 6)! Successful Supply Management always focusses on the most strategic opportunity first!

In summary, SI believes that these questions can help a Supply Manager tame the complexity of today’s Supply Chain by focussing on what matters and ignoring what doesn’t. They’re not a cure-all by any means, but insight never hurts!