Category Archives: Best Practices

Does Outsourcing Save Jobs?

A recent article over on Global Services on “Outsourcing often Mischaracterized as Evil and Insidious” states that outsourcing costs jobs is one of the myths that turn outsourcing into an epithet.

The article states that it is a jobs fallacy that when a job disappears in a western country and turns up in India it was exported by a nefarious businessmen. The article claims that the reality is that the job was exported because the job has been uneconomic to maintain in the West, whether or not India exists. The example given in the article is that when Carly Fiorina exported 35,000 jobs, it was the right decision, because if HP did not remain competitive in fiercely competitive markets, HP would have lost 100,000 jobs. In addition, if a certain job gets too expensive to do, such as calling a patient to remind her to take her medications, then it will disappear. But if it can be outsourced at an affordable cost, it will not.

I certainly buy the second argument. But I don’t know how far I buy the first. Costs have to be kept under control to support solvency and maintain jobs, but does this mean they always have to be outsourced? Sometimes it’s just a matter of increasing productivity. While that may be hard to do in online customer support, in certain areas of manufacturing, new technology and processes might be all that is needed if the plant is put in an area where costs are low or government incentives are high. In other words, outsourcing may not always be saving as many jobs as other methods could. It’s a balance.

Category Management – More than Just a Fad

As per this recent post on “benchmark data points to big advantages of category management” over on SCMR that summarized new data released by APQC, companies that have adopted category management practices – managing product categories separately and customizing them according to specific customer needs – outperform others on a number of key supply chain metrics. Specifically:

  • shorter supplier lead time –
    median lead time of 6 days compared to 28 days
  • faster cycle time –
    median turnaround time of 8 hours compared to 72 hours
  • higher productivity –
    199% more POs processed per FTE
  • fewer FTEs required to order materials and services –
    companies without category management require 2.5 times as many FTEs to order materials and services and have less FTEs to focus on more strategic endeavours

So, if your organization is not already managing on a category basis, maybe it’s time to do so for key categories.

Cost Control – Hwong Style

Those who know Henry, who, before taking on a VP role at Rearden Commerce, held senior roles at Ariba, Provade, Elance, PeopleSoft, and Moai, know that he’s on the ball when it comes to Sourcing and Procurement. Thus, I was very interested to see what his prescription for Cost Control was as he was relatively quiet during his time at Ariba where he took on a more internally focussed role.

But, as per this recent article over on CPO Agenda on “How to Control Costs”, he’s back in the spotlight and eager to share his wisdom with the world.

According to Henry, the secret to cost reduction is not to put more spend under procurement’s control (which is hailed as the holy grail by at least one analyst firm), not to enable enterprise-wide visibility (which is hailed as the holy grail by providers of spend visibility software), and not to put an end to off-contract purchasing (which is hailed as the holy grail by consulting firms a-plenty). While each can reduce costs, the real sercet is to moving towards a more holistic approach to managing the entire lifecycle of a purchase. This is because a platform model that supports the entire procure-to-pay process (and as many categories as possible), gives procurement chiefs the one common driver behind all of the strategies reflected in the survey responses: control.

What a CPO really needs to reduce costs is control over those costs, and, more specifically, control over the processes that drive those costs. Some categories should be purchased centrally, others should be decentralized. Some should be purchased on multi-year contracts. Others should be purchased on a spot-buy every day, week, quarter, or month. Some categories should only be bought on contract. Some should never be bought on contract. The CPO needs the control to ensure that the right policy is followed for every buy. That is the ultimate key to cost control.

In addition, if you really want to control cost, instead of consolidating the supply base, which is the first instinct in 3 out of 5 procurement professionals, you instead expand the supply base. As Henry says, while consolidation presents you with fewer throats to choke, it also increases your exposure to disruption if one of those suppliers fails or has a quality / delivery issue. Plus, when you give users fewer choices, the immediate impact will be an increase in off-contract buying. Thus, if you want to make an impact, you expand the supply base since working with more suppliers can actually increase compliance and interestingly enough reduce costs, as the procurement team has more leverage to work with when negotiating terms.

Finally, if you’re really serious about cost control, you tackle the biggest obstacle of them all — the cultural obstacle. Procurement teams are often not involved in strategic planning decisions and are brought in after major decisions are made and after much of the costs have been locked in. Even having the information that procurement can provide about supplier choices and costs … could play an important role in keeping costs low in the long-run.

It’s a great article that provides great insight into the real drivers of cost — cultural, control, and consternation (about having too many throats to choke). It also provides some great advice on strategies an organization can use to combat wild price changes in dynamic commodities and some insights on where Henry thinks the challenges in Procurement lie. Check it out.

Collaborate, Collaborate, Collaborate, Collaborate … NOT!

Over on the HBR Blogs, Andrew Campbell recently wrote a post on how “Collaboration is Misunderstood and Overused” that was awesome. I don’t necessarily agree with it, but it’s thought-provoking and contrarian and almost ranting in its tone … and I love it!

As you may have guessed by the increase in the number of rants the doctor has written lately, he’s getting fed up of the bland, thoughtless drivel that is becoming common on many “leading” news and blog sites these days. In his view, if you can’t find something new, exciting, and innovative to write about, then, unless you can find something exciting and undiscovered in the same-old-sh*t that you’ve been writing about for years, don’t write anything at all. Stuff gets old and stale very fast on the internet. And those who are leaders, and not laggards, get tired of stale bread very quickly. But I digress.

In his post, Mr. Campbell, who is a director of the Ashridge Strategic Management Centre, notes that collaboration, which often fails because it’s a risky, time-consuming endeavour with hard-to-resolve competing objectives, is often confused with teamwork and that’s the big issue.

In his mind, teamwork is performed by a team that is created when people need to work closely together to achieve a joint objective. And in this team, someone is given the authority to resolve disputes, ensure coordinated action, and remove disruptive or incompetent team members. As a result, even teams at odds can succeed with a good leader.

In contrast, collaboration occurs when either two more individuals (departments, or other entities) identify shared goals and decide to work together to achieve those goals, or, more likely, when a senior executive creates an initiative that spans intra or inter organizational boundaries. But, unlike a team, there is no leader and no guaranteed way to ensure progress. And if the collaboration was mandated, the collaborators can’t walk away when they disagree. As a result, it’s easy for collaboration to come to an unresolvable standstill.

These are good points. If a dispute cannot be (forcefully) resolved (if necessary) and if the participants can just walk away at any time, there is no guarantee of a result — and no way to show collaboration ever took place. As a result, as the author points out, success depends on whether:

  • the participants are committed to work together
  • the participants have high respect for each other and each other’s competencies
  • the participants have the skills to creatively bargain with each other

and, most importantly, at least in the doctor‘s view,

  • the participants can swallow their pride and their ego and admit when someone else has a better way (which can be very hard for Type A’s and PhDs).

Based on this, the author suggest that you should only set up a collaborative relationship when you cannot use a team or a customer-supplier relationship and when some form of interaction is absolutely necessary. And even then, it shouldn’t be a permanent solution.

I’m not sure this is the right view. And I’m probably the most cynical of all the supply chain bloggers (because I know almost all marketers lie, that many, for lack of a better word, “analysts” in the space don’t really know squat about the fundamentals of technology, and that the current state of technology in an average enterprise organization is pretty dismal compared to what it could be)! Yes it often fails, but it’s usually the people and not the process. If you want to work together, you’ll work together. If you don’t, you won’t. Team, customer-supplier, or collaboration. Doesn’t matter. Collaboration can work just as well, even though, in reality, the odds of success might be less. Or maybe I’m just an optimistic cynic.

McKinsey Just Gave Us the Best Argument for Next Practices

From a recent McKinsey Quarterly newsletter:

Spurious frameworks and torrents of data often obscure the basic principles of good strategy. To beat the market, companies must exploit imperfections that stop (or at least slow) its workings. Such competitive advantages are scarce and fleeting because markets drive a reversion to mean performance … . Good strategies therefore emphasize difference …
     From “Why best practice isn’t the best strategy”

But more importantly, an analysis of ROIC and EV/IC for top, middle, and bottom quintile companies from 2001 to 2009 shows an drop in ROIC of almost 75% (from above 15% to below 4%) and a drop of EV/IC of almost 85% (from about 3.2 to 0.5).

Best practices aren’t enough anymore. We need next practices.

As a side-note, the next Next Practices Xchange, hosted by the Mpower Group and one of the few forums dedicated to the discussion of next practices, is November 4, 2011.