Category Archives: Best Practices

Supply Management: Secret Agent of Business Impovement (Key NPX Take Away 5)

 

James Bond Theme Song

 

In our final post for the week on our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management, we finally get to what matters most: A Next Level / Practice / Generation Supply Management Organization that identifies, secures, and executes on value is the Secret Agent of Business Improvement and every Supply Management Professional is an organizational 00 with a license to kill [waste].

Of all of the messages delivered at the NPX, this message from Alastair Donald, the Chief Procurement Officer of Global Procurement Services of ConocoPhillips Company (which currently holds the #4 slot on the Fortune 500) is probably the most important. Supply Management is the secret agent of business success, and ConoccoPhillips continued prominance in the top 10 of Fortune 500 over the last five years years (#6 in 2010, #4 in 2009, #5 in 2008, #5 in 2007, and #6 in 2006) is largely due to significant improvements in Supply Management over the last four years, which went from delivering, on average, a low single digit annual cost reduction from 2002 to 2006 to a low double digit cost reduction from 2007 to 2010. (While SI cannot release exact numbers, the improvement is very impressive.)

So how does Supply Management deliver such significant improvements to the business? First of all, it gets its house in order and ensures that the following ten functions are adequately staffed by its secret agents:

  • Strategic Sourcing
  • Contract Management
  • Category Management
  • Materials Management
  • Supplier Relationship Management
  • Talent Management
  • Procure-to-Pay
  • Governance & Compliance
  • Sustainable Sourcing
  • Market Intelligence

Then it addresses the threats to national security (and organizational stability):

  1. tactical focus
  2. wrong skill sets (engineers are not enough)
  3. ineffective contracts
  4. too much money spent on PO processing
  5. weak governance
  6. lack of value creation

by way of

  1. strategic execution
    which focusses on correct time allocation, the right organizational design, and integrated processes and tools
  2. skill enhancement
    which focusses on identifying cross-functional high potentials, recent college graduates who can be future secret agents, identification and absorption of external expertise, and an end-to-end talent management process
  3. contact excellence
    which focusses on getting the majority of contracts (including all high value or high risk) on company paper, getting templates in place to expedite the process, and ongoing risk assessment
  4. lower PO costs
    by way of a single global ERP instance, appropriate P2P support systems, and low-cost tactical processing centers
  5. globalization
    managed with a center-led philosophy and key stakeholder councils
  6. true value creation
    by way of a value-driven sustainable strategic sourcing process, dedicated SWAT teams, commercial astuteness, robust models driven by high-powered analysts, financial validation, and fact-based decision making

Secret agents will be needed to pull all this off because only secret agents will be able to deal with all of the challenges that will arise, including:

  • artificial constraints
  • strategy changes
  • short term focus by the peer group organizations
  • talent abduction
  • availability of SMEs
  • change management
  • sleeper agents

but when Supply Management has a seat at the grown-ups table, is on investor relations radar, is being pulled in by other organizational units on a regular basis, has its budget increased (while every other organizational unit sees a decrease), and is no longer seen as the leper colony or roach motel, it will be worth it. Because once every dollar taken out by Supply Management hits the bottom line, Supply Management will truly be the secret agent of business improvement.

It’s Not Technology, People, or Process — It’s Execution (Key NPX Take Away 4)

As you probably guessed from the title, this post continues our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management. Now that we have defined value, defined how we get to value, and how we capture value in contracts, the next thing we have to discuss is how important it is to get to execution as quickly and efficiently as possible.

The reality is that it doesn’t matter how good a process is, how modern the supporting technology is, or how good and well managed the people are if the organization doesn’t execute. The foundations are not enough. A Supply Management organization needs to execute on those foundations to get to value. As Dalip Raheja of
The Mpower Group likes to say, it’s not about the consonants (the foundations), it’s about the vowels (the execution on the foundations) beause Old MacDonald Was Right.

A Supply Management organization that doesn’t execute on the foundations never gets beyond best practices and traditional TCO. This will get an organization good results, but it won’t get the organization to world class status in these tight economic times. An organization needs to Adopt the plan, Execute on the plan, Implement the required changes, Optimize its operations on an ongoing basis, and appropriately Utilize the skillsets and technology it has available to get to the next level. One has to remember that simply having the best practices, processes, and technology isn’t enough. Even though it will make an organization a Toyota, it won’t necessarily make the organization sustainable in the long term. Only an organization with sustainable sourcing strategies can get to the next level.

An organization focussed on getting to the next level will go beyond the metrics and KPIs used to measure suppliers but focus on how the relationships will be established and holistically managed to extract maximum value for both parties. The contract is only the beginning of the relationship. Similar principles apply to relationships within the organization. The Supply Management organization goes beyond being a tactical service provider (who gets the contract and secures the supply) to a strategic consultant (who advises on what types of products and services are truly required in the first place and what suppliers should be approached in any event).

It’s only when the Supply Management organization starts focussing on the needs of the organization as a whole that it can truly achieve value. Unlike cost, which is at the component (product or service) level, value is at the system level and only materializes when the entire system is balanced. A truly valuable supply contract doesn’t sacrifice quality for cost, risk mitigation for expediency, or comfort for potential (but not yet realized) innovation. Just like cost can’t be reduced by selecting a lower cost supplier that will result in higher logistics costs, value can’t be created by looking at any single component as it’s holistic, and it results from proper execution of the vowels. As Dalip likes to say, it’s E-I-E-I-O.

Getting to Value (Key NPX Take Away 2)

As per yesterday’s post, last week I attended The Mpower Group‘s Next Practices Xchange and took part in the discussion of what is required to get to the next level of supply management. There are no easy answers, as value is often context and situation dependent, but there are good questions and appropriate starting points in the quest for answers. Yesterday we discussed our perceptions of value and how they often differ from the stakeholder’s perceptions of value and how we need to speak a common language to make headway. Today we will discuss some of the steps an organization can take to get to value.

The first step is to align perspectives on value. To do this, the Supply Management organization needs to go beyond simply understanding the stakeholder’s view of value and genuinely explore value from their perspective. Supply Management needs to engage in an open conversation about what value really is to the internal customer and what Supply Management can do to help the customer realize that value. Once the shared vision is understood, then Supply Management needs to work with the organization to make sure that the key points of the shared vision are reached. For example, if the customer needs a deal in three weeks, then Supply Management may have to make cost or contract concessions to make sure that a deal is reached in three weeks. It’s not perfect, but it will give Supply Management credibility and increase the chances that Supply Management is not only approached much earlier in the contract cycle for the next category, but will be more trusted to work on issues that the customer organization does not yet see as highly valuable.

The next step is to do whatever it takes to accelerate from planning to actual execution. While Supply Management may see value in extended planning, analysis, negotiation, and contracting, the customer only sees value in the result. In early projects wth a customer organization, Supply Management will need to identify only the most critical issues that it feels need to be addressed and sacrifice the rest of its concerns to get to a contract that delivers value in the eyes of the customer as soon as possible. This may mean that it will have to restrict its attention to the current supply base, start with supplier’s paper, or trust the customer that the supplier does deliver best-in-class quality.

The third, and most important step, is to take the best deal in the customer’s eyes, even if it costs more, increases certain risks, or violates Supply Management standard operating practice, especially if it’s a first project from, or critical project for, the internal customer. For example, even if another firm offers to defend a case for $50,000 less, management must be comfortable with the firm selected. Sometimes $50,000 is a small price to pay to keep management happy. A key point that is often overlooked is that Supply Management must be seen as the go-to organization for advice and support where procurement and suppy is concerned and the central cog in the organizational wheel that keeps everything turning. That is going to require a lot of trust and respect from the other organizational units, and it will take time to build.

Along the way, the Supply Management organization has to make the finance organization a partner, garner and keep the support of top management, promote the competencies of its customers, and, most importantly, communicate the value it delivers in customer and organizational terms. For example, we got the best firm on the case for only $50,000 above market average is actually a win in the Chief Council’s eyes.

What Should You Do When Your Firm is About to Undergo an M&A?

M&A activity is heating up, and there’s a chance that your firm could be next. You could be the acquirer, the acquiree, or an equal partner in what is designed to be an equal merger. Either way, you have two choices: embrace the merger / acquisition or pretend it isn’t happening. In the first case, an enteprising Supply Management professional can often land herself a better position in the merged organization if she finds a way to shine. In the second, the disbelieving individual is likely to find himself out of a job in short order.

So what should the enterprising individual do if she wants to make the most of the situation? A recent article over on SupplyManagement.com (from the Official CIPS Magazine), about how such an individual gets “in the mix”, provided some useful insights. According to the article, the individual should:

  • seek out colleagues in the other organization
    and work with them on analysis, contract review, and benchmarking to identify quick wins that will raise her profile
  • understand the other business’ systems and processes
    as there may be scope for re-engineering that will increase efficiency, decrease cost, and improve results
  • look for complementary strengths
    that complement her organization’s weaknesses and use them to attack sourcing projects that would be put off otherwise
  • identify those who feel challenged or threatened
    and work to help them — as they’ll likely remember her when asked who should stay and who should go

and should not:

  • go into avoidance mode and hope it will go away

because, once Procurement is involved, it rarely does.

It’s good advice, and a good article.

Cost Cutting – Let Us Count the Ways

A recent article over on the CPO Agenda on “cutting it fine” noted that there is more to cost cutting than just hammering down price. In fact, it noted that, in most companies, the following seven options are available:

  1. Avoid
    The best way to cut cost is not to spend money in the first place. Improve forecasts, shape demand, and eliminate need (through process transformation), spend will fall, and savings will rise.
  2. Reduce
    Finding a more energy efficient or water efficient manufacturing process will reduce costs, as will one that reduces the amount of (wasted) raw materials required.
  3. Reuse
    Find multiple uses for a product beyond its initial application or self life. Reuse an old desktop machine as a print server.
  4. Recycle
    Any production waste that can be recycled for other purposes will save money (and increase the bottom line if the scrap can be sold) as will any products that can be reclaimed from the end customer for reuse or recycling at end of life.
  5. Recover
    Retrieve discarded products from the customer at the end of life to remove precious metals from the products or components from a computer or piece of electronics equipment.
  6. Treat
    Apply treatments to products or processes to make them last longer and reduce costs.
  7. Dispose
    Dispose of unused or unwanted assets (in a sale if possible) and lower costs.

And the article is 100% correct. The question is, when will the rest of the world see that it’s not just negotiating a price break.