Category Archives: Best Practices

Life Lessons from Clown College: II

   

First of all, let me apologize for taking so long to write Part II. I never expected such an overwhelmingly positive response to my previous posts, and it went to my head, and like a writer who wins a National Book Critics Circle Award for their first novel, I developed a severe case of writer’s block because the last thing I want to do is disappoint you. But thanks to some prodding, and the realization that I don’t have to tackle it all at once, I was able to capture three more life lessons that I learned in clown college that I’m sure will help you in your Procurement Career.

  • Learn to Barter (because it’s all funny money in the end)
    Not all purchases should involve exchanges of currency for goods or services. When possible, and especially when the deal is with a strategic supplier or partner, an exchange of goods or services should be considered. For example, if you’re a temporary labor placement agency buying software from a foreign IT company that needs temporary labor in your home country, consider an exchange of services in lieu of paying for support or future upgrades. Not only will this reduce cash-flow requirements in a tight economy, but it protects you from currency exchange risks in countries with unstable currencies undergoing fairly rapid inflation or deflation.
  • Be Cognizant of the Risks
    Those of you who don’t might end up without a job just like Fred ended up without a head. I didn’t know No-Head Fred, but, thanks to him, my entire class knew why you didn’t stick your head in the mouth of a hungry lion who didn’t like you. Fred didn’t understand that a lion could bite your head off and, as a result, didn’t insure that the lion was fed before performing the stick-your-head-in-the-lion’s-mouth trick. However, since the rest of us understood the risk, we always insured that the lion was fed and happy before performing the trick, and we all kept our head. Now that trade is truly global, this is one of the most important lessons for a Procurement Professional. If you’re not cognizant of the risks, you’ll never know when you might lose an entire shipment, or, if you’re not careful, your life. While a short-cut off the coast of Somalia in a shipment from Mumbai to Adan (for example) might seem like a good idea at the time, it won’t seem like such a good idea when Pirates are boarding you. North of Seoul might be the last place you want to build a new plant if North Korea declares war on South Korea. I know the risks aren’t always this big, but they can be, and if you’re not cognizant of them (and do not take the necessary precautions), you could lose your head over them.
  • Don’t Be Afraid to Laugh at Yourself
    Just like the situation gets a little tense in the dressing room when you have a poorly-timed wardrobe malfunction, negotiations in challenging economic times can get so dire that you couldn’t even cut the tension with a knife. In these situations, the only way to break the tension-ice is with a good hearty laugh, but no one is going to laugh unless you laugh at yourself first. In the first situation, the only thing you can do is look down and let out the heartiest laugh you can. In the second, you’ll have to make a slip of the tongue that’s so funny that you can’t help but laugh heartily at yourself. For example, if you were buying ball bearings and you accidentally called them bears’ balls, I’m sure laughter would break out.

I hope you enjoyed these life lessons. Until next time, please join me and eleven of my friends as we take a ride in our clown car.

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The Three Best Habits of Highly Successful SME Supply Chains

A recent article in Canadian Manufacturing on “the seven habits of highly successful SME supply chains” had three great habits that all supply chains should follow:

  • Long-Term Approach
    As the article points out, identifying overseas export markets and establishing supply chain partners in those markets can be a time-consuming and costly endeavour. As a result, it’s important to take a long term view when identifying overseas markets and selecting supply chain partners in those markets as you won’t be able to make a quick change if you make a mistake.
  • Inventory Intelligence
    In a downturn, it’s easy to get stuck with excess inventory that will have to be sold at a loss, if you’re lucky, or written off entirely, if you’re not. Also, in an upturn, it’s easy to sell-out and lose sales to a competitor with a similar product. In both cases, poor inventory management can cost your company a lot of money. Inventory needs to be based on real demand, which comes from demand signals. That’s why you need to take the leap of faith and tie into retailer PoS systems for current demand signals.
  • Cultural Cleverness
    It’s not just SMEs in Canada who have been vexed by unanticipated strains in relations and delays due to miscommunication sparked by cultural differences. That’s why this blog ran two series, edited by Dick Locke, on Overcoming Cultural Differences in International Trade and Cultural Intelligence. Before you work with a different culture, better get some cultural training.

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Using Consultants and Advisors Wisely


Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

Maybe it is the urgency of the current business environment, but in the past few months we’ve heard about several large procurement consulting projects that did not turn out well. For a recap of some of the classic reasons for potential trouble, see my earlier posting on Consultants: Use Them Intelligently.

Two of the most recent stories that came to our attention involved different firms but a common thread: “success fee” or “risk free” procurement consulting engagements. For those of you who are not familiar with the practice, “success fee” or “risk free” consulting obligates the client to pay to the consulting firm a fairly hefty percentage of the “savings” generated during the project. Often, 30 to 40% of the first year’s benefits are due as payment. These arrangements are also sometimes known as “shared savings” engagements.

Beyond the large total cost of this option (often 3 to 4 times more expensive than the classic professional time and expenses approach), major challenges/drawbacks of a success fee approach include:

  1. Potential misalignment of interests between client and consulting firm (the client often wants not just negotiated cost reduction, but implemented results — along with fundamental transformation and capability building; consulting firms in a pure success fee or “risk-free” arrangement are incented to drive quickly for negotiated savings, and then depart for their next client.)
  2. Administrative and practical complexities of agreeing on savings calculations, and the potential of disputes regarding payments due.
  3. Unpredictable, and potentially unproductive, behaviours from client employees if the existence of the shared savings arrangement becomes known.

When a client asks us whether we would entertain doing sourcing advisory work on a success basis, we take the opportunity to have a full disclosure conversation on the subject. For example, at a minimum, Greybeard presents the detailed pros and cons, including estimated total costs for the project scope, for three options: professional time and expenses, success fee, and a hybrid of the other two. That information is the catalyst for a meaningful conversation. And, it enables the client firm to make an informed decision that is in its best interests, not the consulting firm’s best interests.

Thanks, Bob!

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Why It’s Time to Take that Leap of Faith

Lora Cecere, of the Altimeter Group, just published a great piece on the Supply Chain Shaman blog on why it’s time to take a leap of faith as far as using POS data to drive actionable replenishment is concerned. Yes, it’s time to move from PUSH to PULL using real demand and insight and not just seat-of-the-pants forecasts.

The post, which is over 2,100 words in length, is too in-depth to do justice in a short summarization, so I won’t try, but I will point out a few keen observations that often go overlooked in most discussions and add one or two of my own.

First of all, as Lora keenly points out, you can’t prove ROI for an initiative before the initiative is done, which means if you want a proven ROI, you can’t be an innovator … and the big returns in this space will go to the innovators, not the renovators. You have to take that leap of faith.

There aren’t a lot of predictive analytic solutions on the market, but there really don’t need to be. If you get better data faster, you can re-run and correct your forecasts on a regular basis and minimize the the divergence between macro-level estimates and reality. That alone could save you millions.

You have to get close to the customer and get good at using the data in the sales relationship. If you don’t get close to the customer, learn their pain points, and figure out how you can use their data to help them, they’re not going to be that interested in helping you get access to it on a regular basis.

You have to build a cross-functional team led by business unit leaders focussed on innovation, or the initiative isn’t going to pick up enough momentum to make it. You have to break through mental barriers built up over years, or decades, of doing forecasting and inventory planning a certain way, and that’s not easy to overcome.

However, if you follow Lora’s advice, the rewards could be significant as stockpiles of obsolete inventory will quickly become a thing of the past. More importantly, and this is the one point the article should have really emphasized, so will costly long-term stock-outs. If you have access to daily POS data, you will not only see what is selling fast, and what’s not, but you’ll be able to run cluster analysis to see what products are selling well in what locales, and how the demand is spreading (outward or inward). This will not only allow you to quickly refill inventory on a popular, high-margin, item like a cellular phone or tablet PC, at a location about to run out, but predict which neighbouring locations should also be stocked up, and sense demand surges earlier in the cycle, giving you more time to ramp up production to prevent lost sales that could make or break the quarter.

To Optimize Supplier Management, Balance the Three R’s

A recent article over on Supply & Demand Chain Executive gave us seven steps to “balance supplier risk versus reward”, the two classic R’s of supplier management. And while it was a great article with seven pieces of great advice (if properly followed and implemented), it may not be enough to truly succeed going forward. There is so much risk at so many levels in today’s global supply chains, that it’s unlikely that the buyer can do enough to balance the end-to-end risk versus the reward without the supplier’s help — help that can be hard to come by if there’s nothing in it for the supplier. In other words, something is still missing.

But before we try to put our finger on the missing piece, let’s review the seven steps offered up by Byron Tatsumi of KPMG in the S&DC Executive article.

  • Define and Prioritize Supplier Tiers
    The most critical suppliers (to operations or revenue) should get the most attention.
  • Utilize Risk Assessment Processes for New Requests
    Regardless of whether the request is against a new or existing supplier. A supplier great at manufacturing electronic components might not be so good at machine parts and vice versa.
  • Implement Ongoing Supplier Due Diligence
    A supplier that is not considered a risk today could be a significant risk in a year and vice versa.
  • Utilize Balanced Category Scorecards
    And look at metrics and performance across the board — cost control, quality control, inventory control, etc.
  • Adopt Robust Performance Reporting and Issue Resolution
    That goes beyond a dangerous dashboard to highlight good, bad, and, most importantly, missing data to help you identify potential issues before they materialize.
  • Maintain Category Market Research Profiles
    Markets are volatile and dynamic. Tomorrow’s costs, and primary cost drivers, can be very different from today’s. Don’t source using last year’s data.
  • Implement a Supplier Six Sigma Program
    With the goal of continuous improvement in mind.

These are all great steps, and they will all help to get better performance from a supplier which will reduce a buyer’s risk and increase a buyer’s reward, but not all risks are supplier risks. Some of your most critical risks could be upstream risks in your supplier’s supplier’s supplier. While balanced scorecards and a good Six Sigma program might be sufficient to convince a first-tier supplier to implement some basic supplier management programs on their end, chances are that, without the right incentive, they won’t be enough to convince the first-tier supplier to work with its critical second tier suppliers to implement corresponding programs. It doesn’t matter if the first tier electronic components manufacturer has the best supply management program in the world if its second tier sub-component manufacturer doesn’t have any programs in place to insure continuity of supply of raw materials and basic inputs from third-tier suppliers.

Without some incentives, it’s unlikely that a first-tier supplier operating on a razor thin profit margin is going to take the time and energy required to transfer the modern supply management processes, that the buyer spent significant time and money on, to second tier suppliers. For that, there’s going to need to be some remuneration involved — the third R. If the supplier is rewarded for decreasing risks, lowering response times, and increasing quality, then it is going to have some incentive to helping its suppliers decrease risk, lower response times, and increase quality. If, instead of focussing only on penalty clauses, the buyer instead includes some reward clauses for improving performance, it’s likely that overall risk will decrease while buyer rewards (fewer stock-outs, fewer returns, etc.) increase as well.

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