Category Archives: Best Practices

Three Tips to Get Strategy Right

A recent blog entry on “strategy on the morph” from The Conversation over at the Harvard Business Review had three great tips on how to get your strategy right in these turbulent times that need to be highlighted.

  1. Distribute the right to make strategy throughout your organization
    Strategy needs to be a collective effort — not an edict handed down from on high — and people need to be empowered to make the right decisions.
  2. One process does not fit all decisions
    Some processes need to be long and drawn out because the decision will affect everyone at all levels of the organization … others, that involve decisions that will only affect a single department, can be made more quickly. The key is knowing what process to use when, and distributing that knowledge throughout the organization.
  3. Resources — money and talent — needs to move as fast as decision making
    A strategy needs to be executed. Otherwise, it’s just another pointless decision.

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Demand Management, CPO Agenda Style

I found a recent article in CPO Agenda on how to “engineer fresh opportunities to control spending” quite timely given the extended recession and the limited revenue growth opportunities due to the reduced amounts of disposable income end customers have in their pockets to buy products and services. According to the article, effective demand management is the next logical step to controlling costs and driving down inefficiency and waste, and along with improved inventory management and distribution network design, they’re right.

With a better understanding of the factors at the root of demand for products, services or internal resources, a company can put in place innovative ways to eliminate, reduce or meet demand more efficiently and the result can be considerable savings. And while demand management may be traditionally associated with indirect spend, the greatest savings to be had are usually in direct categories. The key to realizing that is to stop focussing on “savings” and instead focus on “cost avoidance” because, as I said before, “savings” is just money you should not have spent in the first place!

So how do you get started? According to the article, you follow these five steps:

  1. Create a Demand Tree
    This a flowchart that starts with demand origin and documents key drivers. It breaks down the product or service into its constituent parts to aid in a full understanding of the product or service provided.
  2. Calculate Demand
    Based on this flowchart, calculate annual demand for each component.
  3. Calculate Capacity
    Figure out how much you can produce at each production level and the associated costs.
  4. Compare Capacity and Demand
    What capacity level are you at with current and projected demands. Does it make sense?
  5. Create Action Plans
    Once you’ve figured out what level you should be at, you can create a plan to alter demand accordingly. You can ramp up sales and marketing efforts if the product or service has the potential for great profitability at a higher demand level, or shift focus to another product or service if it’s not profitable, or would be more profitable at a lower demand level (because you’ve exceeded optimal capacity and additional units require costly overtime to produce).

In other words, you simply understand where you’re at and figure out where you should be, and then create a plan to get there. Of course, the plan could require a lot of work, but at least you’re taking a step in the right direction.

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Transformation is Necessary for High Procurement Performance

Last week, where I walked you through The Hackett Group’s 18 value streams that can take you from a naive apprentice to expert sourcerer, I noted that your procurement needed to be transformational. I also provided you with some examples of transformational value streams that included process re-engineering, financial hedging, and supplier collaboration. But I didn’t address how you shift from a strategic mindset to a truly transformational one.

The key is to think about reinventing your procurement organization. That requires going beyond simple strategic sourcing where you are sourcing current needs using the best tools, processes, and information available to thinking about your long term needs beyond the current project (and contract) and coming up with a strategy to make any savings you secure sustainable over the long term. For example, you might focus on securing a long term contract with a supplier who could become a strategic partner, or with a third party manufacturer committed to upgrading it’s production equipment and processes to deliver year-over-year cost reductions, or with a design firm who works with you to continually re-engineer designs to be more cost effective to produce.

As this recent article in Industry Week about how “to achieve high performance” points out, transformation is the process by which companies, business units, or locations make a step-change improvement in their operating performance. It’s more than just an incremental improvement. It’s a new way of operating. It’s not just shifting from cost savings (tactical) to cost reduction (strategic), but to cost avoidance (transformational). It’s going beyond a focus on lowest TCO to a focus on highest value. For example, maybe you could save 10% if you could increase your order from 75K units to 100K units, but when all is said and done, the company is measured on profit. Maybe it’s better to create a slightly higher quality version of the product, only order 50K, pay a little more, but sell them at a higher profit margin. Whereas a strategic sourcerer would try to negotiate the 10% discount on the possibility of 100K of demand as a stretch goal, the transformational sourcerer would accept a slightly higher price-point for 50K, slightly improved, units to maximize total company profit in the long term.

So where do you start? As per the Industry Week Article, you start by recognizing the gaps between your performance and that of best in class companies. If you don’t understand how much better you could be doing, you’ll probably never acquire the drive to be truly transformational. As a result, you’ll leave significant value on the table without even realizing it.

Then you set stretch goals that seem unattainable but are, in actuality, just a little beyond reach. Given that over 80% of all activity in most business processes is a waste — adding no customer value whatsoever — there’s a lot of room for improvement. And since no one says you have to get there all at once, shoot for 50% improvement. If you get 20%+ every year, you’ll be pretty close to your goal after a few years.

Finally, you get a strong organizational leader on your side. As with every other effort, the support of a strong C-suite leader is the key to success. At some point, someone is going to need to make a tough call because you’re going to have to radically change how things are done and there is going to be a lot of resistance at first. But that’s good, because that probably means you’re on the right track.

Stay there, and you might just find out what transformational procurement really is!

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Supply Chain Excellence Pays Off In Spades

“Does Supply Chain Excellence Really Pay Off?”

You don’t even have to go beyond the first page of this recent article in the Supply Chain Management Review (subscription required) to find the answer. According to a recent study by Morgan L. Swink, Rajdeep Golecha and Tim Richardson at Michigan State University, which analyzed the financials of top supply chain management companies and their nearest competitors from 2004 to 2007, supply chain leaders clearly outperformed their closest competitors across the following 10 metrics:

  • 50% higher net margins
  • 20% lower operating and SG&A expenses
  • 12% lower average inventories
  • 30% less working capital expenses
  • 2X the ROA
  • 2X the ROE
  • 44% higher economic value add
  • 2X the return on stock price
  • 2.4X the risk-weighted stock return
  • 46% greater market value-to-assets ratio

Excellence pays. What else do you need to know?

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The Real Price of Cost Cutting

Last November, Basware released a research report on “Cost of Control: The Real Price of Cost Cutting” that expanded upon their “Cost of Control” research summary (that they released last June) with in-depth interviews to illuminate some of the key issues that will form supply management strategy in the years to come. The white paper illuminated some good points which I’d like to expand on in this post.

Technology is Key to Efficiency

The report noted that respondents are alive and alert to the potential of efficiencies delivered through the use of technology, although IT investment is tight in the current market and that investment funds are likely to be made available where the business case is able to deliver tangible, short-term savings. This is positive — in that business are starting to see the value technology can deliver, and negative — in that business won’t invest unless they are convinced they can see immediate payback. In other words, as long as the market is tight, they are going to postpone new technology purchases and continue to bleed year after year, hoping that they’ll still have blood left when the economy improves.

Unfortunately, this report, like many others, did not address how to deal with this problem. The answer lies not in the ROI analysis (which is there, but not always rapid enough to justify six or seven figures up front) but in the approach to technology acquisition and payment. Businesses need to understand that it’s a tough economy for vendors too and that you don’t need to pay for it all up front anymore. Not only can you start with a SaaS pay-as-you-go solution (which will generate instant savings as long as you select a solution that costs less per month than the minimum average monthly ROI you expect), but most businesses will give you a payment plan in this economy, even if you buy a perpetual license. Furthermore, you can also pay as you go on services and support, and many organizations will even give you a payment plan on up front installation and integration if a lot of work is needed. Vendors would rather be paid tomorrow for work done today than not be paid at all.

Procurement and Finance is a Tense Relationship

A number of recurring issues erode the relationship between the functions but encouragingly cause regret on both sides. Whether Procurement reports to Finance or to the Board, Procurement has to work hand-in-hand with Finance, respect the cash-flow realities of the business, and make purchases that have the greatest positive impact to the bottom line. You’re not saving 2% by agreeing to early payment if you have to borrow the money at 24% annual interest because your customers are all paying late. Cost of capital, currency conversions, cost of commodity risk management (through hedge funds, futures, etc.) all have to be taken into your total cost of ownership equation — not just unit price, shipping price, storage price, and tariffs.

Again, the report presented no clear advice on how to resolve the conflict. While there is no answer that will be right for everyone, you need to start with the formation of cross-functional teams on every sourcing project which includes a Finance representative who can help you understand the financial impacts and ramifications of a proposed sourcing arrangement. Getting Finance’s input before the contract is signed will go a long way towards easing the tension and maintaining the relationship.

Minor Risks are Important Too

Businesses are looking for the ‘Tsunami’ events that take place in the supply chain, but failing to keep track of the ‘soil erosion’ that is more likely to be experienced over time with regards to quality and servicing issues surrounding the supplier relationship. Furthermore, respondents are happy to articulate potential failures among their key suppliers and the discrete disappearance of supplier businesses, but do not appear to pay enough attention to the broader issues created by compound supplier instability.

The fact of that matter is that if a number of minor risks materialize simultaneously, they can be just as devastating as a major risk materializing. Let’s say you make a product that requires five key components. What if all five suppliers experience problems at the same time and your orders are delayed at least 90 days from each supplier, in your peak season. One component, you could probably go into recovery mode and find a replacement quickly. Two components, super-charged fire-fighting mode. Five components? Forget it! All risks and suppliers have to be tracked and attention paid if leading indicators indicate trouble.

In other words, regardless of what fire you’re fighting today, there’s a big picture and you better not lose track of it. But it’s important to have a plan, and that’s where the report stops short.

Finally, don’t forget that, Across-the-Board Year-Over-Year Savings Targets are Stupid. After all, I even gave you Yet Another Reason Across-the-Board Year-Over-Year Savings Targets are Stupid.

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