Category Archives: Best Practices

What Level of Procurement Performance Are You At?

Last week, Pierre Mitchell of The Hackett Group asked you if you knew the difference between procurement value and procurement performance (part I and part II) over on Spend Matters and invited you to participate in a study that would help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary level, to “expert sorcerer”, where you’re extracting procurement value at a very advanced level. (Pierre also posted a link to a corresponding finance study that will help Hackett compile a full view on the problem, which Pierre has promised to provide free insights into on Spend Matters in the weeks to come.)

If you haven’t taken the survey, as a serious supply management professional, I highly recommend that you do. I know that 30 to 45 minutes is a lot of time given how busy most of you are, but the 14 page survey is overflowing with more good information on what you might do to become “best in class” and much more informative than the last dozen tragic quadrants, graves, and research griefs that I’ve read from the “major” analyst firms. Organized around the 18 value streams that are designed to take a Procurement organization from “naive apprentice” to “strategic sourcerer”, it forces you to think about the core issues and will help you understand where you are in your Procurement journey and just how far there is to go. This, in turn, will prepare you for the forthcoming posts where I give you the value streams and explain why they are important. These posts will then be followed by more posts from Pierre that will summarize the major results, on Spend Matters, and, at a later date, provide his views on the results and a few of the best practices that might help get you started on your journey, here on Sourcing Innovation.

(For those of you thinking you can skip the survey and wait, I have two things to tell you. First, Hackett, which is the premiere benchmarking and strategic advisory firm in the space, doesn’t give away everything for free — at the very least you have to complete the survey if you want deep insights. Second, if you don’t take the survey and think about the questions with respect to the given alternatives, you’re not likely to fully understand the value propositions Pierre and I will be giving you. Just like you have to prepare your body for a marathon, you have to prepare your mind for knowledge.)

Stay tuned! Much more to come in the weeks ahead.

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Seven Strategies for Open Collaboration

A recent article in Strategy + Business on The Promise and Perils of Open Collaboration presented seven strategies you can use to make your open collaboration a success that are worth repeating.

  1. Craft a Leadership Message
    The best CEOs articulate a leadership message that is both universal and of immediate relevance to a company’s strategic needs. Open collaboration is a social process that needs to extend beyond R&D and penetrate the entire organization. For that to happen, a clear message of support needs to come from the top.
  2. Collaborate with Your Customers
    Keeping abreast of the changing needs of consumers in a global marketplace is a tall order. Open collaboration provides new ways to incorporate customers’ ideas and in some verticals, you’ll find that lead users can generate more than half of your innovations.
  3. Build a Culture of Trust and Open Communication
    Trust is needed to win the participation of employees and suppliers in collaborative improvement efforts. In a culture of trust, you can free up over half of your organizational time to innovate. (John Whitney of Columbia Business School has estimated that more than half of a traditional organization’s activities — including the use of time clocks to monitor workers and marketing campaigns designed to win back disappointed customers, are needed only because of mistrust.) Start by creating open forums, on-line and off, where everyone can collaborate.
  4. Cultivate Continuous Improvement
    An early release-and-fix process parallels advances in supply chain management, such as just-in-time inventory methods and insures that the company is on the right track before significant amounts of money are invested in the development of a product that won’t sell.
  5. Build a Flexible Innovation Infrastructure
    Open collaboration relies on the rapid flow of intellectual property among the company’s people and its outside partners and systems that can enable quick decisions about which new ideas to embrace and which ideas to discard. As a result, collaboration must be integrated into every aspect of the business.
  6. Prepare Your Organization for the New Skill Sets
    Open collaboration often runs on open source and knowledge networks, new tools that require new skill sets to use effectively. Furthermore, your employees will need writing skills and the patience to communicate and collaborate when rapid-feedback is the norm.
  7. Align Evaluations and Rewards
    As I’ve said time and time again, top talent deserves top compensation.

Like open source, open collaboration is more than using the tools. It’s embracing the process with an open mind and giving it 100%. It’s walking-the-walk and not talking the talk, and these seven strategies will help to get you seven steps down that path. And then you can work with your suppliers and your customers to build a more successful end-to-end supply chain.

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Yet Another Reason Across-the-Board Year-Over-Year Savings Targets are Stupid

This morning I told you how year-over-year savings targets are costing you a small fortune right now. Now I’m going to tell you how they cost you a large fortune over the long term.

Typically what happens in a company that gets serious about cost reduction as a result of a knee-jerk survival reaction in a recession is that, if they can attract one, they bring in a top-notch CPO. This CPO pulls the weeds out of the organization and replaces them with strong trees, acquires some decent tools (or at least access to some on-demand SaaS tools), institutes good processes, and brings in expert consultants to assist on the strategic sourcing of key categories where her team is weak. Over the next couple of years, the team kicks ass and exceeds their savings targets and everyone is happy. The corporation is saving money and the team is getting lots of kudos and bonuses for a job well done.

But then the inevitable happens. The economic cycle runs its course, the next economic boom occurs, demand for raw materials skyrockets, and prices go up, often significantly. As a result, it becomes impossible for the CPO and his team to get any year-over-year savings in any of the high-spend categories, which they had negotiated down to razor-slim margins when the supplier was desperate. (After all, not only is the supplier being offered a lot more money for a limited supply, but the supplier can’t even cover its input costs at last year’s prices.)

Then management, used to price reductions and unwilling to admit, and sometimes unable to even understand, the new market reality, makes another knee-jerk reaction and fires the CPO, with no plan for cost containment — which is much more important than cost savings. A monkey with an auction platform and the ability to use Google and access a D&B report can save you money in a recession when dozens of suppliers are desperate for your business (and will happily forego profits for a chance to survive). But only a true Procurement Pro can contain costs in a boom market when the supplier holds all the cards. A true pro can contain cost increases to only 10% when production costs go up 20%+ through skillful negotiations, collaboration, innovative delivery options, and so on. Everyone else will be lucky to secure supply at a 20% increase, which is what the company will end up having to accept without a procurement master at the wheel. And you’ll end up losing so much money that I don’t even want to attempt to calculate how much it will be, since the profuse bleeding won’t even begin to slow until you get a new CPO at the wheel, who’ll be hesitant to accept knowing that you’re last CPO, who was a superstar, didn’t make the cut.

You see, it’s not how much you save, because there is no such thing as savings. All “savings” means is that you were paying too much in the first place. What matters is the best deal with the greatest total value for every sourcing event, and a performance that outdoes the market average. When you start measuring that way (against competition, indices, and carefully researched should cost models), and calculate year over year improvements appropriately, that’s when you see real performance. Until then, you’re running a marathon you cannot win.

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Across-the-Board Year-Over-Year Savings Targets are Stupid

You heard me right. They’re bloody ridiculous.

You might think you’re saving money, but in reality, you’re losing a small fortune. And if you take the time to read this post in its entirely, I’ll show you why.

One of the good things about the lingering recession, which is the third significant recession in less than a decade, is that it’s finally convinced many companies that they need a long-term plan for spend control. However, this is also one of the bad things because many companies have made a knee-jerk reaction of just imposing across-the-board year-over-year savings targets without thinking of the ramifications of this ridiculously stupid idea.

When you impose a blanket “savings target” instead of a single “cost reduction goal”, one of two things generally happens.

  1. Quality Plummets
    From a pure spend perspective, your purchases fall into three buckets, you’re spending way too much, you’re spending more than you need to, and you’re spending about the right amount. If you impose an across-the-board cost reduction on a category that your spending the right amount on (because an A-team completed a very successful strategic sourcing event in the last year and raw material costs increased), the only way you’re going to lower prices further is to change the specs, which you usually can’t do, or lower your quality thresholds. As a result, after a few years of squeezing a supplier’s margins too thin, you’re going to get pure junk and lose a fortune in warranty, repair, and return costs.
  2. You Leave a Small Fortune on the Table
    At the other end of the spectrum, if you impose an across-the-board cost reduction target on a category that you’re spending way too much on, your team is going to leave a lot of money on the table. They’re going to say “I have to save 5% year over year for the next 3 years. If I take the 15% savings I’ve identified now, and raw material prices increase, I won’t be able to meet my numbers next year. I won’t get my bonus, and I might even be next in line for layoffs if things get even worse. So I’m going to negotiate a 5% year-over-year cost reduction for three years now, because they’re going to “innovate”, or just take a 5% and then re-source next year, armed with all the research I did this year.” Trust me. I hear this story time and time again from consultancies who join me in shaking their heads in disbelief.

And you lose in the third case, where there are savings to be had, but not much, because once a sourcing professional realizes there isn’t a lot of wiggle room, the sourcing professional will spend as little time on the category as possible so he can move on to the next category in hopes it will be one with a lot of savings potential and the possibility to negotiate a year-over-year savings contract. (And in doing so might miss an opportunity to redefine the sourcing event or raw need and find savings by innovating design or delivery.)

And any way you look at it, you’re losing a fortune.

Scenario 1: Quality drops through the floor.

Let’s say that instead of having 2% of products defective, you now have 10%. Your warranty-related costs have quintupled. If we’re talking 1 M products worth $20, with a total warranty cost of replacement and return equal to $30 off of your bottom line, your warranty costs have increased from $600,000 to $3,000,000. That’s a 2.4M loss on a 20M category, or over 10% of revenues down the drain.

Scenario 2: You Leave a small fortune on the table.

Let’s say that you have a 10M category that has never been strategically sourced before, a 15% savings opportunity, and a 5% year-over-year across-the-board savings target. Your average purchaser who wants his bonus and his job is going to try to negotiate a 5% year-over-year cost reduction with his preferred supplier. That sounds great until you realize that means you leave 10% on the table this year, at least 5% on the table next year, and who knows how much on the table after that (when the supplier gets more efficient and/or volumes increase and/or raw material prices go down again). Even leaving just 10% on the table this year and 5% on the table next year will cost you 1.5M over the next 2 years!

If you must create a “target”, make a sourcing department wide goal of XM for this year only, where X is a small, reasonable, percentage of total corporate spend, and let sourcing decide the best way to try and meet that goal. Furthermore, have an incentive plan that pays a bigger bonus for every dollar of savings realized above the goal. Better yet, focus on “cost avoidance”, where Sourcing focusses on controlling costs in categories where raw material costs have skyrocketed. That way, sourcing won’t leave any money on the table and you’ll stay ahead of your competition.

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Learn from Obama’s Five Collaboration Mistakes — Don’t Repeat Them

A recent article over on the Harvard Business Review blogs addressed “Obama’s Five Collaboration Mistakes” that are representative of many of the common collaboration mistakes that prevent cooperation efforts from ever bearing fruit. If you understand them, you can take steps to prevent them, and have a much better chance of seeing results from your efforts.

Use the Right Language with Rank-and-File

Don’t do like his Chief of Staff and call them F@cking Retarded. They might not have your understanding of an issue, but it’s not their fault, it’s yours. You should be educating them, at their level, so they can see the full glory of your vision and, hopefully, get behind it. As per this experiment at Standford, the choice of language has a considerable impact on whether your people will cooperate or compete. It’s really up to you.

Collaborate, Don’t Delegate

Yes, it might be their job, but, as a leader, you need to stay actively involved, be there to help when they need, or want it, and give credit where credit is due.

Reach Out to Opponents

If you truly want to succeed, you need to make your most vocal opponent your biggest proponent. And that’s not as ludicrous as it sounds. Usually when someone reacts strongly to a change in strategy or technology, it’s because they believe that the new strategy or technology is not addressing one or more critical requirements that they need to do their jobs effectively on a daily basis. If you can show them that you understand their issues and that the new strategy addresses their issues, though possibly in a different, but better, manner, you can often win them over. Once they see that you’re trying to help them, they might just get behind you and help you win over the silent opposition.

Be Prepared for Hard Compromises

Sometimes, as pointed out by Nilofer Merchant’s The New How, that I reviewed here on SI a few weeks ago, hard compromise have to be made. You need to be ready, or risk having your project stalled indefinitely as key stakeholders will refuse to get on board if you’re not willing to concede to at least some of their demands.

Create a Compelling, Common Goal

Sometimes you have to shoot for the moon, even if you know it might take eight long years of hard, backbreaking work to reach the goal. As long as everyone is united along the way, you will make progress.

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