Category Archives: Best Practices

Do you need a Chief Strategy Management Officer?

Perusing the CFO Research Services site, I came across the “Corporate Performance Management: How Committed Leaders Drive Results” Report, consisting of conclusions papers from the CFO executive conference held earlier this year in New York, New York.

The second mini-paper in the report was Aligning the finance function to strategy execution based on a presentation by Robert Kaplan, co-developer of the balanced scorecard and a Professor at Harvard Business School. In this presentation, Robert Kaplan discussed various approaches for aligning the finance function more strategically with the goals of business units and corporate leaders, including:

  • the use of balanced scorecards as a shared framework to run the business, guide the operating agenda, and evaluate progress against strategy;
  • the use of activity-based budgeting to link the strategic planning capability of Balanced Scorecards with the operational budgeting mechanism of a time-driven ABC (activity-based costing) model; and
  • Establishing a new Office of Strategy Management to help execute strategy more effectively.

These are all fantastic recommendations, after all, scorecarding is something I recommend you use in your sourcing organization as it is one of the few mechanisms for addressing operations as a whole, activity-based budgeting makes more sense to me than silo-based budgeting since most activities today cut across traditional organizational boundaries, and the key to the development of a first-class supply chain is a good strategy.

My question is whether or not you really need an Office of Strategy Management and a Chief Strategy Management Officer. I whole-heartedly agree on the paramount importance of good business strategy and the need to elevate strategy at the senior executive level, definately agree that you should have a strategy team, and see the importance of good execution and communication of strategy throughout the organization, but am curious as to why this function cannot be appropriately handled by the CEO, CFO, COO, CPO, and CCO. (Chief Executive Officer, Chief Finance Officer, Chief Operations Officer, Chief Procurement Officer, and Chief Communications Officer.)

According to the mini-paper, Kaplan advocates the adoption of a new two-to-six person Office of Strategy Management to be led by a Chief Strategy Management Officer (CSMO). This CSMO would ideally report to the CEO or COO but could also report to the CFO, especially at companies where the planning chief already reports to the CFO. The CSMO’s job would be to formulate and communicate strategy and to oversee its execution. He would help breach silos by coordinating strategy across functions. He would make sure that all business and support groups were aligned with the enterprise strategy and that strategy remained a high management and board priority.

I don’t know about you, but this sounds like a CPO role description to me. After all, with procurement about to become the center of tomorrow’s organization (as per my e-Sourcing Forum [WayBackMachine] Purchasing Innovation series, including my post on “Sourcing the New Organization”), it is going to be the CPO’s job to breach silos, align business groups, and lead strategic initiatives on a daily basis. Thus, I believe that strategy should be led by the CPO, with appropriate input and support from the rest of the CXO team, especially the CCO who will need to help communicate the corporate strategies to the rest of the organization.

But the role of executive leadership is critical to sustain the focus in people’s busy lives, Robert Kaplan is not just any bloke, I was not fortunate enought to attend the talk and had to settle for the summary, and this topic certainly deserves some very deep thought. Strategy is critical. Maybe you need a separate unit and a new CXO, maybe the CPO can handle it appropriately backed by the rest of the executive team, and maybe you need a strategy coordinator that reports to the COO or CPO. It’s a tough question. Anyone have any additional thoughts or comments on the matter? Any fellow bloggers want to chime in?

The E-Procurement Benchmark Report

This summer Aberdeen released its fourth “E-Procurement Benchmark Report”, E-Procurement 2.0, where Aberdeen found that like your local mail service, e-procurement steadily delivers.

According to the report, enterprises participating in the 2006 benchmark report that they:

  • increased their spend under management by 36%
  • reduced their requisition-to-order cycles by 75%
  • reduced their requisition-to-order costs by 48%
  • reduced their maverick spend by 36%

However, the report also found that there is tremendous opportunity for many procurement organizations to improve their performance as a significant gap exists between the Best-in-Class companies and the rest of the field. Specifically, best-in-class companies have the following significant advantages over all others:

  • 28.6% improvement in spend compliance
  • 90.9% improvement in spend under management
  • 41.6% impact on requisition-to-order cycle-time
  • 23.3% impact on requisition-to-order costs

There’s a lot of good information in this report, and I’d suggest you download a copy and read it if you haven’t already while it’s still sponsored. More over, the “Steps to Success” are dead-on.

Moreover, if you’re not employing e-procurement solutions, given the expected improvements outlined above, there is no absolutely no reason you shouldn’t be, especially since a funny thing happened since Aberdeen Group delivered its initial E-Procurement Benchmark Report in 1998: solution providers developed functionality effective, cost-efficient, and rapidly deployable e-procurement solutions and large, mid-size, and small enterprises utilized them to place more spend under management and ignite the transformation of their procurement organizations.

Managing Global Trade Data

In our last post on Global Trade Data Management we indicated that not a lot of focus has been traditionally placed on the management of Global Trade Data because, if it’s done right, there are no significant savings opportunities and most companies still are not really aware that they should be focused on it. The reason they should be focused on it is that error rates in global trade processes approach 10% to 20% and this is costing many companies millions of dollars, especially when affordable technology solutions to tackle these problems now exist.

Why is managing global trade data so important? In addition to the fact that the Customs Modernization Act of 1993 shifted the responsibility of documentation accuracy from the government to the importer and that errors can result in long delays, huge fines or overpayments (that the government will not identify for you), this years budget for US Customers and Border Protection (CBP) increased 4.8%. As part of this increase, CBP plans to spend $305M in the implementation of the Automated Commercial Environment (ACE) and another $16M on the International Trade Data System (ITDS) program in conjunction with the Customs Trade Partnership Against Terrorism (C-TPAT). When you combine these initiatives with the compliance legislation of the recent Sarbanes-Oxley act, the level of visibility and control you really need with respect to your trade data is probably well beyond what you have. And since you never know when you could be audited, which is probably more likely than you think when you consider that statistics indicate that the goverment collects $7 in fines and interest on underpayments for every $1 it spends on a trade-compliance audit, you should be getting your data into shape now. (Furthermore, in addition to the Securities and Exchange Commission, depending on what you are importing or exporting, you may also be subject to oversight from the Department of Transportation, Department of Defense, Federal Communications Commission, Federal Aviation Commission, and the Food and Drug Administration, for example.)

You start with an audit of your current processes, systems, and, most importantly data, to determine where the issues are and what you have to address. A company like Global Data Mining (acquired by CUSTOMS Info which was acquired by Descartes) can help you do this using a 3-R process that recreates years of historical import transactions to identify and quantify errors and non-compliance activities, produces executive-level reports to provide decision makers the information they need to determine priorities and define go-forward plans, and reparis existing data and current control processes to prevent the same mistakes from happening again.

Manual processes, which are still standard for the majority of importers, and which typically rely on a person to make a decision with only shorthand invoice descriptions available, are subject to errors and generally produce the following common inaccuracies:

  • inaccurate notation of merchandise value
  • improper classification of merchandise
  • incorrect payment and documentation of duties

Generally speaking, your reporting process will highlight these issues and your repair process will focus on implementing new, preferably technology driven, processes that will prevent these errors from happening again.

The reality is that despite the fact there are tens of thousands of rulings by US Customs that need to be referred to in product classification, and that this shear number is beyond the grasp of even the best of human experts, this is a very small number from a systems perspective and a good technology solution can locate and apply the right ruling, classification, and rate in a fraction of a second with the right description and HTS codes.

For more information, I encourage you to check out Global Data Mining’s white papers and their white paper on Import Compliance in particular. I think it will be worth your time.

Global Trade Data Management

We’ve discussed Global Supplier Visibility and Performance, Supply Chain Finance, and even Supply Chain Audits, but we have not yet delved into Global Trade Data Management, an area that, if mismanaged, can cost you millions of dollars.

Why? Maybe it’s because if it’s done properly, there are no considerable savings opportunities when compared with other areas of the supply chain. With visibility, there are always new ways to manage risk that can be significantly more cost competitive. With finance, new payment methods or arrangements always present noticably increased potential. With sourcing, we know where the enormous opportunities are. With global trade, governments fix tariffs and duties and that’s that.

But only if your items are property classified and validated and only if you pay the right amount. The reality is that, in many corporations, error rates in global trade processes approach 10% to 20%. The effective control of global trade processes is often 100 to 200 times worse compared to accounts payable processes in the same company.

Why? A combination of reasons. Up until 1993, the government was responsible for reviewing the accuracy of documentation and markings and assessing appropriate duties. Then the Customs Modernization Act shifted responsibility for import compliance to the importer. Businesses were not ready, so they deferred to third-party providers (customhouse brokerage services). But as they expanded, so did the broad range of countries and commodities they had to processes, as well as the ever increasing range of HTS (Harmonized Tariff Schedule) codes they had to deal with, many of which had confusing sub-classifications that were not well known or commonly used. In addition, whereas accounting had a number of sophisticated accounting systems to choose from on the marketplace, technology solutions for these customhouse brokerage providers were almost non-existent. In effect, proper classification depended on the expertise of the human classifying the data – which leads to errors, all of which are costly since they will result in delayed clearance, fines, or undetected overpayments – the last of which the government is not looking for on your behalf.

How could this happen? Many categories have subcategories. Consider 3703.10, photographic paper. It’s US HTS rate is 3.7% unless it’s 3703.10.60, Other (not falling into the .30 category of rolls exceeding 610 mm), and then its 3.1%. If you were unaware of this special subclassification, or simply left off the .60, you’d be paying 0.6% more. Another common error is a mixed shipment where a rushed or lazy agent simply uses the high level four digit code in a mixed shipment. If the majority of the shipment was at a lower rate, or was subject to reduced rates because of a free trade agreement or free trade zone, you could be considerably overpaying. And if you’re importing 50M and overpaying 2%, that’s 1M you’re losing.

So what can you do? Up until recently, the best you could do is subscribe to a service that kept up-to-date rates and manually verify each shipment against the rates, which required lots of manpower and might cost more than you save if you are a mid-sized company or smaller. Today, there are technology solutions to assist you. One such solution is that offered by Global Data Mining [GDM] (acquired by Customs Info, acquired by Descartes), a company that specializes in helping high-volume, high-value global trade businesses build effective trade databases for extensive trade reporting and comprehensive auditing to significantly improve their processes, reduce their error rates, and save time and money in their global trade endeavors.

Earlier this week I had a chance to speak with the president of GDM, and the president of their sister company, International Trade Bureau and I must say that I was impressed with their knowledge of the issues in the global trade space and their processes and solutions for addressing them. Although they do not provide a complete solution on their own, with the right internal team and consulting partners, the foundation their solutions provide will allow you to address your trade issues end to end. How? That’s a topic for a later post.

A Systemic Blindness (in the Supply Chain)

One of the presentations at the Fourth Annual International Symposium on Supply Chain Management was by Mark Gallant of Accenture on Supply Chain Management: The Road to High Performance based on yet another global study that they have recently completed on 600 Global 300 companies.

One of the most interesting aspects of this study was, as far as I was concerned, the lack of any new results. It might as well have been Capgemini reporting on their results (which I mentioned in my post on The Need for Supplier Relationship Management Education and which Jason Busch of Spend Matters critiques in “The Consulting SRM Research Pile-On Continues”*) or another consulting firm.

This leads me to hypothesize that not only are many companies not spending enough time and money training and educating their procurement team, they are not concentrating enough of their focus on their supply chain and still not attributing the necessary amount of importance to it.

I know I should not find this surprising given the traditional pace of transformation in the corporate world, but I do. After all, I reminded you of Dr. John K. Potter’s claim that most major initiatives in an organization required 5 to 10 years in The Change Management Myth: Why e-Procurement Initiatives Fail, indicating that many enterprises have just not caught up with the speed of business – even though, as I have pointed out a couple of times now, Aberdeen recently found that your average company experiences two major supply chain disruptions a year.

However, when you consider the direct impact that supply chain performance has on the stock market price of your corporation, and the considerable focus financials have always received, this systemic blindness should be changing as I type this.

After all, SAP’s recent analysis of supply chain glitches (as presented by Al Norrie in the software panel discussion), has found that stock prices drop by an average of 7.5% to 11% after a supply chain disruption.

Glitch Stock Price Delta
Product Development Delays 10%
Rollout Delays 11%
Production Problems 10%
Quality Problems 9%
Material Shortage 7.5%

In addition, Accenture analyzed stock prices of market leaders, transformers, laggards, and decliners over the last decade and found that while leaders maintained a market cap approximately 15% above average for their industry, laggards were roughly 5% below market average and decliners were as much as 15% below market average. In simple terms, bad supply chain performance can result in a stock price 30% less than the market leader under an apples-to-apples comparison!

So what can you do? According to Accenture, you should

  • incorporate supply chain into your core business strategy
  • make strategic in-source vs out-source decisions
  • build effective linkages with trading partners
  • adopt leading edge technology and best practices
  • relentlessly shorten your supply chain
  • flawlessly execute against your capabilities
  • continuously evolve strategies and optimize models
  • have a vision and a strategy
  • adopt the right culture

In other words, just follow all of the good advice that bloggers such as Jason Busch (Spend Matters), David Bush (e-Sourcing Forum [WayBackMachine], Dave Stephens (Procurement Central [WayBackMachine]), Tim Minahan (Supply Excellence [WayBackMachine]), and I have been imparting since we started blogging and most importantly, if you truly believe your supply chain is very important or critical (as 44% and 45% of survey respondents, respectively, believe), be sure to commit the appropriate resources to address it.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.