Category Archives: Market Intelligence

The Measurable Value of Supply Management Maturity

Simply put:

  1. a ROIC (Return On Invested Capital) of 12.8% vs 8.5% for laggards
  2. an Operating Margin of 14.6% vs 8.4% for laggards

according to BravoSolution (Source), who, as a Best-of-Breed global e-Sourcing software and services provider that has been delivering software and services to global clients for over a decade, has been measuring the maturity of client organizations from the time they start their e-Sourcing journey (with BravoSolution) to the time that they master the e-Sourcing process that BravoSolution supports and the platforms they provide.

This 50% performance improvement in ROIC and 75% performance improvement in Operating Margin should not be too surprising given that all of the analysts firms have been telling us for years that leading Supply Management organizations far outpace laggard Supply Management organizations when it comes to financial success. What should be surprising is that the vast majority of companies still have trouble advancing Supply Management out of the laggard category even though many of the secrets of success have been known for many years.

Especially since the the first step is to align the Supply Management organization with the business (goals). This shouldn’t be hard, but for many companies it is. Why?

Let’s start by considering the reasons for misalignment

  • 5% is due to different drivers
  • 30% is due to (different) data
  • 65% is due to differing definitions

The big problem is still communication. In most organizations, Procurement doesn’t speak the same language as the rest of the business, and Finance in particular. Remember, HR still thinks sourcing refers to the recruiting function, Engineering thinks procurement is calling up the preferred supplier and asking them to ship the required parts for the prototype, and Finance defines savings as the difference between last year’s spend and this year’s spend, not how much savings have been identified or how much cost has been avoided. In order for Supply Management to mature as an organization, it not only has to align with the business goals, but it has to speak the business language.

So how can Supply Management achieve alignment and, at the same time, advance as a function and achieve the financial success that will make it the favourite child of the organization?

The EPAM Loop.
Evaluate. Plan. Act. Measure.

In the 1950’s W. Edwards Denning proposed that business processes should be analyzed and measured to identify sources of variations that cause products to deviate from customer requirements. Specifically, he recommended that business processes be placed in the context of a continuous PDCA (Plan. Do. Check. Act.) feedback loop so that managers can identify and change parts of the process that need improvement. And it was a leap forward in business philosophy at the time (and could even be considered the foundation for the DMAIC (Define. Measure. Analyze. Improve. Control) cycle that is the foundation for Six Sigma. Given that sourcing processes are only improved if they are continuously monitored, it’s obvious that a similar process is needed.

So why can’t we just use the classic PDCA cycle? Simply put, we have no way of knowing whether or not a plan is likely to be beneficial, or even executable by the organization, without an understanding of what the current level of organizational maturity is. That’s why the first thing that needs to be done is an evaluation of where the organization is against a maturity framework, built on the study of Supply Management transformations over the last two decades. When an evaluation is done against a well-defined framework, that is associated with best practices that have been successfully used by leading organizations to advance up the maturity curve, the organization can come up with a plan appropriate to its current level of capability. This not only maximizes the organization’s chance of project success but helps it accelerate up the curve faster than organizations that take their best guess, which amounts to nothing more than trial and error.

Once an organization has a proper transition plan in place, it’s talent should be able to quickly execute on that plan and see some success in the short term. Then, when the project has finished, or in the case of a multi-year project, reached key milestones, the team can measure the results versus the expected results (based on case studies and surveys of organizations who undertook similar projects at a similar maturity level), and determine if they are on-track, ahead, or behind. If the team is behind where they can expect to be, they return to the Evaluation stage, determine the reason for the shortfall, modify the process, and try again. When the team has reached the desired level of success, and advanced up the maturity framework, it begins the EPAM cycle again and comes up with process and technology transitions designed to get it to the next level of maturity.

BravoSolution, which has been working on improving their assessment and change management process for years, has found that the process works so well that they have cemented their global sourcing service offerings on the process, which they are calling BravoAlign. Regardless of what it’s called, the method works, and can work for your organization too.

John Mavriyannakis on the Future of Procurement: Part II

In Part I, we described the 4 major trends affecting Procurement today that were identified by Deloitte in its research and consulting initiatives (and which have been addressed in publications that include “Supply Chain Strategy”, “Winning With Your Supply Chain”, and “Charting the Course: Why Procurement Must Transform Itself by 2020”) that were summarized nicely by John Mavriyannakis, a Senior Manager at Deloitte Canada (and the Practice Leader in Sourcing, Procurement, and Settlement), in his recent presentation on Empowering Modern Procurement that was given as part of the Coupa One Vision Roadshow in Toronto

Specifically, John Mavriyannakis identified the following four trends:

  • Margin Pressure
  • Supply Chain Risk
  • Government Regulations
  • Talent

As a result of these trends, it is clear that today’s supply managers need to:

  • control margin pressure,
  • mitigate supply chain risk,
  • stay ahead of changing regulations, and
  • win the war for talent.

But that’s not going to be enough for a Procurement organization to succeed in the long term in the dynamically changing global marketplace. If they wish to survive, Procurement and Supply Management organizations need to rethink mission and capabilities. Specifically, they need to:

  • get strategic
    and establish a formal organizational presence that ties metrics to company performance,
  • transition
    to re-aligned processes and responsibilities that focus on business outcomes,
  • task talent cross-functionally
    to enhance the procurement capability of the organization as a whole, and
  • tie it all to technology
    that blends service and management tools that are easy to use and that allow for the right level of control.

While keeping in mind that they need to get to the 2020 Procurement and Supply Management organization in just 6 short years (which is no easy feat given that the average transformation time that is required for a Global 3000 organization to become a world class Procurement organization, according to The Hackett Group, is at least 5 years). In 2020, Procurement, according to Deloitte, is going to (need to) be:

  • the keepers of the global supply and demand perspective,
  • the nexus of finance, operations, and supply chain,
  • risk forecasters,
  • the arbiter of risk vs. reward,
  • the value-generation unit that is the treasure trove of ideas, and
  • talent rich.

And SI fully agrees with all but the last of these predictions. In addition, it partially agrees with the last prediction that Procurement is going to need to be talent rich to achieve the goals that are set before it, but given the lack of investment in talent to date in the average Procurement organization, SI isn’t sure that the talent is going to be where it needs to be in 2020. Even though talent has been in the top three Procurement issues for at least the last three years, it’s still in the top three budget items that are cut every year in these tough economic times, even though a small investment in talent can lead to a (very) large return in savings in a Procurement organization. (For example, one of the first companies to certify their entire department with the SPSM designation offered by Next Level Purchasing, a 1 Billion furniture manufacturer, doubled their annual savings only one year after completing the certification on the department level. That’s a double digit ROI multiple in one year! Compare that to the 2X or 3X you might get from automating manual processes.) Basically, the most successful Procurement organizations in 2020 will be talent rich, but the average Procurement organization will be struggling at the current rate of training and talent induction into our space.

John Mavriyannakis on the Future of Procurement: Part I

John Mavriyannakis is a Senior Manager at Deloitte Canada and the Practice Leader in Sourcing, Procurement, and Settlement who recently gave a presentation on Empowering Modern Procurement as part of the Coupa One Vision Roadshow in Toronto. Through its regular CPO Surveys, CFO Surveys, and its Source-to-Procure experience across 1000+ projects for 300+ clients, which made it #1 in the Procurement Consulting provider in the global Procurement Consulting marketplace, Deloitte has built up a considerable understanding of the current state of Procurement [which it has captured in a number of publications, including Supply Chain Strategy (Deloitte), Winning With Your Supply Chain (Deloitte), the CFO Surveys, and Charting the Course: Why Procurement Must Transform Itself by 2020 (Deloitte)].

According to Deloitte, Procurement today is dealing with 4 major trends, which are going to continue for the foreseeable future:

Margin Pressure
Margins are getting tighter and organizations need to be looking at least ten years ahead to determine future (labour) arbitrage opportunities, which are becoming increasingly more difficult to leverage as emerging economies emerge and produce middle classes with higher wage expectations (and transportation costs increase to make up the difference). In addition, the fact that price volatility has increased 57% in the last 12 months hasn’t helped matters any.

Supply Chain Risk
Due to the increasing interdependence and extensiveness of supply chains, risk is increasing, as illustrated byt he fact that 85% of surveyed organizations experienced at least one large scale disruption in the last 12 months. The increased risk is a big issue given that companies announcing supply chain disruptions had a 30% lower supply chain return compared to the benchmark group.

Government Regulations
Regulatory compliance issues have resulted in high-profile, high-cost shutdowns in recent years and with 2/3rds of CPOs admitting that their companies are only in the early stages of compiling information required to meet the recent SEC reporting changes, this is not a good state of affairs as the SEC reporting requirements are only one of a plethora of reporting requirements an international company that is importing and exporting on a daily basis around the globe needs to be compliant with.

Talent
Given that 76% of CPOs feel that their staffs’ skills need improvement or have a significant gap, talent is on the radar in a big way. And not just any talent — with 91% of the 60% of CPOs planning to change their operational model announcing a shift to center-led or centralized supply chain operations, this means that over half of the talent that is required needs to be effective in these type of Supply Management models.

So what does this mean? We’ll discuss tomorrow in Part II.

Are American Companies Threatening Their Own Supply Chains?

A recent article over on CNN Money on how “Starbucks is in Hot Water over China prices” (Oct 21, 2013) has me wondering. According to the article, Starbucks is charging more in China for a cup of coffee in China than it is in Chicago or London (with a medium size Latte costing $4.40 vs $3,20 and $4.00). Similarly, it is charging as much as $18 in China for its Starbucks Coffee mug, that sells for between $10 and $14 in the US.

This is despite the fact that it is doing quite well in China, with strong sales contributing to a year-on-year jump in revenues in the Asia Pacific region of 30%.

Is this how you want to be treating a country you rely on for low-cost product production?

In the case of Starbucks, it could be argued that the mugs are not a main source of income, and since the coffee beans are not sourced from China, Starbucks isn’t really relying on China for its supply chain. But consider Apple, which is using refurbished parts to repair products in China and limiting some warranties to one year, as compared to the two and three years it offers in North America.

We all know that Apple relies on Foxconn Technology Group for it’s iPhone and iPad production, and is thus heavily reliant on China in is Supply Chain.

The last thing Apple should want to do is get the attention of China’s government, that recently recorded fines against five international dairy firms after they were accused of fixing the prices of baby formula, and that is currently investigating production costs and price setting practices at 60 pharmaceutical companies as part of a wider anti-corruption crackdown.

But this post isn’t about Starbucks or Apple, but about every company sourcing from China that also does business in China. Considering their dependence on China, shouldn’t they be treating the Chinese market with the fairness that they demanded for years? How many years were we conveying the message that American negotiators shouldn’t stop until they paid China price, as Chinese sellers had a history of charging foreign buyers more than native buyers?

If we want to get China price, shouldn’t we be charging China price, or at least a price that’s fair with respect to what we charge else where? Otherwise, what right do we have to complain about unfair competition or about a government that might respond by slapping fines on us and/or adding new export tariffs to punish us for our relatively un-ethical pricing measures.

Does Gen-X Rule?

Well, if we are talking about the Billy Idol led band Generation X, I think we can all agree that they most definitely rule as Ready Steady Go* is still a punk rock anthem 25 years later!

But if we are talking about the post-boomer, pre-millennial generation, it’s a harder question to answer, but if you look at the recent Generation Gap survey from E&Y (as summarized on The Economist), we’re the most entrepreneurial, the easiest to work with, the best team players, and the best problem solvers — taking 4 out of the 6 rankings. In addition, we’re almost as hard working as the baby boomers and the second most cost-effective employees. From a statistical point of view, we beat out the boomers and trounce Gen-Y. Now, we’re not going to say the E&Y study is conclusive, but it’s suggestive.

Which leads the doctor to ask, does your supply chain have Gen-X at its core?

*Starts at the 1:08 mark.