The best way to get out of trouble is to avoid trouble in the first place. In a recent blog entry, the Strategic Sourceror outlined four common mistakes that a company can avoid to minimize poor spend management and operational efficiency.
Overlooking the Importance of Supplier Visibility
Having a clear understanding of supplier practices is essential in evaluating the risks and possible sources of disruption that are inherent in sourcing partnerships. Blindly entering a relationship with a supplier may result in a procurement strategy that is misaligned with business goals, and this could result in slashed profits in the future. For example, the strategy could be high quality to support the brand, but the end result could be poor quality and the resultant impact to the brand from the high defect rate could result in lost sales and slashed profits.
Failing to Emphasize Results
Because Procurement resides in the back office, it is often tempting to think of it as a service function and not a driver of productivity and profit. It’s critical to focus on real, measurable, and substantial results and communicate the message to the rest of the business. Like any business process, procurement management needs to impact the bottom line. When it does, and the message is communicated, Procurement, unlike Rodney Dangerfield, will get more respect.
Without written contracts with specific language, businesses won’t have adequate protection if a supplier relationship goes sour. That’s why contracts should be reviewed by a corporate lawyer before being signed. But just getting the contract right isn’t enough. It’s also important to make sure the terms are followed, rebates and discounts are collected, and contracts are renegotiated and not allowed to go evergreen.
Permitting In-House Inefficiencies
An inefficient internal procurement process can limit firms’ ability to obtain the goods and raw materials they need in a timely fashion. Be sure to install the appropriate e-commerce tools that will help a company identify potential suppliers, execute RFxs, conduct auctions, optimize awards, and strategically manage the maximum number of categories.
… for the biggest risks in your supply chain, as per our classic post where we told you don’t blame the lawyers, blame the bankers because they were ultimately responsible for three of the top four most likely risks to disrupt your supply chain.
(Even though the doctor can sympathize with William Shakespeare when he said the first thing we do, let’s kill all the lawyers, the lawyers are not responsible for the current state of the global economy, the bankers are. And while it’s true that the lawyers are not innocent, happily taking the bankers money to do things that disrupt entire economies, it is the bankers that were the ringleaders here.)
But do we still blame all the bankers? Well, yes, we blame them for the economic risks that continue to persist to this day. But we no longer blame them for the top three risks in our global supply chains.
That honour goes to … The United States of America. Yes, that’s right. The root cause of the three biggest risks in your supply chain is the United States of America. (And not China, although there is a massive risk there as well. And if we wait a few more years, they might get their turn on top.)
How can it be? How can the United States be the single cause of the three biggest risks in your supply chain?
To explain that, we’ll start by repeating them for those of you that have not read The Global Risks Report 2019, 14th Edition, from the World Economic Forum.
According to this report, produced in partnership with Marsh & McLennan Companies and Zurich Insurance Group, the three biggest risks are:
- Extreme Weather Events
- Failure of Climate Change Mitigation and Adaptation
- Natural Disasters
and, as should be obvious, these are all interconnected.
Many (if not the majority of) natural disasters are the result of extreme weather events, and many (if not the majority of) extreme weather events are, whether your choose to believe facts or not, the result of the failure of climate change mitigation and adaptation.
And why has climate change mitigation and adaptation failed? Because it hasn’t happened. And why hasn’t it happened? Because countries aren’t aggressively working toward it. And why is that not the case? Because only 175 parties, of 197, have ratified The Paris Agreement (the UN Convention on Climate Change) … and one party that initially accepted has withdrawn (and done so in a very public manner). Guess what that country is? You guessed it!
The United States of America has withdrawn from the Paris Agreement. If the country that is responsible for approximately 25% of global GDP refuses to support the most important initiative in the world (which still falls short of where we need to be to truly mitigate climate change, but would make a substantial impact on slowing climate change down), especially when it comes to preventing the three biggest risks in your supply chain, then that country is unilaterally responsible for those risks.
So next time a typhoon sinks the freighter carrying all your goods, don’t blame God, Poseidon, or Mother Earth. Blame the United States of America. Or, if you really want to, blame Trump. But don’t blame God or nature because, with the current rate of increase in the number of natural disasters annually, there will soon be a 90% chance that it the natural disaster is 100% the result of climate change brought on by the United States inaction to do anything about it.
A decade ago we ran a piece on The Value of Market Intelligence in a Down Economy because it was a down economy near the end of last decade and many organizations were overlooking the importance of market intelligence at a time when it was needed most. (Because, when times get tough, organizations always cut the training budget first and the intelligence / consulting budget second, even though the only thing that will get the organizations though the tough times is their talent — which needs to be as educated and informed as possible to do the jobs that need to be done.)
But now that depression era economics are about to make a come back, SI believes its time to repeat the message in the hopes that you will do the right thing and make sure that, under no condition, do the limited market intelligence and training budget get cut when they are needed most.
Remembering that success in a down economy stems from smart sourcing, and that smart sourcing stems from intelligence, it should be pretty obvious how critical market intelligence is, but just in case it is not, let’s remind you that:
- market cost data is market intelligence
and without it, you don’t have enough data to know how much you should be paying (even if you have extensive should cost models because, guess what, those component costs need to come from the market)
- expected supplier performance is market intelligence
even if you have lots of historical performance data across your supply base, that doesn’t tell you how good a supplier should perform, just what would be better performance for your organization
- expected product quality, lifespan, and consumer usage levels is market intelligence
and you are only going to get so much data from your customer base, and none for a new product line under development
Plus, when you look at the big picture:
- it’s not as expensive as you think it is
since a lot of the data or information you need to spot trends and focus on the core issues and data points is low cost, and even expert advice at 5K a day is nothing if it saves you 50K of internal research or steers you toward a solution that helps the organization generate a 500K return
- it enables supplier performance, and relationship, management
which is key in difficult times — just look at the auto industry. When times get tough, the American automakers (that score dismal on the OEM-Supplier Working Relations Index [OEM-WRI]) all fail while the Japanese (and Korean), who cooperate and collaborate with their suppliers (and rock the OEM-WRI) always pull through
- intelligence gathering is an iterative process
not “one-and-done” and if you stop, especially when market conditions are changing constantly and could change drastically at some point in the near future, you can be blindsided by an event that could grind the entire organization to a halt
Market Intelligence is critical for good decision making – in good times, and bad. Especially in bad. It identifies risks before they materialize and insures that your contracts have appropriate risk mitigation clauses built in. It leads to savings and cost avoidance that would never be identified without it. And while it doesn’t always require multiple high six-figure subscriptions to analyst firms … it does require some spending to keep up with what you need, when you need it. But if you choose wisely, it will save you 5X to 10X what you spend or help you increase your value proposition by that amount.
So get the intelligence you need. Today.
Five years ago, the doctor wrote a post about how the doctor’s 2014 Procurement Prediction is Going to Come True and that 2014 was going to be 2009 Part VI and
- the focus will continue to be on cost-cutting and not value-creation,
- valuable, high-ROI, technology will continue to be ignored, and
- the training and new talent budgets will remain empty.
And it was a sad state of affairs. And he’d hoped that, by now, things would have changed. But if you check the latest Deloitte Global CPO Survey, 78% of CPOS are still PRIMARILY FOCUSSED on Cost Reduction!
Unless they’re Procurement team has been totally incompetent for the last five year, that’s not going to happen. We’re about to return to Depression Era Economics. We’re heading for a downturn a result of a global slowdown in GDP growth. China can’t keep building empty cities. The US can’t continue to build (defence) debt and grow without an immigrant workforce that will do the jobs Americans don’t want. Goods can’t continue to get cheaper when labour costs are rising and materials are becoming scarce. Outsourcing is not going to get cheaper when transportation costs have to rise as energy (oil) costs rise. And so on.
Also, the study found that, even in 2018, only one third of Procurement Leaders use modern technologies such as predictive analytics and collaboration networks.
And over half of Procurement Leaders believe that their current teams do not have sufficient levels of skills and capabilities to deliver on their procurement strategy … proving that they have, as expected, not been investing in training like they should have been.
Eleven years ago, Hackett published a vision of Procurement in 2020 where it predicted that, through a year-over-year evolutionary strategy, it would reach the point where it was harnessing the power of supply markets to maximize the value it is getting from its spend, enabling business strategy, and optimizing its tactical execution. But, in an average organization, Procurement is, at least for now, still overspending, still divorced from business strategy, and unable to react to unexpected disruptions or opportunities in the supply chain.
And it looks like 2020 is, not as everyone predicted in the noughts, going to be 2009 Part XI. Who will take the lead and change it?