Category Archives: Miscellaneous

If You Missed the Purch-lympics, Here’s What You Missed

For the last week, Next Level Purchasing (Certitrek NLPA) has been hosting its own Purch-lympics. For the last five days, it has been posting short essays submitted by Purchasers around the globe that described a problem they encountered, the action(s) they took to resolve the problem, and the ultimate results. Each day, readers were allowed to vote on the best essay, and the top five advanced to a final voting round, which takes place today, where the winner receives a full scholarship to the SPSM Certification.

Some of these essays had good tips from Purchasers like you that you could use in your daily jobs to solve your problems. To help you identify which essays are relevant to you, here is a brief overview of what each essay covers.

  • Leonard Ruhukwa on Supplier Relatinoships Finalist
    Monitoring and being aware of the foreign currency exchange rate helps you in negotiating a realistic price from your suppliers.
  • Aung Kyaw Than on Specification Errors
    Often the best way to win a dispute with your supplier is to do your homework.
  • Grace Paddy Wanzala on Alternate Sources of Supply
    If you know your suppliers’ capacity before awarding a large bid, you know when you can safely sole source and when you have to multi-source.
  • Reybien Basto on Documentation
    If you’re stuck between a rock and a hard place, keep good records — that way you can’t be blamed for someone else’s screw-ups.
  • Jehu Selman Mamven on Bidding
    In order to procure fairly, you need to stand by the rules of the bid.
  • Evans Mudake on Implementing Payment Controls
    A good purchase order / goods receipt system is needed to insure that you are getting what you pay for.
  • G.P Thushara Sampath Gunasekara on Increasing Supplier Competition Finalist
    If you make your RFP too strict, you will eliminate competition. Before issuing the RFP, research the market to make sure at least two or three suppliers can meet the minimum requirements. If the contract is long-term, and you partner with them, sometimes a tier-2 supplier can improve to the point where they are world-class.
  • Enoch Dugbatey on Improving Cash Flow
    If cash flow is limited, appropriately constructed Purchase Frame Agreements (FAs) and Blanket Purchasing Agreements (BPAs) can ensure that materials keep flowing on schedule (as suppliers are more confident they will get paid).
  • Dylan Tao on Switching Distribution Channels
    Before accepting a price increase due to “raw material price increases” do your homework on the cost structure. If most of the cost is value-add, and not raw materials, you might actually be able to negotiate a price concession, especially if you can work with the design team to re-engineer the product to require less effort in production.
  • Bizerka Oreskovic on Creative Logistics Solutions
    Logistics doesn’t have to be limited to rail, big trucks, and super-size cargo ships. Depending on how much you need, there are alternatives – like smaller boats and, for small deliveries, even cargo areas on busses.
  • John Ransom on Evaluating Vendor Viability Finalist
    To get through these tough times, take a positive attitude, re-balance the supply chain, and identify those vendors most likely to survive and partner with them to make it through the storm.
  • Annette Opondo on Dealing with Internal Conflict
    If you’re having a hard time securing the best deal because your manager has a preferred supplier, work out the cost models in detail and properly take them through the appropriate channels.
  • Daniel Haakuria on Improving Logistics
    A good understanding of shipping schedules and nascent negotiation skills will allow you to take advantage of opportunities when they become available and allow you to obtain a much greater ROI later for a little more up front.
  • S.B. Odegha on Proving Supply Chain’s Sourcing Abilities
    Sometimes you will have to educate Engineering and other departments in order to do your job effectively, as they will insist that only they can procure certain parts.
  • Mukut Roy on Project Management
    Sometimes you have to be creative to see a project to fruition, especially when a war splits the country you’re sourcing from into two or more countries!
  • Abdul Khan on Vendor Managed Inventory
    Sometimes the best way to identify the root cause of a problem, and an appropriate solution, is to form a cross-functional team that involves the vendor. And sometimes this will lead to a joint decision that vendor managed inventory is the right way to go.
  • Alfred Onyango on Procurement Ethics
    Ethics are important, but there are times you will have to stick to your guns to make sure your department behaves ethically.
  • Sandi Derouin on Fixing Internal Customer Errors Finalist
    Sometimes the best way to gain respect in Purchasing is to help other departments out of the mess they create for themselves by not involving Purchasing in the first place. But to do that, you’ll have to do some digging to get to the truth.
  • Lynn Hoover on Surviving a Supplier Catastrophe
    Sometimes the best way to insure continuity of supplies is to maintain some production capabilities in house.
  • Khin Aye Myint on Sourcing and Sanctions
    Sanctions can throw a wrench into your sourcing plans if you are not careful. Check denied party lists carefully before sending out an RFQ, or you might not get any usable responses.
  • Burt Schilder on Implementing an ERP System
    ERP still has a lot of value if properly deployed, maintained, and used … especially if you don’t overpay for it!
  • David Ah-Tow on Obtaining Vendor Information
    Sometimes you have to work with your vendor to get what you need.
  • Denis Minnich on Obtaining Emergency Vendor Services Finalist
    If your current vendor is non-responsive to your needs, all is not lost, there is always someone else ready and willing to take your business if you look hard enough.
  • Yvetta Koleva on Negotiation
    If you want to get the best price, do your homework. Some vendors will quote as much as they think they can get away with.
  • Kacwa Ronnie on Increasing Procurement Visibility
    Sometimes it will take a lot of education on your behalf to convince management of procurement’s value.
  • Antony Naploli on Internal Customer-Supplier Relations
    Sometimes the best way to improve relations is to take an active approach and form a process improvement team to get the job done.

Asian Lessons in Managing Capital Projects

A recent article in the McKinsey Quarterly on “Managing Capital Projects: Lessons from Asia” (registration required) about how some Asian companies are better at managing capital projects than rivals elsewhere caught my attention because many companies are still buying traditional, on-premise, behind-the-firewall enterprise application software (despite the proliferation of good SaaS alternatives) — and these are always intensive capital projects. While not all of the lessons learned in a traditional capital project that revolves around physical assets will be directly applicable to such a project, the fact of the matter remains that, as a supply & spend management professional, you will have to manage these projects from time to time — and any free advice you can find is definitely worth a quick read. Furthermore, since resources required for new capital projects are becoming scarce around the world, now, more than ever, you cannot afford to screw up.

Lessons from Asia are particularly relevant now as more than 50% of the world’s capital investment is projected to take place in Asia over the next seven years. Furthermore, there have already been some major successes in China and India, including a recent oil refinery and petrochemical complex in Jamnagar built by India’s largest private-sector enterprise for 20% less capital than was required by similar plants elsewhere.

After weeding out local Asian conditions that were neither common nor transferable elsewhere (such as land costs, taxes, and regulations), as well as current global best practices, the study described in the article identified five innovative practices that break with the conventional wisdom of western companies and set the recent Asian successes apart. These five strategies are:

  • Set Aggressive Goals
    While safe and realistic targets for cost, quality, and execution time adds assurance that goals will be met on time, it increases costs and creates expectations of tolerance for delays. In contrast, best-in-class Asian CEOs typically set high, even unrealistic, targets and make explicit trade-offs between time and cost — which usually results in an over investment in the equipment and labor that generally form a relatively small part (< 5%) of a large capital project. This allows companies to work on a number of projects simultaneously, preventing downtime.
  • Invest Broadly
    Asia’s best companies regard project management as a core competence. While they may outsource various parts of a project, they retain an active role as overall integrator and manager. Generally, they will manage all critical aspects in-house and only outsource standard equipment / project work on a turnkey basis.
  • Reconsider Low Cost Suppliers
    Asia’s leading capital project managers obtain lower costs and faster service by aggressively sourcing even critical equipment from promising vendors that have developed strong capabilities and reputations in their home countries but that may lack extensive experience in global markets.
  • Avoid Gold Plating
    Leading Asian companies believe in challenging all assumptions and in understanding the reasons for designs and specifications by subjecting them to rigorous value-engineering tests. This often allows them to drive out 10% more cost than a Western organization would believe possible.
  • Flatten the Organization
    Leading Asian companies realize that the fast-paced nature of capital projects makes a flat organizational structure essential and typically only have two layers between line staff and project managers, who report directly to the CEO or another board member. Furthermore, while the CEO will be involved in all critical decisions, project managers are given full authority to supervise support functions and manage resources and can make decisions themselves if the budget is not threatened.

What really interested me is how these have their equivalents in capital-intensive software projects:

  • Set Aggressive Goals
    Especially if you bring in a third party to do the implementation. Furthermore, agree on reasonable SLAs and hold the third party to the SLAs when it is realistic to do so.
  • Invest Broadly
    Make sure your people and the third party integrators and consultants have the tools they need to work effectively. If middle-ware exists that already performs the ETL tasks that are required, don’t pay your team to reinvent the data wheel.
  • Reconsider Low Cost Suppliers
    You don’t always need IBM Global Data Services. With the right tools, the crack developer at the local IT shop might be able to do the job just as well.
  • Avoid Gold Plating
    Thoroughly investigate the requirements before assuming an implementation will take a certain amount of time or require a (large) number of third party consultants.
  • Flatten the Organization
    The implementation team should be flat. Leave the politics to the politicians.

Overcoming Worker Resistance in Process Improvements

Sometimes, despite your best efforts, certain members of your organization will resist change tooth and nail. That’s why a recent Industry Week article on “How to Bring About Process Improvement When Workers Resist” caught my eye. The article, about Dover Corps. efforts to reconcile processes and operations between a plant in Tulsa, Oklahoma (Norris) and in Edmonton, Alberta (Alberta Oil and Tool), overviewed a good approach that might help you convince two competing divisions, or even two businesses within the same conglomerate, to play nice.

The article started off by noting early that processes are only as good as the people who implement them, and if John doesn’t like Bill and Bill thinks John is an idiot, no change initiatives can succeed and that systems are held together by purpose, relationships, and information. This is important because, at the very least, you will need a team that is willing to work together if you are to have any hope that your efforts to integrate disparate processes will work.

Dover Corps. began its process by putting all types of employees — union factory workers, maintenance personnel, front-line supervisors, engineers, and scheduling personnel — through three programs: on-line assessments, a relationship workshop, and individual sessions with an executive coach. The goals were to demonstrate:

  • the behavioral style of each individual to them, and how their style affects their communication with people throughout the organization
  • the best way to communicate with people of different behavioral styles
  • that many communication problems can be solved by adapting your style to better understand what another is trying to say
  • the ability for everyone to learn new ways of doing things

The process was very effective for Dover Corps. Results included:

  • recognition, and improved focus, on the strategic constraint for both companies
  • increased profits, despite the fact that 33% of constraint capacity at one location had to be taken temporarily out of service for repairs and upgrades
  • 87.5% reduction in setup time at one location
  • 80% improvement in rework

Finally, the article shared some key lessons learned, which contain some useful advice:

  • Work on relationships before you work on an issue.
  • Folks are folks (are folks). Whether you’re in the executive suite or on the shop floor, relationship building should work.
  • People need to be engaged in a proactive manner before they are pushed into a new process.

Secrets of Successful Strategy Execution

Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness — decision rights and information flow.
Gary Neilson, Karla Martin, Elizabeth Powers, “The Secrets to Successful Strategy Execution”, Harvard Business Review

The above referenced article (registration and/or subscription may be required) is a great read for any procurement organization trying to guide their company down the execution path, which is critical in a market where stagnation can kill a company. It describes the four fundamental building blocks for successful strategy execution as identified by booz & co. over the past five years. In brief, they are:

  • clarify decision rights
    how are decisions made, who has the right to make the final decision, and how are they accountable; if people don’t know what decisions they can and can’t make, they’ll sit around waiting for someone else to make a decision rather than taking action themselves
  • design information flows
    this is usually twice as effective in improving execution than any structural change an organization can make
  • align motivators
    there should be a strong link between performance and reward, not a weak one; and managers should get rewarded for doing, not spending half of their time justifying their jobs and reporting upward
  • make structural changes
    only after you’ve figured out who should be responsible for what decisions, how information should flow, and how your managers and employees should get rewarded should you redesign your organizational chart, because only then will you know what structure will truly be more appropriate to your current organization than your current one

The reason why many organizations fail to execute successfully, is they go straight to structural changes because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete. Although they might get lucky sometimes and reap short-term benefits, they’re only addressing the symptoms of their problems, and not the underlying root causes, and it won’t be long until they end up at the same place again — performing poorly with an inefficient organizational structure.

The short story is that people in your organization have to be empowered to do their jobs, and not spend all their time reporting upwards and managing downwards; they need to have the information they need (when they need it) to do their jobs effectively; and the rewards have to be structured in such a way that they are rewarded for making the best decisions for the company as a whole, not just their department or themselves.

This also implies to me that an appropriate center-led purchasing operation can be the most effective one for your organization. How so? In order to operate effectively, a center-led purchasing organization will have to spend a significant amount of time deciding what is purchased in a distributed manner and what is purchased off of central agreements and who gets to make the decision as to whether a new item or product is purchased locally, department-wide, or organization wide; they’ll have to design efficient information flows to make sure that not only do the details of the centrally negotiated contracts and best practices flow out to each team across the globe but that information on actual purchases and newly discovered best practices flows back into the center of excellence; they’ll have to help management align motivators to make sure each team acts in the best interests of the company overall; and they’ll have to lead the identification and implementation of appropriate structural changes across the organization shortly after being formed (and identifying the best structure for the company) and whenever market changes require a reaction on their part.

Lies, Damn Lies, and Statistics

Hopefully you caught The Brain’s much needed lesson in statistics back in January, as it was very informative. (If you didn’t, you can still go back and read it. Heck, even if you did, it probably wouldn’t be a bad idea to go back and read it again.)

The reason I’m pointing it out again is that I just noticed that Knowledge and Wharton put out a great summary of some of the key points in their article on “The Use — and Misuse — of Statistics: How and Why Numbers Are So Easily Manipulated”. Even though they had to go and use, what is in my view, the waste-of-time, waste-of-print, and waste-of-breath story on Roger Clemens and his alleged (ab)use of steroids as a background, they still made some great points regarding statistics, which need to be reiterated every now and again (because it seems that the vast majority of people who like to do statistical studies and quote statistical results still don’t understand what statistics is really all about).

  • Correlation is not Causation!
    As the article notes, a chain of retail stores may analyze its operations for a set period and find that those times when it reduced its sales prices coincided with times that overall sales fell. The chain might conclude that low prices reduce sales volume when, in fact, it could be the case that stores run semi-annual sales during known down periods. In other words, low sales are causing price declines and not the other way around.
  • It’s much easier to isolate and exclude extraneous data when you have experimental or hard-sciences data.
    In post-activity analysis in a business setting, it’s much more difficult to isolate the effects of a variety of other influences — and any attempt to simplify will most likely lead to incorrect results.
  • Comparing your situation only to those that produced positive effects is selection bias — and it’s wrong! Samples must be random.
    The example the authors use is that the Clemens report tried to prove he didn’t do steroids by noting that there are other examples of professional baseball players, like Nolan Ryan, Randy Johnson, and Curt Schilling, that also enjoyed great success in their 40s. However, that’s atypical behavior. The vast majority of players, and pitchers in particular, steadily improve in their early careers, peak at about 30, and then slowly decline. Clemens started declining in his late 20’s and then rebounded and improved in his 40s.
  • A single, short-term study on a small population is not conclusive! Especially if the population is not representative of the population at large!
    The example given here is a lawsuit filed against the Coca-Cola Company’s marketing for Enviga, it’s caffeinated green-tea drink, that states it actually burns more calories than it provides, resulting in ‘negative calories’. The claim is based on a clinical study of a small group of individuals with an average BMI (Body Mass Index) of 22. However, the majority of the American population has a BMI of 25 or more. Thus, its not statistically reasonable to say that the study would be representative of the population at large.
  • An accounting of the entire testing process is required for proper perspective in interpretation.
    So you found a statistically significant effect, correlation, or difference between some set of variables. If you don’t report the twenty-one insignificant tests you did before you found that one significant result, how do you know it wasn’t a fluke and that the test should probably be repeated?
  • Data-driven studies can’t always tell you the right answer.
    All they can tell you is which answers to eliminate because the data does not support them. The true value of a statistical analysis is that it helps users to properly characterize uncertainty as opposed to a “best guess”, to realize what outcomes are statistically significant, and to answer specific hypotheses.
  • You have to understand what the drivers behind the variables are if you are to have any hope of making a correct interpretation!
    Consider the example of major league baseball outfielders. A hypothesis going into such a study might be that outfielders have a harder time catching balls hit behind them, which forces them to run backwards. You’ll likely find that the opposite was true – that outfielders tend to catch more balls running backwards, even though this seems counter-intuitive at first. However, when you consider the hang-time of the ball, and the fact that balls hit farther are in the air longer, which gives the outfielder more time to catch them, it starts to make sense.
  • The validity of a statistical analysis is only as good as it’s individual components.
    And if even one component is invalid, the whole work is invalid.