Category Archives: NPX

McKinsey Just Gave Us the Best Argument for Next Practices

From a recent McKinsey Quarterly newsletter:

  Spurious frameworks and torrents of data often obscure the basic principles of good strategy. To beat the market, companies must exploit imperfections that stop (or at least slow) its workings. Such competitive advantages are scarce and fleeting because markets drive a reversion to mean performance … . Good strategies therefore emphasize difference …
       From Why best practice isn’t the best strategy

But more importantly, an analysis of ROIC and EV/IC for top, middle, and bottom quintile companies from 2001 to 2009 shows an drop in ROIC of almost 75% (from above 15% to below 4%) and a drop of EV/IC of almost 85% (from about 3.2 to 0.5).

Best practices aren’t enough anymore. We need next practices.

As a side-note, the next Next Practices Xchange, hosted by the Mpower Group and one of the few forums dedicated to the discussion of next practices, is November 4, 2011.

Feces!! Dookie!! Scheisse!! How do you define Value?

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can use TMG blog.

Let me answer the question first. It doesn’t matter how you define value. That definition is actually worth a bucket of crap (I missed that one). But I digress and will come back to that question later. Let me address the other part of my title first by asking you a hypothetical question. Regardless of whether you believe in climate change or not, if I were to tell you that there was a way to provide you with water that you could bathe in and drink with a 100% certainty that it was cleaner than any other water source, would you use it? Now, if I were to tell you that it was actually recycled water but was still able to prove to you scientifically that it was absolutely clean, would you still use it? Would your answer still be the same if I were to tell you that it was waste (sewage) water from where you live?

It turns out that people strongly resist the 3rd option of using local waste water, even if they are facing a drought. Water prices are going up and scientists have categorically proven that it is cleaner than almost ALL other water sources (including natural springs). In addition, it has a significant positive impact on the environment, preserves water sources, eliminates the need to dispose of waste water, etc. etc. etc!

According to Alix Spiegel, from NPR, “No matter what the scientists or environmental organizations said, the public saw it differently: They thought that directly reusing former sewage water was just plain gross.” It turns out that you can take the physical excrement out of the water but you cannot take the cognitive crap out of it! The technical term for this is psychological contagion. The fact that ALL water has someone’s feces in it (upstream sewage) and the fact that birds and fish are contributing their feces is irrelevant. It just cannot be my scheisse. And it turns out that the only way you can get rid of my psychological dookie is to process the water through a natural aquifer, even though that will take 10 years AND it actually makes the treated water less pure!

The NPR article goes onto say that those working on the project didn’t feel that the public was looking at the scientific facts and simply rejected the water, infuriating water engineers who felt that the public was being irrational. If you replace public with stakeholders (customers) in that statement, it might represent what a large number of Sourcing/Supply Chain professionals might say. The reason is that we continue to define value as we see it, whereas our customers define value totally differently. Continuing to throw more spend analysis, decision optimizers, and Total Cost of Ownership (TCO) models at them is not going to alter the fact that our definition of Value Drivers is fundamentally at odds with each other. Unless we change our definition of value to match the definition of value by our customers, we will continue to knock at the proverbial C level door as a profession. By the way, redefining the Value Drivers is only half the battle. Actually adopting and implementing them is the real challenge.

Thanks, Dalip.

We Need to Win the Battle for Share of Mind

A recent article over on TechCrunch on how you need to win the battle for share of mind makes a great point of how any organization that wants to grow over time needs to win mind share if it wants to survive, and thrive, over the long term. Not just start-ups. Just like a start-up has to do more than get people to play with its hot product for more than six months if it wants to be around next year, Supply Management needs to do more than just get people talking about some quick-hit cost savings if it wants to ingrain itself into the core processes of each of the business units it supports.

For Supply Management to truly become the central cog in the organizational wheel, and become the first organization consulted on any project, it has to gain permanent mind share among its stakeholders. Engineering has to think of Supply Management as the organization that can identify new potential sources of material and supply before that product is designed, not just the paper pushes who will execute the buy. Legal has to think of Supply Management as the organization in the best position to judge the potential of an M&A, not just the organization that sends the cheque to the external council. Marketing has to think of Supply Management as the organization that can help it understand the market dynamics of the new geographies it wants to expand into, not just the organization that buys the paper.

So how do we do this? We have to solve real problems and provide real value. This has to go beyond just saving 10% on a contract renewal, because high cost isn’t a problem, it’s a symptom. Either the right supplier wasn’t at the table, or the right logistics strategy wasn’t employed, or the right should cost models weren’t used, or the right contract wasn’t negotiated. If supplier discovery and management, network design and management, and contract negotiation and management were all done right the last time, there’d be no money to save (unless raw material prices dropped, but that would be immediately apparent from the should-cost models that used market indices and a pricing formula to capture index changes could be written into the contract to insure the organization gets to take advantage of lower prices immediately). In all but the rarest of situations, savings are only possible because the issue wasn’t addressed right last time.

The rest of the organization has to see Supply Management as the organization that can help their business unit get it right and prevent unecessary spending in the first place. The organization that will get supplier discovery and management, network design and management, and contract negotiation and management right the first time. The organization that will bring true value to their business unit. If we can do that, not only will we have our permanent seat at the big kids table, but we’ll be the central cog in the organizational wheel. We’ll finally be where we’re supposed to be.

So how do we do that?

We start, as pointed out by Lamar Chesney, CPO of SunTrust, and summarized in this Sourcing Innovation post, by learning what value is to our stakeholders and communicating that message. Then to get to value we align perspectives and work together towards the goal. Next we capture the value in an appropriate agreement that focusses on the required solution, not just tactical t’s and c’s. Finally, we help the stakeholder organization with execution because value doesn’t exist until it is realized, and if it’s not realized, we’ll get blamed and fail to capture our much needed mind share. And when all is said and done, we’ll be the secret agent of business improvement.

PPT isn’t enough, you need EAI as well (NPX Deep Dive #1)

As many of you are well aware by now, a few weeks ago I attended The Mpower Group‘s Next Practices Xchange. A gathering of some of the top supply management personnel from a select group of Fortune 500 companies who met to discuss how to get to the next level of supply management, the NPX participants are leaders in their fields. On average, NPX members beat the field at the macro level at supply chain visibility, risk management, strategy execution, and value creation (at least according to a recent joint survey undertaken with the IACCM that will be explored in a future post).

But today’s best is not enough to sustain value in an increasingly competitive and economically challenging global marketplace, and the best of the best know it. The supply management leaders are already working hard to figure out how they are going to maintain their edge in tomorrow’s supply chain landscape. While there are still a number of questions to be answered, they know that the first step is to understand value, that the second step is to get to value, the third step is to capture value, and the fourth, and most critical step, is to step is to execute.

But execution is tricky. It’s more than just People, Process, and Technology (PPT) that consultants have been talking about for decades. It’s more than just the following framework, which isn’t enough.

People
Organization
Talent
use  
Process
Strategy
Procedure
Tools and Templates
supported by  
Technology
Infrastructure

It’s Exploration, Alignment, and Information. It’s the Adoption, Execution, Implementation, Optimization, and Utilization of the People, Process, and Technology to their fullest potential, as illustrated by the following framework:

Information
Visibility
Metrics and Reporting
Knowledge Management
undergoes  
Alignment
Decision Process
Business Strategy
Change Management
by way of  
Exploration
Learning
Coaching &Mentoring

Technology enables the processing of information which is used by good processes that support organizational alignment with the business by people who explore next generation supply management practices and techniques and take the business to the next level. PPT goes hand in hand with EAI and neither on their own will deliver EBR (Exceptional Business Results).

The importance of the vowels in next generation supply management, and the EAI framework they define, will be explored further in future posts. The reality is that best (PPT) framework in the world is useless if you don’t execute. So master the vowels and see your organization advance to the next level of supply management.

Cost is Just Another Component of Risk (Bonus NPX Take Away 3)

One of the most useful, and possibly controversial take aways, from the NPX exchange put on by The Mpower Group is that a Next Practice organization should not have cost as part of its value equation as a focus on cost has not only not served the Supply Management community well, but has destroyed incalculable value over the years. This is especially true in high-value or strategic categories.

Cost should be viewed as just another component risk, and in particular, the risk of cost increase beyond an acceptable level is what the organization should be focussed on. Furthermore, once the organization has established that cost is in an acceptable band, the organization should remove cost from the equation entirely in high value and strategic categories.

The reality is that for some categories, a +/- of up to 5% is insignificant when compared to the critical factors of stability of supply, quality, and flexibility. Consider the Apple iPad. While it is obviously in Apple’s best interest to drive down cost as much as possible, it’s more important that Apple be able to guarantee supply, quality, and flexibility in its supply chain. The extra savings of $2 on each unit will not make up for the loss in profit if Apple fails to deliver on 100,000 orders. Nor will it make up for the warranty costs if the quality drops to the point where Apple has to make 25% more repairs under service contract.

So if you really want to focus on value, band cost, and then remove it from the top-level value equation altogether as cost control then becomes simply another component of risk management in the overall value equation. The organization just might see better results in its high-value and strategic categories.

Comments?