Category Archives: NPX

If You Have to Hire, Maybe You Should Hire At Home (Bonus NPX Take Away 2)

Yes, the doctor is back on his home-sourcing horse, but there are good reasons. It’s now literally cheaper to “off-shore” in Oklahoma, Alabama, and Michigan than to go to Maharastra, Andhra Pradesh, or Rajasthan. At both the Hackett Group Conference and the NPX gathering put on by The Mpower Group, I heard a number of top executives from Fortune 500 companies note how it was cheaper to bring certain operations and services back home than keep them in India where labor rates are still increasing in the double-digits year after year.

And if this isn’t enough to convince you, this fact should really make you think twice. Not only are American companies hiring at home, but now Indian companies are hiring American citizens on American soil to fulfill the outsourcing contracts granted to them by American companies. And this is happening in Procurement, Finance, and Legal. That’s right! There are so many unemployed lawyers now that it’s cheaper for Indian firms to hire unemployed American lawyers than to try and recruit lawyers that know American law because they are few and far between, in great demand in India outsourcing shops, and command ever increasing salaries.

So hire at home before India (and, in short order, China) scoop up all your talent!

You Can’t Hire 100 People At a Time (Bonus NPX Take Away 1)

One of the things I heard at the NPX exchange put on by The Mpower Group is that there are companies out there looking to hire 50, 100, and even 200 Supply Management professionals — right now. What, what, what? I can’t believe I just heard that. While I’m sure most of you are saying that’s great news because, in your opinion, that means jobs are returning and/or faith in Supply Management is finally getting to what it needs to be, I can assure you this is not great news.

What this really signifies is that there is a deep fundamental problem in the organization in question. A well-run company should not suddenly need 200 people in its Supply Management organization. The first thing one has to ask when hearing that a company needs that many people is why. And “we’re centralizing operations” or “we’re expanding our global footprint” are not good reasons.

A company doesn’t have to hire more people to centralize operations, even if it is moving Supply Management headquarters. It simply has to relocate some staff on location and everyone else can work wherever they are. Now that most people have affordable video conferencing on their desktop, and it’s quick and easy to get just about anywhere in the world within two days, there’s no excuse for not letting people work where they are. (And any HR professional worth their salt will tell you that it’s much cheaper to relocate talent than to hire new talent and get them up to speed.) If the organization needs new people because it just got rid of a bunch, one needs to ask why. Did it really have that many people who couldn’t cut it and, more importantly, couldn’t be trained to cut it? If so, there is something fundamentally wrong with its hiring practices and talent management and it’s probably not somewhere anyone would want to work.

A company doesn’t have to hire that many more people to expand its global footprint either. It just has to hire a few local resources in the region and open an office. That’s 20 people, tops, not 200. If it needs more, then it’s expansion plans are too aggressive. There’s no way you can parachute 50 to 200 people into an organization and not expect everything to come to a screeching halt for 6 months. Even if you can figure out where to put 200 people, you need to get them equipment, train them on general organizational processes, assign them specific jobs, train them on the appropriate technology and specific processes, hold their hands until they know how to do their daily jobs, and have mentors readily available to answer questions for up to two years as they learn the ins and outs of the more complex aspects of their assignment.

In short, jobs returning to Supply Management are a good thing, but only if they are added in moderation.

Supply Management: Secret Agent of Business Impovement (Key NPX Take Away 5)

 

James Bond Theme Song

 

In our final post for the week on our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management, we finally get to what matters most: A Next Level / Practice / Generation Supply Management Organization that identifies, secures, and executes on value is the Secret Agent of Business Improvement and every Supply Management Professional is an organizational 00 with a license to kill [waste].

Of all of the messages delivered at the NPX, this message from Alastair Donald, the Chief Procurement Officer of Global Procurement Services of ConocoPhillips Company (which currently holds the #4 slot on the Fortune 500) is probably the most important. Supply Management is the secret agent of business success, and ConoccoPhillips continued prominance in the top 10 of Fortune 500 over the last five years years (#6 in 2010, #4 in 2009, #5 in 2008, #5 in 2007, and #6 in 2006) is largely due to significant improvements in Supply Management over the last four years, which went from delivering, on average, a low single digit annual cost reduction from 2002 to 2006 to a low double digit cost reduction from 2007 to 2010. (While SI cannot release exact numbers, the improvement is very impressive.)

So how does Supply Management deliver such significant improvements to the business? First of all, it gets its house in order and ensures that the following ten functions are adequately staffed by its secret agents:

  • Strategic Sourcing
  • Contract Management
  • Category Management
  • Materials Management
  • Supplier Relationship Management
  • Talent Management
  • Procure-to-Pay
  • Governance & Compliance
  • Sustainable Sourcing
  • Market Intelligence

Then it addresses the threats to national security (and organizational stability):

  1. tactical focus
  2. wrong skill sets (engineers are not enough)
  3. ineffective contracts
  4. too much money spent on PO processing
  5. weak governance
  6. lack of value creation

by way of

  1. strategic execution
    which focusses on correct time allocation, the right organizational design, and integrated processes and tools
  2. skill enhancement
    which focusses on identifying cross-functional high potentials, recent college graduates who can be future secret agents, identification and absorption of external expertise, and an end-to-end talent management process
  3. contact excellence
    which focusses on getting the majority of contracts (including all high value or high risk) on company paper, getting templates in place to expedite the process, and ongoing risk assessment
  4. lower PO costs
    by way of a single global ERP instance, appropriate P2P support systems, and low-cost tactical processing centers
  5. globalization
    managed with a center-led philosophy and key stakeholder councils
  6. true value creation
    by way of a value-driven sustainable strategic sourcing process, dedicated SWAT teams, commercial astuteness, robust models driven by high-powered analysts, financial validation, and fact-based decision making

Secret agents will be needed to pull all this off because only secret agents will be able to deal with all of the challenges that will arise, including:

  • artificial constraints
  • strategy changes
  • short term focus by the peer group organizations
  • talent abduction
  • availability of SMEs
  • change management
  • sleeper agents

but when Supply Management has a seat at the grown-ups table, is on investor relations radar, is being pulled in by other organizational units on a regular basis, has its budget increased (while every other organizational unit sees a decrease), and is no longer seen as the leper colony or roach motel, it will be worth it. Because once every dollar taken out by Supply Management hits the bottom line, Supply Management will truly be the secret agent of business improvement.

It’s Not Technology, People, or Process — It’s Execution (Key NPX Take Away 4)

As you probably guessed from the title, this post continues our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management. Now that we have defined value, defined how we get to value, and how we capture value in contracts, the next thing we have to discuss is how important it is to get to execution as quickly and efficiently as possible.

The reality is that it doesn’t matter how good a process is, how modern the supporting technology is, or how good and well managed the people are if the organization doesn’t execute. The foundations are not enough. A Supply Management organization needs to execute on those foundations to get to value. As Dalip Raheja of
The Mpower Group likes to say, it’s not about the consonants (the foundations), it’s about the vowels (the execution on the foundations) beause Old MacDonald Was Right.

A Supply Management organization that doesn’t execute on the foundations never gets beyond best practices and traditional TCO. This will get an organization good results, but it won’t get the organization to world class status in these tight economic times. An organization needs to Adopt the plan, Execute on the plan, Implement the required changes, Optimize its operations on an ongoing basis, and appropriately Utilize the skillsets and technology it has available to get to the next level. One has to remember that simply having the best practices, processes, and technology isn’t enough. Even though it will make an organization a Toyota, it won’t necessarily make the organization sustainable in the long term. Only an organization with sustainable sourcing strategies can get to the next level.

An organization focussed on getting to the next level will go beyond the metrics and KPIs used to measure suppliers but focus on how the relationships will be established and holistically managed to extract maximum value for both parties. The contract is only the beginning of the relationship. Similar principles apply to relationships within the organization. The Supply Management organization goes beyond being a tactical service provider (who gets the contract and secures the supply) to a strategic consultant (who advises on what types of products and services are truly required in the first place and what suppliers should be approached in any event).

It’s only when the Supply Management organization starts focussing on the needs of the organization as a whole that it can truly achieve value. Unlike cost, which is at the component (product or service) level, value is at the system level and only materializes when the entire system is balanced. A truly valuable supply contract doesn’t sacrifice quality for cost, risk mitigation for expediency, or comfort for potential (but not yet realized) innovation. Just like cost can’t be reduced by selecting a lower cost supplier that will result in higher logistics costs, value can’t be created by looking at any single component as it’s holistic, and it results from proper execution of the vowels. As Dalip likes to say, it’s E-I-E-I-O.

Contracts Capture Value (Key NPX Take Away 3)

This post continues our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management. On monday, we started with a discussion of value and how the views of Supply Management are not always aligned with that of the internal customer and stakeholders. Yesterday, we discussed how to align those views and get to value. This post will discuss how an appropriately drafted contract will capture soft, and hard, value in the eyese of all parties and how such value can be communicated.

In many organizations, contracts are viewed as roadblocks. However, as Brad Peterson from Mayer Brown points out, this is a viewpoint that Supply Management needs to overcome because good contract terms create value by improving business outcomes. Supply Management needs to learn how to communicate this value because many companies don’t often recognize the value of contract terms in decsion making. Having a quick out clause with little or no penalty in the case of a major disruptive event that will prevent the supplier from insuring a continuity of supply can often save the organization millions of dollars. For example, if war breaks out in the country that your supplier’s production facilities are located in and roadblocks are put up, you will need to shift orders quickly in order to be sure of supply continuity. Not having the right to do this will put the organization at serious risk.

Well designed contracts create value and reduce risk as they will

  • bind suppliers to commitments to provide specified products & services at firm prices (and eliminate price risks for the contract term)
  • give the buyer options to flex, change, or terminate under conditions that the buyer knows would require flexing, changing, or termination to insure organizational profitability
  • provide the supplier with incentives to perform in ways that increase value or reduce risk
  • specify how alignment will be achieved (through governance and IP rights that will prevent problems later)
  • define when, where, and how the products and services will be provided and address logistics concerns in advance

But, most importantly, failing to recognize the value of good contract terms is wht leads to poor business outcomes in most organizations as

  • projected savings get eaten up by change orders
  • service levels stay green even though the customer is red (and stuck in an unhappy relationship for a long time)
  • the promised innovation never materializes
  • the contract turns out to be unexpectedly costly to govern
  • the supplier makes unilateral changes that don’t violate the poor contract terms

That’s why Supply Management has to work on communicating the value of good contracts (that include key clauses that are identified well before negotiations begin) which address the customer’s value points, the key risks, and the overall business strategy. Specifically, Supply Management needs to point out that, with a good contract,

  • suppliers work to keep their promises
  • suppliers do whatever they can to get their incentives
  • options allow the organization to steer to better outcomes
  • alignment allows both parties to work together efficiently
  • removal of uncertainties saves soft and hard dollars

And the value of each benefit can be estimated using expected value, actuarial calculations, economic calculations, and/or monte carlo simulation even when a fixed price is not included. So focus on better terms, and realize better outcomes.