In Part I.i we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. Then, in Part I.ii, we reviewed the seven-step process that an organization could follow to get from where it is to where it needs to be. This was followed with a review of some case studies and insights from best in class in Part II. Our last post, Part III.i, covered four of the best practice ABCs that will help an organization get to best-in-class more efficiently while increasing the effectiveness of your Supply Management organization. Today’s post reviews the remaining six ABCs.

Negotiations Management

Nothing captures the inherent complexity of negotiations management better than this quote straight from the bottom line:

Everyone in the organization has bought things for their personal lives. Whether it’s the CEO, his executive assistant, or the blue-collar guy on the loading dock, everyone buys things every week in their personal lives. And, in fact, most people are very proud of their buying skills. Why not? After all, ever since someone spent his or her first dollar as a young person, that person has done a lot of buying, and they probably believe they do a good job at it. That’s our biggest challenge — everyone sees themselves as a buyer.

This is why it’s challenging, why a buyer needs a strategy, why a buyer has to define a MDO (Most Desired Outcome), a LAA (Least Acceptable Agreement), and a BATNA (Best Alternative To Negotiated Agreement) before starting a negotiation and be prepared to stick to her guns. And she needs to be aware of all of the basic factors that can affect a negotiation — summarized and discussed in the text.

Contract Management

Contract Management goes beyond using a contract management tool to create templates, capture contracts, and track expiration dates to supplier-centric strategies. An organization that does so will not only reduce (contract) creation time, reduce maverick buying, and properly prepare for sourcing efforts, but also optimize the total relationship with its key suppliers through a holistic review of the relationship.

Risk Management

Risk Management is the process of analyzing the possible exposure to loss and reducing loss potential. Proper risk management recognizes that some loss potentials may be avoided, others can be modified to limit their financial consequences, and not all risks must be accepted as they first present themselves. The risks that will be addressed are those with a loss potential that is unpalatable to the organization. The type of mitigation will be dependent on the risk in question, and may take the form of change in sourcing strategy, interest rate hedging, commodity hedging, credit insurance, and/or asset insurance, depending on the risk in question. For detailed examples of market, social, property, casualty, employee, and financial risks and mitigtions, which can be quite complex, see the text.

Consortium Buying / Group Purchasing Organizations

Consortium buying, the process of pooling your needs with those of other companies, is a great idea in theory but, in practice, it generally hasn’t worked. First of all, direct competitors are not good candidates for a consortium due to a natural reluctance to share basic information and best practices with each other. Secondly, most of the initial companies will be at different stages of procurement sophistication and it will be difficult to get all of the companies on the same page. Third, the quality of data available from each company regarding total spend will be vastly different. As a result, most consortia failed. There are some examples to the contrary, including Corporate United, but unless the participants are:

• centralized or center-led
• relatively sophisticated
• from different industries
• from diverse markets
• apples-to-apples with quality spend data

the chances of a consortium working are not very good.

Asset Recovery

Used equipment dealers seemed to prefer (and be able to afford) new Cadillacs in their line of business. Why? Because, traditionally, when a plant facility had an idle piece of equipment somewhere in the plant, someone in the plant would declare the equipment as “surplus”, it would be subsequently written off for accounting purposes, then stored somewhere and forgotten until it got in someone’s way who would then seek out a scrap dealer who would get the equipment simply by offering an amount close to the scrap or write-off value. In reality, the asset would be worth considerably more, and if the scrap dealer could find another buyer, the scrap dealer would net a very high return.

However, an organization with an effective asset recovery program in place will match unused equipement with needs in other parts of the business and strategically dispose of unneeded assets in profitable used equipment sales.

Business Process Outsourcing (BPO)

Often defined as “the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers, and manages the selected process based on defined and measurable performance criteria”, the BPO market exceeded 100 Billion in 2004 and may exceed 1 Trillion today. The Procurement BPO market is (significantly) smaller, but if the organization is not up to snuff in certain categories, it might be the better option. The advantages of BPO include rapid cost reduction, the ability to focus scarce resources on strategic catgories, and the ability to upgrade systems and people across the enterprise. The main disadvantage is higher costs and reduced efficiency if done wrong. For an overview of the organizational state required for BPO success, see the text.

Finally, the authors also provide a detailed discussion of when to use a consultant (intelligently).

For more details on the effective use of outsourcing, negotiations management, contract management, risk management, consortium buying, and asset recovery, (re)read Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line. It’s packed with insights on every single page. And even though, at five posts, this is SI’s longest book review, it’s only scratched the surface at summarizing the deep and varied insights that can be found in this classic text. When Bob & Doug put pen to paper, not only do they match the insights of Canada’s own Bob and Doug, but the content is so rich that a proper review would be longer than the book itself. So give it a(nother) read. You won’t be disappointed.

In Part I.i we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. Then in Part I.ii we reviewed the seven-step process that an organization could follow to get from where it is to where it needs to be. This was followed with a review of some case studies and insights from best in class in Part II. In the next two posts that comprise the third and final part of our book review, we will cover the best practice ABCs that will help you get to best-in-class more efficiently while increasing the effectiveness of your Supply Management organization.

In this third part, the authors cover ten techniques that an organization can use to take its Supply Management up a notch. In a nutshell, these techniques, which will be covered in today’s and tomorrow’s post, are:

Strategic Sourcing

Strategic Sourcing is the cornerstone of World Class Supply Management and without the foundatons it provides, an organization will not get to the next level. The fact based, rigourous process that involves substantial internal data gathering and evaluation, and extensive external data gathering and interactions, in order to select the most appropriate strategy and negotiations approach and ultimately select the right supplier(s), it transforms conventional purchasing into a strategic process involving all appropriate stakeholders in a company and add[s] significant value by reducing total costs relating to purchased goods and services. Depending on whom you consult, it is usually a five to nine step process, with seven steps being the most common. The classic A.T. Kearney model has the seven steps of sourcing group definition, sourcing strategy, supplier portfolio, implementation path, negotiations management, operational integration, and continuous market benchmarking where the right strategy depends on business impact and supply market complexity.

Sourcing events will be tackled in waves where easy, high opportunity categories will be tackled first, followed by moderatly complex, high opportunity categories and then, finally, by difficult high opportunity categories. Only once the high opportunity categories have been sourced will catgories with lesser opportunities be considered, and only if it’s not time to circle back to new, easy, high opportunity categories.

Supplier Relationship Management

Companies at either end of the supply chain can sharply differentiate themselves if they apply a differentiated structural approach to their relationships with each other. Given that new product development time in 2005 was 12% less than 2000, that revenues from new products was 70% higher in 2005 than it was in 1998, and that product development time was trending downward while new product revenue was trending upwards, competitive pressure is increasing and the chances of success in key categories without collaboration are getting smaller by the day.

Strategic relationships with strategic suppliers are becoming more important by the day. However, the right relationship is needed with each supplier, and the right relationship depends on the category, the readiness of each party for a true partnership, and the complexity of the market. Depending on these factors, and the supplier’s view of the buyer, the right relationship might be transactional, basic, strategic, or equity. However, regardless of the relationship, management is important and management should be done to metrics that measure what’s important.

Supplier Diversity & Supplier Recognition Programs

Diversity, which fits into corporate social responsibility (CSR) programs, is an imperative for many companies, and those that do business in the public sector in particular as some government programs are only for those organizations that award a certain amount of their business to minority suppliers. Furthermore, with minority-owned businesses expected to be 37% of the market by 2020, getting a jump start is a good idea.

Supplier recognition programs recognize and reward an organization’s best suppliers. They are important because:

• they reinforce your company’s expectations that suppliers must perform
• they create a powerful incentive for a winning supplier to work even harder to win again
• they create a powerful incentive for a non-winning supplier to step up their game for a chance to win next year
• they raise the “performance bar” which benefits your company

Low Cost Country Sourcing (LCCS)

Low Cost Country Sourcing (LCCS) was the name of the game in the early naughts, with the trend in some industries (like electronics) to source from low cost locales being dramatic. Some companies source over 70% of their supply from India and China. This is not surprising considering that, when done right, LCCS can take 15% to 25% off of a category’s costs, and there are documented savings of 29% at some companies.

However, LCCS is not a one-size fits all approach and a fair amount of complexity has to be resolved before a decision can be made. LCCS involves the following, often unique, complications that must be addressed

country risk supply disruption risk extended lead times safety stock assessment of creditworthiness supplier capability determination business practice, and ethical, differences productivity differences

shipping costs trade regulations technical differences foreign currency (exchange) negotiations local customs legal domain in-country infrastructure

For more details on the effective use of strategic sourcing, proper supplier relationship management (SRM), effective use of supplier diversity and supplier recognition programs, and LCCS (re)read Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line. It’s packed with insights on every single page. In our next post, the final of this series, we will review, at a high level, the final set of best practices covered in Bob & Doug’s (& Michael & Shelley’s) classic text in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap.

In Part I.i we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. Then in Part I.ii we reviewed the seven-step process that an organization could follow to get from where it is to where it needs to be. This post will discuss two of the three detailed case studies presented in the book that illustrate why an organization wants to transform itself into a best in class organization.

In 2003/2004, when Colgate-Palmolive’s stock dropped 25% on an earnings warning (per share) that was 10 cents less than what the analysts expected and when Unilever’s net income was only half that of some of its peers, Proctor & Gamble’s (P&G) stock price had double its 2000 value and cumulative sales over the past three years had increased 30%. P&G was the quiet giant that could, and did.

How did P&G succeed in a market when so many of its peers where struggling? A major component was an important, but low key, story of supply chain creativity that not only lowered costs but dramatically increased access to external technology.

P&G built a Global Product Supply organization in the late 1980s that included purchasing, manufacturing, engineering, and logistics and organized its purchases on a global basis in 1992 — before its giant business units were organized globally. Purchasing staff members were embedded in the global business units to insure a close alignment with corporate goals. Supply Management was a corporate priority because it impacted 55% of the company’s revenue stream and up to 70% of product costs in some business units. A 5% improvement in costs translated to a 20% improvement in process.

P&G cautiously implemented electronic technology solutions in the dot-com era and today is a leader in optimization and innovation. It built 20 communities of practice internally to make sure technology ideas were shared internally. It launched the Connect-and-Develop program to boost access to innovation from outside sources. P&G scientists and commercial professionals work as equals on product development teams. And it has a tool called Navigator that allows it to view and manage all of its interactions. (Think of it as a drill-down dashboard on steroids.)

P&G was an early adopter of e-auction and strategic sourcing decision optimization and saved over 300 Million with expressive bidding and optimization back in 2003-2004. And, due to its advanced supply management capability, P&G estimated that its acquisition of Gillette would generate 14B to 16B in incremental shareholder value, with 10B to 11B, or 63% to 79%, coming from cost structure improvements alone.

The next case study that we will review is that of United Technologies Corp. (UTC) In 1994, the new CEO saw the need for improved perfomance in UTC. A believer in the power of cost-driven enterprises, the new CEO hired a new VP of Supply Management in 1996 to define the future of purchasing at UTC.

In the beginning, the new VP was focussed on cost reduction. He appointed a director of worldwide sourcing, embraced internet auctions, and outsourced tactical functions of general procurement. From 1996 through 2001, UTC sourced more than 2.5B of goods and services through FreeMarkets and achieved savings in excess of 18% on this spend alone.

UTC was the first customer of IBMs new procurement services offering that included strategic sourcing consulting, purchasing services, and IT systems support. Experienced IBM buyers became consultants on UTC supply teams and helped them build data warehouses, identify suppliers, study markets, and develop processes for continual improvement. Then IBM installed an automated purchasing system, req-to-check, that allowed requisitioners to order approved goods (such as desktop computers) on their own, subject to approval rules based on level of authority. Purchased orders went through the system and were automatically dispatched to suppliers who issued electronic invoices upon shipment. The new system was capable of generating detailed spending reports by group and requisitioner and helped UTC stop maverick buying in its tracks. Soon inventory levels were reduced as users found faith in the process. Not only did compliance create savings, but the speed of transactions improved cycle time.

After delivering significant savings in the first five years of its focus on supply management, in 2001 UTC embarked on phase 2 of its supply management transformation which takes a more strategic approach to cost reduction and value creation. Whereas phase 1 focussed on automation, phase 2 focussed on rethinking the business rules and processes to find greater savings. The goal of phase 2, called UT500, is to orchestrate cross-functional groups to cut inventory, standardize, and save money through a combination of big and small ideas, including lean. The program reached its 500M savings goal in just two years, one year ahead of schedule and in 2004 was on track to save 1B in just four years. In other words, your organization has 1 Billion reasons to embark on a supply management transformation, all of which will make your CFO, CEO, and shareholders very happy.

For deeper insights into how P&G and UTC achieved their supply management transformation and, collectively, saved billions of dollars, as well as how Chrysler succeeded while GM failed, I strongly urge you to (re)read the brilliant case studies in Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management. It’s worth a review while we wait for Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28.

In part I.i, we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. We’re doing this because, even if you have read it, it doesn’t hurt to read it again and brush up on the foundations before starting your Next Level Supply Management journey.

The authors outline a seven-step process to get from where the organization is to where it needs to be that starts with goals and ends with transformation. And it goes something like this:

1. The Right Goals

The right goals are SMART: specific, measurable, attainable, relevant, and time-sensitive and they must focus on real cost savings and value generation, not the cost per purchase order processed or the cost per FTE (which are tactical and send the wrong message — especially in the latter case as Hackett data demonstrates that world-class Procurement organizations tend to have the highest costs per FTE).

Targets should be mid-term, and not immediate, as true value comes from transformation, not one-time savings from a reverse auction because the supply-demand dynamics temporarily shifted in your favor. The authors recommend three-to-five year cost reduction targets that are mutually owned by Procurement, Manufacturing, Engineering, R&D, IT, and/or Finance as true transformation requires significant, up-front, investment in capital, brainpower, and personal commitment. However, considering that some organizations have seen 50:1 ROIs, the up-front preparation and investment will be worth it. In addition, the organization should start with three-to-five initiatives at first, and then add more only when the first set are under control. And it should avoid following in the footsteps of Jack Welch or Ignacio Lopez de Arriortua whose hard-nosed approach to cost reduction ultimately backfired in the end.

2. Process Integration

Competition is no longer company-to-company but supply chain -to- supply chain. As a result, a loosely coordinated group of companies focussed on the optimization of their individual objectives can not possibly compete with a supply chain operating as a team. A successful supply chain integrates each element of supply, design, production and distribution end-to-end. All of the stakeholders, both internal and external to the company, need to be involved in design and delivery. This is why its so important to have partnerships with strategic suppliers focussed on mutual benefit, and not arms-length hostile arrangements that result from a focus on hardball negotiations and perpetual price reductions on the supply side.

Within the company, the C-Suite, Sales & Marketting, R&D, Operations Management, Product Support, Finance, and Supply Management organizations must all be aligned and represented on the cross-functional team that manages each category. Each will have different primary goals, but the goals will be aligned with the written strategic sourcing plan, which will be aligned with the corporate strategy and objectives. And the right suppliers must be involved. As per a Wharton study quoted by the authors, one recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting 30 Billion annually. If that’s not a good enough reason to integrate, I don’t know what is.

3. The Right Leader

The CPO must be able to lead well and work with the team. A lone wolf will not be able to handle the challenges of today’s purchasing organizations, which constantly change. The leader must be able to attract top talent and should possess a reasonable subset of the following skills:

• cross-functional experience
• credibility with Finance, IT, and Operations
• experience interacting with the C-Suite
• strategic thinking
• ability to make tough decisions
• results orientation
• integrity

The last thing you want is a CPO who tells everyone that they have to spend four years as an entry-level tactical buyer before they can move up the ranks, unless, of course, you want your entire team to quit.

4. The Right (Corporate) Structure

Purchasing should lead from the center. Most best in class Procurement organizations, including most of the winners of Purchasing Magazine’s Medal of Professional Excellence, have been centralized or center-led organizations. (From 1984 to 2004, only two were decentralized.) A 2004 study from CAPS found that 83% of Procurement organizations were centralized or center led (hybrid). In a decentralized organization, it’s much harder to leverage volume, best practices, or market and supplier insight which will exist in pockets through the organization. Although the best structure will be dependent upon the organizational structure and the support from the top, at the very least the Procurement organization should be center-led and influence the decentralized units wherever it can make an impact.

5. Innovation & Technology

Best-in-Class Procurement organizations are willing to innovate and employ best-in-class technology to improve their sourcing and procurement initiatives. While the level of innovation that can be achieved at the current time will be dependent upon where an organization is on its journey, just about any organization can take advantage of new technology to improve its automation of tactical processes (through P2P), increase its insight into organizational spend (through Spend Analysis), and streamline it’s negotiation and award processes (through e-Negotiation and Decision Optimization) and start saving today. Leaders will also embrace Product LifeCycle Management (PLM) solutions.

6. Show Them the Money

Leading Procurement organizations know that the first question on every C-level Executive’s mind is Show Me the Money and are prepared to show a real savings report that answers the following questions:

• Are the savings real?
• Are they net of inflation?
• How were they calculated?
• What’s the baseline?
• Who (in finance) verified the calculation?
• Where are the savings on my bottom line?

In addition, they’ll have calculations ready that demonstrate their impact on the P&L, which will capture:

• initiatives
• volume fluctuations
• marketplace factors

in order to demonstrate total profit-and-loss-impact.

Even though a good Procurement organization

• improves working capital
• improves “monetization” of underutilized corporate assets
• reduces risk and pricing volatility
• increases organizational compliance with contracts
• improves the overall effectiveness and efficiency of the supply chain in meeting key operational needs

until Procurement has established itself as a critical enabler of corporate success, all Procurement will hear from the C-Suite is Show Me the Money.

7. Transformation

This is the end-state, the foundations of a world-class supply management organization that applies leadership, best practices, innovation, and technology to generate year-over-year savings and value for the organization. However, this transformation will only be achieved if:

• a shared need that everyone understands and believes in is defined
• an exciting vision of change is presented
• clear communication is made on a regular basis
• obstacles are eliminated (by the CEO if need be)
• executive actions are consistent with the vision
• changes are reinforced
• leadership has skin-in-the-game and stays the course

It can be a long journey to a best-in-class supply management organization, but it will be well worth the effort. For more information, and examples, on how to set goals, integrate processes, pick the right leader, define the right corporate structure, innovate and apply technology, show them the money, and achieve total Procurement organization transformation, review Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line while you wait for Robert A. Rudzki and Robert J. Trent’s follow-up on Next Level Supply Management Excellence.

In preparation for next month’s June 28 release of Robert A. Rudzki and Robert J. Trent’s Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap, we’re going to do a formal review of Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management. Even if you have read it, now would be a good time to read it again to make sure you’re well versed in all of the foundations before starting your Next Level Supply Management journey.

The classic text starts with an overview of the opportunity available to those organizations willing to embark on a Supply Management journey. Packed with success stories, including that of a 40B Manufacturer who saved 1B over three years with a modest investment of 20M, of Xerox and how it slashed produt development time by a year and manufacturing costs by 50% by including suppliers strategically in design, and of Lucent and how it achieved 20% year-to-year price savings when it needed them most, the underlying theme is that supply chain management can play a significant role in profitability.

In addition to describing the great opportunity that Supply Management offers an organization, the first chapter also does a great job in defining the new role for Purchasing in a modern supply management focussed organization and the benefits that can be achieved. Some of the key changes and benefits are:

Changes	Benefits
Ongoing Priority Transformation Mandate Central Point of Contact for Suppliers Strategic Corporate Objectives Cross-Functional	Reduced Cost Structures Higher Return on Assets Better Risk Management Reduced Cycle Times One Voice

Before diving into the basic roadmap, the authors state that an organization must first understand where it is before it can define the roadmap to where it is going. And the organization should start by asking some important questions, which the authors define as follows:

1. Are supply chain goals integrated into the strategic plan of the business?
2. Does the chief executive know who the chief purchasing professional is?
3. What is the relationship of the chief purchasing professional to the chief executive?
4. Does the procurement team have top- and bottom-line objectives?
5. What percentage of external spend is supervised by purchasing and covered by a written strategic sourcing plan?
6. What percentage of spend is leveraged through internal spend pools?
7. Does the organization have the right leadership in the Procurement function.
8. What is the working relationship between Procurement professionals and those in other disciplines?
9. What are the opportunities available to Purchasing professionals for training and improvement?
10. What is the chief executive’s personal commitment to achieving improved corporate performance through a best-in-class Procurement organization?

There are right answers and wrong answers to each of these questions. Before an organization can truly begin it’s journey, it must have the right answers to most, if not all, of these questions. Otherwise it won’t have what it takes to move up the Procurement maturity curve. And an organization does want to be best-in-class because best-in-class organizations see the following transformations:

Before	After
Little/No Strategic Sourcing	100% of Sourcing Covered by Written Sourcing Plans
Spreadsheet Analysis	Optimization Analysis
Defect Rates > 40K PPM	Six Sigma Quality
On Time Delivery (OTD) of 65% to 90%	Optimized OTD
Prices Rise 3% to 5% Annually	Costs Drop 5% to 7% Annually

And these benefits just scratch the surface. For more benefits, more success stories, more insights, and the right answers to the above questions, check out Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line while you wait for Robert A. Rudzki and Robert J. Trent’s follow-up on Next Level Supply Management Excellence.