Category Archives: Robert Rudzki

Four Principles To Keep In Mind When Thinking Like a CFO

As Bob will tell you again and again one of the keys to a successful career in Procurement (which includes a seat at the C-Suite’s table) is to speak like a CFO. But if you want to keep that seat, at some point you will have to think like a CFO or you will quickly be dismissed if your plans don’t measure up to their high expectations upon careful review.
But how do you think like a CFO when it’s often challenging enough just to speak like one? A recent article in the McKinsey Quarterly had some good advice to get you started.

According to the CEO’s guide to corporate finance, the following four principles will help you choose the alternatives that qualify as great financial decisions and that will win you a lot of attention in the C-suite.

  • The Core-of-Value Principle
    Value creation is a function of returns on capital and growth. Procurement should pursue projects that will generate returns in terms of productivity or cost reduction and should not ignore potentially high-return projects (such as an investment in a new, but unproven, supplier who uses a new technology) just because there is a moderate downside risk.
  • The Conservation-of-Value Principle
    Only improving cash flows will create value. Don’t pursue projects on expected ROX (ROI, ROE, etc.) metrics alone. Make sure there will also be an impact on cash-flow in a reasonable time-frame. For example, a piece of shop-floor technology that is expected to improve efficiency by a factor of 30%, reduce production costs by 15%, and generate an ROI of 5X over a 3 year life span is not worth it if it does not free up any cash flows for two years because most of the production costs are labor and labor can’t be reduced or reassigned in the short term.
  • The Expectations Treadmill Principle
    Movements in a company’s share price reflect changes in the stock market’s expectations about performance. The better the share price does, the better the company is expected to do. When the share price is increasing, the focus needs to be on projects that will support long-term growth (such as advanced data analysis systems that will allow the organization to identify cost reduction opportunities going forward).
  • The Best-Owner Principle
    No business has an inherent value in and of itself. (It has a different value to different owners or potential owners–a value based on how they manage it and what strategy they pursue.) Procurement should participate in regular cross-organization business-unit reviews and make sure it is still the best owner of each and every function under its control. If it is not the best owner of a function, the function should be reassigned or outsourced, and if it could be the best owner of a function controlled by another business unit, it should be willing to take that function over.

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Where Does Strategic Sourcing Fit In?

Today’s post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

There has been increasing debate in the blogosphere about the alleged death of strategic sourcing. Today, I’d like to propose several more fundamental, and on a company-specific basis, more revealing questions:

     

a) Do your senior executives understand the enormous potential of modern supply management (only one element of which is strategic sourcing)?

b) Do your senior executives understand how to achieve that enormous potential — i.e., how to build the transformation roadmap and how to support it?

c) If the answer to the first two questions is “no,” are you prepared to take a leadership role in helping your senior executives achieve the necessary awareness? If not, then debating the “strategic sourcing is dead” question is moot at the company level.

In past contributions to Sourcing Innovation, I have described the importance of Speaking Like a CFO (Part I and Part II).

I’ve also described essentials of Procurement and Supply Management Transformation.

Consistent with my past blogs, leading edge companies introduce strategic sourcing as one element of a comprehensive transformation roadmap. They recognize that trying to introduce and embed strategic sourcing without the supporting pillars of a transformation roadmap is likely to generate only short-lived benefits.

These leading companies are the ones most likely to be using true strategic sourcing (and other best practices) over an extended timeframe — not as a fad — yielding substantial and sustainable value. Done as it should be, and led properly, true strategic sourcing generates lasting benefits that go well beyond price or cost.

And, the importance of approaching this subject as more than just a narrow focus on implementing strategic sourcing is captured in this quote from the Institute for Supply Management: “Without real procurement transformation, only 60% of the value of procurement initiatives are retained by year two. This value drops by 10% for each subsequent year.”

So, it’s time to put the birth or death of strategic sourcing in its proper context: the leadership, or lack thereof, at each company. Here are some observations from my combined experiences as a CPO-practitioner, advisor and speaker:

  • Believe it or not, 25 years after the birth of strategic sourcing, many companies of all sizes still are not aware of “true” strategic sourcing.
  • Equally astonishing, a surprising number of companies believe they are using strategic sourcing, but in fact are not.
  • Perhaps as a reaction to the need for “quick wins” in the current business environment, some companies who previously used a true strategic sourcing process have since “dumbed down” their process into a tactical ghost of what it used to be.
  • As noted above, trying to introduce and embed strategic sourcing without the supporting pillars of a transformation roadmap is likely to generate only short-lived benefits.

Thanks, Bob!

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ROI, ROIC, ROCE, and … ROSMA?

The key to a rising CPO’s success is the often the ability to talk shop with the CFO and explain the advantages of supply chain management in terms that the CFO can understand. It’s often the quickest way to a seat at the boardroom table. Traditionally, this has come down to the ability to provide the CFO with the ROI (Return on Investment), the ROIC (Return on Invested Capital), and the ROE (Return on Equity) of every investment. This is because ROI measures the efficiency of investment, the ROIC measures the company’s efficiency at allocating the capital under its control to profitable investments, and the ROE measures the profitability of the investment. But will CPOs soon have to add another measure to their financial lexicon?

Near the end of A.T. Kearney’s Higher Visibility, Greater Expectations that chronicled the results of their recent Indirect Procurement study, they discuss their new approach to translate the business case into a language more recognizable to finance executives which revolves around their new ROSMA (Return on Supply Management Assets) metric. Now, it sounds good … because what could be better than a financial metric (which gets a CFO excited) specifically designed to showcase the performance of supply management … but does it deliver?

Breaking it down, A.T. Kearney defines ROSMA(c) as financial results delivered / invested supply management assets where the financial results are the product of spend coverage, velocity, category yields, and compliance plus the net extended benefits and the invested supply management assets are the sum of period costs and structural investments. This sounds logical, and when you consider that twenty different factors go into the calculation of the financial results and that twelve different factors go into the calculation of the invested supply management assets, it sounds complete, but it is sound. And more importantly, will CFOs bite?

To answer this question, I’ve invited Robert Rudzki, SI’s resident expert on supply chain finance (and [co-]author of Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line), to chime in. This is what he had to say:

 

AT Kearney’s ROSMA(c) framework offers another tool to connect the supply management function with its colleagues in the financial function. As a former practitioner with a dual background in finance and supply management, I appreciate the applicability of the concept. I do have a few specific questions; for example, does “supply management assets” include the assets participating from other functions outside of supply management? If so, then ROSMA(c) appears to be a comprehensive framework that can withstand the scrutiny of the toughest bean counters.

The more fundamental question however is this: do we really need a another framework, or do we just need to do a better job connecting to the financial metrics that are already being used by the CEO and CFO to manage the business?

In our experience, CPOs can dramatically improve their internal credibility with the executive staff by relating their proposed agenda (including the need to transform supply management) to the metrics that the senior staff and the Board of Directors already monitor. Such key metrics as ROIC / ROE / RONA (Return on Net Assets), cash flow and EPS (Earnings Per Share), are highly visible and relevant metrics. Rather than introduce a new metric, we have generally found it to be more productive — and quicker at achieving credibility — to relate the proposed CPO agenda directly to the particular metrics currently in use by the company’s senior management.

Thanks, Bob!

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Supplier Partnerships

Today’s post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

A supplier representative visits your offices and begins to talk about “the partnership” between your two firms. You hadn’t realized the relationship was that comprehensive, so you ask him to describe the exact nature of this partnership. Chances are that the answer you receive will be rather wordy and nonspecific, about what you would expect from a “glad-handing salesperson.”

“Partnership” is one of the most overused and misused terms in the world of business. When I was a CPO, we dealt with this phenomenon by taking two steps:

(1) our Procurement Council developed a written definition of what we meant by the term “supplier partnership”

(2) once we had that definition, we decided how to put it to good use to improve both our internal and our external processes

If you’ve never done the exercise of developing your own written definition of supplier partnerships, I would encourage you to do so. It has several benefits. It will help you organize your ideas about this important subject. Also, you can create a common understanding within your company regarding what the partnership term means and how it should fit into your overall supplier selection and management process. And finally, it can serve as an excellent point of discussion with your suppliers — especially those who say they want to become your partner.

We did this in my corporate career as a CPO, with real benefits. We went so far as to print our short definition of supplier partnerships on the back of our business cards. When meeting a supplier for the first time, we pointed out the definition on the back of the cards and used this as a launching point for a discussion that often proved to be very meaningful.

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Thanks, Bob!

Speaking Like a CFO — Part II

Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

Another important aspect of Speaking Like a CFO is knowing how to build a business case in support of your overall transformation agenda, as well as business cases related to specific subjects such as technology investments.

When we work with clients, we prefer to start with a business case from a total transformation perspective. Why? It is part of a logical sequence. Once you’ve assessed your current state and compared it to best practices, identified the opportunities from successfully transforming your practices, and designed the detailed roadmap to get you there, why not request the full amount of resources needed to do the job well?

It might sound optimistic to ask for more resources when the current business outlook for your company is weak — but it can work if you approach the subject in the manner I described. In fact, we’ve worked with several companies who — as a result of following the process outlined — added more resources to their strategic procurement staff during the recession. Today, they are receiving the bottom-line benefits of taking that bold leap.

The alternative, quite frankly, is to be subject to the same headcount reduction guidelines that often are widely applied to all departments in times of business stress. That’s not where you want to find yourself; and, quite frankly, there is no reason to end up there.

Thanks, Bob!

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