Category Archives: Strategy

The Strategic Sourcing Debate, Part I

Last month, Dalip Raheja of The Mpower Group decided to stir the global hornet’s nest by declaring that Strategic Sourcing is Dead and that The Sourcing Emperor Has No Clothes. Since then, the post has been picked up by over half a dozen blogs (including the German Supply Management Blog) and the sparks have been flying.

Starting with Tim Cummins’ (of the IACCM) post on The Death Of Procurement: Nightmare or Nirvana?, we have seen input from

  • Robert A. Rudzki (of Greybeard Advisors) who tackled “Returning the “Strategic” to Strategic Sourcing” on SpendMatters
  • Steve Hall (of the Procurement Leaders Blog) who addressed the “Rumours of the Death of Strategic Sourcing”
  • Dave Henshall (of Purchasing Practice) who addressed Procurement 2.0 – and Other Labels
  • Steve Hall (of the Procurement Leaders Blog) who also gave us “A CPO’s Story of Strategic Sourcing”
  • Josh Dials (of Iasta) who said it’s time to “Put “Strategic” Back into your Strategic Sourcing” (on the e-Sourcing Forum)
  • Jason Busch (of Spend Matters) who insisted that “Strategic Sourcing Ain’t Dead, Regardless of What the Naysayers Suggest”
  • Joe Payne (of Source One Management Services) who echoed his cry and shouted that “Strategic Sourcing Lives On!” on the Strategic Sourceror and
  • William Dorn (of Source One Management Services) who ranted that “Strategic Sourcing is Alive and Kicking” on the Strategic Sourceror.

It’s been quite a spirited debate. But the real question is, who’s right? Well, before we answer that, we have to know, essentially, what each contributor is saying. So, in this post, I will attempt to summarize their arguments and main points.

Dalip Raheja’s viewpoint is that the Strategic Sourcing Process is fundamentally flawed as it hasn’t been delivering the promised results and, in some cases, there are unintended consequences that destroy overall, system-wide, value. Why? Because, while we have moved from unit cost to landed cost to total cost of ownership, the process is still cost focussed. And while cost is important, Dalip believes that a process rooted in cost can never be a strategic process, as long-term growth can not be achieved from a foundation of cost-cutting. In order to be strategic, you need to focus on value that can drive long-term competitive advantage. Finally, the strategic sourcing process cannot be a strategic and competitive differentiator if everyone else is doing it.

Tim Cummins believes that Dalip is fundamentally right and that the real problem is that Procurement and Supply Management Groups have generally failed to escape the role of supplier-bashing as one of the biggest weaknesses of most Procurement organizations is the ability to “form relationships”. Procurement, and the business in general, needs to change the way it selects, forms, and manages its trading relationships with suppliers, customers, and distribution channels. It needs to identify and select the right customers and suppliers — and it will only be able to do that if it eliminates transaction-oriented Procurement and sell-side contract management organizations and replaces these groups with a Trading Relationship Enablement Group (TREG) that will coordinate the perspectives and needs of the many stakeholders to ensure that buy-side and sell-side requirements are coordinated and that any trading relationships that are established meet these requirements.

Robert A. Rudzki states that “strategic” is the most overused (and misused) term in business today and that a sourcing process is not strategic if it simply adds a few bells and whistles to the conventional model or if it is dumbed down to a non-strategic, tactical ghost of what it is supposed to be so it can be “applied across the organization” — and that too many organizations these days are doing the latter in an attempt to get “quick wins”.

Steve Hall believes that the rumors of the death of strategic sourcing are probably exaggerated, but notes that most organizations are a long way from what they should be. Steve also states that in order to truly be successful, most Procurement organizations will need a competitive supply base that meets the needs of the company but that this will not be achieved unless the Procurement organization interacts with the rest of the business and forms strategic relationships with the key stakeholders. Finally, he notes that the Procurement function must be an enabler for the business.

David Henshall claims that adopting strategic sourcing is a necessary early step in the development of procurement maturity in an organization, and because of this, it is certainly not dead. Furthermore, an organization at this level of maturity must focus on continual development as it needs to progress to the category management level of maturity which links sourcing strategy to business strategy. Thus, strategic sourcing is not the holy grail.

Josh Dials writes that the key to success is a true front-to-back sourcing strategy that goes beyond the supplier selection, auction, and ranking of the auction results, which constitute the middle parts of the sourcing process, to include spend analysis at the front end — which tells you what to source, and decision optimization on the back end — which tells you who you should be sourcing from to achieve the best value. As a result, most organizations aren’t executing a true “strategic” sourcing process to begin with.

Jason Busch chimes in with a viewpoint that no one has said anything new and that the reality is that the earlier stages of sourcing maturity are going out of vogue even though strategic sourcing is thriving as the actual role is evolving to encompass more than it used to. The five, seven, or nine step strategic sourcing process never goes away, rather, newer elements, such as risk and performance management, will begin to include themselves not just as separate areas, but as integral components of strategic sourcing. Furthermore, a focus on cost can be a growth driver for business as it can drive bottom line results that increase share prices and enable other activities.

Joe Payne shouted that Dalip is way off base and that, in reality, at most companies, the concept of strategic sourcing hasn’t even been born yet. Billion dollar plus publicly traded internationals still allow administrative assistants, IT gurus, and marketing people with no formal procurement training to manage spends of a million dollars or more. As a result, strategic sourcing is always going to be a tool in the bag.

William Dorn also vehemently disagrees with Dalip and states that what is actually dead is the ability to sell supply chain improvement projects, both as internal initiatives or hired-consulting firm initiatives. He also believes that a process rooted in cost can be strategic, pointing out examples in consumer electronics, and Acer and Asus in particular, as examples. Finally, he contends that the sourcing process is only fundamentally flawed if you follow the original A.T. Kearney 7 Step Sourcing Process without adapting it to your needs.

So who is right?

I’ll let you know in Part II.

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The Triple-A Approach to Growing Green

A recent article in the Harvard Business Review on “growing green“: three smart paths to developing sustainable products presented three broad strategies that those companies looking to obtain green growth can consider. While each strategy, as the article suggests, can be used independently, the best results will be obtained if all three can be used in unison. But first, the strategies:

1. Accenturate

Accentuation is the process of identifying and playing up existing, or latent, green attributes in the current portfolio. For example, if your company has been developing products with environmentally friendly raw materials or using recyclable packing for decades since before it came into fashion, you can already claim some level of environmental sensitivity. (And even a small claim can lead to substantial savings if the sustainability claims are not exaggerated — the media is quick to pick up on, and shame, greenwashers. For example, Brita increased its sales 23% compared with the category market average of 2% with such a strategy.)

2. Acquire

If there are no green products in your portfolio, buy someone else’s. If you can find one that has a good reputation, but lots of room for growth, you can hit the leprechaun’s jackpot. Just don’t try to integrate their operations into yours too rapidly if there is a cultural divide. The acquired company might have to operate as a separate division for a while. During this time, you’ll need to observe them and slowly replicate the most productive practices and ideals throughout your operations. After all, they’ve already mastered eco-friendly manufacturing, sustainable supply chain management, and green market development, so you need to learn from them.

3. Architect

If your company has a history of innovation and considerable new product development capability, building green products from scratch is an option. Even though this approach is the slowest of the three, it’s actually the most valuable as it forces the company to acquire valuable sustainable competency.

But the best approach for most companies will be a combination of all three strategies. The company should start by identifying and capitalizing on any sustainable products or processes it already has in place. As long as it doesn’t over-reach in its claims, this will help it to establish some street cred. Then it should look for an appropriate acquisition target. Not only will this add credibility by adding more green products to the product line, but it will give the company the expertise it needs to design, manufacture, and market new green products. Then, it should take what it has learned and start architecting it’s own green products, replacing those products in its catalog that aren’t green one by one. Eventually, everything will be green and it will clearly stand out from the crowd when compared with its competition.

For more information on how to accentuate, acquire, and architect, check out the article. It also has some great questions to ask when deciding if a particular strategy is right for you.

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What’s the Right Planning Horizon for Your Supply Chain?

The recent report on “Supply Chain Strategy in the Board Room” by the Cranfield School of Management and Solving Efeso had some interesting and surprising statistics on the frequency of supply chain strategy review and the supply chain planning horizon. Namely, while the frequency of review was all over the place and ranged from less than a year at some companies to over 3 years at others, with an average of approximately 1.25 years for the electronics industry and 2.70 years for the heavy machinery industry, with the exception of APAC, the average planning horizon was between 3 and 4 years, and with the exception of the automative industry (which had an average planning horizon of 5 years), the average planning horizon was almost exactly 4 years across all of the other industries. That’s right, the average planning horizon for construction, heavy industry, electronics, consumer goods, chemicals, textiles, pharma, retail & distribution, and food & beverage was 4 years.

If empirical evidence is to be taken as truth, than this would suggest that 4 years is the right planning horizon for your supply chain. But is it? While the organization does need flexibility and the ability to change direction quickly if the market shifts, does that mean the entire supply chain needs to be reinvented every 4 years?

Product life-cycles are shorter than they used to be, but will the organization be producing completely different products in only 4 years? Or simply bigger, better, badder versions of the current product. At an industry level, most product categories have lifespans of decades … or longer. The basics offerings in any electronics category don’t change that often. CRT TVs lasted decades. Cell phones were primarily analog for about a decade. Than they were primarily digital for another before the modern smartphone came along, which will probably not change much (except with respect to the feature/function/performance classifications) for another decade. The technology for packaging food and making clothes changes very little from decade to decade. Even if the products themselves change rapidly, the production technologies change slowly and the dominant suppliers tend to retain dominance for years and relevance for over a decade, if not two. If a supply chain is properly designed, there’s no reason to think that the fundamentals will have to change every few years.

Furthermore, isn’t a long term strategic planning supposed to look forward five to ten years into the future? Maybe 4 is the new 5, but deeper thought would seem to suggest that this is a very-shortsighted view that will prevent the company from ever realizing all of the efficiencies and economies of scale that are available. This insight from one of the more forwarding thinking interviewees (who’s viewpoint was shared by about 10% of the respondents, who could be considered the leaders) sums it up best:

The review is continuous but the planning horizon is 7 years because the results couldn’t be reached in a shorter period.

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Supply Chain Leaders Internalize Risks Before They Come To Pass

A recent article in the Harvard Business Review on “leadership in the age of transparency” noted that whereas, in ages past, companies could ignore “externalities” and still prosper, today’s leaders are finding that, in order to truly prosper, they have to internalize the “externalities” and successfully manage them long before they creep into realm of regulation or law.

(In economics, an exernality [or transaction spillover] is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. As a result, in a competitive market, prices do not reflect the full costs or benefits of producing or consuming a product or service, producers and consumers may either not bear all of the costs or not reap all of the benefits of the economic activity, and too much or too little of the good will be produced or consumed in terms of overall costs and benefits to society . The examples give by the article are the tobacco industry, that profited by burying research it did in the seventies that proved smoking was an addiction and not a choice for most people, and the use of trans-fats, which are only now being outlawed in restaurants despite the facts that it has been well known for a while that they have no health benefits and provide a danger to some people.)

Supply chain leaders take a similar approach to supply chain management. Whereas good business leaders look beyond the market of today to the market of tomorrow where regulation, activism, or other forces could threaten their business and find ways to internalize those threats and eliminate them before they occur, supply chain leaders are always on the lookout for issues that could cause a major supply chain disruption. Leaders have noticed the increase in natural disasters in recent years that are posing supply chain threats and developed alternate routes and contingency plans. Leaders keep on top of the results of additive and chemical testing and find ways to remove dangerous chemicals and additives from their products long before regulations prevent their use. Leaders are on top of supply and demand swings and proactively lock up supply before it becomes a problem. Leaders look ahead and internalize what’s important.

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Six Drivers of a Successful Supply Chain Strategy

In addition to offering insights into planning horizons and supply chain strategy drivers, the recent report on “Supply Chain Strategy in the Board Room” by the Cranfield School of Management and Solving Efeso also summarized six drivers of a successful supply chain strategy. While there were no surprises, the points do deserve reiterating.

  • A balanced input of vision. A strategy developed without the blinders on generally works better than one developed with the blinders on.
  • Frequent review. When there’s a regular review to insure the strategy is being followed and implemented properly, the strategy will tend to be more successful.
  • Balanced input of quantitative modelling. Decisions based on a consideration of facts tend to be better than decisions made solely by gut instinct.
  • Adaption.What gets adapted gets implemented.
  • Integrated risk management. A supply chain that is less prone to collapse tends to function better than one that is more prone to collapse.
  • Benefit tracking. What gets measured gets managed is a timeless truth.

It would have been nice to see more insightful drivers considered, but c’est la vie. The reality is that if every company made these six drivers part of their supply chain strategy checklist, the average supply chain would function much better than it does today.

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