Category Archives: Supply Chain

While You’re Celebrating Your Thanksgiving in the U.S.

Think about what you can do to make the rest of the world, including the 870 Million people in the world who are chronically under-nourished, thankful as well.

As Procurement Pros, you have a lot of control over the global food supply whether you realize it or not. Money does talk, and with enough pressure, the supply chain will walk to your marching orders. And if those orders are appropriate, maybe we can prevent half of the food being produced going to waste.

According to The Food and Agriculture Organization (FAO) of the United Nations, roughly 1/3rd of the food produced in the world for human consumption every year, approximately 1.3 Billion Tons, gets lost or wasted — due to losses during harvesting, storage, transport, and processing. This loss is almost four times what would be needed to feed all of the chronically under-nourished people in the world, and part of the reason food reserves are at an all time low.

And to make matters worse, the growth, and partial harvesting, storage, transport and / or processing produces 3.3 Billion tons of CO2 emissions and wastes precious water and energy resources. So, not only are people starving when there should be enough food, but we’re wasting limited fresh water and energy in the production of the food that is being wasted.

In developing countries, 40% of this loss is occurring at post-harvest and processing levels due to financial, managerial, and technical constraints in harvesting techniques as well as storage and cooling facilities. Additional infrastructure investments would solve the financial and technical issues, and getting smart people on the ground would solve the managerial issues. If a large grocery chain decided to invest on the ground, and reduce loss from an average of 35% to 10%, it would effectively increase production by almost 40% and lower the cost per unit by almost 30%. (Production levels go from 65% to 90%. 40% of 90% is 36%. 30% of 90% is 27%.) This is not a hard problem to solve. And it wouldn’t take too long before the grocery chain saw ROI.

In developed countries, more than than 40% of losses happen at retail and consumer levels. Faster transport, better storage, and better inventory planning could have a big impact at the retail level. The only thing a Procurement Pro can’t really control is consumer waste.

So think about what changes you can make in your organization to minimize food waste and encourage investments on the ground in the regions, and on the farms, you depend on. And when costs go down, your organization will have something to be thankful for too!

Can Six Drucker Questions Simplify a Complex Supply Chain? Part II

A recent post on the HBR Blog Network on Six Drucker Questions that Simplify a Complex Age poses us with a interesting inquiry — can they simplify a complex supply chain? After all, these are questions out of Drucker’s writing handpicked by Rick Wartzman (Executive Director of the Drucker Institute at Claremont Graduate University), not out of Drucker’s mouth (as Drucker died 8 years ago), and given the recent turmoil in the economy, Drucker might choose different questions to lead us back to the road to recovery (and he might not).

Getting straight to the point, as an existential discussion on what Drucker may or may not ask today doesn’t help us much in the real-world of real-time supply chains, we will skip the philosophical debate and jump right into a discussion of the last three questions, continuing in the same vein as yesterday’s post.

  1. What Are Our Ideas to Try to Do New Things, Develop New Products, Design New Ways of Reaching the Market?
      SI agrees that this would be near the top of Drucker’s list as innovation is becoming more imperative for an organization to survive every year. It’s often the difference between success and bankruptcy, even for a Fortune 500, as today’s fickle consumer can often change the course of a global corporation in just a few years.
      This question is especially imperative for Supply Management that needs to get involved as early as possible in the NPD cycle to not only help identify lower cost suppliers or materials, but the most lucrative markets that will enable to organization to take advantage of economies of scale. Furthermore, supply management technology is considerably ahead of where it was a decade ago, even though most Supply Management organizations are still running on the same ERP they were running on a decade ago, and Supply Management needs to ask not only how it can catch up, but get ahead of the curve and become best-in-class sooner rather than later. Even the most laggard of the Global 3000 can become best in class in as little as five years with the right vision, plan, and change management methodology — but without the right vision, plan and change management methodology, that same organization is likely to be even further behind in five years (if it is still solvent).
  2. Who In This Organization Depends on Us for What Information?
      SI agrees that Drucker would definitely ask this question in a detailed assessment of corporate performance, but SI believes it would be in the context of who in the organization should depend on us for what information. Everyone has a role to play, but in your average organization, not everyone is playing the right role, or even understands what the roles should be!
      For example, Finance typically depends on Procurement for visibility into cash commitments, but does not depend on Procurement for Working Capital Management (WCM) guidance. Finance should be depending on Procurement for WCM guidance as only Procurement has the visibility into the supplier’s cost, financial viability, and expected cost of capital given their financial stability and local market conditions. Thus, if cashflow is limited and AP can’t take advantage of all of the early payment discounts / dynamic discounts at its disposal, only Procurement is in the position to truly determine which discounts are best for the organization in the long-term. For example, sometimes it’s better to take a lower discount if it means paying a supplier that would otherwise have to borrow at 20% per annum, as this could allow the supplier to reduce its operational costs and pass those savings back to the supplier through lower prices at contract renewal time. In comparison, paying a supplier with a cost of capital of 6% per annum early is not going to help that supplier much, which means that the one-time discount is all the value the organization gets.
  3. What Would Happen If This Specific Task Were Not Done At All?
      SI agrees that this is another inquiry Drucker would ask when doing an operational review, but doubts that it would be top of the list. SI believes that the first question would be along the lines of what would happen if we did not supply this product or service, from a market perspective and from an organizational perspective, and then when that understanding is gained, and a commitment to the product or service is confirmed, the individual tasks that are currently involved in the production and/or delivery would be questioned.
      Of course, from a Supply Management perspective, the first question is pretty easy. Either other units would absorb the minimal necessary functions, and probably do them poorly, or the company would return to the age of end-to-end siloed production where it did everything from mining the raw material to delivering the final product to the store shelves.
      The question posed by Rick is the critical question and needs to be asked of each project and task undertaken by Supply Management. If the answer is “not much”, the task or project is not value-add and probably should be dropped in favor of a task that is (more) value-add. For example, let’s take a buyer who notices that an evergreen contract for widgets, which has been in effect for five years, is coming due, which states the organization gets a 10% wholesale discount off of list price. Let’s also say that the average price increase has been about 3% per year, even though market indexes have only been going up about 2%. At a first glance, there might be a savings opportunity of 5% through re-negotiation or re-sourcing, but let’s also say that demand for the widgets has fallen 50% over the past five years, and that the total annual spend is only 2 Million of the 500 Million of Spend Under Management (SUM). Let’s also say that the organization only has the resources to tackle about 30% of the spend categories each year. In this case, if the buyer were to ignore this 0.02% savings opportunity on SUM and instead focus on sprockets, which has tripled in demand since the last contract was cut and which represents a 20 Million category where current prices are estimated to be at 3% above best price, she might be able to obtain a 0.12% savings on SUM instead. In other words, if the task of sourcing the widgets was not done at all, the organization would be better off (by a factor of 6)! Successful Supply Management always focusses on the most strategic opportunity first!

In summary, SI believes that these questions can help a Supply Manager tame the complexity of today’s Supply Chain by focussing on what matters and ignoring what doesn’t. They’re not a cure-all by any means, but insight never hurts!

Can Six Drucker Questions Simplify a Complex Supply Chain? Part I

A recent post on the HBR Blog Network on Six Drucker Questions that Simplify a Complex Age poses us with a interesting inquiry — can they simplify a complex supply chain? After all, these are questions out of Drucker’s writing handpicked by Rick Wartzman (Executive Director of the Drucker Institute at Claremont Graduate University), not out of Drucker’s mouth (as Drucker died 8 years ago), and given the recent turmoil in the economy, Drucker might choose different questions to lead us back to the road to recovery (and he might not).

Getting straight to the point, as an existential discussion on what Drucker may or may not ask today doesn’t help us much in the real-world of real-time supply chains, we will skip the philosophical debate and jump right into a discussion of the first three questions.

  1. What Does the Customer Value?
    SI agrees that regardless of what has happened since his death, Drucker would still be asking this question — and it would probably be the first question out of his mouth in any business discussion. The tighter times get, the more the customer focusses on what they really need where necessity is concerned and what they really want where discretionary spending, which is limited in difficult economic times, is concerned. If the pie is small, an organization’s only chance of getting a piece of it is to be better at giving the customer what they want than the competition.
    This is a very important question for Supply Management as the Supply Chain should be designed to produce what the customer values, and only what the customer values — extra activity is non-value add and only adds cost to the chain (that Supply Management should focus on removing as soon as possible as that’s easy, instant, cost savings).
  2. What is our Business, and What should it Be?
    SI agrees that Drucker would still be asking this question, an in particular, the latter half of this question. If a customer values X and Y, and the organization is producing X when it could produce Y more competitively, and gain a larger market share, then it should probably switch to producing Y.
    This is another very important question for Supply Management as many Supply Management organizations are still focussed on cost savings when they should be focussed on value generation. Cost can only be taken out once. Value can be generated year after year after year by identifying products and features customers will pay more for and functions that will help the other organizational units do their jobs more (cost) effectively and increase the value those organizational units bring to the table.
  3. What is the Task?
    SI agrees that this is an important question, and would probably be asked by Drucker, but is not sure that this should be in the top 6 questions as SI does not think this question is a starting point.
    More specifically, SI thinks the first question should be What is the Goal?. The task, which is fuzzy in knowledge work, is better understood once the goal is well defined. Moreover, this is not covered by the last question. The last question simply helps the business identify what it should be doing (such as making sprockets and not widgets), not what it should be achieving (such as becoming the market leader in standard sprocket class AZ or the market leader in custom manufactured sprockets for the automotive industry). That’s where the goal comes in.
    In supply management, the task might be to source sprocket springs, but that’s not a clear task until a goal is identified, which could be reduce acquisition costs by 10%, which should be achievable based on current steel prices and supply demand dynamics or select a new strategic supplier who will jointly implement the a new spring production process designed to reduce steel requirements and environmental impacts, which will, in the long run, decrease costs by 25%. Once the goal is defined, the task is better understood and can be mapped out with a workflow and project plan.

Come back tomorrow when we will address the last three questions.

John Mavriyannakis on the Future of Procurement: Part II

In Part I, we described the 4 major trends affecting Procurement today that were identified by Deloitte in its research and consulting initiatives (and which have been addressed in publications that include “Supply Chain Strategy”, “Winning With Your Supply Chain”, and “Charting the Course: Why Procurement Must Transform Itself by 2020”) that were summarized nicely by John Mavriyannakis, a Senior Manager at Deloitte Canada (and the Practice Leader in Sourcing, Procurement, and Settlement), in his recent presentation on Empowering Modern Procurement that was given as part of the Coupa One Vision Roadshow in Toronto

Specifically, John Mavriyannakis identified the following four trends:

  • Margin Pressure
  • Supply Chain Risk
  • Government Regulations
  • Talent

As a result of these trends, it is clear that today’s supply managers need to:

  • control margin pressure,
  • mitigate supply chain risk,
  • stay ahead of changing regulations, and
  • win the war for talent.

But that’s not going to be enough for a Procurement organization to succeed in the long term in the dynamically changing global marketplace. If they wish to survive, Procurement and Supply Management organizations need to rethink mission and capabilities. Specifically, they need to:

  • get strategic
    and establish a formal organizational presence that ties metrics to company performance,
  • transition
    to re-aligned processes and responsibilities that focus on business outcomes,
  • task talent cross-functionally
    to enhance the procurement capability of the organization as a whole, and
  • tie it all to technology
    that blends service and management tools that are easy to use and that allow for the right level of control.

While keeping in mind that they need to get to the 2020 Procurement and Supply Management organization in just 6 short years (which is no easy feat given that the average transformation time that is required for a Global 3000 organization to become a world class Procurement organization, according to The Hackett Group, is at least 5 years). In 2020, Procurement, according to Deloitte, is going to (need to) be:

  • the keepers of the global supply and demand perspective,
  • the nexus of finance, operations, and supply chain,
  • risk forecasters,
  • the arbiter of risk vs. reward,
  • the value-generation unit that is the treasure trove of ideas, and
  • talent rich.

And SI fully agrees with all but the last of these predictions. In addition, it partially agrees with the last prediction that Procurement is going to need to be talent rich to achieve the goals that are set before it, but given the lack of investment in talent to date in the average Procurement organization, SI isn’t sure that the talent is going to be where it needs to be in 2020. Even though talent has been in the top three Procurement issues for at least the last three years, it’s still in the top three budget items that are cut every year in these tough economic times, even though a small investment in talent can lead to a (very) large return in savings in a Procurement organization. (For example, one of the first companies to certify their entire department with the SPSM designation offered by Next Level Purchasing, a 1 Billion furniture manufacturer, doubled their annual savings only one year after completing the certification on the department level. That’s a double digit ROI multiple in one year! Compare that to the 2X or 3X you might get from automating manual processes.) Basically, the most successful Procurement organizations in 2020 will be talent rich, but the average Procurement organization will be struggling at the current rate of training and talent induction into our space.

John Mavriyannakis on the Future of Procurement: Part I

John Mavriyannakis is a Senior Manager at Deloitte Canada and the Practice Leader in Sourcing, Procurement, and Settlement who recently gave a presentation on Empowering Modern Procurement as part of the Coupa One Vision Roadshow in Toronto. Through its regular CPO Surveys, CFO Surveys, and its Source-to-Procure experience across 1000+ projects for 300+ clients, which made it #1 in the Procurement Consulting provider in the global Procurement Consulting marketplace, Deloitte has built up a considerable understanding of the current state of Procurement [which it has captured in a number of publications, including Supply Chain Strategy (Deloitte), Winning With Your Supply Chain (Deloitte), the CFO Surveys, and Charting the Course: Why Procurement Must Transform Itself by 2020 (Deloitte)].

According to Deloitte, Procurement today is dealing with 4 major trends, which are going to continue for the foreseeable future:

Margin Pressure
Margins are getting tighter and organizations need to be looking at least ten years ahead to determine future (labour) arbitrage opportunities, which are becoming increasingly more difficult to leverage as emerging economies emerge and produce middle classes with higher wage expectations (and transportation costs increase to make up the difference). In addition, the fact that price volatility has increased 57% in the last 12 months hasn’t helped matters any.

Supply Chain Risk
Due to the increasing interdependence and extensiveness of supply chains, risk is increasing, as illustrated byt he fact that 85% of surveyed organizations experienced at least one large scale disruption in the last 12 months. The increased risk is a big issue given that companies announcing supply chain disruptions had a 30% lower supply chain return compared to the benchmark group.

Government Regulations
Regulatory compliance issues have resulted in high-profile, high-cost shutdowns in recent years and with 2/3rds of CPOs admitting that their companies are only in the early stages of compiling information required to meet the recent SEC reporting changes, this is not a good state of affairs as the SEC reporting requirements are only one of a plethora of reporting requirements an international company that is importing and exporting on a daily basis around the globe needs to be compliant with.

Talent
Given that 76% of CPOs feel that their staffs’ skills need improvement or have a significant gap, talent is on the radar in a big way. And not just any talent — with 91% of the 60% of CPOs planning to change their operational model announcing a shift to center-led or centralized supply chain operations, this means that over half of the talent that is required needs to be effective in these type of Supply Management models.

So what does this mean? We’ll discuss tomorrow in Part II.