Organizational Sustentation 58: Logistics

While Logistics should be Procurement’s best friend, as per our original damnation post, Logistics can be one of Procurement’s worst enemies. Remember, Procurement has to negotiate the deal with the best overall value, but Logistics is generally responsible for minimizing transportation cost. They may decide to change routes, which lengthens delivery time or puts the cargo at increased risk of theft, select a new carrier, with a lower quality of service and on-time delivery record, or stop using a carrier that will only deliver the organization the promised discount when it gets a sufficient volume of business.

And if Procurement can’t convince the C-Suite that Logistics should be a sub-department of Procurement, what is Procurement to do?

First of all, it has to make friends with Logistics and make sure that Logistics understands that it’s not there to step on Logistics’ toes but simply make the best decisions for the organization overall.

Secondly, it has to accept that Logistics might be better at identifying better carriers and negotiating lower rates and leave it to logistics to oversee the logistics part of any tender and make sure that each invited supplier submits their absolute best bid.

Thirdly, it has to take the time to explain that shifting transportation from the winning supplier to another supplier at a later time not only risks increasing costs (though missed rebates, stock-outs from delivery delays, etc.) but tarnishes the organization’s reputation, which means, in the long run, suppliers will not be as incented to provide their absolute best bid as they know that even if they are awarded the volume, they might get it taken away from them three months down the road. Then it has to get Logistics to agree that the winner, based upon the scoring formula or award methodology that Logistics was aware of (and agreed to) as a stakeholder, will be the winner for the length of the contract (unless the carrier fails to honour its commitment, which allows the organization to terminate the contract).

Fourthly, at review time, it has to work with Logistics to create the reports that demonstrate that Logistics’ decisions, and efforts, have not only decreased overall organizational costs but increased organizational value (through cost, and loss, avoidance).

Most organizational departments want to do the right thing, and Logistics is no exception, so if you work with them (and teach them best practices to enable them to do even better), instead of trying to work around them, you’ll have more success and the damnation they can cause might be minimized. (Or they might secretly hate your guts because they feel you should report to them and stab you in the back at first opportunity. You are in Procurement Hell, after all.)

Building Strategic Supplier Diversity: A Course Review

In our post earlier this week on what is diversity and what is in it for you, we noted that supplier diversity is a much talked about concept and while it is often misunderstood, it is a concept that needs to be well understood, and well executed, because not only is diversity necessary to supply certain public sector organizations, but it is often necessary for your strategic supply management program to succeed.

Chances are that your supplier management team has already elevated you most strategic suppliers to the best level of efficiency and productivity that you can expect without a much bigger contract award or more investment, and additional improvements in the supply chain are going to require new suppliers with new capabilities, which are going to come from new suppliers. But if you really want new capabilities, new ideas, and new innovations, you shouldn’t always go back to the same old supplier pool, and for most organizations, a diverse supplier pool is not the same supplier pool.

But how do you get a diverse supplier pool? You start with a strategic supplier diversity plan, get executive support and budget, and work hard to identify, select, and train diverse suppliers to serve your organization. And how do you build a good supplier diversity plan? With preparation, and, most importantly knowledge. But where do you find that knowledge, especially when many organizations pronounce the benefits of good supplier diversity but don’t provide you much information on how to get there. And it’s not a subject covered much in Universities and Colleges that still teach classic operations research programs. But that’s where organizations like Next Level Purchasing come in. Next Level Purchasing’s latest offering is a course on Strategic Supplier Diversity that not only explains what it is, but how to define and put a successful multi-tier supplier diversity program in place.

The course, which defines a 5-level maturity model for supplier diversity initiatives, calculations for diversity ROI, a 5 step process for maximizing diversity value, benefits of automated supplier diversity tracking, how to verify a supplier is diverse (and not just diverse on paper), and implementation steps, also tackles the notion of multi-tier supplier diversity, which goes well beyond what most articles and papers address and this is where the full value of diversity shines.

While there is value in first tier supplier diversity, such as new ideas, capabilities, better service, and cultural comfortability, at some point, the benefits the diverse supplier can bring on its own will wear out. The supplier will grow, reach its potential, and level out in terms of new value. It will still be minority owned, and still be diverse on paper, but the diversity value it brings beyond that will be minimal. But if the diverse supplier uses diverse suppliers, it will have a constant supply of new ideas, capabilities, services, and cultural influences that will help it constantly improve, which will help you constantly improve.

But it’s not easy to craft a program that will not only be successful within your organization, but flow down into your suppliers and successful in their organizations. It takes a depth of understanding, a great deal of communication, a well constructed policy and guidebook, and internal and external training — and all of this communication, documentation, and training has to be expertly assembled and delivered, which is hard to do if you’ve never done it before – and chances are you haven’t. Senior positions in supplier diversity have only started to materialize over the last decade and the number of experienced diversity managers and executives with experience successfully creating and delivering multi-tier diversity initiatives are few and far between, so you will have to do it yourself, and to do it right, you will need training.

Fortunately, NLP’s new course on Strategic Supplier Diversity, part of their upcoming SPSM4 certification, is very well designed, thought out, clear, and even actionable in its x-step programs and is there to help you understand what you need to do, why, and how best to accomplish it. This is one course on the subject that SI can confidently recommend. Check it out and you will be one step closer to building your own multi-tier diversity program that will rival those of the best Global 3000s.

Geopolitical Sustentation 33: Taxation

As we stated in our original damnation post, taxation may be the only certainty left (especially if the futurists who think that cybernetics will eventually allow us to preserve our mind and live forever are right). Even if your current government(al system) fails, a new order will rise up and, like every order that has come before, in some way, shape, or form, it will tax you.

And, as clearly pointed out in our original post, taxation makes it nearly impossible to answer the ultimate sourcing question: what is the lowest cost of ownership and the best overall total value. When we source according to total value management, we want to maximize the value to cost ratio — but this can only be done when we understand the cost.

And when so much of the cost is taxes — sales taxes, export taxes, import taxes, special surtaxes, state or municipal taxes on top of federal sales taxes, and so on — and when all of these taxes can change almost overnight, how do you answer the ultimate sourcing question? For example, some countries in South America change their import tariff codes twice a week. Taxes generally change when consortiums or labour groups cry foul when a market is flooded with cheaper goods from a foreign market or “buy at home” lobbyists get upset that the best products are being exported and stir up a fuss.

When a 10% duty today can be a 30% duty tomorrow, how do you build accurate cost models that allow you to create three year plans and cut three year contracts? The answer is, you don’t. So what do you do?

Gather a lot of market intelligence and analyze it. Taxes for most of the products or services you are buying are usually going to fall into one of three categories:

  • stable
  • trending, with significance confidence as to approximate future prices, up or down
  • changing unpredictably

If the tax rate is stable, then the organization can take confidence that it will most likely be stable for the life of the contract and put a tax increase in the low risk category and, more or less, ignore it unless an event occurs or information is obtained that something might change.

If the tax rate is trending up or down, then you can do what-if analysis at different tax rates defined as now, 6 months, 1 year, 2 years, contract length to see at what point the lowest cost or highest value buy tips to another market and if that will happen in the first half of a contract period, work with a potential supplier in a market with a stable or lower tax rate to see if there are other cost reductions that would make the other supplier a lower cost over the expected contract length.

If the tax rate is unpredictable, and could increase significantly to a point where the buy would cost considerably more than the next lowest cost buy or cause considerable financial harm to the organization, the organization should consider if there are sources of supply that would avoid the tax rate entirely. If not, then the organization has to figure out some sort of hedging strategy that would allow it to profit financially from the tax increase to cover the increased costs of supply. And that should be left to the financial pros — but it’s good to know when they should be trying to work their voodoo and when they shouldn’t.

Supplier Diversity: What Is It and What Is In It For You?

Supplier diversity is a much talked about and much misunderstood concept in North America. In the United States in particular, suppliers to (big) public sector organizations need to either be diverse or themselves use suppliers that are diverse to meet necessary requirements to supply the (big) public sector organizations.

What does this mean? It means that the supplier must meet a definition of diversity to the public sector organization (government body, council, etc.). What is this definition? Typically, it must be “minority owned”, where minority is often defined as “women owned” or “non-caucasian owned”, or “veteran owned”, but some organizations, especially those in the private sector that have adopted their own diversity programs and definition of diversity, also include “LGBT-owned” or “disability owned” or other definitions that are not “white male caucasian owned”.

But why would you want a diverse supplier? Especially when such a supplier is, as the saying goes, smaller, more expensive, and less capable. Because while many diverse suppliers are smaller, and often look more expensive at a first glance than larger suppliers, they are not necessarily more expensive. The value of a supplier is more than the unit cost of each product or hour of services. It’s the value the supplier brings. Sometimes diverse suppliers bring innovation, cultural diversity, and increased productivity as employees work harder to embrace the new methods and cultural compatibility (because sometimes in a non-minority owned business, the factory has a large number of minority employees).

Plus, diversity can be a great boon to your PR organization. While the diversity movement was not well accepted in the beginning, now it is not only well accepted but appreciated by consumers who find that the companies who practice diversity both in their organization and their supply base are more responsible and deserve more of their dollars.

While the goal of a diversity program should never be cost savings, diversity can bring a lot of value to an organization. New suppliers, even smaller ones, can bring new technologies and new ideas. It can give you access to a new supply base that can reduce overall supply chain risk. Diverse suppliers might use newer methods and technologies that provide you with near real-time information on order status, project completion, or other data elements that you care about. They might be more willing to treat you as a customer of choice and work with you on joint innovation projects or give you first access to production runs or new capabilities. They might be more likely to themselves use diverse suppliers, allowing you to claim a supply chain with multi-tier diversity at home and abroad.

Diverse suppliers can also give your senior employees and management options for mentoring, as smaller diverse suppliers can often use the guidance as they grow into larger minority-owned suppliers to support your future business needs, access to a pre-qualified community of diverse suppliers, as they will already have checked out the diverse suppliers they use, and more PR, as they will be just as happy to issue a press release about your organization and their selection for a project as your PR team will be about releasing a press release about how great your organization is doing in diversity and how socially responsible it is.

But building an effective supplier diversity program that ensures that your organization will set, and hit, appropriate diversity targets in terms of spend and suppliers, and achieve the benefits diversity has to offer, is no easy feat. But that’s the subject of our next post.