Do We Have to Send CPOs to Disney for Training?

According to Steve Hall of Procurement Leaders, who was busy blogging while most people were off on summer vacation, the CPO’s challenge is to re-imagine supply chains. Traditional transformation is just not enough – you have to come up with radically different designs. You have to do for supply chains what Walt Disney Imagineering does for Disney – blending imagination and engineering in a unique way to create unique experiences with their creations.

It seems that according to Steve, rapidly escalating issues such as material shortages, commodity price volatility, increasing government regulation, and financial risk in the supply base cannot be tackled by current supply chains unless they are suitably re-imagined. I’m not sure I entirely agree.

It’s not that I disagree that CPOs will need more imagination, and more engineering skills, in the future, but we must remember that:

  • material shortages happen all the time as a result of natural disasters, unexpected spikes in demand, etc.
  • commodity prices go up and down as a result of shortages, or expected shortages, or expected surpluses
  • government regulations are never-ending – going back decades
  • financial risk has always been there – it’s just at a high-point now due to global economic instability

In short, these risks are not new. They’ve been around since trade began, we’ve had, and developed, methods to deal with them since trade began, and we’ve survived. The only difference now is that all four risk categories have simultaneously hit (near) all-time highs — and the situation is only expected to get worse. Plus, whereas shortages always disappeared in the past when production ramped up, in some categories, either due to space restrictions, climate issues, or production issues, the shortages are not going to go away any time soon. In some areas, there is only so much suitable farmland; in others, the climate is no cooperating, and others still, we can’t mine the materials as fast as we need to concern them. So, in these cases, we are going to have to engineer products to use less of these materials, or alternate materials, but this is as much of an engineering challenge as a supply chain challenge (and proof that Supply Management needs to be involved earlier in product development and closely collaborate with the rest of the organization).

In short, CPOs will need to use their imaginations more often and be more creative in their solutions when backed into tough corners, but it’s not time to throw away the time-honoured supply management toolkit just yet. We’ve faced many of these problems before (even if it has been a decade or two), and many of the solutions are still relevant.

Is Your Supply Chain OCF? Part II

In Part I, we asked if your supply chain was OCF, and by OCF we meant Operating Cash Flow and not Obsessive Compulsive Finance, although you have to be the latter in order to achieve the former. We explained that, at least from a working capital management viewpoint, it is a better measure of financial health than other financial measures. We finished with a question – How Do You Impact It?

First, let’s look at one detailed formula:

  1. revenue as reported
  2. – (increase in) operating trade receivables
  3. – investment income
  4. – other income that is non cash and/or non sales related
  5. – costs of sales
  6. – all other expenses
  7. + (increase in) operating trade payables
  8. + non cash expense items
  9. + financing expenses

Based on this formula, supply chain can impact:

  • 1. Revenue as Reported
    by creating new value-added services, creating enhanced versions of a product that can be sold at a premium, etc.
  • 2. Receivables
    by creating agreements that allow for faster collection, by factoring, etc.
  • 5. Cost of Sales
    by reducing product and service costs, reducing inventory costs, reducing transport costs, etc.
  • 6. All Other Expenses
    by reducing indirect costs, SG&A overheads, etc.
  • 7. Payables
    by taking advantage of early payment discounting, by reducing amounts owed through reciprocal trade agreement, etc.
  • 9. Finance Expenses
    by taking advantage of market knowledge to obtain best rates, by selecting appropriate currencies (to hedge against), etc.

And the impact can be measured as follows:

Supply Chain Contribution to OCF / OCF

where Supply Chain Contribution is, technically (where all projections are without Supply Chain Contribution):

  • Actual Revenue – Projected Revenue +
  • Projected Receivables – Actual Receivables +
  • Projected Cost of Sales – Actual Cost of Sales +
  • Projected Other Expenses – Actual Other Expenses +
  • Actual Payables – Projected Payables** +
  • Projected Finance Expenses – Actual Finance Expenses

** while this is technically correct from a Finance view who want the organization to hold onto cash longer, from a Supply Chain view it’s usually stupid, as SI has argued for years, because your cost of capital is often lower than that of a supplier and the goal is to lower overall supply chain costs. In other words, the improvement in payables is probably coming at a cost of a greater improvement in cost of sales.

In other words, if Supply Chain Contribution to OCF was 400K and the OCF was 2M, then supply chain contributed 20% and that’s proof in the pudding that supply chain has value.

Is Your Supply Chain OCF? Part I

Is it? Well, if it’s any good, it’s probably Obsessive Compulsive about Finance, but that’s not what I’m referring to. By OCF, I’m referring to the Operating Cash Flow Metric that some are claiming is the right way to measure supply chain contributions to the organization, and, as such, the measure that should be used in place of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), ROI (Return On Investment), or ROIC (Return On Invested Capital).

Operating Cash Flow refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investments in securities. The IFRS (International Financial Reporting Standards) defines operation cash flow as cash generated from operations less taxation and interest plus investment income received less dividends. The calculation of cash generated involves determining cash collected from customers and subtracting cash paid to suppliers.

The push for OCF contribution, specifically, the measure of how much additional cash was generated or how much cash payment was avoided, as a measure of supply chain success by a few pundits (including David Schneider) is due to the fact that it is a more accurate measure of how much cash a company has generated (or used) than traditional measures of profitability such as net income or EBIT. (Wikipedia)

The rationale is that other measures are (much) more easily manipulated. For example, a company with numerous fixed assets (factories, equipment, etc.) would have decreased net income due to depreciation, but since depreciation is a non-cash expense, the net income amount is not a true measure of the cash position of the company. In addition, since a company can choose to recognize receivables before the cash is received, traditional balance sheets and resulting EBIT(DA) are also not accurate measurements of the true cash picture. And since companies need cash to run (as pesky people want to be paid), cash flow is often the true measure of company vitality.

OCF allows a company to get a much better grip on its working capital than other measures, and since Supply Chain revolves around working capital, the metric makes sense. So how do you impact it?

Stay Tuned for Part II.

A Managed Relationship is a Measured Relationship

I have to agree with the author of this recent piece in Inside Supply Management on “Building Relationships” who said that

if your organization isn’t seeking internal customer feedback – and using it as a learning tool – you may not be as strategic as you think.

As Thomas Nash, of First Line Consultants, says, “Supply management doesn’t own internal stakeholders’ budgets, we don’t own their spend and we don’t run their business unit/function.” The reality is that “Supply management provides stakeholders with fact-based proposals on how to better manage their spend based on reality, our expertise and best practice.”

This means that unless Supply Management is providing stakeholders with the proposals they need, in the manner they need, and the support to execute those proposals, it will not be doing a good job of managing indirect spend in the organization.

So how do you measure internal stakeholder satisfaction? The article gives some good tips to get you started:

  • Involve Staff
    Involve your staff in the process of creating the survey, choosing a process to deliver it, and a set of metrics to measure it.
  • Consider Timing
    The evaluation process should be done annually, but not during budget planning or vacation season. You need as many responses as possible, and they need to be good, thoughtful, responses.
  • Watch Your Language
    Use language the stakeholders can understand, not technical Supply Management terminology. In particular, when surveying legal, use their language; when surveying finance, use their language; and when surveying marketing, don’t be afraid to use a few buzzwords.
  • Be Patient
    The relationship-building and subsequent evaluation/measurement process won’t happen overnight. It will be a multi-year process, but with effort, the organization will get there and the results will improve year-over-year.
  • Share Results
    Share what you learned and the changes you intend to make as a result of the assessment. Do so quickly, and make sure the identified changes get implemented in a timely manner so the stakeholders can see that Supply Management is endeavoring to improve their service levels to the rest of the organization. This is how you become the trusted go-to department in the organization and get indirect spend appropriately managed.