Monthly Archives: May 2011

Cornerstones of Strategic Procurement

Yesterday I pointed you to Bob’s post on Smart Working Capital Management where he pointed out the pitfalls of being preoccupied with DPO (Days Payable Outstanding) and how a DPO focus can be counter-productive. Specifically, the requests for DPO extensions that tend to result from the DPO focus tend to leave untested the willingness of suppliers to entertain aggressive discount payment terms in exchange for early payment by the customer.

Today I want to remind you of a post Bob wrote back in early January that you might have missed if you returned late from the Christmas vacation. In the evolving landscape of low cost country sourcing, Bob outlines the three fundamental requirements of strategic procurement:

  1. fact-based approach based on a thorough understanding of current reality and anticipated trends
    that should be based on whatever data you have available
  2. an investment in the appropriate skills and enough of the right resources to develop and execute the strategies
    including the right technology to perform the necessary analysis
  3. constant monitoring and adjustment to optimize results in an ever-changing world
    that should include simulation and modeling software where appropriate

For more information on strategic procurement, be sure to check out Bob’s new book on Next Level Suppply Management Excellence, hitting the (e-) shelves on June 28, 2011.

Listen to Bob and Avoid the Pitfalls of DPO

In a recent post over on the Supply Chain Management Review on smart working capital management, Bob points out the pitfalls of being tempted to be preoccupied with DPO (days payable outstanding). While the objective to match DPO up with DSO (days dals outstanding) is an admirable one, as this would balance the cash cycle time tied up in accounts receivable (waiting for your customers to pay you) with the cash cycle time contributed by supplier payment terms, this can be counter-productive. Since this usually results in requests for DPO extensions, it leaves untested the willingness of suppliers to entertain aggressive discount payment terms in exchange for early payment by the customer. From a balance sheet perspective, cost savings are always better than favorable DPO terms. Plus, if the organization can negotiate aggressive discount terms from its supplier(s), it can then offer its customers discount terms which could speed up their payments to the organization.

If the organization speeds up its payments to its suppliers and its customers speed up their payments to the organization, the net result is not only a shorter cash cycle time, but, as a side effect, the payment cycles will start to line up — allowing Procurement to accomplish its original goal of balancing DSO and DPO while saving money. That’s a win-win that all parties at the table can win with. So listen to Bob and avoid the pitfalls of DPO preoccupation.

Benefits of Coopetition

As this recent HBR post on how to “make your competition work for you”, even if you are afraid that your allies will steal your business, in today’s economy, a creative collaboration with your biggest competitor may be the best opportunity for revenue and survival.

They key to survival is coopetition — finding a way to partner with your competitor in such a way that both parties can substantially benefit from their shared resources without stealing customers or damaging credibility. While easier said than done, there are advantages.

  • Best of Both Creates New Markets
    If your strengths differ from your competitor’s strengths in a complementary way, a strategic combination of your solutions can win in a new segment of the market which neither of you could enter.
  • Economies of Scale
    If companies work togehter on business segments where they can minimize costs but not jeopardize unique attributes, they can share costs and economies of scale.
  • Opportunities for Upsell
    If a customer would benefit by having another product that you sell, or that your competitor sells, there will be an opportunity to upsell the customer at a later time.
  • Integration for Critical Mass
    If your competitor has a product your customer base also wants, it can help you get critical mass a lot faster.
  • Cross-Endorsement
    If your competitor isn’t directly competing with your market, then you can refer business to each other without losing customers.
  • Potential Investor
    Once credibility and value has been established, a strategic partnership can extend to a financial relationship. They could have the finances you need to launch more NPD. Or a merger could allow for economies of scale that will free up even more money for NPD and marketing.

And once both companies are working in sync, there will be the following benefit:

  • Supply Chain Streamlining
    You can partner on procurement, logistics, and NPD. And, if you’re lucky, you can conquer your space like Apple conquered theirs through a best-in-class supply chain.

For More Savings, Turn Your Sights on IT

Every organization has it’s sacred cows, be it legal, marketing, or IT. And every head of the sacred cow organization says that Procurement couldn’t possibly help it save money because of the nature of the relationships it needs to maintain and the need for highly specialized, expensive skills. And while this is true to some extent, any automated discovery program that does X, Y, and Z may do the trick; printing is not a highly skilled and specialized operation; and most hardware is commodity these days, so Procurement does have a role to play in reducing cost in each of these organizations.

And now that many software systems are becoming commodity and the cloud is making IT a utility, Procurement has an increasingly important role to play, especially for “Factory IT”. As per this recet McKinsey Quarterly article, which is well worth the read, on “reshaping IT management for turbulent times”, IT can be broken down into “Factory IT” and “Enabling IT”. “Factory IT”, which composes the bulk of an organization’s IT activities, is amenable to standardization, simplication, scale, and outsourcing to increase efficiency and reduce cost — and a perfect category for Procurement to help IT identify significant cost savings. While “Enabling IT”, that helps organizations respond more effectively to changing business needs and gain a competitive advantage through innovation and growth, may need expensive resources with rare skill sets or custom built systems, Factory IT can often be bought like a commodity.

So don’t overlook IT. It’s ripe with cost savings.

The AchieveGlobal Model for an Innovation Culture

A recent article over on Chief Executive outlined “The “Six C’s” Model for Building A Culture of Innovation” from AchieveGlobal. The model was created by examining the practices and behaviors of the Boston Consulting Group’s top 100 innovative firms around the world and is worth a review.

  1. Collaboration
    Innovation now requires the collaboration of large, diverse groups of people. Not only has the size of research teams grown by 20% per decade over the last 50 years, but a paper is six times more likely to get at least 1,000 citations if it comes from a team, which should be made up of a socioeconomic mix of people at all levels up and down your supply chain, from different departments, functions, divisions, brands and plants.
  2. Customer Centric
    A culture of innovation requires a deep commitment to understanding customers’ expectations and providing them with value. In addition, it looks for user innovation and situations where users use products for unintended purposes or refine the products for particular needs.
  3. Context Rich
    Leaders in innovation put lots of effort into the development of formal and informal systems to collect and share information throughout the workforce.
  4. Curious
    Innovative leaders encourage their employees to question authority, to question their assumptions, to ask why, why not and what if? Innovation leaders give their employees time to research, explore, and even wander down blind alleys.
  5. Confidence Focussed
    Businesses that excel at innovation actively increase their employees’ capabilities and self-esteem. Innovation requires the confidence to explore, experiment, push-through the darkness, and succeed.
  6. Challenge Culture
    Innovative companies focus on meeting challenges and aiming for new heights. They are never content with good enough or solving today’s problems. They strive for excellence and solutions to tomorrow’s problems.