In Part I.i we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. Then in Part I.ii we reviewed the seven-step process that an organization could follow to get from where it is to where it needs to be. This post will discuss two of the three detailed case studies presented in the book that illustrate why an organization wants to transform itself into a best in class organization.

In 2003/2004, when Colgate-Palmolive’s stock dropped 25% on an earnings warning (per share) that was 10 cents less than what the analysts expected and when Unilever’s net income was only half that of some of its peers, Proctor & Gamble’s (P&G) stock price had double its 2000 value and cumulative sales over the past three years had increased 30%. P&G was the quiet giant that could, and did.

How did P&G succeed in a market when so many of its peers where struggling? A major component was an important, but low key, story of supply chain creativity that not only lowered costs but dramatically increased access to external technology.

P&G built a Global Product Supply organization in the late 1980s that included purchasing, manufacturing, engineering, and logistics and organized its purchases on a global basis in 1992 — before its giant business units were organized globally. Purchasing staff members were embedded in the global business units to insure a close alignment with corporate goals. Supply Management was a corporate priority because it impacted 55% of the company’s revenue stream and up to 70% of product costs in some business units. A 5% improvement in costs translated to a 20% improvement in process.

P&G cautiously implemented electronic technology solutions in the dot-com era and today is a leader in optimization and innovation. It built 20 communities of practice internally to make sure technology ideas were shared internally. It launched the Connect-and-Develop program to boost access to innovation from outside sources. P&G scientists and commercial professionals work as equals on product development teams. And it has a tool called Navigator that allows it to view and manage all of its interactions. (Think of it as a drill-down dashboard on steroids.)

P&G was an early adopter of e-auction and strategic sourcing decision optimization and saved over 300 Million with expressive bidding and optimization back in 2003-2004. And, due to its advanced supply management capability, P&G estimated that its acquisition of Gillette would generate 14B to 16B in incremental shareholder value, with 10B to 11B, or 63% to 79%, coming from cost structure improvements alone.

The next case study that we will review is that of United Technologies Corp. (UTC) In 1994, the new CEO saw the need for improved perfomance in UTC. A believer in the power of cost-driven enterprises, the new CEO hired a new VP of Supply Management in 1996 to define the future of purchasing at UTC.

In the beginning, the new VP was focussed on cost reduction. He appointed a director of worldwide sourcing, embraced internet auctions, and outsourced tactical functions of general procurement. From 1996 through 2001, UTC sourced more than 2.5B of goods and services through FreeMarkets and achieved savings in excess of 18% on this spend alone.

UTC was the first customer of IBMs new procurement services offering that included strategic sourcing consulting, purchasing services, and IT systems support. Experienced IBM buyers became consultants on UTC supply teams and helped them build data warehouses, identify suppliers, study markets, and develop processes for continual improvement. Then IBM installed an automated purchasing system, req-to-check, that allowed requisitioners to order approved goods (such as desktop computers) on their own, subject to approval rules based on level of authority. Purchased orders went through the system and were automatically dispatched to suppliers who issued electronic invoices upon shipment. The new system was capable of generating detailed spending reports by group and requisitioner and helped UTC stop maverick buying in its tracks. Soon inventory levels were reduced as users found faith in the process. Not only did compliance create savings, but the speed of transactions improved cycle time.

After delivering significant savings in the first five years of its focus on supply management, in 2001 UTC embarked on phase 2 of its supply management transformation which takes a more strategic approach to cost reduction and value creation. Whereas phase 1 focussed on automation, phase 2 focussed on rethinking the business rules and processes to find greater savings. The goal of phase 2, called UT500, is to orchestrate cross-functional groups to cut inventory, standardize, and save money through a combination of big and small ideas, including lean. The program reached its 500M savings goal in just two years, one year ahead of schedule and in 2004 was on track to save 1B in just four years. In other words, your organization has 1 Billion reasons to embark on a supply management transformation, all of which will make your CFO, CEO, and shareholders very happy.

For deeper insights into how P&G and UTC achieved their supply management transformation and, collectively, saved billions of dollars, as well as how Chrysler succeeded while GM failed, I strongly urge you to (re)read the brilliant case studies in Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management. It’s worth a review while we wait for Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28.

In part I.i, we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. We’re doing this because, even if you have read it, it doesn’t hurt to read it again and brush up on the foundations before starting your Next Level Supply Management journey.

The authors outline a seven-step process to get from where the organization is to where it needs to be that starts with goals and ends with transformation. And it goes something like this:

1. The Right Goals

The right goals are SMART: specific, measurable, attainable, relevant, and time-sensitive and they must focus on real cost savings and value generation, not the cost per purchase order processed or the cost per FTE (which are tactical and send the wrong message — especially in the latter case as Hackett data demonstrates that world-class Procurement organizations tend to have the highest costs per FTE).

Targets should be mid-term, and not immediate, as true value comes from transformation, not one-time savings from a reverse auction because the supply-demand dynamics temporarily shifted in your favor. The authors recommend three-to-five year cost reduction targets that are mutually owned by Procurement, Manufacturing, Engineering, R&D, IT, and/or Finance as true transformation requires significant, up-front, investment in capital, brainpower, and personal commitment. However, considering that some organizations have seen 50:1 ROIs, the up-front preparation and investment will be worth it. In addition, the organization should start with three-to-five initiatives at first, and then add more only when the first set are under control. And it should avoid following in the footsteps of Jack Welch or Ignacio Lopez de Arriortua whose hard-nosed approach to cost reduction ultimately backfired in the end.

2. Process Integration

Competition is no longer company-to-company but supply chain -to- supply chain. As a result, a loosely coordinated group of companies focussed on the optimization of their individual objectives can not possibly compete with a supply chain operating as a team. A successful supply chain integrates each element of supply, design, production and distribution end-to-end. All of the stakeholders, both internal and external to the company, need to be involved in design and delivery. This is why its so important to have partnerships with strategic suppliers focussed on mutual benefit, and not arms-length hostile arrangements that result from a focus on hardball negotiations and perpetual price reductions on the supply side.

Within the company, the C-Suite, Sales & Marketting, R&D, Operations Management, Product Support, Finance, and Supply Management organizations must all be aligned and represented on the cross-functional team that manages each category. Each will have different primary goals, but the goals will be aligned with the written strategic sourcing plan, which will be aligned with the corporate strategy and objectives. And the right suppliers must be involved. As per a Wharton study quoted by the authors, one recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting 30 Billion annually. If that’s not a good enough reason to integrate, I don’t know what is.

3. The Right Leader

The CPO must be able to lead well and work with the team. A lone wolf will not be able to handle the challenges of today’s purchasing organizations, which constantly change. The leader must be able to attract top talent and should possess a reasonable subset of the following skills:

• cross-functional experience
• credibility with Finance, IT, and Operations
• experience interacting with the C-Suite
• strategic thinking
• ability to make tough decisions
• results orientation
• integrity

The last thing you want is a CPO who tells everyone that they have to spend four years as an entry-level tactical buyer before they can move up the ranks, unless, of course, you want your entire team to quit.

4. The Right (Corporate) Structure

Purchasing should lead from the center. Most best in class Procurement organizations, including most of the winners of Purchasing Magazine’s Medal of Professional Excellence, have been centralized or center-led organizations. (From 1984 to 2004, only two were decentralized.) A 2004 study from CAPS found that 83% of Procurement organizations were centralized or center led (hybrid). In a decentralized organization, it’s much harder to leverage volume, best practices, or market and supplier insight which will exist in pockets through the organization. Although the best structure will be dependent upon the organizational structure and the support from the top, at the very least the Procurement organization should be center-led and influence the decentralized units wherever it can make an impact.

5. Innovation & Technology

Best-in-Class Procurement organizations are willing to innovate and employ best-in-class technology to improve their sourcing and procurement initiatives. While the level of innovation that can be achieved at the current time will be dependent upon where an organization is on its journey, just about any organization can take advantage of new technology to improve its automation of tactical processes (through P2P), increase its insight into organizational spend (through Spend Analysis), and streamline it’s negotiation and award processes (through e-Negotiation and Decision Optimization) and start saving today. Leaders will also embrace Product LifeCycle Management (PLM) solutions.

6. Show Them the Money

Leading Procurement organizations know that the first question on every C-level Executive’s mind is Show Me the Money and are prepared to show a real savings report that answers the following questions:

• Are the savings real?
• Are they net of inflation?
• How were they calculated?
• What’s the baseline?
• Who (in finance) verified the calculation?
• Where are the savings on my bottom line?

In addition, they’ll have calculations ready that demonstrate their impact on the P&L, which will capture:

• initiatives
• volume fluctuations
• marketplace factors

in order to demonstrate total profit-and-loss-impact.

Even though a good Procurement organization

• improves working capital
• improves “monetization” of underutilized corporate assets
• reduces risk and pricing volatility
• increases organizational compliance with contracts
• improves the overall effectiveness and efficiency of the supply chain in meeting key operational needs

until Procurement has established itself as a critical enabler of corporate success, all Procurement will hear from the C-Suite is Show Me the Money.

7. Transformation

This is the end-state, the foundations of a world-class supply management organization that applies leadership, best practices, innovation, and technology to generate year-over-year savings and value for the organization. However, this transformation will only be achieved if:

• a shared need that everyone understands and believes in is defined
• an exciting vision of change is presented
• clear communication is made on a regular basis
• obstacles are eliminated (by the CEO if need be)
• executive actions are consistent with the vision
• changes are reinforced
• leadership has skin-in-the-game and stays the course

It can be a long journey to a best-in-class supply management organization, but it will be well worth the effort. For more information, and examples, on how to set goals, integrate processes, pick the right leader, define the right corporate structure, innovate and apply technology, show them the money, and achieve total Procurement organization transformation, review Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line while you wait for Robert A. Rudzki and Robert J. Trent’s follow-up on Next Level Supply Management Excellence.