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The Measurable Value of Supply Management Maturity

Simply put:

  1. a ROIC (Return On Invested Capital) of 12.8% vs 8.5% for laggards
  2. an Operating Margin of 14.6% vs 8.4% for laggards

according to BravoSolution (Source), who, as a Best-of-Breed global e-Sourcing software and services provider that has been delivering software and services to global clients for over a decade, has been measuring the maturity of client organizations from the time they start their e-Sourcing journey (with BravoSolution) to the time that they master the e-Sourcing process that BravoSolution supports and the platforms they provide.

This 50% performance improvement in ROIC and 75% performance improvement in Operating Margin should not be too surprising given that all of the analysts firms have been telling us for years that leading Supply Management organizations far outpace laggard Supply Management organizations when it comes to financial success. What should be surprising is that the vast majority of companies still have trouble advancing Supply Management out of the laggard category even though many of the secrets of success have been known for many years.

Especially since the the first step is to align the Supply Management organization with the business (goals). This shouldn’t be hard, but for many companies it is. Why?

Let’s start by considering the reasons for misalignment

  • 5% is due to different drivers
  • 30% is due to (different) data
  • 65% is due to differing definitions

The big problem is still communication. In most organizations, Procurement doesn’t speak the same language as the rest of the business, and Finance in particular. Remember, HR still thinks sourcing refers to the recruiting function, Engineering thinks procurement is calling up the preferred supplier and asking them to ship the required parts for the prototype, and Finance defines savings as the difference between last year’s spend and this year’s spend, not how much savings have been identified or how much cost has been avoided. In order for Supply Management to mature as an organization, it not only has to align with the business goals, but it has to speak the business language.

So how can Supply Management achieve alignment and, at the same time, advance as a function and achieve the financial success that will make it the favourite child of the organization?

The EPAM Loop.
Evaluate. Plan. Act. Measure.

In the 1950’s W. Edwards Denning proposed that business processes should be analyzed and measured to identify sources of variations that cause products to deviate from customer requirements. Specifically, he recommended that business processes be placed in the context of a continuous PDCA (Plan. Do. Check. Act.) feedback loop so that managers can identify and change parts of the process that need improvement. And it was a leap forward in business philosophy at the time (and could even be considered the foundation for the DMAIC (Define. Measure. Analyze. Improve. Control) cycle that is the foundation for Six Sigma. Given that sourcing processes are only improved if they are continuously monitored, it’s obvious that a similar process is needed.

So why can’t we just use the classic PDCA cycle? Simply put, we have no way of knowing whether or not a plan is likely to be beneficial, or even executable by the organization, without an understanding of what the current level of organizational maturity is. That’s why the first thing that needs to be done is an evaluation of where the organization is against a maturity framework, built on the study of Supply Management transformations over the last two decades. When an evaluation is done against a well-defined framework, that is associated with best practices that have been successfully used by leading organizations to advance up the maturity curve, the organization can come up with a plan appropriate to its current level of capability. This not only maximizes the organization’s chance of project success but helps it accelerate up the curve faster than organizations that take their best guess, which amounts to nothing more than trial and error.

Once an organization has a proper transition plan in place, it’s talent should be able to quickly execute on that plan and see some success in the short term. Then, when the project has finished, or in the case of a multi-year project, reached key milestones, the team can measure the results versus the expected results (based on case studies and surveys of organizations who undertook similar projects at a similar maturity level), and determine if they are on-track, ahead, or behind. If the team is behind where they can expect to be, they return to the Evaluation stage, determine the reason for the shortfall, modify the process, and try again. When the team has reached the desired level of success, and advanced up the maturity framework, it begins the EPAM cycle again and comes up with process and technology transitions designed to get it to the next level of maturity.

BravoSolution, which has been working on improving their assessment and change management process for years, has found that the process works so well that they have cemented their global sourcing service offerings on the process, which they are calling BravoAlign. Regardless of what it’s called, the method works, and can work for your organization too.

Duty Drawback – The Devil is in the Details

Duty Drawback, granted under section 313(a) of the Tariff Act of 1930, as amended in 19 U.S.C. Section 1313(a), costs North American business up to 2.4 Billion a year [Source: Neville Peterson LLP] because the process is so convoluted that most business would rather lose the money owed to them then try to navigate through a process which seemingly requires truckloads of paperwork and which can take 6 months or more to resolve. Why is it so difficult? The US has had 224 years to make it so (as it was the second law passed by the first Congress way back in 1789).

Even though the goal of duty drawback is to promote U.S. business development by allowing a company to secure refunds for products that were exported, the government considers this drawback a privilege, and one that has to be earned (through a rigorous filing process).
Duty drawback is further complicated by the fact that claims are not just limited to importers, manufacturers who purchase imported products for use in their manufactured goods that are to be exported and exporters who purchase products made from imported merchandise are also eligible to make drawback claims, because drawback is paid to the exporter (under the assumption that the importer they bought the goods from charged the buyer enough to make a profit, and thus recovered the duty in this way), who has to have proof that the product is eligible for duty drawback. For a product to be eligible, it has to be an imported product on which duty was paid and which was subsequently substantially transformed and then either exported within five years of import, rejected upon import, or unused and exported or destroyed within three years of import.

What is a substantial transformation? It is one that is complicated, requires money and labour, and results in a new and different product, which has a new name, character and usage. Detailed documentation of the process may be required in filing the claim.

To file a claim on the product that was substantially transformed, the filer needs to prove that the resultant product contains an imported product on which duty was paid. This requires an exact paper trail that documents the product, either by batch, lot, or serial number that was consumed and the product that was produced. If the merchandise that was imported is then exported or destroyed within three years in an unused state, the organization is also eligible for drawback. In this situation, the organization will need to keep a paper trail that proves the unused merchandise that was exported or destroyed was the same merchandise that was subject to an import duty. Finally, an organization also has the option of rejecting import merchandise that does not conform to specifications, that was shipped without its consent, or that was determined to be defective, and file a drawback claim on this merchandise, but to do so the merchandise must be returned to customs. Unless the merchandise has no resale value, this is generally not a good option.

Unless the claim is for goods imported from Canada or Mexico under NAFTA, which has its own drawback filing process, the steps involve:

    • applying for a ruling
      this provides an organization with permission to submit a claim, and will generally require that the organization provide a detailed description of the process that demonstrates it substantially transforms the product on which the organization is intending to file a drawback
    • file the claim
      including all of the paperwork required, which, at a minimum will require the following for proof of import

      • Customs Form 7501
      • Commercial Invoice
      • Documentation necessary to support use of products in a substantial transformation manufacturing process
      • Waste summary documentation for any products discarded
      • Certificate of Delivery

and, at a minimum, the following for proof of export

    • export declaration
    • invoice
    • bill of lading
    • purchase orders and receipts from the customer

And it will take time. As the CBP site says be aware the process of filing for drawback can be involved and the time it takes to receive refunds can be lengthy. But if you do a lot of exporting, the cashflow could make even a six month wait worth it.

The Most Important Word In Supplier Relationship Management Is Not What You Think It Is


Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC. Joe co-wrote the book on Managing Indirect Spend: Enhancing Profitability through Strategic Sourcing.

It may be an old story, but it is still an important story in any discussion of Supplier Relationship Management (SRM). According to Business Insider, with about six weeks to go before the launch of the iPhone in 2007, an angry Steve Jobs pulled his senior team into an impromptu meeting on a Monday morning. His plastic-screen’d iPhone prototype was scratched, and he demanded a glass screen be fitted to the iPhone. Specifically, he is quoted as saying “I want a glass screen. And I want it perfect in six weeks“.

If you read the Walter Isaacson biography on Jobs, you can imagine a few other words were in those two sentences. But that is not critical to this story.

Here is the important part. Once Apple and Corning perfected the art of cutting glass so intricately on a massive scale, they had two weeks to get the new glass faces on the phones. Their assembler, Foxconn, woke its employees when the first glass shipments arrived in the middle of the night, and arranged for production to run non-stop.
Not every supplier is going to wake its staff in the middle of the night to cater to your needs, but when you maintain a close relationship with them, and firmly establish the ways in which each party is critical to the other’s success, then the proverbial (and in Apple’s case, actual) doors open. This is the critical takeaway from any talk on Supplier Relationship Management: those in-depth relationships with your suppliers can lead to competitive advantages ranging from moving up in that supplier’s priority list to getting first dibs on their innovative practices and products.

The importance of Supplier Relationship Management is not lost on sourcing professionals and the industry at large, but the most important aspect of SRM seems to have been lost; or if not lost, then effectively drowned out by savvy marketers. A Googling of “Supplier Relationship Management” produces more than eight million results, but the first page is dominated by companies selling SRM software. When I googled, seven of the first page’s organic results, and all of the ad space, are dedicated to software solutions. While “Management” is an important aspect of “Supplier Relationship Management”, and having a clear view of your organization’s entire supplier pool is critical to effectively working with them, the value of SRM comes from the “Relationship” portion. Worded another way, no supplier has ever given a customer exclusive access to a new product because that customer put them in a database!

I should probably stop here to note that SRM software is a great way to manage all of your suppliers, and relatively easy to implement across all of them. Relationship-building, by comparison, is an impractical across-the-board practice returning minimal results for maximized efforts for all suppliers outside those producing critical, hard-to-obtain, or otherwise-important materials for your organization.

That said, “Relationship” is the critical term of SRM when dealing with critical suppliers. Period. Supplier relationship software allows you to track purchases, organize data, and better understanding of your organization’s demand for a supplier’s goods — all of which are tactical, short-term measures. Building relationships, on the other hand, is crucial for your organization’s critical suppliers, as it allows you to talk frankly with them and develop the long-term strategies necessary for mutual success. And it provides critical benefits.

So what are those critical benefits? For starters,

Preferential Access to the Supplier — Much like Apple was able to rouse Foxconn’s employees in the dead of night for glass screens, a thoroughly developed relationship with a supplier can gain your organization preferential access to them. The benefits of a healthy relationship can be leveraged to obtain priority access to product capacity, better pricing, and, depending on the supplier and product or service needed, access to the supplier’s best people.

Supply Chain Stability — With a relationship developed between your organization and a supplier, it is possible to talk frankly about their risks. Weather and disaster vulnerability, political events, logistics concerns — anything that could potentially impact the supply of their products to your organization. Additionally, these discussions allow you to get a better understanding of the supplier’s supply chain and the potential hiccups within it. Most importantly, these discussions provide the foundation for your organization and a critical supplier to jointly develop solutions to potential problems, ensuring that a mutually beneficial solution is reached in the creation of a better understanding between the two organizations.

Input Into Innovation — Another area where Apple capitalizes on its strong supplier relationships is in the joint innovation of new technologies, strategies, or processes. The company routinely puts out the cash to fuel a supplier’s development of an improved or revolutionary product or process in exchange for exclusivity. Recent examples include the company’s lockdown of capacitive touch screens following the iPhone’s launch and their joint development of the highly precise lasers used to perforate the aluminum MacBook frames to allow for hidden status lights. Even if your organization lacks the capital to fund supplier improvements, enhanced relationships can still get your organization input into a supplier’s next product, leading to design changes that can lead to more efficient production, or a lower cost, on your side.

Knowing that a partnership can lead to a reduced total cost of goods through shared responsibility, assistance in the product development process through shared expertise, and long-term stability through the forming of a bond with a customer are key incentives that can persuade reluctant suppliers to come onboard and sweeten the relationship on an ongoing basis.

If your supplier is critical, a deep and mutually beneficial relationship with them is critical too.

Thanks, Joe!

It’s an e-Frenzy Out There! Can You Make Sense Of It All?

It’s an e-Frenzy out there! e-Sourcing. e-RFX. e-Procurement. e-Payment. e-Negotiation. e-Procure-to-Pay. e-Invoicing. e-Auction. e-Contract. etc.

The Supply Management solution space is filled with e-Solutions. And, as you might have guessed, they are not all the same. They solve different problems. Some solutions are sub-solutions of other solutions. Some focus purely on the sourcing side of the equation where the products and services are identified and contracted. Some focus purely on the procurement side, where requisitions are placed, purchase orders are placed, products are received, and invoices are processed. Some play on both sides of the sourcing and procurement pond, but only address a few functions from each side.

To help you understand what solution you really need, Sourcing Innovation is hosting a webinar on Making Sense of e- in Sourcing and Procurement: What Solution Do You Really Need?. This webinar, sponsored by the Next Level Purchasing Association (NLPA), taking place next Wednesday, November 20th at 8:30 am PST / 11:30 am EST / 4:30 pm GMT, is for NLPA members only, but basic membership is free. Space is limited, so (if necessary, join the NLPA and) sign up now.

In this webinar on Making Sense of e- in Sourcing and Procurement: What Solution Do You Really Need?, we will clearly define the sourcing and procurement cycle, indicate where each technology falls, outline what each technology does, and indicate the conditions that need to exist for each solution to potentially be appropriate. We will describe the e-Sourcing journey and provide the user with a starting set of questions that they can ask to determine what technologies they need to focus on as they look to acquire new sourcing and procurement technologies to support them in their Supply Management Journey.