Category Archives: Best Practices

The Right MindSet is the Foundation for a Successful Procurement Career but

the mind has to be prepared for the job at hand to succeed.

A recent post on “the right mindset: what does it take to have a successful acquisition career today” over on the Public Spend Forum (powered by Spend Matters and the Censeo Consulting Group) by David Wyld did a great job of outlining twelve traits that procurement professionals need to succeed in supply management today. However, while these traits may do a great job of laying the foundation for a procurement career, they are not sufficient on their own to prepare one for a successful procurement or supply management career.

SI would add at least six additional traits to the list, three major traits and three minor traits. The major traits that SI would insist are necessary for success in today’s Supply Management space are:

Technological Competence

Modern Supply Management runs on modern supply management technology – without it, best-in-class status is unobtainable as sophisticated spend analysis, decision optimization, and decision support systems are need to analyze, manage, and squeak cost savings and efficiency out of modern supply chain networks.

Risk Awareness and Risk Averseness

The rate of supply chain disruptions is increasing year-over-year and the chances of a major multi-national not experiencing a disruption over a twenty-four month period is 2% or less and dropping fast. In order to succeed, a supply manager needs to be aware of risk and have a mindset to mitigate it before it happens. Contingency and mitigation are the new modus operandi.

Project Management

Sourcing is no longer three-bids-and-a-buy. It is a sophisticated process that typically involves sophisticated supply market research, should cost models, deep category expertise, fact-based negotiations, and in-depth analysis. In addition, most sourcing exercises are category-focussed and need to be managed as category-based projects.

The minor traits that SI would insist are necessary are necessary for success in today’s Supply Management space are:

Habitual Change (Management)

Supply Management is in a state of constant flux these days as technologies, best practices, and global trade regulations are constantly changing and shifting. In order to stay on top of the supply chain game, a practitioner needs to be ready to adapt as needed.

A Sustainable Mindset

Oil reserves are limited. Demand for rare earth metals is increasing. Food reserves are hovering near all-time lows. Water is becoming scarce. Energy production is limited in many locales. A Supply Management professional needs to not only be thinking about the environment, but needs to be focussed on sustainable alternatives in order to keep production going.

Cost Conscious

Inflation is back, and hyper-inflation might be just around the corner. Manual processes are costly, and a lack of data is costlier. A Procurement Professional has to always have cost at the back of her mind and identify unique and creative ways to contain costs going forward.

So How Do You Align Your Supply Management Organization and Advance its Maturity?

In our last post we indicated that the expected value of Supply Management maturity was a 50% improvement in ROIC and a 75% improvement in Operating Margin, but that effort was needed for an organization to reach that maturity level. However, any effort involved would pay off handsomely as this is only an average – for example, in “Enterprise Procurement – Back on Track”, a presentation on Aurizon’s Procurement Transformation presented last month, Roger McNeill documented a ROIC increased from 2.0% in 2010 to 8.0% in 2013, a 300% improvement!

We also indicated that if the effort was put into the right process, specifically the EPAM (Evaluate. Plan. Act. Measure.) process, the organization could move up the maturity curve and see this success, as well as make the necessary alignments with the business in the process. So how does it do this?

1. Evaluate

Start by measuring the organizational maturity on the axes of proactivity and organizational alignment. Specifically, is the organization:

  • Reactive and/or Internally Focused
    a Supply Management organization that is reactive and/or internally focussed is typically near the bottom of the maturity curve, still approaching sourcing from an auction or best-bid perspective, running on an ERP, and quoting savings numbers without validation
  • Proactive and Metric Focussed
    a Supply Management organization that is proactive and metric focussed is typically in the middle of the maturity curve, approach sourcing as a total cost optimization project, implementing P2P, adopting best practices, and measuring realized savings; they’re doing good, but could be doing better
  • Strategic and Organizational Strategy Focussed
    a Supply Management organization that is strategic and focussed on organizational strategy is at the leading edge of the maturity curve, approaching sourcing as a value generation exercise, running on a suite of best of breed source-to-pay solutions, approaching sourcing exercises as strategic joint ventures with other organizations, creating best practices, and measuring outcomes against shareholder value and time to that value

Plan.

Where the organization is on the curve dictates what the organization has to do next.
An organization that is:

  • Reactive and/or Internally Focused
    needs to plan sourcing events with ample time to do the detailed spend and market analysis required to approach the category strategically, move to bid evaluation on total cost (of ownership) and not just landed cost models, implement a P2P or e-Procurement system to capture organizational spend and increase Spend Under Management (SUM), implement an appropriate e-Sourcing solution, institue best e-Sourcing practices, and start measuring realized savings using the P2P system
  • Proactive and Metric Focussed
    needs to plan sourcing events in conjunction with stakeholders and identify the outcomes that are most important to the stakeholders and give those outcomes the greatest weight in a total value model, run on an integrated end-to-end Source-to-Pay suite (which could include sub-suites from different leading BoB [Best-of-Breed] vendors), institutionalize and embed best practices in the sourcing technologies and processes, and measure outcomes using the metrics of interest to finance and the C-Suite (like ROIC, Operating Margin, increased market share, etc.)
  • Strategic and Organizational Strategy Focussed
    needs to embed itself in NPD and NPI (new product design and new product introduction) to take cost out before cost is baked in by Engineering (or Marketing when it insists on features that most of the target market doesn’t want, which Supply Management can identify by sourcing an appropriate market research study), work with Marketing to help it understand the risks and difficulties in new market entry based on its global market knowledge gained from sourcing from different regions, work with Operations to redesign the corporate footprint to reduce cost and increase sustainability, work with Finance to help it better manage Working Capital based on better demand management and improved cash-flow forecasting, and help the C-Suite define the corporate strategy

Act.

Once the plan is in place, the organization needs to execute the plan. The execution will vary based on the plan.

Measure.

The plan, if properly defined, will include metrics and outcomes that can be measured quantitatively and evaluated qualitatively. When the plan has been executed, the results should be measured, compared against any baselines or expected outcomes, and reported.

The devil is in the details, but the process is sound. And there are a number of leading Supply Management software and solution companies that can help your organization through this process, including BravoSolution, if the organization is looking for software and services, and Deloitte, if the organization already has a sourcing software suite (from a provider that doesn’t provide transformation services). And even it it takes 4-5 years, which is the average for Global 3000 organizations, the end result will be worth it as most save hundreds of millions of dollars and see an increase in key financial metrics of 50% or more.

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.

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!

Building and Ground Maintenance Outsourcing: A Maturing Cost Reduction Trend That Requires a Disciplined Approach


Today’s post is from Howard Gutman, a Manager in the Hackett Group’s Strategy and Operations Practice who consults to Fortune 1000 clients in operations improvement, sourcing and procurement, supply chain, and cost optimization. He was previously associated with MMG, KPMG, and PWC PRTM.

Many companies currently have their building and ground maintenance function (e.g. security, janitorial, and HVAC) managed by their own employees and/or a set of local suppliers for individual offices/ manufacturing sites. However, the success of companies such as AT&T and BMW, who have outsourced their building and ground maintenance function to integrated facilities management firms such as Jones Lang LaSalle and ABM, has caused many companies to question whether they should change their approach to the building and ground maintenance (BGM) function. Based on our recent client work, the outsourcing of BGM is an increasingly maturing trend across several industries but it requires a disciplined approach to develop an understanding of a company’s current demand and specifications in order to maximize the overall savings opportunity.

Before a company can consider outsourcing this function, a company should utilize a disciplined approach to understand demand for BGM by collecting the following information:

  1. Number of building sites;
  2. Basic information about each site (e.g., address information, total square footage, building population, number of bathrooms, outdoor square footage);
  3. Total spend for each major building and ground maintenance category by site (e.g. janitorial, HVAC, and environmental services).

Once this basic understanding of a company’s demand is established, a company must work with their operational leads to gather detailed specifications for each of their BGM services (e.g., frequency and requirement for HVAC maintenance at each site). After the development of the demand set and specifications, a company can pursue a strategy of outsourcing this function as the information mentioned above is essential for any RFP process involving integrated facilities management companies.

Two recent clients utilized the above approach to outsource their BGM function but each had initial concerns about outsourcing this function due to business culture and regulatory reasons.

Our first client, a Fortune 500 telecommunications company, liked the operational benefits of moving to a single integrated building provider, which includes centralized reporting and 24-7 support. However, they had concerns about regulatory issues such as maintaining continuous 911 service at rural locations. Through the RFP process, our client discovered that all of its major competitors had moved to an outsourced BGM solution, particularly at their rural locations.

Our second client, in the manufacturing space, had concerns about moving control of building management from their plant managers to an outside building and ground maintenance provider. Through the RFP process, it discovered that many of its competitors had moved to integrated facilities management companies who were deeply experienced in the manufacturing space.

The results of these two projects are projected to result in cost savings of 10% to 12.5% over the next two years along with increased maintenance standards and visibility into building issues through 24/7 online reporting. However, the main benefit for these organizations was that they could better focus on their core business functions, while delivering continuous savings through a disciplined approach for outsourcing BGM that has already been implemented by their peers.

Thanks, Howard for some insight into this often overlooked spend category!