Category Archives: Guest Author

Charles Dominick on “Are You Prepared”

Today’s post is from Charles Dominick of Next Level Purchasing (and the SPSM certification) and blogmaster of the Purchasing Certification Blog.

I can’t recall a time in my procurement career when business conditions so strongly indicated that changes were a–coming. The latest United States GDP report indicated that the economic freefall has subsided, likely giving businesses the confidence necessary to resume the spending that will fuel growth. The last several US unemployment reports indicate that, while unemployment is still high at 9.8%, things aren’t getting worse by the minute the way that they were earlier in the year. And, after a period where commodities posted month–to–month price declines in seven of eight consecutive months, stability has prevailed and inflation has begun.

All of these indicators should be writing on the wall for today’s chief procurement officers: changes and challenges are ahead. Are you prepared?

What kind of challenges, you ask?

Consider these:

1. Heavier Workload.
As your company forecasts — and invests in marketing to create — demand for 2010, there will be a higher volume of inputs needed to support the higher volume of outputs. So procurement activity will increase. With a 9.8% unemployment rate in the US, this recession has claimed its fair share of procurement jobs. So, if you’re doing more with less now, you’re going to either have to find a way to squeeze more productivity out of your current (possibly depleted) team or add new staff —- new staff that will have to get up to speed very, very quickly.

2. Staff Will Leave.
As you contemplate having your existing staff handle the heavier workload, have you considered the possibility that some of those people may not be around for you to delegate to? Very, very few good employees will voluntarily leave a company during a bad recession. They know the risk of doing so. But as the economy thaws out and heats up, more opportunities will present themselves. Those employees that were unhappy but stuck with the company because of fear will finally feel ready to move on to greener pastures. You may find yourself trying to fill positions that you didn’t count on having vacated.

3. Price Increases.
There will so much upward pressure on price, it’s not funny. First, every year, suppliers come out with their new pricing in January. January is always a convenient excuse for raising prices. January is right around the corner. Second, commodity prices are on the rise, so prices for most goods tend to follow. Third, because of the nasty effects of the recession, some suppliers are so financially weak that their choices are to either raise prices to cover their losses or die. Fourth, it’s basic economics that as demand picks up, prices go up until supply adjusts to keep things in balance. With such a long economic dry spell, businesses are antsy to quit hunkering down already. Demand will go up, pushing prices up.

So, you may very well find yourself with a heavier workload, fewer long-time employees, more newer employees, and suppliers shoving higher prices down your throat. Because of the line of business that I am in, I know one solution that will help employees be more productive, get new employees to deliver results more quickly, boost the morale of existing employees, and provide your team with the skills necessary to combat price increases. But there are other solutions and this post is not a sales pitch so I won’t even go into what that solution is.

What I do want to do is just to share what I foresee in the immediate future for procurement leaders so that you can be prepared for these challenges with the solution(s) of your choice. With proper preparation, you can be ahead of this wave of change and succeed while other, less prepared peers of yours struggle to keep their proverbial heads above water.

Thanks, Charles!

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Brian Sommer on The New Sourcing Concerns

Today’s guest post is from Brian Sommer of Vital Analysis — a research analyst firm that advises technology buyers on what to buy or run from — and TechVentive — a market research firm that advises major technology and services firms on the messages that resonate with today’s buyers. He is also the blogmaster of Software and Services Safari.

So it’s time to reset the plans, dreams, strategies, etc. of souring and procurement organizations. The economy has bottomed out. Businesses have exhausted their inventories and must replenish their stores. Sourcing should kick in again.

But will it be any different than before? I have my doubts.

In a study I completed this summer, I conducted detailed interviews with sourcing professionals, supply chain experts, research analysts and more to find out what’s changed with strategic sourcing and procurement the last ten years. The unsurprising and disappointing answer was ‘not much’.

So these disciplines haven’t changed in robust times or poor times. When, then, will they change? I don’t know but I do know of several problem areas sourcing experts must address soon if their groups are to remain viable and relevant.

1) Knowledge Transfer
The folks at the MPower Group are hearing some of their clients worry that large amounts of sourcing and technical knowledge is about to leave their firms. Businesses with complex, aging tools, equipment, etc. will need to replace these items in the near future; however, the individuals who did the initial sourcing are retiring and their knowledge of suppliers, engineering specifications, lead times, supply sources, etc. may be leaving with them. Your key to-do is to determine how many of your key sourcing experts may leave your employ once their 401K is rejuvenated via a rising stock market. Then, decide how you can capture this person’s knowledge before they’re out the door.

2) New supply chain opportunities are available but you might not know about them.
For example, the Kansas City Southern (KCS) railway has been building out a powerful rail network the last few years. From the Midwest U.S. to Gulf ports and southwest into Mexico, it’s an interesting route. They’ve also developed a deep port on the Mexican west coast that can take container traffic scheduled for U.S. ports without the delays that used to plague those ports. Now, the KCS has put in a new rail line southwest of Houston that significantly reduces transit times for trains moving across Texas and Mexico. Rail traffic is down, fuel costs are down (for now), ports are less congested, etc. Now is the time to re-evaluate and re-negotiate.

3) Bankruptcies are still happening
This recession artifact is not over yet. Just because the economy has bottomed out doesn’t mean that the remaining companies will be survivors or prosperous. Watch out for key suppliers as some may fail right before your eyes.

4) When the economy does improve, there is a real risk that hyperinflation could strike.
That’s not a guarantee but the level of debt the U.S. has (to fund two wars, TARP, etc.) will eventually drive up interest rates. Your sourcing team must develop two alternate sourcing scenario strategies: one for hyperinflation and one for stagflation. Make sure you know how to tell which space the economy is in and how to adjust buying accordingly.

5) The risk of a pandemic outbreak (e.g., SARS, swine flu) could be a real problem for modern businesses.
It could change what we buy, where we buy it, how it gets shipped, etc. Make sure you have multiple suppliers in diverse parts of the world ready to provide materials to you. Don’t bet it all on one country, one supplier, etc.

Thanks, Brian!

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Transfer Knowledge to Reduce Risk

Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.

As reported on August 15, 2009 in my local South Florida newspaper, two New Jersey police officers in their 20’s failed to recognize singer-songwriter Bob Dylan. Mr. Dylan was wondering around a low-income neighborhood when he was spotted by someone who apparently called the police to report a suspicious character. It’s important to note that Mr. Dylan did not have identification on him. The police officers escorted Mr. Dylan to the resort where tour management confirmed his identification.

[Editor’s note: People worry about a return to 1984, but this smacks of a return to 1963. For those of you old enough to remember, it’s alright, ma.]

Around this time I attended a business event and saw some folks I knew from my networking who invited me to join their group. During our conversation I made a reference to the classic rock band Deep Purple (one of my favorites) as we were discussing colors and shades for use in corporate marketing. A young lady in the group, I have no doubt in her 20’s, looked puzzled and said she was unfamiliar with this band. I asked her if she knew the song Smoke On The Water and did my best to hum the famous guitar riff. She confessed she still did not recognize the tune which is understandable if you’ve ever heard me attempt anything musical, though I suspect this was more related to a generational gap. (I did receive a follow-up e-mail from her a few days later stating that she was familiar with the riff but not the band behind it. She may have followed my suggestion and did a YouTube(R) lookup.)

More so in lean economic times companies have a habit of getting rid of employees with deep knowledge and replacing them with younger less-experienced and less-knowledgeable people. This is not a very wise decision when reliance on such knowledge is what separates the company from its competitors as would be the case in most companies.

(One only need look at the demise of Circuit City as an example: experienced floor sales people were let go to bring in a younger less-expensive sales force which failed to provide the same level of customer service and left customers taking their money elsewhere.)

Typical when experienced employees are (suddenly) replaced, there is a failure to transfer critical knowledge. Older employees must understand that they have a responsibility to their employer that goes beyond their own interest of self-preservation: Unless you work for yourself your knowledge belongs to your employer and they have every right to require that you document what you know and provide training to those less-experienced. Good sustainability and risk management practices require this and Sarbanes-Oxley compliance demands it.

Studies have shown that Millenials (aka, Generation Y, born between 1978 and 1989 depending on whose definition you look at) tend to be more result-oriented than process-oriented. This can be problematic in regulated enterprises and public companies. This can run counter to Lean thinking and Six Sigma methodologies that look to process improvements for efficiency. Entities such as ISO (International Standards Organization) rely on documented processes for their certifications.

Is it any wonder why Gen Y is so results oriented when knowledge can be so difficult to acquire and job performance tends to be based on results and not how those results were achieved? It’s important for enterprises to explain and show why the process matters and encourage process improvements that do not cross the line of regulatory or certification requirements.

Classic rock may one day face its own extinction in one form or another and the world will be a sadder place the day the music truly dies.

Enterprises have a more immediate need to and face a greater crisis in the short-term due to knowledge gaps. Risk is reduced when knowledge is transferred. Enterprises should work towards closing generational gaps by creating teams that use the best characteristics of its generational members. Each generation needs to respect the other and acknowledge the benefits each brings to the table. Torches will forever be passed and this does not require that anyone get burned in the process.

Norman Katz, Katzscan

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Service Leaders Speak: Mark Usher of Treya Partners on “A Game Changing Procurement Initiative”

Today’s post is from Mark Usher of Treya Partners.

Procurement service providers can create game-changing value for their customers in the current economic climate through high impact sourcing initiatives in both DIRECT and INDIRECT spend areas. Since indirect procurement has been well covered in the blogosphere recently (and one can only keep readers interested for so long about how to design the perfect office supplies core list) I’m going to focus solely on how procurement can not only protect profit margins but create sustainable competitive advantage through world class direct materials sourcing. Whether your customers are in manufacturing, retail, food, or consumer packaged goods these procurement strategies will keep your clients afloat through the perfect economic storm and excellently equipped to maintain a healthy lead over their competition when balmy financial weather returns.

THE DIRECT MATERIALS GAME CHANGING PROCUREMENT INITIATIVE

Increase Gross Margins by developing a supply base that enables an organization to minimize cost and maximize customer service for its most highly demanded products.

Thousands of companies go out of business in recessionary economic environments because their supply chains are unable to deliver the very products that their customers are ready and willing to buy. It turns out that many of these same products are also their most profitable. In good economic times, a poorly performing supply chain like this doesn’t present too many obvious problems. If you’re selling a billion dollars of product at 20% gross margin you can swan along quite happily feeding an operating expense base of nearly $200 million, leaving millions of customers wanting stuff you’ve run out of and millions of dollars of stuff they don’t want sitting on store shelves or in the warehouse. However, when the downturn hits and your sales nosedive, your 20% gross margin is now trying to satisfy the same operating expense base. Hello negative operating income!

Procurement service providers can help companies maintain positive operating margins in recessionary or slow growth environments by helping them select suppliers that can deliver the lowest total cost inputs to production (or resale merchandise for retailers and distributors) while also supporting the highest levels of customer service for the end products that are in highest demand from customers. Low cost inputs result in a profitable product while high customer service results in an available product. Making a profitable and highly demanded product available is the greatest lever a company has to increase gross margin. What role can Procurement play in this? First, analyze historical order history by product (making sure to include backorders) and identify the 20% of products comprising the top 80% of customer demand. Then calculate profit contribution for each of these high demand products, where profit contribution is the difference between a product’s selling price and its total cost including procurement cost, transportation cost, and any internal manufacturing costs. Now identify the 20% of the high demand products that comprise 80% of total profit contribution. These are your company’s most profitable and highly demanded products! If an organization can ensure that these products are always available for their customers to buy, it will be fully realizing maximum potential gross margin for its industry sector.

Procurement’s role in helping an organization achieve this goal should be to facilitate a cross-functional strategic sourcing process that identifies, evaluates and selects suppliers based on their ability to meet exacting criteria for total cost management and customer service. Specifically, Procurement should work with stakeholders in marketing, manufacturing, distribution and other departments to develop weighted, metric-based criteria in areas such as a supplier’s capability to strategically source their own raw materials, implement lean manufacturing processes, deploy logistics strategies capable of consistently achieving 99% line item fill rates at their customers’ point of sale, and manage indirect operating expenses to maintain financial health while delivering low prices to their customers. The outcome of the strategic sourcing process should be a set of closely integrated supply relationships with a small number of supply partners that between them satisfy the ultimate goal of lowest total cost of ownership and highest customer service for the company’s highest demand products.

If you are a service provider with a competency for developing low cost/high service level supply bases, you can ensure that your customers will always enjoy gross margins in the top quartile for their industry. Particularly in recessionary or slow growth periods, a laser-like focus on service levels and availability for high profit/high demand products will guarantee financial health until the recovery is in full swing. And by helping your customers optimize their supply chains today, you will help them remain strides ahead of their competitors long after the recessionary period has ended. By maintaining above average profitability for their industry they will be able to make heavier investments than competitors in all aspects of their business, allowing them to maintain a perpetual competitive advantage.

Who said procurement was all about buying pens and pencils?

Thanks, Mark.

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Service Leaders Speak: Ashton Udall of Global Sourcing Specialists on “Supply Chain Sustainability and Transparency”

Today’s post is from Ashton Udall, a Global Sourcing Specialist (and author of the GSS Blog).

As optimism returns and some of the challenges of the downturn begin to recede, we are quickly reminded that many challenges and trends which played at the forefront of business concerns, prior to the economic fallout of 2008, will return. How are sourcing organizations evolving to meet customer needs in the next decade? Surely, strategic sourcing, spend management, and risk assessment and mitigation will see continued development and increased sophistication. But there is another trend that has come to the fore in the last few years; a trend that requires many sourcing and procurement organizations to stretch outside their traditional bounds because of its interdisciplinary and cross-functional nature. Whether one likes it or not, for reasons of consumer demand, cost reduction and risk, and good ol’ conservationism, environmental sustainability will grow in importance and the supply chain will increasingly be dragged into the limelight on this topic.

Companies will face a demand for greater transparency as a result of growing consumer awareness and changing priorities, the continued spread of technology — cell phones, video, and internet access, and executive leadership. Authenticity and transparency will become greater drivers of brand loyalty, and companies will be expected to do as they claim, and show what they do.

Waving the green flag of sustainability is not enough. Smart companies, those who are ahead of the curve, will assume greater market leadership in years to come. These companies are working hard to find win-win situations in which both the financial and environmental bottom line benefit. Walmart is leading the charge, in one recent example, recently reporting that adherence to its sustainability goals has led to a reduction in toy packaging, saving the company 727 shipping containers and 1,300 barrels of oil in comparison to the previous year, which adds up to an impactful $3.5 million.

Packaging reduction is considered a low hanging fruit of environmental initiatives, but a survey of topics to be covered at the 3rd SustainableSupply Chain Summit (North America, 2009), includes issues such as carbon footprint, ROI on green initiatives, supplier collaboration and partnerships to attain greater efficiency, and the emergence of the Chief Sustainability Officer. Packaging reduction is only the beginning.

Design and product development teams will hand over greater requirements in the realms of sustainable packaging, sustainable materials, lower carbon footprint, and certified labor conditions to the sourcing and procurement departments, and it will be up to sourcing and procurement to provide solutions to meet these needs. Smart companies will get out in front of these issues and not remain in a reactionary state. Sourcing leaders will need to develop greater sophistication in assessing supplier operations and risk. Specifically, sourcing leaders will require more robust methods of identifying and calculating risk to CSR and marketing programs that emphasize the social and environmental perspective, vendor monitoring and compliance, and supplier capacity development. Opportunities will not be limited to finding ways to reduce environmental footprint and informing consumers. Creating and capturing value will entail sourcing professionals to develop the ability to create scenarios in which cost is continually reduced in the supply chain by reducing energy inputs, material waste, and operational inefficiencies, while simultaneously fulfilling CSR goals that build brand loyalty. Inorder for this to occur, compliance, procurement, and brand management will need to act cross-functionally, and in concert, to drive optimal results.

Sourcing solutions providers which continually investing in their staff to understand this new and rapidly evolving field, building relationships with service providers that specialize in compliance and capacity building programs, and expand and refine their network of suppliers that meet higher requirements, will be in a strong position to increasingly add value to customers’ top and bottom lines as we enter the next decade of transparency and sustainability in supply chains.

Thanks, Ashton.

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