Category Archives: Market Intelligence

John Mavriyannakis on the Future of Procurement: Part II

In Part I, we described the 4 major trends affecting Procurement today that were identified by Deloitte in its research and consulting initiatives (and which have been addressed in publications that include “Supply Chain Strategy”, “Winning With Your Supply Chain”, and “Charting the Course: Why Procurement Must Transform Itself by 2020”) that were summarized nicely by John Mavriyannakis, a Senior Manager at Deloitte Canada (and the Practice Leader in Sourcing, Procurement, and Settlement), in his recent presentation on Empowering Modern Procurement that was given as part of the Coupa One Vision Roadshow in Toronto

Specifically, John Mavriyannakis identified the following four trends:

  • Margin Pressure
  • Supply Chain Risk
  • Government Regulations
  • Talent

As a result of these trends, it is clear that today’s supply managers need to:

  • control margin pressure,
  • mitigate supply chain risk,
  • stay ahead of changing regulations, and
  • win the war for talent.

But that’s not going to be enough for a Procurement organization to succeed in the long term in the dynamically changing global marketplace. If they wish to survive, Procurement and Supply Management organizations need to rethink mission and capabilities. Specifically, they need to:

  • get strategic
    and establish a formal organizational presence that ties metrics to company performance,
  • transition
    to re-aligned processes and responsibilities that focus on business outcomes,
  • task talent cross-functionally
    to enhance the procurement capability of the organization as a whole, and
  • tie it all to technology
    that blends service and management tools that are easy to use and that allow for the right level of control.

While keeping in mind that they need to get to the 2020 Procurement and Supply Management organization in just 6 short years (which is no easy feat given that the average transformation time that is required for a Global 3000 organization to become a world class Procurement organization, according to The Hackett Group, is at least 5 years). In 2020, Procurement, according to Deloitte, is going to (need to) be:

  • the keepers of the global supply and demand perspective,
  • the nexus of finance, operations, and supply chain,
  • risk forecasters,
  • the arbiter of risk vs. reward,
  • the value-generation unit that is the treasure trove of ideas, and
  • talent rich.

And SI fully agrees with all but the last of these predictions. In addition, it partially agrees with the last prediction that Procurement is going to need to be talent rich to achieve the goals that are set before it, but given the lack of investment in talent to date in the average Procurement organization, SI isn’t sure that the talent is going to be where it needs to be in 2020. Even though talent has been in the top three Procurement issues for at least the last three years, it’s still in the top three budget items that are cut every year in these tough economic times, even though a small investment in talent can lead to a (very) large return in savings in a Procurement organization. (For example, one of the first companies to certify their entire department with the SPSM designation offered by Next Level Purchasing, a 1 Billion furniture manufacturer, doubled their annual savings only one year after completing the certification on the department level. That’s a double digit ROI multiple in one year! Compare that to the 2X or 3X you might get from automating manual processes.) Basically, the most successful Procurement organizations in 2020 will be talent rich, but the average Procurement organization will be struggling at the current rate of training and talent induction into our space.

John Mavriyannakis on the Future of Procurement: Part I

John Mavriyannakis is a Senior Manager at Deloitte Canada and the Practice Leader in Sourcing, Procurement, and Settlement who recently gave a presentation on Empowering Modern Procurement as part of the Coupa One Vision Roadshow in Toronto. Through its regular CPO Surveys, CFO Surveys, and its Source-to-Procure experience across 1000+ projects for 300+ clients, which made it #1 in the Procurement Consulting provider in the global Procurement Consulting marketplace, Deloitte has built up a considerable understanding of the current state of Procurement [which it has captured in a number of publications, including Supply Chain Strategy (Deloitte), Winning With Your Supply Chain (Deloitte), the CFO Surveys, and Charting the Course: Why Procurement Must Transform Itself by 2020 (Deloitte)].

According to Deloitte, Procurement today is dealing with 4 major trends, which are going to continue for the foreseeable future:

Margin Pressure
Margins are getting tighter and organizations need to be looking at least ten years ahead to determine future (labour) arbitrage opportunities, which are becoming increasingly more difficult to leverage as emerging economies emerge and produce middle classes with higher wage expectations (and transportation costs increase to make up the difference). In addition, the fact that price volatility has increased 57% in the last 12 months hasn’t helped matters any.

Supply Chain Risk
Due to the increasing interdependence and extensiveness of supply chains, risk is increasing, as illustrated byt he fact that 85% of surveyed organizations experienced at least one large scale disruption in the last 12 months. The increased risk is a big issue given that companies announcing supply chain disruptions had a 30% lower supply chain return compared to the benchmark group.

Government Regulations
Regulatory compliance issues have resulted in high-profile, high-cost shutdowns in recent years and with 2/3rds of CPOs admitting that their companies are only in the early stages of compiling information required to meet the recent SEC reporting changes, this is not a good state of affairs as the SEC reporting requirements are only one of a plethora of reporting requirements an international company that is importing and exporting on a daily basis around the globe needs to be compliant with.

Talent
Given that 76% of CPOs feel that their staffs’ skills need improvement or have a significant gap, talent is on the radar in a big way. And not just any talent — with 91% of the 60% of CPOs planning to change their operational model announcing a shift to center-led or centralized supply chain operations, this means that over half of the talent that is required needs to be effective in these type of Supply Management models.

So what does this mean? We’ll discuss tomorrow in Part II.

Are American Companies Threatening Their Own Supply Chains?

A recent article over on CNN Money on how “Starbucks is in Hot Water over China prices” (Oct 21, 2013) has me wondering. According to the article, Starbucks is charging more in China for a cup of coffee in China than it is in Chicago or London (with a medium size Latte costing $4.40 vs $3,20 and $4.00). Similarly, it is charging as much as $18 in China for its Starbucks Coffee mug, that sells for between $10 and $14 in the US.

This is despite the fact that it is doing quite well in China, with strong sales contributing to a year-on-year jump in revenues in the Asia Pacific region of 30%.

Is this how you want to be treating a country you rely on for low-cost product production?

In the case of Starbucks, it could be argued that the mugs are not a main source of income, and since the coffee beans are not sourced from China, Starbucks isn’t really relying on China for its supply chain. But consider Apple, which is using refurbished parts to repair products in China and limiting some warranties to one year, as compared to the two and three years it offers in North America.

We all know that Apple relies on Foxconn Technology Group for it’s iPhone and iPad production, and is thus heavily reliant on China in is Supply Chain.

The last thing Apple should want to do is get the attention of China’s government, that recently recorded fines against five international dairy firms after they were accused of fixing the prices of baby formula, and that is currently investigating production costs and price setting practices at 60 pharmaceutical companies as part of a wider anti-corruption crackdown.

But this post isn’t about Starbucks or Apple, but about every company sourcing from China that also does business in China. Considering their dependence on China, shouldn’t they be treating the Chinese market with the fairness that they demanded for years? How many years were we conveying the message that American negotiators shouldn’t stop until they paid China price, as Chinese sellers had a history of charging foreign buyers more than native buyers?

If we want to get China price, shouldn’t we be charging China price, or at least a price that’s fair with respect to what we charge else where? Otherwise, what right do we have to complain about unfair competition or about a government that might respond by slapping fines on us and/or adding new export tariffs to punish us for our relatively un-ethical pricing measures.

Does Gen-X Rule?

Well, if we are talking about the Billy Idol led band Generation X, I think we can all agree that they most definitely rule as Ready Steady Go* is still a punk rock anthem 25 years later!

But if we are talking about the post-boomer, pre-millennial generation, it’s a harder question to answer, but if you look at the recent Generation Gap survey from E&Y (as summarized on The Economist), we’re the most entrepreneurial, the easiest to work with, the best team players, and the best problem solvers — taking 4 out of the 6 rankings. In addition, we’re almost as hard working as the baby boomers and the second most cost-effective employees. From a statistical point of view, we beat out the boomers and trounce Gen-Y. Now, we’re not going to say the E&Y study is conclusive, but it’s suggestive.

Which leads the doctor to ask, does your supply chain have Gen-X at its core?

*Starts at the 1:08 mark.

Banks Have A Place In The Supply Chain – But That Place is Simply Financial!

Supply chains require capital. Lots of capital. And the role of a bank is to provide that capital through financing, even though, these days, private lenders are sometimes doing more through Supply Chain Finance platforms (like those offered by Prime Revenue, Oxygen Finance, and Orbian) than the banks are.

However, and in the United States in particular, the role of a bank is not to invest in, and retain the majority control of, companies that control significant stores of commodities that drive the markets that banks run. It’s an indirect route to a price-fixing monopoly, which is a criminal federal offense under section 1 of the Sherman Antitrust Act. It seems that the banks realize this, and, according to this article on CFO.com that states “A Bank Is Hiding Inside Your Supply Chain”, they’ve found a new way to inflate commodity prices and make extra profit off of your supply chain at your expense.

According to Tim Weiner, Global Risk Manager of Commodities and Metals at MillerCoors LLC, who recently testified at a senate hearing, bank holding companies are slowing the load-out of physical aluminum from warehouses controlled and owned by these U.S. bank holding companies to ensure that they receive increased rent for an extended period of time. According to MillerCoors, they have to wait as long as 18 months for the metal (that is just sitting in a warehouse ready to be used) or pay a high premium in a market where there has been massive oversupply and record production.

And according to the article, and the hearing of the Financial Institutions and Consumer Protection Subcommittee of the Senate Committee on Banking, Housing & Urban Affairs that took place this summer on July 23, 2013, this isn’t the only instance where large U.S. banks have diversified into commodities-markets operations, stretching the limits of rules designed to separate banking and commerce to the point where part of the high prices and price volatility some commodities have experienced is likely due to the banks’ increased involvement in the storage, transportation, and trading of these physical commodities (when they are supposed to stick to the non-physical futures and options markets).

In SI’s view, banks shouldn’t own any business that has any control over a commodity. As the CFO article clearly states, through bank ownership of a commodities business, a financial institution can place its hand on the scale of supply and demand for a commodity and distort the free market. Furthermore, a bank can not only affect the price of the commodity, it can also make profitable bets on its direction in the futures markets. Plus, and this is really scary, a bank that owns a commodities business could choose to deny lending or underwriting to a competitor of that commercial business or even lend at preferential rates to its own commercial commodities business. Thus, SI is in full agreement that regulators need to force banks to be more transparent about their commodities’ operations and divest them where appropriate.

So what does this mean for your supply chain? It means you have to be ever vigilant and know where banks are in, or may be able to take, control in your supply chain and plan appropriately for the disruptive actions to cost or supply that they could take. It means that visibility is key, that transparency from your supply chain partners is more important than ever, and that good record keeping is a must. If banks start to unduly pressure your business, as they are doing to MillerCoors LLC and others, you need to have the data to stand up to them. Price-fixing and manipulation is illegal, and if enough companies stand up to it, it’s a safe bet that something will be done about it (unless the TPP passes. Then all bets are off).