Category Archives: Procurement Innovation

Six Key Lessons for Sustainable Supply Management

A recent article over on the CPO Agenda on “Platforms for Growth” that discussed the challenges for Supply Management involved in procuring goods and services for decommissioning oil rigs had some great lessons for Supply Management professionals involved in projects in new or emerging areas of spend. While cost control is important, it’s even more important that Supply Management prevent their organization from becoming the subject of media headlines — as this is never a good thing. Plus, early approaches to category strategy can set a pattern within an organization and even drive market structures across the industry that, once established, become difficult to change. Thus, it’s important to get spending in new categories right.

Think Strategy
Supply Management needs to be a part of all of the strategic decisions of the organization as true commercial advantage can only be obtained if Supply Management is involved early enough in projects to influence raw material and service requirements. Not only does the design stage lock in up to 80% of the cost, but it can lock in up to 100% of the market risk. If the design locks in a raw material in tight supply as necessary, such as tantalum, instead of a more available material, such as aluminum (for capacitors), and unrest along the African coast suddenly makes 15% of the global supply unavailable, the organization will be in for a major price shock.

Influence the Plan
Not only does Supply Management need to be involved in all strategic decisions, but it has to come to the table with a good understanding of potential scenarios and a plan in mind. If, by working with marketing and external market research agencies, it understands that sales will be maximized at a certain price point, it can ensure that the selected design can be profitably produced for that price point.

Go for Global Category Scale
Even if the product must be customized for different regions, Supply Management should still attempt to aggregate global demand and award it to a small number of suppliers who are capable of producing variants for the global market to take advantage of economies of scale.

Build the Desired Marketplace
If the product or service being designed is (relatively) new, then Supply Management might be buying from an immature market. In this situation, the organization has the ability to influence market development, which occurs quickly once demand exceeds a critical mass. If Supply Management implements a category strategy that meets the objective of the organization, and it is the first major player in the market, the market will likely mould itself to that need. If the market strategy is low-cost, then the suppliers will focus on no-frill production and delivery. If the market strategy is the full service experience, suppliers will focus on creating end-to-end value added services. If the focus is on being the epitome of cool, then suppliers will focus on creating the most stylish and sleek product they can, with a price tag to match.

Do Your Homework
Market intelligence is the lifeblood of effective category management and the best way to influence the strategy, plan, and marketplace. Even if the organization does not agree with the proposed category strategy, it’s much harder to refute facts than opinions. Plus, it’s much harder for a supplier to exploit the organization in negotiations if Supply Management goes in armed with full knowledge about the current market state.

Examine New Buying (Structure) Options
Don’t limit your options to the current organizational buying strategy. Consider in-house, industry buying groups, vertical integration and even the creation of a Global Business Services organization. New markets sometimes offer new opportunities for doing things different. Take advantage of this.

It’s Not Technology, People, or Process — It’s Execution (Key NPX Take Away 4)

As you probably guessed from the title, this post continues our discussion of the key take aways from The Mpower Group‘s Next Practices Xchange and its discussion of what is required to get to the next level of supply management. Now that we have defined value, defined how we get to value, and how we capture value in contracts, the next thing we have to discuss is how important it is to get to execution as quickly and efficiently as possible.

The reality is that it doesn’t matter how good a process is, how modern the supporting technology is, or how good and well managed the people are if the organization doesn’t execute. The foundations are not enough. A Supply Management organization needs to execute on those foundations to get to value. As Dalip Raheja of
The Mpower Group likes to say, it’s not about the consonants (the foundations), it’s about the vowels (the execution on the foundations) beause Old MacDonald Was Right.

A Supply Management organization that doesn’t execute on the foundations never gets beyond best practices and traditional TCO. This will get an organization good results, but it won’t get the organization to world class status in these tight economic times. An organization needs to Adopt the plan, Execute on the plan, Implement the required changes, Optimize its operations on an ongoing basis, and appropriately Utilize the skillsets and technology it has available to get to the next level. One has to remember that simply having the best practices, processes, and technology isn’t enough. Even though it will make an organization a Toyota, it won’t necessarily make the organization sustainable in the long term. Only an organization with sustainable sourcing strategies can get to the next level.

An organization focussed on getting to the next level will go beyond the metrics and KPIs used to measure suppliers but focus on how the relationships will be established and holistically managed to extract maximum value for both parties. The contract is only the beginning of the relationship. Similar principles apply to relationships within the organization. The Supply Management organization goes beyond being a tactical service provider (who gets the contract and secures the supply) to a strategic consultant (who advises on what types of products and services are truly required in the first place and what suppliers should be approached in any event).

It’s only when the Supply Management organization starts focussing on the needs of the organization as a whole that it can truly achieve value. Unlike cost, which is at the component (product or service) level, value is at the system level and only materializes when the entire system is balanced. A truly valuable supply contract doesn’t sacrifice quality for cost, risk mitigation for expediency, or comfort for potential (but not yet realized) innovation. Just like cost can’t be reduced by selecting a lower cost supplier that will result in higher logistics costs, value can’t be created by looking at any single component as it’s holistic, and it results from proper execution of the vowels. As Dalip likes to say, it’s E-I-E-I-O.

The Best Way to Handle Decentralized / Local Supply Management Groups

While a well designed Sourcing / Procurement / Supply Management organization will have as many functions center-led, if not centralized, as possible, in a large multi-national, some groups will have to be regional to be effective and some purchases will have to be local. For example, fashion purchases will have to be driven regionally by someone with a pulse on the market and it does not make sense to ask the central asset management organization in (southern) India to manage snow removal operations in (northern) Canada (unless someone wants to see some really strange looks).

But how does your hybrid center-led Supply Management organization effectively manage these decentralized / local groups for best results? A great post on how when managing complexity, “less is more” over on the HBR blogs had a great suggestion — restrict activies at the group level to a core set of five that enable and enhance business performance. Specifically, focus on:

  1. Portfolio Management
    which activities fall under Supply Management purview
  2. Performance Management
    what are the cost / quality / value goals for each unit and how will the center-led Supply Management organization help the units achieve the goals
  3. Capital Allocation
    what investments can be made in each unit (in terms of technology, process, and people) to deliver the greatest returns
  4. Talent Management
    are the best people working the right jobs
  5. Synergy Capture
    to identify new or large opportunities that should be pulled up into the center-led Supply Management organization

It’s all about the selection of the handful of critical leverage points that will have the biggest impact on success and [a] relentless focus on doing them better. The purchase was pushed out to a local group because it wasn’t of a high enough value to manage centrally or because the central organization did not have the (local) knowledge required to make the best decision, so it needs to focus on the leverage points that will help the local organization, not on the task itself.

Is Your Supply Management Organization About to Move to Asia?

As per this recent article over on the McKinsey Quarterly on “Translating Innovation into US Growth: An Advanced-Industries Perspective”, the US is posed for a future in which the elements of economic leadership are moving abroad. The US might still be the global leader in R&D spending overall, but in order to maintain its competitive edge, it has to be able to devise innovations the world wants and needs and translate those into economic leadership.

Economic leadership requires more than a capital market system that encourages (and rewards) risk taking and entrepreneurship, more than simply attracting top students and teachers globally, and more than bulk spending. As per the article, it also requires cutting-edge technology, demand, talent, and entrepreneurial spirit. And, right now, the US is falling behind on each of these.

Cutting-Edge Technology
In leading industrial technologies — such as advanced batteries, high-speed rail, hybrid automobiles, solar modules, offshore wind turbines, and machine tools — the United States finds itself competing against, or even catching up, with foreign companies and engineers. Furthermore, as the article notes, the US is now relying on Japan, Russian, and Western Europe to launch its satellites — an industry it used to pretty much own globally. If the US can’t even compete in green energy, it’s in for trouble.

Demand
More than 50% of the global middle class now lives outside North America and the demand for many next-generation products is now coming from Asia, Latin Ameria, and the Middle East. These customers are creating new markets and dictating preferences. US products for the US market are no longer profitable on their own in many industries.

Talent
Scientific and engineering talent is now building up outside the US while one-third of US manufacturing companies are suffering from skills shortages. Cutting edge research is moving to India and China as well as accelerating in Japan and Germany.

Entrepreneurial Spirit
Once a mainstay of the private sector, risk aversion to new vetures is increasing across the board in the US. At the same time, the “new” India is becoming much more entrepreneurial and risk taking. It’s not a good combination.

Then, when you also consider:

Cost
Many emerging countries have labour and overall operating costs that are still only a third of labour and operational costs in North America or Europe.

Success
A number of global multinationals, including IBM, have proved that you can move global Financial, Services, and Supply Management organizations to China and India and still be a world-class organization.

it becomes impossible not to ask if your supply management organization is about to move to Asia.

Quick Hit Cost Savings Projects

Since it’s impossible to get away from cost reduction, inspired by a recent SIG article on “Strategic Cost Management: The Survivor’s Playbook to Savings”, which listed the following high-impact projects for same year savings:

  • Software Maintenance-Rate Reduction
    Identify all of the maintenance contracts, annual spend, and maintenance percentages. Develop a standard maintenance agreement and standard percentage for annual maintenance, require an exception appoval process with senior management involvement for any alterations, and focus (re)negotiations on highest savings opportunities. Savings of 5%+ is not uncommon.
  • Software Maintenance-Elimination
    Eliminate maintenance on all non-critical systems or all systems where annual maintenance cost is low. (In the latter case, even if the system is critical, it will cost less to re-instate the maintenance on a system at a later time if it is required than to pay maintenance on all such systems.)
  • Legal Services-Hourly Rate Reduction
    Most legal firms raise costs annually regardless of competitive market conditions. (Threaten to) conduct a sourcing exercise and watch rates drop quickly.
  • Legal Services-Bundles and AFAs (Alternate Fee Arrangements)
    For general legal services that are project or task oriented, and not litigation oriented, bundles or AFAs can save the company a significant amount of money.
  • Desktop Printers-Elimination
    Shared multi-function devices, with password printing, are much cheaper to operate than individual desktop printers.

here are a few more quick-hit cost savings projects that will generate cost savings if the organization has not run them (recently):

  • Marketing-Print
    Unbundle print from creative services and then run a quick sourcing project. Significant cost reductions in the 10% to 20% range (or more) will quickly materialize when printers are being faced off against each other.
  • Office Supplies-Live SKU Guarantees & Price Checks
    Everyone knows that a quick auction will drop prices across the board, but most category experts also know that the vendors make this back by raising prices a few months down the road when they think no one is looking and by bidding expiring SKUs, which will be substituted with higher price items down the road. Insisting on a clause that states that all SKUs must not be schduled to reach end of life within the contract term, and that any SKU that is retired must be replaced with a SKU of equivalent, or greater, functionality at current, or reduced, cost will prevent those overpayments and insure that significantly greater savings materialize.
  • Computers-Overpayment Recovery
    Most vendors don’t honor the “best price” clause and generally charge the same rate for the life of the contract, even though most computers and components decrease 2% to 3% a month. A careful spend audit will typically reveal 10% or more in overpayments that can be targetted quickly.