Category Archives: Procurement Innovation

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.

Lessons Learned from Best-in-Class, Part VIII

The following are some more of the lessons learned shared by some of the participants at this year’s Hackett Best Practices conference in no particular order.

35. The key to success is to change the score from cost to desired result (without losing cost control)
Procurement can no longer be an organization focussed on cost savings but must be focussed on results and value if it is to become a Next Level Supply Management organization. It’s only possible to take out so much cost. Eventually there is no fat left in the raw material buy, the manufacturing process, or the supplier’s margin and as costs rise with inflation, not only will savings stagnate, but costs will increase unless the organization has shifted to focussing on the end-to-end product and service lifecycle and the value that can be generated. If the goal is an affordably priced product with a great warranty and service, then maybe Procurement will have to find the savings in quality improvement (to minimize the defect rates and return costs) and service level improvements at the same cost point.

36. The Procurement roadmap must be milestone driven
The only way to keep Procurement truly focussed on results and value is to define milestones at a macro level, a category level, and a project level and keep the team working towards those goals. If the team is constantly focussed on meeting the milestone and the associated result, it will keep the team from slipping back into a cost focus, which is no longer a behavior that can be tolerated in a Procurement organization that wants to get to world class.

37. There is only ONE procurement team
Even if the organization is centre-led and there are individual teams scattered across the business units and geographies, and even if projects are managed at a category level, it must still be one unified Procurement team focussed on the overall goals of the business and the needs of its internal customers. For example, if logistics costs can be greatly reduced by syncing two different category buys, then the teams will work togehter to sync the buys and reduce the overall TCO and increase the value delivered. The team must speak with one voice in its requests for new systems and processes. And the team must speak with one voice when dealing with suppliers, or they will either not take Procurement seriously or try to sneak in a back door during negotiations.

38. Transition Management is Key
It is absolutely crucial that change management not be overlooked when a new supplier is being brought on board or an old supplier is being removed from the day to day Procurement equation. If change is not managed carefully, and planning not done sufficiently in advance, there can be significant disruptions as the new supplier is ramping up, especially if the old supplier decides to retaliate and delays orders or skips the quality check.

39. Use customer terminology
One of the quickest ways to gain respect when trying to get the support of the business units is to talk in their language. Engineering, Marketing, Legal, and Finance will be significantly more impressed if Procurements learn the language of design, of advertising, of contracts, and of finance, demonstrates that Procurement has done its homework, and makes an extra effort to show the business units that their success comes first.

This concludes our eight part series on lessons learned from best-in-class companies that were shared by some of the participants at this year’s Hackett Best Practices conference.

Lessons Learned from Best-in-Class, Part VII

The following are some more of the lessons learned shared by some of the participants at this year’s Hackett Best Practices conference in no particular order.

30. Procurement must be run like a business
Just like a business is profitable, Procurement must be profitable and must be seen as a profit-generator, not a sunk cost. If Procurement is being run as a services organization and has to charge the other organizational units internally for its services, it must insure that the charges cover its costs. Furthermore, it must reduce it’s cost per dollar of value generated year over year just like it reduces the costs of product or service acquisition on the projects it participates in. If it is not profitable, it will not have the respect of the C-suite.

And if it doesn’t have to charge the other business units to cover its costs, it should find a way to directly contribute to revenue generation to such an extent that it not only shows savings, but profit for the organizational unit for the balance sheet. Even if it can’t roll up its expertise and sell outsourced Procurement functions to smaller businesses like IBM, maybe it can still package some market expertise in a market intelligence service or offer NPD consulting to Engineering or manage the SRM projects internally to deliver even greater value to the organization.

31. Show sensitivity and respect for existing external relationships
Just because the current provider for a certain component required in production of the flagship product is the most expensive on the market doesn’t mean that Engineering will think that Procurement has the right to replace a vendor they’ve been working with for 10 years, even if the proposed vendor can deliver a higher quality product at a lower cost. Depending on the nature of the relationship, Procurement will have to either accept that this supplier is going to get some categories no matter what and will have to focus either on introducing a new supplier as a back-up, secondary source, that can also be used by Engineering to secure non-critical parts of the business or on working with the supplier on a lean initiative to take costs out over time.

32. Simplify and standardize
This may be among the most challenging initiatives the Procurement department ever takes, but it is one of the most essential. First of all, the last thing the organization wants to do is automate a broken process. Secondly, it can’t just throw a broken or inefficient process over the wall to a BPO or outsourcer and expect efficiency and costs savings. Thirdly, the organization will never achieve economies of scale if it uses three different systems for completing organizational transactions (such as a P2P e-invoicing system, a p-card system, and an accounting-based AP system where paper invoices are manually entered and paid) or for conducting e-Negotiation projects.

33. Sometimes its easier if services precedes manufacturing when expanding into new markets
As stated above, Procurement needs to be an enablement function. One of the ways it can do that is to use its knowledge of emerging economies where it sources from to help Sales and Marketing or Engineering expand into those economies. When expanding into new markets, its often easier if services are introduced before new plants are built or new products are introduced. Services provide “a personal touch” and can help the local talent pool (which will be needed to staff a new plant) and early adopter consumers (who will be counted on to buy the new products being introduced) get comfortable with the company.

34. Strong leadership is a must
It take more than the right people, processes, and technology for a Procurment organization to become world class. It takes strong leadership that will rally the troops to advance to the next level of performance, that will speak up and get the organization a seat at the big-boys table, and that will go out and make the case for Procurement involvement in each organizational unit of the business — sacred cows be damned. Without strong leadership, the talent, who will need to be critcal parts of cross-functional teams, will never advance beyond the status quo; the CPO will never graduate from the kiddie table (and that’s if she even makes it that far); and the


Our next post will continue our overview of the lessons learned that were shared by some of the participants at this year’s Hackett Best Practices conference.

Lessons Learned from Best-in-Class, Part VI

The following are some more of the lessons learned shared by some of the participants at this year’s Hackett Best Practices conference in no particular order.

26. Operational transparency is a must
This is especially true if the Procurement organization is based in a (global) shared services organization and is forced to charge-back the organizational units for its services. Keep open books where the other organizational unit excutives are involved and be prepared to show how the value generated per Procurement dollar increases with time, otherwise the Procurement organization might be accused of attempting to make a power grab.

27. Perception always trumps reality
This is why the Procurement organization has to communicate, communicate, communicate, and communicate again. In the executive offices. In the hallways. With the line managers. Through the corporate newsletters. At the training sessions. If the rest of the organization does not have the true picture regarding Procurement and the value it contributes, the old-school perceptions of Procurement being non-value add tactical paper-pushers and process enforcers will persist and Procurement will risk losing its seat at the kiddie table.

This is also true when current processes and supplier relationships are on the table. If the organizational personnel perceive them as effective and efficient and the “right way to do things”, even if all three perceptions are false, it will be almost impossible to get the personnel to change the processes until they see the limitations and weaknesses and see that the proposed processes are better and come with additional benefits. The same holds for supplier relationships.

28. Procurement can never be satisfied with the status quo
Since the value delivered is never enough, and the cost of delivering that value is never low enough, no matter how good Procurement is, it still has to improve — even if it is world class (as this is a moving target that moves as soon as a competitor passes an organization that has stopped to take a breather). The reality is that no one cares about what Procurement did yesterday, they are only concerned about the value Procurement is going to bring tomorrow and how they are going to make their numbers.

29. Procurement needs to be an enablement function
It needs to go beyond cost reduction and avoidance and consider the end-to-end financial implications for working capital management, the risks associated with the supply plan and appropriate mitigations, and the innovation it can bring to the table. Procurement has the greatest impact when it is consulted early on in new projects, not after almost all of the designs have been completed and decisions have been made and the only cost left to take out are in the transaction. If Procurement is involved in NPD, it can take cost out before 80% of the costs are locked in.

If Procurement is involved in Marketing vendor selection, it can make sure that contracts disassociate creative from copy and bid out commodity print or production jobs to the lowest bidder. If Procurement is involved in law firm selection, it can help steer Legal to those that are capable of doing the work and willing to do AFAs (Alternate Fee Arrangements) on a project or task basis and steer the business away from the costly unlimited billable hour. And if it is seen as an enablement function that can help in project definition as well as project implementation, it can not only play a larger role in the business, but secure better results in the long run


Our next post will continue our overview of the lessons learned that were shared by some of the participants at this year’s Hackett Best Practices conference.